Greenbook/Tealbook

Prefatory Note

The attached document represents the most complete and accurate version available based on original copies culled from the files of the FOMC Secretariat at the Board of Governors of the Federal Reserve System. This electronic document was created through a comprehensive digitization process which included identifying the bestpreserved paper copies, scanning those copies, 1 and then making the scanned versions text-searchable. 2 Though a stringent quality assurance process was employed, some imperfections may remain. Please note that some material may have been redacted from this document if that material was received on a confidential basis. Redacted material is indicated by occasional gaps in the text or by gray boxes around non-text content. All redacted passages are exempt from disclosure under applicable provisions of the Freedom of Information Act.

1

In some cases, original copies needed to be photocopied before being scanned into electronic format. All scanned images were deskewed (to remove the effects of printer- and scanner-introduced tilting) and lightly cleaned (to remove dark spots caused by staple holes, hole punches, and other blemishes caused after initial printing).

2

A two-step process was used. An advanced optical character recognition computer program (OCR) first created electronic text from the document image. Where the OCR results were inconclusive, staff checked and corrected the text as necessary. Please note that the numbers and text in charts and tables were not reliably recognized by the OCR process and were not checked or corrected by staff.

Content last modified 6/05/2009.

CONFIDENTIAL (FR)

SUPPLEMENT CURRENT ECONOMIC AND FINANCIAL CONDITIONS

Prepared for the Federal Open Market Committee

By the Staff Board of Governors of the Federal Reserve System

April 2,

1971

SUPPLEMENTAL NOTES

The Domestic Economy Construction.

Expenditures for new construction put in

place showed little month-to-month change in March.

But based on the

data now available, the seasonally adjusted annual rate for February had already reached a record $103.7 billion--6 per cent higher than initially indicated--as a result of substantial upward revisions for February and some earlier months.

(These revisions related mainly to

the "additions and alterations" component of residential construction and to outlays for State and local government projects, by far the major component of the "public" sector.)

Compared with a year earlier, total construction outlays in March averaged 14 per cent higher in current dollars and 5 per cent more in 1957-59 dollars.

The 9 per cent year-to-year increase in con-

struction costs in March was about the same rate of increase as during all of 1970. Even though current dollar outlays for none of the major groups apparently expanded further in March, all reached new highs in

the first quarter as a whole.

Particularly striking was the advance

registered by the public sector.

Reflecting the appreciably increased

availability of funds--discussed in Supplemental Appendix A on State and local financing developments--outlays in this sector actually exceeded the further increase in residential construction expenditures from the fourth quarter of 1970, as indicated in the table.

- 2-

NEW CONSTRUCTION PUT IN PLACE Private All

Total

Residential

None d residential

Public

Billions of dollars Annual

1970 (r)

91.3

63.1

1970 - IV (r)

94.4

65.3

1971 - I (p)

103.0

70.0

29.3

33.8

28.3

31.9

33.4

29.1

35.1

35.1

32.8

31.9

Quarterly (SAAR)

Monthly (SAAR) 1971 January (r)

101.7

69.8

33.4

35.5

February (r)

103.7

70.3

35.4

34.9

33.4

March (p) 1/

103.4

70.2

35.4

34.8

33.2

Per cent change in March from year earlier In current dollars In

1957-59 dollars

14

9

21

--

25

5

2

15

-10

13

1/ Data for most recent month (March) are confidential Census Bureau extrapolations. In no case should public reference be made to them.

Labor market.

Nonfarm payroll employment was unchanged

between February and March at 70.6 million--about the same level as in September just before the GM strike began.

Employment rose slightly

in March in nonmanufacturing activities but manufacturing employment declined further in part because of increased strike activity. Except for the period of the GM strike, manufacturing employment was at its lowest level in March since January 1966.

-3Nonmanufacturing employment is somewhat higher than a year ago.

In manufacturing, however, employment has declined about 1.3

million, including a drop of over a quarter of a million white-collar and technical people, many more than in earlier economic contractions.

NONFARM PAYROLL EMPLOYMENT (Seasonally adjusted, in thousands) 1970 March Total Government Private Nonmanufacturi .ng Manufacturing Production w orkers Nonproductio on workers

September

71,242

70,531

12,503 58,739

12,585 57,946

38,795 19,944 14,512 5,432

38,661 19,285 14,000 5,285

1971 March 70,568 12,879 57,689

39,034 18,655 13,480

5,175

The average workweek rose 0.2 hours in March for rank-andfile workers on private nonfarm payrolls and 0.4 hours for production workers in manufacturing.

