Budget Resolutions and Economic Situation

– in the House of Commons at 12:00 am on 4th May 1966.

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3.50 p.m.

Photo of Sir Douglas Glover Sir Douglas Glover , Ormskirk

I will not detain the Committee for long but as I was in possession of the Floor when business terminated last night, I want to conclude my remarks, first, by saying that I should like to amend what appears in col. 1562 of yesterday's OFFICIAL REPORT, where I referred to subventing the employers by 12s. 6d. for every female employee. I thought that HANSARD would alter the figure, because it should be 3s. 9d.

I congratulate the Chancellor on the way in which he presented his Budget—with charm and an appearance of honesty. But these are the stock-in-trade of the bucket shop operator, and have been from time immemorial. The Budget is not quite so honest as the Chancellor made out when presenting it. It can be criticised because it provides no incentive to exporters, no incentive to efficiency or to greater efforts, and because it is inflationary and will be unfair in its operation.

It puts a general tax on food for the first time for 120 years. The Chancellor was misleading the Committee when he stated that the increase would be 1 per cent. I want to show hon. Members opposite that in fact the increases in food prices brought in by the Chancellor as a result of the Budget are much more likely to be between 5 per cent. and 6 per cent. We shall have to go into this question in a little more detail.

The manufacturing industries, which employ about 9 million people, are to receive a subvention of 7s. 6d. for each male employee and 3s. 9d. for each woman—so much for equal pay for equal work. This subvention will cost the Chancellor roughly £150 million a year. He has to raise that money not from the general body of taxpayers but from his Selective Employment Tax, which is really being levied only on those employed in what the Chancellor euphemistically referred to as "the services". Services include the whole of our distribution industry, and when the Chancellor said that these services, which spend £7,000 million, were taxed only at the rate of 1 per cent., he did not make it clear to the Committee that that £7,000 million includes all the food bought by our population over the retail shop counter.

The Chancellor, having to find £150 million as a subvention to the manufacturing industry, also wants to have £240 million as a net offtake from the consumer. In other words, the services and distribution part of our community will have to find £400 million in taxes. As the Chancellor says that that part of our community spends only £7,000 million, any hon. Member, on either side of the Committee, will be able to calculate that £400 million represents beween 5 per cent. and 6 per cent. of £7,000 million.

Hon. Members opposite, who made such play during the election campaign about Conservative policy putting up the price of food had better go back to their constituencies and say that, as a result of the Chancellor's measures, before the end of the year all their constituents can expect a rise in the price of food between 5 per cent. and 6 per cent. The Budget proposals will increase the cost of distribution of milk to the whole community, including nursing mothers, by about £5 million a year, put up the cost of meat probably by 6 per cent. or 7 per cent. and, far from the net charge working out at 1 per cent., this will be a very heavy burden on the poorer elements in the community.

It really is astonishing that the Government, who last year made so much play about increasing retirement pensions, will, at the rate they are going on, completely have wiped out that increase before next year's Budget. The proposals in this Budget alone will reduce the purchasing power of a single person's pension by at least 4s., and the inflation that took place last year had already reduced it by between 4s. and 5s. Therefore, the 12s. 6d. increase is being eroded almost out of existence, and I forecast that by next year's Budget there will be a strong campaign for an increase in pensions because the Government will have completely annihilated the increase they brought in in March, 1965. What a hollow ring the Budget must have for those on fixed incomes, including pensioners.

I ask the Chancellor for some very clear answers to my next point. Does the Selective Employment Tax apply to all part-time workers? We have a right to demand a clear answer to this question so that we can conduct this debate with a knowledge of the facts. Between 30 per cent. or 40 per cent. of the people employed in distribution are working on a part-time basis, and the Chancellor's proposals, far from getting people out of distribution—far from getting the milk roundsman into computerised industry—will have exactly the opposite effect. A shop employs a part-time worker perhaps for two full day's a week, and if it is now going to have to pay an extra 25s. for a man and 12s. 6d. for a woman, the tendency will be for distribution to organise itself upon a basis of the maximum number of full-time workers and the minimum number of part-time workers.

The tendency will then be not for people to be pulled out of distribution and to go into manufacturing industries. Hon. Members had better go to their constituencies and tell people that tens of thousands of semi-retired and retired people will be thrown out of their jobs because it is no longer economic to employ them. Not one, not two, not a thousand, but literally hundreds of thousands of part-time workers face the threat of the sack as a result of the Chancellor's measures. The Chancellor has also dealt a severe blow to agriculture, and I cannot see that anybody can believe that he will help and protect the horticultural industry. I hope that my right hon. and hon. Friends will put down Amendments when the Finance Bill is debated to put agriculture and horticulture in the neutral zone so that the amounts in tax will be repaid. Otherwise, this will be a very severe blow to all rural communities.

I hope also that my right hon. and hon. Friends will bring in an Amendment to exempt all part-time workers who work under 25 hours a week from the provisions of the Bill. Otherwise, literally hundreds of thousands of them will be facing either the sack or, even worse case, the prospect of having to go home and live solely on their pensions.

I cannot understand what the Chancellor was after in the subvention to manufacturing industries. We are talking about increased efficiency. How can efficiency be increased in any industry by saying to the employer, "We will give you 7s. 6d. for every chap on your payroll"? It will be an enormous incentive for increased wage rises. The First Secretary had better have a talk with the Chancellor about this, because if every employer gets 7s. 6d. I cannot see how any responsible trade union leader can help saying, "We had better have some of that right away". He would not be doing his job as a trade union organiser if he did not do that; but how will it increase efficiency? How will it get off any of the fat by way of hoarding labour?

Therefore, I hope that my right hon. and hon. Friends will bring in an Amendment to the Finance Bill to remove this incentive from manufacturing industries. I accept that it may be unpopular—nobody likes to lose something which is offered—but I think that that would lead to far greater efficiency. [An HON. MEMBER: "It is right across the field."] I do not mind if it is right across the field. I said last night, and I say it again now, that there is something to be said for a payroll tax, but what there is nothing to be said for is a payroll tax so ill-thought out and ill-considered as that presented by the Chancellor yesterday afternoon.

