§ It is on this assumption that I have made my judgment about the size of the stimulus which I can deliver to the economy this year. The total size of the stimulus must, however, depend not only on the assumptions about inflation but also on the nature of the stimulus itself. It can be larger to the extent that it is clearly designed to improve our industrial performance and to strengthen our prospects of success in the fight against inflation.
§ The objective of the measures in my Budget today is to provide additional support for our industrial strategy partly in the form of direct help for business, particularly for small firms, and partly by strengthening the incentive to effort at all levels in industry through cuts in income tax. I also believe that by using tax cuts to increase the real value of the pay packet during the coming year I can encourage further moderation in pay settlements and a continuing fall in the rate of inflation.
§ I recognise, too, that if the Budget measures are to generate the support of working people for the nation's economic objectives they must also contribute directly towards the relief of poverty, to the fight against unemployment, to the improvement of our social services and to the achievement of a more compassionate and fair society. The measures I am about to describe are designed specifically to achieve these objectives.
§ I have, therefore, concluded that it would be right to give a full year stimulus to the economy of some £2½ billion—or about £2 billion in 1978–79. The measures should raise output by another ¾per cent. in the next 12 months and, as a result, GDP should increase by about 3 per cent. at 1970 prices—the highest increase for five years. I am satisfied that this can be done without either prejudicinging our monetary objectives and refuelling inflation or overstraining our productive capacity.
§ As a result of this Budget stimulus the PSBR this year will be within the ceiling I set in my letter to the International Monetary Fund last December. The forecast shows a PSBR of £8½ billion or 5¼ per cent. of GDP, reflecting a general 1195 Government financial deficit which at 4 per cent. of GDP would be no higher than that, for example, of Germany. In fact, the PSBR for 1977–78 as forecast in last year's Budget was exactly the same as the current forecast for 1978–79—£8½ billion. The estimated outturn for last year, however, is now £5.7 billion—nearly £3 billion lower, despite additional cuts in taxation during the year.
§ Of all the elements in the forecast the PSBR is the most difficult to estimate correctly. But even if this year's PSBR is as high as forecast, the higher level of government debt needed to finance it will be counter-balanced by the reduced need to sell gilts to offset the domestic effects of inflows across the exchanges, which were very substantial in the last financial year.
§ The funding of the PSBR outside the banking system will be helped by direct sales of certificates of tax deposits, mainly to companies, and of national savings to individuals. A new issue of savings certificate is announced today, with a yield of just under 6.8 per cent. per annum over its four-year life, and a maximum holding for any one saver of £2,000.
§ This will mean that the forecast requirement for gilt sales will probably be much the same in money terms as the sales achieved in the last two years and somewhat smaller in relation to the institutional funds which are likely to be available. Thus I foresee no difficulty in financing the PSBR for 1978–79 consistently with the new monetary guideline of 8 to 12 per cent.
§ I now come to the Budget measures themselves.