§ The House will recall that in the spring I put the public sector borrowing requirement for 1974–75 at £2,733 million. It may be worth mentioning that the borrowing requirement is the balance of two sides of an account each of which runs in aggregate to about £40 billion. Since it is a balancing item, it is inevitable that what are small percentage changes in either side of the revenue and expenditure account can make a very big change in the borrowing requirement.
§ This year has seen some significant changes on both sides of the account, most of them resulting directly from the effect of inflation on wages, costs and taxes, some from action taken by the Government to cushion the impact of inflation. As I made clear at the time, the July measures increased expenditure and reduced revenue, mainly as a result of the cut in value added tax, by about £340 million. The loan to the building societies may add over £100 million—after repayments—to the requirement this year.
§ Wage increases and other cost increases have increased public expenditure as outlined in the March Budget in current price terms—but not in volume terms—by over £1,000 million more than the additional yield from taxation which results from inflation. Major parts of this increase have occurred in the expenditures of the local authorities and the National Health Service. Subsidies, largely devoted to reducing prices, have 251 increased by nearly £1,100 million, including £300 million for housing subsidies and £550 million for nationalised industries. There were as usual also a multitude of small changes in both directions. The upshot of all these revisions has been to increase the borrowing requirement this year by about £2¾ billion to about £5½ billion.
§ A great deal of this has of course already come through and has been financed either from the sale of gilt-edged or by borrowing abroad. As a result, despite the growth of the public sector borrowing requirement, the rate of growth of money supply has been kept within strict limits and the inflationary impact of this enlarged borrowing requirement has been contained.
§ Though a revision of the borrowing requirement to about £5½ billion is a serious matter, it would be wrong to exaggerate its importance. As far as current expenditure is concerned, the public sector is in substantial surplus, receipts exceeding expenditure by over £3,500 million. The borrowing requirement arises because total capital expenditure of the public sector and its lending to others is nearly three times the current surplus. Much of this capital expenditure—about £7 billion in fact—consists of fixed investment by the nationalised industries and other public bodies, and is a real addition to our stock of capital which it is entirely reasonable for the Government to finance in part by borrowing, as private industry does all the time. So although I would certainly be concerned if the borrowing were being made in a way which added to inflation, I can take comfort from the fact that we have been able to accommodate it within the guidelines set for monetary policy.
§ As the House knows, in the current calendar year the money supply on the broad definition has risen at a rate well below the increase in money GDP, and well under half of the rate of increase in 1973.
§ I should add, because comparisons are sometimes made between the borrowing requirement in the United Kingdom and the balanced budgets presented in some other European countries, such as France and Germany, that their presentation cannot be directly compared with ours.252
§ Their published budgets place the primary emphasis on the accounts of central government, whereas our public sector borrowing requirement covers also the borrowing of local authorities and nationalised industries. If we were to concentrate on the accounts of central government, we should be showing, before the measure which I am about to announce, a borrowing requirement of about £3.1 billion. But £2.2 billion is for on-lending to local authorities and nationalised industries. The amount which the central government would be borrowing for purposes other than this on-lending would thus only be about £900 million—a small fraction of the figure for the public sector borrowing requirement as presented under our conventions.