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Yesterday my right hon. Friend the Member for Saffron Walden (Mr. R. A. Butler), my hon. Friend the Member for Chippenham (Mr. Eccles) and other hon. Friends on this side of the House confined their contributions chiefly to the Budget as such. Today I want to discuss more particularly the Economic Survey for 1950, and the national setting in which the Budget must be viewed. Let me say at the outset that the Economic Survey does nothing to relieve my anxiety about the course of our national affairs. I shall try to explain as objectively as I can the cause of my anxieties.
Before I do so I should hasten to add that there are some features in our national economy which ought to be of great satisfaction to all of us. Three or four of these features are as follow. First, the rise in productivity, however suspect the figures may be; which shows a favourable trend. The figures are subject to a very wide margin of error. Both the Financial Secretary and the President of the Board of Trade have given them such a definiteness that it might be thought that they are readily ascertainable. They are not; they are subject to a very wide margin of error. I notice that in a newspaper article the President of the Board of Trade used a definite figure, and he appeared to be losing his statistical background and undertaking a journalistic one.
Secondly—and this is outside the scope of the Economic Survey itself—there are the increased figures of our gold and currency reserves and of a dollar surplus for the quarter ending 31st March, 1950. We have to be careful not to regard this surplus as one that is likely to recur for long without new measures. Lastly, there is, of course, the high level of our exports. I believe it is a record expressed in pounds sterling, and that is a matter of great satisfaction, but it must be tempered to some extent by the fact that the volume appears to be little more than getting us back and perhaps a little over the point from which we started before devaluation. Be that as it may, the Chancellor's statement on the dollar surplus set out all the qualifications with conspicuous fairness.
Certain features are good, but it is the sum of all the features set out in the Survey that increases my pressing sense of anxiety. Let me turn to that document first of all. At the beginning the writer of the document was faced with the difficulty of explaining away devaluation, and it cannot be explained away. There is still a sort of hint that devaluation was an enlightened act of policy and not what it was—just a bowing to, and acceptance of, the inevitable. The Chancellor of the Exchequer also was at some pains not to explain what part devaluation had in what he calls democratic planning. Of course, those Members who accuse the Government of having planned devaluation do them the greatest injustice. They planned nothing of the kind. In fact, it was economic events which governed the Government, and not the Government which governed events. As I said, in the Economic Survey devaluation is dismissed almost in silence, and where it is mentioned in passing it is delicately suggested, as in the fuel crisis, that it was not the Government but the bad economic weather that was to blame.
To speak more generally, it has proved impossible in the Economic Survey to write a White Paper to support any prediction that prosperity is round the corner, and for those who like to dig beneath the surface, it is quite clear that what is waiting for us round the corner are deadly economic perils. I must explain why I reach this stark conclusion. The subject is very complicated, the terminology with which applied economics has clothed itself is particularly repulsive, and the figures have so many noughts after them that the imagination boggles at the attempt to relate them to ordinary everyday experience. I ask for the indulgence of the Committee in attempting the task.
Before I do so I should like to say there is no solid suggestion of any improvement in the internal position, or very little. In fact, if all the assumptions come right and if all the Government's geese prove to be swans, the citizen will have a couple of per cent. to play about with. There are, of course, to be the same restraints upon personal consumption and upon wages and dividends, and everybody is to behave themselves, except the Government.
It is upon a very precarious foundation of shifting sands that the Government seek to build their economic edifice. I say that it is precarious chiefly because I am anxious at the absence of safety margins wherever we look; or, changing the terms to a military metaphor, I feel that all the reserves have already been thrown into the battle. Though at the time of devaluation the line was swept back, it has since been restored and some local improvements have been made; but if the enemy should launch another attack there are no reserves, no mass of manoeuvre in the hands of the commander-in-chief to throw into the battle, and to restore the line if it is penetrated. Where is this lack of margin of safety to be seen? I will give three instances which I think are of sufficient importance to warrant the attention of the Committee.
First of all, there is no margin of taxable capacity in the country. Secondly, there is no margin in our balance of payments. Thirdly, there is no margin in the so-called personal incomes policy. The first matter, that of taxable resources, is one of the weakest parts of the foundation. It is generally agreed in all quarters of the Committee, I believe, that any further rise in taxation could only be a further deterrent to production and to hard work, and would be at the expense of savings. I believe, and there is much evidence to show, that we have already passed the limit at which taxation is disinflationary—if I have to follow that phraseology and that it is even becoming inflationary by obliging people to live on their capital and to sell their Govern- ment securities of whatever kind in order to meet the rising cost of living.