These workweek increases followed declines

of about the same size in February, when the workweek figures appear to have been distorted by holidays (Lincoln's birthday during the survey week and the Washington's birthday holiday on the following Monday.) The unemployment rate rose to 6 per cent in March from 5.8 per cent in February.

The rise in unemployment occurred largely among

16 to 24 year-olds--the same group that accounted for the decline of 0.2 percentage points in the over-all unemployment rate in February. On balance, the unemployment situation appears little changed since the end of the GM strike.

At 83.5 million in March, the civilian labor

force has declined since the end of last year and increased only one million over the past year.

- 4 -

LABOR FORCE, EMPLOYMENT AND UNEMPLOYMENT (Seasonally adjusted, in thousands)

Civilian labor force Total employment Total unemployment

Oct.

1970 Nov.

Dec.

Jan.

1971 Feb.

Mar.

83,300 78,691 4,609

83,473 78,550 4,923

83,609 78,463 5,146

83,897 78,864 5,033

83,384 78,537 4,847

83,475 78,475 5,000

--------------- (Per cent)----------------Unemployment rates: Total Men aged 20-24 years Men aged 25 and over Women aged 20 and over Teenagers

Wholesale prices.

5.5

5.9

6.2

6.0

5.8

6.0

10.6 3.2

10.4 3.4

10.9 3.7

10.4 3.5

9.7 3.4

10.0 3.4

5.0

5.6

5.8

5.7

5.6

5.8

17.0

17.6

17.8

17.6

16.7

17.8

Wholesale prices rose at a seasonally

adjusted annual rate of 3.4 per cent between early February and early March--about half the average rate of increase in the first two months of the year.

Farm products dropped somewhat after their sharp February

surge, but increases for processed foods and feeds more than offset the decline.

The rise in industrial prices was faster than in February,

but the increase of about 3 per cent (annual rate) was about the same as the 3-month average and below both the first and second half of 1970.

- 5 -

WHOLESALE PRICES (Per cent changes, seasonally adjusted annual rates)

6 months

All commodities 1/

Farm and foodIndustrials

Crude materials2Intermediate materialsFinished goods 2/ Producer Consumer 2/ Durable

2/

Nondurable-

3 months Dec. 1970

Monthly Jan. 1971 Feb. to to Feb. Mar.

Deec. 1969 to J une 1970

June to

to

Dec.

Mar. 1971

2.6

2.0

6.1

9.1

3.4

-1.8 3.9

-.5 3.4

13.7 2.9

33.5 1.6

1.1 3.0

8.7 4.5

.7 1.6

1.7 4.4

-1.0 3.3

-7.6 6.6

3.7 2.5

6.4 5.5

3.5 1.5

3.2 0.0

2.1 -1.1

2.7 2.6

5.9 4.9

2.6 1.1

5.6 -3.2

-4.3 0.0

1/ Farm products, and processed foods and feeds. 2/ Excludes foods.

The rise in prices of both consumer and producer nonfood finished goods slowed in the first quarter and increases were substantially below those in the last half of 1970. Lumber and wood products prices rose sharply in March reflecing heavy demand for softwood lumber and plywood.

However, inventories

have been replenished and, more recently, there has been little change in spot prices for softwood lumber and plywood. Nonferrous metals prices fell last month but more recently nonferrous metal markets have firmed.

Copper, zinc and tin prices

have gone up and further increases for copper and probably for aluminum may follow the reopening of labor contracts in May and June.

- 6-

Steel mill products prices have been raised 1.2 per cent since December compared to 2.5 per cent in the first quarter of last year.

However, judging by the pattern of recent and announced future

increases on products covered by the one-year price guarantee (which

will expire for all products by the end of June), the steel price increase in the first six months of this year may exceed the 6 per cent

rise in the same period last year. Consumer credit.

The February increase in consumer instal-

ment credit outstanding amounted to $1.2 billion at a seasonally

adjusted annual rate.

Almost all of the gain occurred in automobile

credit and in personal loans.

Automobile credit outstanding rose $0.6

billion, the largest monthly increase for this component since November 1969.

On the other hand, nonautomotive consumer goods credit declined

for the first time since June 1961. Seasonally adjusted extensions of instalment credit during February exceeded the previous high reach last July.

Repayments were

at a record level for the second month in a row.

The Domestic Financial Situation Monetary aggregates.

The narrowly defined money supply,

currency plus private demand deposits, (M1) is now estimated to have increased in March at an annual rate of about 9.5 per cent--below the unusually sharp February increase but substantially above the late 1970 pace.

Over the first quarter, growth was at an annual rate of about

8 per cent compared with 3.4 per cent in the fourth quarter of 1970 and 6.1 per cent in the third.

