§ Balance of Payments
§ So much for the past year. I turn now to the future, starting with the prospects for the balance of payments over the next year. It is likely that world trade will grow rather faster in the year ahead than in 1971. Expansionary measures have now been introduced in a number of countries, and, of course, the removal of the United States surcharge and related measures will also help.
§ The current account is expected to continue to show a satisfactory surplus, but it will not be as large as it was in 1971, which in this respect was clearly an exceptional year. Earnings on invisibles should keep up well, but I expect the balance on visible trade to be less favourable this year. The monthly visible trade figures are bound to show a deficit from time to time, because there will be a faster growth of imports as our domestic economy expands. It is as well to remember that 1971 was only the ninth year since the end of the eighteenth century in which we have had a surplus on visible trade. There is no reason to expect that it will now continue year in year out. But a modest deficit on visible trade will be no trouble so long as the other important component of the current account, earnings on invisibles, continues to keep up well—as I believe it will.
§ Exchange Control
§ I must next give the House the outcome of a review of our policies governing international investment. I have decided on the following changes.
§ First, the financing from sterling sources of inward direct investment. As from tomorrow, permission will normally be given for subsidiaries of foreign companies making new direct investments in the assisted areas to draw finance without restriction from sterling sources; and for subsidiaries of E.E.C. companies the restrictions on finance from sterling sources will be completely withdrawn in respect of direct investments in any part of the United Kingdom.
§ Second, outward direct investment in E.E.C. countries. As from tomorrow, United Kingdom companies making direct investments in E.E.C. countries 1351 will be allowed, as an alternative to the usual overseas borrowing, to use official exchange or its equivalent for the first £1 million of any project in an E.E.C. country, or in one of the acceding countries.
§ Finally, it is customary in the Budget Statement to refer to the so-called voluntary programme under which since 1966 companies and institutions have been asked to observe certain restraints on their investment in developed countries of the sterling area. It is right that I should pay tribute to those who have co-operated to maintain the programme over the past six years. But my right hon. Friends and I have always found distasteful the concept of this programme operated on a voluntary basis year after year. Accordingly, the voluntary programme is now abolished.
§ Full details of these changes are being given in a Treasury Press notice and Bank of England exchange control notices issued tonight.
§ I know that other relaxations have also been suggested, but I cannot go further this year. These particular changes have been selected with due regard both to prudence and to a right sense of priorities.
§ The Domestic Economy
§ I turn now to the prospects for the domestic economy.
§ I should at this stage stress that the analysis I am about to give of our economic prospects assumes no changes of policy. It is, of course, this analysis which provides the basis for my Budget judgment and for any proposals for change.
§ Looking ahead over the next 12 months or so, I would expect a recovery in private investment, both in manufacturing industry and in the service sectors. On present policies, however, I do not believe that this recovery would be of the magnitude required either to meet the challenge of Europe or to provide an adequate basis for a return to full employment.
§ On present policies, there are three main elements of demand where a slowing down during the year ahead seems probable—public investment, stock build- 1352 ing, and private consumption. I deal with each of these in turn.
§ First, public investment. As the House knows, because of the high level of unemployment we have deliberately given a large, temporary boost to public investment: and as this comes to an end the rate of increase—albeit from a high level—is bound to slow down.
§ Next, stock building. Stock building was abnormally low last year. A recovery to a more normal rate is almost certain at some stage, though it has probably been delayed somewhat by the coal strike. While the recovery is taking place it will give an important stimulus to the growth of demand, but this stimulus will cease when stock building settles down again at a new, higher rate.
§ Finally, private consumption. This has grown rapidly over the past year, stimulated by taxation reductions, by the abolition of hire purchase terms control and by a large increase in social security benefits last autumn. This rapid rise in private consumption reflected a raising of consumers' expenditure from a lower to a higher level. But it is right to expect that when this process has been completed the rate of increase of private consumption will slow down again to a more normal rate unless steps are taken to stimulate it further.
