Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 29 October 1957.

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Photo of Mr Peter Thorneycroft Mr Peter Thorneycroft , Monmouth 12:00, 29 October 1957

It is the price we paid for fighting for a long time alone on the side of freedom. The resultant disparity between our assets and our liabilities has, however, rendered us much more vulnerable than we otherwise would have been to movements of opinion abroad.

The second factor is our current balance of payments. Since the beginning of 1952, we have earned an average annual surplus of £175 million a year; but it has not been a big enough surplus to cover our long-term investment, to repay our short-term debts and at the same time to build up our reserves. While most of our economy has improved beyond recognition, we have not achieved as much in the field of our external reserve position.

Finally, and most important, is our own cost-price spiral. If it has made us anxious in this country, it has, of course, made holders of sterling anxious, too. We are not alone in this. Other people in other countries have these problems, too. But we are not in the same position as others; we are very different in many ways. We hold, for example, an international currency and we live upon a small island dependent more than, perhaps, any other country in the world upon external trade. Both these facts demand that we maintain confidence in sterling.

The story of what has happened in the last three or four months is one which once more underlines the confidence factor in our affairs. In August, the French Government took certain measures relating to the value of the franc. That set off a bout of speculation. It was thought that the mark might appreciate in value and the £ decline. In three months, we lost £189 million from our reserves, or a little less than one-quarter of our holdings at the end of June. In part, of course, it was due to the German situation. Prudent finance, the influx of young workers from the East and the lighter burden of defence expenditure all combined to strengthen the German economy. [An HON. MEMBER: "Slave labour."] In part, therefore, it was due to the strength of the mark. Essentially, however, it was a matter of judgment about the relative strength of sterling.

This is not a matter of guesswork, but of demonstration. The external results of the announcement of the measures of 19th September are now to be seen. The exchange markets strengthened immediately. The speculative losses have ceased and apart from the settlement of the September E.P.U. deficit, we have been gaining reserves almost daily since. So much for the external scene.

We are holding the value of the £ at 2 dollars 80 cents, and we intend to hold it there. It is in our interests that we should do so. It is worth while remembering, however, that it is in the interests of other people, too. We are all bankers in this country. We hold the reserves of other countries, of our partners in the Commonwealth and other countries, too. Our history and our own efforts have given us that position. It brings to us a great deal in the way of wealth, strength and prestige. Anyway, it is not a position that we can contract out of now. If the £ fell, the value of all those holdings would fall, too; and so our interests, responsibilities and, indeed, our honour demand that we should take all steps to prevent it.

I want now to turn to the subject of inflation at home. What new measures or what reinforcement of old measures—for much has already been done—can be found to deal with it? The fall in the value of our money has been going on, under all parties, since 1945. It has been going, on at a rate unprecedented over such a long period in modern times. It is something which, if we do not halt it, would bring not merely inconvenience, but disaster.

There should be no illusion about the nature of the picture that we have been beholding, when the colleges, the charities and the churches are all scrambling on to the band wagon of the equity market, closely followed by Lloyd's and the Labour Party pension scheme; when gilt-edged and equities change hands; when there is in this country and among our own people a disorderly scramble from a foreseen and tolerated spoilation—it is at this stage that the whole machinery of public finance breaks down. [An HON. MEMBER: "A free-for-all!"] We can finance for a time at the expense of holders of fixed interest stocks, but there comes a moment when a Government cannot raise further money either to finance investments or to repay debt and, at that moment, the mechanics of any policy, whether it is Conservative or Socialist, cease to exist.

Quite apart from economics, a steady price and a stable currency are the foundations of social life in any country. If prices in a country continue to go up; if the value of money used in everyday transactions continues to go down; if savings are eroded and thrift of little worth—that is the way to disrupt society.

By these methods society has been disrupted by many countries in our history. These are the perils towards which the nation has been advancing, and many factors have contributed to it, but there is no doubt as to the overriding cause. Since 1948, money incomes have risen by 75 per cent. and output, in real terms, by 26 per cent. The inevitable result has been a rise, in home costs per unit of output, of 38 per cent. I said "money incomes", and I am not concerned at the moment to argue between wages and profits.