- 7The rate of growth in M 2 (M1 plus commercial bank time and savings deposits other than large CD's) also slowed somewhat in March-an annual rate of about 18 per cent compared with 22 per cent in February.

Over the first quarter, however, expansion at an annual rate

of 17.5 per cent was almost double the rate of growth in the fourth quarter. MONETARY AGGREGATES (Seasonally adjusted percentage changes at annual rates) 1970 1970 QIV

Concepts of money M

1 Currency plus private demand deposits

January

1971 1971 February March e/ QI e/

3.4

1.1

14.0

9.5

8.0

9.2

11.5

22.1

18.0

17.5

MMplus commercial bank time and savings deposits

other than large CD's e/ Estimated. Bank credit.

Preliminary estimates now available for March

indicate that commercial bank credit, adjusted for transfers of loans between banks and their affiliates (and also for System matched salepurchase transactions outstanding at the February month-end) increased at an annual rate of 11.6 per cent--somewhat below the rate earlier in the first quarter.

Expansion in loans slowed reflecting principally

weakness in business loans.

Borrowing by businesses declined at an

annual rate of 6-1/2 per cent in March following growth at an annual rate of about 10 per cent earlier in the year.

- 8 -

Growth in investment holdings accounted for two-thirds of the total credit growth in March--a somewhat higher proportion than in January or February.

Expansion in holdings of municipal and Federal

agency issues--which had slackened in February--accelerated in March to an annual rate of over 33 per cent--not too far below the high late 1970-early 1971 rates.

But the pace of expansion in holdings of U.S.

Government securities declined somewhat despite two Treasury financings.

COMMERCIAL BANK CREDIT ADJUSTED TO INCLUDE OUTSTANDING AMOUNTS OF LOANS SOLD TO AFFILIATES-(Seasonally adjusted percentage changes, at annual rates)

2/

Total loans & investments-

U.S. Government securities

1971

1970 Q IV

Jan.

Feb.

6.1

14.9

13.14

11.6

24.7

10.1

14.5

19.0,

33.4

31.3

4/

2.8

8.3

Other securities

34.5

39.3

Total loans 2/

-1.0

9.1

9.4

-9.2

5.4

14.0

3/ Business loans-

Mar.

-

/

44/

QI 13.3

4.9; -6.4

7.8 4.3

1/ Last Wednesday of month series. 2/ Includes outstanding amounts of loans sold outright by banks to their own holding companies, affiliates, subsidiaries, and foreign

branches. 3/ Includes outstanding amounts of business loans sold outright by

banks to their own holding companies, affiliates, subsidiaries, and foreign branches. 4/ Excludes $814 million of System matched sale-purchase agreements outstanding on February 24.

Nonbank depositary institutions.

Mutual savings banks in

New York City have, as expected, incurred only very modest outflows

during the beginning of the current reinvestment period, the three grace days at the end of March.

Similar data are not yet available for savings

and loan associations but there is every reason to expect that they also will experience only minimal outflows.

In fact, according to a

usually reliable FHLBB sample of associations, the industry received a net deposit inflow of about $2.5 billion during the first three weeks of March.

That amount is almost two-and-one-half times as great as the

inflow during the corresponding period in 1967--a similar period of large deposit growth--and already matches the savings received during all of February (not seasonally adjusted).

15 LARGEST NEW YORK CITY SAVINGS BANKS Net Deposit Flows during the Three-Day End-of-March Grace Period 1/

Millions of dollars 1966 1967 1968 1969 1970 1971 1/

-121 - 55 - 72 - 99 -146 - 42

As per cent of deposits outstanding -. -. -. -. -. -.

78 34 40 53 78 20

These savings banks account for 28 per cent of industry deposits. These data have been adjusted for repayments of passbook loans made

earlier to save interest credited.

- 10 -

INTEREST RATES 1970 Highs

1971 Lows

Mar. 8

Apr.

1

Short-Term Rates Federal funds (weekly averages) 9.39 (2/18)

4.82 (12/30)

3.41 (3/3) 4.02 (3/31)

3-month Treasury bills (bid) Bankers' acceptances Euro-dollars Federal agencies Finance paper

4.74 5.25 6.50 4.81 5.38

3.32 3.75

7.93 8.75 10.50 8.30 8.25

(1/6) (1/13) (1/9) (1/9) (2/1)

(12/17) (12/31) (12/31) (12/18)

(12/10)

3.65 4.00 5.32 5.05 3.33 (3/5) 3.64 3.88 3.75

CD's (prime NYC) Most often quoted new issue 6.75 (10/30) 5.50 (11/25) 4.00 Secondary market 9.25 (1/23) 5.38 (12/23) 3.90

