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The Economic Situation: Annual Review : Chapter I. the British Economy in 1970

Published online by Cambridge University Press:  26 March 2020

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Extract

Although there was no balance of payments problem of the familiar kind in 1970, the year proved conspicuously unsuccessful in other respects. So far from leading on to a period of well-sustained economic growth, declining unemployment, and steadying prices, the hard-won struggle to ‘make devaluation work’ instead brought in its wake a period of accelerating price rises, a wage inflation of virtually unparalleled intensity, and a declining pressure of demand. This combination of ‘nominal’ inflation and ‘real’ stagnation was aptly named ‘stagflation’.

Type
Articles
Information
National Institute Economic Review , Volume 55 , February 1971 , pp. 4 - 21
Copyright
Copyright © 1971 National Institute of Economic and Social Research

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References

Notes

note (1) in page 4 The impression was quite widespread in 1969 and early in 1970 that this lesson of history precluded reflation at that stage. But the essence of ‘stop-go’ was that ‘too much’ was done ‘too late’ precisely because ‘too little’ had been done earlier. On this interpretation, the lesson of ‘stop-go’ could be invoked to support arguments for earlier and more sub stantial reflation—as in the National Institute Economic Review no. 50, November 1969, pages 21-22, and no. 51, February 1970, pages 31-32.

note (2) in page 4 As the Chancellor had singularly little to say in his budget speech about wage inflation, this is largely speculation. But it is fair to add that, earlier, the official view had been expressed that the pace of wage increases was pre-empting the room for reflation and that later—under a different Govern ment—the rate of wage inflation was to be used as an argu ment against further reflation despite evidence that output growth was below target.

note (1) in page 5 The cash deposits scheme was to be used to support the lending guidance given to non-Clearing and non-Scottish banks. No calls were then or subsequently made for cash deposits (whereas there were two calls for special deposits from the clearing and Scottish banks in 1970), and it turned out that the banks subject to cash deposits had in fact been given individual ceilings. Thus, the apparent flexibility of the cash deposits scheme, as outlined in the Quarterly Bulletin of the Bank of England, June 1968, was not tested in the event.

note (2) in page 5 A more detailed exposition of foiecast and out-turn appears below on pages 8-9.

note (1) in page 6 House of Commons Debates, Weekly Hansard, 4 Novem ber 1970, col. 1088.

note (2) in page 6 See below, pages 10-11.

note (3) in page 6 It is not implied by this that ‘money doesn't matter’; simply, and strongly, that ‘money isn't all that matters’.

note (1) in page 7 In our main forecast (Chapter II) we have, nevertheless, assumed a deceleration through the year; but we also suggest an alternative outcome, and do not regard predictions in this area as capable of being made with any great certainty.

note (2) in page 7 The national accounts estimates on which this and subse quent sections are based are those set out in table 1 on page 23; these differ on certain points from official figures so far published, as indicated in the footnote to the table.

note (1) in page 8 As the leakage into indirect taxation was also quite powerful—with percentage increases in the factor cost adjustment over the periods shown not far below the growth rates of imports—this accounts for the still smaller growth of GDP when it is measured at factor cost rather tnan at market prices.

note (2) in page 8 Earlier National Institute forecasts (those prepared in August and November 1969, for example) were actually a great deal more accurate about the growth of output through the year.

note (3) in page 8 The relative accuracy of both sets of forecasts for output in 1969 as assessed in this Review last year (the issue for February 1970, pages 8-9) has proved quite robust in the light of subsequent revisions of the national accounts, although on the figures now available the dependence of this out-turn on cancelling errors is rather greater than previously. But for the period 1st half 1969-1st half 1970, on the figures since published, the NIESR May 1969 output forecast appears to have been substantially more accurate than the FINSTAT (April 1969) forecast.

note (1) in page 9 This view seems to have been adopted also by the Treasury.

note (1) in page 10 The relationships between wages and the volume of consumers' expenditure were discussed in last February's Review, no. 51, pages 26-27, and again in May's, no. 52, pages 17-18. As it turns out, the rate of increase in wages and salaries now estimated is well above the figure adopted in the higher ‘variant’ forecast quoted in February's Review, but we have no cause to alter our general conclusions about the relationships in question.

note (1) in page 11 There is a further discussion of the wage-price issue on pages 49-51 below.

note (1) in page 12 There is further comment on this phenomenon below, see Chapter V.

note (1) in page 13 It is also assumed that low value exports (under £50), of which the destinations are no longer recorded unless they go by parcel post, were in fact distributed by destination in the same proportions as other exports.

note (2) in page 13 National Institute Economic Review no. 47, February 1969, page 12, chart 3.

note (1) in page 14 Although the import deposit scheme was abolished before the end of the quarter it seems extremely unlikely that there could have been a net speculative effect in the fourth quarter of a positive character.

note (1) in page 15 See above, page 10. There is a strong apparent tendency, however, for the import content of plant and machinery investment to rise over time, which is an important additional factor in accounting for the rise in machinery imports.

note (2) in page 15 We suggested last year (National Institute Economic Review no. 51, February 1970, page 12) that the scheme might have restrained imports to the value of £50 million or more (current prices) in 1969. This estimate looks too high in the light of further investigation, except to the extent that the initial financing problems had created a temporary ‘liquidity effect’.

note (3) in page 15 This is before correction for the effect of policy change. The required adjustment, however, is very small, being limited to the effect of the April 1970 budget: it might be put at only some £15-£20 million. The February forecast error was still a great deal smaller than in 1967 or 1968, although higher than in most other years for which the record has been examined. See R. L. Major and M. J. C. Surrey, ‘Errors in National Institute forecasts of the balance of payments’, National Institute Economic Review no. 52, May 1970, pages 35-45.