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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out-of-date.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