The focus of interest of macroeconomic policy has been moving away from the short term towards the medium term. Partly this is because the present recession, already deeper than any experienced since the war, seems still to have some way to go, and the question is hotly debated when, and how strongly, a recovery may be expected to come. But, with the new government, there has also been a significant shift in the attitude towards management of the economy. The government's objectives for the medium term, enunciated in the Financial Statement and Budget Report 1980-81, are ‘to bring down the rate of inflation and to create conditions for a sustainable growth of output and employment’. This reduction in the rate of inflation is to be brought about by a ‘Medium-Term Financial Strategy’ which is based on the idea that the role of government should be to announce, and subsequently adhere to, a sequence of declining targets for £M3 and the PSBR.

The relation between the government's need to borrow and the stock of money in the country is a complex one. It is affected by the nature of the expenditures and revenues which require the borrowing and by the way in which the borrowing is financed. From time to time it has been suggested that nevertheless the two magnitudes have moved together in a stable manner. In this article we demonstrate that no such convenient coincidental movement appears to have been recorded in the UK and hence that it is possible for the government to permit variations in the PSBR to try to offset the recession even while maintaining a medium-term regime of monetary targets.

P. J. Forsyth and J. A. Kay have recently argued, in a widely quoted article, that the enjoyment of the benefits of North Sea oil is only possible if there is a contraction of manufacturing output. Their argument has been mis interpreted in some quarters and it is here re-examined and placed in a wider context. The note was written by G. D. N. Worswick.

In this analysis of the behaviour of the United Kingdom economy we extend our forecast horizon to the end of 1982. As a consequence it is possible to see a slight upturn in economic activity during the forecast period (table 1) with GDP at the end of 1982 reaching about the same level as it had in the second quarter of this year. This upturn, however, is much too small to prevent the continuing rise in unemployment. Accordingly we expect registered unemployment in Great Britain (excluding school leavers) to reach 2½-2¾ million on a seasonally adjusted basis by the end of 1982. The upturn in activity does mean that the rate of increase in unemployment is likely to diminish but it is not sufficient for unemployment to show any signs of reaching a peak before the end of 1982.

Recent data confirm both the severity and the international generality of the check to the growth of output during the summer. Nevertheless it still seems to us that the gloom which it has generated is in many cases excessive (though there is, of course, a risk that by destroying the confidence of consumers and investors the more pessimistic forecasts may become self-fulfilling).

This article presents some alternative models of consumers' expenditure on durable goods and examines some general issues of econometric model building. In the preferred model, income, the change in liquid assets and the real cost of credit have a substantial effect on durables expenditure. Hence, both fiscal policy instruments such as a change in the rate of income tax and monetary variables such as nominal interest rates and sterling M3 influence durables expenditure.

In this Review, as a response to comments from readers, we have replaced the consumer price index by the retail price index as a measure of annual price inflation in our Summary table of our forecast for the home economy. This note therefore sets out the differences between the two series in order to make the nature of the change clear.