§ Our recent achievements have been encouraging and there is every reason to believe that we can make further substantial progress in the coming year. But this Budget must also grapple with the problems of the medium term. It must lay the foundations for a strategy which will enable Britain to enter the 1980s with full employment, stable prices and an economy in balance both at home and abroad.
§ The next few years should see the world recovering from the deepest recession since the 1930s. But there are significant differences between this and earlier upswings in the trade cycle. All the major industrial countries entered the recession with exceptionally high rates of inflation and, despite the severity of the recession, none of them except perhaps Germany has yet succeeded in reducing its inflation to the level it would have regarded as tolerable a few years ago. Partly for this reason, very few of the industrial countries are expected to restore employment to their normal post-war levels by 1980. Moreover, many of the countries which succeeded in achieving a surplus on their current account after the increase in oil prices expect reduced surpluses, or even deficits, as their recovery gets under way. In other words, the whole of the industrial world expects more difficulty than in any 239 earlier recovery in reconciling the basic objectives of economic policy—full employment, stable prices and external balance.
§ I have emphasised this fact because, as a nation exceptionally dependent on foreign trade, Britain cannot achieve immunity from economic trends in the outside world. The problems we face in Britain today are different only in scale from those of other industrial countries. We can hope to solve our problems in full only if our trading partners succeed in solving theirs. Indeed, if any one major industrial country were to seek to solve its problems at the expense of the others we could expect to see emulation and retaliation spreading rapidly in a chain reaction. The whole world could be plunged into a prolonged economic slump like that of the 1930s. That is why the British Government have taken the lead, both in the Commonwealth and the European Community and in other international organisations, in organising collective discussion of our common plight in the hope that we can devise together an international strategy for dealing with what has plainly become an international problem.
§ Yet, though our immediate economic problems are similar in nature to those of our trading partners, the fact remains that they are far greater in scale than most. Even before the oil crisis hit us in 1973, growth had come to a halt in Britain, our balance of payments deficit by the end of 1973 was already racing up, and inflation, fuelled by a grossly excessive increase in the money supply, was already rising rapidly. On top of this, the increase in oil and other commodity prices cut our real national income by nearly 5 per cent.
§ Though we have made progress in dealing with this bitter legacy, Britain nevertheless enters the phase of world recovery with handicaps none of her partners carries. It will be even more difficult for us than for them to achieve full employment together with external balance. We can do it only if we produce a major shift in the use of our resources away from private and public consumption towards exports and investment. We have made a good start on this but there is still a long way to go.240
§ There is no short cut to a solution of our problems. Whatever adjustments the Government may make in their fiscal or monetary policy, our success depends in the end on improving the performance of our manufacturing industry. It is because our manufacturing industry has declined since the war both in size and efficiency by comparison with those of our competitors that our economic record since the war has been inferior to theirs. The Government have launched new policies for improving our industrial performance in co-operation with the leaders of both sides of industry. They have limited the demands of the public sector so as to make room for industrial expansion. But in the end the problem can be solved only at the level of the individual company and plant.
§ How fast we move towards a solution depends on everyone in industry—managers, workers and salesmen alike. The target the Government have set themselves is to get unemployment down to 3 per cent. in 1979. As I told the House the other day that would require an increase in GDP of about 5½ per cent. a year in the three years 1977, 1978 and 1979 and an increase in manufacturing output of about 8½ per cent. a year in the same period. We have never maintained such a rate of increase over so long a period in the past. But it is not impossible today, given the exceptionally low level of capacity use from which we start. Nevertheless, it will require a rapid improvement in our industrial performance in every field and at every level.
§ I see that some hon. Members have described the rates of growth required as implying an economic miracle. Yet many of our competitors have achieved these rates of growth in similar situations since the war. They have already experienced their economic miracle—and they have managed thereafter to sustain levels of performance consistently superior to ours. I do not believe that our countrymen lack any of the essential qualities which so many of our European neighbours, under Governments of various political persuasions, have been able to apply to the solution of their economic problems.
§ In helping to create the conditions for the improvement in our industrial performance which is needed if we are to 241 return at a tolerable speed to full employment, this Government must learn from the lessons of experience under other British Governments since the war. For, like all earlier Govenments in similar situations, we face two major constraints on growth. Each of them by itself could frustrate our efforts to achieve the necessary speed in our recovery unless the right action is taken in time. Neither can be reduced through action by the Government alone.
