§ Let me now deal with the prospects for the year ahead, as they must help to form my Budget judgment. The House must recognise that, whatever steps I take today, the country will be wrestling for many months with the effects of past policies. There is still a great deal in the pipeline which has yet to exert its effect on the economy.
§ First, output. As I have said, there are inevitably great uncertainties about the speed with which the economy can recover from the consequences of the three-day week. I doubt whether in this year as a whole the nation will be able to produce more than it did in 1973. Too much ground has already been lost during the three-day week for that. But 283 we should see a steady growth in output over the next nine months, and I have little doubt that in the second half of the year output will be above the level it was running at before the recent crisis.
§ The outlook for prices is less encouraging. Part of last year's dizzy rise in the price of oil and other basic commodities has still to be felt in the shops, so it is inevitable that the rate of increase of the retail prices index will continue to be substantial for a while yet. I shall refer in a moment to action which the Government will take to deal with the price increases which hit the family budget hardest.
§ In order to persuade the wage-earner that he had some protection against inflation, the last Government established threshold agreements as an integral part of their Pay Code in stage 3. But they do not protect the country from inflation. Indeed, the threshold itself will tend to increase prices as employers pass on at least some of the higher wages it requires them to pay.
§ At a time when world prices are rising, the threshold itself boosts inflation. As I shall show later, it sets limits to the extent to which a Chancellor can use indirect taxation as a means of raising revenue. It is as if I have been sent into the arena to fight the monstrous problems now confronting me with one hand tied behind my back.
§ Faced with the prospects of inflation on their present scale, we cannot afford to leave aside any measure which the Government can take to help the housewife where it matters most. Strengthening the present system of price controls will make a useful and essential contribution. But it would be wrong to expect too much from the operation of price controls alone, even with the improvements we are making.
§ Further action is therefore required, particularly to hold down the increase in the price of essential foods—the most important single item in the family budget and the one which has risen most in recent years. I will outline in a moment the action we are proposing on food subsidies. The House has already welcomed the action my right hon. Friend the Minister for Agriculture and Fisheries took at the weekend to prevent decisions in the European Community from putting 284 up food prices in our shops this spring and summer.
§ A policy for ensuring the orderly growth of incomes is no less necessary for combating inflation. My right hon. Friend the Secretary of State for Employment has already outlined our attitude towards pay and other forms of incomes. But price controls and subsidies, even in alliance with the most perfect incomes policy which could be devised, cannot go far towards winning the battle against inflation if fiscal and monetary policy are pulling in the opposite direction. That is perhaps one of the lessons of our experience over the past few years. My job as Chancellor is to provide the framework of fiscal and monetary policy within which price controls and incomes policy can operate most effectively.
§ The appropriate fiscal measures are of course the main substance of my Budget. But I will say a word here on the monetary outlook. I hope that the new monetary technique adopted last December will enable us to keep the growth in money supply at a much lower rate in the next 12 months.
§ The present level of interest rates, I know, imposes a heavy burden on some businesses and individuals, particularly on those millions of people who desperately want a house but cannot afford a mortgage, and, indeed, on those with mortgages who have bought their homes at the recently inflated prices. Our aim will be to bring about a reduction in interest rates from their present high level as soon as this is feasible. There is no short cut available here. It will depend above all on our success in reducing inflationary expectations, since without question they are a major cause of high nominal interest rates. It will depend on our ability to restrict the public sector borrowing requirement here at home, and it will also require international co-operation to bring down interest rates world-wide.
§ In the period immediately following the three-day week, some firms will undoubtedly require credit to tide them over temporary liquidity difficulties. We shall watch the situation closely and adjust our policy flexibly to ensure that the banks have sufficient resources to meet these needs.
§ I now turn to the balance of payments, dealing first with the problems caused for 285 the United Kingdom and all the other oil importing countries by the recent increase in oil prices. The House will know that the oil-producing countries are likely in 1974 to have among them a current account surplus with the rest of the world of perhaps $60 billion or $70 billion.
§ The impact of the price increases on the United Kingdom can be seen from the fact that our crude oil imports cost £275 million in February compared with only £100 million last September. The last round of price increases has still to work its way right through. In total, price increases will produce an addition of more than £2,000 million to the import bill for oil this year. The financing of deficits of this kind will be a formidable challenge to the international community with which I shall deal later.
§ We in Britain have to consider not only an oil deficit, but a serious underlying deficit. The scale of the problem is well illustrated by the trade figures for February, which have been announced this afternoon. The deficit on visible trade is £429 million, some £50 million higher than the revised figure for January. This unprecedented deficit has been caused in part by the three-day week. Imports in value terms have gone up to £1,579 million and this figure reflects increased imports of semi-manufactured goods as well as oil price increases.
§ But the picture is not wholly discouraging. In spite of the three-day week, exports have also risen sharply to some £1,150 million. This figure confounds the general and quite reasonable expectation that exports would be severely affected in February by three-day working. It shows the determination of everyone in British industry to keep exports going and orders alive in spite of the formidable problems that were faced in the early weeks of this year. It will help to convince overseas customers that this country has the ability and the will to maintain and develop its overseas markets.