It is sometimes said that a declaration of increased profits is an incentive for a demand for increased wages. It is certain that increased wages, at the rate at which they have taken place, by their weight, size and impact upon demand, have themselves led to much easier profits in an inflationary world. But, in truth, the two have spiralled up together; the clash is not between them. The struggle is not between the employer and the worker. The challenge here is to the interests of the consumer and the financial stability of the whole nation.

Nor am I concerned to judge between those who call this a demand inflation and those who call it a cost inflation. Whatever brand of economics we prefer, the reason men go on pushing prices up is that they believe that they can get away with it. I make no apology for repeating here the words which I used on 19th September and repeated in America. They appear to me to be the essence of the matter. I said: So long as it is generally believed that the Government are prepared to see the necessary finance produced to match the upward spiral of costs inflation will continue and prices will go up. It is against this background that the Government have declared their specific measures, and I will now say something about those measures and the wage problem with which they are associated.

The purpose of the measures is to limit the availability of money; to serve notice on ourselves and on the world outside that we are no longer prepared to underwrite, through the banking system or through spending by the Government, the consequences of inflationary actions. First, as to the Government. The Government spend about one-third of the national income, largely for current expenditure but also partly for investment. I will take current expenditure first.

Here, the decision to spend—and to spend at rising prices—is often taken when a service is introduced, such as free education, pensions for the old, or the National Health Service. The amount spent depends largely upon the number of children, the number of old or the number of sick—and if prices rise the cost of administration goes up and the demand for some services, such as pensions, is naturally increased. Nevertheless, economies have been achieved and must be rigorously sought. This year's current expenditure already stands 10 per cent. lower, in real terms, than in 1951.

Instructions have been given that wherever possible increased costs, whether of materials or wages, should be offset by reduced services or administrative economies. Substantial reductions have been found in the field of defence, and efforts are being made to achieve more in this direction. But the struggle in current expenditure is an annual and a continuing one, and it will be more appropriate to discuss it in detail on other occasions, and when the Estimates have been published. Economy here is, in any event, not enough.

In addition, the Government provide funds for the large investment programmes of the nationalised industries, the Post Office and local authorities. Hitherto, the Exchequer has met these requirements irrespective of the state of the capital market or changes in money costs as the programme and its costs go up. In so far as possible they have been met out of revenue—the above-the-line surplus of the Budget—by the proceeds of National Savings, or by long-term borrowings from the public.

The nationalised industries—and this should never be forgotten—draw heavily upon the taxpayers for their capital requirements. Our first measure has been to limit the investment of all public authorities in Great Britain. In money terms, their investments will be held, during the next two years, at the level of 1957–58, or approximately £1,500 million each year.

Some people have represented this as a cut or reduction in expenditure, or as a turning away from expansionary policies. I must say that I find this a rather odd view of the situation. We intend to devote to our capital resources £1,500 million in 1958–59, and the same again in 1959–60, which is a formidable rate of advance. If prices are held stable we can achieve it; if they rise, we shall be able to do rather less in real terms, but on no interpretation whatsoever can it be interpreted as going backwards.

Instructions are being given to the Departments, to local authorities and to the nationalised industries to make the adjustments that are required. I am not going to give all the details, as in some cases they are still being discussed and settled. This is an occasion, rather, for the broad picture of priorities, and this I will try to give. I shall try to show how we have approached the problem and what sort of priorities we have in mind.

We can look at the matter by way of four main groups of investment programmes in the public sector, and I will start with power—electricity, coal and gas—which is the basis of an industrial society. Next year we intend to spend about £450 million on investment in this field, and about £480 million in the year after. Next year's figure represents, in real terms, no less than £170 million more than was spent in 1951. No less than four nuclear power stations are in hand and going ahead—at Bradwell, Berkeley, Hinkley Point and Hunterston. No other country is as far advanced in this field.

In the coal industry we shall invest £110 million next year, and £120 million the year after. This will enable the National Coal Board to complete 40 major colliery development and modernisation schemes, and to continue about 100 and start about 60 more during the period.

This programme in the power industries is a large one, and the onus is fairly and squarely upon the shoulders of those who say that we could do more. Admittedly, it involves overall a substantial reduction—nearly 10 per cent, of what at one time was forecast or planned. It will mean a rephasing in the nuclear power programme. It will take perhaps nine or ten years to attain the potential which at one time it had been planned to reach in eight or nine years. It will mean too that the development programmes in other power fields will take longer. But this is not an unreasonable price to pay as part of our policy to secure a stable currency.

