Oecd Economic Surveys : United Kingdom 1984-1985.

79 Pages·5.34 MB·English

by  OECD

OECD
ECONOMIC SURVEYS
1984/1985
UNITED KINGDOM
JANUARY 1985
OECD ECONOMIC SURVEYS
*
UNITED KINGDOM
JANUARY 1985
ORGANISATION FOR ECONOMIC CO-OPERATION AND DEVELOPMENT
Pursuanttoarticle 1oftheConventionsignedinParison 14th December,
1960,andwhichcameintoforceon30thSeptember, 1961,theOrganisation
for Economic Co-operation and Development (OECD) shall promote
policiesdesigned: .~.j--\$7
- toachi^vélfîp " tsustainableeconomicgrowthandemployment
^.. -"ahga.r'' "rida ofiivinginMembercountries,whilemaintaining
" il|i Sta ' ' . d thus to contribute to the development ofthe
/. »*worlds«jnBtii %
^.A.jJlBi^rttnbuUtfjs^mtl economic expansion in Member as well as
'¥ nopj-qjfnttercountries in ttrcprocess ofeconomicdevelopment; and
*^:'(urtfcritribute,tpVlMrexpajrsion of world trade on a multilateral,
'.'*' non-sUttrïmlrratorv baiis"in accordance with international obliga-
.... '^trWis v.-r *
lis-*"'
Tho-Signatoriesofthe Convention on the OECD are Austria, Belgium,
"Canada, Denmark, France, the Federal Republic of Germany, Greece,
Iceland, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal,
Spain,Sweden,Switzerland,Turkey, theUnited Kingdomand the United
States.ThefollowingcountriesaccededsubsequentlytothisConvention(the
datesarethoseonwhichtheinstrumentsofaccessionweredeposited):Japan
(28thApril, 1964), Finland (28thJanuary, 1969), Australia (7thJune,
1971) and New Zealand (29th May, 1973).
TheSocialistFederalRepublicofYugoslaviatakespartincertainworkof
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©OECD, 1985
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CONTENTS
Introduction
I. The economic strategy and macroeconomic policy 8
The aims ofthe strategy , 8
Macroeconomic policy 9
Monetary policy 9
Fiscal policy 13
II. The supply side 17
Past performance 17
Corporate taxation 20
The promotion of market liberalisation 21
Privatisation 22
Labour market rigidities 25
Remaining rigidities 28
III. The recovery 30
Recoveries compared 30
The miners' strike 32
Demand and output 34
Labour market conditions 38
Costs and prices 41
International trade and payments 43
IV. Economic prospects 46
V. Conclusions 49
Annexes:
I. The company tax system 52
II. Changes in employment statistics 55
III. Calendar ofmain economic events 58
Statistical annex 63
TABLES
Text
1. The Medium-term Financial Strategy 9
2. Formation of the money supply 11
3. Budgetary developments 14
4. Investment shares 18
5. Incremental capital-output ratios 18
6. Output per unit of net capital stock in 1980 19
7. Privatisation sales, 1979/80 to 1984/85 24
8. Contributions to GDP growth during three recoveries 30
9. Demand and output 34
10. Contributions to changes in GDP 35
11. Labour market 39
12. Costs and prices 41
13. Analysis ofprice increases 42
14. Balance ofpayments 44
15. External trade 46
16. Short-term prospects 47
Annexes
Al. Rates ofreturn, new and old systems 52
A2. Corporation tax changes 53
A3. Revised employment estimates for June 1983 55
A4. Comparison ofclaimant count and Survey estimates for the second
quarter of 1983 56
A5. Comparison ofchanges in claimant count and Survey estimates between
the second quarters of 1981 and 1983 57
Statistical annex
A. Expenditure on GDP 64
B. Gross domestic fixed capital formation 65
C. Consumption and investment 66
D. Production and manpower 67
E. Domestic finance 68
F. Wages, prices and external position 69
G. Analysis ofcapital transactions and official financing 70
