CAB129-52 — Page 78

Page 78 19. Taking the whole United Kingdom situation, current and capital, the changes in 1952-53 compared with what has been happening in the first half of 1952 would appear to be of the following scale.

Expenditure

Change

First half 1952 1952-53

'annual rate

(£ million)

Imports

3,360

3,140

- 220 (better)

Overseas Government

Expenditure

220

220

Capital Payments

520

(300)

- 220 (better)

Total

4,100

3,660

440 (better)

Receipts

Exports and re-exports

3,020

2,770

- 250 (worse)

Invisibles (net)......

410

530

+120 (better)

Defence Aid

160

200

+40 (better)

Total

3,590

3,500

90 (worse)

510

160

- 350

Loss of gold reserves

20. This indicates clearly that on the basis of present policy, even if the inci- dence of capital payments is only £300 million (as indicated in paragraph 8 above) we should still expect to be losing gold heavily through 1952-53. Starting with £580 million at end-June, the indicated loss is £160 million, which would certainly lead us into open crisis.

To

21. The scale of uncertainty in these figures is much too great to enable precise deductions to be drawn, but it must be clear from this that the position is highly precarious and no sort of assurance can be given that, on the basis of present policies, we shall be able to survive the autumn and winter. If we look at the items one by one, indeed, we see how intractable the problem is. Certainly a new series of import cuts would present great difficulty; indeed, in recent weeks I have been under considerable pressure to increase the import programme. reduce overseas Government expenditure involves major changes in military policy. It is perfectly true that the capital payments may be less costly than £300 million, but they may, on the other hand, be substantially more costly; in any case these too are very difficult to escape within the present framework of policy. As regards exports, the reduction compared with the present rate may be surprising to my colleagues, but this year exports have been running at an abnormally high level because of the flood of supplies to Australia, and we have made very large sales of materials from our stockpile to the United States; the indicated level for 1952-53 is, in fact, higher than the level for 1951, and I do not think the President of the Board of Trade will be prepared to assure us that we shall be able to do better than this. Of course, we could always sell more exports by giving more credit. But this would increase the capital payments element on the other side of the balance sheet and therefore would not benefit our balance of payments. It may never- theless be necessary to give some credits in selected cases for the sake of our long-term competitive position. The figure for invisible income shows a substantial increase which looks rather optimistic and we are relying also upon very substantial defence aid from the United States.

22. The scale of the difficulties emerges with great clarity when we consider the situation of the sterling area against the rest of the world. This is really another way of looking at the same thing.

23. I pointed out in paragraph 17 above that at the present time the sterling area as a whole is running a deficit of about £700 million a year with the rest of the world. The other sterling area countries account for about £150 million of this. At the Commonwealth Finance Ministers' meeting in January, and subsequently, I pressed them to cut down their expenditure so that they would have a surplus with the non-sterling world. But it is very doubtful whether in fact they will be able to do so. Their export earnings depend largely upon the course of world demand for Page 78 of 200

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wbagfubeffcalda, &c. They have cut their imports but it is difft 79 pfearf the impact. They may manage to get into balance with the non-sterling world. But we certainly cannot rely on them doing more now or at any other time. The ability of the other sterling area countries to reduce their expenditure on non- sterling imports depends largely on whether our exports are competitive and freely available.

24. This means, as I announced in my Budget speech, that we ourselves must at least achieve a balance with the non-sterling world (including defence aid). Even this is not quite good enough for we have capital commitments outside the sterling area-repayment of United States and Canadian debt, oil investment overseas, possibly repayment of debt to E.P.U., repayment of sterling balances to Egypt and others, and we are doing some and should very much like to do more investment in Canada. At the very least, in our relations with the non-sterling world, we must live on our earnings plus defence aid.

*

25. The illustrative figures in the appendix show the same conclusion as that derived above from consideration of the total United Kingdom balance of pay- ments position. On reasonable expectations about the course of exports to the non-sterling world, and on rather optimistic assumptions about the course of our oil and invisible earnings, it seems to me most unlikely that we shall be able to afford the level of imports from the non-sterling world which we need even to maintain our present food consumption and to provide the raw materials for expanding industrial production. This situation can be changed only if we can do something very effective to get a quick and large expansion of exports to the non-sterling world--in conditions which look somewhat unpropitious.

26. This is the state of affairs which confronts us and I must once more emphasise to my colleagues that the capital position is so weak that we cannot run risks and that we shall have to make our import arrangements sufficiently flexible to enable us to keep our spending within our earnings.

Prospects after mid-1953

27. Looking farther ahead, it is unfortunately true that there is no relief in sight. None of the items in our accounts will automatically improve after next year.

Indeed, there are at least three major loads in sight which will make the problem worse, rather than better:-

For

(i) We are relying on £200 million of United States aid in 1952–53.

1953-54 and subsequent years, there is not the slightest guarantee that there will be any United States economic aid-or, even if there were, that the conditions would be acceptable. There may be United States aid, but we cannot count on it.

(ii) There is the uncertainty about payment for our troops in Germany-up to £130 million a year-and the possibility of further military expendi- ture in the Middle East (and perhaps also elsewhere).

(iii) We shall need more imports. If our production and exports are to increase, our imports must also increase, and to the extent to which we are now living on stocks, we shall need bigger imports simply to sustain the level of consumption. We cannot continue indefinitely, moreover, with our present intensive import restrictions, for sooner or later this will destroy our exporters' opportunities. By 1953-54 we shall probably need another £100 million of imports without allowing any increase of food consumption.

28.

These new loads add up to about £400-£450 million a year compared with 1952-53. But in 1952-53, on present policies, there is a prospective loss of gold reserves of about £160 million. In other words, it would seem that we have to improve upon the prospective 1952-53 situation by about £600 million. And even that is not likely to permit us to improve our gold reserves, or to provide against such contingencies as a worsening of the terms of trade, or, of course, to cope with any major change in the world situation, such as an American slump.

29. The fact is, therefore, that time is not on our side. This is no temporary hump," with a secure future if we can survive the next few months. Indeed, it is the reverse. Menacing though the present situation looks, our problems on the basis of present policies will grow worse, not easier.