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The original documents are located in Box B113, folder "United Kingdom General,
1971-77 (2)" of the Arthur Burns Papers at the Gerald R. Ford Presidential Library.
Copyright Notice
The copyright law of the United States (Title 17, United States Code) governs the making of
photocopies or other reproductions of copyrighted material. Gerald R. Ford donated to the United
States of America his copyrights in all of his unpublished writings in National Archives collections.
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domain. The copyrights to materials written by other individuals or organizations are presumed to
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copyright claim, please contact the Gerald R. Ford Presidential Library.
Digitized from Box B113 of the Arthur Burns Papers at the Gerald R. Ford Presidential Library
NATIONAL ARCHIVES AND RECORDS SERVICE
WITHDRAWAL SHEET (PRESIDENTIAL LIBRARIES)
FORM OF
CORRESPONDENTS OR TITLE
DATE
RESTRICTION
DOCUMENT
1. memo case, Reynolds to Board of Governors, 11/23/76
la. table
The External Financial Position of the U.K. Public
11/16/76
C(A)
Sector (2 pp. )
2. memo case, Reynolds to Board of Governors, 1/28/77
2a. memo
R. H. Mills, Jr. to Mr. Reynolds, re $1. 5 billion
1/28/77
C
Eurodollar loan to Britain (3 pp.)
3. memo
R. H. Mills, Jr. to Ted Truman re Euro-dollar loan
1/27/77
C
to United Kingdom (2 pp.
4. memo
copy of item 2a (3 pp.)
1/28/77
C
5. memo
Ted Truman to Burns re Euro-dollar loan to U.K (2 pp. ) 2/15/77
C
FILE LOCATION
Arthur Burns Papers
SR
Federal Reserve Board Subject File, Box B113
11/2/84
United Kingdom: General, Nov. 1976-1977
RESTRICTION CODES
(A) Closed by Executive Order 12065 governing access to national security information.
(B) Closed by statute or by the agency which originated the document.
(C) Closed in accordance with restrictions contained in the donor's deed of gift.
GENERAL SERVICES ADMINISTRATION
GSA FORM 7122 (REV. 1-81)
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date November 23, 1976
To
Board of Governors
Subject: Attached Material on the
From
John E. Reynolds
United Kingdom
The attached papers supplement David Howard's November 15
briefing on the United Kingdom.
Attachments
ACTION REPORT
DATE
SUMMARY
CONTACT
PHONE
PLAYERS
ACTION TAKEN
DATE
ACTION
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date November 23, 1976
To
Mr. Reynolds
Subject: Attached Material on the
From
David H. Howard
United Kingdom
The attached papers present background information on the
United Kingdom. For your convenience, a copy of my November 15, 1976
Board briefing on the United Kingdom is also attached.
Attachments: (1) Monetary Policy in the United Kingdom.
(2) Domestic Credit Expansion in the United Kingdom.
(3) The U.K. Public Sector Borrowing Requirement.
(4) U.K. Public Expenditure.
(5) Major Policy Steps in the United Kingdom in 1976.
(6) The November 18 Measures.
(7) Sterling Balances.
(8) A Sterling Float.
(9) Note to Governor Wallich on the U.K.'s External
Assets and Liabilities.
(10) Note by Scott B. Brown: Assessment of the Impact
of North Sea Oil on the U.K. Balance of
Payments.
(11) U.K. Political Situation.
(12) Board Briefing, November 15, 1976.
(13) Economic and Financial Indicators.
David H. Howard
November 22, 1976
Monetary Policy in the United Kingdom
Broadly speaking, U.K. macroeconomic policy has two
purposes: bringing inflation down with a minimum cost in increased
unemployment; and shifting resources from the public sector into private
investment -- particularly investment in export industries. (The
note, "Major Policy Steps in the United Kingdom in 1976," presents
a chronology of recent policy measures.) This note outlines present U.K.
macroeconomic policies in general terms, and then discusses U.K. monetary
policy in more detail.
1. Present Policies
The United Kingdom is now pursuing a monetary policy based
upon a growth rate target for M3 of 12 per cent during the fiscal
year that began in April. The recent increases in the Minimum
Lending Rate and the rate of supplementary reserve deposits
were adopted to carry out this money growth target, rather than
as new policy steps. In the letter of intent to the IMF
in connection with the U.K.'s credit drawings earlier this year, the
U.K. government committed itself to a £9 billion increase in domestic
credit during the present fiscal year. (See the note, "Domestic
Credit Expansion in the United Kingdom" for an explanation of this
concept.)
In July, the U.K. government announced some spending cuts and
tax increases for the next fiscal year and, at the same time, forecast
a public sector borrowing requirement for this fiscal year of £11-1/2
billion (9 per cent of nominal GDP) and one of £9 billion (6 per cent
-2-
of GDP) for the next fiscal year. However, because of the
faltering recovery, the borrowing requirement under current
policies, may be as high as £11 billion (7.5 per cent of GDP)
next fiscal year.
The U.K. government has been successful in persuading
the U.K.'s powerful unions to accept an incomes policy that
roughly halved the rate of wage inflation during the first year
of the policy (through July 1976). The second phase of the
policy, in which wage increases are limited to an average of 4-1/2
per cent, was shaken by the settlement of a seamen's dispute that
seemed to point the way to a loophole in the policy (in the form of
fringe benefits). Nevertheless, the policy -- aided by high levels
of unemployment -- is expected to hold for a second year (through
July 1977), and again roughly halve the rate of wage inflation.
Other important aspects of U.K. economic policy include a
price control system that amounts to a price and profit monitoring
system, minimal -- at least so far -- trade restrictions, and an
industrial strategy aimed at the refurbishment of the capital stock
of British industry through government assistance.
2. The U.K. Money Supply Target
The quantitative money supply growth target in the United
Kingdom is aimed at three major objectives: (1) improvement of confidence,
particularly on foreign exchange markets; (2) imposition of a budget
restraint on the public sector; and (3) prevention of a renewal of
-3-
massive inflationary pressure. However, the state of monetary
economic science in the United Kingdom is such that there is no
way of knowing that any one number, e.g., 12 per cent, is an
appropriate target. In fact, one U.K. Treasury source claims
that the model used to formulate the target actually generated a
target range of 10-14 per cent (which was stipulated to be consistent
with likely private sector industrial investment) rather than the
announced 12 per cent (the mid-point of the range). Authorities
had so little confidence even in the 10-14 per cent rangethat they
did not want to commit themselves in public to it until after they
had gained some experience operating with a quantitative money
target. However, events forced their hand. Unfortunately, by
backing into a publicly-announced money target they have committed
themselves to a perhaps overly restrictive or at least overly
inflexible target without gaining the full favorable confidence/
expectations effects that a firm, early commitment might have had.
The 12 per cent M3 growth target, given M3 expansion through
October, implies a 5 per cent growth (S.A.A.R.) for the rest of the
fiscal year (9 per cent if a 14 per cent target is used). Given a
likely growth in nominal GDP of some 16 per cent (S.A.A.R.), monetary
policy will indeed be tight between now and next April if the U.K.
government is to succeed in hitting the target.
3. Control of the U.K. Money Supply
Besides the monetary squeeze necessitated by the 12 per cent
M3 target, there are several problems having to do with monetary control
-4-
that call into question the U.K.'s ability to adhere closely to any
specific quantitative money supply target.
The size of the public sector borrowing requirement has
made the control of monetary expansion difficult and has elevated
sales of government bonds to nonbanks to a position of extreme
importance.
Bond sales to nonbanks are important to monetary control
in the United Kingdom -- they are the equivalent of open-market
sales in the United States. However, a peculiar, self-imposed
constraint has impaired the Bank of England's ability to sell bonds
aggressively; thus, the government's broker in the past has usually
only followed the market price down, he has not usually initiated a
decline in price. The Bank considers it to be a breach of faith
with the market to sell at one price one day and then to sell at a
lower price the next day unless the going market price has come
down in the meantime "on its own accord.' In practice, however,
typically, and certainly lately, the price of bonds has not come
down on its own accord, but, rather, has declined. in response to
the government's manipulation of the Treasury bill rate and/or the
-5-
Minimum Lending Rate. However, raising short rates has the
immediate effect of narrowing the yield gap between short and
long rates and, other things being equal, actually encourages --
for awhile -- lenders to stay short rather than go long. Furthermore, the
present bond sales strategy is based upon selling on a rising
market, which means that rates of interest must be forced so high
that nearly everyone expects them to fall. Large amounts of sales of bonds
may require several interest rate cycles -- perhaps with increasing
amplitudes -- and with a quantified money supply target and borrowing
requirement forecast, it is at least questionable how effective
such a strategy is likely to be, since lenders in such a case are
not easily fooled.
Although there is some evidence that the government's
broker is becoming more flexible and even aggressive in his selling
techniques, the basic sales strategy has not changed, as witnessed
by the October changes in the Minimum Lending Rate. The October
measures show that the government is continuing to operate by way
of the short end of the market and that it is still trying to set
yields at such a high rate that lenders will expect that they can
move downward only.
4. Alternative Monetary Measures
If present monetary measures do not succeed in curbing
money supply growth sufficiently there are several options available
to the U.K. government. The most obvious one is to reduce the public
-6-
sector borrowing requirement and thus ease the burden on monetary
policy. Monetary policy options include credit controls (such as
those imposed on November 18), import deposits, higher rates of
supplementary reserve deposits, higher interest rates, and new
techniques of bond sales. Of course, the money supply target itself
could be changed. It is probably too late to change the public
sector borrowing requirement for the current fiscal year and the
monetary policy options mentioned above would make the present
private credit conditions still tighter and thus endanger the U.K.'s
medium-term economic growth prospects.
A reasonable alternative to further tightening of bank
lending to the private sector for investment purposes would be for
the U.K. authorities to operate as if the 12 per cent target were
a 10-14 per cent target range. On the basis of the discussion of the
apparent origin of the 12 per cent figure in section 2 above, it would
appear that a target of 10-14 per cent would not represent a substantive
change of policy, although it might be viewed as a softening of policy. A
14 per cent upper limit would mean that M3 growth during the remainder
of the fiscal year could be 9 per cent (S.A.A.R.) rather than the
5 per cent (S.A.A.R.) implied by the 12 per cent target. 10 per cent
growth is still fairly restrictive but achieving it probably would
not constitute as much of a danger to private investment as would the 6
per cent figure.
For next fiscal year, however, further cuts in the borrowing
requirement would be useful since its size is the fundamental cause
of the U.K.'s present difficulties of monetary control.
David H. Howard
November 22, 1976
Domestic Credit Expansion in the United Kingdom
In an open economy such as the U.K.'s, published money stock
statistics are not always an adequate indicator of monetary conditions
since an external deficit (surplus) tends to reduce (increase) the re-
corded rate of growth of the money supply. The concept of domestic
credit expansion (D.C.E.) has been developed to adjust the recorded
change in the domestic money supply for the effects of the external
deficit or surplus; that is, D.C.E. is an adjusted money supply growth
indicator.
Broadly speaking, D.C.E. is the increase in the money supply
plus official financing (i.e., overseas lending to public sector and
change in reserves). However, several idiosyncrasies of U.K. data
series complicate the actual computational formulae for D.C.E.
Of these formulae, the simplest is:
(1) D.C.E. = public sector borrowing requirement
less sales of public sector debt to
non-bank private sector
plus bank lending to the private sector.
Unfortunately, not all of these data are available as promptly or as
frequently as one would like. Formulae employing more rapidly and
frequently available data are:
(2) D.C.E. = bank lending to public sector
plus bank lending to private sector
plus increase in notes and coin in circulation with public
plus overseas lending to public sector;
- 2 -
(3) D.C.E. = increase in M3
plus overseas lending to public sector
plus some adjustments;
and,
(4) D.C.E. = official financing
plus bank lending to public and private
sectors, and in sterling to overseas
plus increase in currency in circulation
with the public.
For the purposes of determining the domestic impact
of a given D.C.E. target, formula (1) is perhaps the most useful since,
typically, a public sector borrowing requirement will be given also.
However, for the purposes of determining a rough D.C.E. target, it is
probably best to think in terms of the sum of desirable M3 expansion
plus a desirable amount of official financing.
GERAL
David H. Howard
November 22, 1976
The U.K. Public Sector Borrowing Requirement
A great deal of the concern about the future of the U.K.
economy has centered on the size of the public sector borrowing
requirement (PSBR). During the fiscal year 1975-76, the PSBR was
£10-1/2 billion -- about 10 per cent of nominal GDP (at market
prices). For the current fiscal year that began April 1, the U.K.
government expects the PSBR to be £11-1/2 billion, greater in
absolute terms but one percentage point less than last year's PSBR
as a per cent of nominal GDP. (See Table 1 for past data on the PSBR.)
The PSBR is usually interpreted as the government budget deficit and
often compared with other countries' budget deficits. This comparison
usually indicates that the U.K.'s budget deficit as a percentage of GDP
exceeds substantially the budget deficits of most other industrial
countries. Such a comparison can be misleading, however, -- and hence
any derived conclusions may be erroneous -- unless the PSBR concept is
clearly understood. This note discusses the PSBR concept.
The U.K. public sector accounts include the central government,
local governments, the social security system, and public enterprises
(nationalized industries). The inclusion of nationalized industries
is in marked contrast with practice in many other countries where such
industries are partly or wholly excluded from the public sector accounts.
