§ I start by referring to some of the main developments of the past year. It has been a year which has been dominated by the twin evils of inflation and unemployment.
§ Inflation
§ I ask hon. and right hon. Members to cast their minds back to the time of the Budget last March, a year ago. We were then facing a problem of cost inflation which, in the minds of many, was the biggest single threat to our prosperity. Both the problem and the threat remain, but I think that my right hon. Friends and I can fairly claim some success.
§ As regards prices, the facts have been published, and they speak for themselves. Since last summer the rate of increase has been halved.
§ I am sure that the whole House will want to pay tribute to the Confederation of British Industry for its programme of price restraint and to all the companies and nationalised industries which have responded. Together with the cuts which I made in selective employment tax and purchase tax, that programme has made a major contribution in reducing the rate of inflation and in improving the climate for wage bargaining.
§ Taking the past year as a whole, the average level of pay settlements has fallen 1346 significantly. I have no doubt that, in part, this has been due to the slower rise in prices. In part, too, it may reflect a growing awareness of the truth—to quote one right hon. Gentleman—that "One man's wage increase is the next man's price increase"; that there is no future in an irresponsible scramble for higher pay all round if the only result is higher prices all round; and that rising costs may be just as damaging to employment prospects as falling demand.
§ But if it be true that we have already made considerable progress in the fight against inflation, it is true also that we still have a considerable way to go in narrowing the gap between the rate of increase of money incomes and of productivity. And, in the end, that is the only sure way that we can keep prices steady, maintain our international competitiveness and substantially improve the prospects for employment.
§ Output and Employment
§ There is universal agreement that the present high level of unemployment is on every ground—economic and social—one which no Government could tolerate. It is also generally agreed that over the past year unemployment has risen to a much greater extent than could have been expected if one had regard only to the movement of output. The upward trend in unemployment was partly the result of very slow growth in 1970 and a fall in output in the first half of 1971. But there has been an additional factor with major consequences for the level of unemployment—the so-called "shake-out" of labour which stemmed from the rapid rise in wage costs. While cost inflation is clearly one of the causes of high unemployment, I have never agreed with those who look to unemployment as the cure for inflation.
§ And so throughout this past year we have acted to raise the level of economic activity. The various reflationary measures which were taken resulted in a strong rise in demand in the second half of last year: between the first and second halves of last year gross domestic product is estimated to have increased by around 2½ per cent. or 5 per cent. at anannual rate. It is difficult to forecast the level of output in the first half of this year, especially in view of the dislocating effects of the coal strike, but, to give the 1347 House the underlying trend, I believe that had it not been for the coal strike the growth of output between the first halves of 1971 and 1972 would have been broadly in line with the forecast which I made last July of 4–4½ per cent.
§ Monetary Developments
§ I turn now to monetary developments. A year ago I outlined a radical and far-reaching reform of credit control and banking arrangements. The details are known. Suffice it to say, therefore, that that reform is now in full operation, and it has opened a new era in British banking.
§ Monetary policy in the past year has been expansionary, in line with our other policies for stimulating the economy. All terms control restrictions on hire purchase, credit sale and rental agreements were removed last July. Interest rates have declined, and there has been a strong growth of bank lending and consumer credit.
§ All this has been reflected in a faster growth of money supply, and the high growth of output which I intend to sustain with this Budget will entail a growth of money supply that is also high by the standards of past years, in order to ensure that adequate finance is available for the extra output. To proceed otherwise would reduce the growth of real output itself.
§ This reasoning is now, I think, generally accepted. It recognises the important and strong effects that monetary policy can have on the economy. But it recognises also that these effects operate through demand.
§ And so monetary policy will be used in the future, as it has been during the past year, as an integral part of the general management of demand. Because one of the main qualities of monetary policy is its flexibility, I do not propose to lay down numerical targets. The policy will be geared to the needs of the situation, and will change as those needs change.
§ Government finance
§ It has been traditional to give, in the Budget Speech itself, some description of the Government's financial accounts, both past and prospective. But as all the 1348 figures are set out in the greatest possible detail in the Financial Statement and Budget Report, I think that hon. Members will agree that I can this year spare the House an oral summary.
§ National savings
§ In last year's Budget I announced a number of improvements concerning National Savings. I do not propose any further changes at this time.
§ Over the past year National Savings have gone from strength to strength. In the 12 months to the end of February the amount of National Savings outstanding, including accrued interest, increased by £733 million, or about 8½ per cent. That is the best result ever recorded, and it reflects great credit on the whole National Savings movement. The thousands of voluntary workers throughout the country deserve our gratitude.