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(3*

BUDGET SECRET

£>Ll^)

CH/EX. REF. NO. COPY NO.

1

OF 3 .

22-

COPIES

roasurv Chambers. Parliament Street. S W 1 P 3AG

PRIME MINISTER

I t h i n k you w i l l

want t o s e e t h e l a t e s t T r e a s u r y

w h i c h h a s r e c e n t l y been c o m p l e t e d . policy on

The f o r e c a s t u s e s p o s t - B u d g e t

a s s u m p t i o n s , though t h e package i n c o r p o r a t e d

out-of-date.

t o show a r i s e

o f 17 p e r c e n t

r a t h e r t h a n 171 p e r c e n t f o r t h e f o u r t h q u a r t e r respectT~~the forecast w i l l

should

know t h a t t h e u s u a l

prospect by 2.

quarter

The p r o s p e c t

respects.

of

i s obviously

i n t h e FSBR w i l l

the f i n a l

employment) as w e l l a s f o r p r i c e s . figures.

n o t e on t h e B u d g e t

p a c k a g e e n a b l e s us t o i.e.below

But the consequence i s i n e v i t a b l y a

one i n t h e s h o r t - t e r m

of c o n s i d e r a t i o n s

rate

an u n c o m f o r t a b l e one i n many

a PSBR f o r e c a s t f o r 1979-80 o f $.81 b i l l i o n :

discouraging

You

go on t o show t h e

i n the year-on-year i n f l a t i o n

As I have o b s e r v e d i n my s e p a r a t e

Denis Healey's t a r g e t .

( I n most

1980.

package, I s h a l l ensure that display

o f 1979.

n o t be m a t e r i a l l y a f f e c t e d . )

tables

of a substantial f a l l

the third

i s now somewhat

I n p a r t i c u l a r , we now e x p e c t a r a t h e r smaller i m p a c t

t h e R P I , w h i c h i s now l i k e l y

other

forecast

which should

help

both f o r output

(and t h e r e f o r e

T h e r e a r e , h o w e v e r , a number t o de-fuse t h e impact o f these

F a r a n d away t h e most i m p o r t a n t i s t h e f a c t t h a t any

Budget - f r o m any Government - a t t h i s t i m e w o u l d have h a d t o be "deflationary".

C e r t a i n l y Denis Healey w i l l

n o t be a b l e

t h a t t o a c h i e v e h i s own s t a t e d PSBR t a r g e t o f £8J b i l l i o n alone t o increase

t a x a l l o w a n c e s beyond t h e p r o v i s i o n s

F i n a n c e A c t ) he w o u l d e q u a l l y have h a d t o i n t r o d u c e

t o deny (let

i nthe A p r i l

a contractionary

Budget. 3.

We must a c c e p t t h a t t h e i n c r e a s e s

l e s s e r extent

i nindirect

some o f t h e p u b l i c e x p e n d i t u r e

- 1 -

BUDGET SECRET

taxes

- and t o a

m e a s u r e s - have an

BUDGET

adverse

impact

on

prices.

*

By

from

middle

the

increase

can

fair

do

to

of

developments

last

i n the

Our

fiscal

i s bound

there

achieves 4.

On

t o be

about

3 2 per



cent.

o f what

about of

the

this

not

i s , of

per

inevitable of

w h i c h we

can

remain

that

s u r e s t way

to

inflation

an

uncomfortable

firm

interval





a

i s not

of

our

this



on

and

but



and

policy

monetary

before



the



o i l prices)

down;



much

It is

cent.

unavoidable

theme must

get

only

defend



happening

consequence

(especially



the

limits.)

There

u n d e r l y i n g 12£

policies,

are

cash

course,



cent

the

include

i s happening.

i n general

per

i n d u s t r y p r i c e s and

Government's

i s the

0.3



that policy





results. output,

at

about another

CTPdo

Budget

d e c i s i o n s on

i s the

be

previous the

world

general

policy

this

increases r e q u i r e d which

Government's

several specific

merit.

from

t h a t most

may

charges.

small part

the

put

nationalised

t o meet t h e

immediately

say

failure

of

of higher

increase arising

comparatively we

there

industry price

anyway, s i m p l y The

year

in prescription

nationalised

now



of next

effects

We



1

the



S E C R E T

the

gloomy

prospect

f o r the

immediate

future is

an

>

inevitable p'olicies for to

the

implication

which longer

we

of our

believe should

term.