§ Those constraints are, first, the risk of temporary shortages of capacity—skilled manpower, capital equipment, raw materials, components and so on—which I may describe as the bottleneck problem and, secondly, the risk of an unacceptable deficit on the balance of payments. The first constraint may bring the second in its train if, as happened under the last Government, too much demand is pumped into the economy too fast. In that case the result may be, as it was in 1973, a complete seizure in domestic production followed by an intolerable balance of payments deficit as the frustrated demand sucks in imports.
§ This Government have long recognised the need to deal with the bottleneck problem. They began to take action in the Budget a year ago by concentrating assistance on industries like machine tools which have been unable to expand their activity sufficiently in the past, and by introducing measures to accelerate investment projects. They have also doubled the amount of money available for industrial training. The first survey of leading sectors in the economy, which will be drawn together by the National Economic Development Council in two months' time as a basis for our industrial strategy, should help us to identify other areas where action is needed—whether by the Government, by management or by the unions—in order to eliminate bottlenecks in advance of recovery.
§ Bottlenecks can arise not only from bad planning by Government or management. They can, and all too often do, derive from bad industrial relations leading to the sort of stoppages in a components factory which can bring a whole industry to a halt. Recent events illustrated more forcibly than any abstract argument that it can be highly dangerous to expand domestic demand without 242 a firm assurance that our industry has both the will and the capacity to meet it. Otherwise, the only result will be to establish foreign manufacturers in a position in the British market from which it may be immensely difficult to dislodge them later.
§ So far as the balance of payments imposes a constraint on growth, there is only one answer—to base expansion in the first place on exports and import substitution and not on a general reflation of domestic demand. Whatever other issues may divide rival schools of economists who contend so publicly for our attention these days, they all agree that a massive reflation on its own could lead only to disaster. It would reduce unemployment temporarily but at the cost of increasing the balance of payments deficit intolerably. This would soon exhaust our ability to finance our external deficit—and thereby force us into renewed deflation and a higher level of unemployment than that from which we started.
§ The balance of payments problem is so important a constraint on the speed at which we can return to full employment that I hope the House will forgive me if I discuss it at some length.
§ The only reliable means of removing the balance of payments constraint in the longer run is to ensure that our manufacturing industry performs much better in the future than it did in the past. This is often expressed by saying that it must compete more effectively both at home and abroad. But effective competition has many dimensions; it is not just a question of price—otherwise Germany would now have a substantial deficit instead of a substantial surplus. It is a question of producing the right goods, of the right quality, delivered at the right time, and of devoting the right amount of effort to selling those goods, at home as well as abroad, as well as of selling them at a price that offers good value to the buyer.
§ Compared with our situation at a similar point in past cycles, we have some things working in our favour. Our costs are competitive and we have spare capacity both in resources and in manpower. So we are well placed to sustain an expansion which is led by exports. But we shall not succeed in this unless we hold down the domestic claims on 243 our resources, particularly consumption, both private and public. As I mentioned earlier, since the third quarter of last year the volume of our manufactured exports has been increasing at an annual rate that is well into double figures. At the same time, the volume of finished manufactures which we import has been relatively stable and is still slightly below the level reached in 1973. This represents an excellent first step towards export-led growth.
§ Those who argue that we in Britain are infected with an excessive and increasing import propensity—by this they mean that in any period of recovery we are bound to increase our manufactured imports much faster than our exports—forget that our imports of manufactures have grown at an intolerable rate only in those particular years when the impatience of certain Chancellors of the Exchequer, and their urgent need to restore electoral popularity—I forbear to identify their party—led them to reflate too fast or to run the economy at an excessive pressure of domestic demand. These were the two-year periods of 1958–60 when the volume of semi-finished and finished manufactured imports grew by no less than 51 per cent.; of 1962–64, when it grew by 32 per cent.; and in 1971–73, when it grew by 45 per cent. [Interruption.] This is the legacy we inherited. It is reasonable to assume, therefore, that with our present level of costs we should be able to contain the growth of manufactured imports within acceptable limits if we avoid overheating the economy—either through maintaining an excessive pressure of demand, or through attempting too rapid an expansion.
