§ I now turn to the main guidelines which I have set myself for the management of the economy over the next few years since, as I have said, the measures I announced today must be seen as the first stage in implementing a strategy for the medium term.
§ Let me start with a fact which should neither be ignored nor treated as grounds for complacency. Although we entered the era of the oil crisis with a worse inheritance than most of our competitors, we entered it with better prospects in one key respect. The latest evidence suggests that in three years' time we should be meeting half of our oil requirements from our own national resources beneath the seas around us.
§ Mr. Healey
In 1980 we may even have a small surplus to export. So our central problem is to get through the next few years without damage to the fabric of our society and meantime to correct the structural weaknesses in our economy.
Our prime objective must be to make the best and fullest use of the human and material resources we have available. Deliberately to adopt a strategy which requires mass unemployment would be no less an economic than a moral crime. But no-one can claim that we are making the best use of our human and material resources at the moment.
Despite some recent improvements in our relative performance which I have mentioned, Britain's economy is still subject to major weaknesses compared with our competitors in world trade. At no time since the war have we succeeded in 254 maintaining an increase in our productivity close to that of most other industrial countries. The consequence has been that although our living standards have steadily improved—and improved faster than they did before the war—we have been slowly sinking back in the international league table.
One of the reasons for our disappointing performance is that by and large we have tended to invest less of our annual output in new capacity than our competitors, and even where we have maintained the same rate of investment we have secured a much smaller return in additional output.
Thus, although earnings in Britain have increased no faster than the international average, our unit labour costs and export prices in sterling terms have increased faster than those of our competitors because our productivity grew so much slower. So the decline in our relative living standards has been accompanied by a failure to achieve a balance in our external payments for any length of time.
I am determined that we shall reverse this trend. This means devoting a greater proportion of our output to exports and investment than in the past—so that, at least in the next few years, the great majority of us cannot expect any appreciable increase in our living standards, and increases in public expenditure will have to be held below the average increases in national output. The limit the Government have set themselves for expansion of public expenditure over the next four years is an average rate of 2¾ per cent. a year in demand terms.
We cannot afford to evade or postpone recognition of this necessity either by letting our trade deficit run on indefinitely or by using resources for personal or public consumption which should go to industrial investment to provide future growth and assure future jobs. This shift of resources into exports and investment is my first priority in economic management.
The second arm of our strategy for making the best use of our resources is to mount a national campaign against waste wherever we can find it. Above all we must adjust our behaviour both public and private to the enormous increase in the cost of energy. Our present pattern 255 of prices, subsidies and taxes simply does not fit a world in which the price of imported oil has increased five-fold in less than a year. Moreover, uncertainties in the Middle Eastern situation may persist for many years. It would be dangerous to ignore this aspect of the problem. It will be hard to adjust to a pattern of high-cost energy, but the sooner a start is made the easier we shall find it.
My colleague, the Secretary of State for Energy, and I will be introducing some immediate measures to this end. They will be only the first step. One of our policy objectives must be the elimination of subsidies to the use of energy through artificial prices for the products of the nationalised industries—for example, at the margin electricity is generated entirely from imported oil. It is impossible to justify a policy which actively encourages oil imports to produce electricity at uneconomic prices.
In general we must reduce and eventually remove subsidies of all kinds which distort the relative cost of different forms of energy, and which stimulate wasteful consumption. Higher energy prices will affect some people more than others. Fuel bulks large in old age pensioners' budgets. But the best way to help pensioners is to increase pensions, not to sell fuel to everybody far below its cost.
The need for realistic energy prices is only one part—though at present by far the most important part—of a wider problem. We in Britain cannot ignore the immense changes in world prices which have taken place in recent years and are likely to continue. We must therefore change the pattern of our private and public spending to take account of them. Even though, when we have carried out the necessary structural changes in our economy, it should be possible for us to resume the improvement in our standard of living, the factors which contribute to it will have to be differently proportioned.
In many respects I believe that the new patterns in our spending can in themselves improve our quality of life. The senseless accumulation of material goods of exactly the same type as the Western world has been producing since the war can no longer be regarded as the only guarantee of human happiness or the only measure of economic success.