I think that this Budget is inflationary. It is a smack in the eye for the farmer; it is a death blow for the small horticulturist; it is a severe strain on part-time workers; it is unfair in its effects, and it in no way solves the problems which the Chancellor posed at the start of his speech. It does not increase incentive, it does not increase efficiency, and it does not provide rewards for greater effort. Therefore, I hope that all my colleagues will oppose it, not only at the end of this debate, but also during the debates on the Finance Bill.

4.3 p.m.

Photo of Mr Iain Macleod Mr Iain Macleod , Enfield West

One is inclined merely to second that admirable speech and to sit down. [An HON. MEMBER: "Reply to it.") But I could not reply to it: I agreed with it.

The Chancellor received many congratulations yesterday—they were sincerely meant—on his performance. His speech was lucid and mercifully brief, but, as he knows, congratulations from the Opposition on this occasion are limited to the manner and do not relate to the matter; they refer to the presentation rather than to the content. As he developed his theme. particularly that of the new tax, I became more and more convinced that he was making a serious and fundamental mistake in his appraisal. The relief, if relief it was, has been short lived. The facts, after all, are these. In Budget No. 1, in November 1964, £304 million a year was put on taxation; in Budget No. 2, in April 1965, the addition was £323 million; leaving out the restrictive Budgets Nos. 3 and 4, Budget No. 5 put on .£385 million. All those together total over £1,000 million.

This latest Budget is the most severe, however it may look, that the country has had to face since 1951, although the effect on the demand, that is to say, how much of this will really impinge on demand and how much will be met through bank borrowing, is very much more difficult to assess. The Chancellor yesterday, to soothe the patient—he did this also on T.V.—slipped into his old habit, which cost us a great deal last year, of double talk. We all remember the Bank Rate which was not going to work through to the domestic economy. We remember the resistance to further economic measures followed by those measures a fortnight later. And we remember the corner we were rounding well over a year ago now; yet we are still in this present crisis.

It is ingenuous to think that prices will not go up, and it is wrong to think that they will not go up substantially. I am certain that the rise will be formidable and far in excess of the 1 per cent. prophesied yesterday by the Chancellor.

For example, one heard someone on television yesterday rejoicing that the cost of his motoring was not to go up. Of course, he is wrong. The cost of his motoring will go up, because the cost of service and repairs and everything to do with a garage is going up, according to the Motor Agents' Association, by no less than 5s. an hour. What we must do is to study the Chancellor's Budget judgment and his solution and then its relevance to the problems we have today. I will take only very briefly the background, as I see it, to our problems, looking at the strong and weak elements in our economy. It is a great mistake to play down the elements of strength in our economy, and I shall start with those.

We have overseas assets that are vastly greater than our overseas liabilities, although the latter worry us a great deal. We have a situation in which exports grew strongly, particularly in the second half of last year. Investment in manufacturing rose, although there were some signs that 1966 will not be a particularly good year. We are still, then, a very wealthy nation, and our trading account, taking visible and invisible together, is in balance, year in and year out.

We should not, then, play down our strength, but it is the other side of the ledger which has been worrying the Chancellor. We have had stagnant production for a long time now, and the latest figure is one point lower than in January 1965. We expect a rise of growth in real demand in 1966 of something around 2½ per cent., which is, of course, well below all the targets towards which we are working. We have an exceptionally tight labour market, with which I shall deal in a moment. Last year was a bad year for savings generally, and a disastrous one for National Savings. The Chancellor said that the message was clear: more savings, less tax. If I may suggest to him, the opposite message is equally clear: more tax, less savings. There was a rise in the index from April last year to March this year of 4-3 per cent., against the average of 2½ per cent. over the last six years of Tory Government, and there is a prospective deficit this year of about £200 million, I would guess. The Chancellor's high hopes are gone. He is now talking about "the trend".

We have, finally, a formidable load of debt with sketchy, true visible reserves. However, I was delighted to hear the Chancellor speak yesterday about the repayment of the I.M.F. moneys due in November, 1967. To use a phrase which he used about a year ago, that will make very good hearing abroad. I understand—and I agree that he is right to do this—that he is keeping open the question of refinancing the second tranche because it is too early now for a decision or even comment on that.

These are the main factors which the Government, and the Chancellor in particular, must have considered. It has been an exceptionally difficult year for him to make an assessment, and it is particularly important that he gets it right. There has been a lot of advice given to him, but no concensus at all. We know the analogy of the "hawk" school and the "dove" school between the economists and their fierce arguments for months past.

As I see it, there are two great dangers. There is the danger of a Budget that may be thought to be—whether or not it is, is in a sense, almost secondary—too soft. The danger there is that confidence abroad would slip and we would have a new run on reserves. The danger of a Budget which is too tough is that it would punch an economy which is already on the turn and thus would aggravate a slide. This makes the Chancellor's decision particularly awkward, but I am convinced that the first danger is the more serious of the two and so, I judge from his speech yesterday, does the Chancellor.

The argument turns basically on one's view of the future course of unemployment. This seems so important that I will occupy the time of the House for a few minutes on it. We know the figures for 18th April. The figure was 1·3 per cent. However, the figures available at that date show a fall in unemployment for April less than the normal seasonal fall. The question is whether that is the beginning of a turn or whether the employment figure is so low that it is comparatively meaningless to read too much into it. My view is that the economy is at least as stretched as the figures would indicate.

When we get as low as this in unemployment, with a vast number of vacancies not being notified to the exchanges because employers see very little chance of these being filled, one is right to look at that turn with a good deal of caution, and I put a suggestion to the Chancellor about this. He would give a great deal, and so would I, to know what the May figures will be. From my experience at the Ministry of Labour, the May figures are collected on the second Monday, which, I believe, will be next Monday, and issued on an appropriate Thursday towards the end of the month.