3.75 3.90

6-month

Treasury bills Bankers' acceptances Commercial paper (4-6 months) Federal agencies CD's (prime NYC) Most often quoted new issue Secondary market

7.99 8.88 9.13 8.50

(1/5) (1/13) (1/8) (1/28)

7.00 (10/7) 9.38 (1/23)

1-year Treasury bills (bid) 7.62 (1/30) CD's (prime NYC) Most often quoted new issue 7.50 (9/16) Prime municipals 5.60 (1/9)

4.78 (12/17) 5.50 (12/4) 5.63 (12/4) 5.12 (12/18)

3.42 3.74 3.88 (e) 4.12 (a) 4.25 4.50 3.66 (3/5) 3.78

5.50 (12/23) 4.00 5.50 (12/23) 3.70

4.13 4.05

3.60

3.67

4.74 (12/31)

4.50 5.50 (12/23) 4.38 2.95 (12/17) 2.35 (3/5) 2.30

Intermediate and Long-Term Treasury coupon issues

5-years

8.30 (1/7)

5.85 (12/4)

5.16

20-years

7.73 (5/26)

6.15 (12/16)

6.16

5.16 5.85

8.60 (6/24) 9.47 (8/28)

7.47 (12/29) 8.57 (3/10)

7.18 8.44

7.23 8.46

9.30 (6/19)

7.68 (12/18) 7.79 (3/3) 7.15

Municipal Bond Buyer Index Moody's Aaa

7.12 (5/28) 6.95 (6/18)

5.33 (12/10) 5.37 (3/5) 5.15 5.15 (12/10) 5.15 (3/5) 5.00

Mortgage--implicit yield in FNMA biweekly auction 1/

9.36 (1/2)

8.36 (12/28)

Corporate Seasoned Aaa

Baa New Issue Aaa

7.43 (3/1)

7.45 (3/29)

1/ Yield on 6-month forward commitment after allowance for commitment fee and required purchase and holding of FNMA stock. Assumes discount on 30-year loan amortized over 15 years. e--estimated

- 11 -

International developments Monetary policy actions abroad.

In Germany, the Bundes-

bank reduced its discount rate from 6 to 5 per cent, and its rate

on advances ("Lombard" rate) from 7-1/2 to 6-1/2 per cent, effective April 1. At the same time, however, it reduced the banks' rediscount quotas by 10 per cent (while allowing banks which had been using more than 90 per cent of their previous quotas to adjust to the new quotas by June 30), and announced that open-market operations with non-banks to absorb liquidity would be intensified.

These

actions are intended to reduce short-term interest rate differentials between Frankfurt and the Euro-dollar market, and thus to reduce the incentive for inflows of foreign funds, without relaxing domestic credit restraints.

They are similar to the actions taken last Novem-

ber, when the Bundesbank lowered the discount rate but increased reserve requirements.

Money market rates in Frankfurt are likely to

remain relatively high; in recent months they have tended to stay near the Bundesbank's Lombard rate (now 6-1/2 per cent). In the United Kingdom, the Bank of England reduced its

discount rate from 7 to 6 per cent on April 1. The main aim, as in Germany, was to narrow international interest rate differentials and discourage inflows of funds which have been very large in recent months.

But in Britain, unlike Germany, some easing of domestic

credit restraints is now thought to be justified by economic prospects. In the Chancellor's budget speech of March 30, he indicated that bank

- 12 -

loans and the money supply would be allowed to increase more rapidly over the year ahead than had earlier been thought appropriate.

(See

Appendix B for a discussion of the U.K. budget and related measures.) The Netherlands Bank lowered its discount rate from 6 to 5-1/2 per cent effective April 5, and the Bank of Italy reduced its rate from 5-1/2 to 5 per cent effective April 5. Earlier, the Swedish Riksbank had cut its discount rate from 7 to 6-1/2 per cent effective March 19, and the National Bank of Belgium had cut its rate from 6-1/2 to 6 per cent effective March 25.

In all these cases, a main consid-

eration was the decline in rates in other countries and in the Eurodollar market; but in Sweden and Italy some easing of domestic restraints was also intended. The Reserve Bank of South Africa raised its discount rate from 5-1/2 to 6-1/2 per cent on March 31.

South Africa has been ex-

periencing a gathering inflation domestically and a large balance of payments deficit. Foreign exchange markets.

Following the announcement on

March 31 of the German monetary actions described above, speculative pressures on the dollar, which had been building for several weeks,

intensified.

Market participants interpreted the German actions as

implying that market interest rates in Germany would remain high, and that German reserve gains would continue.

After an initial

easing, the mark moved back to the ceiling on March 31 and the

-

13 -

Bundesbank purchased $292 million.

