Orders of the Day — Supplementary Vote of Credit, 1940.

– in the House of Commons on 6th February 1941.

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(EXPENDITURE ARISING OUT OF THE WAR.)

Motion made, and Question proposed, That a Supplementary sum, not exceeding £600,000,000, be granted to His Majesty, towards defraying the expenses which may be incurred during the year ending on the 31st day of March, 1941, for general Navy, Army and Air Services and for the Ministry of Supply in so far as specific provision is not made therefor by Parliament, for securing the public safety, the defence of the realm, the maintenance of public order and the efficient prosecution of the war, for maintaining supplies and services essential to the life of the community and generally for all expenses, beyond those provided for in the ordinary Grants of Parliament, arising out of the existence of a state of war.

Photo of Sir Kingsley Wood Sir Kingsley Wood , Woolwich West

May I suggest to you, Sir Dennis, that we should take the two Votes of Credit together? I have consulted with some of my hon. Friends who are interested in this matter, and I understand that they agree to this course if we have your assent.

Photo of Lieut-General Edward Fitzroy Lieut-General Edward Fitzroy , Daventry

It is a matter for the Committee to decide whether to assent to the proposal. I have not the least objection to that course being taken if the Committee give general assent. I take it the Committee assents.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

I think it would be a very sensible plan.

Photo of Sir Kingsley Wood Sir Kingsley Wood , Woolwich West

To-day we are asking for agreement on two Votes of Credit. The first is a Supplementary Vote for £600,000,000 for the current financial, year, and the second is a Vote for £1,000,000,000 for the coming financial year, 1941–42. I will deal first with the Supplementary Vote for the current year. The Committee will remember that in October last, when I asked for a further Vote for £1,000,000,000, I said that on the basis of the average rate of expenditure from the Vole of Credit then prevailing of some £64,000,000 a week, this Vote would not carry us beyond the early days of March. But that weekly rate of £64,000,000 has, in fact, risen with our increasing war effort, and, taking the figures in the last five weeks, it now averages some £73,000,000, and the amount for which I am now asking, with some margin for contingencies, should cover us until the end of the present financial year.

War is always costly, and this war is the costliest and most expensive war in our history. If the Committee agree to a Vote of £600,000,000, this, as can be seen from the statement on the printed Estimate, will bring our total grants for Votes of Credit in the current financial year to £3,300,000,000. In the last war the largest sum granted was £2,500,000,000, in 1918, though this was not all spent owing to the conclusion of the war in that year. The largest sum actually spent was some £2,432,000,000 in 1917. We have, therefore, already passed the highest amount of expenditure in the last war, and the pace is still growing. The other comparison that I would make is in relation to our growing rate of expenditure in the present war. A year ago our daily rate of expenditure was £5,000,000, £4,000,000 of which was for the Fighting Services. To-day that daily rate has risen to some £10,500,000; £8,000,000 for the Fighting Services and £2,500,000 for other war services, such as the outlays of the Ministries of Shipping, Food and Home Security. Our daily expenditure has therefore more than doubled since a year ago, and has increased by nearly £1,500,000 a day since I asked for the Supplementary Vote in October last.

I cannot now forecast what the rate of expenditure will be in the early months of the next financial year, and I have again asked for the sum of £1,000,000,000 because it is the largest sum I can reasonably ask the Committee to grant at one time. Apart altogether from my point of view as Chancellor of the Exchequer, I would say, in connection with the tremendous figures I have given, that they are indeed striking proof of the country's determination to prosecute the war with all its might and with all energy and speed.

I have spoken again to-day of vast sums. It is difficult to convey in words what they and their implications mean to us. These two Votes of Credit are only available for our war services. There are other considerable services of the State: the service of the Debt and the Civil Votes, including our social services, and when we add that expenditure to that on the war we are now spending approximately at the rate of £12,250,000 a day. These are vast and stupendous sums. They have already involved heavy burdens and sacrifices, and they must mean still more. We have not only to consider our immediate vital interests, but also to plan in such a way that we can emerge from this conflict with reasonable prospects for the future and with decent conditions and tolerable lives for the people of this country. All I can say to-day is that all these are, of course, matters for grave and anxious consideration in relation to the next Budget proposals that are now not far distant.

In this connection and in the light of the figures which I have just quoted, I would like to say a word to the direct taxpayers who contribute to the Income Tax, Surtax, National Defence Contribution and Excess Profits Tax. The great bulk of these taxes are payable in the present quarter. I am glad to say that many taxpapers have already paid what is due, and many have even paid in advance. To those who have not yet paid I would make a special appeal for early payment; however difficult or unpleasant payment may be, these taxes are necessary, and our determination to carry the war through to victory can certainly be shown with the readiness with which we pay them. Let me also say this: it is imperative that these great sums shall be well spent, and that the greatest effort should be made to check extravagance and waste, so that not a penny should be thrown away. The House and the country are indebted to the Committee and Sub-committees on National Expenditure for all that they have done and are doing. There is, I know it myself, the great urge and necessity of speed and increased output in connection with the war effort, but there is a danger of waste and extravagance, and to check this is not only a considerable responsibility of the Government, but of every one of us so far as lies in our power. The other day the "Times" said something which would commend itself to most of us. It is this:— The strongest feelings are aroused not by the amount we spend but by the amount we continue to waste. Many criticisms are no doubt based upon misunderstandings and imperfect knowledge, but certainly some are much better founded, and I would only say that I recognise the special responsibility of the Treasury in this matter, and that we shall continue to examine and investigate all complaints brought to our notice, in consultation with the Department concerned.

Let me add another thing. It is also imperative that civilian consumption should continue to be curtailed and that every penny possible should be saved and lent to the State. The National Savings Movement has done splendid work. In the first 12 months of the campaign some £1,140,000,000 was raised by various Government loans and increases in Savings Bank deposits, and for the succeeding eight weeks subscriptions averaged over 26,000,000 a week. These figures are good, but it is vital that they should be exceeded, and I have no doubt, with the higher level of national income which will result from the increasing drive in production and other causes, that they will be considerably increased in the coming year.

I have one other matter to refer to. I will briefly refer to a subject which is a matter of some present discussion, that of an impending danger of inflation. My observations on this, of course, must of necessity be brief, because it is a subject more appropriate to the consideration of the Budget, which, as I have said, will soon be due. We know that war involves a certain increase of prices connected with war conditions and war impediments to production. But inflation is more in the nature of an unhealthy rise of prices over and beyond the necessities of the case. An excessive gap between taxation and savings on the one hand and expenditure on the other is undoubtedly a predisposing cause, and it is often said that the present gap is very great. A superficial study of the figures might support that contention, but, as I was at some pains to point out in my Budget speech last July, we have been able very largely to draw on our outside resources to meet our heavy overseas expenditure, whether in the Empire or in foreign countries, and apart from the savings which individuals patriotically make, there are very large automatic sources of saving which operate in war but are not available to us in times of peace.

I am certainly claiming that, upon a true analysis, the danger of the so-called gap has been greatly exaggerated. But—I emphasise this—this does not mean that I wish to minimise the danger that prices may rise excessively, for there are other elements in the problem, other sources of danger, that need to be carefully watched. In conclusion, I would give an assurance to the Committee that the Government are very much alive to the whole matter, and will not hesitate to take any practical steps to control the danger should it arise—and it is obviously a subject which can be tackled from several angles. Therefore, with those considerations in mind, I ask the Committee, with confidence, to approve these two Votes. We shall not hesitate to make this necessary provision for the war, nor shall we shrink from carrying any of the burdens which it may entail.

Photo of Mr Frederick Pethick-Lawrence Mr Frederick Pethick-Lawrence , Edinburgh East

The Chancellor of the Exchequer has put before us vast figures, and has called upon the Committee to support him and the Government on these Votes of Credit. I do not think there will be any two opinions here as to our action in that regard. The Committee wills victory; and he who wills the end wills the means. One of the means of victory is finance. Therefore, I have no doubt that the Committee will unanimously support the Chancellor of the Exchequer in his proposals. But I should like to say a few words about these vast figures. I want to put them into a shape in which they will mean something tangible to us and to the country as a whole. When the war started, the total expenditure of the State on the war and on the civil requirements was roughly one-third of the total national income. To-day, it is practically certain that that expenditure exceeds one-half of the total national income. The Chancellor's figures, worked out annually, show that we are spending, at the present moment, at the rate of over £4,000,000,000 a year. I think that an optimistic estimate of the total income of the country would not put it much, if at all, above £8,000,000,000; so we have now reached an expenditure by the State of more than half the total national income on the prosecution of the war and on those other civil services to which the Chancellor referred.

