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Published online by Cambridge University Press: 26 March 2020
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.
note (1) in page 17 The question of why a breach of the monetary targets should affect confidence is another matter: it is sufficient for this argument that it probably would. It seems likely that the reversal of confidence would result from concern about the effect on domestic inflation. The actual effect on domestic inflation of an increase in the money supply from foreign inflows is uncertain. Increases in domestic sterling deposits from this source are probably more likely to be held as assets or exchanged for other financial assets (for example govern ment securities) than to be spent on goods and services in such circumstances as to cause upward pressure on prices.
note (2) in page 17 The deterioration in the terms of trade, however, reduces real national income by about 1 per cent, so that in the short run there is a net fall in real national income.
note (1) in page 18 See the explanatory note ‘Formal and informal aspects of forecasting with an econometric model’ by M. J. C. Surrey and P. A. Ormerod, National Institute Economic Review No. 81, August 1977.