§ Mr. Iain Macleod (by Private Notice)
asked the Chancellor of the Exchequer whether he will make a statement on the conclusion of the standby loan to Britain by the I.M.F.
§ The Chancellor of the Exchequer (Mr. Roy Jenkins)
The House will note that a standby credit of 1.4 billion dollars has now been made available to us by the I.M.F. We have no intention of drawing on this credit in the near future. Its availability, however, is of great importance not only in reinforcing confidence in the new parity of sterling, but also for the stabiltiy of the international monetary system as a whole.
In spite of misleading reports to the contrary, the Fund has not attached conditions to this credit. I am circulating in the OFFICIAL REPORT the text of the Letter of Intent sent by my predecessor to the Managing Director of the International Monetary Fund on 23rd November.
644 This letter sets out the policies already announced to the House that the Government are following. These are designed to make certain that full advantage can be taken of the improvement in our competitive position resulting from devaluation and to ensure that sufficient capacity at home is available to meet the expected increase in export demand as it builds up over time.
§ Mr. Macleod
May I, first, extend to the right hon. Gentleman the congratulations of the House on his first appearance as Chancellor of the Exchequer at the Box?
Secondly, although it is satisfactory that the arrangements have been concluded, may I put one main point to the Chancellor? Of course, we recognise that there are nothing so crude as conditions, but there has been the usual examination. I quote from what Mr. Pierre-Paul Schweitzer said a year ago:When we put all this money at your disposal we just agreed with your Government on what our common view is on desirable policies in the United Kingdom.Is there again a common view on the desirable policies for the United Kingdom to follow and, if so, what are they?
§ Mr. Jenkins
I am grateful to the right hon. Gentleman for his congratulations, although I am not quite sure that I am grateful to him for giving me such an early opportunity of appearing at the Dispatch Box in my new rôle.
On the point he specifically put to me, I believe that we have a common view about what policies should be pursued, but we are taking the unusual step of making available to the House and the country the Letter of Intent which my predecessor sent on 23rd November. Letters of Intent have been sent before, by the previous Government and by this Government, but we have not previously made one fully available to the public. We are doing this. We shall, of course, continue to consult with the Fund about the working out of this policy, but that is a normal international arrangement for all countries.
§ Mr. Macleod
I understand that point. We shall study the Letter of Intent with great interest. A year ago what emerged was that the common view was for a statutory wages policy and a most savage 645 policy of deflation. What the House wants to know now is what understanding exists this time.
§ Mr. Jenkins
The House will be well informed of what understanding exists when it is able to read—as it will be very soon—the full text of the Letter of Intent. This will make it clear that while the Government are pursuing a policy which will make available resources to be pushed into exports and thus enable us to make a success of devaluation—I think that we should carry the whole House with us in agreeing that this is an essential aspect of policy—this does not involve any net deflationary policy.
§ Mr. Mendelson
Is my right hon. Friend categorcally saying that all the well-substantiated reports about the discussion of this matter in London and now in Paris and the conditions laid down—whatever word one uses—on the economic and fiscal policy to be pursued by Her Majesty's Government, and a policy which will lead to further deflationary measures, is all a figment of the imagination? Will he give an assurance that under no circumstances will he avoid a policy of expansion because of conditions laid down by the bankers?
§ Mr. Jenkins
I can assure my hon. Friend and the House that everything we have said to the Fund is contained in the letter which I am circulating in the OFFICIAL REPORT. I cannot quote the letter, because it is a long one, but I am making it freely available. At the beginning of the letter there is a paragraph—the governing paragraph, perhaps—which says that the Government's main objectives of policy remain the achievement and maintenance of a strong balance of payments together with a high rate of economic growth which will make for full employment.
§ Mr. Thorpe
May I join the right hon. Member for Enfield, West (Mr. lain Macleod) in congratulating the Chancellor of the Exchequer and wishing him success? I ask two questions. Is this special arrangement of a permanent or a temporary nature? Will the right hon. Gentleman confirm that it in no way restrict,: his freedom of manoeuvre in framing his Budget?
§ Mr. Jenkins
I do not think that there is any rime limit to this arrangement. I 646 hope that it will prove a temporary measure. It does not in any way restrict my freedom of manoeuvre in arriving at the Budget next spring. What will restrict my freedom of manoeuvre are the hard facts which confront us at the present time.
