CAB129-45 — Page 42

11657-Economic Survey-Galley 22

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118. In relation to the increase in the national income, the increase in personal expenditure in 1950 was moderate. This made possible the large improvement in the balance of payments-an improvement, even though partly offset by the fall in commodity stocks. Though the increase in national income was much larger than had been foreseen, the allocation of the enlarged national income was in line with the Governments' objectives, and can justly be claimed as a vindication of the general policy of dis- inflation. In achieving this result the most important elements of policy have been the maintenance of a Budget surplus, the voluntary restraint of dividends and wages, and the general restraint of credit by the banking system. The two former have limited consumption expenditure and increased the portion of the national income available for investment. Credit policy, on the other hand, has tended to reinforce direct controls in limiting invest- ment expenditure.

119. Monetary policy thus aided the favourable developments of the year. The increase in output and prices made it necessary for industry to raise a considerable amount of new finance; in addition to the sums raised in new issues on the Stock Exchange, bank advances rose by £120 million over the year. Direct and indirect bank accommodation to the Government was little changed, since the Budget surplus was offset by loans to other public bodies and by the effects of the overseas surplus on the Exchange Equalisa- tion Account. The expansion of credit was probably not excessive, and over the year as a whole the rate of interest was higher than in 1949. The yield on Consols averaged 3.54 per cent., compared with 3.30 per cent. in 1949. 120. It is against the background of this general stability in 1950, taking the year as a whole, that the risks of inflationary pressure in 1951 have to be assessed. These are due to recent changes rather than to any persist- ence of past pressure. The financial policies required in 1951 must take account not only of the great increase in defence expenditure, but of other changes that are likely at the same time. Tables 23 to 26 are designed to set out the national accounts, including price changes. But present con- ditions make it exceptionally difficult to forecast developments over the next twelve months. The greatest cause of uncertainty is the rise in import prices. These are bound to have an important effect on internal price levels, but it is not possible to say how quickly the economy will adapt itself to the new conditions. The forecasts given here claim therefore to be no more than a reasonable projection of the effect of current trends in import prices and in internal costs. Though in detail they are bound to be falsified by events, they illustrate the main lines of the problems with which we are faced.

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121. The forecast of national product in Table 23 allows for an 8 per cent, increase in the value of the output of industry and commerce. By the beginning of 1951 weekly wage earnings, as distinct from wage rates, had probably risen by rather less than this proportion above the average 1950 level. It is assumed that there will be no significant change in the numbers employed. The increase in import prices will substantially increase the cost of replacing stocks; and the forecast makes allowance for this stock appreciation, as well as for the effects of the continued increase in export prices that seems likely. The figure for the value of the work performed by Government employees rises in 1951 because of increases in the numbers in the Armed Forces, in their pay, and in the pay of certain other Govern- ment employees.

122. The prospective increase in prices will present us with a grave problem in maintaining stability at home. Some increase in prices is inevitable(1). We cannot isolate ourselves from what happens in the rest of the world, nor prevent the higher cost of imports from affecting our purses. Our whole economy rests on these imports, and the consequences of not getting them would be far more disastrous than the consequences of having to pay more for them. But this does not mean that no action is necessary against inflation. In the Government's view, there are two things that can and should be done.

(1) Much of the increase in prices in 1951 will be due to the increase in import prices which has already taken place in 1950. Much of the increase in the import prices and in internal costs in 1951 will probably be delayed and appear first as an increase in the value of work in progress rather than as an immediate price increase.

123. First, while some adjustment to wages may be necessary and some increases have already taken place, there should be no unreasonable increases in wages or in other personal incomes. In present circumstances, the in- creases which have already taken place, to the extent that they lead to higher export prices, reduce somewhat the burdens imposed on us by higher import prices. But every increase adds to our costs, leads in itself to further price increases. and to demands for still higher incomes which again lead to higher prices. In the end this process would make it impossible to sell our goods abloageant2tkus 5 get our imports at all, while at home it wogaead of 587 grave social injustices which would fall most heavily on those least able to bear them. The policy of restraint in personal incomes is as important to-day as in the past, and is a responsibility of the whole community.

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