§ 3.48 p.m.
§ LORD BESWICKMy Lords, perhaps I may now give your Lordships the Statement made in another place by my right honourable friend the Chancellor of the Exchequer to which I referred just now. It is as follows:
"The House will note that a standby credit of 1.4 billion dollars has now been made available to us by the International Monetary Fund. We have no intention of drawing on this credit in the near future. Its availability, however, is of great importance not only in reinforcing confidence in the new parity of sterling, but also for the stability of the international monetary system as a whole.
"In spite of misleading reports to the contrary, there has been no question of the Fund attaching conditions to this credit. I am proposing circulating in the OFFICIAL REPORT the text of Letter of Intent sent by my predecessor to the Managing Director of the International Monetary Fund on November 23. This letter sets out the policies already announced to the House that the Government is following. These are designed to make certain that full advantage can be taken of the improvement in our competitive position resulting from devaluation and to ensure that sufficient capacity at home is, available to meet the expected increase in export demand as it builds up over the time."
§ Following is the text of the Letter of Intent referred to by Lord Beswick:
§ 23rd November, 1967.
§ "My dear Mr. Schweitzer,
§ I am setting out in this letter a statement of the policies and intentions of the Government of the United Kingdom.
§ 2. The United Kingdom Government reached their decision to seek the International Monetary Fund's agreement to a reduction in the parity of the pound sterling in the light of their latest periodic review of the position and prospects of the United Kingdom economy, including the outlook for the balance of payments, to the end of 1968.
§ 3. The Government's main objectives of policy remain the achievement and maintenance of a strong balance of payments, together with a high rate of economic growth which will make for full employment.
§ 4. So far as the balance of payments is concerned, the Government's aim, at the new rate of exchange which has been concurred in by the Fund, is an improvement of at least £500 million a year. On present prospects for world trade this should mean a surplus in the second half of 1968 at an annual rate of at least £200 million. Beyond that there should be a further substantial rise in the surplus as the full benefits of the change in the United Kingdom's competitive position are felt.
§ 5. At the same time as they took their decision on the rate of exchange, the Government decided that measures should be taken as and when required to free resources from domestic use on the scale necessary to secure the improvement referred to in paragraph 4 above.
§ 6. As the Fund Board will be aware, calculations of the effect of a change in the parity of a currency, and still more of the timing of such effects, are necessarily extremely speculative. This makes it difficult to decide precisely, in the initial stages, on the scale and timing of the measures that are required to make sure that the improvement in the competitive position is not lost through insufficient capacity at home being available to meet the expected increase in demand as it builds up over time.
§ 7. The Government is satisfied that the measures announced on 18 November, 1967 will bring about a sufficient shift in resources in the coming months to go a very long way towards achieving the improvement needed to achieve their balance of payments objective. These measures—details of which are annexed to this letter—will, together with the effect on purchasing power at home of the devaluation itself, lead to a reduction of home demand by about £750 million to £800 million below what would otherwise have been the case.
§ 8. The Government is fully aware of the possibility that further measures will be needed to maintain the momentum towards the balance of payments improvement referred to in paragraph 4 above. They intend to take further action once it becomes apparent that 244 such action is required to secure the necessary balance of payments surplus.
§ 9. The next review of the position and prospects of the United Kingdom economy and balance of payments will, in the normal course of business, be carried out in February, 1968. At this time it should be possible to assess more accurately than can be done at present the effects of the decisions announced on 18 November, 1967. In the light of the review, the Government will make a decision on the precise nature of any further action required. They will be happy to consult with the Managing Director on the results of this review, and again after the further reviews which are planned for July and November, 1968.
§ 10. Fiscal policy will continue to play the most important role in making room for the needed improvement in the balance of payments. It is the Government's intention to ensure that the Exchequer's borrowing requirment for the financial year beginning 1 April, 1968, is kept under firm control. So far as can be seen at present, this entails holding down the borrowing requirement to not more than £1 billion—the appropriateness of which estimate and the measures necessary to ensure that it is achieved will be reviewed with the Managing Director in accordance with the time-table specified in paragraph 9.
§ 11. The steps that have already been taken and will continue to be taken give rise to the expectation at present that bank credit expansion will be sufficiently limited to ensure that the growth of money supply will be less in 1968 than the present estimate for 1967. both absolutely and as a proportion of G.N.P., despite the expected substantial recovery of reserves. It continues to be the Government's policy to meet its own needs for finance as far as possible by the sale of debt to the non-bank public and interest rate policy will be used to this end. In the consultations mentioned in paragraph 9, the actual course of bank credit in relation to the expected course will be taken into account in determining appropriate policy actions.
