I have a grave statement to make to the House. I propose to deal with the national economic situation as a problem confronting the whole nation and requiring for its solution the united efforts of the whole country. Hon. Members in every part of the House will, I trust, consider and discuss in that spirit what I have to tell them.
It has been generally known for some months that our balance of payments was deteriorating, and that unless vigorous remedial action were taken we should be once more in crisis as in 1947 and 1949. The previous Chancellor of the Exchequer, who is sitting opposite me now, in a debate in July, said that the position was getting worse. In his speech at the Mansion House on 3rd October he announced that the dollar deficit for the third quarter was 638 million dollars compared with a surplus of 56 million dollars—a surplus—in the second quarter and of 360 million dollars in the first quarter. Those who listened to him could not have doubted that whatever Government were returned to power an ugly situation would be bequeathed to them. In fact, the worsening has continued over the last few weeks.
The Prime Minister gave the House yesterday an outline of the grave position we are now facing. In the third quarter of this year the dollar deficit was 638 million dollars. In the month of October alone it was 320 million dollars. It is not usual, I may say, to give figures except at the end of a quarter, but the seriousness of the situation justifies my departing from precedent. In the third quarter we had a deficit with the European Payments Union of £183 million. In October alone the deficit was £89 million, and in a few days' time we shall be paying substantial amounts of gold to the Union.
The present situation is one, therefore, in which the central gold and dollar reserves of the sterling area are being drained away very fast, and a situation in which the sterling area has a deficit with the European Payments Union on a scale which will rapidly exhaust our quota and, indeed, may threaten the stability of the Union itself.
The size of these figures, as hon. Members will observe, is evidence in part of a weakening of confidence in sterling throughout the world. Any weakening in confidence is bound to have a cumulative effect. Consequently, we must immediately quench any doubts which there may be about the strength of sterling and about our ability in the United Kingdom to manage its affairs effectively. We must put beyond question our determination to develop the earning power which is needed to buy the food and raw materials upon which our island economy depends.
In his speech at the Mansion House my predecessor, on the best information then available to him, attributed much of the loss in the third quarter to abnormal and non-recurring factors. So far as the third quarter was concerned those estimates were roughly correct, but some of the factors which we thought were exceptional have continued to operate. With the fuller information now available, and with the clearer view of 1952 which we can now take, our latest estimates reveal an underlying balance of payments situation even worse than had been previously forecast.
It is now believed that the current deficit of the United Kingdom in 1952 on the present trends and import programmes may be of the order of between £500 million and £600 million, and that the loss of gold and dollar reserves in respect of the transactions of the whole sterling area with the rest of the world may be appreciably more. These estimates are based on a forecast of current transactions and take no account of losses due to speculative movements.
When I remind the House that the reserves at the end of October were less than £1,100 million the gravity of this situation speaks for itself, and it must be put right at once, as soon as we possibly can.
That, then, is the situation in which we now find ourselves. I repeat that it appears to me, as, I trust and believe, it will appear to the House, as much too serious a matter for partisan treatment. The only question worth discussing is "How are we to get out of it?" and I trust that the remedies I shall shortly propose will appeal to the House, as they do to the Government, as matters not of political choice but of national necessity. But before I deal with the remedies it is necessary to examine the causes underlying the deterioration with which we have to deal.
Over the last 12 months external factors have imposed new and heavy loads on our balance of payments. There has been, for example, the worsening of the terms of trade during the last 18 months or so. There has been the loss of Abadan. The development of our defence programme, of course, involves substantial external expenditure. All these external special factors imply an increase of external expenditure of the order of no less than £600 million a year compared with 1950.
When new pressure of this kind comes on the balance of payments it is absolutely essential to have a highly flexible internal economy in order to adjust to it, but our economy is not showing this flexibility, and there are three main reasons for the present rigidity. The first of these is that our basic industries of coal, steel and transport, are not productive enough to provide the basis for an economy adequate to our needs and our commitments. We need more coal than we are likely to get on present trends; we need some 1½ million tons of finished steel more than we have been able to produce or import in 1951 to meet home and essential export needs; then the transport system is working under conditions of the greatest strain.
Second, the main impact of the defence programme is on those industries from which any really substantial increase in the exports must come. Third, there is the general overloading of the internal economy which prevents resources being switched, as they must be, to the places where they are most needed. Government expenditure is at a level which necessitates crippling rates of taxation. Last, the home demand for engineering products is far in excess of possible supplies. Taking another example, the work programmed for the building industry in 1952 is 10 per cent., or about £140 million, more than the amount of work which the industry is likely to be able to do in that year. I shall be coming back to this matter in making some proposals.
It is true that there has been some reduction recently in the excessive demand of consumers for goods over and above the supplies available, but we have not yet got the really competitive conditions in the home market which are necessary to increase exports to the maximum. On top of this we have the impact of the defence programme. In January the late Government estimated the cost of the three years' defence programme at £4,700 million. This was adopted at the time, with almost universal support in this House, as a programme that would be pressed through to completion as fast as the limits of our resources and capabilities would allow.