The relative importance of public enterprises in the U.K. economy --
GERALD
-2-
during recent years their capital expenditures have been about 3-4
per cent of GDP -- can lead to a significant overstatement of the
size of the U.K. public sector relative to that of other countries.
Since public enterprises, like their private counterparts, typically
borrow to finance some of their investment, inclusion of such
enterprises in the public sector accounts tends to overstate the
U.K. borrowing requirement relative to those reported by other
countries. Furthermore, the PSBR includes borrowing done by the
public sector to finance loans to other sectors of the economy and,
thus, is not strictly comparable to budget deficits reported by some
other countries (although some lending of this type is included in
the U.S. federal budget).
It is important to distinguish between two concepts of the
public sector deficit: the PSBR and what is called the public
sector financial deficit (PSFD). The PSBR and the PSFD are defined
as follows:
PSFD = current government expenditure
+ public capital expenditure on physical assets
+ net public capital transfer payments
- government receipts.
PSBR = PSFD
+ net lending to other sectors.
There are also central government analogues to the PSBR and
PSFD called the central government borrowing requirement (CGBR), which
includes net lending to local government and public enterprises, and
the central government financial deficit (CGFD).
-3-
Most interest both inside and outside the United Kingdom
centers on the public sector borrowing requirement rather than on
the public sector financial deficit, probably because the PSBR is the
more relevant concept for considering the potential for governmental
monetary expansion. However, with regard to crowding-out it can be
argued that the PSFD is the concept of interest since it excludes
government lending to other sectors. Furthermore, a case can be made
for excluding borrowing for capital expenditures by nationalized
industries because some of such borrowing would take place even if
the industries involved were in the private sector. On the other hand,
the U.K. public sector conducts its lending to the other sectors and
runs the nationalized industries in a way that in some respects
resembles a social welfare program (e.g., as a means of preserving
specific jobs). The existence of lending to other sectors and the
relative importance of public enterprise capital expenditures means that
the PSBR figure exaggerates the potential crowding-out -- both financial
and "real" -- but correcting for this bias is not easy. Simply
deducting the items mentioned would tend to underestimate the potential
crowding-out problem. Under these circumstances it might seem best
to continue to concentrate on the PSBR, particularly since nearly all
public discussion pertains to this magnitude, but to remember that it
tends to exaggerate any potential crowding-out problems.
An additional problem in interpreting the U.K. data is that
the PSBR and PSFD as reported are not cyclically adjusted. The U.K.
-4-
government does not calculate a "full-employment" budget. However, the
National Institute of Economic and Social Research estimates that the
PSBR during this fiscal year and the next are roughly 7 per cent and
4 per cent of nominal GDP (respectively) on a cyclically-adjusted
basis, compared with 9 per cent and 6 per cent on an unadjusted basis.
Lending to other sectors represents about 1 per cent of nominal GDP.
In addition, since nationalized industries' fixed capital
expenditures are included when calculating the PSBR, even a fiscally
neutral PSBR, i.e., a "balanced" budget, would probably involve a
sizeable deficit in order to reflect that amount of borrowing for
industrial investment that would take place even if the nationalized
industries were in the private sector. Thus, some of the remaining
cyclically-adjusted deficit merely reflects the public sector
accounting system used.
David H. Howard
November 22, 1976
U.K. Public Expenditure
The amount of public sector spending and the size of the
U.K. public sector are considered below in section 1. The second
section is concerned with the problem of public expenditure control
in the United Kingdom.
1. The Size of the Public Sector
The argument has been made that the U.K. public sector is
"too big" and is a basic cause of much of the U.K.'s present economic
difficulties. In fact, the present Labour government seems to accept
this argument at least in part. However, even quantifying the size of
the public sector -- let alone deciding on a limit beyond which the
public sector would be "too big" -- is fraught with difficulties. Per-
haps the best approach is to look at several different definitions of
the public sector's size and observe the trends. The attached Table 1
presents such an exercise. The various measures of the size of the pub-
lic sector presented in the table indicate a trend toward a larger public
sector, and that this trend cannot be explained by changes in nationalized
industries. The conclusion to be drawn from Table 1 is that the amount of
resources claimed or allocated by the government, relative to GDP, has been
increasing in the United Kingdom.
GERALD
-2-
2. Public Expenditure Control
Traditionally, U.K. public spending plans have been made
in "real" terms, i.e., in constant prices. In an inflationary
environment this means that the nominal amount of government spending
increases with inflation and that government spending units
have little incentive to resist price (and wage) increases. Recently,
prices paid by the government have increased relatively more than
have prices in general, thus increasing still further the amount of
nominal government spending. The U.K. government has realized this
problem and recently (in April) instituted a cash limits system,
starting in the current fiscal year, whereby most real spending plans
are translated into nominal spending ceilings based on an assumed rate
of inflation. If inflation exceeds the assumed rate, the cash limits
remain in effect and thus real spending must be reduced. Inflation
during the present fiscal year is exceeding the rate assumed when
the cash limits were calculated; and the U.K. government has recently
announced its intention not to revise the limits.
A major factor in the recent increase in total U.K. public spend-
ing has been the spending by local governments. The central government does
not directly control local spending but it does control the amount of budget
subsidy that each local government body receives as well as its borrowing
activity. Until recently this subsidy made up any shortfall between
local current spending and local revenues (borrowing is limited to
capital expenditures). The central government now appears determined
to hold the line on the subsidies to local governments and, failing an
increase in local taxes (property taxes), local government spending
should now be under better control.
Table 1
Indicators of the Size of the U.K. Public Sector
d
Public Sector Expenditures
Public Corporations
Expenditures on
Gross Domestic Fixed
(as a per cent of nominal
Wages and Salaries, etc.
Capital Formation
GDP at market prices)
as a per cent of:
as a per cent of:
Total Gross
Goods and
Total Labor
Domestic Fixed
a
Total
Services
b
Consumptionᶜ
Income
GDP
Capital Formation
GDP
1964
38.5
24.5
16.6
10.3
6.1
19.6
3.6
1965
39.7
24.8
17.0
10.0
6.0
19.9
3.6
1966
40.3
25.7
17.3
9.7
5.8
21.1
3.8
1967
43.7
27.4
18.1
10.1
6.0
22.2
4.1
1968
44.1
26.7
17.8
10.4
6.1
19.8
3.7
1969
42.7
25.5
17.5
10.2
6.0
17.4
3.2
1970
43.1
26.2
17.9
10.1
6.0
17.9
3.3
1971
43.0
26.4
18.3
10.1
6.0
17.9
3.3
1972
43.6
26.3
18.7
10.3
6.2
15.4
2.8
1973
44.9
26.7
18.7
10.0
6.0
14.8
2.9
1974
51.6
29.7
20.7
10.4
6.8e
16.6
3.3
1975
53.2
31.8
22.4
n.a.
n.a.
18.7
3.7
Notes:
a.
Includes all expenditures (including transfer payments and capital expenditures)
by the central government, local authorities, and nationalized industries,
except current expenditures of nationalized industries.
b.
Excludes expenditures on transfer payments, debt interest, and loans to the
private sector and overseas.
c.
Excludes (in addition to the items mentioned in note b.) public sector invest-
ment, e.g., capital expenditures of nationalized industries.
d.
The public corporations, or nationalized industries, include: various public
utilities (i.e., coal, electricity, and gas), British Steel Corporation, the
Post Office (which includes telephone service), various air and surface trans-
portation industries, and British National Oil Corporation. (Note that these
are capital-intensive industries.) The Labour government is now in the process
of nationalizing the aircraft and shipbuilding industries.
e.
This mainly reflects public sector wage increases, but some minor local authority
functions were reclassified as public corporations in 1974 as well.
Sources:
Economic Trends; National Income and Expenditure.
GERALD
David H. Howard
November 22, 1976
Major Policy Steps in the United Kingdom in 1976
I. Monetary Policy
A. Special Deposits
1. January 19: The Bank of England temporarily reduced the rate
of special deposits (i.e., supplementary reserves deposited at
the Bank of England) from 3 to 2 per cent until February 10.
The measure was intended to offset the impact of large sales
of fixed-interest securities by the central government at a
time when substantial tax payments were coming due.
2. September 16: The Bank of England announced an increase in the
special deposit rate of 1 per cent, bringing the total rate of
special deposits to 4 per cent. The additional deposits were
made on the basis of 1/2 per cent on September 28 and
a further 1/2 per cent on October 6.
3. October 7: The Bank of England announced an increase in the
special deposit rate of 2 per cent, bringing the total rate of
special deposits to 6 per cent. The additional deposits are
to be made on the basis of 1 per cent on November 2 and 1 per
cent on December 14.
4. November 18: The Bank of England re-introduced the supplementary
special deposit scheme that sets a guideline for the growth of
the interest-bearing liabilities of banks and deposit-taking
institutions. The particular guidelines announced allow an
expansion of interest-bearing liabilities of 3 per cent during
the first 6 months and 1/2 per cent per month for the next 6 months.
- 2 -
B. Money Supply Growth
1. April 6: In his Budget message, Chancellor Healey was inter-
preted as implying a target rate of growth for M3 equal to the
rate of growth of nominal national income.
2. July 22: Chancellor Healey forecast a rate of growth for the
money supply of about 12 per cent for fiscal 1976-77 (i.e.,
the twelve months beginning April 1976). This forecast has
been widely interpreted as a target for M3 growth.
3. October 7: Government measures make it clear that the U.K.
authorities are indeed pursuing a monetary policy intended
to achieve a 12 per cent growth in M3 during the current fiscal
year.
C. Changes in the Minimum Lending Rate (MLR)
1. January 2:
MLR lowered from 11.25 to 11 per cent.
2. January 16:
MLR lowered from 11 to 10.75 per cent.
3. January 23:
MLR lowered from 10.75 to 10.5 per cent.
4. January 30:
MLR lowered from 10.5 to 10 per cent.
GERALD
5. February 6:
MLR lowered from 10 to 9,5 per cent.
6. February 27:
MLR lowered from 9.5 to 9.25 per cent.
7. March 5:
MLR lowered from 9.25 to 9 per cent.
8. April 23:
MLR raised from 9 to 10.5 per cent.
9. May 21:
MLR raised from 10.5 to 11.5 per cent.
10. September 10:
MLR raised from 11.5 to 13 per cent.
11. October 7:
MLR raised from 13 to 15 per cent. The usual
formula for pegging the MLR to the Treasury Bill Tender was
suspended.
12. November 19: MLR lowered from 15 to 14.75 per cent.
- 3 -
II. Fiscal Policy
1. February 19: The U.K. government published its spending plans for
each of the next four fiscal years (beginning April 1976).
Although there were some cuts in various programs, real public
spending was still scheduled to increase during each of the next
four years, albeit at a much slower rate than it had in the recent
past.
2. April 6: The U.K. government's Budget was presented to Parliament.
There were minor changes in taxation announced, but the Budget's
outstanding feature was its offer of personal tax relief conditional
on the size of the wage increase to be allowed under the second
phase of the U.K.'s incomes policy.
3. May 5: The U.K. government and the Trades Union Congress agreed
to a 4-1/2 per cent (on average) pay raise limit during the second
phase of the U.K. incomes policy (i.e., during the twelve months
starting August 1, 1976). In return, the government reduced
personal income taxes by some £930 million. The public sector
borrowing requirement was forecast to be £12 billion (9-1/2 per cent
of GDP at market prices).
4. July 22: The U.K. government announced plans to cut public sector
spending by £1 billion (in 1976 prices) during the fiscal year that
will begin April 1977. The government also proposed an increase
of two percentage points in employers' social security contributions
beginning April 1977. The increase will yield about £900 million
in additional revenue in fiscal 1977-78.
GERALD
- 4 -
At the same time, the U.K. government revised its forecast
of the public sector borrowing requirement in fiscal 1976-77
to be £11-1/2 billion (9 per cent of GDP). For fiscal 1977-78,
the public sector borrowing requirement is now forecast to be
about £9 billion (6 per cent of GDP).
III. Incomes Policy
August 1: Policy instituted whereby wage increases are limited to an
average of 4-1/2 per cent during the ensuing twelve months. Workers
making less than £50 per week are to receive a £2-1/2 per week raise;
those making £80 per week are to receive a £4 per week raise; and
those earning between £50 and £80 per week are to receive a five
per cent raise. This policy replaced the earlier guideline by which
all raises were limited to no more than £6 per week (about 10 per cent
of average weekly earnings). Price controls remain in effect but
have been liberalized somewhat.
FO
GERALD
David H. Howard
November 22, 1976
The November 18 Measures
On November 18 the British government announced a tightening
of exchange controls on U.K. banks and merchants and the re-introduction
of the supplementary special deposit scheme on the banking system and
deposit-taking institutions. This note is based upon early -- and sketchy --
news stories.
1. Exchange Control
In a move intended to support the pound sterling during the next
6 months and remove a potential source of pressure during any future sterling
crisis, the U.K. authorities have prohibited British banks and merchants
from lending domestic sterling to finance trade between foreign countries.
