I shall try to follow the advice of the hon. Member for Newcastle-upon-Tyne, East (Mr. Rhodes) and for a few minutes forget about the coming election. I may perhaps succeed in that particular thing rather better than he did but, of course, it is easier for me to do it.
As I have often said in this Chamber, I think that the Government were absolutely right to stand firm against devaluation. Devaluation would have afforded a temporary but a most damaging respite. I believe not only that we should maintain the present parity of sterling but that we should and can do so, and nothing I say will do anything to encourage those who think that we ought to, or even must, devalue.
Nevertheless, we have a very long way to go before we are safe, and I am afraid that the Chancellor of the Exchequer—and he is, if he will allow me to say so, a very old and valued friend—by what seemed to me an electioneering, a pre-Budget review, did not strengthen the balance of payments. One of our most eminent economists, Lord Robbins, said two or three weeks ago that unless within a measurable period of time we get equilibrium on current account—and it is that, of course, the current account, which matters—inevitably the balance-of-payments crisis will recur with increased violence.
Like Lord Robbins, I cannot share in the euphoria which prevails in many quarters about our prospects. "Euphoria" is a newish word to me; I believe it means living in dreamland. If a great industrial company paid greatly increased dividends and wages, no doubt its shareholders and workers would be pleased, but if those people found that its distributions were not coming out of increased earnings but out of declining reserves, they would know that they had been living in a fool's paradise and that soon there would be no wages for the workers and no dividends for the shareholders.
In this country we have record high employment, and earnings rising more quickly than prices. No doubt there are many who are content. The question is: lots of jam today, but where is the bread coming from tomorrow? This situation just cannot last, and those who are content with it are indeed living in a fool's paradise. When the profit squeeze reaches its limit some companies will have to slow down their expansion—and thereby dismiss workers and we shall have some unemployment; and others, more dangerously still, will have to raise their prices, and that will precipitate a balance-of-payments crisis.
Sterling was not rescued last autumn by increased productivity or greater ability to compete. It was rescued by loans. Alan Day, in the Observer—a generally friendly critic of the Labour Party—said that this was a miraculous escape, not an economic miracle. It was done by borrowing. I believe that the Government were absolutely right to borrow; where I criticise them is in the use they made of the time they borrowed. We cannot now rely upon other countries letting us out by inflating as much as or even more than ourselves. Exports are at a high level, but what it not always remembered is that most of those exports were ordered 18 months ago when we were getting those record export orders because of the competitive advantage we gained as a result of the policies of my right hon. and learned friend the Member for Wirral (Mr. Selwyn Lloyd). We are losing those advantages very quickly.
The C.B.I. questionnaire on the future prospects of export orders has proved for the last two or three years a very accurate guide, but the answers to its latest questionnaire last month have not been optimistic. The prime failure is due to excess demand. We are spending instead of saving. Under these conditions costs are just bound to rise, and they are not only rising by the 8 per cent. or 9 per cent. by which earnings have gone up, but in many cases by very much more as a result of the big fall in the working week. Getting enough competition, which is what we have to do, is of course always unpopular. Those seeking more wages and those seeking more profits like inflation. What is economically desirable is very often politically difficult and sometimes politically disastrous, and vice versa.
The Prime Minister's words on this are admirable. He said on one occasion:
Whatever has to be done to get the country on a sound basis we shall do regardless of electoral consequences.
The Prime Minister likes this theme. He has often repeated it and the Chancellor seems liable to catch it. There is nothing unpopular in talking tough—it goes down well—it is actual action which is unpopular. Politicians are always under a great temptation to do what is unforgivable, to say one thing and to do another. Of that arch-politician Cardinal Richelieu it was once said:
He is like a man rowing a boat. He is always going in the opposite direction from which he is looking.
The Prime Minister is indeed a master of words. I think the Economist paid him a very deserved tribute two weeks ago, if he takes it as a tribute. It said:
Mr. Wilson has an unequalled talent for making acts of weakness look powerful and dynamic.
We must get more competitive, but how? One way, which appeals to me as a lifelong Free Trader, would be the unilateral reduction of tariffs, but that clearly is impracticable in the present state of our resources. If we had vast reserves we could deal with a temporary surge of imports, but today we cannot and therefore it must be by regulating total demand so that we get the right balance between resources and the claims on those resources.
What I mean by total demand is what the Government spend, plus what industry spends on investment, plus consumption. The Government expenditure is going on rising and rising. The Times on 24th February said in a leading article that the monetary increase in Government expenditure in the coming financial year will be nearer 10 per cent. than 7 per cent., vastly more than any conceivable increase in production. Consumption is being fully maintained and the only indication of any drop is perhaps in industrial investment. That surely is the very last thing that the Government ought to want, particularly the Prime Minister after his brave words at Swansea.
Of course I entirely accept that the Chancellor has tried. He has imposed many burdens on us. Indeed, it might be said that we are having the worst of all worlds. We have borne these burdens without getting any advantages. If a doctor prescribes a very disagreeable treatment and the patient does not get any better, it is generally wise to change the doctor. The Chancellor has imposed on us heavy taxes. I have not criticised him for that. Indeed, in one debate I said that I accepted the need for it. He has imposed a record credit squeeze and put on hire-purchase regulations but all these have been vitiated, partly by the inflationary effect of his first Budget and partly by the fact that this was done in driblets. As my right hon. Friend the Member for Flint, West (Mr. Birch) told us today, on a previous occasion he compared it in military terms with wet hand tactics.
