It has been traditional in Britain for many years to make the centre piece of the spring Budget the so-called Budget judgment. I did so myself last year. As I them explained, the Budget judgment is conventionally seen as an estimate of the amount of demand which the Government should put into the economy or take out of it in order to achieve the optimum use of resources in the short term. For many reasons I do not propose to adopt that approach today. Against the setting which I outlined at the beginning of my speech. I must seek to strike a new sort of balance between the tactical needs of the immediate future and a strategic attack on the long-term structural problems of our economy.
I fully understand why I have been urged by so many friends both inside and outside the House to treat unemployment as the central problem and to stimulate a further growth in home consumption, public or private, so as to start getting the rate of unemployment down as fast as possible. I do not believe it would be wise to follow this advice today. As I have said, I did last July and November adopt reflationary measures whose full effect would only be felt this year. I cannot afford to increase demand further today when 5p in every £we spend at home has been provided by our creditors abroad and inflation is running at its current rate. I do not believe anyone in Britain would thank me for producing an even larger deficit on our balance of payments and injecting a further massive dose of inflation through price and wage increases.
283 Moreover a Rake's Progress of this nature could not last for long. The patience of our creditors would soon be exhausted. We would then face the appalling prospect of going down in a matter of weeks to the levels of public services and personal living standards which we could finance entirely from what we earned. I do not believe that our political or social system could stand that strain.
Fortunately, the alternative to reflation now is not a continuing rise in unemployment over the indefinite future. The measures I took last year should ensure that our levels of unemployment in Britain this year will be less severe than those in other countries affected by the world recession. The main purpose of my Budget today will be to ensure that our economy can take full advantage of the strong recovery in world trade we can expect next year. I have emphasised many times to my Finance Minister colleagues at international meetings in public and in private that the countries with comparatively strong balance of payments positions must lead the way to world recovery for the benefit not only of themselves but of the international economy as a whole. For these countries to maintain deflationary policies is to damage the flow of world trade just as directly as by introducing physical controls on imports. Now that most of them are taking the necessary decisions, we in Britain must be able to take full advantage of the trading opportunities they will offer us. Of course, if those opportunities proved, after all, inadequate I should have to consider other measures for maintaining employment in Britain.
My intention in this Budget is to establish a strategy which will enable us to achieve a very substantial improvement in our current account deficit in the next two years and to eliminate the deficit entirely as rapidly as possible thereafter. We have to set more of our national resources aside for exports. This is not a question of choice or of political decision: it is a fact of the world we live in, a fact which I must budget for now. Our overseas deficit must be removed. and the world must know that it will be removed.
It is not a question of removing our deficit at a stroke or in a single year. 284 Indeed, as I think is now universally accepted, so long as the oil-exporting countries are unable to spend all their earnings on goods and services from the consumer countries, the consuming world must accept the corresponding deficit and finance it by borrowing from them. This can be done through the market, directly from the oil producers or indirectly through international institutions, using recycling mechanisms such as the oil facility I helped to set up in the IMF.
But several factors have emerged in recent months which make it necessary for us in Britain to reduce our balance of payments deficit more rapidly than would be possible under existing policies. One reason, as I have already explained, is our current rate of inflation. Another is the evidence that the oil-producing countries may be spending their wealth rather faster than envisaged and that we must therefore be ready to pay them by supplying the exports which we owe them rather faster. A minor, but not insignificant, factor is the delay in the expected flow of oil from the North Sea in the next year or two which was described in yesterday's Brown Book.
Our offshore oil remains an asset of unique value and we still expect to reach self-sufficiency by 1980, but the build-up of supplies will now follow a profile slightly less helpful for our short-term problems.
Behind all these particular reasons for closing our deficit more quickly lies one overriding and, to me, absolutely compelling argument. We in Britain must keep control of our own policy. We must keep ahead of events. It would be disastrous if we were forced. as sometimes in the past, into running desperately after events which we could not control. By relying unduly on borrowing we would run the risk of being forced to accept political and economic conditions imposed by the will of others. This would represent an absolute and unequivocal loss of sovereignty which I think neither side of the House would wish to invite.