§ 12. Prices and incomes policy.
§ The Government's object will be to ensure, in co-operation with the T.U.C. and C.B.I. that the policy for prices and incomes measures up to the requirements of the new situation. It will be the Government's intention to maintain the policy set out in the White Paper, Prices and Incomes Policy after 30 June, 1967 (Cmnd. 3235), under which there is no entitlement to a "norm" or standard increase in pay, and increases in pay and prices have to be justified against criteria of the national interest which are equally relevant to the new situation. There is no criterion for pay increases related to changes in the cost of living. To support the application of the policy, the vetting arrangements will be strengthened in order to ensure that the rise in wages and salaries does not exceed what the economy can afford over the next twelve months.
§ The Government has already started talks with Management and Unions on alternative ways of achieving this objective.
245§ Exchange control
§ 13. The Government is determined to maintain the new parity without resort to any additional restrictions on current payments or intensification of the present restrictions. The Government, moreover, intends to abolish all remaining restrictions on current transfers and payments as soon as the balance of payments allows. Similarly, as the balance of payments strengthens, the Government will consider what relaxations can be made in the present restrictions on capital transfers.
§ Request for a standby
§ 14. The Government are convinced that the above measures will lead to a strong balance of payments. It is important, however, for the stability of the international monetary system to establish confidence in the new parity from the start. The Government therefore requests a standby of $1.4 billion from the Fund to carry out its economic aims both domestic and external, which it believes are fully in conformity with the aims of the Fund.
§ 15. Before making purchases under this requested standby arrangement with the International Monetary Fund, the Government of the United Kingdom will consult with the Managing Director on the particular currencies to be purchased from the Fund.
§ 16. The Government believe that the policies here outlined are adequate to achieve the economic goals described in this letter. If, however, present policies should turn out to be inadequate, the Government is firmly determined to take such further measures as may be necessary to achieve these goals. If, in the opinion of the Government of the United Kingdom or the Managing Director of the Fund, the policies are not producing the desired improvement in the balance of payments, the Government of the United Kingdom will consult with the Fund, during the period of the standby arrangement and as long thereafter as Fund holdings of sterling exceed 125 per cent. of quota, to find appropriate solutions.
§ Yours sincerely
§ J. CALLAGHAN.
§ Measures Announced on 18th November, 1967
§ 1. Fiscal Policy
- (a) As announced in the supplementary statement on Defence Policy of July 1967 (Cmnd. 3357), defence expenditure was planned to stay below £2,000 million a year at 1964 prices and to be down to £1,900 million by 1970–71. It has now been decided to achieve this reduction by 1968–69, so reducing the cost of the planned defence programme in that year by over £100 million (exclusive of terminal costs and expenditure arising from the change in parity).
- (b) Civil public expenditure as a whole (i.e. including nationalised industry investment and local authority expenditure) is planned to rise over the next few years. Reductions will be made in 1968–69 to reduce the total planned for that year by £100 million.
- (c) The premium (seven shillings and sixpence a week for men) paid to manufacturers under the Selective Employment Payments Act will be withdrawn—except in Development
246 Areas. This will reduce payments by over £100 million in a full year. - (d) Payment of the export rebate will terminate on 31st March, 1968. Exports up to that date will qualify, exports thereafter will not. This will save just under £100 million in a full year, of which approximately two-thirds will be realised in 1968–69. Abolition of the rebate requires legislation which is now being prepared.
- (e) The rate of Corporation Tax will be increased in the 1968 Budget from 40 per cent. to 42½ per cent. The new rate will apply to profits for the year to 31st March, 1968. Allowing for side-effects, the additional yield is estimated at about £95 million in 1969–70 and approaching two-thirds of that figure in 1968–69.
§ 2. Monetary policy and hire-purchase restrictions
§ The Bank Rate has been increased to 8 per cent. from its previous level of 6½ per cent. This high rate has been chosen in order to reinforce the impact on confidence of the Government's measures by the offer of an exceptionally high rate of return on funds invested in London. By raising the cost of credit Bank Rate at this level will also reinforce the impact of the credit restrictions on demand.
§ Severe but selective restrictions are being placed on bank lending to the private sector. New ceilings have been imposed which will prevent aggregate advances rising above their level at 15th November in the case of the London clearing and Scottish banks, and end-October in the case of other banks.
