CAB129-45 — Page 43

11857-Economic Survey-Galley 23

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124. Second, we must not allow inflationary conditions of demand to develop again, for this creates the climate in which price increases are most likely, and adds to the immediate as well as the long-term problem of achiev- ing the level of exports which are necessary to pay for our imports.

125. The problem of avoiding the development of inflationary pressure may be approached from either of two angles. We can ask: will that part of personal incomes which people desire to spend on current consumption exceed the resources available for current consumption at the prices assumed and at current tax rates? Alternatively we can ask, on the same assumptions: will the funds set aside to finance investment be sufficient to finance the total investment assumed? These are, of course, the same question from opposite sides.

126. On the assumptions made here, the national income would increase by about £900 million between 1950 and 1951. Personal incomes would increase much less, for part of the increase in national income would accrue in saving by companies, and if dividends continue to be limited, this will have considerable effect in limiting the increase in consumers' incomes. More- over, without any change in tax rates, part of any increase in personal incomes would be taken in increased taxes, and this will further limit the sums con- sumers have available for spending. The value of goods and services available for consumers to buy may, as shown in Table 24, increase by about £500 million between the two years. In spite of the fact that the volume of con- sumption in real terms will have to decline, the rise in import prices will inevitably cause a rise in retail prices, and thus effectively reduce the real purchasing power of consumers. Because of this, the need to increase taxes to permit the defence programme to be carried through and to enable a high level of exports to be maintained is much less than at first sight appears. Nevertheless, a considerable budgetary problem remains. This is examined below.

127. Table 25 shows the revenue account of the Central Government. This differs in several ways from the Exchequer figures used in the Budget debates, the adjustments being designed to show the effects of the Government's trans- actions upon the rest of the economic system and to consolidate into one account the various transactions of the Central Government. The account is shown for calendar years, since figures for fiscal years are not yet available. The revenue figures are on the basis of existing taxation. The expenditure figures are on the same basis as the published Estimates, except that the figures for defence allow for the additional expenditure required for the three- year programme of £4,700 million. The figures omit capital items including those connected with defence such as strategic stockpiling and the purchase of machine tools. Such items are included in investment expenditure in Table 24.

128. Between the calendar years 1950 and 1951 the revenue account shows a small increase in revenue of £35 million. On the other side of the account there is an increase in current expenditure of £505 million. The current surplus would therefore, on the assumptions adopted, decline by £470 million, from a surplus of £420 million in 1950 to a deficit of £50 million in 1951. Between the two fiscal years 1950-51 and 1951-52 the increase in defence expenditure would be somewhat steeper, and the decline in the surplus some- what more precipitate. It is clear from Table 25 that in 1951 public savings will be greatly reduced by the increase in defence expenditure, unless taxes are raised.

129. Table 26 fits the current Government surplus into the national capital account. This shows how the decline in the overseas surplus (which appears in the table as negative "gifts and loans from abroad") contributed towards the reduction of the sums required to finance investment. We can only export in excess of our imports if we refrain from spending an equivalent amount at home, so that a reduction in the excess allows us to reduce the sums we have to save, private or public, by the same amount. The table also shows the contributions that should be made towards the finance of investment in the form of undistributed profits and tax reserves, as profits increase with the national income.

130. Even after allowing for these contributions, a substantial problem remains. The final item of personal savings is a balancing item and shows what is needed if we are to avoid inflation, rather than what is likely to happen. But when prices are rising, and there is pressure on the cost of living, it seems much more probable that personal savings will fall than that they will show an increase of over £100 million. Further, the calculation is in calendar years and understates the fiscal problem. One quarter of 1951 has already passed, and defence expenditure will be expanding rapidly through the coming fiscal year. It must be the object of policy to curtail the demands upon the economy to make way for the increase in defence pro- duction and to help in the very difficult task of finding enough goods to Paport

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$31. The policy of disinflation has required in the past adequate fiscal measures, and has equally rested on restraint by companies in making dividend payments and restraint by the banks in creating credit. These policies must be continued and strengthened.

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