Financial Resolutions, 1978: Financial Statement, Budget, 1978. - Economic prospects for 1978
We enter 1978 with industrial output rising faster than its trend rate for the past decade and with considerable buoyancy in both the agricultural and services sectors. Employment is increasing, although more slowly than I would wish. There has been notable success in the campaign to reduce inflation. The decline in the exchange rate added considerably to our problems over the past few years, because of the pressure it put on our consumer prices through rising import prices. This decline has now been reversed and the exchange rate should not move far from its present level during 1978.
The outlook for world economic activity is only marginally encouraging, even if the major economies do not falter in their aim to achieve faster growth. The EEC Council of Ministers for Economic and Financial Affairs and the European Council have both endorsed a strategy proposed by the Commission which is intended to increase the Community growth rate to 4 to 4½ per cent in 1978. There should be expansion in our foreign markets of much the same order as last year. However, competition abroad will be tougher, given the present degree of industrial spare capacity internationally and the stronger currency position. This need not necessarily be worrying. Experience in 1977 has shown that, if income increases are moderate and competitiveness is thereby increased, we can substantially increase our market share. I am confident that, with the co-operation of the social partners, we can repeat this performance : growth in industrial exports can reach double figures again in 1978 and the Government target of 7 per cent growth for the economy can be achieved.
If income increases are in line with the manifesto target of about 5 per cent, the Government's taxation reliefs and other proposals will result in a significant increase in purchasing power. This, allied with the boost to consumer confidence from the reduction in the rate of inflation, should ensure that private consumption will contribute to the improvement in economic growth. The year-on-year increase in consumer prices should be in single figures by mid-February for the first time since 1972. It should reach 7 per cent during the year in accordance with the manifesto target.
The buoyancy of domestic demand, together with the increase in public capital expenditure, should lead to a rise in domestic investment. The improvement in competitiveness resulting from the Government's economic proposals should also stimulate investment in the exporting sector and lay the foundation for the continued export-led growth which is vital for the White Paper employment targets.
Any grand strategy to combat major problems can raise other questions. We have paid particular attention to the balance of payments and its effects on our reserves position. We possess substantial reserves. At £1,200 million they are equivalent to over 4½ months imports; but excessive growth in consumption would rapidly run them down. With the growing domestic and external confidence in our economy, the external reserves should benefit from an acceleration in the rate of private capital inflows, particularly for investment projects, so that a balance of payments deficit of £350-£400 million for 1978, while large, is nevertheless supportable. It is a factor which we shall continue to watch carefully.