I remember on one occasion, when it was of particular importance—as I judge the position today—to know whether or not the economy was turning, I asked on the Monday for a special check to be made from eight or 10 different exchanges which, I thought, would give me a bird's eye view of the position throughout the country. As I remember the exercise, it was extremely valuable. The Chancellor might like to consider doing something like that on Monday.

I leave the question of unemployment there, but I very much hope that we shall soon have a debate on the whole situation and our attitude towards unemployment, because politicians are so inhibited from discussing unemployment that we very rarely do this in the House. Yet it is not possible to understand the way the economy is going unless one discusses openly the level of unemployment; what is happening in the frictional employment sphere and how much of the unemployment figure is genuine and how much, in one sense or another, of that figure represents the unemployable. In short, we need—and perhaps at his leisure the Prime Minister will consider this—a new White Paper, a new 1944 White Paper, on unemployment, because the old thoughts and fears of pre-war years are now completely out of date and it would be a good thing if, in modern circumstances, we could see if we could redefine our attitude towards unemployment.

Before I come to the Selective Employment Tax, I will make a few comments about other proposals in the Budget. First, the gambling tax. On 1st March, I said that I thought that the Chancellor was sadly innocent in his approach, and I am afraid that I still thought so after his Budget speech yesterday. I was invited then to give my reasons, and I said that I would not anticipate my Budget statement. But, as I am now released from that inhibition, perhaps I may now tell the Chancellor where I have been led to as a result of making two different studies; one I was asked to do a few years ago by one of my right hon. Friends in Government, and one I did when appointed to this Shadow position a short time ago.

I believe that the right hon. Gentleman is right in some of his proposals and wrong in others because he has not followed consistently the one principle that matters, which is that one should always tax the physical asets and not try to tax the cash flow. If one sticks to that one can make sense of such proposals throughout the sphere of gambling generally. In other words, the right hon. Gentleman is 100 per cent. right, not necessarily in the amount, in the principle of taxing the one-armed bandit, but he would be wrong to try to keep track of the 6d. pieces going through the machine.

On casino gaming, his proposals are probably right for bingo in relation to rateable values, but I am sure that they can have a bad result indeed, and I would like him to think about this in relation to the casinos which have grown up in this country. The right hon. Gentleman said on 1st March: I believe that the levels at which I have fixed them will ensure that betting and other gambling are not driven underground, with still greater social problems in consequence."—[OFFICIAL REPORT, 1st March, 1966; Vol. 725, c. 1125.] By having these enormous leaps in his rateable value table, the right hon. Gentleman has put a premium on having more gambling in any particular premises. He will get no more money out of it, but it will be necessary for the owners of a club which may have perhaps one table to put in more and more gambling tables in order to meet the Chancellor's requirements. We therefore have the curious result, which I do not believe the right hon. Gentleman means to achieve, of first creating more gambling and, secondly, of putting a premium on the sleezy club—the club with unattractive premises—because that would seem the inevitable result of this proposal.

The Chancellor is partly right, but where he is entirely wrong is in relation to the turnover tax on betting. He is wrong here because he is going for the cash flow rather than the physical assets. Of course, the Inland Revenue is extremely skilled in these matters, but, with respect, it is not the Inland Revenue's sphere. I am afraid that the opportunities for evasion are very large indeed, and if I might recommend to the Chancellor same leisure reading next week-end, now that his Budget is out of the way, he might care to get hold of a copy of a book by Edgar Wallace called "The Calendar", which became a film and a play. If I remember rightly, Gordon Harker was in it and the whole plot, the whole story, is about a method of beating the turnover tax as it then existed in this country.

There is, after all, no difference in principle between the two sides of the House here, and I suggest that the Chancellor takes our advice on this matter, because we agree that there should be a tax and we are, therefore, all concerned to achieve the right method. Remembering the principle that I have suggested—of the physical assets—he could tax the licence, the shop and the telephone, because the telephone is an exact measure of the amount of business that is done by a particular firm. If the right hon. Gentleman would listen to my hon. Friends and I this time and alter his Finance Bill accordingly, he will not make the mistake which Sir Winston Churchill made so long ago and which I know the Chancellor is anxious to avoid.

There are two more points, one about Corporation Tax. Naturally, a great deal of this debate will concentrate, as I shall, on the Selective Employment Tax. But it would be wrong not to comment on the level of the 40 per cent. Corporation Tax, because this is a very high rate indeed—quite different from the rate that we were led to believe, in all good faith naturally, by Treasury Ministers in the course of the 1965 Finance Bill. The danger of a 40 per cent. rate of accelerating the slow down in investment, which is something which is to be avoided at all costs, is a very real one indeed.

I should like to ask the Chief Secretary a question, and perhaps he will deal with it when he speaks tomorrow. It is impossible to find out from the figures and the papers with which we have been presented in the last 24 hours exactly how much more money the Government are taking in Corporation Tax. The question really is this. I may be wrong, but my own calculations indicate that the break-even point for Corporation Tax would be something like 36½ per cent. and that anything over 36½ per cent. would mean that the Government would be taking a very substantial extra sum in taxation from the companies.

I ask the right hon. Gentleman to answer this question as specifically as he can. I know that problems like the buoyancy of the revenue come into it and make it difficult to be exact, but what is his calculation of the extra amount which is being taken in Corporation Tax at 40 per cent. and Schedule F over what would have been taken by Income Tax and Profits Tax at the ruling rates?

Secondly—this is a detail, but it would be helpful to know this in advance—approximately how many amendments can we expect in the Finance Bill this year, to the nearest hundred or so? [Interruption.] I am talking about the ones which are going to he printed from the beginning, not the Amendments that we shall try to work into the Bill at later stages.