§ I know that some economists take a different view. But even if I shared their pessimism I would find it difficult to accept their prescription. They argue that Britain would have to cut her imports of most manufacturers by many billion pounds worth a year below what would otherwise have happened, and that the necessary controls would have to continue to 1980 and beyond. Such a large-scale and semi-permanent restriction of imports would mean breaking Britain's treaty obligations to the General Agreement on Tariffs and 244 Trade, the International Monetary Fund and the Community. It would mean telling the world that we planned to base our own growth on the penetration of foreign markets without allowing other countries the same freedom to penetrate our own.
§ It is difficult to believe that under present conditions—or, indeed, under the conditions of the next few years as I have described them—Britain would be allowed to get away with a policy of that nature. On the contrary, such action might well lead to an international trade war on the scale of the 1930s.
§ For that reason, I do not believe that general and prolonged import controls offer any solution to our problems. Selective import controls are, of course, another matter. [HON. MEMBERS: "Oh."] Oh, yes. Although they cannot provide an answer to the macro-economic problems, they may have a valuable rôle to play in protecting particular industries whose survival is threatened by excessive imports, which cause market disruption. The Government have announced several such controls in recent months and we shall remain alert for other cases where they may be appropriate. But there is no escape from the hard fact that the balance of payments constraint on the speed at which we can return to full employment can be removed only by making British industry more efficient in all the respects which affect its sales both at home and abroad.
§ Our industrial policies aim to improve the performance of British manufacturers in this broader sense. Above all, they aim to increase productivity since this is the best way of improving price competitiveness provided that the higher productivity is not creamed off in higher wages or higher profits.
§ We have seen sterling depreciate in recent weeks as the inevitable response to the fact that our rate of inflation has been above that of our competitors. But depreciation of this nature is no answer to our problems. It increases the cost of living and thereby in itself generates new inflationary pressures. It is only by reducing industrial costs through higher productivity and a lower growth of incomes that we can find a lasting solution to the balance of payments constraint on economic growth.245
§ As I have said, the responsibility for meeting both of those conditions lies in the last resort in the individual boardroom and on the individual shop floor. It lies on every man and woman who works in industry at every level. But the Government have the responsibility for helping to create the economic and social environment in which the British people can produce the necessary response.
§ Before outlining my detailed proposals, I should like to give the House a brief account of how I see the economy developing in the next year or so on the assumption of present taxation rates, present expenditure plans and the present rate of pay increases.
§ First, I would expect total output to grow quite briskly, perhaps by about 3½ per cent. in the next 12 months. Within this total the pattern of resource demand would be developing very much as I have suggested it should if we are to bring the economy into better balance in the medium term. The strong elements of demand would be exports, which would grow at perhaps 9 per cent. under the impulse of the rapid growth in world trade, stock-building and private fixed investment, which might grow at 6 to 7 per cent. By contrast, private consumption would be rising at only about l½ per cent. and public expenditure on goods and services would be approximately unchanged.
§ We have to shift the distribution of resources over a sustained period in roughly this pattern. I should not want to change it materially in this Budget. And since the rise in output would be approaching the rate required to meet my objective for unemployment by 1979, I do not think that it would be right to add much to aggregate demand. We must approach the period in which a higher growth rate is required not with a sudden spurt but with a steady and gentle acceleration.
§ It follows from this and from the constraints I have described that my Budget must not on balance add much to demand or change its pattern. Instead, my Budget will have two overriding objectives, both concerned with the essential improvement in our industrial performance: first, to create the conditions in which output and productivity are most 246 likely to increase; and, second, to create the conditions in which wage costs can be kept as low as possible without unnecessarily reducing the real value of the workers' take-home pay.
§ So far as industrial efficiency is concerned, I am proposing a series of measures which I believe will encourage industry to maximise its output and productivity. So far as industrial costs are concerned, I am proposing two sets of measures. The first will take effect immediately, since I believe that they will help to create a suitable climate for the coming discussions on the next wage round. But I shall ask Parliament to approve the second set of measures only when the TUC has made its recommendation on the new pay limit later in the summer.