§ In the coming year all the major components of demand should be increasing or, in simpler language, the demand for British goods should continue to rise vigorously, with all that this means for employment and prosperity.
§ Mr. Maudling
No. There will be plenty of opportunity for several days to debate anything I say this afternoon.
§ Mr. Davies
It is a misinterpretation of the Chancellor's own document. He would not know, because he has not read the damned thing.
§ Mr. Maudling
Reading and understanding do not always march together.
As I have said, in the coming year all the components of demand will be expanding vigorously. To begin with exports, there is no doubt that the opportunity is there for another substantial increase this year in British exports. The American economy should be expanding well under the influence of their tax cut. A good rate of growth is likely to continue in most of Western Europe and, with higher commodity prices, demand from the primary producers, w ho are so important to our exports, should again be higher. There seems every reason to believe, therefore, that the business will be there on an increasing scale if we go out and seize it. There is also good reason to believe that our exporters are rising to their opportunities.
My right hon. Friend the Secretary of State for Industry, Trade and Regional Development will be elaborating on this theme tomorrow. But I can say here and now that, as the March trade figures will show, the trend of exports is still encouragingly upwards—a heartening achievement. Even greater successes will be needed if we are to attain all our 259 aims, but current progress shows that it can be done.
On the side of internal demand, there has been the turn-round in investment expenditure by manufacturing industry and all the indications are that there will be a vigorous growth this year. In the public sector the expansion that is already well under way is certain to continue.
Then there is investment in stocks, which has risen rapidly in recent months after running at a relatively low level for a considerable time. Stock-to-turnover ratios are still comparatively low and we must be prepared to see stock-building continuing at a high rate and, indeed, probably increasing further.
With all these forces making for expansion of the activity of the economy, real personal income—or spending power, in simpler terms—must be expected to go on rising strongly and this will be reflected in the actual growth of consumer expenditure.
The outlook for demand as a whole is a continued expansion at a high rate which, although somewhat lower than in recent months, when it has been about 6 per cent., would still be very high and substantially greater than 4 per cent. per annum.
I turn now to the external position. The prospect for exports, as I have already shown, is encouraging. There should be a substantial increase. The prospect for imports, also, is that they will be considerably higher in 1964 than in 1963. This is the inevitable effect of a higher rate of activity.
It is difficult to make any exact prediction, partly because of the uncertainty of import prices—which have already risen substantially—but also because it is difficult to be sure how far recent substantial imports have already reflected the initial stock-building phase of our expansion. The level and extent of stock-building is notoriously the most volatile and unpredictable element in our economy.
While, therefore, we have already seen the effects of the first spurt in stock-building, there can be no certainty about what will follow. But in so far as we are paying for imports that are necessary for economic expansion, we are, as I have repeatedly said, entitled to regard this as a proper subject for financing 260 through the use of our external credit, so long—and this condition must never be overlooked—as our domestic economy remains sound.
Here, I want to say a word about imports of manufactures, as much attention has been given to this recently. They have, of course, risen rapidly recently in relative terms although in absolute terms they are less important than the bulk imports of food, fuel and materials. There are some people who argue that we should place controls upon the imports of manufactured goods—about two-thirds of which, by the way, are machinery for industry—on the ground that we can make them for ourselves.
I do not object to import controls on doctrinal grounds, but on grounds of practical policy. Certainly, there could be occasions where their use would be justified and permissible under international agreements, that is, if we should be facing severe balance of payments difficulties which could not be dealt with in better ways. But we must always remember that as a country that lives by the export of manufactured goods our interest lies in the greatest worldwide freedom of trade in them. We cannot expect to export machinery and consumer goods if we are not prepared to import them.
There are three further difficulties about a policy of import controls on manufactures. First, in the case of machinery, where trade is becoming increasingly worldwide and specialisation more extensive, we should be denying to our manufacturers access to some of the best and most modern machinery. Secondly, by protecting our own industries against external competition we should be missing opportunities of stimulating them to greater efficiency. Thirdly, our policies for helping the under-developed countries will be frustrated if we are not prepared to accept from them as the years go by progressively increased imports of manufactures.
There is only one effective answer to growing imports of manufactures: to produce more and more efficiently ourselves in competition with imports and to expand our exports.
On the capital account this year, we cannot look for a continuance of the comparatively low rate of net outflow 261 we have had in the past few years. Overseas investment by the oil industry, for example, is likely to increase this year. But we are all the time building up our stock of overseas assets. We are net creditors on assets and liabilities of most types, and there is a substantial excess of assets over liabilities in the higher-yielding categories.
As a result, we have a net income from overseas by way of interest, profits and dividends of £340 million a year. While, therefore, the outflow of long-term capital may add to our short-term problems, we must remember that it is strengthening the current account in the future, though there are, of course, limits to what we can or should do, even in this field of useful and profitable activity.
To sum up the external prospects for the coming year, the combination of an increased capital outflow with a deterioration in the current account will mean a worsening of the overall balance of payments this year. Provided that it is temporary, this should give rise neither to alarm nor dismay, and it would be very foolish of anyone to proclaim that it shou1d. It is the predictable accompaniment of a vigorous rate of growth which all of us are committed to seek. We have very large first and second line reserves and other borrowing facilities which can be mobilised to deal with a position of temporary imbalance or with movements of short-term funds. In addition to the gold and dollar reserves, there is the Government's dollar portfolio which has averaged around 1 billion dollars in value. Short-term assistance from other central banks is available, as we saw a year ago, and we have the 500 million dollar swap agreement with the U.S.A. Our standby arrangement with the International Monetary Fund enables us to draw quickly 1 billion dollars from that source and our total drawing rights amount to nearly 2½ billion dollars.
These are strong defences. I hope, moreover, that the work of the Group of Ten, in which the United Kingdom is playing a full part, and the coming meeting of the International Monetary Fund this autumn, will further strengthen the international liquidity system, with benefit to the position of sterling along with the other major currencies.
262 We cannot, however, be confident that the worsening in our overall balance will be temporary unless we keep control of our own costs and particularly of our export pi ices. It is manifest from the figures that I have given, and from the studies published, for example, by the N.E.D.C., that the key to all our success is a vigorous increase of exports and that this depends upon keeping our costs competitive. We have recently benefited from increases in costs suffered by some of our competitors particularly on the Continent, but we cannot, and should not, rely on this process continuing; it will not. In Germany, in France and in Japan vigorous measures have been taken to keep the situation under control; while in the United States, still our most formidable industrial rival, the level of costs has been kept quite remarkably stable for several years now.
It cannot be too often repeated that the level of costs is a matter within our own control. It is fair to say that British manufacturers have, in general, access to raw materials on terms at least as favourable as our competitors. It is what we add ourselves that will make the difference between success and failure in our export efforts.
This year, we have encouraging prospects of price stability in basic industries. The National Economic Development Office has recently announced that price increases this year are unlikely for a number of key products, namely, coal, oil, steel, cement and chemicals. Indeed, I understand that it is likely that the National Coal Board will shortly he making a reduction of 2s. 6d. per ton in the price of coking coal supplied to the steel industry. As I said earlier, out policy in setting financial targets is bearing fruit.
It is encouraging that the Board feels able to make this reduction, despite the difficult task with which it is faced in continuing fully to pay its way, for the industry has a stern struggle on its hands, and feels the current pressure of prices of supplies and other components in its costs. This reduction in the price of coking coal should yield benefits beyond the steel industry itself, and I regard it as a useful contribution towards keeping our industrial costs competitive. This prospect of stability in some of the basic products gives us a 263 foundation on which to work. Our success will depend more than anything else on the trend of incomes.