I have one other point to raise, and it is very serious. It is the question of the voluntary action to be taken in relation to investment in the developed sterling area—Australia, New Zealand, South Africa and the Irish Republic. Here the Chancellor is using—referring to the note that I made when he announced it—what one might call White House techniques, techniques developed by President Kennedy and President Johnson, of voluntary action in this field. Yesterday he said, after suggesting the procedure and the submission to the Bank of England of the schemes: In any case, the benefit defined in this way should be large enough to equal the cost of the original investment in two to three years—HON. MEMBERS: Oh!"—[OFFICIAL REPORT, 3rd May, 1966; Vol. 727, c. 1446.] —and I am not surprised. Does he really mean that? I myself have some knowledge of this field. I am, in fact, a director of a very large firm which has considerable investments in three out of these four countries, and perhaps the Chief Secretary might like to take up this point in particular.

My last point is this. My right hon. Friend the Leader of the Opposition made some comments on these proposals yesterday. I am told that in Australia at least, the Chancellor's proposals have had a very unhappy reception indeed, and that in that country they see this as an expression of isolationism in this country. There are many other countries longing to put their money into these particular countries if we are not ready to do so. I find it deeply depressing that Little England has won again in so far as these proposals are concerned.

I now come to the Selective Employment Tax, which is the main proposal. Indeed, I shall devote the rest of my speech to it. I think that, far from this being modern, it contains within it a ludicrously old fashioned view of the structure of our economy. An explosive growth in services is the surest possible sign of a modern prosperous society. It has been so everywhere, and so it is here. In any case, services and manufactures, whatever may have been the truth long ago, can no longer be as tidily isolated as the White Paper suggests. Transport, for example, is part of production, part of the very production line.

The Labour Party is so obsessed with the attack on the "candy floss society" that it does not realise that what it is doing is to pay a premium to the manufacturers of pin tables, even in areas of high employment, and to penalise, say, banking and insurance, wherever they are situated, on which virtually all export in one way or another relies. We are convinced that our first thoughts on this were best, and my criticisms take up the general line of those which were made as an immediate reaction by my right hon. Friend the Leader of the Opposition.

I should like to deal with one or two individual points and then comment on the entire concept. First of all, let me take some specific instances, beginning with agriculture. In paragraph 17 of the White Paper on Selective Employment Tax, it is said: In agriculture the Government intend to offset the effect of the tax on the industry, so far as practicable, through the normal machinery of the Annual Review. That would be alarming enough without the words "so far as practicable". I urge the Government to think again. We shall certainly press it with all our strength.

For many people this is going to be a hideous burden. Let us take, for example, the situation of the dairy farmer who relies on his milk cheque to pay the wages bill. What will now happen to him is that from 5th September for at least six months he will be forced to give an interest-free loan to the Government of about £30 per man and will hope, with no undertaking at all, to get it back at the end of the period. As to the cereal grower, because of the length of time till the harvesting, he may be in an even worse position. This is the situation, wherever we look, and one can mention in particular forestry, to which only the vaguest reference is made and for which industry there is no specific price review. So I echo what has been said by my hon. Friend the Member for Ormskirk. We are completely dissatisfied with the treatment of agriculture, horticulture and forestry, and if the Government do not see the light we shall try to amend the Bill accordingly in due course.

Now a word about the Special Areas. The most obvious one is the Highlands of Scotland. There, in a sense, the services are the industry. Almost throughout the Highlands it is the service industries on which people rely for employment and which in turn attract the tourists, the foreign exchange and everything that goes with it that enables this industry to stay in the Highlands. As a result of this, if he does not amend the Bill, the Chancellor of the Exchequer will be responsible for a very serious lack of confidence in the Highlands, and some very worrying problems of emigration as well.

Apart from the Highlands, let me take as another instance the West Country as a whole. Virtually the only industries in the West Country—I believe there is a very small part of an aircraft industry—are clay mining and tin mining, and these, although they are producing essential raw materials for manufacturing industries, are extractive industries and do not qualify. Then there are sand and gravel, quarrying, the tourist trade and farming. This is the way life is built up there, and in every instance they are attacked savagely by the Government in their Budget.

I take the example of the china clay industry. It exports no less than 70 per cent. of its production, which is very valuable indeed to us. It is granted an export rebate at the top rate of 3¼ per cent. Yet it is to be penalised along with many others as a result of yesterday's measures. Perhaps the First Secretary of State, who is to follow me and who will, no doubt, deal with other matters, might care to remember what he said on 20th April, 1961, when there was a discussion on the Budget of the payroll tax proposed by my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd), then suggested at 4s. Incidentally, if the amount now proposed were spread without the premium, it would come out at something like 4s. The right hon. Gentleman then said: This is quite a frightening business for large areas of industry, for the development districts, for Scotland, and for Northern Ireland. Areas of heavy unemployment must be very frightened of a tax of this kind being imposed to discourage the employment of labour."—[OFFICIAL REPORT, 20th April, 1961: Vol. 638, c. 1507.] If that had any truth in it at a level of 4s., what on earth can be the truth of it when the level is 25s., as it is to be?

I take next the hotel trade and construction industry. It seems absolutely certain that charges in hotels and catering establishments will go up. One curious result of this is that it will be made more attractive to holiday abroad and, consequently, the direct objective which the Chancellor put before us some time ago, particularly in a speech at the Boat Show, I think, will be frustrated, and frustrated by himself.

If the object be to squeeze labour out, one fact which we would all admit is that there is no hoarding of labour in the hotel trade in this country. On the contrary, there is a severe shortage. This is true also of very many shops. The figures for employment in shops are entirely misleading because, of course, they include many people who work only, perhaps, on Saturday mornings because the remainder of the employees are working a five-day week, but who are included on the list of those on the payroll.

