The question is, should we seek this year to make up the whole of this £819 million and so earn as big a surplus as last year? If not, what surplus should we aim at?
The answer to these questions cannot be given from a study of the Government Revenue and Expenditure accounts alone. It depends, after all, on how far we judge, after taking all other economic developments into account, that the net extra Government spending will be inflationary. I apologise to the Committee for bringing in economics again but it is, after all fundamental to this whole study. It depends, that is, upon how far the extra expenditure which is not balanced by extra revenue—that is £819 million—will bring the nation's total expenditure at home above the value of the output we can afford to consume at home. Or, to put the same thing in another somewhat technical and, in a sense, more familiar way, it depends upon how large a Budget surplus we need this year to bring the level of the nation's total savings—personal and private, public and corporate—up to what is required to finance the total investment by the Government and industry in buildings and plant and machinery and higher stocks.
In applying these general principles—now pretty familiar to the Committee—to our present problem, the first step must be to separate the Government's capital expenditure from its current expenditure. Apart from strategic stockpiling, which I will deal with in a moment, the capital expenditure of the Government is included in the estimates of total national investment which I will bring into the picture later. As the Committee are aware, this distinction between current and capital expenditure cannot easily be made on the basis of the Exchequer accounts in their conventional form. These, after all, are drawn up, as we all know, to meet Parliamentary and statutory requirements, and do not distinguish satisfactorily between capital and current items.
In order to arrive at a truer measure of the Government's current expenditure, obviously we must first take out expenditure on strategic stockpiling, which shows an increase of £130 million. Since it is proposed to pay for these purchases by accepting a deficit in our balance of overseas payments, which we announced some time ago, in other words by a deterioration in the external capital account, they will have no further repercussions on our economy and need not be taken into account any more this afternoon. Secondly, we must take out other items of capital expenditure, partly of a defence nature—to which I referred a little while ago—where the increase is £40 million. This expenditure, as I have implied, is included in the estimate of total national investment. Thirdly, we must exclude net expenditure on trading departments stocks and other assets, on which the increase is £111 million, and which is also reckoned in the estimates of total investment.
There are few other details of less importance. We must take out payments to sinking funds since these are only an internal transfer; these rise by £1 million. Finally, we must take out certain receipts—from the sale of surplus stores and so forth—which are of a capital nature. Here again the Government disinvestment from which they arise is included in the estimate of total national investment. They are expected to fall by £62 million this year and I have allowed for this in the total investment.
The total of these changes in capital items is £344 million, so that the result of excluding them is to reduce the excess of additional expenditure over additional revenue from the very high figure of £819 million, but still to leave it at a figure of £475 million. This is the decline in the so-called "above the line" surplus on the alternative classification which my predecessor introduced three years ago. I have repeated this alternative classification in the Financial Statement which will shortly be available to hon. Members, and those who are interested in these rather technical questions will no doubt study it in detail at leisure.
There is one other thing of a more general character I should like to say at this stage. In the last two years, it so happened that the net effect of all the inflationary and deflationary factors in our economy was such that the aim of the Budget could rightly be expressed as to achieve an overall balance—that is to produce a surplus on current account sufficient to cover the net cost of that part of investment which was financed through Government channels. This need not of course be the case, because that part of total investment—which incidentally is purely dependent on Parliamentary and statutory factors I mentioned earlier—is only one of the factors to be taken into account in determining what the size of the current surplus should be.
What matters is the current surplus, because this is the Government's contribution to the level of savings required to finance total investment, including Government investment. This is shown in the alternative classification and, as I have said, the change from last year to this, on the basis of existing taxation, is a decline of £475 million. In other words, the contribution made by the Government to the finance of national investment, its own as well as everyone else's, both at home and overseas, would decline, if we took no further steps, by £475 million.
Can we possibly afford such a decline? And if not, by how much must the Government's contribution be increased? As I think the Committee appreciate, the answer turns on what other changes are likely in investment at home and overseas and what amounts are likely to be saved by the community, apart from the Government, in order to meet them.
