The right hon. Gentleman said things at the beginning of his speech which are, of course, profoundly true and a matter of united opinion. The first is that these economic problems are at the heart of our affairs. I agree. I have said it myself, and I think that every one of us who is concerned with policy today feels that we are "cabin'd and confin'd" by the balance of payments deficit from which we are doing our best to escape. It is true also, I agree, that we have supported the international financial structure to the benefit of the rest of the world. We have done it at some cost to ourselves in the expansion of our own economy, but it has been of benefit to the world. Finally, I agree with the right hon. Gentleman that the military commitments and aid which we have undertaken during these years have been a very heavy burden upon the British people.
I come now to the situation confronting us. For the Leader of the Opposition, history seems to have started on 16th October last; and I shall not, therefore, go back over the preceding years, except for two quotations, both of which are non-party but which put this debate and the measures of the last nine months in somewhat different perspective.
First, I quote from the O.E.C.D. Annual Report, just published:
The attempt … to reflate the economy"—
started by the right hon. Member for Barnet—
and to reach a steady and sustainable rate of growth of output had disappointing results. The pressure and pattern of demand generated by the expansionary measures taken in 1962 and 1963 proved too great for price stability and balance of payments equilibrium to be maintained.
That is the first quotation, and it is a statement of fact from which, I think, no hon. Member on either side could dissent.
The second quotation is from the Report of the Bank for International Settlements:
When the Government took office after the election"—
that is, this Government—
it was confronted with the hard facts of the balance of payments situation; the overall deficit for 1964 was evidently going to be between £700 million and £800 million.… While some deficit was in conformity with the new economic approach, this was obviously overstepping the mark, since the deficit was far larger than could be accounted for by working capital requirements.
When the right hon. Gentleman says that confidence drained away I do not dissent. It drained away precisely for the reason given in the latter part of that sentence because
the deficit was far larger than could be accounted for by working capital requirements.
What happened? Right hon. and hon. Members opposite are no innocents in this matter of creating economic crisis. The position in 1960–61 was parallel, though not quite so severe as it was in 1964. But the simple truth—the House and the country must understand it—is that at a moment when we had followed an expansionary policy for something like 18 months, but not much longer, we were incurring a substantial and growing balance of payments deficit due to imports outrunning exports to an increasing extent.
The world began to wonder whether it was possible for the British industrial system to pay its way at any substantial rate of growth. This is what happened. There is no doubt that, last November, the world began seriously to wonder whether Britain was in a position to overcome the large balance of payments deficit and to put herself again into a position where she could face and compete with the rest of the world. This was the trouble we were faced with. It is only in one sense a party trouble. It is a national difficulty that we are faced with. It cannot be overcome by putting down Motions of censure, as though everything which is wrong started on 16th October last. It did not.
Without going over the previous 13 years—I do not wish to embarrass anybody—the roots of our trouble lay far deeper and go way back beyond 16th October last. This situation could not, and cannot, be rectified overnight. Much of what happened in the months following our assumption of office had already been decided and was irretrievable. Our inheritance included not only a massive deficit in 1964, but also a prospective deficit of substantial size in 1965. We were obliged to undertake a series of measures to bring the situation under control, and our policies have been designed to improve, and are improving, all parts of the balance of payments.
The right hon. Gentleman asked me why I had taken measures now. I can tell him in a sentence, immediately. It is because we found in 1964 that we were confronted with a balance of payments deficit, impending in 1965, and I am taking action in 1965 to ensure that we shall not be in the same position in 1966. That is the reason. As he knows, one has to take these measures in good time. Without going back over the dreary days that preceded the last General Election, the fact is—no one can deny it—that if the late Government had wanted to take action to prevent a balance of payments deficit this year, they should have acted in the summer of 1964.
It is all very well to pile all the responsibility on the right hon. Member for Barnet. He knew, but he did not act. The present Leader of the Opposition also knew, and he did not care, because all he was concerned about was how to win the election. I say to the right hon. Gentleman the Member for Kinross and West Perthshire (Sir Alec Douglas-Home), for whom I have great respect, that maybe he did not mean it in this way but I believe that one of the worst things he ever said was the speech that he made on assumption of office in November, 1963, when he said, "From now on all we do and all our actions and all our speeches must be directed to winning the General Election." He may not have meant it in a dishonourable way—I do not believe he did—but there are other and better politicians than he on the Conservative Front Bench who knew very well what they were about.