As for the effect of the tax on construction, it is certain that building society rates to borrowers will be raised. We cannot blame the building societies, which have been patient for very long, if this should happen. The cost of a council house, according to the best estimates I can make, will go up by something between £80 and £100 as a result of the measures in the Budget, and this coming on top of a year in which housing costs have risen more steeply than in any year since records were kept.

I come now to a point which I hope we can clear out of the way at once, almost without waiting for the Finance Bill. The Chancellor will, no doubt, have noted the point about disabled persons made in a Motion put down on the Order Paper by some of my hon. Friends. I cannot think that he means to penalise the disabled in this way. I am sure that he will listen to representations. I take the very fact that this point is not cleared up as an admission that the tax has been thought of very swiftly in the last few weeks and that nothing like enough thought has been given to the details of it.

Quite apart from the disabled, there are the part-timers, the people to whom my hon. Friend the Member for Ormskirk (Sir D. Glover) referred. There is also the serious problem of those of pensionable age who are brought in and whose work is of great value to our economy. They do a small amount of work, but it really helps. Are we to penalise these people if they happen to be working, as almost certainly they will because of their age, in one of the service industries? I hope that the Minister without Portfolio will use some influence here. I do not believe that these matters—I put it as charitably as I can—have been thought out.

Photo of Mr Iain Macleod Mr Iain Macleod , Enfield West

I am sorry to hear that, because it makes the Chancellor a much more callous man than I had thought if he is prepared—

Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee

With respect, I considered putting something into my speech, which the right hon. Gentleman said was short, about a number of these points. The Bill is to come. There are several matters which will have to be looked into. I can tell him now—I am sure that he will accept what I say—that I thought very carefully and am thinking now about the position of the disabled. It is an obvious point which occurs to anybody as soon as he considers a matter of this kind.

Photo of Mr Iain Macleod Mr Iain Macleod , Enfield West

Yes, there is still a Bill to come, but there are many answers given at this stage in the White Paper. We are told how the nationalised industries are to be treated—quite unnecessarily favourably, in my view. We are told what is to happen to the Civil Service, in respect of which the Government will pay all the money in and then draw it all out again. If the Chancellor found time to consider these sectors, he ought to have found time to consider the old and the disabled.

I come now to the whole subject of this selective tax. I believe that it will fail in its objectives, and I shall put the reasons very briefly. First, the battle which we have seen ever since October 1964 between the Chancellor of the Exchequer and the First Secretary of State is clearly going on. The key element in our economy now is what is to happen in the next round of wages or in wages during the months which lie ahead. This is more important than anything else. The Budget yesterday does not give either the First Secretary of State or private industry any encouragement whatever in the way of standing up, as we must—the Chancellor said this himself last night—to some of the wage claims which, unquestionably, will be made. Those who put their wage claims in will know that they will have to pay more for services, they will see that 7s. 6d. tantalisingly before them, and their bids will go in. It is of great importance that we do not have anything remotely like the runaway wage increases which we had last year, and the very first thing to do—[HON. MEMBERS: "The doctors."] The doctors' case has come at an awkward time. Let us admit that. The Prime Minister will admit it, too. There are always exceptions which should be made to any particular policy, and it was agreed long ago between the two sides of the House that doctors' pay should be treated in the way that the Prime Minister has honoured this afternoon. Subject to our study of it, I have no particular criticism of the announcement which he has made.

Second—and this is an important point—it is an innovation in our system that, for the first time, I think, we are having a tax which is not administered by the fiscal Department. With a good deal of knowledge and, even more, of respect for the Ministry of Labour, I do not consider that it is equipped to take on this task. The opportunities—here, of course, the Ministry does know something—for demarcation disputes under this White Paper will, literally, be endless. One can envisage the efforts which will be put in by management in order to be able to say that 51 per cent. of the personnel in any given establishment are outside services.

Third, there is the strange feature of the prize or premium to manufacturing industry. On television last night, the Chancellor seemed to hint—he could do no more than hint—that this was a sort of concealed subsidy to exports. That, of course, would be illegal, and it may well be that the present proposals will meet some criticism. But, in any case, the two convincing arguments against that are, first, that the premium goes to people whether they are efficient or not and, second, it goes to people whether they export or not.

It is true, of course, that no one will take on new labour at £20 a week per man, or whatever it may be, in order to save 7s. 6d. But the real danger is that it will actually encourage the hoarding of labour which is already there. There is a great deal of labour being hoarded in manufacturing industry at present. I know of no academic study of this matter, but I should not be in the least surprised if the amount of labour being hoarded in manufacturing industry was in excess of that being hoarded in the service industries of this country. It follows, then, that if there is no dishoarding of labour, the employment situation will become all the more critical.

Now, a few words about what seems to be the reality of the speech yesterday and, yet, the unreality of the thinking behind it. The voice yesterday was the voice of Jacob, but it was the hand of Esau we were really worried about. [HON. MEMBERS: "Who is that?"] We know who Esau is. Jacob we know well, but until we have "Congressional" committees we shall not, I think, see Esau being interrogated in these matters.

I had the impression of someone almost playing chess with the economy of this country, shuffling people around as though they were pawns. For the whole of the Chancellor's approach takes no account whatever of the special areas or of the special categories, as I have shown, the disabled and the pensioners. All these are forgotten, and in every case the emphasis is straight on old-fashioned cap and muffler Socialism. [HON. MEMBERS: "Oh."] Indeed it is. This is the modern version of it, and it is one of the reasons why we are so distressed about it.

Now, with reference to the whole Budget, I ask the Chancellor quite seriously whether he does not think that he is taking a grave risk in his timing. I said earlier—I think that he will agree—that the danger of what is thought to be a "soft" Budget is of a drift of confidence. Yet practically nothing of what he announced yesterday happens until the autumn and the notorious third quarter of the year. The Selective Employment Tax comes in in September. The gaming tax comes in in October. The import surcharge goes—I am delighted to hear it—in November, and, of course, the Chancellor will be losing revenue because of the holding back which is bound to come following his announcement yesterday.

