If hon. Members will wait a little while, they will find out. I will say clearly to the hon. Member for Cardiff, South-East (Mr. Callaghan) that the Government, and anyone else, must feel concerned at this situation.

The third point of the Amendment is that the Gracious Speech contains "no adequate policies "I believe it is true that the Gracious Speech normally contains proposals for legislation. When we come to proposals for administrative action—tax changes, for example—these are normally announced by the Chancellor of the exchequer in the House of Commons. That is precisely what I intend to do this afternoon.

The hon. Member for Cardiff, South-East referred a good deal to his criticism of the Government. He spent over half-an-hour of his agreeable speech attacking us, and less than ten minutes putting forward positive suggestions. I propose to reverse that ratio and—[HON. MEMBERS: "Oh"] I cannot spend time attacking the policies of the Opposition, because they have not got any. What I am going to do is to outline our proposals for dealing with the present situation.

I am sure that every hon. Member in the House agrees that what we want to aim at is a more rapid and more consistent rate of economic growth. But in looking at the problems involved it is foolish to ignore the real difficulties. There are, and have been in past years, as the hon. Member recognised, certain very clear difficulties facing us. There is, for example, the position of sterling as a reserve currency, to which the hon. Member referred. I think that it is wrong to regard that as an obstacle to growth. I am convinced that we can combine strong sterling with a more rapid rate of growth. Indeed, the two hang together.

But the fact is— and no Government can ignore it, and certainly the Labour Party could not ignore it when it was the Government— that sterling as a reserve currency is often exposed to ebbs and flows in the world situation which are completely outside the control or influence of this country. Also, we must recognise a simple fact which the House should not ignore, that the relation of our reserves and of our liabilities, so different from pre-war, restricts the room for manoeuvre that we have in our internal policy. We cannot deny that.

Secondly, there are financial difficulties. We have seen time and again how expansion, if it goes too fast, can overrun itself on the narrow margins that we have and turn into inflation, which once again has to be checked. The problem in previous years used to be more what is called a demand pull problem. Now it is a cost push problem, and on this the right hon. Member for Huyton (Mr. H. Wilson) is an expert, though I do not see him here today. We have seen recent improvements. If the economy goes ahead rapidly the push of cost becomes too extreme, prices rise and we run into the old balance of payments difficulties with which we are so familiar.

Thirdly, there are the physical limitations on our expansion. It is only fair to recognise that our manpower is not expanding as fast as that of, for example, Germany and France and the other countries which have been quoted. We have not a reserve of people coming across our boundary like the Germans have, and we have not got, as some of these countries have in their agriculture industry, a very large reserve of manpower that can be transferred to industry and thereby in- crease the total level of productivity. All these are real limitations on our powers of expansion which no sensible person would endeavour to ignore.

I turn now to the immediate situation, to the developments of recent months and to what I propose for the immediate future. Since my predecessor's measures last year, the external position has greatly improved. The record loan that we drew from the International Monetary Fund was repaid within twelve months. The strength of sterling is really remarkable. When we consider what has happened in the last few weeks, with the Cuban crisis, and so on, the strength of sterling is really very outstanding. The balance of payments position is much better, though it is true that recent export figures show the need for constant vigilance.

At home there was in the second half of last year a setback to the level of production. At the turn of the year, that altered again and the level is now moving upwards at the rate which I had given and which is statistically accurate, though the hon. Gentleman did not seem to understand the statistical performance. [HON. MEMBERS: "Explain it."] The simple fact is that production has been rising since the trough at the end of the year at an annual rate— [HON. MEMBERS: "What are the figures?"] I gave details in my speech at the Mansion House, if only hon. Members would read it; it is perfectly simple. Also, with greater competition, profit margins have been falling. This has led to reduction in costs, also important, and has had its effect on industrial investment, which is equally important.

Since the turn of the year, production has been increasing. In the heavy industries experience is disappointing, but in a wide range of industries— chemicals and lighter industries— production has been rising and is rising steadily. Profit margins are showing a sign of improving again. Consumption is certainly rising, and rising vigorously. The latest retail trade figures, which are being published today, show that once again this is happening. People are spending more and more and buying more and more in the shops day by day. Public expenditure on both consumption and investment is continuing to rise.

So, in general, the level of demand is increasing and the level of production is increasing. At the same time, we have an increase in unemployment, to which the Amendment refers. This is a matter to give concern to anybody, but the deduction is clear. If one has, as we have at present, increased production with increased unemployment, it means that productivity is rising substantially and that businessmen are finding that they can make as much as, or more than, they did in the past with a smaller labour force. This means— it is a very salutary process indeed— examination of costs and of efficiency and so on. This shows that we have more slack in the economy than we calculated on, and it justifies further measures to stimulate the economy, to which I now intend to turn.

It seems to me that any measures to stimulate the economy should be based on two principal considerations. In the first place, they should be of a nature that can endure. After all, reductions of taxation and increases of expenditure usually create lasting commitments. One of the advantages of the post-war credit release is that it does not create a lasting commitment. But in introducing any new measures, I must be confident that, while they will help to stimulate the economy at a time when it contains some slack, they will not subsequently overload it at a time when demand is high.

The second consideration is this. We need not so much a stimulus to demand generally as special encouragement to investment and to the exporting industries, and to employment in areas where unemployment is above the national average. The unused resources are not so much in the consumer goods industries as in the heavy industries and in sections of engineering, and it is these resources, human and material, that we must seek to bring into use.