It follows that the civil consumption—by that, I mean consumption left in the hands of private individuals—has fallen from two-thirds to something below half the national income. But it does not follow that the amount available for private civil consumption has been cut down in that proportion. Indeed, if we were to judge merely in terms of pounds, shillings and pence, the amount has probably remained the same, at round about £4,000,000,000. Where previously the total income of the country was in the neighbourhood of £6,000,000,000, of which the Government took £2,000,000,000, leaving £4,000,000,000, now the total national income is in the neighbourhood of £8,000,000,000, of which the Government are taking a little over £4,000,000,000, leaving £4,000,000,009 in the hands of private individuals. But if we assumed that the amount available for private consumption had not, in effect, fallen, we should be painting far too rosy a picture. In the first place, we have the very considerable change in the value of money which has taken place; and then, there are other factors to take into account. Still more, if we assumed that for the future we were to be in the same position, we should be departing further and further from reality. The fact is that two things have been taking place.

Before the war began, there was a great deal of what I will call slack—a very large amount of unemployment and under-employment, both of persons and of capital. Now, at last, as a result of the war, we have taken up a very large part of that slack, and there is very little more to be taken up. As the war goes on and the expenditure by the State further increases, we cannot expect any further opportunity of expansion of the real national income, as distinct from its money value. In addition, we are living to a large extent on our hump. That is why this country has neither experienced so much shortage as some people expected nor faced the inflation that some economists prophesied in the early stages of the war. We cannot, in either of those respects, look forward to the same success in future. The hump, after all, representing a reduction in variage stages, leading up to a final reduction in consumption goods, was of limited amount. The time must come when that hump is finished; and we are approaching that time to-day. As I have said, we have taken up a great deal of the slack. There may be a little left—there is a reservoir of labour: a number of women, and some men, who can be taken into the labour field—but, broadly speaking, we are approaching the time when the reserves will be all enmeshed in the productive effort, and when no further increase will be possible.

It follows that we can expect very little increase in the real national income, and that we shall then be faced with the difficulties that were prophesied earlier. But there is one great thing that we may hope to get that will be a set off against that. Up till now we have had this cash-and-carry principle with the United States, and though the resources for that have largely been found on our part out of capital rather than out of income, it has been a drain upon our resources. If the Measure which they are adopting in the United States is carried into law, as we have every reason to hope and believe that it will be, that will, at any rate for the time, relieve us of our immediate concern of paying for these supplies. I am quite sure that I am expressing not only on my own behalf, but on behalf of all the Members of the Committee and of the country our deep sense of gratitude for the generosity which that proposal involves, and we hope very much that the generous attitude of the President will find expression in Congress in carrying that Measure to a conclusion.

But that will only take us a certain way. It is very important, as the Chancellor has already said, that we must not waste a single penny, but when we have done all that, it will still mean that, if we are to avoid inflation, we must tax and save to the utmost limit of our ability. That is a lesson both for the Chancellor himself and for us in this Committee, and for people up and down the country. The lesson for the Chancellor of the Exchequer is one which we have often put before him, that he shall be bold in his plans that he is now making, or will be making at an early date for the Budget speech which he will be making later. Much as the people of this country dislike being taxed, much as they have a difficulty in meeting the demands which the Chancellor of the Exchequer imposes upon them, and much as are the hardships which are inflicted, the people of this country, as I said at the beginning, have the will to victory and the will to means, and they are prepared to face the financial burden with the same courage and determination with which they are facing the other dangers and troubles which this war is bringing upon them.

There is an injunction upon the people of this country that those who are in any way in a position to do so must save not only on the present splendid scale, but on an increasing scale, because if the Chancellor of the Exchequer withholds his hand from taxation, and if the public do not save on a greater scale, then this inflation trouble will come upon us with all the disadvantages it involves and with all the haphazard methods of taxation it brings about. And there is no hokey-pokey by which you can avoid having to pay for the war at the time, no financial device, no theoretical methods by which you can get out of having to face the real physical facts of the situation. Therefore, the Committee, I believe, will support this Vote of Credit, and they will bear in mind that these vast sums will involve grave sacrifices in the future, but they will bear them in the spirit in which the country is facing all the other difficulties to uphold the liberties of the people of these islands and of the world as a whole.

Photo of Mr Henry White Mr Henry White , Birkenhead East

When I first received these two documents from the Vote Office, I was struck with the reflection that in all probability so large a bill had never been presented before in such a very small number of words, and I was rather relieved to hear it said to-day that £1,000,000,000 was considered to be the largest single sum that could be presented to the House. But when we remember that it is not the Budget figure but merely one milestone towards the Budget, we realise what a distance we have travelled since the days before the war, when the prospect of a total Budget for the year of £1,000,000,000 struck one of the right hon. Gentleman's immediate predecessors with feelings bordering upon dismay, which, incidentally, were shared by the public at large. It is a further remarkable circumstance that to-day not only will these figures be passed by common consent, but, I understand, also by the common consent of the Committee, we do not propose to discuss them at any great length, but to devote ourselves to some consideration of Departmental matters. But, as the Chancellor of the Exchequer pointed out, what happens in this way to-day does not mean that the country is not concerned about what is going on.

I was glad to hear the words which fell from his lips about the need for proposals for further economy. That is the case. My post is punctuated regularly with selections of pictures from popular papers which are alleged to indicate small items of extravagance, in uniforms and the like, which indicate that the public are alert on these matters and are feeling anxious. But the public have no right, nor indeed, I think, have they the wish, to complain about the growth of expenditure. The Chancellor of the Exchequer has reminded us that at this time last year our expenditure was at the rate of £5,250,000 a day on war services alone, whereas to-day, including the whole of our expenditure, it amounts to £12,500,000. But at this time last year and at the time of the Budget last year, the public were aghast at the smallness of the figure. Our expenditure was running at the rate of £2,125,000,000 a year, and it was rightly felt that, if that was the figure to be taken as the measure of our war effort, it was utterly inadequate to express the national effort. Therefore, there can be no complaint from the public that the expenditure has risen until it is now running at the rate of something over £4,000,000,000 a year, with the prospect of rising further, provided that our economy is regarded as a whole with both feet of our policy fixed firmly on the ground. By that I mean that our financial and fiscal arrangements in the next Budget will need to be brought into line with the arrangements for manpower and production on which the House has recently conferred.

The Chancellor spoke of the way in which our expenditure has risen since the Budget, and he referred in grave words to the gap which exists between our expenditure and what we receive out of current revenue plus loans. He did not, however, point out that that gap is steadily growing, and that, whereas we set out with the target in our minds of raising 50 per cent. of our war expenditure by taxation, that target is a disappearing one. It is my view that no longer is 50 per cent. of our expenditure being raised by taxation, but that the figure is more like 30 or 35 per cent., and that is a matter which must be a challenge to the House of Commons and also to the country. The Chancellor said that these matters would have to receive grave and serious consideration in the Budget, but I would point out that so far as the House and the ordinary Members of Parliament are concerned, when we reach the Budget it is too late to give serious consideration to the criticisms which may be brought forth. Therefore, I hope the Chancellor has already made up his mind on some plan. Probably rightly, he has refrained from making any great forecast. Those without responsibility can be more venturesome and rush in where angels fear to tread. If the national income rises in the same proportion as it has done since the war started—it is probably running now at the rate of some £8,000,000,000 a year—it will expand to not less than £9,000,000,000 during 1941–42 and the expenditure on the same basis would be over £5,000,000,000.

It is quite clear that we shall have a gap, in the absence of fresh methods of raising money, and here may I add that I wish the Chancellor had enlightened us as to whether he is satisfied with the revenue now coming in from the Purchase Tax and the Excess Profits Tax? When every allowance is made for a reasonable increase of revenue on our present basis of taxation this will be a gap of something like £3,400,000,000 to be filled by voluntary savings and other ways. I have the greatest admiration for the work of the voluntary savings scheme, and I am glad to know that some 30 towns will be startting War Weapons Weeks. I hope they will have every success. I think I am right in saving that for the last week in January the total of voluntary savings from all sources was £10,134,000, which is considerably less than the £12,500,000 we are spending per day at the present time. That is a fact which all concerned with the War Savings Movement should get into their minds. Those who have a rising determination to support and forward the movement must have this question in their minds if they look at the future with prudence. The time may yet come when that principle may have to be fortified by some other method, though whatever that may be no one, of course, can prescribe at this moment.