On April 1, it purchased an addi-

tional $430 million spot and swapped out $608 million.

By Friday

morning, April 2, the 3-month forward mark, which had been at a discount of 3/4 to 1 per cent per annum last week, had moved up to the spot ceiling rate, and the Bundesbank entered the forward market, selling forward marks outright, to keep the forward rate from moving to a premium.

On that day, April 2, it purchased $137 million for-

ward and $598 million spot.

The Federal Reserve Bank of New York

also sold a small amount of marks forward for Open Market account on April 2. Other EEC currencies and the Swiss franc firmed along with the German mark. cept for the lira.

By Friday, all were at their official ceilings exForward rates for the Netherlands guilder and the

Swiss franc, which had been above their spot ceiling rates for several weeks, moved even higher. Total dollar purchases by the central banks of the Netherlands, Switzerland, France, and Belgium swelled to roughly $450 million on April 2, with Switzerland alone accounting for $360 million. Euro-dollar market.

The U.S. Treasury announced on April 1

that it will sell (for payment April 9) $1.5 billion of 3-month certificates of indebtedness to foreign branches of U.S. banks, at 5-3/8 per cent; allocations to individual banks will be based on their average Euro-dollar borrowings from branches and Ex-Im security

- 14 -

holdings of branches in the computation period ended March 17.

The

Federal Reserve amended its regulations to permit U.S. banks to count toward maintenance of their reserve-free Euro-dollar bases any funds invested by their overseas branches in U.S. Treasury securities offered under this program. Correction.

The liquidity deficit of about $2-1/2 bil-

lion in the first quarter of 1971 was not a record, as stated in the Greenbook on page I-6 and suggested on page IV-1.

A larger

liquidity deficit ($3.8 billion) was registered in the second quarter of 1969, and a deficit about as large ($2.3 billion) in the third quarter of 1969. U.S. PAYMENTS BALANCES, SEASONALLY ADJUSTED, 1969-71 1/ (In billions of dollars, quarterly) Liquidity basis

Official settlements basis

1969 - I II III IV

-1.4 -3.8 -2.3 +.4

+1.5 +1.3 -.6 +.5

1970 - I II III IVp

-1.7 -1.5 -.8 -.8

-3.1 -2.0 -2.0 -3.5

1971 - Ie

-2-1/2

-5

Quarter

e Partly estimated. Preliminary. Excluding new allocations of Special Drawing

p 1/

Rights.

Correction: Section I, page 1. Add "little" after changed at the end of line 3 from the bottom.

STRICTLY CONFIDENTIAL (FR)

APPENDIX A:

STATE AND LOCAL GOVERNMENT LONG-TERM BORROWING ANTICIPATIONS AND REALIZATIONS: FOURTH QUARTER 1970*

Results of the FRB-Census 1/ survey of long-term borrowing ofState and local governments for the

anticipations and realizations

fourth calendar quarter of 1970 2/indicate that individual units postponed or cancelled about $1.8 billion of the borrowing they had planned for that quarter. Approximately 30 per cent of this amount was induced by a combination of the levels of long-term municipal yields then prevailing and expectations of further declines in interest rates. Because of the substitution of other financial expedients, these interest rate induced borrowing setbacks led to only a $60 million postponement or cancellation of capital projects. Moreover, expectations of continued favorable market conditions were reflected in a marked increase in long-term borrowing anticipations for the first half of calendar 1971. Partly offsetting the $1.8 billion of planned borrowing that did not occur, about $1.1 billion of the long-term borrowing actually undertaken during the fourth quarter had not been included in plans by borrowing units as of the end of the third quarter. A falling level of yields was responsible for at least a third of these accelerations.

Borrowing Short-falls The level of long-term municipal yields during the fourth

quarter of calendar 1970 induced about $534 million in short-falls from borrowing plans. As indicated in Table 1, about one-half of this short-fall was experienced by units that deferred plans mainly

1/ The Bureau of the Census is responsible for the design of the sample as well as the polling of respondents. 2/

*

The respondents to the survey accounted for $5.2 billion or about 90 per cent of the $5.8 billion borrowed during the fourth quarter. The difference is fully accounted for by non-response; non-respondents are excluded from this report. The response rate for units in the anticipations survey was about 76 per cent. It is felt that the non-respondents generally had no plans to report and thus anticipations totals are most likely accurate. An 84 per cent response rate was experienced in the realizations survey. Although it is felt that non-respondent performance paralleled the experiences of the respondents, they are not represented in the tables or text. Prepared by Paul Schneiderman, Economist, Capital Markets Section,

Division of Research and Statistics.

