ABSTRACT

Nor is this simply a matter of short-run fluctuations; we have to face an even more important problem of longer-run variations in real living standards, owing to the fact that the balance of international trade adjusts only slowly to the foreign-exchange measures taken to control it. During a period of balance-of-trade deficit, our policy implies that tax rates should be low in order to stimulate domestic consumption demands and thus offset the low demand for UK products in export and import competing markets; with the subsequent restoration of the balance of trade, taxes must be raised in order to restrain consumers' demands to offset the restoration of net foreign demand. As a result, under our policies during the period 1975-77, when UK balance of payments was in deficit, the standard of living would have risen much more than could be justified merely by increased domestic productivity; but it would have had to be cut back very sharply in the years 1978-81 as our balance of payments was restored to equilibrium. This problem, and its possible treatment through the structural forward planning of elements of expenditure on UK products other than consumers' demands, is discussed in Section 3 of Chapter VI.