But certain lessons may be learned from the study of this problem. I very much doubt whether this country has proceeded as far as it ought to have done, and could do, with rationing and price-fixing, and, perhaps with advantage, the rationing of money which an individual should receive. There are many in the country to-day whose incomes have increased as a result of the war, and there can be no injustice whatsoever in requiring them to invest the whole or a portion of their increased income for the benefit of the State. That leads me to emphasise the point made by my right hon. Friend the Member for East Edinburgh (Mr. Pethick-Lawrence), who said that civilian consumption must be reduced. It is important for every individual to save as much as he possibly can and lend as much as he possibly can. There is another thing he can do, even if he does not feel able to lend every penny. He can at least refrain from spending every penny. It is just as important to refrain from spending as it is to lend. Despite the reduction in the size of our hump, there is still a little bit left, and if that is not done it is quite clear that the public will be raising grave and serious inconveniences for themselves if the process of inflation occurs.

I am concerned about seeing some method devised to fortify voluntary savings. I am quite convinced in my own mind that if we are to go forward with the special bankers' credit which, if my memory serves me right, amounts to some additional £500,000,000 in the current year, that cannot be continued without a very inconvenient rise in prices. In conclusion, I would say to the Chancellor, with all humility, that if he would cast his mind back to the Budget speech of April, 1940, and his special Budget of the Autumn of last year, he will remember the severe taxes imposed at that time, which, he said, would have been severer had it not been necessary to make some allowances for people to change their methods. The result of his levies and taxes was received, not with cries of indignation and dismay at the heaviness and cruelty of his extortions but with relief at the leniency with which he treated the taxpayer, and it may well be that the public are ready to follow any lead in the region of finance as they have been in other spheres.

It is in the next few weeks, if they have not already been arrived at, that some decisions must be taken which will make it quite certain that we shall not be left with a growing gap between expenditure and tax and loan revenue, to be filled as occasion may serve by methods which can only aggravate our difficulties. People had better be prepared to face a stricter system of rationing in every way and a rationing of expenditure so that we may concentrate the maximum of effort upon the war. I do not know whether it is realised throughout the country that every penny spent needlessly is a direct detraction from our war effort.

Photo of Mr John Wardlaw-Milne Mr John Wardlaw-Milne , Kidderminster

Truly, the figures which the Chancellor has put before us to-day are more than stupendous, and he and my hon. Friend opposite have drawn attention to the magnitude of these figures and the importance of the issue which lies before this country if we are to avoid inflation. I am very grateful to my right hon. Friend the Chancellor for the kind reference which he made to the work of the Select Committee on National Expenditure. I was told the other day that the Select Committee is the policemen who look after the operations of the Government in the interests of the taxpayers. As we all know, the policeman's lot is not a happy one, and I do not know that he is always particularly popular, but in thanking my right hon. Friend for his tribute, it is right that I should say that the Members of the House who work in the Select Committee do an immense amount of public work, almost unending in its character and unlimited in its scope, such is the nature of the tremendous war expenditure that has to be examined. I should like to return the compliment, very genuinely and wholeheartedly, by saying that we who, in the Select Committee, have to bring so many things to the notice of the Treasury are glad to be able to feel that we not only work in complete harmony with the Departments and the Treasury in particu- lar, but that they examine with care the suggestions which we put before them.

I was especially interested in the latter part of my right hon. Friend's remarks, when he spoke on the question of how the country is to avoid inflation. I agree with the hon. Member for East Birkenhead (Mr. Graham White) that it was not perhaps unexpected by some of us that the public's reaction to the Chancellor's last Budget statement was one of relief and, I would add, almost one of surprise that they had not been further taxed. I think this must have been a source of satisfaction to my right hon. Friend, for it showed that the people of this country fully realise that the war has to be paid for. Of course, the problem which my right hon. Friend has to face is not only how much taxation can be imposed, but how much the pubic can bear. It is a question of balancing what is the highest sum that can be taken in taxation against the amount which industry and individual earnings can bear. I think the Treasury have also to be congratulated upon the rate at which they have been able to raise money. From that point of view, this war is very much cheaper than the last one, and although there is this enormous deficit, which the Chancellor has not made any pretence of disguising, we are able to cover some of it by measures which in themselves are satisfactory from the war standpoint, and perhaps more satisfactory than any of us expected a year ago. However, this does not alter the fact that the gap is still an enormous one. It is a gap which no amount of short-term borrowing, no amount of making use of the money that is relent to us from the Dominions, and no amount of further subscriptions to Treasury bonds, will cover. The extent of that gap is the measure of possible inflation, and although my right hon. Friend was right in drawing attention to the fact that there has been considerable exaggeration from time to time of the total figures which represent the gap we have to cover, nevertheless the difference, whatever it is, is a very large sum and is the measure of possible inflation.

Since the war began, wholesale prices have risen by 45 per cent. By means of rationing, retail prices have been kept down to a rise of 25 per cent. Last year, wages nominally rose by only 12 per cent., but that rate does not take into consideration any of the bonuses or extra overtime earnings that have resulted from the war. The question is, how can we avoid inflation? I believe that gradually the people of this country are beginning to realise that that is tile real danger which faces us. There is now less chance of people being led astray, as alas they so often have been in the past, by the fact that they are earning more money. Wages will never overtake the rise in prices if inflation once gets into its stride, and it will be the wage-earners who will suffer first and longest.

It has been said that it is not right to suggest now to my right hon. Friend means by which he could increase taxation, for he alone can judge what is necessary, but at the risk of being accused of anticipating the Debates that will take place on the Budget, I want to refer to the problem that faces us and methods by which it might be met to some extent. I will take, first of all, the Excess Profits Tax. There is no question that that very onerous and in some respects unfair tax was accepted by the House and the country almost without controversy, but equally there is no doubt, as I am sure my right hon. Friend knows better than anybody else, that in some respects that tax falls very heavily and probably to a greater extent than originally foreseen on certain classes of industry, particularly those which in pre-war days were passing through especially difficult times, and also those which have started recently and have had no chance of building up for themselves a reasonable standard of profit. I do not want to detain the Committee by going into that matter at length to-day for it has been dealt with on previous occasions, and I simply suggest to the Chancellor that these are points which I hope he will specially consider if the tax is to be continued.

The Excess Profits Tax affects the profits of companies, industrial concerns, and the like. But all the extra money that is being earned as a result of the war effort does not go into the hands of companies; a good deal of it goes into the hands of private individuals. Is there any reason why the principle of the Excess Profits Tax—whatever may be the rate, which I am not discussing now—should not be extended to private individuals? Is there any reason why a person whose private income benefits as a result of the war—I emphasize that condition—should not be made to contribute, as do the shareholders in public companies? I realise that it would not be an easy matter to frame such a tax and that there may be considerable difficulties in bringing it into operation. But there is no doubt that there is a number of people within the Income Tax limit who have benefited as a result of the country's war expenditure, and if they can be reached in this way, I see no reason why they should not contribute.

Then there remains the question of those below the Income Tax limit. Do not let us mince matters; we know that there are large numbers of people below the Income Tax level who have benefited as a result of the war. I am well aware, from long experience in this House, that when one moves into this region one is apt at once to be regarded as trying to attack the standard of living of the working man. But I am looking at the matter purely from the point of view of how we are to get money and avoid inflation. I say that there is a source of increased income as a result of the war effort coming into the hands of those below the Income Tax level, and that those receiving it ought to be made to contribute like everyone else. Of course, the Purchase Tax, which hits all classes, is to some extent a measure to deal with that problem, but it deals with it only in a very limited way. I know as well as many other people how wonderfully the people of this country are working at the present time. I know the splendid response there has been to every appeal for further work in support of the war effort— in fact, in some cases the workers have to be saved against themselves. There is no question, to my mind, after an examination of this problem almost daily, that fatigue not only affects the people themselves, but actually retards the progress of the war effort if men or women are driven or drive themselves to work too long hours.

There are difficulties, I admit, in bringing taxation in this form down to the income limits I am dealing with. Firstly, there are cases in which the previous earnings were definitely too low, and, secondly, there are cases where specially arduous work requires and justifies extra wages. But I believe, as a part of the desire we all have to meet the cost of the war so far as is possible out of income and to avoid inflation, it is essential for the Government to introduce a national wage policy. It must be one which will maintain the workers and their families in good health, and enable them to stand the strain of war. That strain has not grown less; it has become more serious in all classes of the community. Do not let us lack courage in facing that fact, because there is an increasing strain all the time. Where necessary then the financial position of the worker must be improved to fit him for that higher standard, which, I believe, this country, will secure when consumption—real consumption—by the world's population takes place instead of this absorption for war purposes and destruction. The new policy should provide adequate nutrition standards, and this may, in fact, mean a basic rise in the rate of wages. It must give equal results for equal effort and abolish the many inequalities which now prevail. It must allow fully for exceptional effort.

Photo of Mr Pierse Loftus Mr Pierse Loftus , Lowestoft

What about children's allowances?