The

normal n a t i o n a l income

Treasury

and

net

set

the

effect

i n the

conventional

f o r e c a s t i n g methods f a i l

take

effects

time;

supply

these

particularly

side performance

ensured

that

effects

of

the

our


short-term.

of

of

these

While

policies

insofar of

the

as

we

t h a t by

on

improvement

BUDGET

this

-

S E C R E T

the

the

effects

I

have

favourable

of our -



underlying

confidence.

year)





these

f o r the

part

in



path

that

i n the

business



according

many o f that

the

right

be

i s concerned.

billion

2

to

appreciate

making a s u b s t a n t i a l

d i s p o s a l s (£1.2

the

(as used

i t i s clear

consumer and

of

measures

t o p i c k up

economy

on

i s bound

f o r e c a s t s make some a l l o w a n c e

policies

of asset

economy

practitioners)

deflationary

beneficial

c o n v e r s a t i o n and

f o r e c a s t i n g procedures

most o t h e r

by

pre-lunch

package

measures

We





BUDGET

which

the Opposition would

helping

to achieve

S E C R E T

reject



on d o c t r i n a l

a l o w PSBR a t much

less

grounds

cost

(G.H.)

June 1979

BUDGET

S E C R E T



- we a r e

t o t h e economy.

BUDGET -

SECRET

Chief Secretary

Financial Secretary.

M i n i s t e r o f StateQL)

Minister of State(C)

PCC M e m b e r s

MEG M e m b e r s

Mr R i d l e y

M i s s Brown

Mr Evans

Mrs Lomax

Mr R i l e y

Mr Sedgwick

cc

OF T H E EXCHEQUER

CHANCELLOR

ECONOMIC P R O S P E C T S TO

1

attach

the revised

you

will

2

Further

to

those

assumptions used

of the higher shot"

£200 m i l l i o n

in

f o rthe forecast

indirect

tax version

t h e 1979-80 P S B R

t o £8-J b i l l i o n .

consequent

policy, this

would

price forecast

of course

i s t h e most

I t assumes, f o r example, t h a t

tax

i s adopted,

cuts

score

and reduced

changed

nearly

i s fully

b r i n g t h e PSBR f i g u r e down t o a

This

that

contingency

t h e most

and t h a t

reserve

RPI-expensive of

without

8te

J

R

SHEPHERD

24 May

reflected little

asset

the planned

are held

cash

stringent interpretation

a l l o f t h e £1 b i l l i o n

f o r PSBR p u r p o s e s

that

o f t h e "second

come d o w n b y

possible.

disposals

were

I f t h e f u r t h e r squeeze on

on t h e h i g h e r

could

above £8 b i l l i o n .

option

of which

Income F o r e c a s t ,

t o my c o m m e n t s o n t h e p r e v i e w we now c a l c u l a t e

t h e Budget

limits

Treasury National

seen a preview on Tuesday.

have

if

sighting



1980-81

1979

expenditure any

concessions.

BUDGET - S E C R E T

1980-81

ECONOMIC P R O S P E C T S TO M a y 1979 3nd S u m m a r y

introduction This The

forecast Budget

i s constructed

assumption

Adjustments

recent.

package

Budget

are listed

expenditure

package

fully

i n great approach

detail.

of firm decisions

on

armed f o r c e s

pay and on t h e P r i c e

to

predict

to

specific would

Other

level

the centre

the

i n money i n c o m e s ,

is

indicated

to

keep t h e growth

include

t o around

forces,

range.

sufficient 1979-80





f o r inflation)

with

I n 1980-81

of the large

9% o r l e s s rate

o f £ M 3 i n

i t does n o t accommodate

i t was n o t t h o u g h t

which

PSBR

to t r y

appropriate by means o f

sharply

i s assumed t o be

no n e t i n t e r v e n t i o n b y t h e

o f around

and a package £1 b i l l i o n

o f the going rate

a t t h e outcome o f p u b l i c

and v e r y

t h e growth

i n that

The exchange

on t h e b a s i s

guesses

relationship

i n 1980-81

indexation

but i n the light

involving outflows

agreements

from

Debt repayment c o n t i n u e s

^ejected

round,

assumed

I t was, however,

(apart

restrictive

o f £M3

by market

authorities.

was

Commission) but not t o attempt

o f a 7-11% t a r g e t

i n the forecast

interest rates.

controls

was

(eg those

b y t h e new G o v e r n m e n t

o f expenditure at the reduced

key p o l i c y assumptions

p o l i c y remains

determined

t h e Budget

the assumptions

be f u r t h e r e x p e n d i t u r e cuts

monetary

rising



The

f o r 1980-81.

1979-80 t o w a r d s

rise

Apart from

decisions.

No f u r t h e r t a x c h a n g e s

were assumed 2

future

keep t h e planned

figure.