256 Meanwhile, as we are seeking full employment with a better and less wasteful use of our resources, we must continue with the fight against inflation. In the coming year the key to victory lies in adherence to the guidelines for collective bargaining laid down by the TUC. The Government have their responsibility here, not only in fulfilling their undertakings within the social contract, but also in helping to control overall demand in the economy so as to avoid the twin dangers of mass unemployment and overheating. In this field monetary policy has an important rôle.
The fact that in the current year we have kept the growth in money supply well below the growth in GDP should help us in handling our economic problems in the coming months. It will remain our objective in the medium term to restrain inflationary pressures through the monetary system.
Within our overall commitment to fight unemployment and inflation these are three major objectives of our policy in the medium term—to give priority to investment and to the balance of payments over both public expenditure and private consumption; to adjust prices to reflect real costs, especially of imported energy; and to see that inflation is not fuelled by an excessive increase in the money supply. I am certain that the achievement of these objectives is a necessary condition for creating a viable economy.
But it is not a sufficient condition. As we have seen too often in the past, to achieve success we also need the ability to deal with the structural weaknesses in particular parts of our economy. We need the ability for discriminating and selective action.
Nothing has struck me more forcibly during my eight months at the Treasury than the inadequacy of the instruments currently at our disposal for coping with this task and the unsuitability of general fiscal measures for dealing with specific problem areas. For example, all of us have been perplexed for over a year by the simultaneous phenomena of rising unemployment in the country as a whole and severe shortages of labour in key parts of the economy. Even if we ignore the moral obscenity of such a policy, to try to deal with these specific shortages, 257 as some people recommend, by depressing the general level of demand and throwing a million people out of work would be like burning down the Houses of Parliament to roast a chicken. We need to develop a labour market policy such as has operated so successfully for many years in Sweden, based on an expansion of our provision for industrial training. Yet in the past we have not even had the information on which to base such a policy. We intend to fill this gap with the help of the Manpower Services Commission and the participation in it of both sides of industry.
Similarly, all the work we have recently done in NEDC—and there is no disagreement between the CBI and TUC on this—shows that the central problem of low productivity growth can be tackled only at the level of firm or factory. I am glad to say that NEDC has now decided to make this the main focus of its work in the period ahead. But the Government have at present far too limited a capability for helping with this problem.
The proposals in the White Paper on the Regeneration of Industry have an essential rôle in this regard. The system of planning agreements will enable us to formalise some ground rules for a relationship between Government and industry which has grown steadily more intimate whichever party is in power. Yet that relationship has so far developed without any clear conception of its general rôle in a mixed economy.
The National Enterprise Board will occupy a central position in ordering the relationship between Government and particular parts of industry which require the backing of public funds. These new instruments of policy and management may not have their full impact for several years—even the necessary legislation will take some months to carry through—but well before then they should be making a significant contribution towards the improvement of our industrial performance. They will also provide powerful support to the Government's continuing efforts to achieve a better use of manpower by the reduction of regional imbalances.
There is a final element in the Government's approach to our economic problems—the social contract. What the Government are trying to do—indeed what the nation must achieve if we are to surmount 258 our problems in the difficult years ahead—is to create a new sort of unity among all sections of our people—between Government and both sides of industry, between employers and trade unions, between food producers and consumers in our country.
The politics of confrontation have had their chance. I do not believe that anyone now wishes to return to them. I do not deny the magnitude of this enterprise. In effect we are attempting to change the whole climate in which not just our economy but our society has operated for many generations. But I believe it can be done—indeed, it must be done.
As I have said, this is a task from which no sector of our national life can stand aside. It is not one for Government alone. But so far as the Government are concerned, our rôle is to seek through our actions in the economic and social field to create a degree of confidence in our determination to achieve a fairer balance in our society which will evoke a united and positive response from the British people. Some of us can remember how successfully that response was evoked in war time when, as now, the philosophy of fair shares and equality of sacrifice was the cement of national unity. In their last period of office the Government demonstrated their commitment to the social contract by giving priority to pensions, housing and food subsidies. This time we must give equal priority to the prevention of mass unemployment—for that has become a danger no less real that inflation.