⁽¹⁾ See Economic Trends, April 1970, pages ix-xiii.

⁽³⁾ A detailed comparison of the present forecast with the Treasury's and with the London Business School's latest predictions appears on pages 16-17 below.

⁽¹⁾ This impression is subject to the caveat that the correlation between expected and subsequently reported trends is not always good; but the 50 per cent expecting an upward trend in February 1970 is a very high figure and the change in expectations towards rising prices over the past year is striking. As a limit on capacity to obtain export orders, (relative) prices in February were the most important factor cited by consumer goods industries. Capital goods industries, however, put delivery dates as substantially a more important factor.

⁽¹⁾ The 3 per cent rise in export prices of manufactures predicted for the United Kingdom applies both in year-on-year (1970/69) and in ‘through the year’ (1970 IV/1969 IV) terms. Given the sharp rise in prices experienced by most overseas countries towards the end of last year (see Statistical Appendix table 20), it seems certain that their year-on-year price increase will substantially exceed the price rise likely to be experienced between the end of last year and the end of this. Indeed, if the fourth quarter figures were merely maintained on average unchanged throughout 1969 the weighted average price increase (using as weights the relative values of manufactured exports) for the total of the countries — other than the UK—shown in table 20 of the Statistical Appendix would amount to over 2 1/2 per cent.

⁽²⁾ This is even while allowing for a flattening out in import prices, a slight deceleration in the growth of world trade and a small reduction in the rate of rise of unit wage costs. The acceleration in the rate of price rise reflects the operation of lags on the earlier rate of cost increase.

⁽³⁾ Even then, no significant loss in the British share of world trade and volume of exports would follow immediately. The response of demand appears to lag considerably behind movements in price competitiveness.

⁽¹⁾ The value of other exports increased, as in the fourth quarter of 1969, by about 2 1/2 per cent.

⁽²⁾ These two effects are conceptually separate but in practical work difficult to distinguish. Expectations of price increases might lead, for obvious reasons, to increases in real consumption; it may also be that consumers ‘suffer’ from money illusion, in the sense that they mistake increased money income for increased real income and consume accordingly an abnormally high volume of goods and services in relation to their real income.

Branson and Klevorick, in a very interesting article (‘Money illusion and the aggregate consumption function ‘) which appeared in the American Economic Review, December 1969, were able to devise tests for discriminating (on certain assumptions) between these effects; their results (with American data) indicated a quite powerful effect of money illusion on real consumption. Our own experiments have so far yielded unacceptable lag structures, and indicate that the identification of money illusion is very sensitive to the specification of the consumption function employed. The relationship used in our forecasting has not shown downward bias over the past two years, when prices have been rising quickly and at a rate similar to that now predicted : so we may have some confidence that powerful illusion effects have not been omitted. The effect of price expectations could, however, be another matter if the expected rate of price rise has moved up at all sharply from past values. But there is no good evidence for this so far.

⁽¹⁾ This is using the hourly wage rate index for all workers.

⁽²⁾ Partly reflecting the impact on dividends of the recently recorded drop in profits, but assuming that self-employment incomes will tend to move up sharply in sympathy with wages and salaries.

⁽³⁾ The marginal rate of taxation on wage and salary incomes must now be around 27 per cent and only slightly dependent upon variations in the distribution of a given increase. A 10 per cent increase in pre-tax labour incomes probably now implies a rise of only about 9 per cent in post-tax income.

⁽⁴⁾ This point is discussed further below, on pages 18-19. The 5 per cent figure is one mentioned by the Chancellor as a desirable rate of expansion for hitherto restricted lending within which the Chancellor hoped to see some continued discrimination against consumer lending. It seems possible, however, that the rate of expansion will exceed the desired level.

⁽¹⁾ Chiefly, the effects of the rise in corporation tax, and last autumn's increase in national insurance contributions.

⁽²⁾ But see pages 17-18 below.

⁽³⁾ See above, page 4.

⁽⁴⁾ No account was taken of any associated speculative effects, as these would affect equally stocks and imports, leaving GDP unchanged.

⁽¹⁾ The overall prediction for imports of goods and services was checked against disaggregated forecasts for goods imports alone. These suggested that the largest increases would be in machinery and other finished manufacturers imports (about 11 per cent in each case for 1970 on 1969) with increases ranging from 1 1/2 to 2 per cent for basic materials and semi-manufactures and 4 1/2 per cent for fuels.