Photo of Mr John Wardlaw-Milne Mr John Wardlaw-Milne , Kidderminster

The hon. Member is taking the words out of my mouth. It means a system of family allowances.

I put these suggestions forward to my right hon. Friend now, because we do not often have an opportunity of discussing these matters. The burden of responsibility which he has to carry is so heavy that if there is anything that any of us can say which will help him, it is, I think, our duty to do so. I anticipate that he will have no better picture to put before us next April, and I wonder if it is possible in any Debates that we may have really to bring it home to the people what this expenditure means to us as a nation. The Chancellor has spoken very clearly to-day and has put a plain statement of the position before the Committee. But I often wonder whether it is possible to get the people fully to realise what the figures mean. The Committee and a certain number of people outside who have been concerned as to the amount of money which can be raised by Income Tax and other taxes, are aware of the position, but I wonder, when the Chancellor speaks as he did to-day of the country spending £12,500,000 a day, whether the public generally realise that that figure is the pre-war equivalent to 2d. or 2½d. on the Income Tax. An addi- tional 2½d. Income Tax, on the pre-war basis, every day of the year! All the argument and talk we used to have on Budget statements of whether the Income Tax should be raised by 6d. or 3d. belong to a distant past. I hope that the public can be made to realise what the figures mean and how essential it is that they should save.

I entirely agree with what my right hon. Friend said in regard to the work of the National Savings Committee. They have clone splendid work, but what the Government must have is still more of new savings and new money, not money raised by the banks and loaned for the purpose. People must be made to realise what a tremendous problem there is if we are to avoid inflation, and the absolute necessity of obtaining every penny we can by taxation within the limits which the Chancellor considers it in the public interest to impose. We have this gap, and stronger and still stronger rationing may also be necessary in order to enable us to fill it and avoid the greatest danger of all.

Photo of Mr Robert Richards Mr Robert Richards , Wrexham

I think the Debate has already shown that the Committee is very much concerned—every speaker, I think, has emphasised the fact—about the growing gap between revenue and expenditure. I am afraid the Chancellor of the Exchequer did not do much to reassure us on this fundamental point. I find it rather difficult to explain why Chancellors in their successive statements are so chary to face up to the mounting cost of the war. I have been wondering whether it is due to the experience that we had with our first Vote of Credit. It was voted at the very beginning of the war, and the £500,000,000 was to carry us on till December. In December it was discovered that only £400,000,000 had been expended. I am afraid that is an indication of the mood in which we were waging war in the latter part of 1939. It may be that this has perhaps coloured successive statements which have been made by Chancellors on this question. That represented an expenditure of £3,500,000 a day. By March last it had mounted up to £1,850,000,000, and on the basis of that new expenditure the Chancellor of the Exchequer, Sir John Simon as he then was, estimated that our ex- penditure in 1940–41 would be at the rate of £2,000,000,000.

It is a very curious fact that all these estimates were hopelessly wrong. By October last we were spending at the rate of £3,850,000,000, and we are now spending at the rate of over £4,000,000,000 on the war alone. That is the basic fact that we have to keep in mind, that expenditure is mounting up very rapidly, and the first question that I should like to ask is, Have we any reason to suppose that it is likely to continue to grow? Judging by successive Debates dealing with production, it is obvious that the House is very much concerned about the fact that we have not yet reached our full productive effort, and, if the House has its way—as I have no doubt it will have—the amount of the productive effort is bound to increase; and, if that is the case, the cost of the new productive effort is bound to mount up. Consequently we are spending on war purposes alone at the rate of £4,000,000,000 a year. I presume that in the next year we shall be spending at the rate of £5,000,000,000. That is to say, it will mount up pro rata as it has mounted up, and will mount even more rapidly if the House gets its way with regard to the productive effort. I do not say that the Chancellor can do anything to check that. That would be against the wishes of the House. However carefully he may watch over expenditure, it is the wish of the House that the absolute maximum effort should be made, both in the productive field and in the field of taxation, to meet the terrible ordeal which is facing us.

There is another question which was touched upon by the last speaker, which is much more disconcerting in my opinion, and that is that the costs of the productive effort of the country are mounting up very rapidly. That is to say, it is costing us more than it was a year and a half ago to produce the things we want, and this, of course, is a very serious matter. We have an index of that in rising prices. Everything that is produced to-day costs more than it did a year or two ago. This is a matter of considerable concern to the Chancellor. Actual expenditure is bound to grow, because we are very anxious to maximise our productivity, but the Chancellor ought to see to it that everything is done to reduce the mounting costs, in other words, to keep down prices, so that we should not pay an excessive amount for the things that are being produced now.

That brings me to the other question. Assuming for the moment that we are spending at the rate of only £4,000,000,000 odd on the war effort, the estimate which was made by the Chancellor last autumn was that he hoped to get £1,360,000,000 from taxation. Since then we have had the Purchase Tax in operation. It has been estimated to bring in something like £115,000,000. On top of that we shall have this year a full year of the Excess Profits Tax. That will possibly bring in another £60,000,000, but even then we are only in the neighbourhood of £1,500,000,000 as against the £4,000,000,000 that is being spent. There comes the gap. The relevant advantages of taxation and borrowing is a very old and a very difficult question. We cannot raise the whole of this by any conceivable system of taxation that the Chancellor can invent. It has been estimated that we could perhaps put another f £100,000,000 on direct taxation, but that would leave us with a gap of something like £3,400,000,000 to find in some other way. Here comes the real difficulty. How is that £3,400,000,000 to be found?

Reference has been made to the admirable work that has been done by the National Savings Committee. There is no need to add my humble tribute to the wonderful work that is being done by that Association. I believe the rate of saving at the moment is something like £100,000,000 a month. You are left with a very considerable balance even then. But investments in war savings are not all taken from real savings. In a great many cases they are transferred from other kinds of savings. Consequently the amount actually saved for the purposes of the war and lent to the Government this year is probably much less than the £1,200,000,000 for which the National Council for Savings is responsible. The rest, of course, has to be borrowed, very largely through the operation of the bankers. The speeches of the chairmen of the various banks which have just been delivered all point to the fact that last year a very considerable amount of increased credit had been granted by the banks. This is the most fruitful source of inflation that can be imagined. The Chancellor really must take this matter in hand and see that what we get in the way of savings are real savings and not merely bank created credits. This is a fundamental question and it may involve a very serious reorganisation of the financial system of the country. Facing us as an alternative, of course, is an extreme system of rationing. It seems to me that there is no alternative if we carry on in the present way. Though we may push taxation to its extreme limit we are still left with a very horrifying gap and, if that is filled in the way in which it generally is, it will simply mean more inflation, it will mean increasing the cost of the productive effort of the war and will eventually have the effect of depressing the standard of life of the people, which is the one thing that we do not desire to do, particularly at present.

Photo of Mr Maurice Hely-Hutchinson Mr Maurice Hely-Hutchinson , Hastings

I feared I might find myself speaking today in circumstances of some difficulty because I only learned this morning that it was contemplated that the Debate might be concerned mostly with the Ministry of Information. I am glad that the speeches to which we have listened so far have led the Debate more on to what we might call legitimate grounds. For surely, when we are voting £1,600,000,000 to the Government it is proper that we should discuss finance. It is part of the business of Parliament from time to time to do a little gentle debunking. I venture to suggest that a Vote of Credit is much more the occasion for debunking, say, the capital levy than it is for debunking the demagogues to whom the Minister of Information suffers us to listen on the space-time continuum of the ether. The right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence) spoke of trying to bring these figures into some sort of relationship with ordinary life. That project is an ambitious one. For if we were to add another nought to these figures I suggest that, instead of there being only 14 hon. Members in the Chamber, there would be none at all. The hon. Member for East Birkenhead (Mr. White) made some pertinent observations on the yield of taxes, to which I hope my right hon. Friend the Chancellor will make reply.

The thoughts pervading the speeches of hon. Members have naturally been in connection with what is called inflation, and it is only natural that the occasion of a new Vote so large as this, coupled with the recent announcement of the partial exhaustion of our foreign assets, should lead our minds on to this subject. We are often asked, as the hon. Member for Ipswich (Mr. Stokes) has often asked, for a definition of inflation. The hon. Member for East Birkenhead said something about not rushing in where angels fear to tread. I can well imagine, if that question were asked the Chancellor, that he might hesitate to answer it; and I can readily believe that even the most cherubic of angels might fear to tread on such ground. Nevertheless, I would like to venture a definition which might help to form the basis of subsequent argument. The term "inflation" is hard to define because it is itself more a characterisation of a condition than the condition itself. It would perhaps be proper and better to define the condition which it characterises rather than the characterisation. The condition characterised by inflation, I suggest, is that state of affairs which arises when, as a result of the creation and use of credit—the word "use" is important—effective demand presses so hard upon available supply as to cause a rapid rise in prices, which is the same thing as a decline in the purchasing power of money. In such a definition the important words are the adjectives "effective" and "available."

