§ But it is not enough simply to mitigate the effects of the unemployment. It is our purpose as well to secure a sustainable growth in job opportunities. So we must look for a larger share of rising demand to be translated into British output and British jobs.
§ Progress on inflation is crucial to the prospects of higher output and lower unemployment. High inflation destroys savings, impairs efficiency and undermines stability. So lower inflation is good in itself. But it also underpins a return to lasting growth and to new jobs.
§ Lower inflation will lead to higher real demand and output, provided we hold to the medium-term financial strategy. Lower inflation helps consumer spending, as savers no longer have to put aside so much simply to maintain the real value of their capital.
§ Lower inflation encourages higher spending by companies, both on stocks and on investment. For lower inflation contributes to lower interest rates, so improving cash flow; and lower inflation helps keep down other costs. This is one reason why industrial profitability, though still by historic standards very low, has begun to recover. This too should encourage new investment and the creation of new jobs.
§ Lower inflation and interest rates also ease the burden of mortgage interest, helping house buyers and in turn house building.
§ With lower inflation the cash programmes of the public sector go further: they buy more goods and services.
§ Lower inflation will provide the stability and confidence needed for further progress in securing the improvement in Britain's economic performance needed to reverse the long years of relative decline.
§ Finally, of course, inflation has long been the enemy of good sense in pay bargaining, and so too the enemy of jobs. The understanding that Government will riot finance higher inflation has done much—though still not enought—to bring common sense back into wage bargaining. The way in which excessive pay increases destroy jobs is now much more widely understood.
§ More moderate pay settlements combined with improved productivity are two of the reasons why last year, in a shrinking world market, British manufacturers succeeded in enlarging their market share. Still lower pay settlements and still higher productivity remain vital to our competitive position. Provided they come through, British 139 business is now better placed than for many years to make inroads into markets at home and overseas—and provided we go on achieving success against inflation.
§ Inflation was on a rising trend when we came to office. It peaked at some 22 per cent. in 1980. The reduction since then has been dramatic, with retail price inflation now down to 5 per cent. The benefits of this transformation are felt throughout the country—it results from the firmness and consistency of the policies we have pursued in the pasts four years.
§ We shall not change course. Downward pressure on inflation will be maintained. With the lower exchange rate some check in our progress now is unavoidable. In the fourth quarter of this year inflation in retail prices may for a time be running at about 6 per cent., a little above what it is now, but still substantially below its level of a year ago. And it seems likely that the rate of increase of the GDP deflator—which is a measure of prices across the whole economy—will continue to fall, from 7 per cent. in 1982–83 to 5½ per cent. next year.
§ The trend of rising inflation that appeared irresistible has been decisively broken. We are now certain to be the first Government for a quarter of a century to achieve a lower average level of inflation than did their predecessor. In the next Parliament it will be our purpose to do even better.
§ One weapon we shall certainly continue to use is effective monetary policy. That nonetary policy has a key part to play in the fight against inflation is recognised by the markets and by Governments abroad. However much they nay deny it now, it was, of course, a pillar of the last Government's counter-inflation policy—and rightly so.
§ In judging manetary conditions we look at the measures of money supply and at other financial indicators such as the exchange rate, real interest rates, and of course at progress in reducing inflation itself. The Red Book includes a full discussion of these matters. Until now, Chancellors have published their thoughts rather like Chairman Mao, in a little Red Book. This year, however, the book is larger and very much easier reading. There are no more pages and much more information at almost the same price. I shall only tru to summarise it at this stage.
§ Since the last Budget, financial conditions have developed much as I foreshadowed. In the year to February, the growth of all three target aggregates was within the target range of 8 to 12 per cent. Other financial indicators also pointed to moderately restrictive monetary conditions.
§ But with the satisfactory development of financial conditions and rapid progress in reducing inflation a significant fall in interest rates was possible. By mid-November, short-term rates had fallen to 9 per cent. They subsequently moved up to around 11 per cent., but they are still very substantially below the 16 per cent. of November 1981. The House will have seen that, following the recent easing in market rates, there has this morning been a further cut in bank base rates.
§ For most of the year the exchange rate was strong. The weakening in November and December seemed mainly to reflect external factors such as concern about oil prices and sharp movements in the world's other major currencies. Opposition statements and election uncertanties, here and abroad, may also have played a part in currency movements.140
§ But this winter's movements in sterling rates were certainly not due to any laxity in the Government's financial policy. On the contrary, our monetary and fiscal objectives were achieved. Provided we continue to meet them—and we are determined to do so—our policies give no reason to expect anything more than a temporary rise in inflation from the fall in the exchange rate that has taken place.
§ The lower exchange rate gives industry an opportunity to improve its competitiveness, but only if other costs are tightly restrained. I make no apology for repeating that this requires still greater moderation in pay bargaining. Without that there would be only a temporary improvement in our competitive position and no long-term help in providing a sustainable basis for the improvement in output and employment that is now within our grasp.
§ That is why I cannot emphasise too strongly our view that devaluation brought about by monetary and fiscal laxity would be damaging and that to seek it as a deliberate act of policy would be a grave mistake. It would be a signal to the world of a willingness to accommodate rising inflation—inflation that would undoubtedly be fuelled by demands for higher wages to offset its effects. Confidence would collapse and jobs would be destroyed.
§ That is not the way we intend to go. That is why, by contrast, last year's medium-term financial strategy again set out a declining path for monetary growth in future years. After growth of 8 per cent. to 12 per cent. in 1982–83, a target of 7 per cent. to 11 per cent. was suggested for 1983–84. I confirm now that the 1983–84 target will indeed be 7 per cent. to 11 per cent. Once again it will apply to both broad and narrow measures of money, though, as I said last year, M1 may for a time grow rather faster than indicated by the range. Given the prospect for inflation, this range gives scope for a healthy rise in output.
§ The establishment of the medium-term financial strategy has been more than justified by its value as a framework of fiscal and monetary discipline. Another innovation has similarly proved its worth, namely, our decision to diversify our funding policy.
§ We have made available indexed as well as conventional assets; and we have secured a larger contribution from the personal sector in the form of national savings. I intend to continue this policy.
§ The Department for National Savings is close to achieving this year's target of £3 billion. For the coming year I am again setting a target of £3 billion. Nearly £2 billion worth of indexed gilts have been issued over the past year and it has been possible to dispense almost completely with long-term fixed interest stocks, which has helped to bring long rates down very nearly as much as short rates.