Table 1 REASONS FOR BORROWING SETBACKS FOURTH CALENDAR QUARTER, 1970 (Millions of dollars) Interest Rate Induced Expected Too Rate Ceilings High to Fall Total States and State Colleges

Admin. or Legal Delay

All Other

Total

Per cent

202.3

17.3

163.51/

21.5

194.9

29.6

426.8

23.5

Counties

42.8

26.2

0.0

16.6

112.4

75.2

230.4

12.7

Cities & Towns

71.5

1.5

28.7

41.3

274.9

170.5

516.9

28.5

Special Districts

111.3

8.1

1.6

101.6

89.4

23.1

223.8

12.3

School Districts

106.0

12.3

19.3

74.4

137.2

173.2

416.4

23.0

533.9

65.4

213.1

255.4

808.8

471.6

1,814.3

100.0

29.4

3.6

11.7

14.1

44.6

26.0

100.0

Total Per cent

1/

This amount is the result of reports by three State agencies.

A - 3 in anticipation of lower interest rates. The largest volume of borrowing setbacks, however, was not directly related to interest rates. Administrative and legal delays caused a larger than normal $800 million in borrowing postponements and cancellations during the period. Questions concerning the constitutionality of some bond authorizations affected all types of units, while bond limit laws had an additional effect on local units facing expanding needs and fixed tax bases. It is notable that State and local governments now have firm plans to reenter the long-term bond market over the course of calendar 1971, planning to make-up 80 per cent of their fourth quarter borrowing setbacks. The planned make-up rate for those units influenced by interest rates in their decision to cancel or postpone was almost 90 per cent. Capital Outlay Postponements and Cancellations It appears that $385 million of capital projects were postponed or cancelled due to long-term borrowing setbacks in the fourth quarter. Approximately $234 million are currently scheduled to be reinitiated during calendar year 1971, however, leaving a potential net loss for the current year due to fourth quarter 1970 borrowing short-falls of about $151 million. Interest rate induced short-falls in borrowing accounted for only about 16 per cent of the total capital project cutbacks. Indicative of borrowing expectations regarding future interest rates, only $8 million of these projects were expected to be cancelled for the rest of calendar 1971. Long-term borrowing setbacks of about $800 million caused by legal or administrative delays induced postponements of almost $100 million of capital projects. As earlier analysis suggests, a substantial amount of these delayed capital projects is due to be reinitiated during calendar 1971. Alternative Financing Further evidence of State and local governments' expectations regarding financial market conditions in 1971 can be read from the survey results. Approximately $760 million in borrowing short-falls for the fourth quarter of 1970 reflected lack of current need. An attempt to gain better market terms and resolve local legal problems

Table 2 CAPITAL OUTLAY POSTPONEMENTS AND CANCELLATIONS FOURTH CALENDAR QUARTER, 1970 (Millions of dollars) Interest Rate Induced

Gross 1/

All Other Reasons

Cutback

Postponed

Cancelled

55.5

52.0

3.5

24.0

0.0

0.0

0.0

0.0

0.0

Districts

0.0

School Districts

States and State Coll. Counties

Total

Gross 1/ Cutback

Gross 1/ Postponed

Cancelled

Cutback

Postponed Cancelled

19.0

5.0

79.5

71.0

11.9

0.0

11.9

11.9

0.0

11.9

0.0

63.8

28.5

35.3

63.8

28.5

35.3

0.0

0.0

17.7

17.7

0.0

17.7

17.7

0.0

4.5

0.0

4.5

207.4

116.3

91.1

211.9

116.3

95.6

60.0

52.0

8.0

324.8

181.5

143.3

384.8

233.5

151.3

8.5

Cities and

Towns Special

Totals

1/

Gross = Postponed & Cancelled

A - 5 was apparent as 86 per cent of this short-fall has been tentatively rescheduled. Table 3

EFFECTS OF BORROWING SETBACKS FOURTH CALENDAR QUARTER, 1970

Per Cent

Millions of Dollars

Capital Outlay Reductions

385.3 1/

Funds Not Currently Needed

759.8

Alternative Financing:

Short-term Financing

60.3

405.2

Reduction of Liquid Assets

27.1

182.3

Reduction or Postponement of Other Cash Outlays

11.6

77.9

.9

6.1

Other

100.0 Total Effect 1/

671.5 1,816.6 1/

A borrowing short-fall may cause a capital project of a larger magnitude to be cancelled or postponed. Thus the total is larger than the levels of shortfalls.