§ Identified lending for exports, and under the schemes providing guaranteed finance for exports, and shipbuilding, will be excluded from the ceilings. Within these ceilings the priority categories for lending have been more narrowly defined than hitherto, leaving a wider area of non-priority borrowers whose demands can be compressed in order to accommodate priority lending.
§ Hire-purchase restrictions are also being tightened. The minimum deposit on cars will be raised from 25 per cent. to 33 and one third per cent., and the maximum repayment period will be reduced from thirty-six months to twenty-seven months. In addition a ceiling is being placed on lending by finance houses restricting their lending to the level at end-October. These measures are likely to reduce net borrowing by some £100 million in 1968."
§ LORD CARRINGTONMy Lords, your Lordships will be obliged to the noble Lord, Lord Beswick, for repeating that Statement, and I think that all of us will welcome the availability of this loan if it is needed to reinforce confidence in the new parity of sterling. I think that your Lordships will be interested, too, that the noble Lord has denied reports which were current, both on the B.B.C. News at 1 o'clock and in the evening newspapers about there being 247 stringent conditions attached to the loan. May I ask the noble Lord this question—though I suppose I ought to know the answer? Is there a commitment fee to this very large loan, and if we do start drawing on the loan, at what rate of interest do we have to pay?
§ LORD BESWICKMy Lords, if the noble Earl will excuse me, I would rather not answer those two questions at the present time. The letter which was despatched by my right honourable friend will be published, and though these two particular details are not those disclosed I shall be glad to give the noble Lord the information on a further occasion.
§ LORD BYERSMy Lords, on behalf of my colleagues on these Benches, may I say how happy we are that no strings have been attached to these facilities? Am I not right in saying that perhaps it would be better to describe this not as a loan, but as a standby credit, or standby facilities, which we may be in a position to take up either in whole or in part, and not necessarily all of it, if we do not need it? Secondly, may I ask whether, in view of the appointment of a new Chancellor of the Exchequer, we may take it that the Government are completely free to change the policies which they have already notified to the International Monetary Fund without prior approval of the Fund, because many of us hope that the new Chancellor will wish to bring in new policies for new incentives to economic growth?
§ LORD BESWICKMy Lords, I confirm part of what the noble Lord said at the beginning, that this is not a loan on which we propose to draw. This is a standby loan which, as the noble Lord, Lord Carrington, said, will help to establish and make certain that confidence is there. It may well be that later on some drawings may be made, but there is no intention at this moment; nor is there any need, provided that nothing is done to upset confidence, to make any drawing upon this amount.
So far as the noble Lord's second question is concerned, when he reads the letter, he will see that it sets out clearly and very forcefully the policy which Her Majesty's Government believe is the right one to make absolutely certain that devaluation leads to a success- 248 ful achievement of the objective we have set out. This is our policy which is set out in this letter. It is the policy which Her Majesty's Government believe is the right one, and we propose to follow it. If, during the course of the year, things turn out differently from what we now believe, again the letter sets out the fact that, as in other cases, we shall consult with the International Monetary Fund as to other courses that may be taken.
§ LORD BYERSMy Lords, do we have to get prior approval before we change the policy?
§ LORD BESWICKMy Lords, the letter sets out our intention to consult. This is common form. Any standby loan of this kind would naturally carry with it an undertaking to consult if the economic developments so required. Again I stress that what we have said we will do is what we believe to be the right thing to do in the present circumstances.
§ LORD ROWLEYMy Lords, can my noble friend say whether these misleading reports emanate from Paris; and, if so, do they emanate from responsible sources there?
§ LORD BESWICKMy Lords, where they emanate from I should not like to say. Some of the points made in the morning Press are correct; others are incorrect; and others have a grain of truth in them. I hope that my noble friend will study the letter that it is proposed to publish.
§ VISCOUNT BRENTFORDMy Lords, could the noble Lord give some greater indication of the legal effect of this Letter of Intent? Is it a part of the contract for this standby credit?
§ LORD BESWICKMy Lords, I hesitate to say whether there is any legal status attached to this Letter. I think, as the noble Viscount will know, that in matters of banking and the creditworthiness of borrowers, there must be faith and confidence between the parties concerned. There would be absolutely no question of anyone in these circumstances resting on any legal definition of the document. We have set out clearly the economic policies we propose to pursue and we stand by those policies.
§ LORD GRIMSTON OF WESTBURYMy Lords, am I right in assuming that 249 the loan would not have been available if the Letter of Intent had not first been received?
§ LORD BESWICKMy Lords, I think that the noble Lord would be assuming too much if he were to do that.