But, with all that, and, perhaps punching the jaw of an economy which may well have turned down to a considerable extent, suddenly, in September, there is an enormous amount of deflation. An enormous amount is taken out of the economy to be repaid in part, perhaps, six months later, after a good part of the winter has been spent. Is the Chancellor really satisfied that he has not taken a far greater risk than he ought to do in making these proposals? Perhaps he would like to have brought them in earlier—no doubt he would—but has he not created that risk by his proposals yesterday which do not operate at once on the level of demand in this country?

I said in the debate on the Address, and I say again now, that we judge these proposals entirely by the test of their relevance to the problems as I outlined them at the beginning of my speech today. The only item which I can find in the Budget which seems to me to help in the creation of a more competitive economy is the removal of the import surcharge. That certainly helps. I welcome it, and I am glad to see it.

But very much more is needed. I urge the President of the Board of Trade to press for time this Session for the reform of company law—a much wider Measure than that which was introduced in the last Parliament. As he knows, this was not in the Queen's Speech. We shall have to agree to differ—the Government having the say in the matter—on the question of trade union legislation, but I state my belief that what is needed is a real attack, not a paper attack, not just speeches by the Minister of Labour and the Prime Minister, on all harmful restrictive practices in labour management and the rest. We need more effort consciously devoted to the science of management, a genuine drive to get into Europe and—the Chancellor said little or nothing about this yesterday—a new attack on Government expenditure at home. There is a vast amount that he can do, and all he is doing every time is to produce new proposals—in steel, in the I.R.C. and in many other things—which will be a burden upon our economy.

This, as I said earlier, is a modern version of ancient Socialism. It has no ideas at all except those of more and more discrimination. That, I think, is a very dangerous course for a Government to embark upon. It has no ideas to meet any of our problems except always by higher and higher taxation, which has now reached the level of £1,000 million since the right hon. Gentleman became Chancellor of the Exchequer.

The better way lies through a competitive policy, as we have tried to outline to the House. It is because we think that the Chancellor of the Exchequer, ingenious though he may be, does not believe in a competitive policy, that we condemn the Budget which he put before the House and the country yesterday.

4.47 p.m.

Photo of Mr George Brown Mr George Brown , Belper

We have listened to a very attractive speech by the right hon. Member for Enfield, West (Mr. Iain Macleod). It seemed to me to be very contradictory, the end from the beginning and the middle from both beginning to end. I was not very clear whether he was arguing that my right hon. Friend had done too much in the way of deflating the economy at a time when we were already on the down-turn, as he said at one time, or whether he was arguing that my right hon. Friend had not done enough at a time when we were too stretched, which was the argument which he used at another stage. I was also rather puzzled to hear him representing a party which has just faced the electorate with a programme intended to put £900 million on the level of public expenditure, attacking us for not having cut expenditure more. Perhaps the best comment on the speech has been passed to me by my ever-resourceful researching hon. Friend the hon. Member for Manchester, Cheetham (Mr. Harold Lever), who points out that in the reference which the right hon. Gentleman made to the hands of Esau he was quoting the words first used by Isaac who was, of course, blind.

Photo of Mr George Brown Mr George Brown , Belper

The right hon. Gentleman, not having been there at the time, is not a good witness.

Before I proceed further, may I be allowed by the House to say "Thank you" to the right hon. Gentleman and to the Leader of the Opposition, who has just left us, for the kind words they said about me while I was away last week. I was delighted to read them. Mark you, Mr. Speaker, had I been consulted in advance I could have perhaps put them a little more enthusiastically. The right hon. Gentleman was most anxious that I should read both parts of the quotation, one of which was that he had affection for me and the other of which was that he had the utmost distrust of me. The Leader of the Opposition said that when I was not here something was missing. I believe that both of those phrases fall pretty well into what people have called "Butlerian", but I am grateful for small mercies and I thank both right hon. Gentlemen.

The right hon. Gentleman has indicated, in a very acceptable and moderate statement, that now, as indeed throughout the last 18 months, he disagrees with pretty well all that we do. On this occasion, at any rate, he seems to have read what we were doing before he disagreed with it, which is an improvement on the past. I will deal with the main points which he raised as I go along, but I would point out to him at this stage that, as there was on the investment grants and as there was on the industrial reorganisation corporation, there is every time a very marked difference between the reaction to what we are proposing from industry and leaders of industry and the reaction from right hon. and hon. Gentlemen opposite. I suspect that he will find, as I found when consulting industry this morning, that the reaction of industry to our proposal is much nearer the position which he will himself reach when he has given himself a little more time to think about it.

The main measure in the Budget, to which he devoted most attention, must be seen as one of a number of continuing measures which we have been putting forward for the last 18 months. In order to examine and assess its value, it is important to look at the objectives of our economic policy, to assess the main problems which we face and to see how the measures already taken and now proposed form part of an overall strategy for achieving our objectives and overcoming the problems. One can always take an individual item and pick holes in it, and, particularly if it is novel and imaginative, one can find rough edges. But it is the totality of the measures and what they add up to in the form of a general pattern which was missing from the right hon. Gentleman's consideration in his speech, although he said that he would do this; and this invalidates much of the criticism which he made.

I should like to emphasise, as my right hon. Friend did yesterday, that one of the traditions of this place is the drama and the glamour associated with Budget Day. But economic advance at any time, and particularly in the situation in which the country has been living for some years, is not limited and should not be tied to any particular day in the year. There is no magic about a day in spring which means that at that time we ought to make our changes or to assess our policies. This is a matter of the continued management of our affair.

