§ I turn now to the prospects for the domestic economy. I should emphasise 1368 here that the analysis which I am about to make is concerned with our prospects on the basis of no changes in policy and, of course, it is this which leads to my Budget judgment and to any proposals for change.
§ Economic forecasting, as every Chancellor who has stood at this Despatch Box knows, is a highly uncertain business. But all the indications are—and this view is supported by most expert opinion—that if no changes of policy were made in the Budget there would be a relatively small increase in output in the year ahead. Even taking into account the cut in the standard rate of income tax, which has already been provided for, the conclusion I have reached is that, in the absence of new measures, national output would grow by not much more than 2 per cent. during the coming year, that is, between the first half of 1971 and the first half of 1972.
§ Of the various elements in demand, the main contributions to expansion are expected to come from exports, public expenditure, private house building and consumers' expenditure. The increase expected in world trade should provide favourable opportunities for an expansion in our exports, provided we remain competitive. Public expenditure on goods and services is likely to rise by about 2 per cent. There should be a sharp increase in private house building, following the welcome recovery in housing starts and building society advances last year. But in absolute terms, the largest expansionary factor is likely to be consumers' expenditure. Here much will depend on personal savings and to what extent firms pass on in prices the increased costs which are already in the pipeline.
§ These are expansionary elements. It is, however, a matter of considerable concern that, on present indications, private industrial investment might well fall over the year ahead if there were no change in the climate of expectations. And the volume of imports is likely to rise faster than total demand and this will, therefore, tend to limit the growth of activity in the home economy.
§ As I have said, these forecasts are inevitably subject to much uncertainty. A great deal will depend on our success in moderating the rate of cost inflation. 1369 But, if the forecast which I have outlined is right, it is to be expected that, with no changes in policy—and I stress that—the trend of unemployment would continue to rise fairly strongly. Some recent estimates about the prospects for unemployment next winter are, I think, a good deal too pessimistic, but, nevertheless, a considerable rise in unemployment would be the most likely trend if no changes in policy were made in this Budget.
§ It will be clear from everything I have said that the economic problems which we face at present, and the problems which I have had to consider in arriving at my Budget judgment, are in many respects paradoxical and uniquely difficult. We have high and rising unemployment combined with rapid cost inflation. We have poor prospects for investment and a likelihood of relatively slow expansion of output in the immediate future; and at the same time a balance of payments situation which, although strong now, could easily deteriorate.
§ The first essential is that there should be no let-up in the fight against cost inflation. I have already said a good deal about this basic problem, and I would only add this. The Budget by itself cannot provide the answer to the problem of cost inflation. Nothing that has happened over these past few months has weakened my conviction that the only way in which we can deal with cost inflation is by means of a progressive and substantial de-escalation of pay settlements—[An HON. MEMBER: "Rubbish."] and this is the policy which we intend to pursue and to pursue with determination.
§ As far as fiscal and monetary policies are concerned, the first requirement is that they should not create any danger that demand inflation will be added to the present inflation stemming from rapidly rising costs. But the forecast which I have outlined—the pre-Budget forecast—suggests that this is not the main danger at present. It is much more probable that, in the absence of any change in policy, the pressure of demand would fall, and I do not believe that the fight against inflation would be aided at present by any further lowering of the pressure of demand. Despite the seriousness of the inflationary dangers which 1370 confront us, it would, in my view, be wrong to introduce a Budget which envisaged that the degree of slack in the economy should increase further. On the contrary, I believe that the fight against inflation itself requires that a greater confidence in the future progress of the economy should be created. And I believe that, unless this is done, there is a danger that investment will fall off to a degree that would damage the long-term growth and competitiveness of the economy.