Now I turn to the balance of payments. I thought that, in a speech which from its length was obviously intended to be comprehensive, the Chancellor devoted far too little time to the subject of sterling balances and other exports of capital. Surely the size of the decrease in our sterling balances, or of the increase in our overseas investments, has a very significant bearing on disinflationary or deflationary pressure. Many economists think that a sober handling of sterling balances over the last four years would notably have reinforced our economic structure and reduced inflationary pressure. I found in the Economic Survey that the paragraph dealing with sterling balances was easily the most interesting in the whole document. I trust that the Government, now that they have made a beginning, will continue the good work and will give us the figures more fully and more frequently than once a year.
The Survey shows that between 1948 and 1949 the amounts of blocked sterling declined from £1,600 million to £1,350 million, a decline of £250 million, while the comparatively free, unrestricted kind rose from £1,750 million to about £2,000 million. Let me first deal with capital investments abroad. For the purposes of this part of my argument it would seem to me that reduction in sterling balances and capital investment abroad both represent, in different shape, the export of capital.
Let me go back a little and follow the course of our export of capital overseas, as well as of the movements in our sterling balances over the last two and a half years. In the two and a half years ended 30th June, 1949, we paid off a total of £467 million in sterling debts owed overseas, and in addition we made just under £500 million of capital investment overseas, making a total of £966 million of.export of capital overseas; that is, just under £400 million a year. In the second half of 1949 there was an abrupt change. Our net overseas investment increased very rapidly to £197 million, at the rate of nearly £400 million a year, nearly twice its previous rate. What we owed abroad, our foreign sterling debts, instead of decreasing as they had been doing, actually increased by £110 million. Therefore, we invested £197 million abroad and increased our debts by £110 million. Thus the net export of capital in the last half of 1949 was reduced to £97 million.
It would appear from the rather cryptic or Sibylline footnote at the bottom of Table 7, that £60 million of that increase was due to writing up of sterling obligations, due to devaluation. If we had guaranteed any country its debt at four dollars to the £ under a so-called gold clause, it is clear that, after devaluation, the figures of our sterling indebtedness have to be adjusted upwards. If we look at the overall figure of sterling balances, the debts owned by this country overseas, we find that in 1949 they hardly changed at all. They stood at £3,359 million at the end of 1948. By the end of 1949 they had fallen to £3,344 millions, which is a difference of a mere £15 million.
Much of the increase in the unrestricted balances is due to the action of countries such as Australia, which is popularly supposed to have over £400 million at its disposal in London. One thing is certain—and this is why I say that this balance of payments situation is so precarious; it is that the accumulation of sterling on this scale must stop one day. Those who have accumulated it will want to be paid either in cash or in goods.
It is very pertinent to our national position to ask how long sterling area countries will be willing to pile up sterling balances on this scale. Speaking in banking terms, these sterling debts and obligations are now quicker than they were. What has happened is that the more or lass restricted sterling balances that we have under notice have gradually come down and that those which are much quicker liabilities have gone up. This underlines the insecurity of our balance of-payments position.
It is now necessary also to underline the true significance of these figures as they relate to exports, to show to what point our exports have to expand in order, first of all, to pay for our necessary imports, and secondly to pay for the export of capital. I think that the export of capital is unlikely to sink below £250 million. I do not know whether that is the right figure. I need hardly remind the committee that the export of capital takes a number of forms, such as unrequited exports to run down sterling balances, overseas investments in the Colonies such as in the groundnuts scheme or the financing of the Orange Free State goldmines. It will very soon take another form, and that is paying the service and the interest on the American and Canadian loans, which become payable in December, 1951. I do not think—I would be glad to be corrected—that it is likely that we shall get on with a lower export of capital than £250 million.
The figure which exports must attain on that assumption and premise is indeed formidable. In 1938—I apologise to the Committee for plunging into figures again —our retained imports cost us £774 million, of which £466 million was covered by visible British exports. By 1949, we were only importing 87 per cent. of the 1938 figures. Accordingly, that ought to have cost us £673 million, which is 87 per cent. of £774 million. They actually cost us £1,910 million. That was a rise in our imports to 283 per cent. of the 1938 level. At the same time the volume of British exports was 151 per cent. of the 1938 level, and their value was £1,730 million, a rise in price of only 248 per cent. compared with 1938.
I calculate that at present prices the sterling value of imports in 1950 seems likely to be at about 310 per cent. of 1938, whereas exports might possibly reach 255 per cent. It means that to cover the imports alone we should have to export a little over 160 per cent. of our 1938 volume but, unfortunately, we have much more than our necessary imports to cover. We have to turn our 1949 deficit on current account of £70 million into a surplus of £50 million. That is the aim of the Economic Survey, and supposing that our invisible exports remain at their 1949 figure of £110 million, we should have to increase our exports to 170 per cent. of the 1938 volume.