I suggest to the right hon. Gentleman that he should consider all our measures, all those taken over the past 18 months and now being taken, the fiscal and the physical measures, and consider them together. He will then get a very different picture from that which he painted of what is happening to British industry and the British economy. I have not time to develop it today, but I ask hon. Members to do so. They should consider what has been done already under our regional policies. The right hon. Gentleman said that the new proposal would have an effect on some of the regions, but he should consider what has happened in the hitherto under-used regions of the country and what we have done already or have caused to be done in the realm of industrial development through N.E.D.C. and the little Neddies, in the realm of labour market policies, if I may import a term, in the changes which we have made to encourage and make easier the mobility of labour, in the new investment inducements which we have introduced and in the new arrangements which we have made to encourage industrial reorganisation. If the right hon. Gentleman takes all those together, he will find that it is a very different picture of the dynamism which exists in this field.

The right hon. Gentleman talked about the total level of taxation and the increase in taxation for which my right hon. Friend was responsible yesterday. I must emphasise that financial and economic measures are not ends in themselves. It is possible to show that at one period taxation was reduced, but one has to consider what was going on in society in general at the same time or possibly as a result of what was done. It is not only a question of the taxation which one raises but also a question of the purposes for which it was raised. What is important is the extent to which this enables us to reconstruct the fabric of our lives and the kind of society in which we live. Much of what my right hon. Friend has done, in fact has been done to enable us collectively to ensure the social changes and social improvements which we judge to be right and which the country agreed with us were right when it was asked a few weeks ago.

The passing of economic measures, the level of efficiency and stability in the price level in our economy, however desirable, are not ends in themselves. They are the means and the prerequisites to the end, which is the kind of society in which we want to live. We can have all these things and still lack that kind of society. Broadly, while the Conservative Party were the Government, that was exactly the situation.

Photo of Mr John Temple Mr John Temple , City of Chester

I have been enthralled and interested in the economic strategy, but one point to which the right hon. Gentleman has not referred is the increase in production. Perhaps he will tell us when he expects production to rise.

Photo of Mr George Brown Mr George Brown , Belper

It will take much longer if hon. Members interrupt me on points which I clearly have not yet reached. I shall deal with that matter.

The debate is, therefore, about the stated aims of policy—and our aims are different from those of hon. Members opposite. The right hon. Gentleman made that clear in the debate on the Queen's Speech and also when he spoke of what he called the right kind of choice and the right kind of choosers. One cannot debate the policies without taking into account the stated aims of the policies and the relevance of the measures which we are proposing as a means of achieving them.

Our economic strategy and the social aims which we want to achieve were set out in the National Plan which we published some time ago. This remains the blueprint for action and the central core of the Government's economic and financial policies. In the debate on the Queen's Speech, when I was not here, the right hon. Gentleman said that he would like me to explain what I meant by "implementing the National Plan". It means the Government and industry carrying out the action programme laid down at the end of the first section of the Plan in order to achieve the aims. A tremendous amount is now being done by industry, as well as in changing Government policies—and the major proposal in the Budget is one of these—in order to bring about the action which is required to enable the aims to be achieved.

It is clear that the Plan itself, as has always been stated, must be reassessed and revised in detail from time to time in the light of progress or the lack of it and in the light of developing information. This is being done this year. Indeed, it is being done currently with the participation of the National Economic Development Council and on the basis of the work and the inquiries which the Little Neddies are making. This will be discussed with industry, and the House and the nation will be told later in the year what is the assessment of the situation in the light of what we have done.

Next year we hope to roll, as I have explained, the whole five-year programme forward, and that will entail a major new industrial inquiry of the sort on which the first programme was based. The main task this year is to pursue with strength and determination the achievement of the action programme set out in the National Plan, and that is what I want industry as well as the Government Departments concerned to concentrate most on.

The right hon. Gentleman drew attention to the fact that the economy is growing more slowly than the average rate required to achieve the National Plan's objectives. That is true, and I do not dispute it. But it is not a new discovery. The total production last year compared with the previous year rose by about 2½ per cent. overall. It was higher than that for manufacturing industry and higher still for some parts of manufacturing industry, particularly engineering. But the fact that, overall, the average so far attained is less than we need, while worrying—and I do not hide that—and something that must act as a spur and not create complacency, is not new. Nor does it invalidate the aims we have set out for the period up to 1970. The National Plan itself clearly states this, and that is why I say that the right hon. Gentleman has not discovered anything new. The Plan says: The need to protect the balance of payments and the position of sterling … will involve some slowing down in the rate of expansion in the next year or so.The Plan will be kept under regular review in the light of developments …". It was, therefore, very clear that this situation was bound to happen if we were to tackle sensibly in a short space of time the balance of payments problem. What is clear also is that the achievement of the aims of the National Plan—and I make no bones about this and will be ready to answer for it—is absolutely essential if the nation is to have the resources necessary to accomplish the rise in social standards as well as in personal standards of living that are set out in the Plan.

If we fail over these next five years, it will not be merely that the Plan has failed or that those in industry and Government associated with it will have failed. It will mean that resources will not be there for all the things we are seeking to do, whether by way of personal consumption, improvement in social standards or overseas expenditure of any kind.

Therefore, overcoming the limitations imposed by our balance of payments situation has had to be a major immediate prerequisite. Until now, right through the period when right hon. Gentlemen opposite were responsible for Government, the problem has been that we have never been able to take the brakes off and maintain a rising rate of growth without running into an intensified balance of payments problem, thus forcing the Government to put the brakes back on in order to ease imports, which in turn forced growth to a standstill with the result that we were worse off when we started again.

Overcoming that sort of situation, with all its difficulties and consequences, was a major immediate prerequisite for the Government, and it is no use, I suggest to the right hon. Gentleman—not that I think that he was particularly guilty of this today, although the Leader of the Opposition has been guilty of it on occasion—from time to time changing one's stance, sometimes making the balance of payments situation one's whole concentration and at other times making the rate of growth one's whole concentration. These two things impinge upon each other and one must take a balanced view of them.

