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There were two pressing problems: how to pay for the war, preferably by increased taxation rather than borrowing, and how to limit inflation. After the change of government in 1940, the economist John Maynard Keynes had a direct influence on policy. Keynes argued that the level of taxation should be based on an assessment of national income rather than on the perception of what taxpayers would tolerate. Sir Kingsley Wood's April 1941 budget was based on a White Paper on national income and expenditure. All classes of taxation were increased during war, increasing revenue but also reducing inflation. More efficient methods of collection, particularly Pay As You Earn (PAYE), were established. The government also instituted savings schemes that helped to reduce demand for consumables.
Initially, the government sought to finance the war with foreign exchange reserves, a drive on exports, and the sale of gold. The futility of this policy was soon revealed as the financial demands of the war effort rapidly increased throughout 1940. By early 1941, the government was facing bankruptcy as saleable assets were exhausted. The situation was saved by the American Lend-Lease programme, which enabled the British government to receive American imports but defer payment until after the war.
The other means of controlling inflation was to ration consumables at fixed prices. Two systems were used: the coupon system that applied to basic foodstuffs and allowed each individual a weekly allowance, and a points system that allowed flexibility, within limits, in the purchase of certain other goods. At the same time, consumers were protected from price increases by food subsidies. In January 1940, the Chancellor announced that subsidies on a range of foods, initially introduced as a temporary measure, would be continued.
The government saw availability of manpower as the major constraint on the war effort. At the end of 1940, the Manpower Requirements Committee undertook a survey of resources against requirements. The expansion of the armed forces, which reached 4.5 million personnel by 1944, drained manpower from the economy. The shortfall was made up by the absorption of the unemployed and a great expansion in the number of women employed. Industry was divided into three groups: munitions and associated industries, essential industries (including metals and engineering), and less essential industries (such as textiles).
The government directed labour from nonessential to essential industries, resulting in a substantial redistribution of the workforce. The direction of labour was achieved through the Schedule of Reserved Occupations and the Essential Work and Registration of Employment Orders of 1941. The government, however, did not employ methods that might be regarded as coercive. A major exception was the conscription of labour and arrival of the 'Bevin Boys' into the coal industry.
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