The mere creation of credit, which is what we are proposing to do to-day, does not itself bring about inflation. It is the effective use of that credit to buy goods and services which will produce a rise in prices if and to the extent that there are other buyers in the market for the goods and services that have come to the market—that is to say, are available. I hope that that definition satisfies my hon. Friend as a basis.

Photo of Mr Maurice Hely-Hutchinson Mr Maurice Hely-Hutchinson , Hastings

It would be almost impossible to do that. I refer to my own powers, not to the hon. Member's appetite. Inflation on that definition describes the state of affairs which arises when two people start bidding against each other for the same thing—when they reach for the same hat or try to sit down upon the same seat.

That brings us to what I would call the Keynes point as distinct from the Keynes plan. The Keynes point is that we must take steps to insure that the increased spending power placed in the hands of individuals as the result of the Government's use of their credit to buy goods and services shall not be allowed during the war to compete too strongly in the markets for the same and other essential goods and services when, as a result of the war, the supply of those goods and services is necessarily short. On the other hand, the Keynes plan, with which I happen to disagree—although perhaps more in respect of nomenclature than of method—is concerned with what measures we shall take to prevent that competition arising. A discussion of the Keynes plan might more properly be held on the Budget, but if one might indicate the field in which it is possible to take action to prevent that competition arising, I would suggest that the first thing that it is necessary to do is to determine where the increased income in the country is to be found. That could be discussed at length and I do not propose to carry it further at this moment.

But it is not solely the expenditure of income which may come into competition with the Government in the purchase of the things that the Government want. Here it is necessary for us to indulge in the luxury of bold thinking. It may be that by the disposal of capital assets an individual might find himself in a position to compete with the Government in the market for what the Government want. What are the implications of that suggestion? It means that if somebody like myself is so lucky as to find somebody foolish enough to buy his house in London, he must be prevented from going on the razzle-dazzle with the proceeds. The simple fact is that those who have capital assets have to be prepared to accept from the Government a restriction on their free power to dispose of the proceeds. Speaking as a free man and not under compulsion, I declare that with a whole heart I am willing to accept that restriction on my free power of disposal. To some extent we are already, especially in the field of non-essentials, in the condition of inflation—which is nature's cure for inaction. But we need have little fear of serious and general inflation if and to the extent that we understand and face our problem.

The problem is not primarily a financial one, though our success in dealing with it will find its measure and expression in money. That view, I think I am right in saying, found expression in the first report of the Committee on National Expenditure—the suggestion that the problem of preventing financial breakdown is not necessarily a financial one. It is not solely a question of restricting demand, it is also a question of stimulating supply, and stimulating in particular supply of the particular goods and services which constitute the kind of income which we need for the prosecution of the war. I suggest that our problem is that of the affirmative application of men and materials to the objects we have in view—feeding, clothing and housing ourselves while at the same time we defeat the enemy.

The Budget problems of my right hon. Friend the Chancellor of the Exchequer are largely framed for him in such Ministries as the Ministry of Labour and National Service and the Ministry of Supply, in their efforts to meet the living requirements of the people and the warlike requirements of the Services. If the Army bids for two lorry drivers when only one is available, we shall get inflation of lorry drivers' wages. My right hon. Friend the Minister of Labour must get hold of a butler and teach him how to drive a lorry. My right hon. Friend the Chancellor of the Exchequer will, by means of taxation, seek to compel the butler's employer to release him for that service. In most cases he has already done so, but to no purpose at all unless the Minister of Labour has already done his part in training the butler for the job. And it is not so much the butler "buttling while Rome burns" that will lead to inflation and incidentally cause us to lose the war, as our failure to teach him how to cease his "buttling" and to start up the engine of a lorry. So, too, my right hon. Friend the Minister of Supply will supply two lorries in the place of one provided the Minister of Labour will train a footman to be a fitter; and the Chancellor of the Exchequer, again with the aid of that dry wag the Income Tax collector, will cause the footman to be torn from the dolce far niente of the servants' hall. But it is, I submit, essen- tially a problem more of men and materials and training than of finance. A breakdown in finance would reflect a breakdown in mechanics and good will. I say "good will" because the key to getting good work out of people is not compulsion but getting their good will to do the work. To secure this it is first of all necessary that they should have confidence in whoever it may be that sets them their task. I say, therefore, to the extent that we can trust each other, can have confidence in each other, the work will be done. There will be no breakdown of mechanics or of good will, and so there will be no serious inflation.

May I say at this stage a word in respect of the suggestion of my hon. Friend the Member for Kidderminster (Sir J. Wardlaw-Milne) with regard to the application of an Excess Profits Tax to individuals? He asked whether there were any objections to that course. I submit that there are the strongest possible objections, both in equity and upon practical grounds. On practical grounds it would be extremely difficult to collect in the lower ranges of incomes, and in the higher ranges of incomes the rate of taxation is already so great that it would yield next to nothing. On grounds of equity, it is applicable only to the higher ranges of income. In the lower ranges of income, where income is largely the result of work done, we want to do nothing to prevent people getting extra pay for extra production. I hope, therefore, that my right hon. Friend will listen with as much attention as he can give to the strong representations which some of us will make to him not to be misled into that very specious form of taxation.

May I say a word on the partial exhaustion of our foreign assets? As my right hon. Friend has suggested, we have, to date, by using those assets, increased the supply of goods in this market by applying just that amount of purchasing power in other markets, principally in the United States of America. To that extent that amount of purchasing power did not fall on the home market and contribute to forcing up prices. But this process obviously cannot go on for ever. There is an end to reserves and the end may come in sight. Hence the vital importance to us, which has been stressed by hon. and right hon. Members, of the President's "Lease and Loan Bill." We were right to take the risk of using up part of our reserves. It was a risk well run, like the risk at Sidi Barrani. But as we approach the end of our reserves, and until and unless increased supplies reach us from the United States, and even thereafter as our war effort grows, we must expect to tighten our belts—and that means all of us, myself, yourself, everyone.

In a series of speeches in this House on financial matters since the war began I have always stressed the necessity of one thing, that the Government to lead us to victory will be the Government that dares to demand mass sacrifice. It seems appropriate to define that phrase in its application to our present circumstances. It is intended to mean just this—that all our people must expect during the war to work harder and to live less well, and we must dare to tell them so. Some will earn more than before—and good luck to them; they have earned it if they produce more; but they must not spend more, at any rate during the war. They must give up part of it in taxes, and the rest of the increase must be lent to the Government. After the war it will be a different matter, though the threat of inflation will continue, albeit under different circumstances; but that is hardly a matter for present discussion.

After a quarter of a century in financial business I started some years ago to write a book about finance which was to be entitled "Character, Credit and Confidence." Partly owing to the inertia of middle age, and partly owing to other preoccupations, that book has not seen the light of day, and never may; which would save rue a lot of trouble. But its title may serve us to-day. For it is our character, such as and whatever it is, which determines our command of confidence, determines our ability to give and receive confidence, and so determines our command of credit.

Photo of Mr Richard Stokes Mr Richard Stokes , Ipswich

The hon. Member for Hastings (Mr. Hely-Hutchinson) indulged in an amusing series of instructions to the Chancellor of the Exchequer and the Minister of Labour as to the way in which they should deal with valets, butlers, lorry drivers and other species of labour. I was glad to perceive the acceptance of the fact that the gigantic problem with which we are confronted is not primarily a financial one, but is essentially one which cannot be brought to a successful conclusion unless the available labour is properly used. It is not appropriate at this moment to discuss how labour should be used, but I hope the Chancellor will use his influence with the other Departments, particularly the Ministry of Labour and the War Office, to curb this appalling fetish of trying to persuade everybody that they are not doing their jobs unless they stop what they are doing and get on with something else. It is a very great danger. It affects the work of all the people of the country. The people of this country can pay their best contribution by sticking to the jobs they can do and getting on with them, producing to the maximum in the work which they are accustomed to pursue.

The hon. Member had a sly dig at me—or perhaps not a sly one—on the question of inflation. I make bold to tell him what my definition is. Like him, I came here unprepared. I hoped that there would be a pre-Budget Debate in which we should have an opportunity of enlarging on all sorts of suggestions which we might put to the Chancellor, but I am speaking now from memory, so to speak, and without having consulted any of the unorthodox text-books. I tell him that his definition of inflation did not completely satisfy me, probably because I did not understand what he said. My complaint against these hon. and right hon. Gentlemen who live in their habitat known as the City is that they use such complicated terms. My simple definition of inflation, in words that I can understand, is that it denotes a state of things in which there is more money available for immediate individual expenditure than there is available a sufficiency of consumable goods to meet the desires of the people.

