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Page 87 defence, infrastructure, works stores, &c.) is expected to be of the order of £600 mil- lion at present prices in 1953 and of £650 million in 1954. Contracts which commit the resources of the engineering industry to the production of defence goods in 1953 and 1954 are from the nature of things having to be made every day. As we may have to decide to reduce the defence production programme in order to free resources for export, we must at least ensure now that the amount of resources which will be irrecoverable for other purposes does not increase further.

29. If we assume for the moment that we do not accept any of the possibilities of easing the metal-goods problem set out in paragraph 20 above, the maximum amount of metal-goods production which could be devoted to defence production, consistent with the export objective, in 1953 and 1954, would be less than £400 million in 1953 and not much more than £400 million in 1954 at the prices now ruling. The metal goods content of the defence production programme is already running at about £500 million per annum and is expected to rise by over £100 million by 1954. It is clear that a reduction of this magnitude in the defence production programme not only has major consequences from the defence point of view, but could not be brought about quickly without a measure of dislocation and waste. It might also react on the receipt by us of United States economic aid for 1952-53, thus increasing the size of the export task in 1953; and on the flow of military aid from the United States to the United Kingdom in 1952–53 and follow- ing years.

30. In my view, however, whatever assessment we make of the possibilities in paragraph 20 above, we are likely to find it necessary to reduce the defence load on the metal-using industries by a substantial amount. I consider, therefore, that no fresh defence contracts with these industries for military production and civil defence should be let until we have completed our review of relevant economic policy. We should aim to complete this review as soon as possible, since if there is to be a substantial reduction in the total size of the programme it is desirable that the production programme should be got into balance as soon as possible.

31. In conclusion, I must emphasise that the balance of payments surplus of £300 million a year upon which my analysis is based, does not take anything approaching full account of the possible contingencies to which we may be sub- jected on our external accounts. Likewise, we have assumed an import expenditure which is very low, both in relation to consumption standards in this country and in relation to commercial policy needs. From the economic point of view, indeed, the analysis contains no margins of safety whatever, and in fact it might very well be argued that a substantial margin in addition ought to be provided for contingencies.

32. Summary and Conclusions

(a) To put right our balance of payments a substantial increase in our exports. of the order of £600 million, compared with 1951, will be necessary over the next three years.

(b) Most of the increase in exports will have to be metal goods, as some cate- gories of exports must be expected to be less than in 1951; but intensive measures must be adopted to promote all other exports, especially those products such as coal and coke which are still in great demand. The necessary priority should be given in raw material allocation and other- wise to permit the quickest possible expansion of exports.

(c) Home demands on both civil and military metal goods must not be so high that they frustrate this increase. Home investment, however, must be adequate for industrial efficiency, and should be allowed to increase beyond the levels intended for 1952. Restrictions on domestic supplies. of durable consumer goods and motor cars will probably need to be retained for at least three years, but it may well be difficult to keep them as low as in 1952.

(d) Even so the programme for defence production (including civil defence) appears to me to be too high in our changed circumstances, and I recommend that we should consider ways and means of readjusting it. In reviewing the size of the defence programme, the possible course of overseas defence expenditures should be taken fully into account. Present indications are that a major contribution from a reduction in the defence production programme will be necessary if we are to have any chance of avoiding balance of payments crises.

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review, immediate action is necessary to prevent Gus & fch Do sions being prejudiced by a further increase in the defence load on the metal goods industries.

Treasury Chambers, S.W. 1,

23rd May, 1952.

R. A. B.

STATISTICAL APPENDIX

1. The following tables illustrate the main magnitude involved in the discus- sion of the balance of payments problem.

2. The Import Bill.—The table below shows how the total import bill might change if imports of food and agricultural products were kept at a level little different from the 1952 programmed level for the next three years. Imports of raw materials and oil are assumed to increase with industrial output and are consistent in particular with the increase in the output of the metal-using industries discussed later. Within the miscellaneous category “all other imports" imports of machine tools, &c., for defence are assumed to become insignificant after 1952 and imports of machinery and of manufactured goods are assumed to remain unchanged at the rate of import programmed for the second half of 1952. No allowance has been made for the cost of any additional imports which would come in if the United Kingdom restored any open general licences for imports from Europe.

TABLE 1

The Total Import Bill, 1951 and 1953 to 1955

Imports consumed—

Food and agriculture

Raw materials

Oil

All other imports

£ million f.o.b. at March 1952 prices

1951

1953

1954

1955

1,300

1,140

1,140

1,140

1,480

1,610

1,700

1,750

180

180

180

190

370

270

260

270

3,330

3,200

3,280

3,350

3. Allowing for the cost of imports which went into stock in 1951 and costing '1951 imports at the actual prices in that year, we find that the total import bill would be about £300 million less in 1953 than in 1951 but by 1955 the total saving would have fallen to about £150 million.

Actual imports

TABLE 2

1951 3,500

3,200

£ million(1) 1953

1954 3,280

1955 3,350

(1) At March 1952 prices, except for 1951 which is at actual prices ruling in 1951.

4. The Export_Task.-The level of exports required to cover the cost of imports together with the various overseas commitments is shown below.

TABLE 3

Derivation of Export Task

1951 ·

£ million at current prices

1953

1954

1955

Imports

3,500

3,200

3,280

3,350

Overseas Government expenditure(1). Foreign exchange cost of troops in

Germany

190

220

220

210

60

130

130

Capital commitments

(-520)

300

300

300

Total receipts required

:

3,170

3,780

3,930

3,990

Net invisibles(2)

United States aid

Exports required

(1) Excluding cost of troops in Germany.

(2) Excluding overseas Government expenditure.

455.

570

630

670

5

100

2,710

3,110

3,300

3,320