But our programme does not stand alone. It is part of a common defence effort by the North Atlantic Treaty countries, and we are making our full contribution. We, in our turn, depend on the contribution of our North Atlantic partners. The North Atlantic Council has set up a special organisation, which is now meeting in Paris, to establish how to balance the requirements of defence with the combined resources, economic and otherwise, of the partner countries.
As this meeting is going on at present I must not anticipate the outcome of this operation, but I should like to tell the House that its results may well have a vital bearing on the defence programme itself and on our internal economy, and these two are so obviously linked up together. Later in my speech I shall describe the measures within our own control which we are taking to restore soundness to our own domestic economy.
Our decisions about the right way to manage our own economic affairs and to use our resources at home must be governed, not only by our own national wishes and aims, but also by the demands which world conditions make upon our economy. These demands have first priority. For example, if world prices rise we must pay them, cost what it may; if new competitors in overseas markets emerge we must be able quickly to adapt ourselves to deal with them; if we are menaced we must re-arm and find the means to do it.
Such new developments are not to be regarded as unhappy accidents. For an exposed island living, as we do, upon imports, they are our normal pattern of life, like our weather, or like the seas which gird our shores, now rough now smooth. We must always be ready at very short notice to make the required changes in our economic rig. We cannot make such changes if we refuse to do without some things that we now have, and if we are so rigid that men and resources cannot be spared to meet new needs.
We have adapted ourselves before, but those of us who were trained in the hard school of listening to and understanding the well justified jeremiads of Sir Stafford Cripps will understand that today we are facing a general balance of payments crisis and not, as in 1949, a problem predominantly of trade between the sterling area and the dollar area. Not only is the United Kingdom in deficit. Many of the other sterling area countries which earlier in the year were in substantial surplus have in recent months moved into deficit themselves. Consequently, the whole sterling area is in deficit all round the world, and this is at once reflected in losses from the gold reserves.
It follows that there is not at the present time as sharp a distinction as there was in recent years between so-called hard currencies and so-called soft currencies. Indeed, all foreign currencies are, alas, now hard. The problem of trade balance between the sterling area and the dollar area continues to be the hard core of our balance of payments problem and we must continue to build up our exports to the United States and Canada accordingly: but in the present crisis the deficit with the rest of the non-sterling world is no less important and demands effective treatment also.
I have said now, I think, all that I need to say on the nature of the situation and the diagnosis of the trouble. This is a critical situation. Let me remind the House in plain terms what it means. By running this overseas deficit we are buying with our accumulated gold reserves, or obtaining on credit, hundreds of millions of pounds worth of food to keep us alive and materials to keep us at work. This will not continue, for if we do not find means to correct the disparity between what we earn and what we buy we shall find that we cannot buy what we want.
We shall lack the materials to maintain employment and to keep the rations even at their present level. We shall, in fact, be bankrupt, idle and hungry. We cannot afford to waste a day in putting our balance of payments right. That is why the Government feel it essential that I should not only give a frank picture of our present situation, but also make some definite proposals designed to aid our recovery.
First, I will spend a few minutes on our long-term objective. In the Government's view, the only ultimate solution must be one of expansion. We are determined to get output up and encourage the country to produce more. That is the long-term objective. The most important materials whose shortage is restricting output at present are coal and steel, as I have said. More of these must be obtained. My colleagues principally concerned will be dealing with these matters in detail during this debate, and so I need not develop these subjects, as they will do it more ably than I can.
In finding means of overcoming the obstacles to expansion, the Government will co-operate closely with the industries concerned. In our efforts to do so, we shall rely upon the good will of the trade unions in these industries, and, indeed, on the whole trade union movement. The Government warmly welcome the Trades Union Congress's recent assurance of friendly co-operation, and will look forward to the closest consultation with it on all matters of common concern, in pursuit of the common national object of strengthening and expanding the national economy.
If we can get enough expansion at the crucial points I have mentioned—and the Government will reject no plan, however unconventional, for achieving these ends—our other problems will fall much more easily into place. In particular, increased steel supplies will make it possible to expand the output of the metal using industries on which we are relying so heavily for defence production, for exports and for home investment. But all this will take time. At the moment, therefore, the essential thing is to strengthen the foundations of the economy before adding to the superstructure. We must, therefore, take drastic steps to solidify and establish these foundations. First, we must ease the over-load both on the external and on the internal economy. Let me consider, first, the external aspect.
In view of all that I have said, and in view of the picture presented, the Government have decided to take immediate and direct action to reduce imports. The series of measures which I shall now describe is designed to save £350 million a year of external expenditure, and to do so in a way which will give the strongest support to our gold and dollar reserves. We are, therefore, not imposing restrictions on our trade with our partners in the sterling area. This total of £350 million may be compared with estimated total imports in 1952, at end-September prices, of about £3,620 million. The full impact will not necessarily be felt at once, for there are existing commitments and contracts which will not be interfered with.
