British economic policy in 1977 was conducted for the most part within the confines of the undertakings given to the IMF in the Letter of Intent of December 1976. Partly as a result, output stagnated almost completely and unemployment rose slowly and erratically by a further 100 thousand during the year. The operation of Stage II of the pay policy during the first half of the year and the almost universal acceptance of the 10 per cent settlements guideline during the second half meant that the wage and salary bill was just under 10 per cent higher in 1977 than in 1976, compared with an increase of over 13 per cent in the previous year. Import prices rose by 16 per cent year-on-year (partly because of the sharp effective depreciation of sterling in late 1976) but the rate of consumer price inflation slowed a little, from 15 1/2 per cent during 1976 (that is, between the final quarters of 1975 and 1976) to just over 14 per cent last year. Despite the virtual stagnation of home demand, the depreciation of sterling (the effective rate was 5 per cent lower on average in 1977 than in 1976) and the net increase in the North Sea oil benefit from about £0.5 billion in 1976 to over £2 billion in 1977, the current account of the balance of payments reached only bare balance (from a 1976 deficit of just over £1 billion).

The state of the economy in 1977 was described in Chapter I. In the first quarter of this year, there have been two connected developments which have significantly altered the picture of the very recent past and the immediate future which we presented in the February Review. The first is that the current balance on external account in the first quarter is now estimated to have been in deficit by over £200 million compared with the surplus of some £500 million which we expected in February. This represented a massive deterioration—of nearly £600 million—from the last quarter of 1977. The second is that, probably in consequence, the exchange rate fell sharply during the quarter, and ended April (in IMF weighted terms) at 62.5, or roughly the level ruling before last autumn's sharp appreciation. In February, on the basis of the forecast current account surplus, we had expected the rate to appreciate a little further in early 1978.

The growth of output in the industrial countries continues to lag behind their oflicial targets and our own expectations (see the appendix). More complete data confirm our February estimate that aggregate production in the OECD area increased by only about 3½ per cent in 1977, leaving unemployment higher at the end of the year than at the beginning in all major countries other than the United States. Even allowing for measures of fiscal stimulation in most of the major countries we do not expect much change in either 1978 or 1979. Growth should be rather faster in Western Europe (particularly this year in the United Kingdom and next year in France, Italy and some of the smaller countries), but we expect these accelerations to be roughly balanced by progressively smaller increases in output in the United States.

There is now, of course, no official medium-term National Plan. The Government in recent years has published very little about possible medium-term developments. In the Public Expenditure White Paper, from December 1972 up to February 1976, there was a single table outlining the possible evolution of the economy over the four-year period which the public expenditure forward estimates cover. In the last two public expenditure white papers, even this single table has been dropped. In the latest paper there is the highly tentative suggestion that gross domestic product might rise at 3½ per cent a year up to 1979-80—but nothing is said about the macro-economic assumptions for later years. There is now no table showing the distribution of resources which might accompany this growth-rate—merely a text reference which says that ‘a rise in the proportion of national income devoted to industrial investment is essential…’

The economists at the Federal Reserve Bank of St Louis in the United States have produced over a number of years a series of models which amount to a reassertion of the short-run quantity theory of money. This theory has been summarised by Tobin as ‘in the short-run, nominal income is proportional to the supply of money, although changes in nominal income may affect output as well as prices’. In other words, it is postulated that in the short-run there is a large and rapid influence of monetary actions on nominal income relative to that of fiscal actions and, indeed, that fiscal action unaccompanied by changes in money has little net effect on national output even in the short-run. This is an extreme version of the monetarist position, given that most monetarists, including Friedman, choose to work in the framework of the long-run rather than the shortrun quantity theory.