A BUDGET FOR STERLING AND A BUDGET FOR JOBS

Abstract

In our assessment macroeconomic policy is now tighter as consequence of the Budget than we had assumed in February. We interpret the Budget speech as indicating higher interest rates (tighter monetary policy) and, in consequence, a stronger exchange rate. On this basis we find that the prospects for inflation are slightly better than before, though output is weaker. Additionally we forecast a PSBR in 1985‐6 of £ 63/4bn, below the official forecast of £7.1bn but in line with our February forecast. Of £7.1bn but in line with our February forecast. Because output is lower, however, this implies a tighter fiscal policy. The other main change to our forecast is unemployment. The changes to National Insurance Contribution scales represent a very cheap way of reducing the cost of employing the lower paid, and we estimate that these measures, together with the extension of the Youth Training Scheme and Community Programme, will create an extra 375,000 jobs and training places by 1988. However these effects are partially offset by the effects on output of the higher interest rates and higher exchange rate that we are now forecasting. When account is also taken of the increase in labour supply that follows any increase in employment, the net effect on unemployment is to reduce it by 300,000 by 1988 compared with our February forecast.

Labour costs and employment policy

“…This estimate is remarkably similar to the 'ball-park' forecasts of the time. (13) For example, the London Business School (Dicks and Robinson, 1985) produced a forecast of 150,000 new jobs created over the 5 years following the changes. Arguments were based on the aggregate workforce.…”

“…A 1 per cent increase in the contributions payable on the higher paid funded a 5 per cent reduction in contributions payable on the low-paid (Dicks and Robinson, 1985).…”