H. Foreign assets and liabilities 72
I. Foreign trade by area 73
DIAGRAMS
1. Money supply 10
2. Nominal and real interest rates 12
3. Rates of return 19
4. Recent recoveries compared 31
5. Trends in output 33
6. Investment components 36
7. Employment trends 40
8. Cost and price indicators 42
9. Exchange rate and competitiveness indicators 45
BASIC STATISTICS OF THE UNITED KINGDOM
THELAND
Area(1 000sq.km) 241 Majorcities(populationinmillions. 1983mid-year
Agriculturalarea(I 000sq.km), 1983 183 estimates):
GreaterLondon 6.7
Birmingham 1.0
Glasgow 0.8
Leeds 0.7
Sheffield 0.5
THEPEOPLE
Population(30.6.1983) 377000 Totalcivilianemployment, 1983 23399000
No.inhabitantspersq.km 234 ofwhich:
Netincreaseinpopulation, 1978-1983, Agriculture 630000
annualaverage 42000 Industry(incl.construction) 7867000
Percentagechangeatannualrate, 1978-1983 0.1 Otheractivities 14903000
THEGOVERNMENT
Publiccurrentexpenditureongoodsandservices CompositionofHouseofCommons,June 1983
1983(percentofGDP) 22 (No.ofseats):
Publicsectorcurrentreceipt», 1983 (percentofGDP) 42 Conservative 397
Nationaldebt,31stMarch 1983(ratiotoGeneral Labour 209
Governmentrevenue) 103 Liberal 17
NorthernIrelandParties 17
Social DemocraticParty 6
ScottishNationalParty 2
PlaidCymru 2
650
Lastgeneralelection:9.6.1983
FOREIGNTRADE
Exports: Imports:
Exportsofgoodsandservicesasapercentage Importsofgoodsandservicesasapercentage
ofGDP(1983) 26 ofGDP(1983) 25
Mainexports(percentageoftotalexportsin 1983): Mainimports(percentageoftotalimportsin 1983):
Machinery 21 Machinery 20
Petroleumandpetroleumproducts 21 Petroleumandpetroleumproducts 9
Chemicals 11 Chemicals 8
Transportequipment 9 Non-ferrousmetals 3
Textiles 2 Meat 2
Non-ferrousmetals 2
Ironandsteel 3
THECURRENCY
Monetaryunit:Poundsterling CurrencyunitperUSS,averageofdailyfigures:
Year 1983 0.6597
November 1984 0.8059
Note: Aninternationalcomparisonofcertainbasicstatisticsisgiveninanannextable.
ThisSurveyisbasedontheSecretariat'sstudypreparedfor
theannualreview ofthe UnitedKingdom by the Economic and
Development Review Committeeon6th December 1984.
Afterrevisionsin thelightofdiscussionsduringthereview,
final approval ofthe Surveyforpublication was given by the
Committeeon 17th December 1984.
INTRODUCTION
Thecurrent recovery, which started earlier than elsewhere, has now lasted threeand a
halfyears. However,giventhedepthofthe 1980recession,theaveragemeasureofrealGDP
only passed its previous mid-1979 peak in themiddle of 1983. The paceofthe recovery has
sloweddownduring 1984.ItissuggestedintheSurveythatthisdecelerationhasnotbeendue
entirely to the effects of the miners' strike but reflects a slight weakening in underlying
conditions. Nevertheless, the rate of growth of GDP in 1983, about 3 Viper cent, was the
fastest since 1978. Furthermore, therecovery, initially led by stocks and then consumption,
nowseemstohavebroadened.Whileconsumptiongrowthhasweakened,thefallinthesaving
ratiohavingapparentlyended,bothinvestmentandexportshavemovedaheadstrongly.This
patternisexpectedtocontinueduringtheforecastperiod,withthegrowthofGDPaveraging
about 2 "Apercentperannumovertheperiod frommid-1984 tomid-1986. Ifthisforecastis
realised,thenthisrecoveryperiodwillhavebeenmuchlongerthanusual. Itwasassumedfor
theforecaststhattheminers' strikewouldbeconcludedaroundtheturnoftheyear;shouldit
continuewell into 1985, the prospects for the year would be affected, with a slower rate of
growth ofGDP and a worse position on the current external account.
