https://cpes.org.uk/om/files/original/5507a22f733494cdcf3e611fd7a8e0b3.pdf 57231834a84c8d288504ef28e2c0ced4 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 Prospects for Economic Management 1972 - 76 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 V Public Expenditure Investment and Private Consumption This chapter estimates how available resources might be divided up between the public and private sectors, and be.tween consumption and investment, given the le-.vel of GDP and tne net resources devoted to the balance of trade. After reviewing the claims of tne public sector and of private investment it will be possible to see how much is left over for private consumption, and to examine the implications for the growth of personal incomes~ Public exeenditure 2·. It is well known that it can be rather misleading to measure the share of resources appropriated by public expanditure at constant 1963 prices. In current price texms the share taken by the publi~ se~tor tends to grow more rapidly because a substantial proportion of public expenditure is incurred for services such as administration. health, education and defence in which little or no productivity growth i.s imputed, The ."relative price effect -Le. the extra grr.>wth of the public sector's share of resources when measured at current prices ~ is normally of the order of about 1% per year for all public expenditure on goods arid services; the effect is attributable to current rather than investment expenditures, 3.· Estimates published in the White Paper (Qnnd" 5178) imply that when meuured at 1963" prices public expenditure on goods and services will grow between 1972 and 1976 at almost the same rate as par GDPc There will be rather faster growth of current expenditure and slower growth of investment than in .the pa.st. 4. Table v-1 shows past and projected ratios of public expenditure to GDP, both at constant 1963 prices and in current price terms, The latter figures for 1976 are based on estimates of the relative price effect in the White Paper. y.--2 Table V-1 Public expenditure on goods and services (f. million, 1963 market: prices) Year Current expenditure Investl1lent in dwellings Other fixed investment: Total public expend1ture on goods and services Total as % of GDP at factor cost At 1963 At current pr1ces prices . 1961 1965 1969 1972 4933 5396 (2 c3) 5806 (L 8) 6249 (2. 5} 315 526 (13,.7) 686 (6 .. 9} 546 (~·7,3) 1644 2061 (5 G 8} 2297 (2c 7} 2598 (4,~2) 6892 7983 (3,, 7) 8789 (2, 4) 9~93 (2 o2) 26c9 27.3 2 7 c4 2?c7 26o4 28o2 30o3 30o8 Fast growth ass lm£tion 1976 7000 (2. 9} 537 (-0.4) ---Slow ~rowth assumEtion - 1976 7000 (2,9) 537 (-0.4) 3020 (3,; 8} 3020 (3.,8} 1055' (3 .. 0) 1055 7 (3.0} 26o0 30.1 27" 8 32o2 Figures in brackets are average growth rates, % per yearo 5. The share of resources absorbed by the public sector (measured at current prices) increased significantly between 1961 and 1965 and again between 1965 and 1969 The reason for the small size of the increase in the ratio of public expenditure to GDP since 1969 is that the relative price effect has been very much smaller than usual; and this can only have bappened because the pay of public sector employees has risen unusually slowly relative to other 1ncomes, The figure for 1972 is therefore a misleading guide to the share of resources absorbed by the public sector; and if the pay of public employees were to catch up again in relative terms,, the c:urrent"·price ratio of public expenditure to GDP in 1976 could be nearly 1% higher than the figures projected in the table" Private investment 6. The level of private housebuilding in 1972 has been about 20% higher than in the previous year~ while other private fixed investment has risen by only 4% above the very depres.sed 1971 level and i~ ~S:till lower than in 1970o Using the same methods. as. in the earlier paper to adjust private investment for variations. in the press.ure o·e demand_. the underlying par growth rate sin.c.e the middle 1960's. is. es.t.imated to have oeen just under 6% per yearo 7. In the past, booms. in private hous-ehuilding such as those in 1964 and 1968 have been followed by downturns of 3,ome $everiJ::y.. While the presei.l.t boom must be expected to .::;.atten off over chz nzxt two or thr.:!e years, the level of private housebuilding is unlikely to decline because of the strong incentives to the private secto:: prov~ded by government housing policy" Given the low levels of publi~ sector housebuilding forecast in Cmr.d" 5178~ total investment i~ hous~ng iL 1976 is expected to be no higher than the previous peak in 1968, even under che assumption of fast growth of GDP Table V-2 Private investment and stockbuilding (£million. 1963 prices} ------------------------------~--~-------------------------------------------- Year Fixed investment Stockbuilding Total investment Total as % of GDP at factor cost 1961 2956 352 3308 12.9 1965 3449 436 3885 (3o9) (4, 1) 196g 3923 441 4364 (3, 3) (2.9) 1972 4232 (2. 6) lOO 4332 (-Oo 2) 12,8 Fast growth assumption 1976 5638 493 6131 (7 ,4) (9 .. 1) Slow growth assumption 1976 5141 187 5328 (5 ,0) (5. 