At this point—and I apologise again for the rather technical character of this exposition, but it is almost unavoidable these days—I pass from what is known or can be more or less precisely estimated to a field in which it is more difficult to foresee the course of events. In this year particularly, in which we are more than usually subject to the play of external forces, every factor in our economy is more or less disturbed. Most are not within our own control, and none is predictable in any exact sense. But it is not possible to reach any rational conclusion about the appropriate Budget surplus or deficit without taking all these matters into account. I must therefore make the best estimate I can of the trend in the coming year of investment at home, of the balance of payments and the probable level of savings.
On these matters, of course, I have had to consider the information available and after weighing all the various factors reach my own conclusion. This is in a sense the heart of the Budget problem nowadays. Upon how the Chancellor of the Exchequer of the day makes up his mind on this, which is in the last resort a matter of judgment, very important consequences to the nation will always depend. It is, therefore, enormously important that he should do so honestly and objectively and with a very strict sense of responsibility. It is no less important that, having made up his mind, he should stick to it and not be moved by pressure of any kind, however insidious or well-intentioned, into changing it. I have no doubt at all—and I am sure the Committee will agree with me—that the decisions of my predecessor were made in this spirit, and I have not the slightest doubt that because of that they were able to play a vital part in protecting us from inflation and cherishing our economic recovery. I can only say that I have tried to follow the same course this year.
Turning, then, to home investment, there is still a heavy pressure of demand for what the experts call investment goods—plant, machinery, buildings and so on. In general, of course, this is to be welcomed as it shows that British industry is alive to the need for modernisation and improvement. But during the next three years the defence programme will make increasing demands both for arms manufacture and for capital plant on the engineering group of industries—to some extent on building as well—which must at the same time—that is, the engineering group—keep up their total volume of exports to the highest practicable level. Faced as we are with shortages of many kinds, especially of materials, we cannot reasonably expect that during the next few years the output of these industries—that is, the engineering groups—magnificent as their record has been in recent years, will increase on a scale large enough to cope as well as everything else with the extra requirements of defence.
I have come to the conclusion, therefore, after a good deal of thought, that we must take steps to reduce the pressure of home demand on the engineering industry for plant and equipment for civilian purposes. It has been suggested that this might be done by administrative means—for example, by requiring that no single piece of plant and machinery shall be installed by industry without a licence. In war this may be inevitable, but in peace I would not myself impose such restrictions, with the enormous administrative complications involved both for industry and for the Government, until all other methods had failed. Those who had experience of the machinery licensing job in the last war will agree that it was one of the most difficult operations we had to undertake.
The policy followed by the banks in granting credit is, of course, closely associated with the whole problem of investment; it has an important bearing upon it and I must, therefore, say a few words about it. Advances in the past year have increased. This is inevitable, particularly in view of the rise in the cost of raw materials and imports and the resultant increase in the cost of financing stocks. I am certain that the banks fully appreciate the renewed importance, in the present circumstances of the Government's disinflationary policy, and I am confident that I can continue to rely on them to maintain a restraint in their credit policy, and in particular to ensure that advances are not made for any speculative purposes or for capital expenditure or investment which would conflict with the intentions of the revised principles of guidance, which I propose to issue in the next day or two to the Capital Issues Committee. The recent rise in interest rates may also exercise some check on investment. But I am satisfied that other measures are also necessary.
Since the planning and execution of most investment takes a considerable time, the scope for restriction in this year, 1951, is obviously limited. But I suggest to the Committee that it is for us to take action now so as to restrain investment in 1952 and later years. I have, therefore, reluctantly decided—and I now come to the first decision, which is not exactly a Budget decision but which will perhaps break the monotony of such a long exposition—that the initial allowances of 40 per cent. given for Income Tax and Profits Tax purposes on plant and machinery, and 10 per cent. on industrial buildings and mines and oil wells, must be suspended as from 6th April, 1952. I am giving a year's notice. Any expenditure incurred on or after that date will, of course, continue to qualify for the ordinary annual depreciation allowances but it will receive no initial allowance.
