§ This conclusion raises two questions. How large an increase in demand can our economy safely absorb? And what action on my part will be necessary, allowing for direct and indirect effects, to produce an increase in demand of that order? These are the questions which have been constantly in my mind in recent months. The answers involve difficult decisions, and, in the end, all that I can say is. "This is the best judgment I can make ". I have already mentioned some of the considerations I have had in mind, and which must be in the minds of the Committee, too.
§ I must remember two things. First, the need to ensure that no increase in exports which we might hope for is held back because of competing demands at home; and, secondly, though neither we nor any other Government can enforce or guarantee price stability, now that it has been achieved, it would be folly to throw away the chances of its continuance. These considerations are reinforced by our past experience that it is uneconomic and costly to run our industries above capacity, and that industrial efficiency benefits from the easing of excessive pressure of demand. For all these reasons, I must clearly keep well within my judgment of what is physically possible.
§ As for the relation between the scale of budgetary action and the ensuing effects on the economy, I will mention two points of which I have also had to take account. The first is that the net cost to the Exchequer of any concession is likely to be less than the gross cost. This is because some part of the increased expenditure and incomes which the concession generates will return in due course to the Exchequer in the form of higher direct or indirect tax revenue; some part, too, in savings. These thoughts are, of course, a source of much comfort and consolation to me. The second is that the total effect of any net concession will normally be greater than its direct effects. For the increased spending which results directly will raise the incomes of those who produce goods and services to meet 49 it, leading, in turn, to an increase in their spending, and so on, in diminishing sequence. That is what the economists know, I believe, as the multiplier effect.
§ Earlier in my speech I called attention to the concern I felt about the prospective decline in private manufacturing investment. It is true that a key factor leading to expansion of investment is a prior expectation of expansion in the demand for the products of capacity already installed, yet I am most anxious that this year the growth of investment should follow on the expansion of demand with as short an interval as possible.
§ These, then, are some of the considerations which I have had to weigh. I am sorry that I have no time to tell hon. Members the other considerations. I have said that, if I made no changes in taxation, the prospective surplus above the line would be £397 million. In present economic circumstances a surplus of this size is no longer needed. I can, therefore, now contemplate with safety some tax reductions that will lead to a fuller use of our resources without creating dangerous pressure on the economy.