Finally, there was the continual assurance that these measures would not hurt us nor create any unemployment. What better way could there be of encouraging those people to hoard labour who do not need it? I should guess that today there are at least 2 million men and women working for companies which do not need them when they are urgently needed elsewhere.
The Chancellor rather maladroitly has been taking what he can of the steam out of the economy but the First Secretary of State and Secretary of State for Economic Affairs has been putting it back. The unfortunate thing is that the First Secretary puts it back twice as much as the Chancellor takes it out Professor Phillips, in a very brilliant essay, convincingly shows that money incomes rise faster than production only when the use of capacity in terms of employment exceeds 97½ per cent. This is taken by the experts to equal running the economy at 95 per cent. of capacity. It is now running at pretty nearly 98 per cent. A leading article in The Times a few weeks ago pointed out that the American economy was likely to have a record growth for all time. Then it added that the American economy is running at 92 per cent. capacity. I believe that 92 per cent. is a good deal too low for us, but I am sure that 98 per cent. is dangerously high.
To get the economy down to 95 per cent., it is necessary to keep down demand, and therefore production, for a time and to keep up growth. I quote two
sentences from page 2 of the National Plan:
…the underlying growth of output per head seems to have averaged a little over 2 per cent. in the early 1950s, nearly 2¾ per cent. over the period from 1960 to 1964, and may now have reached a rate of about 3 per cent per annum. The required acceleration to 3·4 per cent. thus seems feasible in the light of past trends".
Professor Paish in his article in the Daily Telegraph on 16th February, to which my right hon. Friend the Member for Flint, West referred, said that productive potential—that is, the underlying growth—was rising at 3¼ per cent. a year last year and that the rise had fallen back to 2 per cent. In fact, at a time when according to the National Plan we need an acceleration of 3·4 per cent., we have got a decline to 2 per cent. This is the progress towards raising productivity on which the Government are asking for our congratulations.
The decline in the productive potential is in money terms of the order of between £350 million and £400 million per annum. It is an inevitable consequence of the Government's policy and I believe it to be the most grave economic development today. We must have a far stiffer Budget than had been thought necessary a short time ago and a far more painful and stiffer one than would have been necessary if the Chancellor of the Exchequer had acted earlier. It is an unhappy proof of the complete failure of the Government to get our economy back on a sound basis. If in 1965 production had been kept stable for a year and if the rate of productive potential had remained at 3¼ per cent., within a year we should have got a 5 per cent. safety margin of spare capacity. Then we could have a steady and safe rise in the standard of living. Then, indeed, the Government might have won the election and told the truth. They failed. Therefore, it is vital that there should be a drastic cut either in Government expenditure or in consumption. It can be argued either way, according to choice.
How is it to be done? There is no painless way of doing it. Before the war we used to think that all that a Government had to do was to raise the amount of revenue to match their expenditure. I rather suspect that some hon. Members opposite still think that. If that were so, it would in the short run be quite easy. The Chancellor of the Exchequer could confiscate a large part of huge private fortunes or greatly increase company taxation. But if it came out of savings, as it largely would, it would serve no economic purpose at all. The safety of the economy does not depend on how much the Chancellor can collect in revenue. It depends entirely, I maintain, on how much we can cut consumption.
Rather presumptuously, perhaps, I have two suggestions to make. I say "presumptuously" because, obviously, one cannot on the back benches, without resources, make detailed suggestions with any confidence. But I hope that my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod), when he becomes Chancellor, will look carefully at the Irish retail turnover tax, which appears to have worked very well in Ireland, in spite of all the criticisms when it was instituted, and to act as a very good regulator. I suggest, also, that he look at the possibilities of a substantial payroll tax discriminating in favour of the unemployment areas.
What are the objections to running the economy at 95 per cent. capacity? It will be said that it means massive unemployment. I believe that this is a myth and completely out of date today. Professor Paish, to quote him again, has said that, in his opinion we could run the economy with complete efficiency with unemployment down to 1½ per cent. in the areas where two-thirds of the workers live. It would, of course, be higher elsewhere, and the object would be by special regional arrangements to bring it down in those areas. It is said that it would check growth. I believe the very opposite to be true. In the short run, maximum growth depends not on investment but on better use of existing resources, and in the long run, I believe, it depends more on the quality of investment than on the quantity.
Any number of industrial companies brought out reports in 1962 making that clear. I quote from just one, the Steel Company of Wales in 1962. The chairman said:
The emphasis on the company's activities has shifted from maximum production to maximum economy in operation".
In that way, by making the object maximum output per unit of labour rather
than maximum output per unit of capital, we maximise national resources.
We can have stability and the background for growth by accurately regulating the pace of the economy, but we cannot have maximum growth unless we are prepared for changes, and changes which hurt—employing one man instead of two or one man instead of three. Lord Plowden put this very well to a conference two or three years ago, and I quote one passage from his speech:
We can have a rapid rate of growth and a rapidly rising standard of living if we will accept the necessity of change and the fact that change is often uncomfortable. What we cannot do is think that we, as individuals, can get all the benefits from being progressive and adaptable while leaving other people with the pains and disturbances that are the price of progress and adaptability.
We must make a choice. If we want progress, we must give up resisting change for the sake of present comfort. We are not likely to get that attitude under a Government who ratted on Lord Beeching and who prefer fine words to decisive action.