My complaint against the right hon. Member for Barnet is that he was not strong enough to act at the time when he knew he should have acted. All subsequent history reveals that he should have acted. But the responsibility is shared by the former President of the Board of Tade. It is the President of the Board of Trade who has the trade figures. He knows what the trade gap is every month. He knows what the balance of payments deficit is to be. It is all very well the right hon. Gentleman reading out the balance of payments deficit now. What was he doing and thinking of last year when the balance of payments gap was minus £75 million in January—I am talking not on a crude basis but on a balance of payments basis—x00A3;55 million in April, £66 million in June, £51 million in August and £67 million in September? That was how the deficit was mounting up month by month.
There sits the former President of the Board of Trade. Was the right hon. Gentleman urging the right hon. Member For Barnet to act? Was he asking his right hon. Friend to take action because of the growing deficit? He knew well that it could not be financed and that action would have to be taken after the election. But he did not care, because either he would have lost the election and we should have had to take the action, or he would have won the election and we should have had the same old cynical broken pledges again.
The Conservative Party was making pledges knowing full well what the situation was. Right hon. Gentlemen opposite were trying to "kid" us and the country that everything was all right. They were making pledges and embarking on public expenditure sprees. I have been loftily rebuked by the right hon. Member for Barnet for using the word "sprees", but right hon. Gentlemen opposite were embarking on sprees which they knew very well they had no chance at all of paying for.
I was told by the right hon. Gentleman that the Conservative Government costed the programme. I should like to hear my right hon. Friend the Minister of Health telling us about the costings of the hospital programme over the last few years. It was not costed. What the right hon. Gentleman did—I shall come back to this point later—was to add up the total programmes that the Departments put in to him, see what the figure was, write it down, put it in a White Paper and say, "Look, I have costed it." But it bore no relationship to our capacity or to whether we could fulfil those programmes. I tell the right hon. Gentleman that I found an incoherent mess of public expenditure that had to be dealt with when we came to power.
When we assumed office we acted directly on the trade balance—our policies have been designed to improve all parts of the balance of payments and not merely one part—by the temporary import charge, by the ex port rebate and by all the other measures in the fields of export finance, export credit and export promotion. We have acted directly on the capital account by the exchange control measures in the April Budget, reinforced last week by the measures that I announced then, and by the introduction of the Corporation Tax, which will have a substantial influence, building up from 1966 onwards on the capital account. Relief from underlying tax on income from portfolio investments abroad and the Overseas Trade Corporation scheme have also been withdrawn and this will have beneficial effects on the capital account.
We have acted on Government expenditure overseas to reduce expenditure and increase receipts. A stringent review of Government expenditure as a whole was set on foot last October. I shall come to the question of defence later. Meanwhile, all Departments and public authorities have been instructed to observe the most stringent economy in overseas expenditure and do all they can to increase overseas receipts.
We have acted indirectly on the balance of payments through the economy by our monetary and credit policies, by the fiscal measures of both Budgets and by the curbs on central and local government spending recently announced. It is to ease the excess pressure on demand and to redeploy resources towards exports and import saving that this action has been taken. [Interruption.]
The right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) asks what the difference is between this and "stop-go". There are two major differences. One is that these measures are much more selective than those which he adopted in similar but less severe circumstances in 1961. I shall demonstrate this later. The second is that we are tackling the underlying problems as well as the short-term situation. I do not believe that all this can be solved by manipulating financial levers in Whitehall. There has to be a basic reconstruction of the economy as a whole, and it is upon this task that the Government are engaged.
I need not outline here all the steps that are being taken to modernise and strengthen our industrial base and to make the economy more competitive. There is the reorientation of our policy of overseas investment and the more productive reallocation of our resources. These are policies which will pave the way for sustained growth by making a lasting and not just a short-term improvement in our external position.
The balance of payments began to improve in the first quarter of this year. Let me just read the figures. This is what happened in 1964: in the first quarter there was a deficit of £140 million; in the second quarter £174 million; in the third quarter £251 million; and in the fourth quarter £180 million. In the first quarter the deficit was about half as much as the quarterly average in 1964; but it was still too large and its smaller size owed something to the distortion of the trade pattern early this year. But it was minus £97 million—far lower than in any quarter in 1964.
The deficit in the second quarter, ending 30th June, is not yet known precisely and will not be for some weeks, but I am glad to tell the House that there are reliable indications that it was further reduced by comparison with the first quarter. The trade deficit in the first half of this year was little more than half the rate in 1964.
This is an encouraging factor to place before the country and I hope that it will be read not only inside the country, but outside the country as well. It seems to me of the utmost significance that we should, in two successive quarters, have been able to reduce the balance of payments deficit, the first quarter being well below that of last year and the second quarter proving to be, I believe, below that of the first quarter.
This quarter is not likely to be a good one, for reasons well known to the House and traditional in the manner in which we make our purchases; but the fourth quarter, if I may make a projection, is likely to be a reasonably good quarter again and there is no doubt that our balance of payments this year will be vastly better than it was when we took over 12 months ago.