§ Nevertheless, as with the oil deficit, we cannot hope to eliminate the whole of the underlying deficit this year; nor would it be right to try to do so. We may find that we are helped by a flattening—or even a decline—in other commodity prices later in the year. This would be a bonus, but, especially after 286 last year's experience, we must not count on it. Meanwhile, what is necessary is that the deficits should be covered by capital inflows of one kind or another, either by the direct monetary inflows, to which the United Kingdom is well accustomed, or by borrowing in foreign currencies.
§ I have decided that we need to make it clear to the world that we can finance the deficit that lies ahead. Accordingly the Bank of England has, with my authority, been in consultation with the clearing banks about the possibility of a longterm loan of foreign currency for Her Majesty's Government. I am pleased to be able to tell the House that the clearing banks have now arranged such a loan for $2½ billion for 10 years. I congratulate them on the speed and efficiency with which they have arranged it. This is, I believe, the largest loan ever raised in the international capital markets.
§ I can also report further strengthening of our short-term defences for the pound. The Bank of England has agreed with the Federal Reserve Bank of New York that the limit of short-term financial support available under the inter-central bank swap arrangements between them should be raised from $2 billion to $3 billion.
§ Borrowing is more sensible, in economic and human terms, than trying to cut imports by massive deflation. But no one should imagine that it is a soft option. The interest has to be paid each year, and this will eat into our surplus on invisible account. Later on, instalments of the capital will have to be repaid as well.
§ I have, of course, considered what direct measures I might take to help to narrow the balance of payments gap. I do not want to use direct restrictions on imports if this can be avoided; they would not be in the interests of the world economy, upon which we depend so much, and would invite retaliation. Moreover, they would have to be accompanied by measures to reduce home demand—otherwise the place of the imports thus kept out might merely be filled by goods produced at home which could otherwise have been exported.
§ But I have in exchange control another instrument which it makes sense to tighten or relax according to changes in 287 the prospects for the balance of payments. So I am taking four steps, which will have effect from midnight tonight.
§ I am tightening the rules for financing both direct and portfolio investment. I fully understand the importance of this investment and the valuable return it brings by way of interest, profit and dividends, which helps the balance of payments year by year. My object is not to stop it, but only to ensure that it takes place without imposing undue strain on the balance of payments. At a time when the Government, as I have explained, will be borrowing to finance the deficit for the nation as a whole, it is right that the private investor, too, should have to borrow abroad to finance his overseas investment.
§ First, investment in the European Economic Community. Instead of getting a ration of £ 1 million of official exchange for any project in any one year, for the time being such investment must be financed, in the main, without official exchange. The existing rules for investment in the non-sterling area will therefore apply to the EEC also. In practice, this will mean that, apart from using the permitted amount of retained profits—normally one-third—most new investment will be financed with foreign currency borrowing. From this change I hope to produce a saving of £150–200 million in a full year. We have informed the Commission of the European Communities and the other EEC members of what we are doing.
§ Next, the overseas sterling area. When exchange control was extended to transactions with the overseas sterling area in June 1972, the aim was to avoid harm to the economies of individual countries or unnecessary hardship to individuals. I want to emphasise now that, although I am about to announce a tightening of the rules about the provision of official exchange for direct investment in the sterling area, I have satisfied myself that this should not deter investors, so the countries concerned will not suffer damage. The change I am making is to apply the same financing rules to the overseas sterling area as to the non-sterling area, including, now, the EEC. Experience in the non-sterling area certainly shows that these rules do not prevent a steadily growing volume of 288 investment. I would expect the same to be true of the overseas sterling area, so long as the countries concerned maintain a climate favourable for investment. The likely saving in a full year is £50 million. gradually increasing.
§ Next, portfolio investment in the overseas sterling area. When investors sell securities denominated in non-sterling area currencies, they must sell 25 per cent. of the proceeds in the official market. If the securities are denominated in the sterling area currencies there is no such requirement. This is obviously anomalous. There is no reason why United Kingdom portfolio investors in, say, Australia should be more favourably treated than investors in Wall Street; it is right that both should make some contribution to the official sterling market. The sale of 25 per cent. of disinvestment proceeds in the official market will therefore apply to overseas sterling area securities from tomorrow. It is difficult to estimate the likely foreign currency inflow. But the 25 per cent. rule for non-sterling area securities has brought in almost $400 million in 1973, and this figure should now be increased by a useful amount. I have, of course, given advance notice of these changes to the Governments concerned.
§ Finally, a change to the rules concerning direct disinvestment. Hitherto, the sale proceeds of disinvestment from non-sterling area countries which are not members of the EEC have been saleable in the investment currency market, subject to the 25 per cent. requirement. This rule reflects the time when much direct investment was financed through the investment currency market, but this has not been the case in recent years. The right to investment currency treatment—giving windfall gains on disinvestment—has become anomalous. In future, therefore, the proceeds of disinvestment must normally be sold in the official market.
§ The measures I have outlined, together with the appropriate management of demand, should help us to achieve a steady improvement in the external account. Meanwhile, we can face the big current account deficit this year with the prospect of an adequate inflow of borrowed funds to see us through.
§ We have at least one advantage to look forward to. Before too long, we shall 289 have our own oil supplies from the North and Celtic Seas. We must not imagine that this oil will be the answer to all our problems. At present, we cannot put a figure on the benefits it will offer, since we cannot predict the pattern of world energy supply and demand when it becomes available. But, provided the nation takes its rightful share of the profits, it is bound to bring substantial advantage to our balance of payments.