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Chapter I. The Home Economy
Published online by Cambridge University Press: 26 March 2020
Abstract
This chapter is in two parts. The first part contains discussion of the current situation and a short-term forecast to end-1987. The second part looks at the medium term, beginning with an analysis of probable trends in public expenditure over the next five years. The medium-term outlook for the rest of the world is discussed in chapter II.
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- Copyright © 1985 National Institute of Economic and Social Research
References
(1) An article in the July 1985 issue of Economic Trends gives an analysis of revisions to GDP growth rates since 1971. These were upwards on average. However, since the CSO regularly reviews its methods of compiling the figures (e.g. the first estimates of manufacturing production now incorporate a standard allowance for under-recording), it is by no means certain that past experience with revisions will be repeated.
(2) The relationship between answers to the CBI Survey question on the trend in output over the previous four months and movements in the index of manufacturing production is analysed in ‘The Quantification of Survey Data on Expectations’ by Simon Wren- Lewis in the last issue of the Review.
(3) But for the miners' strike, which subtracted over 1 per cent from the rise in GDP in 1984 and added almost as much to it in 1985, growth would have been of the order of 4 per cent in 1984 and probably 2½ per cent in 1985.
(1) Statistical Appendix, table 15.
(1) The Department of Employment's index of unit wage costs in the whole economy, published in the Employment Gazette, is calcu lated using the income, rather than output, estimate of GDP as the denominator. This index shows a lower increase of 3½-4 per cent.
(1) It would be helpful if the CSO would publish a series covering only those corporations which have never been under public ownership.
(2) The highly provisional nature of the employment estimates should, however, be borne in mind.
(1) Projections of the numbers on the various schemes are given in table 5, p. 8, of the May 1985 Review.
(1) See last November's Review, pp. 20-1. The detailed methodol ogy is described in M.S. Levitt and M.A.S. Joyce, ‘Public Expenditure : The next ten years', National Institute Discussion Paper no. 76.
(2) This is in spite of our assumption now that all public services wages rise in line with pay in the rest of the economy; we pre viously assumed that only the pay of doctors, nurses, the armed forces and the police would do so.
(3) See M.S. Levitt, ‘The Economics of Defence Spending’, National Institute Discussion Paper, no. 92.
(4) Levitt, ibid.
(1) See M. A. S. Joyce, ‘Spending on Law and Order: the Police Service in England and Wales’, National Institute Discussion Paper, no. 104.
(1) The abolition of SERPS would not lead to a very substantial revision of this projection since expenditure on this scheme builds up relatively slowly (the effect of its abolition would also be partly offset by increased supplementary and housing benefits). Larger savings could result if the government chose not to uprate all means-tested benefits in line with prices.
(1) This factor is based on material given in a paper by R. Jackman, R. Layard and C. Pissarides, ‘On Vacancies’, Centre for Labour Economics, LSE, Discussion paper no. 165.
(1) There are other possible explanations of this shift. One is that it reflects mismatches in the labour market between, for example, the skills demanded and supplied and the industrial and geographical distribution of vacancies and unemployment. Another is that it reflects an increase in turnover. However, the evidence, surveyed in Jackman, Layard and Pissarides (op.cit.) does not appear to support either of these possibilities.
(2) The stock of capital is sometimes measured by the gross stock, which assumes that capital goods are equally productive throughout their life, and sometimes by the net stock, which makes an allowance for capital consumption. The CSO's estimates of both concepts, which are considered among the least reliable of all economic statistics, show a slowing down in the rate of increase in the capital stock. The gross stock grew at a rate of 3 per cent a year between 1974 and 1979 and 2-2½ per cent between 1979 and 1984. The net stock grew 3¼ per cent a year between 1974 and 1979 and 1 3/4 per cent between 1979 and 1984. A lower growth of the net than of the gross stock is typical when the level of gross investment has fallen. Both concepts (which are based on the assumption that the average lives of particular assets are of fixed length) may tend to overstate the growth in the output potential of fixed capital, since the long period of production at low capacity rates after 1979 probably resulted in accelerated decay of the capital stock—through premature scrapping of machines, factory closures and neglect of the usual maintenance procedures.
(3)This observation is confirmed by answers to the question in the same survey about the existence of spare capacity in firms. It is worth remarking however that the fall in spare capacity comparing 1985 with 1979 seems concentrated in industries in which recent output growth has been relatively low.
(1) ‘Labour force outlook for Great Britain’, Employment Gazette, July 1985.
(1) We assume no change in the numbers covered by special employment and training programmes after 1987/8.
(2)The ‘real’ exchange rate that is assumed constant is defined in terms of the relative price of manufactures—so that while domestic prices would be little affected by movements in overseas prices of manufactures, they would be affected by swings in the terms of trade between manufactures and non-manufactures.
(3) Chapter III looks in detail at the pattern of import penetration by industry.
(1) Bank of England Quarterly Bulletin, September 1985.
(1) It is worth remarking, however, that the wider significance of this inflow for the economy is a matter of conjecture. As we have seen, it may not represent very well the underlying yield of net assets held abroad, so its contribution to national income is uncertain. It does not give any guide as to the balance of supply and demand for sterling, since the yield on both direct and portfolio investment is more often than not reinvested abroad so its contribution to the solution of an emerging problem of trade imbalance is also uncer tain. It will no doubt increase both directly and indirectly the perma nent income or wealth of the UK personal sector, but (finally) its effect on consumer spending or investment demand in the UK is also very uncertain and could perhaps be very weak.
(2) Financial Statement and Budget report 1985-86, HM Treasury, 1985.
(3) The innovation of publishing a forecast on the basis of policy assumptions which are not disclosed seems to us regrettable.