§ In addition, account has to be taken of what is sometimes called "fiscal drag"—the fact that as personal incomes rise tax burdens tend to increase more than proportionately. It is true that a modest boost will be given to consumers' expenditure over the coming months by the repayment of post-war credits, but this again will be a temporary stimulus.
§ For these and other reasons I should expect that, on the basis of present policies, the growth of output would slow down significantly during the year ahead, and would go on slowing down thereafter. The implications of such a slowing down in the growth of output for the general prosperity of the nation and for the level of unemployment in particular are obvious. Such a situation would not be acceptable.
§ The Budget Judgment
§ I have therefore come to the conclusion that a further boost to demand is required.1353
§ In weighing up how great this should be, I have had to take account of a number of considerations—the Government's determination to reduce the level of unemployment, the dangers of inflation, the outlook for the balance of payments, and the paramount need to avoid a purely ephemeral spurt which before long led to another stop. Our task at this time is to lay the foundations for sustained growth over a prolonged period ahead.
§ Taking into account these various considerations, I have come to the conclusion that the stimulus to demand will have to be sufficient, taking account of both direct and indirect effects, to raise output in the first half of next year by about 2 per cent.
§ The measures I shall put to the House are intended to ensure a growth of output at an annual rate of 5 per cent. between the second half of last year and the first half of next. I have chosen as my base period the second half of last year because a much firmer estimate can be made of the level of output in that period than in the current half year, especially in view of the uncertain effects of the coal strike.
§ This growth rate of 5 per cent. is a "central forecast", and I stress that because of the many uncertainties to which, as every former Chancellor knows, such predictions are necessarily subject. This is the reason why policies must be flexible, and why the only sensible course is to be ready to act at any time of the year, as indeed I did last year.
§ If my present expectations are correct, output will have risen by 10 per cent. over the two-year period from the first half of 1971 to the first half of 1973. The extent to which there will be a reduction in unemployment is bound to depend on our success in slowing down inflation. If particular groups insist on pricing themselves out of jobs and the nation out of business no Government can secure full employment.
§ I do not believe that a stimulus to demand of the order I propose will be inimical to the fight against inflation. On the contrary, the business community has repeatedly said that the increase in productivity and profitability resulting from a faster growth of output is one of the most effective means of restraining price increases.1354
§ We now have a rare opportunity to secure a sustained and a faster rate of economic expansion over a considerable period of years. I will list five compelling reasons why this is so.
§ First, our entry into the Common Market next January provides us with a new opportunity for faster growth, which was the experience of nearly all the existing members of the Community when they joined together to establish the larger Market.
§ Second, we are starting from a position where there are more unused resources than there were at the beginning of any previous period of rapid expansion since the war.
§ Third, our potential growth of productivity is greater than it was on any of those earlier occasions.
§ Fourth, the growth of public expenditure, which is deliberately being accelerated very substantially during the coming financial year, will thereafter, as we have planned, show a marked deceleration. One of the purposes of this is to leave room for expansion in the private sector.
§ Fifth, both the current balance of payments and our reserves position are much stronger than they were at the beginning of previous periods of expansion. Moreover I am sure that all hon. Members in this House will agree that the lesson of the international balance of payments upsets of the last few years is that it is neither necessary nor desirable to distort domestic economies to an unacceptable extent in order to maintain unrealistic exchange rates, whether they are too high or too low. Certainly, in the modern world I do not believe that there is any need for this country, or any other, to be frustrated on this score in its determination to sustain sound economic growth and to reduce unemployment. But we should not delude ourselves. There can be no soft options if we fail to get a grip on ever-rising costs.
§ These are the principal reasons why I believe we can now realistically look forward to a prolonged period of sustained expansion, and indeed a prolonged period of expansion is exactly what British industry so desperately needs to provide the foundation and the confidence for ambitious and forward-looking modernisation.1355
§ For the very purpose of avoiding "stop go" and specifically in order to maintain steady growth over a period of years, there will doubtless from time to time need to be measures to regulate demand; and these may be in either direction. But the prospects for expansion and for growing prosperity over the next five years must surely be better than they have been for a very long time.
§ This Budget is designed to set us on that path.