⁽²⁾ The February balance of payments forecast for 1970 (National Institute Economic Review no. 51, February 1970, table 6, page 29) included £50 million credit for an anticipatory effect associated with the end of the import deposit scheme, which is not included in table 6 here. The other, non-anticipatory, effects of abolishing the scheme by the end of the year, are however still included.

⁽¹⁾ There were also certain other less significant revisions, which were mainly of a cancelling character.

⁽²⁾ See pages 29-31 below.

⁽³⁾ The forecast for import prices is prepared initially in terms of the expected movement in the Board of Trade's import unit value index, and then translated into the form used in table 6, an estimated implicit price deflator for the goods section of the total of imported goods and services. Unfortunately, the only official series published at constant prices in balance of payments terms, is for goods and services together, and the implicit deflator of this series has recently behaved rather oddly in relation to the Board of Trade price index for goods. Between the first and fourth quarters of 1969 it rose only from 121 to 123, whereas the Board of Trade index rose from 120 to 125 (both expressed with 1963 = 100). The discrepancy could hardly be attributed to services alone, and unless it is reversed during 1970 (and we see no reason for assuming that this will happen on more than a small scale), the increase from year 1969 to year 1970 must, therefore, be expected to be a good deal smaller for the goods component of the deflator than for the Board of Trade index. For the latter we foresee an overall increase of 3 1/2 per cent (for food : +3.4; basic materials: +3.7; fuel: −5.7: semi-manufactures: +6.1; finished manufactures: +1.3); from the second quarter of this year on, however, all the component indices were forecast to fall (with some recovery beginning in 1971), except that for finished manufactures, where a 2-2¹/₂per cent annual rate of rise was forecast.

⁽¹⁾ The forecast still allows for the planned expenditure on ‘Jumbo’ jets this year.

⁽¹⁾ Financial Statement and Budget Report 1970-71, pages 10-12.

⁽²⁾ Some details of this were published in The Sunday Times, 3 May 1970.

⁽³⁾ This is one reason for the discrepancies in the behaviour of some of the series in 1969. There are also certain conceptual differences; for example, the NIESR (and probably FIN STAT) figures for stockbuilding include the difference between compromise’ GDP and expenditure GDP (table 1), and the LBS GDP figures relate to the expenditure-based estimate of that item. The FINSTAT figures for all items are rounded to the nearest £10 million (1963 prices).

⁽¹⁾ See National Institute Economic Review no. 51, February 1970, pages 26-27 and The Sunday Times, 3 May 1970.

⁽²⁾ See National Institute Economic Review no. 48, May 1969, page 7.

⁽³⁾ See table 5, page 10 of this Review.

⁽⁴⁾ See Financial Statement and Budget Report, 1970-71, page 10.

⁽⁵⁾ It should be stressed that this analysis is in terms of wages and salaries per unit of GDP, and not simply in terms of money wages and salaries. The effect on unit costs of an increase in money wages is partly blunted by an increase in output, and this effect is allowed for by solving the price relationship in the context of our overall forecasting model.

⁽¹⁾ S. Almon, ‘The distributed lag between capital appropriations and expenditures’, Econometrica, January 1965.

⁽¹⁾ Weekly Hansard, no. 825, col. 1232.

⁽²⁾ The external financing term, when positive, measures the extent to which the overseas sector acquires public sector debt, a fall in the gold and foreign exchange reserves being counted as equivalent. Conversely, a liquidation by the overseas sector of its public sector debt holdings, including a rise in the reserves, yields negative external financing. With a highly favourable overall balance of payments outlook, external financing should be expected to be negative, probably involving both a rise in reserves and some net repayment of short- and medium-term assistance, the outstanding amount of which the Chancellor's budget speech indicated as about £1,600 million at the end of 1969/70.

⁽³⁾ We experimented with several relationships involving velocity and the local authority three month deposit rate. These suggested a rise of about 1 percentage point in the course of 1970 on the assumptions indicated in the text.

⁽⁴⁾ See A. A. Walters ‘Monetary Multipliers in the UK 1880-1962,’ Oxford Economic Papers, November 1966.

⁽⁵⁾ Details of the cash deposits scheme were set out in the Bank of England's Quarterly Bulletin, June 1968.

⁽⁶⁾ There is the reservation that cash deposit calls could be made selectively: but this power is only to be used in very exceptional cases.