In my Budget Statement last June I said that the economic situation that we inherited was a difficult one. I stressed that it would take time to check, and then to reverse, Britain's long-run economic decline—time, and resolute commitment to the right strategy, for a period of years ahead. It is important for that strategy to reflect the right lessons of years of disappointing economic performance.Even in the 1950s and early 1960s our economy was lagging behind those of our competitors. But it was a period of low inflation and rising growth rates. Seen in retrospect, that period was something of a golden age. That was not, of course, the feeling at the time. From the mid-1960s onwards we became impatient to throw the resources of Government into efforts to do better, quicker. In rapid succession, we had a national plan for faster growth, devaluation, incomes policies, recurrent bouts of intervention in industry—and much else. The increased scale of Government borrowing from the mid-1970s, as compared with the 1950s and 1960s, is an example of the impatience to which I have referred. Governments became increasingly addicted to deficit spending. This was particularly true of the United Kingdom at the time of, and after the first world oil crisis. Memories of the monetary and inflationary implications of what the Government then did are still vivid. Eventually, it began to be recognised, as indeed the Leader of the Opposition said in 1976, that we could no longer spend our way out of recession. But although that break-through of realism has begun, the change in attitude has not got far enough. Not everybody has yet accepted that public expenditure cannot go on growing while the economy stagnates. Those years of often hectic Government action were equally notable for other things that did not receive the attention they deserved. As well as misjudging the importance of money supply and its proper control, we often paid no more than lip service to the role of private enterprise and to the importance of economic change as an agent of prosperity. Successive Governments acknowledged the need to reduce the power and privilege of organised labour. But in the event, its ability to damage the economy has increased. The outcome is familiar to us all. Our underlying rate of growth has become steadily weaker. At the same time, we have come almost to tolerate inflation at rates that would have horrified an earlier generation. The measures taken following the agreement with the International Monetary Fund in 1976 provided a brief respite. The public sector borrowing requirement fell, monetary growth declined and pay settlements moderated. The inflation rate came down in 1977 and 1978. But the lesson was not well enough learnt. The money supply was again allowed to expand too fast, partly through excessive intervention in the foreign exchange markets. Fiscal policy was eased and the situation deteriorated again.
The Recent Past
During the 18 months to last June the underlying growth rate of sterling M3 was nearly 15 per cent. a year. That compares with the much more modest rate of about 8 per cent. in the year after the IMF measures. The incomes policy of the previous Government had collapsed. Earnings also grew by at least 15 per cent. a year. Not surprisingly it was consumer spending that gained most from this combination of monetary expansion, tax cuts and high pay settlements. In the year before the election the volume of consumer spending rose by more than 5 per cent. a year. That was much too good to last.
There was, indeed, a big price to pay for that short burst of apparent prosperity. Production failed to respond to the surge in demand and imports, especially of manufactures, rose sharply. The current balance of payments, in surplus after the IMF agreement and helped by North Sea oil, moved back into deficit and inflation moved sharply upward.
Last year we made an important start on tackling that inheritance. We set about reducing the rate of monetary growth. We achieved large reductions in dangerously oversize public spending plans. We reduced the share of Government spending and borrowing in the nation's output. And when, last November, the money target looked like being exceeded, we acted promptly and decisively.
We have removed many unnecessary controls and obstacles to enterprise and individual effort. We have removed controls on pay, prices, dividends and foreign exchange, which can now be used freely to acquire productive assets overseas to the benefit of our exports and invisible earnings alike. My first Budget switched the tax burden from earnings to spending and greatly reduced oppressive tax burdens on enterprise.
But during the year that has just ended we have had to contend with a further major increase in world oil prices and with a substantial rise in the price of other commodities. The strength of sterling has to some extent cushioned their impact on domestic inflation. Even so, the price of oil and other inputs to manufacturing industry has risen by 41 per cent. since the beginning of 1979.
The rise in the oil price has also had severe effects on the world prospect generally. The outlook in the coming year is for a significant slow-down in growth and a worsening of inflation everywhere. The year-on-year increase in consumer prices in OECD countries rose from about 10 per cent., on average, in mid-1979 to 14 per cent. by the beginning of 1980.
Every major country is demonstrating its determination to resist this inflation by adopting a firm monetary and fiscal policy. The inevitable immediate result is lower output and higher interest rates. Since early last summer rates have risen by six percentage points, on average, in the major industrial countries. This is much the same as in the United Kingdom over the same period. The increase has been even more marked where the dollar is concerned. Between May last year and the end of last week Eurodollar three-month rates rose by over 8 per cent. to 19 per cent.
The immediate prospect
That is part of the background against which to judge the poor short-term economic outlook for the United Kingdom. The Treasury projections published today suggest that output may fall in 1980 by up to 2½ per cent. This is more or less in line with outside forecasts.
It is important to understand the significance of this recession. There are some who argue, or at least seek to imply, that it is an entirely avoidable development, which need not be inflicted upon the British economy. Others seem almost happy to suggest that, so far from being avoidable, this recession is no more than a foretaste of much worse to come. Some uniquely critical pessimists contrive to convey both impressions at the same time.
The right view to take is that it is, in part, a consequence of the weakness in world demand, in part a consequence of our own inflation—still well in excess of the money supply target—
Who told you that? Milton?
—and in part, perhaps most of all, a consequence of the long-run decline of our economy. These influences are not insuperable. We can most certainly get through the difficult year or two that lie immediately ahead. The important thing is not to allow the difficulties to prevent us setting our feet on the right long-run path.