The banks and merchants may still use Eurosterling or foreign currency
to finance such trade. Previously, British banks and merchants were allowed
to lend sterling up to 6 months in order to finance trade involving residents
of the Overseas Sterling Area (roughly, the old Commonwealth). British banks
and merchants will still be able to finance in sterling U.K. trade as well as
that of Ireland and a few other countries. During the next 6 months, there
should be a reflow of several hundred million pounds sterling as previous
borrowings are paid and no new borrowing is allowed. Some repayments will be
accomplished by running down sterling balances, rather than by purchasing
sterling in the exchange markets.
2. Supplementary Special Deposit Scheme
In an effort to curb excessive money supply growth and in
particular to hit the 12 per cent M3 growth target, the U.K. authorities
- 2 -
have re-introduced the supplementary special deposit scheme that had been
in effect between December 1973 and February 1975. The scheme sets up a
guideline for the growth of the interest-bearing liabilities of each
bank and deposit-taking institution. The particular guidelines announced
November 18 allow an expansion of interest-bearing liabilities of 3 per
cent during the first 6 months and 1/2 per cent per month for the next 2
months. The base period for calculating the expansion will be the average
during the 3 months, August, September, and October. No supplementary de-
posits will be required during the first 6 months of the scheme, but after
that period 5 per cent of any excess of 0-3 per cent must be deposited with
the Bank of England; 25 per cent of a 3-5 per cent excess; and 50 per cent
of an excess larger than 5 per cent. The deposits do not bear interest.
The main purpose of the measures is to curb money supply growth.
Evidently the decision was made that conventional measures, for example,
sales of government bonds to non-banks (see the attached paper, 'Monetary
Policy in the United Kingdom") were inadequate and so the supplementary
special deposit scheme was reactivated.
333
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David H. Howard
November 22, 1976
Sterling Balances
1. The Problem
The term "sterling balances" refers to either (a) exchange
reserves in sterling held by central monetary institutions or (b) that
figure plus banking and money-market sterling liabilities to non-resident
holders other than central monetary institutions. As can be seen in
the attached tables, on either definition, sterling balances have declined
sharply this year due mainly to withdrawals by the central monetary
institutions of oil-exporting countries. The decline in their dollar
value this year was even steeper -- frombalances of all holders of
$14.8 billion at the end of December 1975, to $10.3 billion at the
end of September 1976.
The sterling balances are beyond the reach of present U.K.
exchange controls. They present a problem to the U.K. government because
they create uncertainty and instability on exchange markets due to their
size and actual or potential volatility. When the U.K. authorities are
trying to defend the exchange value of sterling, all of the sterling
balances, regardless of their maturity, are implicit short-term dollar
liabilities. The alternative to redeeming them with dollars is an
exchange depreciation.
In order to cope with the sterling balances, the U.K. govern-
ment has expressed its hope for international assistance in funding
the balances, i.e., restructuring the debt represented by the balances.
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- 2 -
2. Costs and Benefits of Funding Sterling Balances (to the United Kingdom)
The costs and benefits to the United Kingdom of funding the
sterling balances depend on the specific arrangements that might be
adopted. Transforming an implicit short-term dollar liability into an
explicit medium or long-term one is or is not profitable depending on
the relative rates of interest and expected changes in the sterling
exchange rate. However, the intangible benefits of removing the sterling
balances as an overhang on the market, e.g., the benefit from improved
confidence, would help to stabilize, or at least to normalize, the
exchange market for sterling.
Certain specific types of funding arrangements do have
identifiable disadvantages for the United Kingdom. An exchange-rate
guarantee can be costly when conventional purchasing power comparisons
suggest a depreciation is to be expected. Use of high interest rates
to avoid the depreciation (or the need for compensation) is also costly.
Another possible disadvantage is that if the United Kingdom assumes an
explicit dollar obligation, it loses the option of reducing the size of
the implicit dollar liability represented by the sterling balances
through exchange depreciation. (An option which was extremely successful
at reducing the size of sterling balances in dollar terms this year.)
3. Potential Sterling-Balance Withdrawals
As of end-September, total sterling balances were £ 6.2 billion
($10.3 billion at the current exchange rate) and thus would seem to pose
a massive threat to sterling's exchange rate. However, there are reasons
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- 3 -
to believe that potential withdrawals from sterling are quite a bit
less than £ 6.2 billion. First, sterling balances held by holders
other than central monetary institutions (£ 3.4 billion on September 30)
have been remarkably stable during this extremely turbulent year for
sterling, and have in fact risen lately. Since most of this amount is
held by banks and companies, it is reasonable to presume that they are
primarily "working balances." For this reason, plus their stability
so far this year, it might be assumed that, at most, £ .5 billion will
be withdrawn from these holdings during the next few years.
Turning to central monetary institutions, it is probably safe
to assume that holdings by EEC countries and international organizations
will be constant if only to avoid putting further pressure on the U.K.
situation. "Other countries" appear to have already adjusted their
holdings during the second quarter; it might be assumed that, at most,
another £ 100 million will be withdrawn by them. Of the oil exporters'
holdings, one might estimate that at least £ 200 million would be
needed as minimum working balances. Thus, £ 1.3 billion represents
the maximum amount of further withdrawals by the central monetary
institutions of the oil exporters; moreover, withdrawals of this size
would involve substantial liquidation of long-term holdings by the oil-
exporters which have been stable this year at about £ 700 million.
Therefore, a reasonable maximum estimate of the amount of sterling
balance withdrawals during the next few years would be £ 1.9 billion
($3.2 billion at the current exchange rate) consisting of £ 1.4 billion
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- 4 -
($2.34 billion) in balances held by central monetary institutions and
£ .5 billion ($.84 billion) in balances held by other non-residents.
4. The Sterling Balance Problem in 1977 and 1978
The U.K.'s current account deficit is likely to be about $2.5
billion in 1977 and near zero in 1978. Exchange controls limit the scope
for capital outflows (including, to an extent, further changes in the
timing of payments for commercial transactions) other than withdrawals
of sterling balances. Assuming capital outflows in 1977 and 1978 will
consist solely of sterling balance withdrawals -- the right domestic
policies might actually reverse the capital outflow experienced so far
this year -- the U.K. authorities would need $5.7 billion (i.e., to cover
the current account deficit plus maximum sterling balance withdrawals) to
keep the pound sterling approximately at its present value. (Intervention
sales of dollars to defend the exchange rate is, in effect, a method of
funding the sterling balances.)
The IMF loan, after repayment of drawings on the G-10 standby,
will provide Britain with $2.4 billion. So far in 1976, U.K. public
sector bodies have borrowed at an annual rate of $3 billion from
various Euro-market sources. Assuming that the United Kingdom can
continue to finance its current account deficit with Euro-currency loans --
in effect, consumption loans -- until North Sea oil production swings the
current account into surplus, some $2.5 billion from the Euro-market
might reasonably be available to the U.K. public sector in 1977. The
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- 5 -
remainder of the funds needed to finance the maximum likely external
deficit of $5.7 billion -- $.8 billion -- could be supplied from
existing reserves.
The above calculations suggest the conclusion that the
sterling balance problem might prove to be manageable in 1977 and 1978
without a special funding operation if the United Kingdom can continue
to borrow from the Euro-market in 1977 at roughly the 1976 rate. On
the other hand, such an operation might, if accompanied by appropriate
domestic economic policies, help to restore confidence in sterling and
contribute to a final long-run solution of the problem of sterling as
a reserve currency.
RESTRICTED
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November 22, 1976
Sterling holdings of non-residents held in
the United Kingdom (£ millions)
Short-term holdings 2 by
Total
Holdings of central monetary institutions
other non-residents
Holdings of
International
Non-oil
Óil exporters
1/
2/
End of Period
Total
1/
Oil exporters
Organizations
Total
exporters
(of which long-term)
1962
3,863
89
2,223
1,551
1963
4,102
105
2,335
1,662
1964
4.140
110
2,326
1,704
1965
4,074
104
2,214
1,756
1966
3,988
117
2,187
1,684
1967
3,690
101
2,001
1,588
1968
3,380
117
1,803
1,460
1969
3,726
173
2,146
1,407
1970
4,220
182
2,365
1,673
1971
5,622
210
3,030
2,382
1972
5,909
251
3,361
2,291
1973
5,934
300
3,379
2,420
959
(103)
2,255
314
1974
7,134
331
4,303
1,202
3,101
(423)
2,500
344
1975
7,330
386
3,716
877
2,838
(624)
3,228
466
1976 March
7,253
400
3,616
994
2,622
(703)
3,237
474
June
6,335
396
2,715
751
1,964
(721)
3,224
444
3/
Sept.
6,189
377
2,379
838
1,541
(714)
3,433
448
MEMORANDUM:
1976 Sept.
($ million)
10,336
630
3,973
1,399
2,573
(1,192)
5,733
748
1/ Excludes holdings of IBRD and other international institutions included in column (2).
2/ Includes some official agencies.
3/ Confidential until publication in mid-December 1976.
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Sterling Balances
Exchange Reserves in Sterling
Banking and Money-Market
Held by Central Monetary Institutions
Liabilities to Other External Hoiders
Government
External
Treasury
External
Treasury
Date
Total
Stocks
Deposits
Bills
Total
Deposits
Bills
1. Total:
1975: Dec. 31
4,102
1,143
1,698
1,261
3,228
3,202
26
1976: Mar. 31
4,016
1,133
1,503
1,380
3,237
3,229
8
June 30
3,111
1,134
1,081
896
3,224
3,213
11
Sept. 30
2,756
1,108
991
657
3,433
n.a.
n.a.
2. EEC:
1975: Dec. 31
124
25
46
53
774
752
22
1976: Mar. 31
171
27
29
115
750
746
4
June 30
113
27
43
43
776
770
6
Sept. 30
200
27
97
76
896
n.a.
n.a.
3. Oil Exporters:
1975: Dec. 31
2,839
624
1,382
833
466
466
-
1976: Mar. 31
2,622
703
1,147
772
474
474
1
June 30
1,964
721
784
459
444
444
-
Sept. 30
1,541
714
626
201
448
n.a.
n.a.
4.
Other Countries:
1975: Dec. 31
753
374
202
177
1,988
1,984
4
1976: Mar. 31
823
322
233
268
2,013
2,009
4
June 30
638
269
180
189
2,004
1,999
5
Sept. 30
638
251
211
176
2,089
n.a.
n.a.
5. International Organizations other than the IMF:
1975: Dec. 31
386
120
68
198
-
-
-
1976: Mar. 31
400
81
94
225
-
-
June 30
396
117
74
205
-
-
I
Sept. 30
377
116
57
204
-
-
-
David H. Howard
November 22, 1976
A Sterling Float
Despite intervention sales of nearly $7 billion, sterling
has fallen some 36 cents against the dollar since March 1, 1976.
The question arises as to whether the U.K. government should continue
its policy of "managed" floating or, instead, adopt one of "clean"
floating, i.e., little or no intervention.
The U.K.'s economic strategy is based in part on an export-
led recovery. Thus, it is of utmost importance that its exports be
competitive and, hence, that the exchange value of its currency be
realistic. A clean float would probably ensure a realistic
exchange rate. A clean float, of course, would economize
on foreign exchange reserves, and, in the U.K. case, would probably
further diminish the dollar value of the sterling balances. Finally,
one might reasonably expect private market participants to move into
sterling at some point and thus cushion sterling's fall even without
official intervention.
There are, however, several advantages of an intervention
policy that resists, if not arrests, sterling's decline. Any
depreciation of sterling raises the sterling price of imports and,
with a variable time lag, exports. Intervention sales avoid some of
these domestic price level effects, and thus reduce the inflation
rate -- at least temporarily. Such a consideration is of particular
importance in the United Kingdom where adherence to the incomes policy's
- 2 -
wage limits is generally perceived to depend greatly on the government's
success in reducing inflation in the short term. Another advantage,
in the U.K. case, is that intervention sales of dollars extinguish
external sterling balances (when, of course, one of the sources of the
pressure on sterling is from sterling balance holders). In effect,
intervention turns some short-term external sterling liabilities into
(typically) medium-term external dollar liabilities bearing lower
nominal rates of interest. (The extent to which the exchange market
pressure is met through intervention or depreciation affects the price
at which this type of refunding takes place.) Intervention sales of foreign
exchange also provide the government with sterling finance, and, by
strengthening the pound, they also dispel somewhat expectations of
interest rate increases and thereby encourage sales of government bonds.
Finally, intervention, by helping to finance a current-account deficit,
has brought forward some of the increased U.K. consumption made possible
by North Sea oil.
Besides the sale of foreign exchange, alternative intervention
methods available to the U.K. authorities include domestic interest
rate manipulation and import controls. There are three major dis-
advantages to using higher interest rates to protect sterling: (1)
such rates would perpetuate, or even increase, the sterling balance
problem; (2) higher domestic interest rates tend to discourage domestic
investment; and (3) the higher interest rates increase the future sterling
debt-service burden, but the sterling cost (i.e., the dollar interest
- 3 -
rate and the change in sterling's exchange value) of the funds used
in intervention sales must also be considered when choosing between
the two alternatives on this criterion.
Import controls would strengthen the exchange rate somewhat
but would tend to raise the domestic price level (via restricting
supply and substitution of more expensive domestic products) and thus
be counter to the ultimate goal of dampening the effect of depreciation on
inflation in the short run. Furthermore, import controls would promote
inefficiency in British industry and invite retaliation from abroad.
