Oecd Economic Surveys : United Kingdom 1983-1984.

82 Pages·5.138 MB·English

by  OECD

ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
ORGANISATION OE COOPERATION ET DE OEVELOPPEMENT ECONOMIQUES
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OECD ECONOMIC SURVEYS
UNITED KINGDOM
JANUARY 1984
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Pursuanttoarticle 1 oftheConventionsignedinParison 14thDecember,
1960,andwhichcameintoforceon30thSeptember, 1961,theOrganisation
for Economic Co-operation and Development (OECD) shall promote
policiesdesigned:
- toachievethe highestsustainableeconomicgrowthandemployment
andarisingstandardoflivinginMembercountries,whilemaintaining
financial stability, and thus to contribute to the development ofthe
worldeconomy;
- to contribute to sound economic expansion in Member as well as
non-membercountries in theprocessofeconomicdevelopment;and
- to contribute to the expansion of world trade on a multilateral,
non-discriminatory basis in accordance with international obliga¬
tions.
The SignatoriesoftheConvention on the OECD areAustria, Belgium,
Canada, Denmark, France, the Federal Republic of Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain,Sweden,Switzerland,Turkey,the United Kingdomand theUnited
States.ThefollowingcountriesaccededsubsequentlytothisConvention(the
datesarcthoseonwhichtheinstrumentsofaccessionweredeposited):Japan
(28thApril, 1964), Finland (28thJanuary, 1969), Australia (7thJune,
1971) and New Zealand (29th May, 1973).
TheSocialistFederalRepublicofYugoslaviatakespartincertainworkof
the OECD (agreement of28thOctober, 1961).
©OECD, 1984
Application forpermission toreproduceortranslate
all orpart ofthis publicationshould be madeto:
DirectorofInformation, OECD
2, rue André-Pascal, 75775 PARIS CEDEX 16, France.
CONTENTS
Introduction 7
I. The medium-term evolution of economic policy 8
The financial strategy 9
Monetary policy 10
Public sector borrowing 14
The record 20
II. Recent trends 23
Demand and output 23
Labour market conditions 26
Costs and prices 30
International trade and payments 33
Monetary conditions 36
Fiscal policy 40
III. Short-term prospects 42
IV. Conclusions 46
Notes and references 49
Annexes
I. Thenationalaccounts 53
II. Thesavingsratio 56
III. Changesinemploymentandunemploymentstatistics 59
IV. Calendarofmaineconomicevents 62
Statisticalannex 68
TABLES
Text
1. TheMedium-TermFinancialStrategy ; projectionsand outturns 10
2. Monetaryprojectionsandoutcomes(sterlingM3) 11
3. PublicSectorBorrowingRequirement, 1972/73 to 1982/83 15
4. Taxratios, 1972to 1982 17
5. Publicexpenditureincostterms 18
6. Demandand output 23
7. ContributionstochangesinrealGDP 24
8. Labourmarket 27
9. Costsandprices 30
10. Contributionstopriceincreases 31
11. Externaltrade 33
12. Balanceofpayments 34
13. Monetaryaggregates 37
14. Formationofthemoneysupply 38
15. Budgetarydevelopments : generalgovernment 41
16. Short-termprospects 45
Annexes
Al. Effectsofrebasingandrevisingthenationalaccounts 55
A2. Comparison of Census results and the provisional series of employees in
employment 59
A3. ImpactoftheNovember 1982measuresonunemployment 61
A4. Impactofthe 1983 Budgetmeasuresonunemployment 61
Statisticalannex
A. ExpenditureonGDP 68
B. Grossdomesticfixedcapitalformation 69
C. Consumptionandinvestment 70
D. Productionandmanpower 71
E. Domesticfinance 72
F. Wages, pricesandexternalposition 73
G. Analysisofcapitaltransactionsand officialfinancing 74
H. Foreignassetsand liabilities 76
I. Foreigntradebyarea 77
DIAGRAMS
Text
1. Thenominalincomesplitand monetarygrowth 12
2. Publicexpendituretrends 19
3. Relativeeconomicperformance 21
4. Trendsinoutput 26
5. Sectoralemploymenttrends 28
6. Unemploymentchanges 29
7. Costandpriceindicators 31
8. Pricetrends 32
9. Exchangerateandcompetitivenessindicators 35
10. Monetaryindicators 37
11. Nominalandrealinterestrates 39
12. Recentindicators 43
Annexes
Al. AlternativemeasuresofGDP 54
A2. Personalsavingsandconsumption 57
BASIC STATISTICS OF THE UNITED KINGDOM
THELAND
Area (1 000sq.km) 241 Majorciliés(populationin millions
Agriculturalarea(1 000sq.km), 1982 183 1981 mid-yearestimates):
Greater London 6.9
Birmingham 1.0
Glasgow 0.8
Liverpool 0.5
Manchester 0.5
THEPEOPLE
Population(30.6.1982) 56341000 Totalcivilianemployment, 1982 23462000
No.inhabitantspersq.km 231 ofwhich:
Nelincreaseinpopulation, Agriculture 632000
1977-1982,annualaverage 97800 Industry(incl.construction) 8063000
Percentagechangeatannual Otheractivities 14767000
rate, 1977-1982 0.2
THEGOVERNMENT
Publiccurrentexpenditureongoodsandservices CompositionofHouseofCommons,
1982 June 1983 (No.ofseats):
(percentofGDP) 21 Conservative 397
Publicsectorcurrentreceipts 1982 Labour 209
(percentofGDP) 43 Liberal 17
Nationaldebt31st March 1982 Northern Ireland Parties 17
