The Chancellor referred today to his Budget statement and his calling for the triple objective of a strong £ a steadily growing industrial strength and full employment. In the measures of 20th July the impossibility of doing all three together was faced, and what was sacrificed to the impossibility of reconciling them was full employment. Unemployment is one of the solutions to a balance of payments difficulty, of course. But it is, largely, the solution which has been chosen, we must examine it, see why it is necessary and what it does.
First, a high level of unemployment brings down the level of consumption. This is obvious. People consume less—as they consume less, they import less, and there is a direct import saving as a result of a high level of unemployment. The second consequence of a high level of unemployment is a general reduction of confidence. Today and yesterday, we heard a number of hon. Members calling for a growth in confidence. Clearly, this is precisely what one does not want. One wants this reduction in confidence so that people become a little apprehensive about the future, they consume less, they save a little more, and industry allows their stocks to run down so that imports are reduced.
What is needed is an increase in long-term confidence, but this is a very difficult subject for discrimination, to make sure that one maintains long-term confidence while denying short-term confidence.
The third consequence of a high level of unemployment is to convince foreign bankers of our real intentions. These foreign bankers are not the crude deflationists of the 1930s. They have all read their Keynes. They know that the long-term needs of this country are a rise in productivity, a growth of exports, and so on. But they know about our difficulties and problems, and to them the fact that we are prepared to accept so unpalatable a measure of unemployment is one of the surest signs that the Government are determined to carry out their pledge and maintain the strong £ which is the guarantee they most want in leaving their money in this country.
The fourth element of the result of unemployment is that pay increases are hard to obtain and so inflation is kept down. There again, imports are limited. These are the results and the actuality of what we get when we increase unemployment.
What is claimed for it is rather more dubious. It is claimed, first, that there is a shake out, which means that overmanning is reduced. If this were true, a rise in unemployment would have little effect on production. But the production index seasonably adjusted fell from 135 to 131 at a time when unemployment rose. The percentage fall in production is greater than the percentage rise in unemployment. If it were true that only surplus labour was being dismissed then the production index might be expected to fall a certain amount due to certain dislocations but not by this amount.
The second factor claimed as a result of unemployment is the redeployment into export industries. But if one examines the economic crisis of September, 1957, we see that, in the year following, exports did not rise. They fell. The year 1958, which was the year following the extreme economic crisis of 1957, was one of the few years since the war when exports actually fell. Much the same applied to the economic crisis of 1961. Our exports rose in the following year less than in the years before or after.
So we do not see an increase in exports arising from an increase in unemployment. What we do see—and this is most relevant—is a considerable decline in the amount of imports. That is the real result of a deflationary policy, and the reason is not hard to see.
Exports are difficult to increase suddenly. Industry has no preferences. It does not deny certain markets to itself. It sells where it can. If it finds itself with surplus labour, it cannot simply allocate goods intended for the home market to the export markets. That is not how industry runs. It will sell in markets anywhere in the world and if one market closes it is not sure that another will open. It has to work hard for the markets it has and that will continue to be the case.
Often the Government and all of us in this House are apt to blame exporters. During a visit to the United States this year I found that even an American Treasury official was saying that American exporters had gone soft. But we must not expect too much from exporters. The increase that has been taking place is commendable and there are other factors here with which I would like to deal.
Before 20th July, when hopes were entertained for the prices and incomes policy at a time when, if successful, it would have had a massive effect on the economy, producing the triple crown required by the Chancellor—success in keeping the £strong, a high level of employment and growth—I was not so optimistic about the effect of the Act. I thought that, if we could get a reduction of 1 or 2 per cent. in the rate of inflation, this was as much as one could hope for. Together with other factors, this might have given growing control over the economy. My suspicion is that the results of the last few months have set back such an increase in the control over the economy for some time to come.
The Chancellor of the Exchequer agreed that the prices and incomes policy was a bonus. We know that it is deflation that is mainly responsible for price stability, as goods are unsold and remain on the shelves. It is deflation that is mainly responsible for income stability as unemployment rises and people are unable to negotiate wage increases.
But something can be obtained from the prices and incomes policy. We are fortunate if we can get 1 to 2 per cent. a year out of it. If it continued over three or four years, we could get a 3 to 5 per cent. advantage over our competitors. But this would mean retaining the policy for three years or so and such a period of stagnation is unacceptable to us. There is a danger of regarding the prices and incomes policy as the solution. It can help but only in a limited way.