ThemainobjectiveoftheGovernment'seconomicpolicy,thereductionofinflation,was
successfullypursuedintheperiod 1980to 1983,withtherateofpriceincreasebeingreduced
fromaround20percenttobelow5 percent.Therehasbeenlittleprogresssincethen,despite
somefurtherdecelerationinmonetarygrowthandariseinunemploymenttoover3 millionor
12per cent ofthe labour force on OECD definitions. The continued rise in unemployment
during the recovery has increased the emphasis on supply-side policies but has led to no
weakeningofresolveonmonetaryandfiscalpolicy. TheMedium-termFinancialStrategyis
being broadly adhered to; some overrun is expected on the fiscal deficit in 1984/85, due
largelytotheminers'strike,butpublicsectorborrowingmaystillbereducedtoabout2 lkper
centofGDPfrom3 'Apercentin 1983/84.Asimilarreductionisprojectedfor 1985/86tobe
followed by smaller progressive reductions which would bring the PSBR down to about
1 %per centofGDP by 1988/89. The monetary targets indicate a continued decline in the
growth of the monetary aggregates. The concentration of the public sector borrowing
requirementin thefirsthalfofthecurrentfinancial yearled tosomeabove-targetmonetary
growthinthemiddleoftheyear.Therewasa3 percentagepointriseininterestratesinJuly,in
part reflecting higher U.S. rates, but most of that rise has since been reversed. Sterling's
effectiveexchangeratehasfalleninrecentmonthsbutwithoutsofarprovokinganyrenewed
pressureon interest rates, which remain high in real terms. Although the recovery is set to
continue, there seems no early likelihood ofa significant reduction in unemployment.
The Survey begins with a reviewofthe economicstrategy, emphasising itsdual nature
both in the macroeconomic area and on the supply side of the economy. Developments in
monetary and fiscal policy are discussed in the context of the Medium-term Financial
Strategy. Part II then reviews theprogress that has been made in a numberofareas on the
supplyside in promotingtheflexibleoperationofmarkets. Itfocusesonchangesincompany
taxation,ontheprivatisationprogrammeandonlabourmarketrigidities.Part IIIturnstothe
assessment of conjunctural developments. The current recovery is compared with its
predecessorsandthen recenttrends, includingtheeffectsoftheminers' strike,arediscussed.
Part IVsetsouttheshort-termprospectsandPartVconcludestheSurveywithadiscussionof
the main policy issues.
I. THE ECONOMIC STRATEGY AND MACROECONOMIC POLICY
The aims ofthe strategy
TherearetwoaimstotheGovernment'seconomicstrategy. Oneistoreduceinflationby
meansofmonetaryandfiscalpolicy.Theotheristheimprovementofsupply-sideperformance
through the liberalisation of markets. The macroeconomic part was embodied in the
Medium-term Financial Strategy (MTFS) which was examined in detail in the last OECD
EconomicSurvey ofthe United Kingdom, published in January 1984. Therationale for the
strategyisbrieflysummarisedbelowandthentherecordisbroughtuptodatein thesections
which follow. The MTFS was based on the view that traditional policies offiscal expansion
couldnot workbecauseoftheirimpacton inflationandbecauseofinterestrateandexchange
rate crowding out. It was felt important to setout policy aims forthe medium term soas to
generate favourable expectationsand toprovidea consistentframework for macroeconomic
policy. The Government considered that, in a low inflation environment, output, and hence
employment,wouldrecoverinduecourse.Thus,themainaimoftheMTFSwastoengineera
steady reduction in thegrowth ofnominal incomes with pricestability as the eventual goal.
Thatstrategyhasundergonecertainchangesasfarastheprojectedpathsoftheintermediate
targetshavebeenconcerned,butthebroadthrustofpolicyhasnotchanged. Furthermore,the
initialteethingproblems,onboththemonetaryandpublicborrowingtargets,in 1980/81 and
1981/82 have, after some regearing of the target paths, given way to more successful
targetting in the last two financial years. The strategy, although it still has its critics, thus
appears more credible now than at its earlier stages in the winter of 1980/81.
The MTFS, however, does not represent the entirety of the economic strategy. In
evidence tothe HouseofCommons Treasury Committee in December 1983 the Chancellor
described it as "the overall framework offinancial discipline within which a well conducted
economy has to work and operate". He went on to say that "... equally important is the
micro-economicside oftheGovernment's policy, thedesire toallowmarkets toworkbetter,
fortheretobemorecompetitionandlessregulationandsoon".Lateron,intheMaisLecture
inJune 1984,hepointedoutthattheassignmentofpoliciestotargetswasnowthereverseof
that which had characterised most ofthe post-war period when macroeconomic policy had
beenassignedtheoutput/employmentrole(demandmanagement)andmicroeconomicpolicy
hadbeenassignedtheroleof,interalia,controllinginflation(incomespolicy).Theassignment
ofpoliciestotargetswasneverlikelytobeasclearinpracticeasitmightseeminprinciple. In
reality, both macro and micro policies are needed to control inflation and to promote the
growth of output and employment. But the supply-side aspects of the Government's policy
have been given more prominence during the second term of office with the increasing
realisation that, although macroeconomic policy seemed to be on path, the supply-side
response, in particular as regards wages and employment, was much less satisfactory than
desired. Even so, the MTFS remains the centrepiece ofthe Government's economic policy.