One of the disadvantages—or perhaps advantages—of being a Finance Minister at the present time is the exceptionally wide diversity of views among professional economists. Apart from the general uncertainty of forecasting, to 285 which I referred last November, there are deep divisions among the experts about what makes the economy tick. However valuable their advice on specific issues, they find themselves divided on most of the major problems on which the politician most needs their help—like growth and inflation. Some of them even admit it. though humility has not always been a hallmark of their profession.
At present there are particularly fierce disputes about the causal relationships between the four components of a nation's economy which together—and a priori, as my tutors used to tell me years ago—must add up to zero: the external balance, the financial balance of the public sector, and the balances of the corporate and personal sectors.
But although there are different approaches to the analysis of this problem I think most commentators would agree that it is impossible to bring about a sustained and progressive improvement in the balance of payments over a period of years if at the same time the public sector financial deficit is increasing rapidly as a percentage of GNP. Yet, unless I take steps today to change the situation, this is the prospect which now faces us. So I must give the House some explanation of the state of our affairs seen from this particular angle of approach.
The pre-Budget estimate for the public sector financial deficit in 1975–76 points to a figure of nearly £9 billion. Though bitter experience compels me to emphasise the substantial margin of error in such estimates, I am convinced that a figure of this size is inconsistent with the strategy I have laid down. The public sector borrowing requirement, which is higher than the financial deficit, since it includes borrowing for on-lending to the private sector or overseas, was similarly going to rise to over £10 billion. Expressed as a percentage of GNP this represents an increase from just under 10 per cent. in 1974–75 to over 11 per cent. in 1975–76.
The main reason for this increase is that incomes financed by the public sector are rising faster than present rates of inflation, whereas on present policies the receipts of the public sector are doing no more than keep pace with the inflation. Pay in central and local govern- 286 ment is likely to cost upwards of £3 billion more in 1975–76 than in 1974–75. That forecast is based mainly on settlements or proposals already made. Retirement pensions, which are related to the increase in earnings, and other grants to persons are likely to cost between £2½ and £3 billion more. There will also be an increase of about £l billion in the servicing of the debt.
On the receipts side, the yield of personal taxes on income and of national insurance contributions is rising faster than the inflation, but this is more than offset by the slower growth of the yield of other taxes, including in present circumstances the corporation tax, which shows an actual decline, and the excise duties.
I have come to the conclusion that to budget on the basis of a public sector deficit of some £9,000 million and a borrowing requirement of over £10,000 million would involve unacceptable risks. In November I was prepared to tolerate a deficit of nearly £5,000 million and a borrowing requirement of over £6,000 million because I was satisfied that in the circumstances of the time this would not lead to unacceptable consequences for the pressure on resources, the balance of payments or money supply. Subsequent events have. I think, justified that judgment. But a deficit and borrowing requirement of the scale forecast for 1975–76 on the basis of unchanged tax rates would be too high by any standards. My intention is to reduce the borrowing requirement by well over £1 billion in 1975–76 and by about £3 billion in 1976–77.
This change can be brought about only by some reductions in both public and private spending. The reduction in spending would be necessary in any case if resources are to be made available to take advantage of the big improvement in world trade that I foresee for next year. There remains the problem of allocating the burden of readjustment between the public and private sectors and deciding what the timing should be.
The White Paper on Public Expenditure warned that the burden of taxation would have to rise. The situation, as I see it, makes a sizeable increase in taxation unavoidable. But to attempt to take the whole burden on taxation would make an impact on personal consumption 287 so large as to generate new inflationary pressures. Some cut in public expenditure, too, is therefore unavoidable.
But if we are to avoid the wasteful disruption and extra costs always involved by short-term cuts in expenditure programmes—we have all too much experience of that in Governments of both parties—we must plan the reductions well ahead so that they cause the least possible damage when they are carried out. They must also be chosen and distributed so as to preserve as far as possible the industrial and social priorities of the Government. I have therefore decided, as part of the forward strategy that I have explained, that in the current year I shall rely on higher taxation, which can take effect at short notice. and that the reduction in public expenditure should take place in 1976–77.
It is essential that these budgetary instruments should not be undermined by any relaxation of our stance on monetary policy. It is my intention that the growth of money supply should continue to be contained at a level which does not fuel inflation and that, consistently with this, the credit available should be concentrated on the essential needs of the economy I will not hesitate to reintroduce the supplementary deposits scheme should this prove necessary.