My first concern is for investment in manufacturing industry, which has been declining recently, and recent reports, as we all know, suggest the danger of a further decline. There is a definite limit to what Government action can do in this field. The main reasons for the decline in investment in manufacturing industry lie, in my judgment, in the current reduction in profit margins and uncertainties about our future relations with the European Economic Community and uncertainties about the course of the United States economy. Uncertainties on the latter two points are bound to persist, but we shall do all we can to limit them where it lies within our power.

Profitability, which is the other governing factor in investment, will depend on the general course of the economy. I stress again that a healthy growth of profits is essential to an adequate level of investment. The principal factor that determines investment decisions is the prospect of a market for the goods which are to be produced. Government actions to stimulate investment by, for example, changes in depreciation allowances vary very much in their effect according to whether we are working with the tide of demand or against it. Therefore, what we need are measures which will work in either circumstance.

I turn, first, to the capital allowances, or depreciation allowances. It is true that changes here may not have an immediate effect on the expansion plans of the very large firms. But in the long term they certainly will; and in the meantime they can achieve much by helping the medium and smaller firms, by encouraging modernisation— which may be just as important as expansion — in all firms up to the biggest, and by creating confidence in a policy of sustained and deliberate expansion.

I do not believe that our present system of capital allowances is adequate to the changing needs of the 1960s. The recent Report of the N.E.D.C. has stressed once again that we must raise our whole level of investment and keep it at that enhanced level. Therefore, action to stimulate investment now seems justified not only against the background of present circumstances, but also as a requirement of long-term policy.

Alterations in the system of capital allowances involve complicated legislation whose proper place is in the Finance Bill. It would be unusual and unorthodox to act in between Budgets, but there is a case for being unorthodox on this occasion. I want to make it clear that I intend in next year's Budget and Finance Bill to make certain changes in the system of capital allowances. The effect of these changes will apply retrospectively to capital expenditure on new assets which becomes due and payable after today. I think that my hon. Friends will agree that this is a form of retrospection which can be welcomed.

I have considered several possible ways of speeding up depreciation rates. Some relate to the initial and investment allowances and some to the annual allowances. At first, I was much struck by the idea of giving businessmen discretion to take their depreciation allowances for lax purposes at the time of their choosing, but, since there is little connection between the terms of depreciation in a firm's tax assessment and its own commercial accounts, companies could take their full allowance for tax purposes without having to reflect an equal increase of depreciation in their commercial accounts.

Few of us want to pay tax any earlier than we have to pay it, and the practical effect of this free depreciation might be that businessmen would take the maximum available as quickly as possible. If this were the result, the extra cost to the Revenue in respect of one year's expenditure could be about £700 million and, clearly, that is impossible. The alternatives seem to be an increase of the initial or investment allowances.

These two allowances have both their advantages and their disadvantages. Both of them provide more cash for investment. The initial allowance is criticised because it is only an anticipation of the future. The investment allowance, on the other hand, is criticised by purists on the ground that allowing depreciation at 120 per cent. of the cost of the asset is in the nature of a subsidy. I have never myself accepted this argument. I do not think that one can talk about a subsidy to industry when industry as a whole is paying large sums in taxation, including the special tax on profits. Investment allowances should be regarded not as a deduction from this burden, but as a reallocation in favour of those who invest at a high rate.

I am satisfied that, from the point of view of encouraging investment, the investment allowance is a good deal more effective than the initial allowance. At present, it stands at 20 per cent. on new plant and machinery and 10 per cent. on industrial buildings. I propose that plant and machinery and other assets, which at present get 20 per cent., should in future get 30 per cent., and that industrial build- ings and other assets now getting 10 per cent. should in future receive 15 per cent. The cost of this change is likely to be some £8 million next year and about £50 million the year after. Thereafter, the annual amount will increase, depending on the level of investment. This is money to stimulate investment which, I think, is precisely what the party opposite wants to be stimulated.

There are some further changes which I propose to make. I turn next to the position of heavy capital plant. There are two factors here. The heavy engineering industry is in the short term facing considerable difficulties, as the hon. Member for Cardiff, South-East rightly said. Moreover, in the long term I do not believe that the lowest of the present rates of annual depreciation, that is, those which apply in general to the heavier plant, are in line with modern conditions. They relate the period of depreciation to the assumed life of the plant. This principle can be pushed too far and I propose to make certain changes.

It will take until the next Finance Bill to work out the details of the scheme, but I have already decided to propose that for new plant and machinery the lowest actual annual rate of depreciation on the reducing balance basis should be 15 per cent., corresponding to a 12 per cent. basic rate. This is a very complicated matter, but the effect of this will be to reduce very substantially, in some cases by more than a half, the nominal working life of a wide range of types of plant at present assumed for depreciation purposes to have working lives of periods up to forty-five years. I do not think that forty-five years makes any sense in the context of modern industry.

The significance of this change is shown by its cost, which, though in the first year it will be small and in the second year will be £15 million, may rise in some years' time to as much as £55 million a year. The exact amount will depend on the level of future investment. This change, like the change in the investment allowance, will be applied to plant on which expenditure becomes payable after today.

These changes in investment and annual allowances for new plant acquired after today will be of considerable benefit to industry. In the case of plant benefiting by the new minimum annual allowance of 15 per cent., that is, plant at the lowest rate of depreciation, the total tax allowances in the first year will be 55 per cent. of the expenditure. The cumulative allowances in the first five years will be 91 per cent. and at the end of the first ten years 113 per cent. Of the total of 130 per cent. allowed, all but a residual 10 per cent. will have been allowed by the end of fourteen years.

The minimum actual rate for plant on the straight line basis will be 6¼ per cent. and this will benefit, for example, the shipping industry which uses this form of depreciation and whose normal rate on that basis is now 5 per cent. In general, the products of the heavy engineering industry should gain most from this change and I have had their difficulties particularly in mind.