If it is true that the U.K. incomes policy and domestic
stability depend on minimizing the price-level effects of the pressure
on sterling, some amount of exchange market intervention appears to be
justified -- particularly since such intervention has the useful side-
benefit of reducing the long-run sterling balance problem. However, it
is important that intervention not be allowed to jeopardize the U.K.'s
export competitiveness since the viability and solvency of the U.K.
economy depend a great deal on a strong export performance in the
short and medium term.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date November 16, 1976
To
Governor Wallich
Subject: The U.K.'s external assets
From
David H. Howard
and liabilities
The attached tables summarize the U.K.'s external financial
position. Table 1 presents a complete accounting of the U.K.'s
external assets and liabilities as of the end of 1975, expressed in
sterling. The Bank of England publishes this information annually.
A detailed breakdown of the various entries is available in the
attached Bank of England Quarterly Bulletin article. Two of the
entries can be readily updated: "official reserves" at the end of
October were worth £3.0 billion (an increase of £.3 billion); and
"official financing liabilities" at the end of October were worth
£9.4 billion (an increase of £5 billion accounted for by a £1.2 billion
increase due to sterling's depreciation, as well as IMF and Eurocurrency
borrowings of £2.8 billion and G-10 standby drawings of £1 billion).
Table 2 presents details on official reserves and official
financing liabilities as of the end of October in dollar terms.
Table 2 also presents what information is available on the U.K.'s
potentially available financial resources, its estimated repayment
schedule in the 1970's, and the repayment schedule for major loans.
There is very little information on interest rates and payments.
Recent Eurocurrency borrowing has been at 1-1/4 per cent above interbank
rate, the interest rate for the IMF Oil Facility drawing is 7-3/4 per cent,
and 4-6 per cent (depending on time of repayment) for the IMF first
credit tranche.
-2-
In Table 1 some of the liabilities included in "total public
sector borrowing (other than official financing)" are a part of the
sterling balances. For your information, Table 3 presents the latest
information available on the sterling balances (the September figures
are confidential).
Attachments.
David H. Howard
November 16, 1976
Table 1
U.K. External Assets and Liabilities
(end-1975; £ billions)
I. External Assets
Private Sector
89.4
of which:
total private investment abroad
23.4
total banking and commercial claims
66.0
Public Sector
4.9
of which:
total public sector lending, etc.
2.2
official reserves
2.7
Total identified external assets
94.3
II. External Liabilities
Private Sector
81.8
of which:
total overseas investment in the private sector
14.1
total banking and commercial liabilities
67.7
Public Sector
10.7
of which:
total public sector borrowing (other than
official financing)2/
6.4
official financing liabilities
4.4
Total identified external liabilities
92.5
Notes: 1. Totals may not exactly equal the sum of their parts due to rounding.
2. Over 70 per cent of this entry consisted of sterling liabilities.
Source:
Bank of England Quarterly Bulletin, June 1976, pp. 206-211. The
article (attached) contains details on the various entries.
GERALD R. FORD LIBRARY
This form marks the file location of item number
la
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
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Table 3
Sterling Balances
Exchange Reserves in Sterling
Banking and Money-Market
Held by Central Monetary Institutions
Liabilities to Other External Hold
Government
External
Treasury
External
Treasury
Date
Total
Stocks
Deposits
Bills
Total
Deposits
Bills
1. Total:
1975: Dec. 31
4,102
1,143
1,698
1,261
3,228
3,202
26
1976: Mar. 31
4,016
1,133
1,503
1,380
3,237
3,229
8
June 30
3,111
1,134
1,081
896
3,224
3,213
11
Sept. 30
2,756
1,108
991
657
3,433
n.a.
n.a.
2. EEC:
1975: Dec. 31
124
25
46
53
774
752
22
1976: Mar. 31
171
27
29
115
750
746
4
June 30
113
27
43
43
776
770
6
Sept. 30
200
27
97
76
896
n.a.
n.a.
3. Oil Exporters:
1975: Dec. 31
2,839
624
1,382
833
466
466
-
1976: Mar. 31
2,622
703
1,147
772
474
474
-
June 30
1,964
721
784
459
444
444
-
Sept. 30
1,541
714
626
201
448
n.a.
n.a.
4.
Other Countries:
1975: Dec. 31
753
374
202
177
1,988
1,984
4
1976: Mar. 31
823
322
233
268
2,013
2,009
4
June 30
638
269
180
189
2,004
1,999
5
Sept. 30
638
251
211
176
2,089
n.a.
n.a.
5. International Organizations other than the IMF:
1975: Dec. 31
386
120
68
198
-
-
-
1976: Mar. 31
400
81
94
225
-
-
-
June 30
396
117
74
205
-
-
-
Sept. 30
377
116
57
204
-
-
:
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date November 1, 1976
To
Mr. Siegman
Subject: Assessment of the Impact of
From
Scott B. Brown
North Sea Oil on the U.K. Balance of
Payments
In recent months, officials of the British Treasury and Depart-
ment of Energy referred in public statements to the impending dramatic
impact of North Sea oil on the U.K. balance of payments. According to
the latest estimates, both official and private, Britain is expected to
achieve net self-sufficiency for oil by 1980, and may become a net exporter
of oil for more than a decade thereafter. This note and the attached table
attempt to summarize the potential impact of North Sea oil on the balance
of payments.
The pace of development of British offshore oil fields has
fluctuated widely during the first half of this decade. Optimism of the
early 1970's concerning the volume and profitability of eventual oil
production was dampened by the unforeseen technical difficulties and cost-
liness of oil production in deep water, and by uncertainty as to government
policies toward taxation and ownership of oil enterprises. More recently,
the announcement of government policy measures has contributed to an upturn
in North Sea activity during the past year, as the government adopted a
more favorable stance toward taxation and private ownership than had been
anticipated. A petroleum revenue tax was adopted in March 1975, which set
the maximum government share in any enterprise's oil revenues at about 60 per
cent (including the existing 12.5 per cent royalty). It was subsequently
announced that the government would probably waive some of the tax and
Mr. Siegman
- 2 -
royalty payments of small oil fields, in light of their higher average
fixed and production costs, in order to make their development more
attractive. In late 1975 and early 1976, government control was extended
not by requiring sale of a majority interest in all oil fields to the state
oil company, as had been feared, but rather by requiring that the state oil
company have first option to buy oil produced in the British North Sea at
prevailing oil prices. Developments relating to the future course of world
oil prices have also helped spur North Sea development: the fact that oil
prices now are expected to be at least constant, and perhaps rising, in
real terms in the foreseeable future has reduced the need for British oil
firms to guard against the financial hazard (to them) of a drop in oil prices.
According to the latest official forecasts, production of U.K. off-
shore oil is expected to rise from the 8 million barrels produced in 1975
to over 750 million barrels in 1980, slightly greater than forecast con-
sumption in that year. Production should exceed domestic consumption until
at least 1987, making the United Kingdom a net exporter of oil for the 1980's.
At forecast rates of production, proved oil reserves of 10 billion barrels
would sustain peak production of over 900 million barrels per year until
Forecast production levels from the Department of Energy report, "Develop-
ment of the oil and gas resources of the United Kingdom, 1976," are shown in
the attached Table at line L.
Oil consumption is assumed to grow 4 per cent per year from its 1975 level
of about 570 million barrels, in line with the forecasts in the 1974 OECD
document Energy Prospects to 1985.
Proved reserves are those which on available evidence are virtually certain
to be technically producible and commercially producible at current oil prices.
Mr. Siegman
- 3 -
about 1989; the total of all proved, probable, and possible offshore oil
reserves, about 23 billion barrels, would sustain this peak until the
next century. 5/ Whereas in past years forecasts of production and revenues
from North Sea oil have been subject to a high degree of uncertainty (mostly
due to uncertainties as to production techniques and government policy),
more recent estimates seem to be firmer.
As the attached table demonstrates, it is likely under reasonable
assumptions that the effect of North Sea oil production and investment on
the British current account will be positive starting in 1977. In 1977 the
effect of oil on the current account will be positive by about $1 billion
(i.e., the total U.K. current account deficit would be $1 billion worse than
the predicted $2.5 billion for 1977 without the effect of oil). In 1978, a
year in which the total current account, both oil and non-oil, is expected
to be nearly in balance, North Sea oil will have a positive effect of about
$2.7 billion on the current account; the effect of oil on the current account
rises each year thereafter, reaching over $20 billion by 1990. Due to large
capital inflows in the 1970's to finance North Sea investment, the effect on
the total balance of payments was already positive in 1975 (about $700 million);
this effect of North Sea oil also rises each year until at least 1990, when it
is predicted to be over $20 billion.
The assumptions on which this analysis is based are detailed in
footnotes to the table. The key assumption is that of an oil price which
4/ Probable reserves are those felt to have a better than 50 per cent chance
of being technically and commercially producible; possible reserves have a
significant, but less than 50 per cent, probability.
5/ In the event that no increases in proved reserves occur by the mid-1980's,
U.K. offshore oil production levels would probably be considerably lower than
peak production during the late 1980's.
Mr. Siegman
- 4 -
rises by 15 per cent in 1977, and by 5 per cent per year thereafter in
nominal terms (implying a constant or slightly rising price in real
terms). The projected totals arrived at here are not altered much by
slight changes in the assumptions.
Aside from the impact of North Sea oil on the U.K. balance of
payments, one other effect is of crucial importance - the government
revenue obtainable through taxation of oil producers. While the exact
effective tax rate depends on future cost conditions and the tax relief
given to smaller producers, an average effective rate of about 50 per
cent would yield government revenue ranging from about 1 per cent of
nominal GDP in 1977 to about 2.5 per cent during the mid-1980's.
Attachment
IMPACT OF NORTH SEA OIL ON THE
U.K. BALANCE OF PAYMENTS
November 1, 1976
1975 - 1990
(In billions of current U.S. dollars; forecasts for 1983-1990 on next page)
I. BALANCE OF PAYMENTS EFFECT
1975
1976
1977
1978
1979
1980
1981
1982
A. Value of North Sea oil produced (=Line L X Price)
0.1
1.5
3.9
6.3
9.1
11.8
14.7
15.4
2)
B. Imports of equipment for North Sea development
1.7
1.6
1.7
2.0
1.4
0.4
0
0
C. Effect of North Sea on trade balance (=Line A-Line B)
-1.6
-0.1
2.1
4.3
7.6
11.3
14.7
15.4
D. Interest payments on cumulative foreign borrowing for North Sea
investment (Line K), plus profits repatriated by foreign owners
0.3
0.7
1.1
1.6
2.0
2.2
2.3
2.1
E. Effect of North Sea on current account (=Line C-Line D)
-1.9
-0.8
1.0
2.7
5.6
9.1
12.4
13.3
F. Net capital flow for North Sea development (=Line J)
2.6
2.9
2.9
3.0
1.6
-0.8
-2.6
-3.0
G. Effect of North Sea on balance of payments (=Line E + Line F)
0.7
2.1
3.9
5.7
7.2
8.3
9.8
10.2
II. FOREIGN CAPITAL FLOWS AND INTEREST
H. Capital inflow for North Sea investment
2.6
2.9
3.1
3.7
2.9
1.1
O
O
4
I. Repayments
0.01
0.1
0.2
0.7
1.3
1.9
2.6
3.0
J. Net capital flow due to North Sea (=Line H-Line I)
2.6
2.9
2.9
3.0
1.6
-0.8
-2.6
-3.0
K. Interest payments on foreign investment in North Sea
0.3
0.5
0.7
1.0
1.1
1.0
0.8
0.6
III. OIL PRODUCTION AND CONSUMPTION
(In millions of barrels)
L. Average official production forecast
8
128
292
456
621
767
913
913
M. Domestic oil consumption
570
593
617
641
667
693
721
750
All footnotes are on a separate page, following this table.
IMPACT OF NORTH SEA OIL ON THE
U.K. BALANCE OF PAYMENTS
November 1, 1976
(In billions of current U.S. dollars)
I. BALANCE OF PAYMENTS EFFECT
1983
1984
1985
1986
1987
1988
1989
1990
A. Value of North Sea oil produced (=Line L X Price)
16.2
17.0
17.9
18,8
19.7
20.7
21.7
22.8
2/
B. Imports of equipment for North Sea development
0
0
0
0
0
0
0
0
C. Effect of North Sea on trade balance (=Line A-Line B)
16.2
17.0
17.9
18.8
19.7
20.7
21,7
22.8
D. Interest payments on cumulative foreign borrowing for North Sea
investment (Line K), plus profits repatriated by foreign owners
2,0
1,9
1.9
1.9
2.0
2,1
2.2
2.3
E. Effect of North Sea on current account (=Line C-Line D)
14.2
15.1
16.0
16.9
17.7
18.6
19.5
20.5
F. Net capital flow for North Sea development (=Line J)
-2,7
-2.2
-1.5
-0.8
-0.2
0
0
0
G. Effect of North Sea on balance of payments (=Line E + Line F)
11.4
12.9
14.5
16.1
17.5
18.6
19.5
20.5
II. FOREIGN CAPITAL FLOWS AND INTEREST
H. Capital inflow for North Sea investment
0
0
0
0
0
0
0
0
4/
I. Repayments
2.7
2.2
1.5
0.8
0.2
0
0
0
J. Net capital flow due to North Sea (=Line H-Line I)
-2.7
-2.2
-1.5
-0.8
-0.2
0
0
0
K. Interest payments on foreign investment in North See
0.4
0.2
0.1
0.02
0
0
0
0
III.