The initial allowances, after all, were introduced at the end of the war as a means of stimulating re-equipment and modernisation. That is, of course, a very desirable aim, but in our present circumstances to stimulate capital expenditure in this way would, I am satisfied, positively endanger the defence and export programmes too much. When the period of re-armament is over and we can increase home investment again, it will no doubt be desirable to reintroduce allowances of this kind. I would certainly hope so.
The production departments will, of course, take whatever measures are necessary to ensure that the suspension of these allowances does not result, in the case of undertakings engaged on the rearmament programme, in difficulty in providing any necessary additions to their equipment.
As I have already implied, because of the proposed date of operation there will be no yield this year from the suspension of the initial allowances. In a full year the yield will be £170 million, but it will be precisely offset by a corresponding reduction in corporate, in company, saving. The importance of this proposal lies therefore, as I hope the Committee appreciate, not in the yield to the Exchequer but in the effect which I judge it will have on the placing of orders for capital equipment.
Taking account of this, I feel justified in allowing only for a very small increase in the total expenditure, civil and defence, on investment at home—a small increase of £30 million. Having regard to the rise in prices of investment goods—capital equipment and so on—this implies no increase in total real investment and, indeed, a significant fall in investment for civil purposes.
Turning to overseas investment, I estimate very provisionally that last financial year we had a current surplus on the balance of payments of some £200 million. This means, in effect, that the nation refrained from spending this amount out of the income generated and earned from total production, thus leaving the goods and services available to be bought by our customers abroad. This year, as I have already made plain, it will be difficult even to achieve enough exports to keep an overall balance. It follows, however, that we shall not have to provide savings to finance an overseas surplus, so that by comparison with last year, this requirement is reduced by £200 million.
This decline of £200 million in overseas investment, taken with the increase of £30 million in home investment, means that we have a net decline of £170 million in total investment, to set against the decline of £475 million in the Government's contribution to savings. We thus have £305 million to find. Against this, we must now consider what is the probable trend of savings from sources other than the Central Government's current surplus. We must first take account of changes there may be in the net saving of local authorities and the National Insurance Funds. I expect a small decline in the surplus of these other public authorities of, I would say, £15 million.
There will, on the other hand, certainly be a substantial increase in the amounts put to reserve by companies, to cover depreciation of capital, to provide for future payment of taxes on the profits they are earning this year, or as free reserves. But a considerable proportion of this increase will be used to finance replacements of their stocks at higher prices, and this is not taken into account in the estimates of investment that I have just made. Moreover, there has been a clear tendency in recent months to increase dividend distributions, which reduce company saving, and, therefore, add to inflationary pressure. At the same time, it is difficult, I think, to count on any increase in personal savings, in view of the rise in the cost of living.
This is perhaps an appropriate point—when the relation of savings to the Budget is most clearly to be seen, as is the enormous importance it has for the decision as to what is the final gap to be covered—for me to express my gratitude, as Chancellor of the Exchequer, to all the workers in the National Savings Movement for the sustained efforts they have made to secure those savings which, though popularly called "small," are in the aggregate, I can assure them, of great importance to the Chancellor of the Exchequer. I should like to appeal—and I know I have the whole Committee with me in this—with confidence to the National Savings Movement to redouble their efforts, despite difficulties, and, with the help of the more attractive terms now offered, to challenge even their own past achievements.
After considering the possibilities here, and in the light of the trends indicated in the Economic Survey, I estimate that the total of private savings, both company and personal, will increase by about £170 million. Having regard to the fall of £15 million in the surplus of other public authorities, the total savings from sources other than the Central Government increase by £155 million. We have to deduct this from the £305 million which we have arrived at, and we get about £150 million as the short-fall in savings necessary which must be made good by the Government.
This is, as far as I can estimate it, the extent of the net inflationary effect of the change in the Government's current surplus after taking account of all other inflationary or deflationary factors in the economy, including the suspension of the initial allowances. This, therefore, I take as the measure of the extra sums which must be withheld from consumption at home, if we are to speed the defence programme, maintain an even balance of overseas payments and restrain the inflationary pressure of excess demand. I realise that the Committee may be finding this rather tough going. I can give them, however, this degree of comfort, that the technical and less controversial parts of the speech are now concluded.