State and local units with $672 million of borrowing setbacks were able to maintain expenditures by using other financial expedients, as shown in Table 3. Units utilizing these alternatives plan to fund, long-term, about 80 per cent of these alternative financing expedients. As in the past, most of the respondents in this group indicated use of low cost short-term financing to cover their long-term borrowing short-falls. Accelerations in Long-term Borrowing

A decline in bond yields over the course of the fourth quarter induced an additional $343 million in long-term borrowing above plans

A - 6 already formed at the inception of the quarter. As indicated in Table 4 an additional $300 million of accelerations resulted from early autho-

rization, some of which may have reflected the lower level of rates. In all, approximately $1.1 billion was borrowed ahead of schedule during

the fourth quarter. Table 4

LONG-TERM BORROWING ACCELERATIONS FOURTH QUARTER, 1970 (Millions of dollars)

Authorized Sooner than Expected

States & State Colleges

Interest Rate Induced

All Others

Total

111.8

135.2

36.2

283.2

Counties

13.7

16.3

58.7

88.7

Cities & Towns

68.2

98.7

113.5

280.4

Special Districts

65.8

70.2

152.1

288.1

School Districts

42.6

22.5

46.5

111.6

302.1

342.9

407.0

1,052.0

28.7

32.6

38.7

100.0

Total Per cent

Borrowing Anticipations The optimistic outlook for bond yields and the firming of plans by State and local units have been associated with an increase in long-term borrowing anticipations for the first half of calendar 1971 of 40 per cent.

A - 7 Table 5 LONG-TERM BORROWING ANTICIPATIONS AS OF DECEMBER 31, 1970 (Billions of dollars)

Apr.-June 1971 Auth. Unauth. Total

Anticipations

Jan.-Mar. 1971 Auth. Unauth. Total

As of September 30

2.45

1.94

4.39

2.22

1.61

3.83

As of December 31

7.00

.94

7.94

3.42

2.33

5.75

Net Change

4.55

-1.00

3.55

1.20

.72

1.92

Table 6 reflects the growing volume of State and local borrowing, the continued moderating impact of monetary policy on postponements and cancellations of such borrowing, and the subsequent reduced impacts on capital projects.

Maintenance of present credit market conditions is

expected to push long-term borrowing by these governments to a record level in calendar 1971 as projects which have been previously postponed are reinitiated and capital needs continue to accumulate.

Table 6 SUMMARY OF STATE AND LOCAL LONG-TERM BORROWING, SHORTFALL OF BORROWING AND CAPITAL OUTLAYS DUE TO INTEREST RATES (Billions of dollars) Gross Actual Long-term Borrowing 1969 - III

IV 1970 - I

II III IV 1970 - 1

e/

Estimated

Gross Shortfalls Due to High Int. Rates

Cutbacks in Capital Outlays Initiated Due to High Int. Rates

2.5

1.67

0.68

3.0

2.24

1.20

4.1

0.97

.20

3.7 4.4 5.9

1.10 0.59 0.53

.25 .06 .06

6.6 e/

n.a.

n.a.

SUPPLEMENTAL APPENDIX B: THE UNITED KINGDOM BUDGET FOR FISCAL 1971-72*

The British budget for fiscal 1971-72 -- which began April 1 -moves British economic policy in an expansionary direction. The immediate goal of the budget, presented to Parliament on March 30, is to raise the rate of growth of real gross national product, currently running below 2 per cent. This aim is to be achieved mainly through reductions in both personal and business taxes that will reduce revenue by about £550 million (equal to a little less than 1-1/2 per cent of GNP) in 1971-72 and £680 million a year when the reductions are fully operative. Monetary policy will also be eased somewhat. The ceiling on non-priority bank lending is raised to 10 per cent for 1971-72, compared to 5 per cent in the previous year. On April 1, the Bank of England lowered its discount rate from 7 to 6 per cent. The budget presentation also outlined a plan of broad tax reform aimed primarily at simplifying Britain's tax system. As part of that reform, Britain will introduce a value added tax in April 1973. The Budget in Relation to the Current State of the Economy Growth in 1970 was disappointing in light of the widely held expectation a year ago that GNP would expand by at least three per cent a year. The increase from the second half of 1969 to the second half of 1970 was no more than 1-1/2 per cent, and there has been little if any growth thus far in 1971. Seasonally adjusted unemployment has climbed steadily since October and reached 2.9 per cent in March -- exceedingly high by British standards. With growth expected to be sluggish again in 1971, the outlook was for a continued rise in unemployment in the absence of new stimulative measures. The need to check the rise in unemployment -which is about all achievement of the government's 3 per cent growth target can do -- was noted by Chancellor Barber in his budget speech and undoubtedly was a major factor in the government's decision to reflate. The Chancellor acknowledged that inflation remains a serious problem but maintained -- with little evidence -- that the rapid rise in wages that has been the root-cause of inflation would henceforth slow down. He also said that, in any event, the stimulus the government was preparing to administer to the economy would not aggravate what was essentially a cost-push variety of inflation. Wage earnings in 1970 rose by about 14 per cent, while wholesale prices of manufactured goods and retail prices increased by over 8 per cent.

