§ As I have already observed, my predecessor was undoubtedly right to adopt a system of monetary targets. But his other policies were seldom consistent with his own monetary objectives. Thus, although monetary growth in 1978–79 as a whole was just within the target range of 8 per cent. to 12 per cent., it was growing in the second half of the year at an annual rate of almost 13 per cent. Moreover, the May figures, now becoming 242 available, indicate that the underlying growth is still above the top of the range and, if anything, accelerating. One cause of this has been the alarming rate of central Government borrowing—£2½ billion in April and May alone.
§ It is now clear that the public expenditure policies which we inherited would have made it quite impossible to meet the right hon. Gentleman's 8 per cent. to 12 per cent. target without a further savage squeeze on the private sector, involving not just higher interest rates but also a sharp increase in the total tax burden. Not for the first time, the levels of public spending and borrowing which he permitted were far too high to be compatible with his own monetary targets. Reluctantly, I shall myself be obliged to take painful action to correct that mistake.
§ We are committed to the progressive reduction of the rate of growth of the money supply. I therefore intend, despite the discouraging backcloth, and as the first step in this process, to reduce the targe range for the remainder of this year, 1979–80. The new target range, to apply to the growth of sterling M3 in the 10 months to the banking make-up day in April 1980, will therefore be an annual rate of 7 per cent. to 11 per cent., but I will roll the target forward by six months in the autumn.
§ Equally important, I intend to improve the way in which the monetary target is achieved. We need to rely less on curbing the private sector, and put more emphasis on fiscal restraint and economy by the public sector. That requires, as a first step, a significant reduction in the public sector borrowing requirement from the figure of around £10 billion that it would otherwise have reached this year.
§ There are, however, limits to what can be done in this Budget, with two and a half months of the financial year already passed, to curtail the scale of public spending in the current year. This is indeed a severe handicap. Even so, I intend to reduce the public sector's financial needs enough to make it possible to achieve my monetary target with less restraint on the private sector.
§ But the fiscal measures which I am announcing today must inevitably take time to take effect. They cannot immediately reduce the seriously excessive monetary growth that we have inherited. 243 Particularly given the continuing surge in bank lending, I have concluded that there is no option but to act directly to reduce that growth. It is not enough to speak of the importance of monetary policy, unless one is prepared to carry one's words into practice.
§ The Bank of England is accordingly rolling forward the supplementary special deposit scheme, or "corset", by three months on the existing basis. In addition, the Bank is announcing, this afternoon, an increase in its minimum lending rate by 2 per cent. to 14 per cent. [HON. MEMBERS: "Oh".] I must make it very plain to the House that the necessity for this action ranks alongside last week's trade figures as entirely characteristic of the legacy of the last Administration.
§ I return now to consider the right size of the public sector borrowing requirement in the current year. As my predecessor found to his cost, this is a fickle and elusive statistic, so I offer my judgment of the scale of Government borrowing in 1979–80 with a degree of caution. Having said that, my best estimate is that the changes in taxation and public expenditure which I am announcing today will be sufficient to reduce the PSBR to £8¾billion in the current year, as compared with the outturn of £9¼billion for 1978–79. As a percentage of GDP, that will represent a reduction from over 5½per cent. last year to under 4½per cent. in the current year. The public sector deficit will also fall from 4½per cent. to 3¾per cent. of GDP. These are important steps in the right direction. I intend to continue along that path in the years ahead.
§ It will no doubt be argued by some—although I do not think that it can be so argued by my predecessor—that fiscal action to bring down the PSBR to the figure I have mentioned is unduly severe. Indeed, the conventional forecasting arithmetic, which, in accordance with custom and stature, I am publishing in the Financial Statement, does suggest that the economy will show no growth in the period immediately ahead.
§ But this prospect, in so far as it can be viewed as a reliable prediction—which itself is open to doubt—cannot be taken to mean that the Budget is, in the traditional language of neo-Keynesian economists, perversely contractionary. To make that claim is to argue 244 that an alternative course of fiscal policy would produce more growth and more employment. I believe that argument to be profoundly wrong.
§ To aim at a significantly higher public sector borrowing requirement—in other words, to case the stance of fiscal policy—would serve only to fuel the fire of inflation. In the end, we should have less growth, less employment, and even higher prices. Even the Leader of the Opposition must accept that, in the light of the words that I quoted from what he said at Blackpool nearly three years ago. It follows that any decline in economic activity which might, on a narrow view, be attributed to this Budget will be essentially the consequence of the economic situation which has made such measures inevitable, while inflation is being brought under firm control.