5-11.

i n determining

take account

there

a more

The p o l i c y

made s e p a r a t e l y .

to

that

a v a i l a b l e t o us

to reflect

i n paragraphs



basis.

assumed was somewhat a r b i t r a r y and i s n o t

described

the general

on t h e package

to the forecast

are being

assumptions

itself

on a p r o v i s i o n a l post-Budget

was b a s e d

on M a y 1 7 t h .

therefore



Forecast

t e n t a t i v e estimates

between pay, p r i c e s , t a x a t i o n

-1-

BUDGET - S E C R E T

exchange

i s included.



Pay



i n t h e present pay

sector o f an

of

comparability



underlying

and t h e p r e s s u r e

o f demand.

X

SECRET

BUDGET A

numerical

page

summary o f

4.

None o f

Margins of factors

error

- notably

associated level

of

rise

on

scale

containing

this

of

forecast

the

as

amounting to

i n compiling

necessary

for specific

detailed

tables

indicating

annexed

to

(1)

UK

fall

from

output

may

fall

reached

Unemployment

(3)

Earnings

around

in

1979/80 w h e n c o m p a r a b i l i t y

for

to

i n the

the

public

(4)

With

turn

retail

o i l prices

inflation

even i n the

Budget

RPI

increase

and

end

beginning back

(on (5)

rather their the

rising

to

is

detail

uses



the

as

imply.



Thus

recession.

into

i s more l i k e l y

increase. economy as

1978.



to

Manufacturing*^

of

well

factors

mean h i g h e r



remain

slightly

accelerating

increases

year.

for



J

the

18%

perhaps to

1979-80 o f

7-11%

range.

to

keep the In

for

between

the

SECRET

13%

increase o r

a

little

Interest

rates

growth of

£M3

the



over.



is

rise

still

above

towards

absence of





fall

will

billion

i n the



expected

some £8£

1980-81,

-2-

BUDGET -

the

be

inflation,

Allowing

i s foreseen



beginning

adding to

figures could

Government's o b j e c t i v e .

l e v e l s i n order

rates)

Next year

PSBR f o r e c a s t

above the

(eg

exchange r a t e

Budget measures.

approaching

this

the

i n t o double

absence of of



a w h o l e may

perhaps

sharply

The

of



with

arithmetic

taken

h a l f of

agreements w i l l

p o l i c y assumptions),

centre

second

pay.round,

our

present

m u c h and





some d o m e s t i c

this year an

forward

the

be



think

services.

down and price

current

not

move f u r t h e r

rise

f o r the

at

should

to

i s expected

increases

some o f

propositions

i n the

significantly.

(?)

and



some

propositions,

put

f o r most g e n e r a l

note

i s u n l i k e l y to

level

147c

this

economy i s l i k e l y

GDP

the

forecasts But



the

Much more d e t a i l e d

these general

indicates,

volume of

the

unfavourable

I t i s h e l p f u l to

be





of

the

to

a l i m i t e d number o f

confidence.

forecast The

- w h i c h add



on

literally.

exceptionally

numbers, w h i c h can

purposes.

more t h a n

too

B u d g e t m e a s u r e s and the

table

a number

error.

a minimum o f

only

taken

are

margins of

is

The

the

be

there

i n the

P a r a g r a p h 33-37 a t t e m p t

degree of

the

of

and

out

occasion.

a reasonable

useful

numbers s h o u l d

always large

the

i s set

i n c o n s u m e r p r i c e s , and

quantification the

these

forecast

i n t e r n a t i o n a l competitiveness

uncertainties

of

are

the





fiscal





BUDGET - S E C R E T

action

going

beyond

the further expenditure

could

rise

level

o f about £10 b i l l i o n )

very

b y more t h a n

difficult

(6)

with of

will

to foresee, the effective

i t s current particularly

year

emerge.

fiscal

Despite

competitiveness the recent

high

rate i s likely level

over

The r a t e c o u l d h o l d f a i r l y

show a more m a r k e d

unsatisfactory

of

of exports

compared



prospect

w i t h no

i n 1980.

of t h e f o r e c a s t .

to



o r modest

i n balance

worsen f u r t h e r t h i s

rates.

b u i l d - u p o f o i l

economy and t h e c o n t i n u e d

probably

i n interest

Though t h e t i m i n g o f exchange r a t e movements i s v e r y

difficult

but

rises

But ( e x c l u d i n g o i l ) t h e volume balance

recovery

from

substantial

A

imports

(7)

without

to a

GDP ( p e r h a p s

m o n e t a r y t a r g e t c o u l d be

and a t i g h t

should Jce^rj__jthe^_cur^ej^^

production surplus.