OIL PRODUCTION AND CONSUMPTION
(In millions of barrels)
L. Average official production forecast
913
913
913
913
913
913
913
913
7
M. Domestic oil consumption
780
811
844
877
913
949
987
1027
All footnotes are on a separate page, following this table.
FOOTNOTES
The price used assumes a price rise of 15 per cent in 1977, and a price rise of 5 per cent per year in nominal terms thereafter
(implying a constant or slightly rising price in real terms). Prices for 1975 and 1976 are price of Arabian "Marker" crude oil.
2/ Source: Wood, McKenzie and Company, North Sea oil forecast of June 1976.
3/ A 20 per cent profit rate is assumed, with half of total profits accruing to foreign owners who repatriate them.
4/ On the basis of data on Eurodollar credits for North Sea oil development in 1975 and 1976, assumes an average maturity of
7 years, payable in five equal installments in the last five years of the credit.
5/ Interest payments estimated from interest rates on Eurodollar credits for North Sea development. The interest rate is assumed
to be variable, and approximately 1.5 percentage points higher than the six-month London Eurodollar offer rate. For computational
purposes, a rate of 9 per cent in 1975, 8 per cent in 1976, and 8 per cent thereafter is used; interest is assumed paid on cumulative
total of net borrowing.
6/ Average of high and low production forecasts in the April, 1976 Department of Energy report, "Development of the Oil and Gas Re-
sources of the United Kingdom, 1976".
7/ Forecasts for 1976-1980 assume a growth rate of oil consumption of 4 per cent per year from the 1975 level, approximately equal
to that assumed in the OECD document, Energy Prospects to 1985.
David H. Howard
November 9, 1976
U.K. Political Situation
Next election: October 1979, or earlier.
Government: Labour
Representation in House of Commons
Labour:
312
Conservative:
278
Liberals:
13
Scottish Nationalists:
11
Ulster Protestants:
10
Welsh Nationalists:
3
Scottish Labour:
2
Ulster Catholics:
2
Total:
631
Needed for a majority:
316
The Labour party can count on support from Scottish Labour and the
Ulster Catholics. Thus, Labour has an effective majority of one.
However, the opposition parties are rarely united, so on most issues
Labour has a larger majority.
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BOARD BRIEFING
David H. Howard
November 15, 1976
The United Kingdom is presently negotiating a $3.9 billion lean
from the IMF. Any such international loan to the U.K. government will
have policy conditions attached to it. These conditions should have two
objectives: ensuring that the United Kingdom can repay its official
debts, and the establishment of a stronger and more stable British economy.
These two objectives are inter-related because policies that encourage a
competitive external sector and an investment-led recovery also will ensure
that the U.K. public sector is able to repay its official debts on time.
On foreign exchange markets, the pound sterling has been under
considerable pressure. Since March 1, sterling has depreciated 19 per
cent against the dollar, despite net intervention sales of $6.8 billion.
The pressure has come primarily from the U.K.'s sizeable current-account
deficit and changes in the timing of payments for commercial transactions,
but pressure also has come from holders of sterling balances, mainly the
central monetary institutions of some oil-producing countries. During
the second and third quarters of 1976, about £1 billion in sterling
balances were drawn down, leaving some £1.5 billion held by OPEC and
£1.2 billion by other central monetary institutions. Other, mostly
private, holdings of sterling balances -- now about £3.4 billion --
actually rose during this period.
Sterling's weakness has led to the U.K.'s application to the
IMF for credit. In addition, U.K. government leaders have expressed their
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hope for supplementary international assistance to cope with the sterling
balance problem. An IMF loan and any supplementary assistance would, of
course, add to the U.K.'s foreign currency denominated debt.
The U.K. public sector is already deeply in debt to overseas
creditors. Public sector Bodies owe some $15 billion from official short
and medium-term foreign currency borrowing. Of this amount, the U.K.
government owes some $2 billion to the IMF from earlier drawings, and $1.5
billion to the Group of Ten countries and Switzerland, including $300
million each to the Federal Reserve System and the U.S. Treasury, which
is due December 9. Aside from the drawings on the G-10 standby, no
significant amounts of the U.K.'s. official debts. must be repaid until 1979.
The United Kingdom has $4.7 billion in reserves, of which $3.8
billion is held in foreign exchange and SDRs. Some credits through
the European Community may be available to supplement reserves, but the
bulk of any additional lending must come from the IMF, the stronger
economies, and/or Eurocurrency loans.
Current U.K. macroeconomic policy has three major aspects.
First, the public sector borrowing requirement is expected to be 9 per
cent of nominal GDP this fiscal year. The government had expected to
reduce this to 6 per cent of GDP in fiscal 1977-78, but because of the
faltering recovery, the borrowing requirement, under current policies,
may be as high as 7.5 per cent of GDP. Second, monetary policy is based
upon a target growth rate for M3 of 12 per cent during the fiscal year
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that began in April. Apparently, the government's intention is to
reduce further the rate of monetary expansion in the next fiscal year.
The third major aspect of U.K. macroeconomic policy is an incomes policy
that roughly halved the rate of wage inflation during its first year,
starting August 1975. There are no indications that the U.K. government
has formulated plans for the incomes policy beyond July 1977, when the
present phase expires.
Broadly speaking, these macroeconomic policies have two purposes:
bringing inflation down with a minimum of unemployment; and shifting
resources from the public sector fnto private investment -- particularly
investment in export industries. The principal question about the U.K.
economy is whether the government's current policies are adequate to
restore external and internal stability to the economy; this question is
presently being examined by the IMF mission how in the United Kingdom.
Under present policies, the consensus forecast for the U.K.
economy is not favorable. Real GDP growth is likely to be no higher
than 2-3 per cent during the next year or so. No significant improvement
is expected in the unemployment rate -- now at 5.4 per cent. In fact,
it may edge higher during the next several months. The outlook for
private investment -- once expected to be buoyaut towards the end of
1976 -- is now clouded by high interest rates. Because of the substantial
depreciation of sterling this year, inflation is unlikely to decelerate
much from its present rate of about 14 per cent until at least the second
RESTRICTED
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half of 1977, although the incomes policy is expected to hold fairly
well through July 1977. This year's current-account deficit will be
close to $3.3 billion, with next year's expected to be somewhat lower --
perhaps $2.5 billion. However, export volume is expected to grow fairly
strongly and North Sea Oil should move the current account to near balance
in 1978. The United Kingdom is expected to be self-sufficient in oil by
1979 or 1980.
Although there is general agreement that U.K. policies have
recently moved in the right direction, in the Staff's view a faster
movement is required. In particular, the reduction in the public sector
borrowing requirement should be accelerated. It is probably too late to
affect the current fiscal year, but in fiscal 1977-78 the borrowing
requirement might be reduced further -- to perhaps £8 billion, 5.5 per
cent of GDP. A reasonable course for monetary policy would be to aim
at a growth rate for M3 of 10-14 per cent in the current fiscal year,
decelerating to 6-10 per cent in the next fiscal year. Exchange market
intervention should be limited to the minimum consistent with avoiding
as much as possible declines in the external value of sterling that would
undermine the U.K. incomes policy, and industrial relations in general.
These policy prescriptions are based on the following con-
siderations: A reduction in the public sector borrowing requirement would
ease the burden on monetary policy and improve exchange market confidence.
This reduction can be accomplished by means of spending cuts or tax
RESTRICTED
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increases. From a structural point of view, spending cuts are preferable.
There is little scope for increasing direct taxes, although there may be
room for raising indirect taxes, which are relatively low in the United
Kingdom. The high level of unemployment as well as political constraints,
such as the need to maintain public support for the incomes policy, impair
the government's ability to tighten fiscal policy, but some further
tightening is desirable and probably feasible. In fact, there are reports
that the government is putting together such a package for fiscal 1977-78.
Because of excessive money growth during the first half of the
current fiscal year -- 18 per cent (S.A.A.R.) -- monetary policy would
have to be very tight in the second half if the 12 per cent M3 3 growth
target is to be met. Operating with a 10-14 per cent range, rather than
a specific 12 per cent target, would allow greater flexibility in monetary
policy and tend to encourage private sector investment, the revival of
which is a crucial element in the government's medium-term economic
strategy. Further cuts in the borrowing requirement for fiscal 1977-78
should allow a substantial reduction in money growth in the next fiscal
year, perhaps to a 6-10 per cent range, without endangering private
investment.
The United Kingdom faces conflicting objectives with respect
to the exchange value of sterling: depreciation, through its domestic
prive-level effects, undermines acceptance of wage restraint, but it
also helps to ensure the price-competitiveness of U.K. goods. A compromise
RESTRICTED
- 6 L
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policy might be adopted that aimed at minimizing the amount of inter-
vention by resisting only depreciations that are judged by the U.K.
authorities to be serious threats to the incomes policy. The financial
resources necessary for this type of intermention could come from Euro-
currency loans and, if available, the IMF loan, as well as from existing
reserves.
In conclusion, these policy adjustments imply some tightening
of U.K. fiscal policy in order to accelerate the already planned shift
of resources from the public to the private sector. Such a shift appears
to be necessary if Britain is to stabilize its economy and meet its external
obligations. If these policies were included as conditions to an IMF
loan, they would be more credible not only because of the IMF's approval,
but also because of the increased likelihood that the U.K. government
would adhere to them. In addition, a comprehensive package, such as
the one outlined, should improve confidence -- both internal and external
-- more than would the same measures introduced piecemeal.
RESTRICTED
UNITED KINGDOM: ECONOMIC INDICATORS
(SEASONALLY ADJUSTED, UNLESS OTHERWISE INDICATED)
November 23, 1976
1
1973
1974
1975
1975
1975
1975
1976
1976
1976
1976
1976
1976
1976
1976
1976
1976
II
III
IV
I
II
III
APR
MAY
JUNE
JULY
AUG
SEPT
OCT
REAL GDP, 1970=100
109.5
110.2
108.0
107.6
106.9
107.6
109.0
108.1
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
REAL GDP, PER CENT
CHANGE (1)
5.3
0.6
-2.0
-2.1
-0.7
0.7
1.3
-0.8
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
INDUSTRIAL PRODUCTION
1970=100
109.9
106.1
101.0
99.8
99.4
100.3
101.5
102.0
101.6
102.0
104.0
100.1
101.8
100.8
102.3
N.A.
INDUSTRIAL PRODUCTION
PER CENT CHANGE (1)
7.6
-3.4
-4.8
-4.6
-0.4
0.9
1.2
0.5
-0.4
0.3
2.0
-3.8
1.7
-1.0
1.5
N.A.
UNEMPLOYMENT RATE(%)
2.6
2.5
3.9
3.6
4.2
4.8
5.2
5.3
5.5
5.2
5.3
5.3
5.4
5.5
5.5
5.4
WHOLESALE PRICES (NSA)
PER CENT CHANGE (1)
7.3
23.4
24.1
5.8
3.8
3.0
3.9
3.6
4.0
1.4
1.6
1.0
1.3
1.6
1.3
1.5
CONSUMER PRICES (NSA)
PER CENT CHANGE (1)
9.2
16.0
24.2
9.5
4.4
3.4
3.6
3.7
2.3
1.9
1.1
0.5
0.2
1.4
1.3
1.8
AVERAGE EARNINGS
PER CENT CHANGE (1)
N.A.
17.5
26.7
4.0
7.5
4.0
2.9
2.6
N.A.
-0.1
2.4
-0.6
2.2
1.4
N.A.
N.A.
MONEY STOCK (M1)
PER CENT CHANGE (1)
9.8
3.0
19.6
7.1
6.6
2.8
3.5
3.4
4.6
2.0
-0.1
-1.0
3.1
2.0
2.3
-1.7
MONEY STOCK (M3)
PER CENT CHANGE (1)
27.4
19.4
10.0
2.0
2.6
1.7
2.0
2.7
4.3
1.3
0.6
0.5
1.9
1.5
2.4
1-2
BUDGET DEF.(-) OR SUR. (+)
AS PER CENT OF GNP
-3.6
-4.8
-9.1
-8.8
-11.6
-7.1
-8.5
-6.4
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
EXPORTS, FOB
($ BILLION)
28.2
36.5
41.6
10.4
9.9
10.5
10.9
10.9
10.8
3.6
3.6
3.6
3.5
3.6
3.7
3.0
IMPORTS, FOB
($ BILLION)
33.8
48.8
48.7
12.0
12.0
11.9
11.8
12.6
12.9
4.1
4.3
4.3
4.4
4.2
4.3
4.2
TRADE BALANCE($BIL)
-5.6
-12.3
-7.1
-1.6
-2.1
-1.4
-1.0
-1.8
-2.1
-0.5
-0.7
-0.6
-1.0
-0.5
-0.6
-0.6
CURRENT ACCOUNT BALANCE
($ BILLION)
-2.7
-8.8
-3.8
-0.8
-1.2
-0.6
-0.1
-1.0
-1.3
-0.2
-0.4
-0.4
-0.7
-0.2
-0.4
-0.3
(1) PER CENT CHANGE FROM PREVIOUS PERIOD.
