In the three months since our last forecast, the two major changes of policy have been the fiscal measures announced on 26 October and the decision to allow the exchange rate to float from 31 October. The effect on our forecast of the October fiscal changes is not in fact all that great. We had already assumed that personal tax allowances would be indexed next spring, so that this element of the package merely brings forward a change already incorporated in our figures beyond the second quarter of 1978. The same can be said of the increase in child benefits next April, which had already been announced by August. Apart from the effect of the tax cuts in the next six months, there remains only the £400 million increased expenditure on construction as an additional net stimulus to demand, compared with the assumptions made last time.

In a special article in this Review (pp. 41–58), S. A. B. Page sets out estimates of various aspects of the production and economic value of North Sea oil and gas. In this chapter we consider some of the policy options which are opened up for the next four years in the light of the development of the North Sea resources.

Our view of the world economy has grown gloomier during the last three months. It has become increasingly clear that we (and, far more significantly, governments) had underestimated the level of demand that would be needed to induce industry to add substantially to its productive capacity and, in Western Europe, to cease to reduce its work force. The revival of business investment has been generally weak, while unemployment has been falling more slowly in the United States and rising rapidly in Canada and Western Europe, thus further depressing the expectations of consumers and investors alike.

Oil and gas from the North Sea will make the United Kingdom a net exporter of energy in the 1980s and supply a substantial portion of its needs through the 1990s. In value terms, the benefits are principally to the balance of payments and government revenue. The former is improved slightly relative to the pre-oil price rise position, but significantly compared with either the present balance or that of other industrial countries. The absolute size of these benefits and the share of the government in the total are extremely sensitive to the assumptions made about changes in the exchange rate, including those which result from the improvement in the balance of payments. Many decisions about the distribution of the benefits are already being taken, for example in policies for the energy sector and the exchange rate. It is therefore too late to plan to allocate all the benefits to a single purpose, and it may be undesirable to do so.

This note traces the course of the price of crude oil back to 1880 and attempts to assess the changes in its purchasing value by deflating it by the export prices of manufactured goods. The purchasing power of the posted price of crude oil declined through the 1960s, even without allowance for significant discounts, and then trebled in 1974. The sixfold nominal rise of the oil price from 1972 to 1977 compares with a 150 per cent increase in the prices of other primary products, and a rise of about 75 per cent in the price level of manufactured goods in world trade.

The earnings of manual workers in the public and private sectors for the years 1970-77 are examined. The marked improvement in the relative pay of public sector workers which had been noted in earlier work is confirmed. It is found that in the period from 1970 to 1976 the relative pay of the public sector improved by over 10 per cent. In 1977 there was a movement back in favour of the private sector of about 2 1/2 per cent, but this still left the relative pay of public sector manual workers 10 per cent higher than in the 1950s and 1960s.