(ratiotoGeneralGovernment Social DemocraticParty 6
revenue) 99 ScottishNational Party 2
PlaidCymru 2
650
Lastgeneralelection:9.6.1983
FOREIGNTRADE
Exports: Imports:
Exportsofgoodsandservicesas Importsofgoodsandservicesas
apercentageofGDP(1982) 27 apercentageofGDP(1982) 24
Mainexports(percentageoftotal Mainimports(percentageoftotal
exportsin 1982): importsin 1982):
Machinery 23 Machinery 19
Petroleumandpetroleumproducts 19 Petroleumandpetroleumproducts 11
Chemicals II Chemicals 7
Transportequipment 9 Non-ferrousmetals 3
Textiles 2 Meat 2
Non-ferrousmetals 2
Ironandsteel 2
THECURRENCY
Monetaryunil: Poundsterling CurrencyunilperUS$,
averageofdailyfigures:
Year 1983 0.6597
December 1983 0.6972
Note: Aninternationalcomparisonofcertainbasicstatisticsisgiven inanannextable.
ThisSurveyisbasedontheSecretariat'sstudypreparedfor
the annualreviewofthe UnitedKingdom bytheEconomicand
DevelopmentReviewCommitteeon8th December 1983.
Afterrevisionsinthelightofdiscussionsduringthereview,
final approval ofthe Surveyforpublication was given by the
Committeeon 28th December 1983.
INTRODUCTION
The economic recovery which started in the middle of 1981, strengthened in the
twelve months to mid-1983 with real GDP increasing at an annual rate of 2| per cent,
the fastest growth for five years. But, reflecting the depth of the intervening recession,
real GDP is only now getting back to its previous peak level of 1979 despite rapid
growth of North Sea oil production. Moreover, growth has been weaker than typically
experienced in periods of recovery partly because, unusually, the upturn in the United
Kingdom has preceded that elsewhere. The earlier tightness of fiscal and monetary
conditions succeeded in its objective of reducing inflation, which fell from the high
rates of around 20 per cent in early 1980 to around 5 per cent by mid-1983. During the
period of disinflation production fell sharply and unemployment more than doubled to
around 3 million. The response of industrial production and the labour market to the
pick-up in demand has so far been relatively weak. To some extent this reflects the
nature of the recovery, being heavily reliant on stockbuilding and then private
consumption, both components having a large import content. In addition,
competitiveness although considerably improved since 1981 remains problematic
for industry. Reflecting also the earlier upturn than in most other countries, there has
been a marked rise in import volumes and stagnating export volumes. The sizeable
current account surplus in 1982 has been substantially reduced in 1983.
In the early months of 1983, rapid growth of public expenditure pushed public
sector borrowing above the level implied in the Medium-Term Financial Strategy ; as
sales of government paper to the non-bank public were weak, there was an acceleration
in the growth of the main monetary aggregates to rates well in excess of the 7 to 11 per
cent target range. Since around mid-year, with sales of gilt-edged stock picking up, the
growth of sterling M3 has moved within the range, although both narrower and
broader measures of money remain a little above. At the same time, a package of
expenditure cuts and additional public sector asset sales totalling £1 billion was
announced in July to bring public sector borrowing closer to the Budget plans. It was
announced in the November Autumn Statement, however, that the Public Sector
Borrowing Requirement in 1983/84 would be about £10 billion, somewhat above the
Budget estimate. Assuming that the monetary projections in the Medium-Term
Financial Strategy are broadly adhered to up to mid-1985, the overall stance of policy
would be little changed. On this basis and assuming unchanged exchange rates, real
GDP is projected by the OECD to rise at an annual rate of about 2-i-per cent over the
next eighteen months. As exports and fixed investment are expected to pick up, the
expansion would become more soundly based than up to mid-1983. Such a rate of
growth, however, would only be sufficient to reverse the rise in unemployment as from
the middle of 1984. After an acceleration in the second half of 1983, the rate of
inflation is expected to start falling again. With the projected recovery in the world
economy, the current external account may remain in small surplus up to mid-1985.
This Survey begins with a review of medium-term fiscal and monetary trends with
particular emphasis on developments under the Medium-Term Financial Strategy
introduced in 1980 (Part I). Part II outlines recent developments in demand and
output, the labour market, costs and prices, the balance of payments and short-term
monetary conditions and fiscal policy. Part HI contains an assessment of economic
prospects up to mid-1985 and Part IV concludes the Survey with a discussion of the
main policy issues.
