I beg to move,
That this House takes note of Commission Document R/731/1/75.
Almost a year ago I had the privilege of initiating in this House the first debate on a report of the Scrutiny Committee. It was then on the economic guidelines applicable to last year. This evening I have the privilege of initiating the first debate on a report of the Scrutiny Committee after the referendum which confirmed Britain's membership of the European Community. It is again on the economic policy guidelines, applicable for the present.
The three documents covered by the Commission letter (R/731/1/75) are concerned with the adjusted economic policy guidelines for 1975, with the summary account of economic policies pursued in 1974, and with the report on the application of the Council decision on 18th February 1974 on the attainment of a high degree of convergence on economic policies of member States. Right hon. and hon. Gentlemen will recall the debate last July when I dwelt at length on the guidelines system. I pointed out that it provided a useful practical procedure for discussing national economic policies and their interaction and that it was an additional means for making our views on common problems known, in a way which may lead member countries to adopt policies which will ease the adjustment process.
The general guidelines—that is, the guidelines addressed to the member States collectively—recognise three major economic priorities—the correction of the balance of payments, the fight against inflation and the reduction of the level of unemployment; and on the basis of the external position and the rate of inflation the United Kingdom and Italy have been singled out as countries in which there is a continuing need to maintain overall policies of restraint, while vigorously supporting the necessary transfer of resources into the balance of payments and fixed investment.
Broadly speaking, we accept these general guidelines. Indeed, by his action in the recent Budget, my right hon. Friend the Chancellor of the Exchequer provided proof of this Government's determination to correct the structural weaknesses in the United Kingdom economy, made considerably more serious by the recent oil crisis. We have made a start. The statistics show a major swing of resources into the balance of payments last year. The prospect is for a further movement of resources into the balance of payments this year, and a deficit at least £1 billion less than the £3·8 billion in 1974. The medium-term intention to eliminate the deficit entirely is in accordance with the specific United Kingdom guideline that reducing the external deficit should remain one of the principal aims of economic policy.
Both the general guidelines and the specific United Kingdom guidelines emphasise the need for high deficit countries to contain the growth of real personal consumption in order to achieve the necessary reduction in the external deficit. In the United Kingdom personal consumption showed no growth at all in 1974, and it weakened further in the first quarter of 1975. The effects of the April Budget measures on real personal disposable income are expected to result in a further small fall after the Budget, thereafter showing little change from the level in the second half of 1974. But, while we accept the need for moderation at home, we believe that the surplus countries within the Community—the Netherlands and West Germany—have a particular responsibility to get demand moving. The guidelines recognise this, although we might place a rather greater emphasis on the rôle of a strong rise in consumption rather than investment as the basis of their re-expansion.
If the recovery is to be lasting, however, there is a need, stressed in the guidelines document, not only for a better allocation of resources but for a slow-down in the rise of costs and prices. The problem of inflation remains a serious threat to our overall economic strategy. Over the last year to March, earnings and retail prices have risen 27·9 per cent. and 21·2 per cent. respectively—a rate of wage and price inflation out of keeping with trends in other countries. Although British exports remain competitive at present, the continuation of a high rate of inflation would cast doubts on our ability to maintain this advantage in the months ahead. There are, however, as my right hon. Friend said in his April Budget Statement, good prospects of a slower rise in the cost of living in the second half of the year. By that time the effects of the Budget measures will have fed through to prices in the shops, and the benefit of lower food and commodity prices should be making itself felt. But everything depends on the success with which we tackle the problem of excessive wage settlements.
Although the problem of unemployment is covered only in the general guidelines, it must clearly be faced as one of our most serious problems Nevertheless, our record to date compares favourably with most other member countries, where the effects of measures taken or not taken have tended to be more restrictive than was perhaps intended, and there now appears to be general agreement that demand has fallen to an undesirable extent.
Looking ahead, the prospect for the United Kingdom is a continued rise in unemployment this year, and although some will say there was a case for reflation in the recent Budget, this argument takes no account of the unprecedented nature of the circumstances which face us in 1975, nor of the damaging consequence it would bring in its wake. It would worsen the balance of payments by increasing the demand for imports with possible adverse effects for exports. It would increase the demands made on the system at a time when inflation is continuing at a very high rate—a rate higher than that of our major trading partners, and so dangerous for United Kingdom trade and payments in the future. It would increase an already massive public sector borrowing requirement by a wilful act of policy. Brighter prospects in the export sector should, however, tend somewhat to offset the deflationary effects of the recent Budget.
The guidelines, drafted before the Budget, urged that
vigorous efforts should be made to reduce the share of the public sector deficit in the GDP.
As a result of the Budget, the public sector deficit and the borrowing requirement should be much the same in 1975–76 as a percentage of GDP—8 per cent. and 10 per cent. respectively. The Budget tax measures, together with the public
expenditure measures, will have a much greater effect in 1976–77.