3) Figures in brackets are average growth rates~ % per year, 8. Other private fixed investment will grow.more rapidly~ recovering from very depressed levels in 1971 and 1972. An increas.e of 7% is expected next year and a further incre.as.e of about U/. :i:n 1974. Under the slow growth assumption little further increase in expected, bu.t under the stimulus of fast growth in d~and private fixed investment is· expected to continue to grow at 6% per year up to 1976o 9. The recovery in demand in 1972 and 1973 will probably lead to substantial stockbuilding in 1973. Published estimates show very large reductions in stocks in the first three quarters of 1972. But recent research ( 1) suggests that the official estimates of the stock appreciation component of the increase in value of stocks have been too high in recent years, and consequently that stockbuilding has been underestimated A revised series for stockbuilding has been constructed on the assumption that the stock appreciation component of the reported change in the valuecr stocks has been overestimated by a fraction rising from 11% in 1960 to 25% in 1965, and remaining constant thereafter. (See Appendix Table ll)o The revised figures imply a rather stable ratio of end~year stock to GDP over the whole period 1960-72 and stocks do not appear to be very far below their normal levels relative to output even at the end of 1972, 10. Total private investment, including stockbuilding 1 absorbed a very low share of output in 1972. Even under the slow growth assumption the ratio of private investment to GDP is expected to rise sharply from under 13% in 1972 to nearly 15/. in 1974i with fast growth in demand the ratio would rise to about 1517. in 1974. The upswing in private investment together with increases in public expenditure will absorb a considerable part of the increase in output over the next few years. (1) A project at the Department of Applied Economics sponsored by the Department of Trade and Industry has been investigating the measurement of stock appreciation by companies. Private Consumption V-5 11. To calculate par levels of pr1vate consumption and the future growth of consumption consistent with different assumptions about the growth of G.D.P. and about the balance of trade, consumption must be treated as the residual component of demand. It is implicitly assumed that consumption 1s stimulated or restrained by fiscal or monetary action so as to achieve the given overall growth of demand for G.D.P. 12. Under par cond1tions the rate of gr.owth of private consumption must normally be slightly less than che rate of growth ot G.D.f because of the tendency for investment to take a rising share or the ava1lable resources and because of the increased target surpluses on goods and serv1.;::es needed to maintain a reasonable balance of payments position. Over the past twelve years private consumpt1on has actually grown at an average rate of 3% per year; the growth rate was much lower than this when the balance of payments position improved, during 1967-71, and rather faster 1n years such as 1972 when the balance of payments position was allowed to deteriorate. 13. Table V-3 gives summary projections for private consumption 1n 1972-6 under various different conditions; a full set of estimates will be found in Appendix Tables 11-14. It is worth noting that in 1972 G.D.P. was about £1,000 million (at 1963 prices) below par, defined as a level consistent with 2!% unemployment. But private consumption 1n the same year was if anything already above par; under conditions of steady growth and with adequate resources devoted to the foreign balance the whole of the extra £1,000 million of resources available in the par economy would have been required for fixed investment, stockbuilding and larger net exports. Table V-3 V-6 Resources available for private consumption (Expenditures at factor cost: £ milllon, 1963 prices) Year GDP (1) Public expenditure Private ( 2) investment Balance (3) of trade Private consumption Actual 1961 1965 1969 1972 25609 29118 31939 33726 6639 7683 8408 9037 3149 3700 4153 4105 -286 -402 18 -710 16107 18138 (3.0) 19359 (1.6) 21294 (3 0 2) Par 1972 34741 9037 4652 -48 21100 Fast srmvth assumption 1976 40465 10157 (a) devaluation to $L 60 in 1973 5828 306 (b) continued depreciation to $2 . 00 in 1976 -1847 (c) fixed exchange rate at $2o35~ 1973-6 -2446 ~ Slow srowth assumEtion 1976 37802 10157 5052 (a) devaluation to $1.80 in 1973 178 (b) continued depreciation to $2.00 1976 r (c) fixed exchange rate at $2o35, 1973-6 -1050 -1648 24174 (3. 2) 26328 (5. 4) 26926 (6o 0) 22416 (1. 3) 23644 (2. 7) 24242 (3. 3) (1) Expenditure estimate of GDP at factor costc (2) Including stockbuilding. (3) Exports less imports of goods and services, at factor cost. Figures in brackets are average growth rates, % per year, V-7 14. For the period up to 1976, the fast G.D.P. growth assumption will naturally permit quite rapid growth of private consumption. But only if the balance of payments could be allowed to go into mass1.v:e deficit (as under (b) and (c) in Table V-3) could consumption grow as fasL as output. If a reasonable balance of payments position is to be achieved (as for example under (a) in the Table), the average growth of consumption will have to be restrained to abcut 3% per year, considerably less than the assumed 4~% per year growth ~f G.D.P., in order to leave adequate resources for private inves:m2m:, stockbu1.lding and net exports. 