i n p r o p o r t i o n t o nominal

t o achieve

The d e p r e s s e d

a s s u m e d , t h e PSBR

cuts

fall

year

the f u l l firm

a fall

i n the

1979

things, the

f o r 1980-81

exchange r a t e ,

cost

t o remain unfavourable

back

period

during

a s , among o t h e r

and monetary background

are l i k e l y

past,

next

to fall

begins

and p r i c e

by the standards

contributing to the d i f f i c u l t i e s

of

manufacturing

industry. (8) high of

Poor i n t e r n a t i o n a l

interest

industrial

profitability one

4

of

in

liquidity

may b e v e r y

l o w and t h e p r o s p e c t

crisis

position



i s foreseen, but

must be a d i s c o u r a g i n g

and s t o c k b u i l d i n g d e s p i t e p o s s i b l y f a v o u r a b l e

o f Government p o l i c y

on l o n g e r

paper

lists

term

expectations.

the policy



assumptions

i n more

e x p l a i n s some o f t h e k e y f o r e c a s t i n g j u d g m e n t s i n v o l v e d

theparticular

u n c e r t a i n t i e s and t h e g e n e r a l

error attaching to forecasts of this a selection

the forecast.

separate

a c t i v i t y and

t o worsen the f i n a n c i a l

No m a j o r

i n d i c a t e s both

provide

depressed

companies.

The r e m a i n d e r o f t h i s

detail, and

r a t e s a r e expected

f o rinvestment

effects

competitiveness,

note.

kind.

o f t h e more d e t a i l e d

The f i n a n c i a l

The. a t t a c h e d

numerical

forecasts are being



-3-

BUDGET - S E C R E T

work

margins

tables

incorporated

covered

i na



BUDGET - S E C R E T

May a s s e s s m e n t : P E R C E N T A G E CHANGES ON A Y E A R Gross 2nd 2nd 1st 2nd

Domestic

half half half half

Manufacturing 2nd 2nd 1st 2nd

half half half half

4th 4th 2nd 4th



3.0 -0.4 -1.0 -0.8

1978

1979

1980

1980

quarter quarter quarter

Retail

EARLIER

(volume)

Production

forecast









1.1 -1.1 -1.8 -2.0





earnings

Average 3rd 3rd 3rd

P r o d u c t

1978

1979

1980

1980

summary o f

price

quarter quarter quarter quarter



14.2 14.1 1S.8

1978

1979

1980

index





8.1 17.8 18.5 13.3

1978

1979

1980

1980



<



LEVELS

Current

b a l a n c e (£ b i l l i o n )

1978 1979 1980 PSBR

Effective



( 5 . 6 % o f m a r k e t p r i c e GDP)

( 4 . 4 % o f m a r k e t p r i c e GDP) < — - — ( 4 . 6 % o f m a r k e t p r i c e GDP)

exchange

quarter quarter quarter

1978 1979 1980

rate

( D e c e m b e r 1971 =

quarter quarter quarter

Interest

93-6 103.5 105.1

1978

1979

1980

R a t e s

S h o r t R a t e s

Average

1978-79

Average Average

1979-80 1980-81

100)









62.7 64.9 61.9

Labour cost competitiveness: competitiveness)

4th 4th 4th

<^

(£ b i l l i o n )

1978- 79 9.3 1979- 8 0 8.4 1980- 8 1 10.0

4th 4th 4th

0.3 0.4 0.1

(increase implies

worsening of





Long

Rates



- 4 -

BUDGET - S E C R E T

Mortgage

Rate



« u * H r r ­

SECRET

. Ik

lO DOWNING STREET

From the Private Secretary

4 June 1979

The P r i m e M i n i s t e r was g r a t e f u l f C h a n c e l l o r ' s minute o f 1 J u n e i n w h i c h out h i s main Budget p r o p o s a l s . This i c o n f i r m t h a t s h e i s c o n t e n t w i t h them.

or the

he s e t

s to



The P r i m e M i n i s t e r h a s a l s o c o n s i d e r e d

the C h a n c e l l o r ' s minute o f 1 June concerning

VAT o n p e t r o l . She i s content t o accept t h e

C h a n c e l l o r ' s judgement on t h i s matter, though

she h a s n o t e d t h a t he i n t e n d s t o i n s t r u c t

o f f i c i a l s t o g i v e i t more d e t a i l e d c o n s i d e r a t i o n

a f t e r t h e Budget f c r p o s s i b l e a c t i o n e i t h e r

next year o r , i ft h e energy supply situation

should s e r i o u s l y d e t e r i o r a t e , l a t e r t h i s year.

The P r i m e M i n i s t e r w a s a l s o g r a t e f u l f o r

the C h a n c e l l o r ' s note, and t h e accompanying

p a p e r s b y o f f i c i a l s . , on t h e f o r e c a s t .

LT. P. EANKESTER Tony B a t t i s h i l l . E s q . ,

HM T r e a s u r y .

SECRET