The remainder of Part I looks at the way in which the MTFS has evolved, focusing in
particularonthedevelopmentofmonetaryandfiscalpolicyduringthelastyear.Part IIofthe
Survey then takes up various issues on the supply side ofthe economy.
Macroeconomicpolicy
TheMedium-termFinancial Strategyhasnowbeen inexistencesincethe 1980 Budget,
with annual revisionandextension makingthecurrent 1984 Budgetversion thefifth edition.
Although there have been some major problems and resulting changes over the years, in
particulara major regearing ofthepolicy in 1982, themedium-term framework has clearly
proved important both as a planning tool and as a discipline for Government. Its particular
strengthisitsdirectlinkingofmonetaryandfiscalpolicyinafarmorecoherentwaythanhad
beenevidentbefore.Inthelastyearmonetarygrowthhasingeneralbeenwithinorclosetothe
rangessetoutinthe MTFSbutpublicsectorborrowinghasbeenmoreproblematic,withthe
difficulties lying mainly with public expenditure.
Monetarypolicy
MonetarypolicyremainsthecentralpartoftheMedium-termFinancialStrategyandis
an importantreasonfortryingtoreducethePSBRasa shareofGDP. Followingsubstantial
overshootingofthesterling M3 targetsin thefinancialyears 1980/81 and 1981/82, targets
forsterling M3wererevised upandsupplementedbytargetsforotheraggregates. Growthof
sterlingM3 inthelasttwoyearshasbeenabout 1 percentbelowthetopofthetargetranges
(Table 1).Inthecurrentfinancialyear, 1984/85,sterling M3 hasbeenclosetothetopofthe
Table 1. TheMedium-termFinancialStrategy; projectionsand outturnsi
1979/80 1980/81 1981/82 1982/83 1983/84 1984/85 1985/86 1986/87 1987/88 1988/89
Moneysupply:sterlingM3
(percentchange)
June 19792 7-11
March 1980 - 7-11 6-10 5-9 4-8 - -
March 1981 - - 6-10 5-9 4-8 - -
March 1982 - - 8-12 7-11 6-10 -
March 1983 - - - - 7-11 6-10 5-9
March 1984 ____ _- _- 66--1100 55--99 4-8 3-7 2-6
ActuaP 11.2 19.4 12.8 11.2 10.1 _____
Publicsectorborrowing
requirement
(percentofGDP)
June 1979 4'A
March 1980 4% 3% 3 2'/« 154 _
March 1981 5 6 4<A 3'/4 2 _
March 1982 _ 5.7 414 3H 2y4 2
March 1983 - - 314 2V, 2V> 214 2
March 1984 -- -- -- 33..33 331144 22''AA** 22 2 VA VA
Actual 4.9 5.7 3.4 3.3 314 -
Actual 9.9 13.2 8.7 9.2 10.1
(£billion)
1. Figuresinitalicsaretargets.FromtheStanofthe1984/85financialyear,thedefinitionsofsterlingM3andthePSBRhavebeenrevised.SterlingM3
nowexcludespublicsectorbankdeposit*whilethePSBRexcludestheseaswellascertainotherliquidassets.Thefiguresindicatedhereareontheold
definitionsthoughtheMarch1984Budgettargetsareonthenewbasis.TherateofgrowthofsterlingM3for1983/84onthenewdefinitionswas9.7per
cent,whilethePSBRwas£9.6billion.
2. AtargetforthetenmonthstoApril1980waspublishedintheJune1979Budget.
3. SeasonallyadjustedannualisedratesforrelevantperiodsslatedintheJune1979BudgetandinsuccessiveMTFS.
4. IntheChancellor'sAutumnStatementinNovember1984theprojectedPSBRfor1984/85wasrevisedupfrom£7.2billionlo£8Mbillionequivalentto
214percentofGDP.Thiswaslargelyduetothepublicsectorcostsoftheminers'strike.
Sources: FinancialStatementandBudgetReports. 1979-80to1984-85,andFinancialStatistics.