Next, as to transport and communications. On the roads, we will be spending nearly £100 million over the next two years—twice the rate of this year. This involves no alteration in the programmes announced. On the services of the British Transport Commission we shall be investing about £170 million in each of the next two years—a substantial increase on what is being done this year. It represents, nevertheless, a slowing down of the rate of investment planned under the railway modernisation scheme, but it should not materially affect the advance of the railways towards solvency.

Next, as to the Post Office, we have been spending a lot on Post Office investment. This has, indeed, been rising towards £100 million, and we cannot afford to go on at quite the same pace in the next two years. We plan to spend £95 million next year and £90 million in the year after.

Next, the field of social investment. On the hospital programme we shall, as already announced, spend £23 million next year, and in the year after we plan to spend £25 million. This should allow some increase in the amount of work in 1959–60, but how much will, of course, depend on the movement of building costs.

As to education, the main school building programme will continue unchanged, although some slight rephasing may perhaps be necessary in Scotland. The five-years' programme for technological education will remain unaltered. Minor improvement projects will be severely restricted, and the programme for rural reorganisation in England and Wales will have to be slowed down.

As to housing, housing has over the past four or five years absorbed a very large proportion—between a quarter and a fifth—of our total investment, and some reduction is inevitable. As to house building by public authorities, it is expected that rather more than 150,000 houses will be completed in 1957–58 in Great Britain. There will be a progressive slowing down so that by 1959–60 the provision will be about 80 per cent. of the present level. In Scotland, as in England and Wales, there will have to be some rephasing of investment plans, but Scotland will get her fair share of the large total investment which I have outlined.

The programmes which I have mentioned cover about four-fifths of the public sector and similar adjustments are being made in the remainder. Programmes of this kind present difficult problems of priority. It is sometimes said that we should be selective. We have been selective. We have to meet the growing requirements of the power industries and modern transport, and in these fields expenditure will, in fact, grow. We could not do this and keep up that level of social investment without a reduction in housing—the biggest element in the public sector. That is the broad basis of our choice. There cannot be any serious doubt that this choice is correct.

Those who challenge it should say how much more money they would spend, where the resources would come from and which programme they would cut in order to extend another.

I emphasise that these limits are expressed in money terms. If costs rise, the amount of work will have to be reduced so that the expenditure limits will not be exceeded. We do not intend to finance the inflation. This total of an additional £1,500 million a year compares with only £1,100 million in 1951—an increase of 37 per cent. in real terms. It is manifestly absurd to talk about stagnation. At the same time, I must emphasise our confidence that this programme is within our power to carry out, and I have every reason to suppose that this will match our real resources. And we are looking ahead. Limits are being fixed for two years ahead, and this time next year limits will be fixed for 1960–61, and so on, year by year. There will be an annual review of long-term investment plans to see that they do not run ahead of the prospective means of financing them.

I now come to the private sector. Here, the source of new money is bank lending, and I have asked the banks to control money supplies as in the public sector by placing a limit on the amount of money that they provide. I recognise that the bankers' task is harder because of the restrictions already carried out in response to requests made both by myself and my predecessors. I am grateful for the assurance of the banks that they will do their best to hold the average level of advances for the next twelve months at the average level of the last twelve months. I know that the banks will do their best to finance exports and other purposes of high priority, but they will do their best within the total limit that is being set. In our present situation, we need to limit the money supply, and no purpose, however good, must outweigh that objective.

The bankers' efforts will be supported by the request to the Capital Issues Committee to intensify its critical attitude to applications to borrow. They will also be fortified by the increase in the Bank Rate to 7 per cent. Interest rates and the quantitative control of money must work in the same direction.

These, then, are our measures. They are designed to make money scarcer and more expensive. Their purpose is to secure, so far as possible, that where money is taken out that is not matched by work and effort, we should not provide the cash to finance this new income, but should save it by economies in the same or other fields. These measures have, of course, already been widely debated, and different economists, not surprisingly, hold different views about them. The test of them will be, however, not in academics, but in practice; and a million dollars flowing into the reserves is worth a deal of academic argument. It will certainly be in the national interest that every section of the community should give them the best chance to work.