Photo of Mr Emanuel Shinwell Mr Emanuel Shinwell , Seaham

It is the same thing.

Photo of Mr Richard Stokes Mr Richard Stokes , Ipswich

It may be the same thing, but I have put it in words which I understand. If hon. Members agree with me, we shall be able to live a peaceful life in this House, as long as our constituents allow us to do so, on this point, if not upon a great many others. I did not understand the hon. Member's idea, moreover, that inflation is avoidable. I agree that the evil effects of inflation may be avoidable, but I think that inflation is inevitable in war-time, if you have a state of things in which people are producing vast quantities of goods which they do not want to consume and are paid large wages while there is nothing to buy. Inflation is upon us, and unless we take care we shall find ourselves in Queer Street; I should like to address a few remarks on this subject to the Chancellor of the Exchequer later.

Considerable reference to the Excess Profits Tax was made by the hon. Member for Kidderminster (Sir J. Wardlaw-Milne). In the early days of last year I came out as the champion of the 100 per cent. Excess Profits Tax, and I do not deviate from that position. I agree that it has had some bad effects, but I submit that in at least some trades with which I am acquainted it has had the very good effect of keeping prices down. I hope that the Chancellor will not be tempted or, shall I say, will not give way to pressure from outside, to deviate from the path of rectitude which he adopted when he put that tax up to 100 per cent. There is a case for continuity in that tax, but I would like to see him change two things. He should agree to a much greater allowance for depreciation and obsolescence. I do not think anybody in this country realises the rate at which plant depreciates, not only from wear and tear but because new inventions come along at such a rate that unless you are prepared to write off the whole of your plant within 10 years you are completely out-of-date. This fact accounts for the backwardness exhibited in some of our industries right up to the outbreak of the war.

I would also ask the Chancellor to consider making arrangements whereby a proportion—it is not for me to say what proportion—of the Excess Profits Tax should be put aside by firms for capital expenditure and extension. To my mind it is essential, if he does that, that he should bring in a Limitation of Dividends Bill, absolutely preventing any distribution, including distribution by the banks, of dividends above 6 per cent. If the right hon. Gentleman would adopt those suggestions I think we should find ourselves on the right road when the war ends instead of being in Queer Street, so far as the efficiency of our plant is concerned.

The hon. Member for Kidderminster spoke also of the inequity of applying the 100 per cent. to firms and not to individuals. I agree with him entirely. I almost begin to feel that the hon. Gentleman might cross the Floor and join us on this side of the Chamber. It seems quite wrong at this stage that many individual middlemen are apparently able to get away with enormous profits such as are absolutely forbidden to any company. I would direct the Chancellor's attention particularly to what is going on at the present moment—it does not conic directly under his control—in which large profits being made by funny happenings in the distribution of food. There is no discouragement, and large profits are being made, particularly in regard to pigs and onions. I speak unqualifiedly as a back-bench Member of Parliament. I consider, with the hon. Member for Kidderminster, that, in the present state of affairs, nobody should be allowed to benefit by the war. If anybody finds himself better off, he ought to pay the excess into the common pool, including Cabinet Ministers.

The hon. Member also called attention to the fact that what is generally termed the working man finds himself considerably better off now, although he is below the Income Tax level, and that he ought to be dealt with. That is all very well, but if the Chancellor contemplates accepting that suggestion I hope he will have regard to the necessary standard of living of the working man. Merely because a man's wages have gone up it does not follow that his inner state has improved. He has to carry out very arduous duties which are required of him, in circumstances of rising prices. I do not think anybody will contend that if a man finds himself earning £1,000 a year whereas he previously earned something like £150 a year, he should not be dealt with by taxation. I believe that is done, but I have a shrewd suspicion that the hon. Member was looking to a lower wage-scale, which I consider is well left alone and ought not to be dealt with at the present time.

Another reason for watching these vast sums of national expenditure in connection with the war is the appalling waste and extravagance that go on. Reference has been made to them by myself and other Members of this House, and particularly by the hon. Member for Chislehurst (Sir W. Smithers), who has called attention to particular matters concerning the construction of militia camps and other engineering contracts. The Chancellor of the Exchequer is the keeper of the nation's purse, and we are here to ask him why it is that we cannot get any proper inquiry into that form of extravagance. It is no use his telling me in reply that the matter has been referred to the Select Committee on Expenditure; that is no use at all, for the reason that the Committee's terms of reference do not allow it to examine witnesses on oath. Hon. Members are aware that people have come forward to complain not only of extravagance and waste but actually of wrongful and dishonest doings among people engaged in the construction of these camps. Yet we cannot get the Chancellor, the War Office or anybody to take the slightest bit of constructive interest in the matter.

I do not wish to insult the Civil Service, because I think they are an admirable body of people, but they are the closest trade union in the world. They always find a very good reason for doing nothing. They never want to show each other up; they never give anyone away. As Sir Arthur Conan Doyle once said, when you are up against the Civil Service you are up against a very close trade union; they do not admit themselves wrong and are inclined to maintain that position even to the disadvantage of the public interest. The matter to which I refer has not been examined, although I brought it to the notice of the right hon. Gentleman and his predecessor, and my hon. Friend the Member for Chislehurst (Sir W. Smithers) has also done so. You cannot get people to come forward and lay themselves open to dismissal if you will not have their cases examined. Those cases ought to be examined; if they are wrong, the people should be dealt with in a disciplinary manner, and if they are right, the people who have committed those wrongdoings should be dealt with by the Government and turned out of their jobs.

I wish to indulge in one or two perplexities. We have been asked in this Debate, Who pays for the war? My first reaction when I heard the hon. Member for Kidderminster ask that question was to invite the Chancellor of the Exchequer to have a look across the Channel and see what Hitler has done. He has quite obviously burst the money racket. It is evident that money does not pay for the war. My second contemplation is this: Surely the right answer to the question "Who pays for the war?" is that wars are paid for by the sweat and blood of the people who fight them and who work in the factories turning out things that they do not want but which are essential if you are to blow other people's heads off. My final perplexity is this: I find it extremely difficult to see why you should first pay a man for doing a thing and then take the money away from him in order to pay him for having done it. That is what is done with your one-sided national balance-sheet. It is the only balance-sheet I have ever seen with no assets side. It has no assets side only because it suits the money creators to say that it has no assets. The whole thing wants recasting, and I invite the attention of my right hon. Friend the Chancellor of the Exchequer to various letters and memoranda which I have inflicted upon Treasury Chambers from time to time.

Finally, the hon. Member for Kidderminster made this profound remark, that we cannot finance war by money provided by the banks. I would say. "For heaven's sake, Mr. Chancellor, do not let us finance this war by money created by the banks." As I see it, we are fighting this war under the White Ensign, but unless we are very careful we shall find ourselves under the three brass balls.

Photo of Major John Mills Major John Mills , New Forest and Christchurch

I heard with pleasure my right hon. Friend the Chancellor say that he would do everything he could in consultation with the Departments concerned to check extravagance and eliminate waste. I want to assure him that this Committee will agree to this Vote of Credit with the approval of the country, but that the approval of the country will be much more readily given if the country is convinced that waste and extravagance are being eliminated. My postbag makes that fact quite clear. I will give two examples, and the first fits in very well indeed with what the hon. Member for Ipswich (Mr. Stokes) has just said with regard to extravagance and waste in connection with the way in which camps were erected. The thinking public hate the cost-plus-profit system of putting out contracts. I completely agree with the hon. Member that there is no incentive to economy on the part of the contractor, and the checking of costs comes far too late and in itself is too costly. The system may nave been necessary in the early days, but I trunk that sucent experience must have been accumulated by now, and that system should be abandoned and contracts should be made on ordinary lines with a clause to cover damage or extra expense caused by enemy action.

The second thing which hurts the public is waste by the troops, either of food or petrol. The public are short of both, and they think that they see a lot of both wasted. I know that the Army ration has been cut down once or twice, so that much less waste should now be possible. But waste there is, and waste there always will be unless the company officer takes a real interest in the company cookhouse and in how the rations are used and cooked. The cooking is a very important factor. I know what I am talking about, because I spent a good many months last winter as a subaltern in a company of a Home Defence battalion which was split up into many small detachments. I know what I saw in regard to waste there. If the cookhouse is properly inspected every day, a great deal of waste can be eliminated, and, what is more, the men will be much better fed if a good commanding officer will make it a matter of discipline on his periodical inspection. Of petrol, I cannot speak so definitely, but the public think that units such as the R.A.S.C. and the Royal Engineers who have plenty of lorries at their disposal use it extravagantly. If it is so—and I suspect that it is—it is a matter for organisation and inspection by the officers directly in charge of the lorries. I hope my right hon. Friend will take that point into consideration.