However, I am a long-term optimist. I believe that eventually our export difficulties will resolve themselves. I base this on two main reasons. The first is the decline in Commonwealth trade. From 1956 to 1964 our Commonwealth trade as a proportion of our total exports declined from 40 per cent. to 29 per cent. while our exports to Western Europe in particular, where the most competitive markets are to be found, increased from 28 to 38 per cent. So the exports lost to Commonwealth countries have largely been made up by exports to Western Europe.
A decline in the cohesion of the Commonwealth has brought in its wake less trade which has not been due to a decline in total exports because we have been able to sell to these competitive countries of Western Europe. The decline in our Commonwealth trade means that we are now approaching the position where the curve should level out, with benefit to our economy.
The second factor which gives rise to a more modest degree of optimism is the massive spending on defence. In the inter-war years, the cost of Government expenditure overseas in foreign exchange was on average under £3 million a year. It is now running at a rate net of £500 million. This massive increase is becoming more and more unacceptable. As this realisation takes effect—and I believe that it is working even in Government circles—I am sure that there will be a growing demand that this expenditure must be reduced.
Up to 10th November, when it was announced that we were to make an approach to the Common Market, my solution, such as it was, would have been control of imports in one way or the other, followed by defence cuts, then by measures through technology and the I.R.C. and by success in the Kennedy Round, which are our long term hopes for exports. I would have proposed control for perhaps two or three years, followed by the defence cuts. This would have given us an interval during which our long-term plans could come into effect.
But the decision to go into Europe ruled out any chance of import quotas. The whole purpose of the Common Market is the reduction of quotas and tariffs and their imposition now is clearly impossible. I believe on the other hand that East of Suez defence expenditure can be cut even more than the Government are doing at present. Here again, the door is slightly ajar and we are just pushing it a little further open.
Our problems are essentially short and medium term. When my right hon. Friend the Chancellor of the Exchequer mentioned again his triple objectives today, he did not put them in any form of priority. I myself have come to accept that full employment and growth have been sacrificed to the £. Therefore, we must not be surprised if this priority does not come up for re-examination.
The great argument against devaluation in October, 1964, was that industry was near the limit of its capacity, which limited its possibility of expanding to produce the exports required. In order to provide the surplus capacity, a level of deflation and high unemployment would have been necessary in October, 1964, which at that time all of us regarded as totally unacceptable. But, as the Chancellor said this afternoon, now we have and shall be having this spare capacity, and if the orders were there, there would be no difficulty in fulfilling the amount of exports.
As a matter of historical record, we know that, following the devaluation of September, 1949, exports from this country rose in 1950 by 21 per cent. and in 1951, as compared with 1949, by 47 per cent. There was a massive increase in exports, which was not surprising considering the large amount of offers which exporters make all over the world, a small proportion of which result in sales. The advantages of selling cheaply means a higher success rate from offers and the possibility of a massive expansion of exports.
And so in 1950 we had an improvement in the balance of payments of £306 million and, leaving out the 1951 accounts, because of the incidence of Korea and the upset which that caused, the surplus of balance of payments on average through the years 1952, 1953 and 1954 was £150 million, which was largely the reason why the Tory Government were able to claim the success which they had. It was because of the devaluation by the Labour Government in 1949.
This is not the only comparison which one can make. In France the devaluation in December, 1958, meant that in 1960 French exports went up by 21 per cent. over 1959 while in the five years from 1959 to 1964 French exports increased by 59 per cent. The present strength of the economy of a moderate sized country like France, which is able to embarrass a massive industrial and economic Power like the United States, is one indication of the value of that devaluation to the French economy. The Germans have had the benefit of an undervalued currency up to the last year or two, and the fact that their currency was under-valued enabled them to find markets all over the world.
We know that at present all of this is an academic argument, but it is more likely to become relevant when we think about entering Europe. The economic purpose of entering Europe is to increase exports. Our exports are too low at present, perhaps too low by £300 million, but if we enter the European Economic Community, if we get the right terms, we shall see a massive rise of imports, and the Treasury and the Board of Trade have consistently underestimated the rise of imports. To offset that rise will need an increase in exports higher than we now consider necessary.
It is no good relying on deflation until exports rise further, because if imports rise higher, we will need a measure of deflation even greater than we now have or are likely to have in the next few months. Any hope of controlling imports by import quotas or other means is a denial of the fundamental purpose of the European Economic Community. If we entered Europe with the wrong exchange rate, this would be gross economic mismanagement. We would then be unable to take advantage of going into Europe and with the further deflation necessary we would be the stagnant partner of the European Community.
The opportunity which we have of entering Europe gives us what is likely to be our only chance of the export-orientated boom which we need in order to stimulate our exporters to discover further markets and to start a boom in the only way in which a boom should come to this country—by means of our exports. These are the possibilities, and I hope that at some time in the future we will take them.