§ Mr. Cant
If the Letter of Intent does include what may be euphemistically called "strings", will my right hon. Friend say whether or not he would expect that this might have a therapeutic value in that it would persuade my Left-wing hon. Friends below the Gangway that devaluation was not a magic wand which will bring economic salvation?
§ Mr. Jenkins
I doubt whether anyone believes that devaluation is a magic wand. What we now have to make sure is that we take full advantage of the opportunity it offers us.
§ Mr. Bruce-Gardyne
Will the Chancellor of the Exchequer bear in mind that in the months ahead the House will be at least as interested in the regular good conduct reports which he is apparently to make to the Fund as the officials of the Fund will be? Will he therefore undertake to publish them to the House as they are made, bearing in mind that. if he does not, the French will?
§ Mr. Jenkins
I have already, in the course of 24 hours at the Treasury, with the full agreement, I may say, of my right hon. Friend the Home Secretary, taken the decision to publish the Letter of Intent, something which was not done by the right hon. Member for Barnet (Mr. Maudling) when he wrote a Letter of Intent. I think that I had better not enter into any further publication undertakings for this 24 hours, at any rate.
§ Mr. Woodburn
Is my right hon. Friend aware that it needs neither Letters of Intent nor any instructions from the International Monetary Fund to tell us that we cannot go on living at a rate beyond what we are producing?
§ Mr. Jenkins
I think that there is a lot in what my right hon. Friend says. I see the Leader of the Opposition nodding vehemently, but I am bound to say that this is not a feature of the last three years in particular. It is a feature of a much longer period indeed. What is undoubtedly the case is that what we 647 have to face at the present are not conditions of the International Monetary Fund, but the realities of the situation.
§ Mr. Sandys
The right hon. Gentleman said that the Government do not intend to draw upon the new loan for the present. Does that mean that they envisage the possibility of drawing upon it later on?
§ Mr. Jenkins
No. 1 hope that the right hon. Gentleman does not intend to be mischievous. I am sure that he does not. The intention is firmly and clearly that this standby credit should in no way be a subsidy to our standard of living in this country—
§ Mr. Jenkins
—either now or in the future. It is a piece of international monetary management in the interest of sterling, and of the rest of the world just as much as it is of sterling.
§ Mr. Atkinson
Will my right hon. Friend confirm that the declared intention of the Government to achieve a 6 per cent. growth rate in 1968 will not in any way be slowed as a result of the recommendations made by the O.E.C.D. Working Party?
§ Mr. Jenkins
I am not exactly certain to what commitment my hon. Friend refers. I assure him that there is no intention at all that this package of measures which was announced last week or any other measures should lead to a net deflationary effect.
§ Mr. Boyd-Carpenter
During the course of the negotiations leading up to the granting of this credit was there any mention of the possibility of the imposition of statutory control of wages; and, if so, was agreement reached between the parties on this point?
§ Mr. Jenkins
No, Sir. The right hon. Gentleman will see that in the Letter of Intent there is, as is entirely appropriate, because it is an important subject, a substantial mention of prices and incomes policy. It does not go beyond what has previously been announced to the House. That is what is clearly set down in the letter.
§ Mr. Victor Yates
In view of the widespread Press reports, which apparently are 648 quite inaccurate, and which must cause very considerable anxiety, about the conditions which were supposed to be attached to this loan, will the Government seriously consider their public relations or how best these dangerous tendencies of the Press can be corrected?
§ Mr. Jenkins
I have many responsibilities in my new job, but I do not think that I had better take on those of dealing with the Press as well.
§ Mr. Biffen
Is the right hon. Gentleman aware that a great deal of the concern around these negotiations for the standby loan does not arise from whether or not the measures accompanying devaluation have a net deflationary effect, but from whether or not it is, in the view of the Government, a measure of reflation? Will the right hon. Gentleman therefore take this opportunity of confirming that he stands by the speech of Sir Leslie O'Brien at Buenos Aires about the necessity for continuing margins of unused capacity for the economy to operate effectively?
§ Mr. Jenkins
What I stand by is paragraph 3 of the Letter of Intent, which I have already read out to the House.
§ Following is the text of the Letter of Intent:
§ 23rd November, 1967.