The following are the detailed measures. We propose, first, to revoke open general licences for private imports from Europe and other non-sterling countries on a selected list of commodities, and substitute import licensing with, in most cases, a quota for each commodity based on the value of imports from these sources in the year July, 1950, to June, 1951, and at levels substantially below those in recent months. Certain raw materials will be included in the list, but the reduction in these will not be very great.
This measure will give a saving of about £130 million a year, mainly in un-rationed food but also in a few manufactured goods. In food, the total cut on these privately imported commodities will be equivalent to about one quarter of the total private imports of food from all sources. The items to be cut include canned hams and meats, of which a tremendous and expensive import has developed in the last year or so, various forms of sugar manufactures, such as fon- dant and sugar-fat mixtures, canned fruit and vegetables, and fresh fruit and nuts. The total saving from all the cuts in private imports will be about £130 million.
To prevent forestalling, these measures must be taken at once. Particulars of the items affected will be announced tonight by the Board of Trade. This is an action which the Government are very loth to take. [Laughter.] I hope that hon. Members will realise that these decisions have had to be taken in a most serious atmosphere. This decision involves the reimposition of quota restrictions, which in themselves are contrary to our aim to liberalise intra-European trade. It will, in due course, limit the housewife's choice of food supplies—[Interruption.]—perhaps the House will listen to this—which, although not absolutely essential, have been a welcome improvement to the diet in the last few years.
I need hardly say that we are doing this only because we are forced to do so to help put right the balance of payments. There is, in fact, no escape from it. We are running so heavily in deficit with the European Payments Union that we must take immediate action. If we did not, as I save said, the Union itself would be irremediably weakened, and this would be a crushing blow to Europe and, indeed, to the whole of the free world.
We have framed our list in a way which secures the maximum saving consistent with the minimum damage to the liberalisation of intra-European trade. Even after these cuts have been applied, some three-fifths of our imports on private account from other European countries in the O.E.E.C. will still be free from quota restrictions. It has always been provided in the O.E.E.C. that a country which has serious balance of payments difficulties may re-impose restrictions in this way, and we shall supply to them the necessary information to establish that we have acted in full accord with our obligations.
I come to the second recommendation under this head. While the crisis lasts, we shall have to forgo increases in the total consumption of rationed food above the average 1951 level. There will have to be reductions in some rationed foods, and there will also be a reduction in the supply of unrationed foods imported by the Ministry of Food as distinct from the private imports to which I referred earlier.
Third, we propose to slow down the further carrying out of the strategic stockpiling programme instituted by the previous Government. Good progress has been made on this—[HON. MEMBERS: "Hear, hear."]—if I am to hear those cheers I wish they had been made earlier—and our hope would have been to maintain this progress. In present circumstances, however, we cannot afford to continue at the same rate. It should be clearly understood that this will not affect our defence production programme. Significant supplies of many of the more bulky commodities have already been accumulated and, in our view, some delay is a necessary price for solvency.
Fourth, we propose to reduce the tourist allowance from £100 to £50 per head. This reduction will come into effect immediately. We intend that the reduced allowance of £50 shall be available for the 12 months ending October. 1952. I realise that this decision is bound to cause inconvenience and disappointment, but the situation is too serious to allow expenditure on tourism to continue as it is. I might add that this will not affect the special arrangements of travel which we have with Norway, Sweden and Denmark.
Last in this series, the Government are giving prompt consideration to the reversion of all softwood purchasing to private trade, with arrangements for a global limitation of purchases. We intend that the consumption of softwood shall be maintained at its present level.
The sum of these, together with the saving of shipping and a general tightening up of closer administrative scrutiny of external expenditure of all kinds, should save some £350 million a year. This immediate action does not fill the whole balance of payments gap, but in combination with the internal measures, which I am now about to describe, it should make a substantial improvement in our position.
I turn next to what is broadly called home investment. The building programme, which was authorised by the late Government last summer, rests on the assumption that the output of the building industry would increase by 5 per cent. in 1951 and 10 per cent. in 1952 over the output in 1950. In the first half of 1951, however, the output of the industry, so far from increasing, was below the average output of 1950 as a whole. This was due partly to bad weather—this is reminiscent of earlier debates—and this bad weather was under the administration of right hon. Gentlemen opposite; partly to the shortage of building steel and partly to the attempt to achieve too much in the wrong way.
The combined result of all these factors is that the building industry is now badly overburdened. Much more work has been started or approved than can be done with the labour and materials, particularly steel, which are available. Consequently, individual projects have been taking longer to complete than ever before. This will get worse unless steps are taken quickly to lighten the burden on the industry. The only way to do this, particularly in areas where the excess demand is greatest, is to reduce the amount of new building work which is started, until the industry is abreast of its tasks, and to secure that the subsequent programme does not exceed the capacity of the industry at any particular time. To do this and to speed up completion of projects the Government have decided that no new starting dates for building work will be granted for operation during the next three months, except for special schemes approved as exceptionally urgent in the national interest.