QUARTERLY CHANGES AT QUARTERLY RATES: MONTHLY
CHANGES AT MONTHLY RATES.
RESTRICTED-CONTROLLED
C.14b
FINANCIAL INDICATORS -- UNITED KINGDOM
(dollar amounts in millions)
1975
1976
NOV 1-
Week ended
YEAR
QI
QII
QIII
AUG
SEPT
OCT
22
OCT 13
OCT 20
OCT 27
NOV 3'
NOV 10
NOV 17
EXCHANGE RATE (CENTS PER POUND, END OF PERIOD)
202.35
191.59
178.50
166.00
177.75
166.00
158.80
164.00
165.41
164.63
158.30
160.75
163.33
166.45
WEIGHTED AVERAGE (May 1970=100; E.O.P.)
72.58
68.32
65.75
60.00
64.55
60.00
57.45
59.30
59.20
59.19
58.46
57.37
58.85
59.55
SDR VALUE OF POUND (E.O.P.)
1.7285
1.6567
1.5542
1.4498
1.5421
1.4498
1.3908
1.4432
1.4297
1.4162
1.3843
1.3804
1.4187
1.4306
SHORT TERM INTEREST RATE (E.O.P.)
10.81
8.75
11.19
12.81
11.19
12.81
15.25
14.50
14.44
15.00
15.38
15.00
14.67
14.69
LONG TERM INTEREST RATE (E.O.P.)
14.49
13.95
13.64
14.76
14.00
14.76
15.50
14.74
15.40
15.19
15.31
15.29
14.93
15.01
RESERVES (IFS, E.O.P.)
5,459
5,917
5,302
5,217
5,044
5,217
4,762P
4,650
AVAILABLE IMF CREDIT TRANCHES (E.O.P.)
3,278
4,695
3,851
3,888
3,866
3,888
3,890P
3,888P
INTERVENTION, PURCHASES (+) OR SALES (-)
OF DOLLARS
242
-900
-3,732
-1,582
-636
-675
-372
-112
-69
-106
-106
-13
-25
-19
(OF OTHER CURRENCIES; $ EQUIVALENT)
SWAP ACTIVITY
DRAWINGS (+), REPAYMENTS (-)
--
200
100
:
100
--
--
--
SWAP LINE -- 3,000
RESTRICTED-CONTROLLED
November 23, 1976
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date December 15, 1976
To
Chairman Burns
Subject: Reuters Reports on
From
Charles J. Siegman
CJS
Chancellor Healey's Economic Program
Attached are selected excerpts as reported on Reuters on
Chancellor Healey's economic policy statement delivered to the House
of Commons today. Note report (first item) that refers to a $500
million swap offer by the U.S. Treasury and the Federal Reserve to
strengthen U.K. reserves.
The initial foreign exchange market response has been a
weakening of sterling by 1 per cent.
The new package of measures will be summarized in today's
International Digest.
Attachment
cc: Governor Wallich
1605 : HEALEY ANNOUNCES SWAP ARRANGEMENT WITH 11
in
LONDON DEC 15 -- CHANCELLOR OF THE EXCHEQUER
DENIS HEALEY INTENDS TO STRENGTHEN THE RESERVES
WITH 500 MLN DLRS WHICH HAS BEEN OFFERED
BY THE US TREASURY AND THE FEDERAL RESERVE
MORE
1613 SWAP ARRANGEMENT 2 LONDON:
HEALEY TOLD PARLIAMENT THAT IN ADDITION THE
1
BUNDESBANK HAS OFFERED THE BANK OF ENGLAND A
STANDBY FACILITY OF 350 MLN DLRS BY WAY OF
FURTHER SUPPORT.
IN COMMENTING ON TALKS RECENTLY ON THE
PROBLEM OF THE STERLING BALANCES, HEALEY SAID
THESE TALKS REVEALED "A GENERAL DESIRE ON THE
PART OF THOSE CONCERNED TO ACHIEVE A SATISFAC-
TORY ARRANGEMENT FOR THE STERLING BALANCES, AND
I BELIEVE IT WILL BE POSSIBLE TO REACH AN
AGREEMENT BEFORE LONG. #
MORE
1817 ALD ? FORD
NNNN
1556 : HEALEY ANNOUNCES 2.5 BILLION STG SPENDIN
CUTS OVER TWO YEARS:
LONDON, DEC. 15 --- CHANCELLOR OF THE
EXCHEQUER DENIS HEALEY SAID THE GOVERNMENT
HAS DECIDED TO REDUCE PUBLIC SPENDING
PROGRAMMES FURTHER BY ONE BILLION STG IN
1977/78 AND 1.5 BILLION IN 1978/79 AT 1976
SURVEY PRICES.
MORE
1603 : SPENDING CUTS 2 LONDON:
AMONG THE CUTS HEALEY ANNOUNCED WERE IN
DEFENCE WHERE HE SAID THE GOVERNMENT WAS
LOOKING TO THAT SECTOR FOR SAVINGS OF 100 MLN
STG IN 1977/78 AND 200 MLN IN 1978/79.
HEALEY SAID THERE WOULD BE A REDUCTION IN
HOUSING CAPITAL PROGRAMMES. THIS REDUCTION
WOULD OFFSET MOST OF THE LIKELY EXCESS
SPENDING NEXT YEAR AND WOULD CONTRIBUTE
0 COVING nc 799 MIN CTC TH TUE EALIOUTNO
NNNN
1701 : CORRECTION -- SPENDING CUTS LONDON:
IN "SPENDING CUTS 3 LONDON, 11 PLSE READ
SECOND SENTENCE AS THIS WOULD SAVE ABOUT
270 RPT 270 MLN STG NEXT YEAR CORRECTING
FIGURE.
REUTER
FORD & LIBRARY 076839
WNNN
1557 : SPENDING CUTS 3 LONDON:
NEW CONSTRUCTION WOULD BE SUSPENDED OR
CURTAILED IN SEVERAL OTHER CENTRAL AND LOCAL
GOVERNMENT PROGRAMMES. THIS WOULD SAVE
MLN STG IN 1978/79.
ABOUT 27 MLN STG NEXT YEAR AND OVER 300
REUTER
1646 : SPENDING CUTS 4 LONDON:
HEALEY SAID "THE PLANNED PROGRAMME FOR
PHASING OUT THE GOVERNMENT'S 5 FOOD SUBSIDIES
WILL BE ACCELERATED AND WILL BE COMPLETED
IN 1977/78, SAVING 160 MLN TSG IN THAT YEAR
AND ABOUT 60 MLN IN THE FOLLOWING YEAR.
THIS WILL ADD LESS THAN ONE QUARTER PCT
TO THE RETAIL PRICE INDEX OVER 1977/78.
HE ALSO ANNOUNCED SAVINGS ON EDUCATION OF
20 MLN STG IN 1977/78 AND 30 MLN IN 1978/79.
REUTER
BERRLO FORD LIBRARY
1631 : HEALEY DRECASTS CURRENT PUBLIC SECTOR
BORROWING REQUIREMENT:
LONDON, DEC. 15 CHANCELLOR OF THE
EXCHEQUER DENIS HEALEY IN HIS LETTER OF INTENT
TO THE IMF SAID THE GOVERNMENT'S MOST RECENT
FORECAST SHOWS THE PUBLIC SECTOR BORROWING
REQUIREMENT IN THE CURRENT FINANCIAL YEAR TO BE
11.2 BILLION STG.
THIS CONTRASTED WITH THE FIGURE OF 12
BILLION STG FORECAST WHEN HE REQUESTED A STANDBY
ARRANGEMENT OF 700 MLN SPECIAL DRAWING RIGHTS
IN THE FIRST IMF CREDIT TRANCHE IN DECEMBER LAST
YEAR.
MORE
1639 : HEALEY FORECASTS 2 LONDON:
REFERRING TO THE GOVERNMENT'S DECISION TO
REDUCE PUBLIC SPENDING IN THE NEXT TWO FISCAL
YEARS, HEALEY SAID IN THE LETTER HE WISHED TO
GIVE THE MAXIMUM POSSIBLE HELP TO INDUSTRY AND
TO AVOID UNNECESSARY UNEMPLOYMENT.
"I THEREFORE INTEND TO INCREASE EXPENDITURE
ON INCENTIVES FOR INDUSTRIAL INVESTMENT AND
EXPANSION AND ON MEASURES TO REDUCE UNEMPLOYMENT
IN EACH OF THE TWO YEARS 1977/78 AND 178/79 BY
200 MLN STG. il THIS EXPENDITURE WOULD BE
FINANCED BY AN INCREASE OF 10 PCT IN DUTIES ON
ALCOHOL AND TOBACCO.
REUTER
RARY
1538 :HEALEY ANNOUNCES PUBLIC SECTOR BORROWING
REQUIREMENT REDUCTION:
LONDON, DEC 15 -- CHANCELLOR OF THE
EXCHEQUER DENIS HEALEY ANNOUNCED THE GOVERNMENT
IS TO REDUCE THE PUBLIC SECTOR BORROWING
REQUIREMENT TO ABOUT & 7 BILLION STG IN
1977/78 AND TO SOMEWHAT LESS IN THE FOLLOWING
YEAR.
MORE
1543 BORROWING 2 LONDON:
HEALEY TOLD THE HOUSE OF COMMONS THE
REDUCTION IN THE PSBR WOULD BE NEARLY TWO
BILLION STG IN 1977/78 AND NEARLY THREE BILLION
STG IN 1978/79.
HE SAID "EXPRESSED AS A PERCENTAGE OF GROSS
DOMESTIC PRODUCTION, PUBLIC SECTOR BORROWING
REQUIREMENT WILL FALL STEADILY FROM NINE PCT IN
THE CURRENT YEAR TO ABOUT SIX PCT IN 1977/78 AND
RATHER OVER FIVE PCT IN 1978/79. II
MORE
FORD
GERALD
LIBRARY
1547 : BORROWING 3 LONDON:
TO ACHIEVE THESE OBJECTIVES, HEALEY
SAID, THE GOVERNMENT WAS PROPOSING ADJUSTMENTS
TO CURRENT PLANS AMOUNTING TO 1.5 BILLION
STG IN 1977/78 AND TWO BILLION STG IN 1978/79.
"I AM THEREFORE ANNOUNCING THE SPECIFIC
MEASURES THIS AFTERNOON WHICH AMOUNT TO SOME
1.5 BILLION STG IN EACH YEAR.
"IN ADDITION THE GOVERNMENT WILL MAKE
A FURTHER FISCAL ADJUSTMENT OF ABOUT 500
MLN STG IN 1978/79. il HEALEY SAID IT WAS TOO
500N TO SAY WHAT FORM THIS FURTHER ADJUSTMENT
WOULD TAKE.
1650 : HEALE SAYS PROSPECT OF INCOME TAX CUT IN
NEXT BUDGET:
LONDON, DEC. 15 -- CHANCELLOR OF THE
EXCHEQUER DENIS HERLEY SAID HE BELIEVED THERE
WOULD BE PROSPECTS FOR INCOME TAX CUTS IN HIS
NEXT BUDGET.
HOWEVER, HE MADE THIS STATEMENT TO THE
COMMONS CONDITIONAL ON A SATISFACTORY AGREEMENT
BEING REACHED WITH THE TRADES UNION CONGRESS
AND THE CONFEDEATION OF BRITISH INDUSTRY ON THE
NEXT PAY ROUND AND A JUDGEMENT THAT IT COULD BE
DONE WITHOUT INCREASING THE PUBLIC SECTOR
BORROWING REQUIREMENT ABOVE 8.7 BILLION STG IN
1977/78.
MORE
1057 : PROSPECT 2 LONDON:
"A CENTRAL OBJECTIVE OF GOVERNMENT POLICY
IS TO CONTINUE THE ATTACK ON INFLATION.
TO MAINTAIN A CONTINUED FALL IN INFLATION
THROUGH TO 1978, WE SHALL NEED AGREEMENT
BETWEEN THE TUC AND THE GOVERNMENT HOW TO
PURSUE THE ATTACK ON INFLATION WHILE
PERMITTING GREATER FLEXIBILITY IN PAY
NEGOTIATION IN THE PERIOD AFTER JULY 1977, =
HE SAID.
"I HOPE IT WILL BE POSSIBLE FOR US TO
REACH AGREEMENT ON THIS IN TIME FOR ME TO TAKE
ACCOUNT OF THE OUTCOME IN SETTLING
THE LEVELS OF INCOME TAX IN THE NEXT BUDGET.
=
REUTER
RA
1619 : HEALEY SAYS WITTEVEEN SUPPORTS ECONOMIC
STRATEGY:
LONDON DEC 15 -- THE MANAGING DIRECTOR
OF THE INTERNATIONAL MONETARY FUND JOHANNES
WITTEVEEN HAS TOLD CHANCELLOR OF THE EXCHEQUER
DENIS HEALEY THAT HE SUPPORTS BOTH THE
ECONOMIC STRATEGY AND THE MEASURES THE
BRITISH GOVERNMENT IS TAKING TO SUPPORT
ITS APPLICATION FOR 3.9 BILLION DLRS FROM THE
IMF, HEALEY TOLD PARLIAMENT.