15. Under the slow growth assumption, Taoie \1-3 shcws a very luw a-v-erage growth rate of consumption (1.3% par year under (a) in the Table) unless the balance of payments could be aLowea .::o fun .:...ntv huge deficit, 16. The main squeeze on private c::msu.npr..;.::.n :Jmc.s in 1973-4" Whether under the fast or slOi..r growth assumpt.i.Jns, there w;:;u~d be ...a:cge 1.ncrea:;es in investment and stockbuilding in tnese two ye&rs as c.omp.:.red witn 1972. Pubiic expenditure is also forecast to rise particularlj f.:.st. If progress is to be made towards putting the balance of payments to rights, there will have to be a virtual standstill in private consumption for at least the nex-c year because it is already over 3% higher than the average level in 1972" 17. Once the disposition of resources has been put into a more sustainable pattern, with larger provision for investment and net exports, private consumption could of course be allowed to start to grow once more at almost the same rate as G.D.P. Consumption and fiscal policy 18. The real income of the personal sector var1.es 1n relation to G.D.P. not only because of taxation and transfers from the public authorities but also on account of changes in the ratio of import. pri~es to domestic prices and because l V-8 of variations in the share of income accruing to companies as undistributed profits. To see how the growth of personal income and hence consumption may have to be stimulated or restrained relative to G.D.P. we have made estimates of the likely effect of some of these influences on personal consumption. 19. The projections already described in the preceding section show required levels of private consumption, under alternative assumptions about the future growth of G.D.P. and exchange rate movements, needed to provide the assumed growth of demand. Estimates can also be made of the levels of consumption which would be generated by the assumed growth of G.D.P. on specified assumptions about fiscal policy, import prices and the.distribution of income between companies and the personal sector. The projections of generated consumption in this paper allow for changes in the share of income retained by companies which occur because of changes in the pressure of demand; but they assume a constant personal savings ratio, a constant ratio of net taxation to income and constant relationships between import prices, export prices (which also affect company profits) and domestic prices. The projections start from the actual ratio of consumption to G.D.P. in 1972. 20. The difference between required and generated consumption (the 'initial consumption gap') must be assumed to be closed either by changes in the ratio of net taxation to income or by movements of import and export prices relative to domestic prices. The effects of the latter ('terms of trade' effects) have been calculated on the same assumptions as in our earlier paper. Figures for the terms of trade effect can be used to show how much of the initial gap remains to be closed by fiscal monetary action. 21. Appendix Table 15 gives detailed projections of the initial consumption gap and terms of trade effects for 1972-76 under various assumptions about the growth of G.D.P. and movements of the exchange rate. Par figures are shown in Table V-4 below. Already in 1972 there is an initial consumption gap V-9 because of the need to make more resources available for investment and the balance of trade; the less favourable terms of trade in the par economy (because of the lower level of relative costs needed to achieve sufficient export growth) would largely have closed this initial gap. This imp lies that the actual effects of net taxation on consumption for 1972 as a whole were not very different from par requirements; but of course the average for the year only reflects a part of the large tax reductions in the budget and by comparison with the present position the par economy would require tighter fiscal policy. Table V-4 Par consumption and fiscal policy (£ million, 1963 prices) 1972 1973 1974 1975 1976 Required consumption 25202 25618 26326 27356 28495 Generated(!) Initial consumption gap 25942 26687 27494 28472 29528 -740 -1069 -1168 -1116 -1033 Terms of( 2) t~ade Effect -576 -748 -915 -1072 -1230 Fiscal (3) policy Effect -164 -321 .:...253 -44 197 (1) Assuming the same ratios of net taxation to income and the same relationship between import and export prices and domestic incomes as foT the actual economy in 1972. (2) The effects on generated consumption of differences between par and actual 1972 import and export prices (relative to domestic incomes). (3) Additional effects on generated consumption required to make it equal to required levels. See Appendix foT more detailed explanations. · v-10 22. The par estimates. for 1973-76 show an increasingly deflationary terms of trade effect because of the need for continued reductions in relative costs to maintain the external position. The projections suggest that very slight fiscal stimulus might be needed after 1973 to keep demand growing at the par rate. 23. The par figures show the implications of assuming that the economy follows a path of steady growth and balance of payments equilibrium. Alternative projections starting from the actual position in 1972 (see Appendix Table 15) have quite different implications for the consumption gap and fiscal policy, depending on what is assumed to .happen to the balance of payments. Without large devaluation continued fiscal stimulus is required t~ sustain the growth of demand in the face of rapidly widening deficits on trade in goods and services. If very large devaluations are assumed, the growth of consumption must be restrained in order to leave room for fast growth of exports within the assumed overall totals for G.D.P; most of the necessary deflation of domestic demand is projected to come from the terms of trade effect.  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 V Public Expenditure, Investment and Private Consumption Creator An entity primarily responsible for making the resource CEPG Source A related resource from which the described resource is derived Prospects for Economic Management 1972 - 76, pages V-1 to V-10 Date A point or period of time associated with an event in the lifecycle of the resource 1973