These goals appear to be very high and the road to them very, very steep. For example, can we spare this volume of exports from our own needs? Can we sell them to countries which will pay us in money with which we can buy what we want? Above all, are we likely to be able to do this in a world in which supply is already overtaking demand and where, for example, there are coal surpluses in a number of countries, and where German and Japanese competition, which has been absolutely negligible during the whole of this period, is now beginning to make itself felt? I have news of a contract in Turkey taken by German manufacturers at about 42 per cent. of the lowest international price and there are evidences in Pakistan that Japanese machinery is being offered at 30 per cent. or 40 per cent. below current British prices.
The second dangerous part of the foundation—the first was that we have no taxable margin—is that to maintain our balance of payments and to reach the goal we have in mind, an enormous volume of exports will be necessary. The third precarious part of the foundation relates to the wage freeze and to dividend limitation. I do not think that the keenest advocates of these two measures would describe them as other than highly artificial.
The wage freeze is maintained under an ever-increasing pressure of the rising cost of living, and the extent of this rise in the cost of living, which we shall one day have to face, has not been fully felt because there are large stocks in the country on which we are living. When we have to buy for current consumption out of current supplies at the exchange of 2.80 dollars to the £ in the Western hemisphere, the cushion will by then have been removed and we must expect to see steeper and quicker rises in the cost of living. If the wage freeze is a highly artificial measure, so also is dividend limitation.
If the Committee will remember the export figures I have given, I should say that one thing stands out clearly: that it is imperative that British industry and production should be expanded as rapidly as possible if these targets are ever to be hit. The slowest way to do this—although it is a sure way—is to plough back profits into industry. What is really required is a combination of conservative finance and adequate retention of profits in the business, plus conservatively increased dividends in order to attract new capital into these enterprises, and foreign capital if need be, in order that British industry may expand as rapidly as possible and not as slowly as possible.
It is no answer to a critic of the wage freeze or of dividend limitation to say that without them the Government economic policy would collapse. I agree profoundly with my right hon. Friend the Member for Warwick and Leamington (Mr. Eden) when he said that we must support dividend limitation and the wage freeze at this moment, because the house of cards would collapse without them. However, that is no answer. There should not be an economic system which depends for its stability upon two such impermanent, ephemeral and insubstantial barriers as wage freeze and dividend limitation. No economic policy ought to be erected on that foundation. We can all make calculations and engage in economic exercises if we are allowed to introduce those abnormal features. That is the third reason why I say that we are building up on the shakiest of foundations.
I have given three major instances—no margin of taxable capacity, the extremely insecure position regarding the balance of payments, and the artificial and insecure foundations regarding the so-called personal income profits—and my right hon. Friend the Member for Woodford (Mr. Churchill) reminds me that the "infrastructure" is defective. [Laughter.] In this precarious position, our expectations of holding even our present level are based upon a number of major assumptions—continued American prosperity, a continued demand for British exports and the ability of the exporter to supply them at competitive prices, an increase in productivity, an increase in profits—for all that hon. Members opposite may say, that is what the Government are budgeting for, and profits arc now falling—continued restraint in private spending and in private claims.
May I weary the Committee for a few moments by discussing these matters? First, the continuation of American prosperity. I need look no further for my argument on this point than to the second report of O.E.E.C. on the European Recovery Programme. This is what it says:
A decisive condition for the solution of the dollar problem is the maintenance of a high level of business activity in the United States and in all countries.…
This paragraph ends with pretty strong words—
The sort of expansion of dollar earnings which the O.E.E.C. countries contemplate is inconceivable in conditions of declining business activity in the United States.
Secondly, we have to assume that foreign countries will continue their demand for British exports, and that British exporters will be able to produce at figures which compare favourably with the severe competition that will be seen more and more from Germany and Japan. There, again, the continuance of competitive costs will depend largely upon the success of the wage freeze. I quite agree with what the President of the Board of Trade said some time ago, that there is a field for British exports in the United States hitherto untapped. However, I do not share the almost astronomical views expressed sometimes about the total size we may reach. It was significant to read in one American document that the total British exports to the United States are scarcely more than the turnover of one large New York department store.
The next assumption is that there is to be an increase in productivity. I find all the figures for 1949 on this subject extremely doubtful, and I think the Financial Secretary was the first occupant of the Government Front Bench to give out these figures with any qualifications at all. Of course they have to be qualified greatly. They are analysed with great perspicuity and penetration in an article in "Lloyds Bank Review" this week written by Professor Ely Devons. I believe it to be true that the undoubted increase in productivity is due—and the Chancellor said so himself—mainly because we are now beginning to reap the results of the vast capital investment made in our industries since the war ended. It must be due to that, because the working population is not working the same hours—I am not saying anything about the effort put in—as they were, and this increase is largely due to better tools.
The Financial Secretary committed himself last night, in a moment of inadvertence, to a statement that the increase of production which has taken place in the last five years was unprecedented.