MORE
1624 : WITTEVEEN 2 LONDON:
HEALEY TOLD THE COMMONS OF WITTEVEEN'S 5
SUPPORT AND SAID THE MANAGING DIRECTOR
WAS PREPARED TO RECOMMEND ACCEPTANCE
OF HIS (HEALEY'S) REQUEST FOR A STANDBY
ARRANGEMENT.
IN DETAILING THE STANDBY ARRANGEMENTS,
HEALEY SAID THAT THEY THIS TIME COVERED
A TWO YEAR PERIOD "50 THAT WE CAN MAKE THE
NECESSARY STRAINS ON THE SOCIAL CONTRACT
AND THE INDUSTRIAL STRATEGY. #
MORE
LIBRARY GERALD ? FORD
1625 :WITTEVEE 3 LUNDON.
IN TOTAL THE UK SHOULD BE ABLE TO DRAW UP TO
NEARLY FOUR BILLION DLRS OF WHICH 1 15 BILLION
DLRS COULD BE DRAWN IMMEDIATELY WITH OVER ONE
BILLION DLRS MORE BEFORE THE END OF 1977.
"THIS, I AM CONFIDENT, WILL TRANSFORM THE
EXTERNAL FINANCING POSITION IN 1977, il HE ADDED.
"BEFORE THE FUND BOARD MEETS THERE WILL BE A
MEETING OF THE GROUP OF TEN COUNTRIES, WHO STAND
READY, UNDER THE GENERAL ARRANGEENTS TO BORROW,
TO PROVIDE THE FUND WITH THE USEABLE CURRENCIES
IT NEEDS FOR LARGE DRAWINGS IF ITS OWN AVAILABLE
CURRENCIES ARE INADEQUATE."
MORE
1633 WISTEVEEN 4 LONDON:
HEALEY SAID "I AM CONFIDENT THAT, IN A
MATTER OF DAYS AFTER THE END OF THE YEAR THE
OPERATION WILL BE COMPLETE AND THE RESERVES
REPLENISHED"
REUTER
BOARD OF GOVERNORS
OF THE
DERAL RESERVE SYSTEM
Office Correspondence
Date January 28, 1977
To Board of Governors
Subject:
From John E. Reynolds
Attached, in response to your request, is a note by Mr. Mills
concerning the Euro-dollar loan to Britain.
Attachment
GERALD R. FORD LIBRARY
This form marks the file location of item number 2a
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
GERALD R. FORD LIBRARY
This form marks the file location of item number
3
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
GERALD R. FORD LIBRARY
This form marks the file location of item number
4
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
GERALD R. FORD LIBRARY
5
This form marks the file location of item number
as listed on the pink form (GSA Form 7122, Withdrawal Sheet)
at the front of the folder.
RESTRICTED
RESTRICTED
HANDLE THE ATTACHED DOCUMENT IN ACCORDANCE WITH INTERNAL
INFORMATION SECURITY PROCEDURES FOR RESTRICTED INFORMATION
LIBRARY GERALD FORD
RESTRICTED
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date March 30, 1977
To Mr. Reynolds
Subject: The U.K. Budget and General
From David H. Howard
Economic Situation
RESTRICTED
On March 29, Chancellor of the Exchequer Denis Healey presented to
Parliament the British government's budget for the fiscal year beginning April 1977.
Highlights of the proposed budget include:
-- Reductions in personal income taxes amounting to some £1.3
billion in a full year.
-- An additional reduction in the basic rate of personal income
taxation (from 35 per cent to 33 per cent) amounting to about £1 billion in a
full year. This reduction is conditional on a satisfactory agreement being
reached on wage policy for the third phase of U.K. incomes policy, which is to
begin in August.
-- Increases in indirect taxes amounting to about £800 million.
-- Spending programs for the next two years totaling £400 million,
including about £200 million for employment subsidies.
-- In his budget message, the Chancellor said that on unchanged
policies, the public sector borrowing requirement (PSBR) in fiscal 1977/78 would
have been £7.5 billion -- well below the £8.7 billion target set in December. The
budget measures --including the conditional tax cut of £1 billion --are expected
to result in a PSBR of £8.5 billion in 1977/78 (6 per cent of GDP). (The first
year PSBR increase --fl billion-- is less than the full-year net revenue reduction
-- £1.5 billion-- because of lags in revenue collection, and because the tax cut
will tend to increase economic activity.) Domestic credit expansion (DCE) in
1977/78 is expected to be within the £7.7 billion ceiling announced in December,
and sterling M3 growth, according to the Chancellor, should be in the 9 to 13 per
RESTRICTED
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date March 30, 1977
To
Board of Governors
Subject:
The U.K. Budget and General
From John E. Reynolds
Economic Situation
Attached, for your information, is a note by David Howard
on the U.K. budget (announced yesterday) and on the general economic
situation in the United Kingdom.
Attachment.
RESTRICTED
- 2 -
cent range. Thus, the forecasts for both the PSBR and DCE are consistent with the
conditions for the IMF stand-by agreed upon in December. The budget measures
should add perhaps 1/2 per cent to output by mid-1978, according to the Chancellor.
-- Initial exchange market reaction to the budget has been very
favorable.
This note presents further details of the proposed budget and also
discusses the general economic situation in the United Kingdom, the government's
expenditure plans, and the status of the U.K.'s incomes policy.
1. General Economic Situation
The crisis atmosphere in the United Kingdom has abated; in particular,
the pound sterling has been strong in recent months and interest rates have fallen
from the extraordinarily high levels reached toward the end of last year. In
fact, U.K. authorities have recently been acting to restrain the upward movement
of sterling -- through the purchase of foreign exchange reserves -- and the
downward movement of interest rates -- through the temporary suspension of the
formula by which the Bank of England's Minimum Lending Rate is related to the
Treasury bill tender rate.
The current account in February was in surplus by some $50 million
after an average deficit of $270 million in the two previous months. British
foreign currency reserves have been rebuilt as a result of drawings on the recently
negotiated IMF and Eurodollar loans, an unwinding of leads and lags in commercial
payments, the new restrictions on sterling financing of third-country trade, and
a capital inflow induced by an upturn in investor confidence in the U.K. economy
and the prospect of capital gains to be made as U.K. interest rates declined from
their crisis levels.
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- 3 -
Official sterling balances (excluding those held by international
organizations other than the IMF) fell slightly between December 8 and January 19,
but confidential data just received from the Bank of England indicate that between
January 19 and February 16, these balances rose somewhat, and the latest figure
on these official balances indicates a level just slightly above the December 8
level. There was a moderate rise in the private holdings of sterling balances
during December, but there was little change between the end of last year and
February 16. On April 4, the Bank of England will present to official sterling
balance holders the detailed terms on its foreign currency bonds to be issued in
connection with the 1977 Basle sterling balance agreement.
Industrial production increased by 1 per cent in January and
unemployment (seasonally adjusted) fell slightly in March for the second straight
month. However, with GDP expected to grow at only about 2 per cent annual rate
during 1977, increases in unemployment are more likely than further decreases.
Price inflation has accelerated recently, but the pound's recent strength should
help to reverse this trend. The incomes policy has held fairly well -- between
July 1976 and January 1977, average earnings increased at an annual rate of about
11 per cent while retail prices excluding those of seasonal foods increased nearly
19 per cent (annual rate).
The growth rates of the monetary aggregates have declined in recent
months, and the February levels (seasonally adjusted) of M1 and M3 are actually
below the levels prevailing last September. It appears that sterling M3 growth
will be about 9 per cent for the banking year ending in April, and DCE is fore-
cast to be about half of the DCE ceiling (agreed upon with the IMF) of £9 billion
for banking year 1976/77. In addition, the public sector borrowing requirement
GERAL
RESTRICTED
RESTRICTED
- 4 -
for fiscal 1976/77 is now forecast to be £8.8 billion (7 per cent of GDP) -- well
within the December forecast of £11.2 billion.)
2. Details of the Budget
a. Personal income taxation. Various personal tax allowances
were raised and the threshold levels for the higher tax brackets (i.e., those
higher than the basic rate) were increased, as were the threshold levels for pay-
ment of the tax surcharge on investment income. These measures take effect imme-
diately and involve a reduction in tax revenue of some £1.3 billion in a full year.
It is also proposed that the basic rate of personal taxation be reduced from 35
per cent to 33 per cent if and when there is a satisfactory agreement on the next
phase of wage restraint. Such a reduction would mean a decrease in revenue of
about £960 million in a full year. The Chancellor did not offer any specific
indication of what would constitute a satisfactory agreement.
b. Corporate taxation. Corporate tax rates remain the same, but
the level below which the small company preferential rate applies was increased,
and tax relief for inventory appreciation is to be continued for two more years.
There were also some relatively minor changes in business taxes.
C. Indirect taxes. Duties on gasoline, heavy oil, and cigarettes
were raised, and the excise duties on various motor vehicles were increased. These
tax increases will produce £810 million in a full year and are expected to make
retail prices about 1 per cent higher by the end of 1977 than they would have been
otherwise. There was no change in the value-added tax.
d. Spending. Extensions of various employment subsidy programs
amounting to an additional £214 million during the next 2 years were announced,
and some £100 million will be spent on construction in inner-city areas over the
next two years. Some other minor programs were also announced by the Chancellor.
The spending plans announced by the Chancellor are to be financed mostly by budget
reserves and previously appropriated funds.
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- 5 -
e. Other. The Chancellor's other proposals include a tightening
of exchange controls on U.K. companies controlled by non-residents, and a tax
break for overseas earnings of employees who are U.K. residents.
3. U.K. Government Spending Plans
Earlier this year, the British government announced its spending
plans -- in real terms -- for fiscal years 1977/78 and 1978/79; see Table 1.
(Some figures were announced for the two subsequent fiscal years as well, but they
do not reflect December's changes in spending plans and will probably be revised
downward this summer.)
The spending plans confirm those announced in December in conjunc-
tion with the U.K.'s application for an IMF loan. According to the U.K. govern-
ment, the ratio of total public expenditure (row 1 in the table) to GDP in market
prices is expected to decline from 46 per cent in 1975/76 to 42-43 per cent in
1978/79. (This implies a 2.8 per cent annual rate of growth of real GDP between
1975/76 and 1978/79.)
The data for fiscal year 1976/77 indicate that actual government
expenditures are expected to be within previously planned limits. In addition,
the plans for the next two fiscal years indicate an intent to hold down government
spending. The British government has been criticized for the nature of the cuts
made in its spending plans, since the bulk of the reductions fall on capital projects
and transfers rather than current spending. Hence, a major part of any unemployment
effects of the cuts will fall on the private sector rather than on the public
sector, and will do little to reduce the size of the government's direct resource
claims. Table 2 indicates how the changes in spending plans since last February
are distributed.
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- 6 -
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4. Incomes Policy.
As expected, the British government is again offering tax concessions
as part of an agreement with the Trades Union Congress (TUC) on wage restraint.
As an additional incentive for labor's compliance to a third year of some sort of
wage restraint, the government has proposed an extended and revised system of
price controls. The present system -- which is scheduled to expire this summer --
operates on the basis of profit margins and allows most cost increases to be
reflected in higher prices, although every price increase has to be approved. The
proposed price-control system -- to be in effect for an indefinite period -- will
continue to control profit margins but will no longer require that individual price
increases be justified by cost increases. However, large companies will continue
to be obliged to submit proposed price changes to the Price Commission, which will
be empowered to make investigations and stop any proposed price increase for up to
a year. The criteria by which the Commission is to judge the appropriateness of
price changes are vague, subjective, and explicitly not related mechanically to
costs. Uncertainty over the criteria to be used in practice has led British
industry to protest the proposed system.
Although the wage agreement with the TUC has not yet been concluded,
it appears that it will be more flexible than the last two years' agreements. It
is important that the next phase of the U.K.'s incomes policy -- to begin August 1
-- be more flexible with regard to such factors as pay differentials, incentive
schemes, and new fringe benefits (the miners have already negotiated a new fringe
benefit -- early retirement -- to be effective in August); another year of inflex-
ible restraint would further distort the wage structure and inhibit constructive
changes in industrial relations. In any case, it is unlikely that the TUC and/or
the individual labor unions would be willing to accept another year of wage
RESTRICTED
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- 7 -
restraint as rigid as has been in force for the last two years. Although the
incomes policy seems to have improved British industrial relations during the
past two years, recently it has become an irritant. Many of the recent labor
problems in the U.K. auto industry, in particular, seem to stem from the erosion
of traditional pay differentials among skilled workers.
In his budget message, the Chancellor was careful not to commit the
government on what would constitute a satisfactory wage agreement, thereby leaving
the government with room to maneuver. Bargaining over phase three should begin in
earnest now. According to the Chancellor, the proposed tax measures would increase
the take-home pay of a married man earning £80 per week (roughly average earnings
for men) by £2 a week (2-1/2 per cent), as much as would a 4-1/2 per cent increase
in pre-tax wages.
