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17. Price policy raises particularly difficult issues because we have inherited measures designed to alleviate the symptoms of inflation rather than to cure the disease. These measures involved the use of public funds to subsidise certain prices, and the imposition of controls and rationing to prevent prices rising, although goods were scarce. Thus shortages were perpetuated, and taxes kept high to find money for subsidies. In many cases some goods were taxed and their prices raised to provide funds to keep down other prices. The rents of some houses are still controlled at such low levels that many owners cannot afford to repair them, at a time when we are running great risks to secure sufficient resources to build

new ones.

18. We are, I think agreed that we must get away from all this, and return to a policy of economic realism, by which increases in the cost of goods are allowed to work through to the consumer. At the same time the consumer as taxpayer must be given some lightening of the crushing burden of taxation, with all its disincentive effect. We made a start in both these directions in the Budget.

19. It is important, however, that we should be clear what such a policy means. It means that we must be prepared to accept some further rise in the cost of living, including house rents and food prices. But this need not mean a reduction in the standard of living, if we can keep our tax policy in step with our policy on prices. On the contrary, as production increases, the general standard of living will ultimately rise.

20. Judging by past experience, however, an improvement in the standard of living is usually associated, over a period of years, with a gradual rise and not a fall in the general price level. People are nevertheless made better off by the fact that their incomes, as a whole, rise with rising production and more than compensate for higher prices. A good recent example is the experience of the United States since the war. We could look forward to such a process taking place here without inflation, if, but only if, production increases fast enough.

Government Expenditure

21. Apart from defence (to which I refer later) the main fields of Govern- ment expenditure are social services, education, and subsidies. We must face the fact that no major changes are possible in any of these without changes in basic policy; and that such a change involves major political difficulties and will require very careful consideration. Nevertheless it is vital that we should prevent the very large claims which the Government makes on the economy from rising any further and that we should make all possible economies, however small they may be individually, so as to reduce them as far as we may. I shall wish to discuss this with my colleagues in more detail later.

Defence Production

22.

There must be a comprehensive review of the resources we are devoting to defence production, including civil defence and the stockpiling programme. Preliminary studies which have been made in this field indicated that there is no escape from the conclusion that the load we are at present imposing on the metal- using industries for defence purposes gives us no hope of solving our balance of payments problem by the only way in which it can be solved, namely by a rapid expansion in our exports of metal goods. I shall submit a paper on this question shortly.

Investment

23. I have already stressed that if we are to succeed in achieving our over- riding production and export objectives of making and selling the types of goods which people abroad want we must ensure that the investment needs of productive industry are met. It is clear to me that while the demand for investment goods continues to be far in excess of the supply this leaves us no choice but to maintain control over the distribution of the resources available for investment. These controls cover the work of the Capital Issues Committee, building licensing, and steel allocations, as well as the arrangements worked out with industry governing the division of engineering products between defence production, exports and home investment. A suitable credit policy can certainly contribute to our objectives in this field, but if we tried to control the distribution of investment by credit policy alone we should have to be so severe that industry generally would be hard hit, and so wide is the field covered directly or indirectly by Government investment

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