§ I open, as is usual, with a short review of the British economy in 1973—a review which has more than usual relevance, since it must describe the legacy that I inherited from the previous Government three weeks ago. The picture is a sombre one—it reflects what even before the onset of the three-day week was generally regarded as the gravest situation Britain has faced since the war.
§ By the end of last year, before the increase in oil prices had exerted more than a very minor impact and before the recent industrial disruption, nearly all the major indicators of the British economy were flashing warning lights. Output, which had expanded vigorously in the early months of 1973, was slowing to a halt through shortages of capacity. The balance of trade was deteriorating faster and faster. The balance of payments on current account registered a deficit of £1,470 million on the year as a whole.
§ After three disappointing years, manufacturing investment was only just beginning to gain momentum by the end of 1973. Despite the complex machinery of wage and price control, inflation last year was worse than in 1972. At the end of the year, the retail price index showed an increase of 10.6 per cent. over a year earlier when the corresponding figure for December 1972 was 7.7 per cent. The 279 rate of inflation is still increasing—last week's figure shows that over the year ending in mid-February the retail price index rose 13.2 per cent.
§ On the brighter side, unemployment in the United Kingdom as a whole fell during the year from over 750,000 to half a million in December and during the same period unfilled vacancies rose. But by the third and fourth quarters there were shortages of skilled labour in some industries, especially construction. Shortages of materials and finished goods were drawing in extra imports.
§ Many hon. Members on this side of the House, as well as on the benches opposite, had been prepared to run substantial risks on the balance of payments and inflation for the sake of forcing Britain on to the path of higher growth. The tragedy is that the gamble failed. The last Government's dash for growth, like so many in the past, produced an impressive spurt for a few months while taking up the slack caused by the mass unemployment of 1971–72. But there is no evidence that the underlying growth rate of the economy as a whole has improved.
§ By the end of the year, as the oil crisis broke, the problems were piling up on every side. As the House knows, my predecessor took action in December both on the money supply and on public expenditure. Since his measures form part of the base on which I must construct my Budget, I now deal with the monetary problem at greater length.
§ The year 1973 saw a rapid growth in money and credit, accompanied by high nominal rates of interest. Unrestrained bidding by the banks for funds in the money markets almost certainly accelerated monetary growth. Rates offered for deposits rose more than the cost of bank credit, thus giving an incentive to the banks' big customers to arbitrage by borrowing on overdraft and on-lending in the money markets. The previous Government's earlier decision to allow tax-free interest on personal loans must have aggravated this trend.
§ As a result of these factors, money supply, broadly defined, rose by 27 per cent. in the past year. The public sector borrowing requirement of over £4 billion was a powerful contributory force in 280 this monetary expansion. An even greater stimulus to the growth in money supply came from the private sector's demand for bank credit, amounting to nearly £6 billion.
§ The failure of the techniques of competition and credit control to stem this tide of monetary expansion led the Bank of England to introduce a new scheme in December to supplement the existing arrangements for controlling the growth of money and credit. The effect of the scheme will be greatly to increase the marginal cost of funds to the banks should they significantly exceed the 8 per cent. guideline for the growth of their interest-bearing liabilities. They cannot pass on this cost by increasing the general level of their lending rates, and this should deter them from excessive bidding for funds in the money markets. It may, therefore, produce more stable short-term interest rates. I shall watch carefully to see whether this new scheme proves to be effective in practice.
§ These new proposals signalled the collapse of the policies by which the previous Government had hoped to deal with the monetary situation. On 17th December, my predecessor used the prospect of a shortage of energy in 1974 to justify cuts in public expenditure and the imposition of hire-purchase restrictions. What I still find impossible to understand is why at the moment when the then Chancellor took these measures on the grounds that, to quote his words, this country faced its gravest economic situation since the war, he should once again have renounced an opportunity for creating that national unity which is a precondition for tackling the situation he so graphically described.
§ Even more baffling is the then Prime Minister's decision to lead his colleagues into an unnecessary confrontation with the National Union of Mineworkers, which was bound to produce widespread industrial disruption and lead to a series of catastrophies for the economy as a whole.
§ It is still too early to assess the full effects of the three-day week and still more to predict how fast the nation will recover from its consequences. In some respects the economy has weathered the three-day week better than many feared, partly, perhaps, because in many cases 281 employers and workers joined forces to reduce or even to avoid the impact of the Government's restrictions. Indeed, the energetic and whole-hearted co-operation between trade unions and management that we have seen throughout the country in the past three months gives the lie direct to the widespread myth that industrial relations are exceptionally bad in Britain.
§ But, despite all the efforts of both sides of British industry to ease the suffering inflicted on them, the consequences were grave enough. Personal income has fallen, though guaranteed minimum earnings arrangements, social security benefits and tax refunds may have reduced the aggregate loss of personal income to under 5 per cent.
§ Output as a whole fell much more, perhaps as much as 10 per cent. Nearly all the loss was of industrial output, which may have fallen by over 20 per cent. The consequent fall in profit income was cushioned by running down liquidity and—even more—by reducing stocks. I fear that the three-day week may have delivered a heavy, but I hope a temporary, blow to the investment intentions of many companies. Moreover, there has been a further deterioration in the trading position of the nationalised industries which requires the immediate action that I shall describe later in my speech.
§ The trade figures which have just been published show that in the two months of January and February our trade deficit amounted to some £800 million. There is no doubt that extra imports to take the place of goods not available in Britain helped to produce this deficit. The effects of the three-day week will continue to damage our trade figures for some time to come.
§ The election came just in time to save us from a worse disaster. But the stark fact is that already the nation has probably lost something between £1,500 million and £1,750 million worth of output as a result of the three-day week, and well over that since the ban on overtime began. This is a very heavy handicap to have to carry at a time when we face so many other problems. I dare say that hon. Members on both sides of the House may wonder whether it was worth it.282
§ But that is water over the dam. The miners are now back to work and the whole of the economy is moving forward once again. Though the effects of the three-day week will be felt for some months yet, I hope and believe that both sides of industry are determined to expand production rapidly so as to make good the shortages that have arisen and to enable manufacturers to rebuild their stocks.
§ With hard work, it should be possible by the middle of the year to get output running at something like the level it would have reached without the three-day week. After that, we shall still be working to complete the replacement of stocks lost in the past months. This is bound to have unwelcome consequences for the balance of payments.
Perhaps I can best conclude this brief summary of events over the past year by quoting the words of the National Institute's Economic Review for February on the prospect for the coming year, words which were written before the last General Election was held:
It is not often that a Government finds itself confronted with the possibility of a simultaneous failure to achieve all four main policy objectives—of adequate economic growth, full employment, a satisfactory balance of payments, and reasonably stable prices.
§ Yet this was my inheritance when I entered the Treasury just three weeks ago today. I do not believe that any hon. Member would claim that it was a happy one.