§ My Dear Mr. Schweitzer,
§ I am setting out in this letter a statement of the policies and intentions of the Government of the United Kingdom.
§ 2. The United Kingdom Government reached their decision to seek the International Monetary Fund's agreement to a reduction in the parity of the pound sterling in the light of their latest periodic review of the position and prospects of the United Kingdom economy, including the outlook for the balance of payments, to the end of 1968.
§ 3. The Government's main objectives of policy remain the achievement and maintenance of a strong balance of payments, together with a high rate of economic growth which will make for full employment.649
§ 4. So far as the balance of payments is concerned, the Government's aim, at the new rate of exchange which has been concurred in by the Fund, is an improvement of at least £500 million a year. On present prospects for world trade this should mean a surplus in the second half of 1968 at an annual rate of at least £200 million. Beyond that there should be a further substantial rise in the surplus as the full benefits of the change in the United Kingdom's competitive position are felt.
§ 5. At the same time as they took their decision on the rate of exchange, the Government decided that measures should be taken as and when required to free resources from domestic use on the scale necessary to secure the improvement referred to in paragraph 4 above.
§ 6. As the Fund Board will be aware, calculations of the effect of a change in the parity of a currency, and still more of the timing of such effects, are necessarily extremely speculative. This makes it difficult to decide precisely, in the initial stages, on the scale and timing of the measures that are required to make sure that the improvement in the competitive position is not lost through insufficient capacity at home being available to meet the expected increase in demand as it builds up over time.
§ 7. The Government is satisfied that the measures announced on 18th November, 1967 will bring about a sufficient shift in resources in the coming months to go a very long way towards achieving the improvement needed to achieve their balance of payments objective. These measures—details of which are annexed to this letter—will, together with the effect on purchasing power at home of the devaluation itself, lead to a reduction of home demand by about £750 million to £800 million below what would otherwise have been the case.
§ 8. The Government is fully aware of the possibility that further measures will be needed to maintain the momentum towards the balance of payments improvement referred to in paragraph 4 above. They intend to take further action once it becomes apparent that such action is required to secure the necessary balance of payments surplus.
§ 9. The next review of the position and prospects of the United Kingdom economy and balance of payments will, in the normal course of business, be carried out in February, 1968. At this time it should be possible to assess more accurately than can be done at present the effects of the decisions announced on 18th November, 1967. In the light of the review, the Government will make a decision on the precise nature of any further action required. They will be happy to consult with the Managing Director' on the results of this review, and again after the further reviews which are planned for July and November, 1968.
§ 10. Fiscal policy will continue to play the most important rôle in making room for the needed improvement in the balance of payments. It is the Government's intention to ensure that the Exchequer's borrowing requirement for the financial year beginning 1st April, 1968, is cent under firm control. So far as 650 can be seen at present, this entails holding down the borrowing requirement to not more than £1 billion—the appropriateness of which estimate and the measures necessary to ensure that it is achieved will be reviewed with the Managing Director in accordance with the timetable specified in paragraph 9.
§ 11. The steps that have already been taken and will continue to be taken give rise to the expectation at present that bank credit expansion will be sufficiently limited to ensure that the growth of money supply will be less in 1968 than the present estimate for 1967, both absolutely and as a proportion of G.N.P., despite the expected substantial recovery of reserves. It continues to be the Government's policy to meet its own needs for finance as far as possible by the sale of debt to the non-bank public and interest rate policy will be used to this end. In the consultations mentioned in paragraph 9, the actual course of bank credit in relation to the expected course will be taken into account in determining appropriate policy actions.
§ Prices and incomes policy
§ 12. The Government's object will be to ensure, in co-operation with the T.U.C. and C.B.I., that the policy for prices and incomes measures up to the requirements of the new situation. It will be the Government's intention to maintain the policy set out in the White Paper, Prices and Incomes Policy after 30th June, 1967 (Cmnd. 3235), under which there is no entitlement to a "norm" or standard increase in pay, and increases in pay and prices have to be justified against criteria of the national interest which are equally relevant to the new situation. There is no criterion for pay increases related to changes in the cost of living. To support the application of the policy, the vetting arrangements will be strengthened in order to ensure that the rise in wages and salaries does not exceed what the economy can afford over the next twelve months.