* Prepared by Martin J. Kohn, Economist, Europe and British Commonwealth Section, Division of International Finance.

-2

-

The balance of payments remains strong, thus permitting the government to enact expansionary measures without fear of provoking a

sterling crisis.

The current account is in substantial surplus,and heavy

capital inflows into sterling in the last six months have enabled Britain to reduce its short- and medium-term external debt by $2.3 billion to about

$1.7 billion, all but $56 million of it owed to the IMF.

On March 31, the

British repaid in advance $684 million of the $1.4 billion IMF drawing of June 1968. Principal Stimulative Measures for 1971-72

About half of the tax relief for 1971-72 announced in the budget speech is to be provided directly to business. The corporate income tax, which was reduced from 45 to 42-1/2 per cent in October,will be cut by another 2-1/2 percentage points in 1971-72. The selective employment tax (SET) -- which affects mostly service industries and requires employers to pay a fixed sum per employee -- will be halved in July. The tax reductions for business are almost certainly designed to stimulate investment. Little growth in industrial investment expenditures is expected this year, with a decline from 1970 forecast for investment in the manufacturing sector. The largest reduction in personal taxation will result from an increase in child allowances permitted to payers of income tax. This move will lower revenue by an estimated £163 million in 1971-72 and by £207 million on a full-year basis. Pensions will be raised, effective September 20, with the additional payments expected to total £560 million annually. Though most of the increase will be financed by higher social insurance contributions, the net effect should be stimulative, given the high marginal propensity to consume of pension recipients. In addition to the reductions disclosed March 30, the cut in the standard rate of income tax from 41.25 to 38.75 per cent announced last October will take effect April 6. In general, the standard rate applies to the taxable income of persons with a gross annual income up to £5,500. The cut in the standard rate was not represented, when announced last autumn, as a stimulative measure. It was explained as a counterpart of the reduction in government spending being made in accordance with the Conservatives' long-term program for diminishing the role of the government in the economy, particularly in providing subsidies for welfare purposes. The government also announced several tax reductions, allegedly intended to promote savings and remove inequities, which will ease the tax burden of the wealthy. These measures include: a reduction in the steep progression of marginal income tax rates, with the peak rate lowered from

- 3-

88.75 per cent to 75.4 per cent; elimination of the distinction between short- and long-term capital gains, with the lower long-term rate to apply to all capital gains; and an increase in the amount of an estate that is exempt from taxes. The revenue loss from these measures is expected to be small. The central government expects to run a deficit of about £600 million in 1971-72, and a deficit of £1.2 billion for the public sector as a whole -- which includes, in addition to the central government, local authorities and public corporations -- is predicted. In 1970-71, the central government ran a surplus of about £50 million, while the public sector was in deficit by about £600 million. Monetary stringency will be relaxed in 1971-72, as is indicated by the liberalization of the bank lending ceiling and the cut in Bank rate on April 1. The latter measure came one day after the Bundesbank reduced its discount rate by a full point and was intended at least in part to prevent an intensification of hot money flows into sterling as a result of interest differentials in favor of sterling assets. However, cutting Bank rate is consistent with the expansionary policy laid out on March 30. The money supply will be allowed to expand at an annual rate of

12 per cent in 1971-72, the same rate at which it grew from the end of March to the end of December. The government has thus accepted a rate of increase hitherto considered too rapid.

Long-term Tax Reform Chancellor Barber's speech set forth plans for extensive tax

reform, to be implemented for the most part two years from now.

These

reforms are intended to simplify the tax system and encourage savings, in the interest of promoting economic growth. A value added tax is to be instituted in April 1973, accompanied by the abolition of the SET and pur-

chase taxes.

The latter are excises, collected at the wholesale level, on

a variety of consumer goods, with the rates varying according to categories

of goods. The personal income tax system is to be simplified effective April 1973. A single set of progressive rates will apply to both earned and investment income. The distinction between the two types of income will be retained, however, with a surtax to be imposed on investment income. But the maximum amount of investment income subject only to the basic rate of taxation will be raised. In the business sphere, starting in 1973 corporate income will be taxed in such a way as to remove the current incentive for corporations to retain earnings. The method by which this objective is to be accomplished

has not yet been determined.

At present, all corporate profits are taxed at

the same rate, regardless of the amount distributed in dividends. This, the Conservatives maintain, leads to inefficient allocation of capital investment.