CAB129-45 — Page 25

11657-Economic Survey-Galley 6

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19. All but a small proportion of the increased defence expenditure of the next three years will make a direct call upon physical resources. There are in principle four ways in which these resources could be obtained: first, through an increase in total production; second, by the withdrawal of resources from the production of consumption goods and services at home; third, at the expense of the production of investment goods-houses, factories, plant and machinery, and the like; lastly, through allowing a deterioration in the overseas balance.

20. It is obvious that the first of these courses would provide the happiest solution to the problem. This could happen either if there were many idle resources or if the productivity of the resources already employed could be improved. The former is, of course, precisely the way in which a re-armament programme would be carried out in a country with heavy unemployment and much unused industrial capital. The civilian economy would not suffer; the cost of defence would be met by reducing previous waste. This was, in fact, how the United Kingdom's rearmament was in the main conducted in the late 1930's. Today, however, we have neither the unemployed labour nor the empty factories that would be needed for this to be possible again. 21. Alternatively, is there any possibility that the existing labour force could provide the extra production required by increasing output per head? There would then be no.need for any accompanying reduction in present consumption and investment levels. The only sacrifice incurred would be a sacrifice of improvements that would otherwise have come about. striking increases in productivity that have been almost the rule in British industry in the last three years would, at first sight, make this appear a reasonable hope today, for the increase in defence production is of the same order of magnitude as the increases in output which past productivity trends would suggest for the next two or three years. Unhappily, however, as the discussion below makes clear, raw material difficulties make it unlikely that in the years immediately ahead productivity can continue to improve so fast as recently.

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22. Moreover, the problems ahead are not solely problems of aggregate output. The increased claims of defence are not distributed evenly over the economy, but are largely concentrated upon particular sectors-most of all upon the metal-using industries. The great bulk of the output of these industries goes to home investment and exports and only a very small part consists of consumption goods. This makes it much more difficult to shift the main burden of re-armament on to consumption. It is indeed certain that defence orders must to a considerable extent displace the production of metal goods for export and investment, and it will be a major task for Government and industry in co-operation to ensure, not only that the arma- ments are produced in time, but also that the other output displaced is of the least important kind.

23. The Government does not consider that these problems can be dealt with by giving an over-riding priority to arms production. Experience during the war here and in other countries has shown that this is an ineffective and dangerous instrument in times when all resources are greatly strained. It may sometimes be better that a firm should continue production for export or investment than that it should undertake a particular defence contract which some other firm, though perhaps less experienced in this type of work, could carry out efficiently and in time without displacing essential production. The Government has made arrangements by which advice can be given to industry when such clashes of urgency arise, but no hard and fast rules can be laid down. It is a matter rather where each case must be judged on its own merits, and much will be learnt from experience.

24. Wherever necessary, formal controls and powers of direction over pro- duction will be used. Scarcities of materials have already made it necessary to impose a number of controls to ensure that an adequate part of limited supplies is made available for defence and vital export and investment uses. These controls cover both allocation and limitation and prohibition of end- uses and are mentioned below. Further measures have been planned and will be carried out if they come to be needed. Factory and storage space will be requisitioned where necessary.

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25. Physical shortages and the needs of arms production will inevitably lead to a reduction in exports of coal, metals and some metal goods. time when the cost of imports is rising with alarming rapidity, this gravely threatens the balance of payments. The Government is resolved that the United Kingdom's external accounts must not run into deficit during the re- armament period. To prevent this, the level of other exports must be raised. In particular, a new export drive by the textile industries is called for, and many other smaller industries producing consumption goods must also play their part.

Targets are now being worked out and will be announced as Pageon 5sofo587e after discussion with the industries concerne Page 25 of 587

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