There is one other point with regard to rations. The Army has had its rations reduced. I believe that the Royal Air Force have had no cut at all. No one grudges the heroes who fly by day and by night, and to whom we owe so much, as much beef, mutton, cheese and tea as they can consume. But there is a very large staff on the ground for every man who is flying or learning to fly. Do the ground staffs need more food than The Army? I can hardly think so. Perhaps my right hon. Friend would consult the Secretary of State for Air and see whether economy is not possible here I should have thought that separate scales of rations and separate messes could be arranged without much difficulty. Finally, I can assure my right hon. Friend that any steps he can take to ensure the prevention of waste or extravagance will be popular with the public.

Photo of Sir Herbert Butcher Sir Herbert Butcher , Holland with Boston

The hon. and gallant Member who has just spoken has emphasised some points of economy to which the Chancellor himself referred in his opening remarks. The instances of waste in the Army have perhaps been exaggerated, but at the same time they should come under a most careful survey of the Chancellor and of this Committee. The Secretary of State for War on the last Sitting Day referred to the fact that about 300 Army vehicles were damaged every day. If they are repairable at a cost of not more than £10 each, the cost of this one item alone amounts to about £1,000,000 a year. Spending at the rate we are, and as we are trying to prevent waste and leakage, it is worth while saving any odd million that we can.

I do not think the Chancellor will complain at the way in which the Committee has received his proposals to-day. The tone was rightly set by the right hon. Gentleman the Member for East Edinburgh (Mr. Pethick-Lawrence), who said that the country was determined to go all out for victory and to win. If I had any criticism to make of the speech of my right hon. Friend the Chancellor, it would be this, that he did not take this opportunity of giving the country a tonic shock as to the sacrifices that it must be prepared to accept in the future. I hope that the forthcoming Budget to which he alluded will show that he has the courage to impose heavy additional taxation on all classes; the country, I know, will show itself ready to bear his chastening with fortitude. As was said by my hon. Friend the Member for East Birkenhead (Mr. White), there is very much to be said for trying to get back, if at all possible, to the figure of 50 per cent. to be raised by taxation during the war. My hon. Friend the Member for Kidderminster (Sir J. Wardlaw-Milne) said that the Chancellor was faced with two maxima: the maximum amount that should be secured, and the maximum that the people of this country could hear. I hope the Chancellor will not err on the side of leniency in this question. Financial changes, as indeed changes of all kinds, are most easily made in conditions of war. People are rapidly moving from one scale of expenditure into another as a result of the war, of losses that have been sustained and so on, and all these things are understood, giving the Chancellor a chance to make a really definite attack on this problem of paying for the war as we go. After all, we do hope that when this war is over we and our children are going to set about the building of a new and better world, and before we do that we want to get as much as possible of the cost of this war out of the way.

Tribute has been paid to the work of the War Savings Committee, and of those who organise War Weapons Weeks up and down the country. I would be the last not to pay tribute also, but I am bound to say that I doubt whether this is a satisfactory way of raising money for a European or world-wide war on the present scale. After all, the problems of the war are the mobilisation of men and the mobilisation of money. In the 1914 struggle the ways of doing both those things were the same—the mass meeting, the patriotic appeal, the brass band for both men and money. We found out at the time that that did not work for men, and we have since revised the system of calling men for service in the national interest. Instead of being seen off by enthusiastic crowds, as in the past, the young man slips away quietly in civilian clothes, without the cheers of his fellow townspeople and the handshake of the mayor. That handshake is now reserved for the local representative of the insurance company, who wanders along and pays £5,000 to head the War Weapons Week. I say frankly that I hope that my right hon. Friend will, as the financial stress develops, take more and greater control of the financial resources of the country.

I believe that the rationing of expenditure is one of the lines on which he could most fruitfully proceed. We are all in this war together, exposed to common perils, and subject to engagements entered into before the war and which must be honourably fulfilled, there is no particular reason why for the period of the war one class or one member of the community should have much more to spend than any other. This could quite properly be coupled with a system of family allowances. After all, the system of family allow- ances. After all, the system of family allowances does place the spending power where it is necessary for the maintenance of the health and strength of the coming generation. A wage rightly earned by heavy and hard exertions by a single man may be more than he should properly be permitted to spend at the present time, and he could therefore be compelled to reserve some of that spending power until after the war. But that same wage might not be sufficient for the married man with a large family to maintain in health and strength. So I say to my right hon. Friend that he has chastened us with whips in the past, but if he now produces the scorpions, we will submit to them, and we will back him and the Government in every way to get this war won and paid for as soon as we can.

Photo of Sir Stanley Reed Sir Stanley Reed , Aylesbury

I would like to suggest two points to the Committee. First, I would like to ask the Chancellor, in all seriousness, that when he comes to cast his next Budget he will give greater weight to the remarks made by the hon. Member for Kidderminster (Sir J. Wardlaw-Milne) than to those which have just fallen from my hon. Friend the Member for Holland-with-Boston (Mr. Butcher). When the hon. Member for Kidderminster talked about the limit of bearable taxation, I am quite certain that he meant, and that the Committee understood, the limits of realisable taxation. All the hot air which was talked in this House on the last Budget about its being not sufficiently stringent, and all the hot air which is talked now by those who may not have to pay, about making the next Budget still more stringent, entirely ignores the basic problem, which is the limit of realisable taxation from the direct taxpayer at a time when vast masses of what we call taxable assets have completely disappeared or are in the process of completely disappearing. To follow advice which has been thrust at the Committee would be merely to accumulate an enormous block of bad debt—of direct taxation which could never be realised—so I hope the Committee will give its unhesitating support to the policy pursued by the Chancellor of keeping the weight of direct taxation within the bearable capacity of the direct taxpayer, or, in other words, his capacity to find the means of payment during the difficult period when he is reducing his commit- ments and adjusting his expenditure in order to liberate money for the higher taxation payments, because I am perfectly certain this policy has produced, and will produce, the very largest amount which could be obtained in any circumstances whatsoever.

The points I wish to commend to the Committee and to the Chancellor are those advanced by the hon. Member for East Birkenhead (Mr. White) for, apart from the astronomical figures which have been given in this discussion and in the Chancellor's opening statement, the whole issue narrows itself down to this: How can the gap between the maximum yield of taxation and the maximum amount of voluntary saving be bridged and satisfied? That is the point to which the hon. Member for East Birkenhead addressed his attention, and I am sorry he was too modest not to develop it. I hope he will develop it on a later occasion, because he made three fundamental points. The first was whether the National Savings Campaign does not need now to be reinforced by some other measure. That, I would suggest, is a matter of the very first importance.

We all talked a great deal about Mr. Keynes' Plan when it was produced, and we have forgotten it now. Looking back it seems to me that Mr. Keynes had the real salt of the matter in him although the methods by which he meant to apply his plan were not adapted to the circumstances. He proposed deferred payments from all wages. Everybody knows that at that time the scale of wages in millions of instances did not allow of any postponement of the wage, because the wage only just met essential family expenditure. Had Mr. Keynes put this proposal for deferred payments upon overtime and bonuses he might have gone to the root of the matter. Overtime payment is the most wasteful payment in the world; bonus payments are often very large amounting to three or four times the standard wage. These are what we might have to turn into national savings. The second point is the rationing of commodities. There he was on rather more dangerous ground for every expansion of rationing means a great increase in our colossal bureaucracy. I think that that problem will be settled by the Purchase Tax and the limitation of supplies. The third point was the rationing of the armed services—that is saying to the services: "The maximum sum you can handle consistent with the national resources is so much and you must do the best you can with it." I know that that will be regarded as heterodox. I am not at all certain that you could not get the same measure of efficiency and the same measure of armed strength and offensive power from a system so devised and so applied as from an uncontrolled expenditure which goes right beyond the grip of the Treasury and beyond any grip which this House may fasten upon the outlay. I hope that in later stages of this financial discussion these points may be dealt with. I think they are pertinent, and I trust that they will meet with the sympathetic consideration of the Chancellor himself.

