https://cpes.org.uk/om/files/original/f06eec5e206e894226347e68a3968e5a.pdf 25046b546fd4ce2a1e7e1cc516dbb42c Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Problems in the Management of the Economy 1971 - 75 Text A resource consisting primarily of words for reading. Examples include books, letters, dissertations, poems, newspapers, articles, archives of mailing lists. Note that facsimiles or images of texts are still of the genre Text. Text Any textual data included in the document Chapter 1 Objectives and methodology The main purpose of this study is to provide informat1on which will assist discussion of policy decisions which have their main consequences some years after they are taken. A particular focus of the exercise is public sector expenditure which can only be adjusted in the short run to a minor extent and at considerable cost to longer-run social object1ves .. 2. Public sector expenditure is conventionally classified into several categories; expenditure on goods and serv1ces, current transfers to the private sector, capital transfers to the pr1vate sectvr, and current and capital transfers abroad. Each of these types of eKpend1tUtl· has a number of important k1nds of effect on the economy.. The consequences of expend1 ture policies with which this study is mainly concerned are 1ts effects on the level and composition of aggregate demand and 1ts implicat1ons for the net burden of taxation on the personal sector. Public expenditure programmes do of course also have major effects on the distribution of real income between different soctal groups and on the efficiency of production in the economy, as well as the1r direct contr1bution to the achievement of var1ous soctal and pol1t1cal goals. 3.. The procedures conventionally used for short term forecasting and demand management are by now very familiar . It is customary first to forecast what would actually happen over the next eighteen months, particularly to output, unemployment and the balance of payments, on the assumption that there is no change in policy, Forecasts of the consequences of alternative policies can also then be made, and it 1s on the basis of these forecasts that the Government decides what to do. Many aspects of policy, such as public expenditure, local authority rates, the exchange rate and trade policy, are assumed to be given; and so, broadly speaking, is the underlying structure and rate of growth of the economy. The short' term forecasting exercise is designed to gu1de the Government's decisions on changes in Central Government tax rates and on credit conditions, which are in practice the most flexible instruments for management I - 2. of the economy which the Government possesses .. 4" In the end, the power of fiscal and credit policy to regulate the economy l.S rather limited, particularly as regards the composttion of demand 111 relat1on to G.D.P. and the surplus or deficit on the balance of payments. Dec1sions about the desired level of G,DuP. and pressure of demand cannot be taken independently of their inevitable consequences for the burden of personal taxation and for the balance of trade.. The outcome is genera I !y a compromtse forced by circumstances over which. in the short term, the Government has ltttle controL The par economy as a framework of analys1s 5. In this study we have set up a framework for exam1n1ng those problems in economic management which can only be resolved in a longer term c~ntext. For this purpose we deliberately avoid any specific assumpttons about short-term policy decisions and do not attempt to make forecasts of what would actually happen under unchanged policies. As the horizcn of poltcy·making is extended further into the future, such forecasts would have l1ttle relevance because short·run decis1ons will be able to be reconsidered and rev1sed many times in the light of actual devidopments before our time horizon, set 1n this exerci&e at 1975, is reached. 6 We abstract from the complexittes of short··cerm demand management by assuming that the level of aggregate demand can be adjusted more-or·less to any desired level, subject to the usual resource constraints; fiscal and credit policy is assumed to act on demand through prtvate consumpt1on, and the latter is therefore treated as a residual in our calculations as though it were a direct instrument of Government policy. 7.. In the main set of estimates we also abstract from the complexities of exchange-rate management and the control of domestic 1nflation and assume that the competitiveness of the U.. K.. economy can be adjusted so as to achieve a satisfactory balance of payments. I - 3u 8. These two abstractions enable us to construct a set of estimates of the economy as it could have been in the past, or would be in the future, if demand were adjusted so as to maintain a steady level of unemployment and if the balance of trade were regulated to ensure the long-term v~abl.lity of the U"K,.'s reserve positl.Ono The economy. regulated in this way, w~ll be termed the par economlFor the past it is reconstructed from the recorded actual outcome, as measured in the national income and balance of payments acLounts and for the future it is projected on the basis of our very 1mpertecl knowledge of the underly~ng trends and exogenous changes wh1.ch are to be expcc ted., 9.. The estimates for the par economy are 1n fact condittonc. 