RESTRICTED
RESTRICTED
- 8 -
TABLE 1
U.K. PUBLIC EXPENDITURE PLANS
£ MILLION AT 1976 PRICES
1976/77
1977/78
1978/79
Total public expenditure, including
53,698
52,502
53,130
sale of BP shares as a negative
expenditure
(Percentage change from previous
year)
(+1.4)
(-2.2)
(+1.2)
Total public expenditure, excluding
53,698
53,002
53,130
sale of BP shares
(Percentage change from previous
year)
(+1.4)
(-1.3)
(+0.2)
Total public expenditure, excluding
50,900
49,800
49,800
government loans and capital grants
to the nationalized industries, sale
of BP shares, and debt interest *
(Percentage change from previous
year)
(+ .8)
(-2.2)
( 0.0)
* This total apparently is the one reported in the IMF Document, United Kingdom --
Request for Standby Arrangement, December 16, 1976.
SOURCE: The Government's Expenditure Plans: I, London, January 1977.
RESTRICTED
GEROLD'S
RESTRICTE
- 9 -
TABLE 2
CHANGES IN PUBLIC EXPENDITURE PROGRAMS SINCE
LAST YEAR'S WHITE PAPTER ON PUBLIC EXPENDITURE
£ MILLION AT 1976 PRICES
1976/77
1977/78
1978/79
Current expenditure on goods
and services
+ 171
- 215
- 158
Capital expenditure on goods
and services
- 60
- 755
- 735
Subsidies and grants
- 138
+ 247
+ 741
Other transfers
+ 107
- 901 *
- 497
Total
+ 80
-1,624
- 649
* Includes the sale of BP shares as a negative expenditure.
SOURCE: The Government's Expenditure Plans: II, London, February 1977.
RESTRICTED
UNITED KINGDOM: ECONOMIC INDICATORS
(SEASONALLY ADJUSTED, UNLESS OTHERWISE INDICATED)
MARCH 30, 1977
1974
1975
1976
1975
1976
1976
1976
1976
1977
1976
1976
1976
1976
1977
1977
1977
IV
I
II
III
IV
I
SEPT
OCT
NOV
DEC
JAN
FEB
MAR
REAL GDR, 1970=100
110.1
107.8
109.0
107.4
109.2
108.4
108.6
109.7
N,A,
N.A.
N.A.
N.A.
N.A.
N,A,
NoA.
N,A,
REAL SBP, PER CENT
RESTRICTED
CHANGE (1)
0.5
-2.1
1.1
0.7
1.7
-0.7
0.2
1.0
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
NoA.
N.A.
INDUSTRIAL PRODUCTION
1970=100
106.3
101.1
102.2
100.4
101.9
102.5
101.6
102.8
N.A,
102.5
102.5
103.0
102.9
103.9
N.A.
N.A.
STRIAL PRODUCTION
PER CENT CHANGE (1)
-3.4
-5.0
1.1
1.1
1.5
0.6
-0.8
1.2
N.A.
1.7
0.0
0.5
-0.1
1.2
N.A.
N.A.
UNE-PLOYMENT RATE(%)
2.5
3.9
5.3
4.7
5.1
5.2
5.5
N.A.
5.5
5.5
5.5
N.A.
5.5
5.0
5.5
5.5
WHOLESALE PRICES (NSA)
PER CENT CHANGE (1)
23.4
24.1
16.4
3.0
3.9
3.0
4.1
4.8
N.A.
1.3
1.0
2.0
1.1
3.2
1.3
N.A.
CONSUMER PRICES (NSA)
RESTRICTED
PER CENT CHANGE (1)
10.0
24.2
16.6
3.4
3.6
3.7
2.3
4.6
N.A.
1.3
1.8
1.4
1.3
2.6
1.0
N.A.
AVERAGE EARNINGS
PER CENT CHANGE (1)
17.5
26.6
15.8
3.6
3.3
3.1
2.7
2.7
N.A.
-0.4
1.1
1.2
1.8
0.1
N.A,
N.A.
10 I
MONEY STOCK (M1)
PER CENT CHANGE (1)
3.0
19.0
16.6
2.8
3.5
3.4
4.5
1.3
N.A.
2.3
=1.8
1.2
0.9
"1.6
1.3
N.A.
YONEY STOCK (-3)
PER CENT CHANGE (1)
19.4
10.0
10.7
1.7
1.9
2.8
4.6
3.5
N.A.
2.5
1.2
0.4
-0.7
=1.2
-0.3
N.A.
BUDGET DEF. (.) 3R SUR.(+)
15 PER CENT OF GNP
-4.8
-9.1
-n.2
-10.4
-5.5
-8.4
-5.9
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
N.A.
(
EXPORTS, FUB
($ BILLION)
37.2
42.6
44.4
10.5
10.8
10.8
11.0
11.7
N.A.
3.8
3.8
3.8
4.1
4.2
4.2
n.s.
IMPORTS, FOB
($ BILLION)
49.4
49.7
50.8
11.8
11.9
12.5
13.1
13,3
N.A.
4.5
4.3
4.5
4.5
5.1
4.5
N.A.
TRADE BALANCE($BIL)
=12.2
-7.1
-6.5
-1.3
=1.1
-1.7
-2.0
-1.6
N.A.
-0.6
-0.5
-0.7
-0.4
-0.9
-0.3
N.A.
CURRENT ACCOUNT BALANCE
is BILLION)
-7.8
-3.7
-2.5
-0.5
-0.2
-0.8
-0.9
-0.6
N.A.
-0.3
-0.2
-0.4
0.0
-0.5
0.1
N.A.
(1) PER CENT CHANGE FROM PREVIOUS PERIOD.
GUARTERLY CHANGES AT QUARTERLY RATES: MONTHLY
CHANGES AT MONTHLY RATES,
OF
THE
TREASURY
THE SECRETARY OF THE TREASURY
WASHINGTON
1789
JAN 14 1977
Dear Mr. Chairman:
With respect to the official sterling balances facility
that has been the subject of extensive discussion among the
U.S. Treasury, the Federal Reserve System, the Bank of
England and the governors of the other central banks repre-
sented at the BIS in Basle, I should like to confirm the
following agreement between the Treasury and the Federal
Reserve.
In light of the agreement that has now been reached in
Basle and of our existing mutual understanding about the
prospective implementation of that agreement we agree to
the following arrangements for joint Federal Reserve-U.S.
Treasury participation in the facility.
-- If the U.S. is required to provide financing
to the BIS in support of that facility, the funds
will be provided initially by the Federal Reserve
through its existing swap arrangement with the BIS,
taking the form of a usual three-month swap renewable
three times.
-- Should the Federal Reserve be called upon to
provide financing under the terms of the facility
continuously for more than one year, in light of the
close cooperation between the Treasury and Federal
Reserve, such financing will be provided to the Federal
Reserve System by the U.S. Treasury, acting through
the Exchange Stabilization Fund.
-- Risk associated with U.S. financing of the
facility, whether such financing is provided by the
Federal Reserve or the Exchange Stabilization Fund,
will be borne equally by the Federal Reserve and the
Exchange Stabilization Fund.
I understand that the BIS has agreed, as part of the
sterling balance facility, to make every effort to finance any
U.K. drawing by raising funds in other markets, thereby
limiting the need for official financing for the facility.
Sincerely yours,
Bill William E. Simon
The Honorable
Arthur F. Burns
Chairman, Federal Reserve Board
Washington, D. C.
RESTRICTED
April 4, 1977
TO:
Chairman Burns
FROM: Ted Truman EMT
I have reread Secretary Simon's letter to you of January 14
concerning the official sterling balances facility. The letter does
promise an unambiguous Treasury take over of any Federal Reserve claims
under the facility that are continuously outstanding for more than one
year.
A copy of the letter is attached.
RESTRICTED
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 4, 1977
To Chairman Burns
Subject: The Effects of the Proposed
From David H. Howard
Changes in U.K. Personal Income Taxation
Attached is a table showing the effects on different income
groups of the personal income tax changes proposed in the U.K. budget,
which you requested at this morning's briefing. For your information,
I have attached another table presenting the U.K.'s personal income
tax schedule before and after the changes proposed in the budget.
Attachment.
BOARD GOVERNORS SYSTE
OF RESERVE PM
FEDERAL 1977 APR -4 5: 5:02 02
OFFICE THE RECEIVED CHAIRMAN
David H. Howard
April 4, 1977
Effects of All Income Tax Changes Proposed in U.K. Budget
Single Person; All Earned* Income (£)
Proposed Reductions
Fiscal 1976/77
Proposed Fiscal 1977/78
in Taxes
Income
Average
Marginal
Income
Average
Marginal
Percentage
Earned Income
Tax
Rate
Rate
Tax
Rate
Rate
Total
of Income
(
2,500
617.75
24.7
35.0
559.35
22.4
33.0
58.40
2.3
4,000**
1,142.75
28.6
35.0
1,054.35
26.4
33.0
88.40
2.2
5,000
1,492.75
29.9
35.0
1,384.35
27.7
33.0
108.40
2.2
6,000
1,856.00
30.9
40.0
1,714.35
28.6
33.0
141.65
2.4
7,000
2,294.25
32.8
45.0
2,058.00
29.4
40.0
236.25
3.4
8,000
2,782.50
34.8
50.0
2,467.75
30.8
45.0
314.75
3.9
9,000
3,320.75
36.9
55.0
2,927.50
32.5
50.0
393.25
4.4
10,000
3,909.00
39.1
60.0
3,437.25
34.4
55.0
471.75
4.7
(
15,000
7,235.50
48.2
70.0
6,516.50
43.4
70.0
719.00
4.8
20,000
10,948.75
54.7
75.0
10,176.25
50.9
75.0
772.50
3.9
25,000
15,039.95
60.2
83.0
14,181.85
56.7
83.0
858.10
3.4
*
It is proposed that the tax surcharge on investment income be 15 per cent on inves tment income over £2, OOO
(for those under 65 years old) and 10 per cent on such income between £1,500 and £2, 000.
**
Approximately average earnings for men.
David H. Howard
April 4, 1977
1. The U.K.'s Proposed Personal Income Tax Schedule
GERALO
Taxable Income (£)
Proposed Tax Rate
Former Tax Rate
0-6, 000
33
35-40
6, 000-7, 000
40
45-50
7, 000-8, 000
45
50-55
8, 000-9, 000
50
55-60
9, 000-10, OOO
55
60
10, 000-12, 000
60
65
12, 000-14, 000
65
70
14, 000-16, 000
70
70-75
16, 000-21, 000
75
75-83
over 21, 000
83
83
2. The U.K.'s Proposed Investment Income Tax Surcharge Schedule
Investment Income (£)
Proposed Tax Rate
Former Tax Rate
Under 65 years old:
0-1, 500
0
0-10
1, 500-2, 000
10
10
over 2, 000
15
15
65 years old and over:
0-2, 000
O
0-10
2, 000-2, 500
10
10
over 2,500
15
15
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 18, 1977
To
Chairman Burns
Subject:
The Pound Sterling's Recent
From
Larry Promisel
Strength and U.K. Reserves
Attached is a short note in reply to the question that
you raised at last Friday's briefing.
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Date April 18, 1977
To
Mr. Promisel
Subject: The Pound Sterling's Recent
From
David H. Howard
Strength and U.K. Reserves
RESTRICTED
The pound sterling has been quite strong so far this year --
since January 1, sterling has appreciated some 1-1/2 per cent on a trade-
weighted basis and net intervention purchases of dollars by the Bank of
England have been about $4.4 billion. Such intervention purchases, plus
loans from the IMF and commercial banks, have helped to increase U.K.
exchange reserves from $4.1 billion at the end of December to $9.6 billion
at the end of March.
The turnaround in sterling's position stems in part from an in-
crease in confidence in the United Kingdom following the December IMF
loan agreement, the January sterling balance agreement, and the Euro-
dollar loan also announced in January. The increase in confidence made
sterling interest rates appear very attractive, and encouraged a reversal
of the shift in the timing of commercial payments that took place last
year. In addition, North Sea oil flows have become more noticeable, further
boosting confidence. March's budget -- with its adherence to the conditions
of the IMF agreement -- reinforced this upturn in confidence. Finally, per-
haps $1 - 1-1/2 billion of the capital inflow in recent months has been due
to a change in U.K. exchange controls that restricted the use of sterling
finance of third-country trade.
RESTRICTED
Mr. Promisel
RESTRICTED
- 2 -
The pound sterling is likely to continue to exhibit some
external strength in the longer run, at least relative to what might
be expected to occur given its high rates of inflation, because of
the effect of North Sea oil on the U.K.'s current account. The U.K.
authorities probably will continue to build reserves rather than
allow a significant appreciation of sterling in order to be able to
meet the U.K.'s external debt payments in future years, and to keep U.K. ex-
ports of manufactured goods competitive. Between 1977 and 1985, the U.K.
public sector must pay or roll-over some $18 billion in external debts. In
addition, at the end of 1976, official reserves as a per cent of the
U.K.'s annual import bill were much less than they had been
earlier in the 1970's. Thus, a case could be made for accumulating
reserves rather than letting the exchange rate rise. Furthermore,
the agreement with the IMF included something of a commitment by the
United Kingdom to maintain a "competitive" exchange rate. A final --
short-term -- reason for avoiding a sterling appreciation now is that
the third phase of the U.K.'s incomes policy is yet to be negotiated,
and until it is, the market for sterling is likely to be unsettled.
(For example, a discouraging statement by a union leader on April 14
weakened sterling and the Bank of England sold dollars.) Therefore,
keeping sterling from rising now may keep it from falling precipitously
later this year.
RESTRICTED