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Chapter IV. Problems of the Medium Term

Published online by Cambridge University Press:  26 March 2020

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In Chapter I we considered the prospects for the UK economy until end-1977 on the usual assumptions of ‘unchanged policies’, though with two alternative assumptions about the outcome of the wage-bargaining process for the 1976/77 wage calendar. We argued that with restraint in nominal wages in 1977 there was a prospect of a continued moderate recovery in UK economic activity though there were still serious problems outstanding by the end of 1977—high unemployment and a large current account deficit. We also argued that without restraint in nominal wages the chances of a sustained pick-up in activity looked poor and real growth would be slowing down sharply in the course of 1977. On this latter assumption, medium-term issues barely arise since the UK would be once again plunged into a short-term crisis. In this Chapter, we address the central medium-term issue of what sort of recovery paths could reasonably be expected for the UK economy over the next five years and what implications these prospects have for policy.

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Articles
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National Institute Economic Review , Volume 75 , February 1976 , pp. 64 - 74
Copyright
Copyright © 1976 National Institute of Economic and Social Research

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References

Note (1) page 65 This was written before the appearance of the Public Expenditure White Paper (Cmnd 6393), which, however, broadly confirms this statement; some rise in the ‘tax burden’ is consistent with constant tax rates because inflation raises revenues slightly faster than incomes (p. 74).

Note (1) page 69 See for example R. A. Batchelor and C. Bowe, ‘Fore casting international trade: a general equilibrium approach’, Applied Economics, vol. 6, 1974, pp. 109-141; on p. 121 their Table 1 shows the elasticities found in a number of recent studies. See also J. P. Hutton and A. P. L. Minford, ‘A model of UK manufactured exports and export prices’, Government Economic Service Occasional Paper No. 11, 1975, HMSO. Further unpublished work has also been done within this Institute by R. A. Batchelor and J. D. Whitley, and is available on request.

Note (2) page 69 This is a highly controversial matter. See, for example, D. Maki and Z. A. Spindler, ‘The effect of unemployment compensation’, Oxford Economic Papers, November 1975; ‘The unemployment’ statistics and their interpretation', Department of Employment Gazette, March 1975; and G. D. N. Worswick (ed.), The concept and measurement of involuntary unemployment, George Allen and Unwin, forthcoming.

Note (1) page 70 Nevertheless the argument of retaliation ought not to be pressed too far against any one particular means of improving the trade balance for it applies to them all, including devaluation. It is true that devaluation is no longer regarded as a definite breach of international obligations, but it should not be lightly assumed that any scale of devaluation is possible without provoking any retaliation.

Note (1) page 71 See, for example, J. Johnston, and M. C. Timbrell, ‘Empirical tests of a bargaining model of wage rate deter mination’, Manchester School, vol. 41, June 1973.

Note (1) page 72 Possibly also to the relative price of oil; but the UK terms of trade are insignificantly affected by this because by 1980 we are nearly self-sufficient in oil.

Note (2) page 72 This point has been cogently argued by R. J. Ball, T. Burns, and J. S. E. Laury in a recent paper, ‘The role of the exchange rate in the balance of payments adjustment process’, Discussion Paper No. 32, London Business School, December 1975.

Note (1) page 73 This estimate is taken from OECD Economic Prospects Division, ‘The measurement of domestic cyclical fluctuations’, OECD Occasional Study, July 1973. The growth of ‘labour productivity’ (output per man), or ‘productive potential’, will normally be higher at around 2 3/4 per cent per year, because in normal conditions with constant terms of trade real wages pre-tax should rise by about 3 1/4 per cent per year, so inducing a steady rise in the capital/labour ratio.

Note (2) page 73 After an allowance for estimated spare capacity at end-1977.

Note (1) page 74 The equation is: the percentage change in real wages approximately equals 3 1/4 per cent + 1/2 times the percentage improvement in the terms of trade.