TNAG-1393-FCO40-1865-Future-of-Hong-Kong-briefing-for-meetings-and-visits-1985 — Page 60

uarter

verage

owl

around 31 per

GENERAL ECONOMIC STRATEGY

112

Al

1. Economic Strategy: progress and objectives

Objective is continued reduction of inflation and sustained economic growth. Maintenance

of firm financial framework is bringing successful response. Inflation is down sharply from

1980 peak of over 20 per cent.

Micro-economic policies to improve supply performance essential. Privatisation and

removing obstacles to free functioning of markets encourage vigorous enterprising economy,

higher output and more jobs. Reduction and simplification of taxes reduce distortions and

improve incentives. Easing rigidities in labour markets encourages better match of supply

to demand for labour and so faster creation of new jobs.

Low inflation is bringing steady growth of output. UK now entering fifth year of rising

GDP. Annual growth from trough of recession in 1981 Q2 to 1985 Q1 averaged 3 per cent.

UK likely to grow faster than any other Community country and US in 1985. Government forecast is rise of 31 per cent.

Figures suggest total employment has been growing since Spring 1983. Estimated 649,000

rise in UK employed labour force March 1983 to March 1985. Prospects for unemployment

depend on encouraging enterprise and effort and moderation of real wage increases (have

averaged about 3 per cent a year since 1981).

2.

MTFS

Restatement of Medium Term Financial Strategy in 1985-86 FSBR (Red Book) set out

indicative ranges for (decelerating) monetary growth and figures for government receipts,

spending and borrowing to 1988-89. Reduced level of public sector borrowing essential for

medium term. Government strategy is to hold public spending broadly flat in real terms at

1984-85 level (excluding effect of coal strike). In growing economy, tax burden can then

come down as percentage of GDP.

3. Chancellor ready to increase PSBR for 1986-87 to finance extra tax cuts?

[Budget Speech said ... "nothing sacrosanct about the precise mix of monetary and fiscal policies required to meet the objectives of the MTFS, but this [ie 1985-86] is not the year to make adjustments in either direction". 1985 MTFS indicated 1986-87 PSBR of £7 billion - 2 per cent of GDP. Issue was pursued further in Chancellor's Weekend World interview

24 March.]

Nothing to add to what Chancellor has already said: any adjustment of monetary/fiscal

policy mix would be undertaken only if fully confident inflation on sustained downward

trend.

Page 60Page 61