I now turn to the question of wages and profits, and I would say this about them both. Our object is to secure that increases in both are more difficult to get. I am not in this speech appealing to anyone, but I would say, in regard to profits, that restraint in distribution would help our national purpose. What should be our attitude to wages. The rôle of the Government and its policy can be quite clearly stated. First, the Government should state with absolute clarity their own view of the economic situation, and where they consider the national interest to lie. Secondly, they should, by their monetary, fiscal and spending policies, create conditions and an economic climate consistent with this view. Thirdly, they should not interfere with collective bargaining, and fourthly, they should, where they are themselves the employer, seek to follow policies similar to those which they urge upon others.

How should we apply this to the situation today? The Government are not taking over the control of either the wage or the profit levels in the country, and I do not believe that it is seriously suggested that they should. At the same time, no Government, and certainly no Chancellor, can be indifferent to the problem of wage increases. I am not now talking of individual claims, but of the general picture. If wage increases on the scale which they have been given in the past, and are still being today demanded, were, in fact, granted, I have no doubt as to the result. It would be a disaster to this country; it would be a disaster to the firms who gave them and it would be a disaster to the men who got them.

Wages increases unrelated to, and going far beyond, the general growth of real wealth within the country are by far the greatest danger we have to face, and we should be deceiving ourselves if we pretended otherwise. Those who ask for wage increases, those who grant wage increases and those who adjudicate about wages should have this fact firmly in the forefront of their minds. Any large mistake at this stage by any of them could do grievous damage to the nation as a whole. It is our duty as a Government to see that, and it is the duty of the Government as employers to act upon it.

The measures which we have taken—[HON. MEMBERS: "Open war."]—in relation to the money supplies are intended to make it harder both to earn profits and to get wage increases. They will operate over a wide area. I have already shown how they apply in the field of public investment. We shall apply them with determination. If costs, including wage costs, go up, activity will have to be reduced, and this will be the policy where the Government are looked to as the source of cash. I include, for example, the case of the British Transport Commission, where the Government are providing the finances required to meet the railway deficit. The Government advances are being made on the basis of the firm plan put forward by the Commission in which it is aiming to break even by 1962.

The Government have no intention of extending their financial assistance to the railways beyond the terms of this arrangement. So that it should know exactly how it stands, the Commission has accordingly been informed that for 1958 the amount will not be in excess of the ascertained deficit of 1957 as certified by the auditors in due course; and that for 1959 finances will be reduced in accordance with the forecast on which the White Paper is based.

Of course, the Government do not operate over the whole field. Of course, in a free society we cannot control the individual judgments and decisions of the whole economy. In this context it is of the utmost value that the Council on Productivity, Prices and Incomes has begun its work under the chairmanship of Lord Cohen. I believe it can make a valuable contribution to thought upon this subject. I do not know what advice it will tender, but I am sure that impartial advice from this quarter will help to secure the responsible approach essential to success.

One further question we are asked is: will these measures lead to unemployment? Not on our expectations or our intentions, provided moderation is exercised all round. By that I do not mean that we must stick at any cost to an unemployment figure of 1·2 per cent., nor does any thoughtful person of any political persuasion mean it either. It is, indeed, certain that one cause of inflation since the war has been the attempt to drive the economy at a pace above and beyond what can be justified by our resources of men, money and materials. But the truth about unemployment is this: without the measures which we have announced there would have been massive unemployment within a matter of months. We depend on the value of our £ to buy our food and our raw materials and a stable £ is the prerequisite of full employment. We must, therefore, put it first.

Of course, other policies will be urged; appeals for restraint and the whole armoury of physical controls. But those controls have been tried before. They have been tried with all the machinery of control in full existence and inherited from a major world war, and even then they failed. Some economists are urging us to spend our way out of the present difficulty, and that sounds a most attractive remedy indeed, but I do not believe it is one which will be accepted by the common sense of the House of Commons. In any event, it proposes no remedy for rising prices. Others enlarge on the technical difficulties of any scheme and the problems raised by the velocity of money and the activation of balances and the like. If we listened to all the technical difficulties, no solution would ever be propounded at all.

I believe that these measures will work. We do not intend to let them fail. If more is needed, more will be done. We are by no means at the end of our resources either of monetary or fiscal policy and we intend to hold the value of the £. Already we are winning the opening rounds of the engagement. The £ is strong and growing stronger. Money is coming into the reserves and not going out. The nation cannot say that it is going without a lead and the Government are entitled to ask, in return, that these measures be given every chance to work.