Economic progress report. No. 35

              No. 35  DECEMBER 1967      ECONOMIC
DEA progress report
PREPARED BY THE DEPARTMENT OF ECONOMIC AFFAIRS IN CONSULTATION WITH OTHER GOVERNMENT DEPARTMENTS
WHAT DEVALUATION MEANS
The devaluation of the pound and the measures to restrict home demand, announced by the Chancellor of the Exchequer on 18 November, are designed to bring about a lasting improvement in our balance of payments.
The lowering of the exchange rate of the pound by 14.3 per cent (from $2.80 to the £ down to $2.40 to the £) means that the pound is worth less in terms of foreign currencies. For example, it will cost us in Britain 16.7 per cent more in pounds to buy a given amount of dollars while Americans will find that the pound costs them 14.3 per cent less in terms of dollars than before. In other words, our imports will cost us more in terms of sterling and our exports will become cheaper for people abroad to buy in terms of their own currencies. There will be more incentive for people abroad to buy our exports and less incentive for us to buy imports. Devaluation will therefore be a powerful factor in improving our balance of payments.
A boost for exports
The major advantage of devaluation lies in the boost it will give to British exports. Exports will be more rewarding compared with home sales, and firms will be well placed to achieve a decisive breakthrough. This they can do by adopting the correct marketing tactics for their particular products and markets — whether by cutting export prices, strengthening overseas marketing, sales and after-sales service, or spending more on product design and investment. The President of the Board of Trade is to have urgent discussions with the CBI and the British National Export Council on the best way of following up inquiries from overseas for British goods. The Board of Trade's export intelligence services are being strengthened to help both established exporters and firms breaking into overseas markets for the first time.
To ensure that the benefits of devaluation are not wasted, the Government will continue to pursue with vigour the policies for increasing productivity and efficiency throughout the economy. The effect of devaluation on orders won by our manufacturers is likely to come soon, but the effect on goods actually despatched from our ports will be slower. It is estimated that the improvement in the balance of payments may build up to some £500 million a year, with a strong forward surge in exports during 1968.
Effect on prices
Devaluation will cause a rise in certain prices as a result of the increase in the sterling cost of our imports. But the rise in the cost of living will be very much less than the 14 per cent change in the exchange rate. Although prices of certain goods imported from abroad may go up noticeably, the average level of import prices is unlikely to rise by the full extent of the devaluation. Also, import costs are only a part of the total cost of the goods and services we buy. Furthermore, some countries which supply us with an important part of our food imports have decided to devalue their own currencies and there will be no, or very little, increase in the sterling cost of our imports from them (for example, New Zealand, Denmark and the Irish Republic). After taking these factors into account, it is estimated that the effects of devaluation will raise the cost of living by approximately 3 per cent (about 7 1/2d in the £). The rise in food prices will come quite quickly, but elsewhere it is expected that price increases will take some months to work their way through. These increases will not occur all at once. In addition to these increases there is likely to be some increase in prices next year which can be justified under the criteria set out in the White Paper, Prices and Incomes Policy after 30th June, 1967.
The Government have said that they will maintain a careful check on the movement of prices in the coming months to ensure that there are no unnecessary increases. Because some rise in prices is unavoidable, the Government have stated that they will take any necessary steps to protect the most vulnerable sections of the community.
If the competitive advantages of devaluation are to last, it is essential that price increases do not lead to consequential wage increases. The productivity, prices and incomes policy now becomes even more important. The Government have already begun consultations with the TUC and CBI to ensure that the existing prices and incomes policy measures up to the needs of the new situation. The TUC General Council have approved a statement endorsing the objectives of devaluation. A strict watch will be kept on dividends and capital gains; corporation tax will be raised by 2 1/2 points to 42 1/2 per cent in next year's Budget.
Effect on the home economy
The measures taken to restrain the growth of home demand include the increase in bank rate to 8 per cent,
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