§ The Government has already started talks with Managements and Unions on alternative ways of achieving this objective.
§ Exchange control
§ 13. The Government is determined to maintain the new parity without resort to any additional restrictions on current payments or intensification of the present restrictions. The Government, moreover, intends to abolish all remaining restrictions on current transfers and payments as soon as the balance of payments allows. Similarly, as the balance of payments strengthens, the Government will consider what relaxations can be made in the present restrictions on capital transfers.
§ Request for a standby
§ 14. The Government are convinced that the above measures will lead to a strong balance of payments. It is important, however, for the stability of the international monetary system to establish confidence in the new parity from the start. The Government therefore requests a standby of $1.4 billion from the Fund to carry out its economic aims, both domestic and 651 external, which it believes are fully in conformity with the aims of the Fund.
§ 15. Before making purchases under this requested standby arrangement with the International Monetary Fund, the Government of the United Kingdom will consult with the Managing Director on the particular currencies to be purchased from the Fund.
§ 16. The Government believe that the policies here outlined are adequate to achieve the economic goals described in this letter. If, however, present policies should turn out to be inadequate, the Government is firmly determined to take such further measures as may be necessary to achieve these goals. If, in the opinion of the Government of the United Kingdom or the Managing Director of the Fund, the policies are not producing the desired improvement in the balance of payments, the Government of the United Kingdom will consult with the Fund, during the period of the standby arrangement and as long thereafter as Fund holdings of sterling exceed 125 per cent. of quota, to find appropriate solutions.
§ Yours sincerely,
§ J. CALLAGHAN.
§ Measures Announced on 18th November, 1967
§ 1. Fiscal Policy
- (a) As announced in the supplementary statement on Defence Policy of July, 1967 (Cmnd. 3357), defence expenditure was planned to stay below £2,000 million a year at 1964 prices and to be down to £1,900 million by 1970–71. It has now been decided to achieve this reduction by 1968–69, so reducing the cost of the planned defence programme in that year by over £100 million (exclusive of terminal costs and expenditure arising from the change in parity).
- (b) Civil public expenditure as a whole (i.e. including nationalised industry investment and local authority expenditure) is planned to rise over the next few years. Reductions will be made in 1968–69 to reduce the total planned for that year by £100 million.
- (c) The premium (seven shillings and sixpence a week for men) paid to manufacturers under the Selective Employment Payments Act will be withdrawn—except in Development Areas. This will reduce payments by over £100 million in a full year.
- (d) Payment of the export rebate will terminate on 31st March, 1968. Exports up to that date will qualify, exports thereafter will not. This will save just under £100 million in a full year, of which approximately two-thirds will be realised in 1968–69. Abolition of the rebate requires legislation which is now being prepared.
- (e) The rate of Corporation Tax will be increased in the 1968 Budget from 40 per cent. to 42½ per cent. The new rate will apply to profits for the year to 31st March, 1968. Allowing for side-effects, the additional yield is estimated at about £95 million in 1969–70 and approaching two-thirds of that figure in 1968–69.
§ 2. Monetary policy and hire-purchase restrictions
§ The Bank Rate has been increased to 8 per cent. from its previous level of 6½ per cent. This high rate has been chosen in order to reinforce the impact on confidence of the Government's measures by the offer of an exceptionally high rate of return on funds invested in London. By raising the cost of credit Bank Rate at this level will also reinforce the impact of the credit restrictions on demand.
§ Severe but selective restrictions are being placed on bank lending to the private sector. New ceilings have been imposed which will prevent aggregate advances rising above their level at 15th November in the case of the London clearing and Scottish banks, and end-October in the case of other banks.
§ Identified lending for exports, and under the schemes providing guaranteed finance for exports, and shipbuilding, will be excluded from the ceilings. Within these ceilings the priority categories for lending have been more narrowly defined than hitherto, leaving a wider area of non-priority borrowers whose demands can be compressed in order to accommodate priority lending.
§ Hire-purchase restrictions are also being tightened. The minimum deposit on cars will be raised from 25 per cent. to 33 and one third per cent., and the maximum repayment period will be reduced from thirty-six months to twenty-seven months. In addition a ceiling is being placed on lending by finance houses restricting their lending to the level at end-October. These measures are likely to reduce net borrowing by some £100 million in 1968.