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Chapter I. The Home Economy
Published online by Cambridge University Press: 26 March 2020
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The latest budget was the clearest indication yet of the break which is occurring in the way in which economic policy has been conducted since the war. Against a background of falling output and rapidly rising unemployment (actual, as well as forecast) the Chancellor introduced a deflationary package. The last time unemployment reached ¾ million on an upward trend, in mid-1971, policy was already moving towards stimulation of demand, and this was the tendency on all previous occasions when the unemployment figures had been rising for any length of time. The different reaction this time is a measure of the seriousness with which the Chancellor views the balance of payments situation and, more especially, wage and salary inflation. Demand management policy is evidently now being used not to maintain a high and stable level of employment but as a bargaining weapon in an attempt to get some effective tightening of the social contract. Wages have risen much faster than prices over the past twelve months, evidence that the Trade Union side of the contract is not being kept. The government is therefore showing that it can no longer keep its part of the bargain and that it will not, through its fiscal and monetary policies, continue to validate a rate of wage increase between 20 and 30 per cent per annum. While this policy is pursued, unemployment must rise unless or until the inflation of incomes slows down.
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- Copyright © 1975 National Institute of Economic and Social Research
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Notes
(page 10 note 1) Though the figure for ‘compromise’ stockbuilding will then reflect the unwinding of the dock strike and other effects.
(page 10 note 2) In one sense the Budget itself was obviously and unambiguously ‘deflationary’. The estimated public sector borrowing requirement for 1975-1976 was over £1 billion less ‘after budget changes' than it was ‘before budget changes’. However, this is because in British parliamentary procedure fiscal policy is taken in two steps. Expenditure decisions are made first and are taken as given in the Budget, which is concerned with raising or lowering tax rates. Here, however, we are attempting to measure ‘budgetary policy’ including both sides of the account. On the expenditure side there is, of course, a certain difficulty in deciding which changes in expenditure are genuinely discretionary, and which might be regarded as outside government control, in the short-run at any rate, such as the acceptance of decisions concerning public sector pay according to procedures agreed to in earlier years.
(page 10 note 3) See National Institute Economic Review no. 71, February 1975, pages 13-16, where the calculation of the relative price effect is explained.
(page 11 note 1) Note that the forecast fall of £725 million in Corporation Tax receipts is given a relatively low demand weight: implicitly, it will contribute to an improvement in the corporate sector's financial position.
(page 12 note 1) See National Institute Economic Review no. 71, February 1975, page 15.