1 predictions ot the state of the economy given a certa~n pressure of demand and dn assumed balance of payments position .. G~ven .:>ur methods and assumptions. the_ estl.males are defined precisely by the postulated steady level of unemployment and trade surplus or deficit. An alternative but equ1.valent def~nttlon of the estimates ~s g1.ven by postulated levels of G"D .. P, and the terms of trade (whtch reflect the competitiveness of the U, K .. economy) Alternative projections 10 It is also useful in explor1ng future prospects for the structure of demand and the balance of payments to make alternat~ve est~mates wh1.ch are projections conditional on assumed movements of actual G.D.P. and the terms of trade. In this exercise we have made twv such hypothetical project~ons which are designed to explore the problems which may ar~se as a result of reflation of demand up to 1975, with or without devaluat1.on. These hypothettcal projections are in no sense forecasts of what would happen under unchanged policies.. They may imply substantial changes in tax rates or credit controls. Relevance to short-term and medium-·term stratesl 11 From the discussion above it should be clear that this study is not intended as a substitute for any conventional pre-Budget exercise. But it I - 4 .. does enable ~s to reach some broad conclusions about budgetary strategy. The problems which emerge from our projections to 1975 are d1rectly relevant to short-term policy because they help to show whether current policies are temporary or sustainable in the longer run. They 1nd1cate whether the shortterm objectives are likely to prove consLstent or 1n conflict w1th the longerterm requirements of economic managemenL 12. ' The main conclusions which can be reached u~1ng this framework of mediumterm analysis concern the management of the balance of payments, the implications of public expenditure for the allocation of resources to the prtvate sector, and its consequences for the real burden of taxation on the personc ~ sector Plan of the study 13. The detailed analysis in the following chapters starts .with au examinal1ou of the relationship between aggregate demand (G D P at factor cost) and the lc\els of employment and unemployment This pruv1des the bas1s fur an estunate of the resources available in the par economy, as measurtd by G D P at factor cost, at the steady 2.5 per cent unemployment which is adopted as a def1nit1on of par 1n this studyv 14. Chapter Ill investigates the various non·trdde balance of payments flows and the balance sheet of foreign assets and l1abil1t1es 1n order to establ1sh reasonable targets for the balance of trade wh1ch then fully define the par economy for the purposes of this exerc1se . The tol.low1ng chapters est1mate the resources required to achieve the target balance 0f trade, for public sector expenditure (forecast for the future in the Wh1te Paper on Public Expenditure, Cmnd. 4829) and for private investment and stockbuild1ng 15. The projections of the balance of trade to 1975 reveal that at the par pressure of demand, or 1n the course of any actual reflat1on, severe balance of payments problems are likely to be encountered by 1974-5 I - 5 .. 16.. Given the available level of G.D P at the par pressure of demand and all the claims on resources estimated in earlier chapters, consumers' expenditure is obtained in Chapter Vll as a res1dual demand which matches the aggregate level of demand with G,.D, P, Different estimates of consumers' expenditure are then derived on alternat1ve assumptions about the real burden of taxation; these latter estimates represent the level of private consumption which would normally be generated by the flow of tncomes at the given level of G D P The difference between required consumption and that whtch would be generated under given fiscal assumptions indicates the size of the 'tax gap , or the tncrease (or reduction) in real taxation of the personal sector, which wvuld be required ·in order to adjust aggregate demand to the postulated level. 17. The estimates indicate that gtven the levels of public ·expenditurE forecast in the White Paper, private consumplton would have to fall as a share of G D.P (as compared with the actual posl.tlJn m 1971) by 1975., even if the pressure of demand is by then at, or above, pal The Increased pressure of demand would in itself cause some reduct1on 1n the share of private consumption, given an unchanged real tax burden, because of the 1mprovement In the share et company profits;, a further small reduction 1n the share of consumption 1s expected to follow from a rise 1n the personal savings rat1o from its abnormally low level in 1971 18. The calculations on which our cone lus1ons rest are based on uncertain assumptions and are therefore subject t-.> wtde marg1ns of error It appears that under all the conditions which we have postulated, the share of consumption in G.D.P. in 1975 would be more-or-less appropriate without any Increase In the net burden imposed by taxation and the terms of trade, as compared with the present position, A policy of reflation raises serious balance of payments difficulties wh1ch could be solved by devaluation. But the personal sector need not suffer the deflationary consequences of the implied deterioration in the terms I-6 of trade provided the par pressure of demand is maintained by appropr~ate fiscal action. ~f, on the other hand. the balance of payments problem were to be staved off for a time by deflation, the personal sector would inevitably suffer a very large loss of resources potentially available for consumption. 19. The method we have developed will in due course enable us, at least in principle, to verify the predictions we have made. We have evolved a precise way of converting the actual to the 'par' past; we shall be able to use these , precise operations t~ convert future 'actuals', as these become available. to par values which can be directly compared with those we are now presenting. It is admitted that the strict implication of our method (to the extent it has so far evolved) is that there is no interraction between the way the economy has been or will be managed in the short term and its structural evolution through the medium and long term. We are not begging any questions, however~ We make this assumption because we cannot establish any presumption about these interrelationships ·. In other words, our estimates of the par economy are intended as genuine estimates of how the economy would have evolved under the conditions defined. ~··  Dublin Core The Dublin Core metadata element set is common to all Omeka records, including items, files, and collections. For more information see, http://dublincore.org/documents/dces/. Title A name given to the resource Chapter I Objectives and methodology Creator An entity primarily responsible for making the resource Cambridge Economic Policy Group Source A related resource from which the described resource is derived Problems in the management of the economy 1971 - 75 pages I-1 to I-6 Date A point or period of time associated with an event in the lifecycle of the resource 1972