§ In deciding how much stimulus I can afford to give the economy this year, I have to make a judgment about the rate at which our industry can increase its output to meet the consequent demand and about the competitiveness of the goods it produces. I must also consider the likely development of the economy over the next year or so if I take no further action at all in this Budget.
§ These are all difficult questions of judgment on which the margin for error is uncomfortably large. Economics, after all, is about the behaviour of human beings—the most unpredictable of all creatures. It is a useful tool of policy but still far from being an exact science—if it is a science at all. As I have warned the House on many occasions, economic 1190 forecasts, like weather forecasts, become increasingly unreliable as they look further ahead, particularly if precise figures are attached to them—as must be the case, for example, with the forecasts which the House has instructed me to provide. But some trends are fairly clear.
§ Now that the inflation rate is stabilising at a level well below the increase in earnings, living standards and personal consumption should both rise substantially. Private investment in manufacturing industry rose about 14 per cent. in volume last year and is expected to show a similar increase this year. Public expenditure on goods and services is planned to rise significantly.
§ It is more difficult to forecast how our trade performance will develop since assumptions about our competitiveness are crucial here. But it is reasonable to expect that exports will continue to increase substantially, though higher domestic demand will probably lead to faster growth in our imports of manufactures.
§ This leads me to conclude that without any stimulus from the present Budget the economy might grow in the coming year by 2 per cent. to 2½ per cent., if, as is still the case, we make these calculations at the prices which ruled in 1970. If, on the other hand, we value the contribution of North Sea oil at the relative prices of 1975, after the oil price explosion, which we plan to do for all national income statistics later this year, then the increase in oil production would, of itself, add a further ¾ per cent. to our growth rate.
§ Against this broad estimate of the likely growth in the economy without a Budget stimulus, the increase in demand which I can afford to generate this year depends critically on the outlook for inflation. This, in turn, will depend primarily on two factors—our monetary policy over the next 12 months and the outlook for wage costs. So far as the immediate future is concerned the outlook is now firmly established and our success is evident in the figures already available.
§ Our year-on-year inflation rate reached single figures in January—months earlier than we predicted last November. Over the last 10 months, the month-to-month increase in inflation has been running at an annual level below 8 per cent. The yearon-year inflation rate is likely to reach 7 per cent. in spring or early summer. 1191 Unless there is some quite unforeseeable catastrophe, it seems likely to remain fairly steady at around 7 per cent. for the rest of this year—at about the average rate for most industrial countries and lower than that of some of our competitors whose inflation rate has been rising rather than falling in recent months. But if we are to be sure of maintaining at least this level in 1979, then we must have appropriate policies for dealing both with the money supply and with pay and prices. I shall deal with each of these factors in turn.