In my Budget speech on 17th April I referred to the unsatisfactory balance of payments and the probable expansion of home demand with its effect upon costs, and upon our competitiveness. I provided for a very large surplus of over £500 million above the line, but I clearly indicated that I thought the situation might require further measures. I asked for two new powers—the regulators.
In the three months since the Budget, home demand has continued to increase and is likely to increase even more than was then foreseen. There are labour shortages in most areas. Investment is rising strongly. The building industry already has more demand upon it than it can satisfy, and parts of the engineering industry are coming under increasing pressure.
Simultaneously with the increase of pressure on our domestic resources, we are faced with a critical external situation. This is the third successive year in which our overall balance of payments has been in deficit, and this is, clearly, not a situation which can be allowed to continue.
In 1960, the deficit on current account was about £350 million and there was also a net movement overseas of capital funds, by way of Government loan and private investment, of about £200 million. This was not reflected in the reserve figures because of a large flow of funds to London. Indeed, during 1960 the reserves rose by £177 million and, in addition, we strengthened our position with the International Monetary Fund to the tune of about £130 million.
During the first half of 1961 our current account was still in deficit though at a substantially lower rate than last year's rate. There have, however, been heavy withdrawals of short-term balances and, in spite of the Ford transaction and the prepayment of German debt, our reserves of gold and dollars have fallen by about £164 million over the past six months. This fall would have been much greater but for the special arrangements made with the central banks.
If rising personal demand and rising investment demand are not matched by increased production, the burden falls on the balance of payments. We have less for exports and we import more. In addition, prices go up, our competitiveness suffers, and it becomes more difficult to sell our goods abroad.
In my view, therefore, our aims at the present time should be as follows: First, we should maintain investment in productive industry with a view to the long-term growth of the economy. At the same time, we must make ourselves more competitive. Both are vital for a long-term improvement in the balance of payments.
Secondly, we must see that public expenditure is brought under better control.
Thirdly, we must take action designed to protect our position in the immediate future.
The proposals which I shall now outline are, in part, long-term and matters to which I have been giving consideration for some time; in part, they are required by the exigencies of the present situation.