I. THE MEDIUM-TERM EVOLUTION OF ECONOMIC POLICY
The philosophy and conduct of economic policy have undergone a significant
change during the last ten years with a move away from the interventionist fine-tuning
of demand approach which characterised most of the first thirty post-war years. This
change has not been unique to the United Kingdom but the reorientation of policy has
perhaps been more marked there than elsewhere. The new emphasis has been
associated in particular with the Conservative administration which took office in May
1979 and was re-elected in June 1983. Although the Government since 1979 has
pursued a more pervasively "free market" policy, it is possible to see that shift away
from the 1950s and 1960s Keynesian consensus began to occur in the mid-1970s under
the previous Labour government. Inflationary expectations became more volatile and
conventional demand-management instruments seemed to have less impact on output
and more on inflation than in earlier years. The switch in policy was mainly a response
to the acceleration of inflation over a longer period and the apparent inability of
incomes policies to generate a sustained reduction in the inflation rate. Governments
increasingly accepted the view that unemployment could not be reduced until inflation
was first brought under control.
Although the change in approach was gradual, its clearest indication came with
the 1975 Budget when the Chancellor introduced a deflationary budget at a time of
falling output and rising unemployment1. Controlling the rate of monetary growth had
already become a part of established government policy. This was reiterated in the
1976 Budget Speech together with a concern "to ensure that industry's requirements
for finance are not crowded out by other demands, notably by those of the public
sector". Later that year, the Prime Minister spelt out to the Labour Party Conference
the way in which the perception of economic policy had changed : "We used to think
that you could just spend your way out of a recession and increase employment by
cutting taxes and boosting Government spending. I tell you in all candour that that
option no longer exists and insofar as it ever did exist, it worked by injecting inflation
into the economy. And each time that happened the average level of unemployment
has risen". This position, adopted by government in the mid-1970s, has since been
accepted policy though being practised with more intensity and greater consistency
after 1979. From that time, far more attention began to be paid to the Public Sector
Borrowing Requirement (PSBR) and to the rate of growth of the money supply. And
more attention came to be paid to such factors by the financial community, so that
such concerns were validated by market reactions to good and bad news in these areas.
While the emphasis of economic policy changed in the mid-1970s, being reinforced
by the conditions of the IMF Letter of Intent at the end of 1976, the then Government
was still uncomfortable with some of the implications of its economic policy stance and
remained in many respects interventionist. But the Government which came to office in
1979 was non-interventionist in its philosophy. As regards economic policy this did not
mean as great a break with the past as in some other areas and, in practice, the change
did not result in an immediately much more restrictive policy stance. But it involved
some freeing-up of the economy in the areas of pay, price and dividend controls, and
restrictions on bank lending and credit and, externally, exchange controls. The
coherency of policy was improved with the establishment of a Medium-Term Financial
Strategy (MTFS) in the 1980 Budget. Though that strategy has undergone certain
changes as far as the projected paths of the intermediate targets have been concerned,
the main emphasis of the strategy, namely the anti-inflation objective, remains the
cornerstone of economic policy. The rest of this Part of the Survey focuses on the
development of aspects of economic policy, mainly since the end of the 1970s, with
particular reference to monetary targets and public expenditure control, before
appraising, briefly, the new policy approach.
Thefinancialstrategy
Monetary targetry and close planning and monitoring of the PSBR both originated
in the 1970s, although concern about both monetary growth and budget deficits was
important in earlier periods. The new development in the mid-1970s was the
explicitness of the commitment to stated monetary targets and closer attention to the
borrowing requirement. The further development, in 1980, was twofold :
i) The shift from the short term to the medium term in the framework of
macroeconomic policy.
ii) The new coherency of policy, with movements in the PSBR being directly
linked to movements in the money supply with a further link to the rate of
inflation.
The Government believed thatit could control the growth of the money supply, through
control of the PSBR and an active interest rate and debt-funding policy, and that the
achievement of a progressive reduction in the money supply would be a sufficient
condition for reducing inflation. In addition, the supply side of the economy would be
strengthened by tax and other measures aimed at improving the working of the market
mechanism.
Theinclusion oftheMTFSinthe 1980Budgetconfirmed theGovernment'sintention
to pursue a policy over a period ofyears which would "bring down the rate of inflation
and create conditions for a sustainable growth of output and employment". This would
beachievedbyaprogressivereductioninthegrowth ofthemoneystock. In ordertoavoid
an excessive reliance on interest rates, the PSBR would be substantially reduced over the
medium term (Table 1). The intention was that this reduction in the PSBR would be
achieved through cuts in public expenditure in volume terms. Thus, the 1980 Budget
MTFS foresaw a reduction of 4 per cent in the volume of public expenditure between
1979/80 and 1983/84, entailing a fall in such expenditure as a proportion ofGDP. Such
reductions, if achieved, would then enable taxes to be reduced in later years2. The
projected medium-term paths for all these variables were conditional on assumed
developments in the economy. Nevertheless, there was some expectation that the
combination of lower public expenditure and a smaller PSBR would allow slower
monetary growth to be achieved with lower interest rates. While financial conditions
would remain tightas inflation remained high relative to the target for monetary growth,