Photo of Mr Pierse Loftus Mr Pierse Loftus , Lowestoft

I did not intend to speak to-day. I decided to do so only a very short time ago. Like many other hon. Members, I had understood that to-day was to be devoted to a discussion on the Ministry of Information. Because of that belief, several of those who were gravely concerned about the financial position decided not to speak to-day, as we felt that, with this immense problem facing us, we should have to prepare our remarks most carefully. We understood that before the next Budget in April a day would be given for a discussion of the financial problem. I very much regret that that prospect is receding into the distance. I cannot conceive a more useful function for the House of Commons to perform than to face this problem, which is almost, if not quite, the greatest problem of the war, and to devote a day to discussing, in a quite non-party manner, any ideas which any hon. Member can put forward to help my right hon. Friend, preparatory to his introducing the Budget. I very greatly regret that; and, therefore, I have decided to venture a few remarks to-day.

The discussion has turned largely upon the danger of inflation. Of course, it has turned on the question of this enormous gap. How can we avoid inflation, with its evil results? There are only three methods of financing the war. In abstract theory, the most just and certain method of avoiding inflation is to raise the whole cost by taxation. But, in practice, that is utterly impossible. We have not yet reached the limit of taxa- tion, but we are moving steadily on in that direction. The second method is to raise the finances of the war as much as possible by taxation, supplemented by loans, hoping that that will prevent inflation, and meet the total expenditure of the war. But does any hon. or right hon. Member believe that that is possible? Does any individual in this country, facing the gigantic figure of expenditure that is before us, believe that sufficient money can come from those two sources of revenue, taxation and genuine savings? I challenge anyone to answer in the affirmative. It cannot be done. Let us face realities, and admit that that gap cannot be bridged either by taxation or by genuine savings. These may narrow the gap, but they cannot bridge it. We have to face the fact that there must be some degree of inflation. We ought to consider which is the least harmful way of bridging the gap by some method of inflation. I suggest that we should all agree that the most harmful way would be to copy the methods of the last war, with its enormous creation of bank credits, used to subscribe the new loans at 5 per cent., which has left that appalling burden of debt upon the nation as an annual charge.

I think that we are to-day using a much better method. My right hon. Friend is using the new method of borrowing from the joint stock banks Treasury deposit receipts at 1⅜ per cent. The money he gets goes into circulation, and gradually creates new bank deposits, on which he again borrows at 1⅜ per cent. Again the money goes into circulation, paying for all kinds of Government expenditure, and creates new deposits. On those, he can borrow again at 1⅜ per cent. That is an enormous improvement in technique on what happened in the last war; and the Treasury deserve to be congratulated. But is there not a danger that these loans at 1⅜ per cent. may later be converted into subscriptions to medium and long term Government loans, at, say, 2½ per cent.? I direct the attention of the Committee to the statement of Mr. McKenna, chairman of the Midland Bank, the other day. He pointed out that the creation of credit by the joint stock banks was not costless. Over all, the interest that the banks will receive is about one per cent. He suggested that that would just about cover the cost of the creation of the credit. If we assume that to be so, and these loans due to the Treasury are converted later on into long-term loans at 2½ per cent., obviously that would be the beginning of the disastrous procedure of the finance of the last war.

I feel that, if there has been a bridging of the gap by the creation of credit, we ought to face the fact and create that credit in such a manner as to do the least harm. It is bound to do harm, but it should be done in such a manner as to do the least harm and place the least burden on the future of this country in the way of debt. I strongly suggest that, where taxation, plus genuine savings, does not meet the expenditure of the war, the State itself should, at the Bank of England, create credit to bridge the gap without debt. It is inflation, I agree, and it would mean that at the end of the war there would be a debit to the State at the Bank of England of whatever figure it was, of £2,000,000,000 or £3,000,000,000, which would represent the real cost to the nation, or a great part of it, in the loss of wealth due to the war effort.

If the answer to that proposal is that that is inflation, I agree, but our present methods are inflation, and methods founded on the last war are inflation. The advantage of this method is that it does not pile up any permanent interest-bearing debt in the future. I wish we could to-day have a discussion of these very difficult problems. We all realise that finance is one of the main levers of war, and it is the desire of every hon. Member of the Committee to face this gigantic problem and to think over every possible method of helping, realising that on a successful solution may well depend the issue of the war, and also that there is no perfect solution, but that we have to face facts and so organise our funds that, if there is to he any kind of inflationary tendency, it shall rigidly be controlled, and by the least possible harmful method.

Photo of Colonel Josiah Wedgwood Colonel Josiah Wedgwood , Newcastle-under-Lyme

I cannot follow the hon. Member for Lowestoft (Mr. Loftus) through his speech. It seems to me that this creation of credit is only a branch of the great Major Douglas proposals we have had for the last 25 years.

Photo of Mr Pierse Loftus Mr Pierse Loftus , Lowestoft

Credit is being created every day now in the war, and after the last war most of the National Debt was created credit.

Photo of Colonel Josiah Wedgwood Colonel Josiah Wedgwood , Newcastle-under-Lyme

The hon. Member must wait and follow my speech at each stage. The Chancellor of the Exchequer dealt with inflation, and the inflation problem is the real one that we have to consider. It is the basis of this credit-creation question altogether. I should say that every year the measure of inflation which we are inflicting upon the future is measured by the difference between the expenditure of the country and the amount collected in taxation; that the lack of balance between expenditure and taxation measures the inflation of the future. We are all anxious to see that inflation is reduced, but we ought, first of all, to grasp the idea that every deficit of this nature to a certain extent creates the inflation that we have to face. That inflation is not reduced by the amount of money that is borrowed; whether the debt is funded or unfunded, it will still lead to inflation. It merely postpones the date on which inflation occurs. I do not expect that during the duration of the war there will be much inflation at all; in the last war it came afterwards, as a surprise to everybody. But the measure of the inflation to be faced and the measure of our capital assets is the difference between the expenditure of the State and the tax revenue.

The next point that I want to make is this: It really does not matter to this country whether the money is put into businesses or into Treasury bonds. It does not make any difference to the inflationary results or to the financing of the war. The Chancellor ought to be equally pleased when £10,000,000 is put into savings of any sort in this country, or goes to the banks and through the banks into businesses, because it is as much needed in business as it is in the State financing of the war. You cannot finance the development of factories which are in private hands unless they can borrow money. It is all part of the war effort. Even if those factories are being used for export trade or required for war credits, it is just as much a development of the war wealth of those factories. All savings are to the good, and all individual extravagance is to the bad, and I do not think that we are meeting the extravagant expenditure of the people of this country by putting on a Purchase Tax or things of that sort.

Sooner or later you will have to prevent extravagance in other ways. I saw an advertisement in the "Evening Standard" last night, in which it stated that a restaurant was ready to supply meals at home to people who could afford to pay 5s. for one dish. I think it was called hare, but it might have been rabbit. Apparently it paid to put in the Press an advertisement for this kind of extravagant meal. It meant that you could not get a lunch under £1, and I do not think you can stop that kind of extravagance by putting on a small Purchase Tax. What you have to do is to get to the root of the evil and prevent people from having extravagant incomes. Income Tax is at present 8s. 6d. in the £, which I would call not a bad start. Obviously, this year Income Tax will increase, and I would ask the Chancellor to consider once more what might be called the "Keynes plan"—that is to say, not to take incomes entirely for expenditure but to give us bonds in exchange for part of our incomes, interest on which will begin to be paid at the end of the war. I believe that that would have a very good effect in two different ways. In the first place it would, stop the extravagant expenditure of the present day. People would not have the money to spend. Secondly, if applied all round to all classes of society, it would have a great stabilising effect upon the people of the country, in that it would give everybody an interest in the continued solvency of the State, a direct interest in there being no inflation, and a stake in the country which they do not possess at the present time and which would be extremely valuable in all classes of the community.

Therefore, the three points I want to make are these. First, any form of created credit, whether it be by short-term borrowing or long-term borrowing, any form of shortage between the annual expenditure of the country and its annual income, must inevitably lead to inflation. Secondly, that inflation is not reduced by lending money to the Government any more than it is by lending money to private concerns, as long as that money somehow gets into business and creates the power of using capital in the develop- ment of industry in this country. Thirdly, it would be much more tolerable to people to have an excessively high rate of Income Tax if part of that Income Tax did not go straight to the State, but was merely converted into some form of bond the interest on which would not begin to be paid until the end of the war. This would give a real reduction in extravagant expenditure, and it would give to all classes of the community a stake in the country which would be a safeguard against inflation and be in favour of the continued solvency of the State.

Photo of Sir Kingsley Wood Sir Kingsley Wood , Woolwich West

I am very much indebted to hon. Members for the contributions they have made to the Debate. Many hon. Members have seized the opportunity to give me their opinions and suggestions concerning our finances, and some of that advice has been conflicting. However, I appreciate all that has been said, and I will carefully study it and take it into account. The only direct question that was put to me was whether I could give any estimate of what the Revenue will be. I cannot do that at this time.