§ The Chancellor of the Exchequer (Mr. Denis Healey)I have already described the targets which we have set for the PSBR of £8.7 billion for 1977–78 and £8.6 billion for 1978–79, in order to create monetary conditions which will encourage investment and growth and will help to control inflation. We are expressing the essential monetary targets in terms of Domestic Credit Expansion rather than money supply, since we agree with the IMF that this will be more appropriate than a target for M3, during a period when we shall be giving top priority to putting our balance of payments right.
DCE will be kept to £9 billion in the year up to 20th April 1977 and £7.7 billion in the year ending 19th April 1978, and I expect a further reduction in the following year to £6 billion. The growth of M3 which will accompany DCE at these rates will depend on a number of factors, especially progress on the balance of payments. For 1976–77, again on a banking month basis, the growth of sterling M3 is likely to be between 9 per cent. and 13 per cent. It is too early to give an estimate for 1977–78. But our target will now be in terms of DCE, not M3.
Because the public sector will be making a smaller demand on savings in the next two years, these DCE targets should provide sufficient room for industry's essential needs. The targets will be reviewed after six months to ensure that this is so. I hope, too, that the IMF agreement and the measures I have announced will enable us to see interest rates fall from their present exceptional levels while keeping control of the monetary aggregates. This reduction in interest rates may be slow at first, but should move faster as the balance of payments and the rate of inflation both improve. We shall, however, need the existing range of credit controls for the present, perhaps with technical adjustments to special deposits arising from success with gilt sales.