What is so silly is this continued presentation, which I do not mind very much, for it adds to the gaiety of life, of an alleged conflict between my right hon. Friend the Chancellor of the Exchequer and myself that is supposed to be going on all the time. What in fact goes on is a balanced view of these two requirements and the need to see that one is dealt with without inhibiting the achievements of the other—which is as much my right hon. Friend's concern as it is mine.

The Committee will not need to be reminded of the unprecedented severity of the balance of payments crisis which the nation faced in 1964 at the end of a very long and tedious period. In the past, such crises were dealt with in one of two main ways, either by devaluing the currency, with all that that involves, or by imposing deflation—in other words, by deliberately reducing the country's ability to produce and so creating substantial unemployment.

Although I note the protestations of the right hon. Gentleman—in a television programme in which he and I took part some time ago he said that he thought that I had been unfair to him on this—and having heard the Leader of the Opposition yesterday, I still hold the view that the logic of their case is that they still believe that the second of these two courses is the one that ought to be adopted.

Rightly or wrongly, this time we were determined that we would do it differently. We recognised that we could solve the payments crisis if we wanted to by pushing deflation far enough. We also recognised what the cost would be. We have, therefore, tried for the first time to solve the balance of payments crisis without jeopardising the country's long-term advance.

None of us will deny the complicated nature of the struggle to avoid the short-term being the enemy of essential longer term policies. Nor will anyone deny the conflicts inherent in it. We have lived with the problem too much to be foolish enough to do that. But let the Committee also recognise that we have already gone a long way in managing to balance the two things. As my right hon. Friend said yesterday, we have halved the balance of payments deficit, maintained the rate of investment in industry, improved the social services, strengthened the country's growth potential and maintained full employment. We are proud of this achievement, and I say to the right hon. Gentleman that the picture he has presented is a traversy of what we have achieved, amidst all the difficulties, over the last 18 months or so.

But I do not deny, if it is any value to the right hon. Gentleman, that the battle for a permanent solution of our problems is still on and that we have some way to go before we can claim that we have solved it. The extent of our success so far is not a reason to get gloomy and pessimistic, however, but to be encouraged to believe that it can be maintained.

The further measures on the export of capital which my right hon. Friend announced yesterday are, of course, part of the whole consistent strategy. I noted the reaction opposite yesterday when these were announced, but frankly, I believe that the Opposition get this wrong. Of course, exports of capital building up new assets overseas can be very beneficial to the country in the right circumstances and at the right time. But it is no use borrowing long and lending short—[Interruption.] I beg your pardon—borrowing short and lending long for this purpose. Having made that verbal slip, I have no doubt brought the fact more clearly to the notice of right hon. and hon. Members opposite and I am encouraged by the speed with which they corrected me, which shows how they are following the argument. It is no use borrowing short and lending long. It is no good continuing to invest money that we have not got. One can do this for a time by borrowing from others, and that is exactly what the last Government did. But in the end one is forced to take action.

I say to the right hon. Member for Enfield, West that it seems pointless to argue for keeping our own people and our own assets at home under-employed and under-used in order to create new jobs and new assets overseas. I see the value of overseas capital investment, but in circumstances in which we cannot have both home and overseas investment the choice which the party opposite has made has been the opposite to the one that should have been made. If one does not take the right choice in these circumstances one has to impose restrictions of other kinds. The import surcharge was an example of a restrictive measure forced on us by pre- cisely the consequences of the kind of policy the right hon. Gentleman continues to advocate.

My right hon. Friend the Chancellor of the Exchequer and I, when we had the thankless task of announcing the import surcharge shortly after we took office, never saw the import surcharge as a desirable measure nor as a permanent measure. It simply seemed to us to be the least objectionable measure available to deal with part of a situation which could not be sustained and while longer-term measures had time to take effect. It has played its part in building the strength we have now got and therefore we have been able to decide that, in the interests of our trading relations, the surcharge should be removed at the end of November.

Our ability to do this reflects the strength we have built up since October 1964, but the necessary continued improvement in our position which will be required to sustain the situation without the surcharge is also, of course, partly dependent upon the other actions related to our balance of payments problem described by my right hon. Friend.

I think that the right hon. Gentleman did himself less than justice in his speech, because it is no good saying that one is pleased that the imports surcharge is to come off and then attacking the very policies that created the situation in which that could be done. Unless one pursued such policies, one would either have to retain the surcharge or replace it by something which might be equally or even more harmful to international trade. The ultimate and positive road to success is through an even better export performance.

Restrictions can never be a positive road to success in trade—that is clear. If my right hon. Friend the President of the Board of Trade catches your eye, Sir Eric, he will set out in detail ways and means that the Government have sought to give new assistance to manufacturers and to others to export. A great deal has been done during the last 18 months, as can be discovered from the reports from export promotion bodies and the National Economic Development Council.

I want to make it clear that the Government are actively considering now what further changes we can bring about to stimulate exports. We have to recognise the obligations that rest upon us under the General Agreement on Tariffs and Trade and other international agreements to which we are a party. Even so, we must find new ways, and are continually trying to do so, of giving more positive assistance to exporters. That is relevant to what we are discussing today.

It is clear that the nation is relieved that we are not adopting the old stale remedies. I think that the right hon. Gentleman was ill-advised to look down his nose at the idea that the country has this sense of relief. I think that it has. But I do agree with him that one wants the country clearly to understand that if we are to get our balance of payments right in the long-term and succeed in positive measures, it is no use just having a sense of relief because certain tax increases were not made. There must be a recognition by everyone in the country and in industry that we need urgently a much greater rise in productivity than we are currently getting.

Photo of Sir Harmar Nicholls Sir Harmar Nicholls , Peterborough

Can the right hon. Gentleman give any timetable for the talks with G.A.T.T.? Preferential treatment for exports is vital and something to be supported on both sides, but if the discussions with G.A.T.T. go on indefinitely we may well lose our chance to do anything.

Photo of Mr George Brown Mr George Brown , Belper

I think that the hon. Gentleman may have misunderstood me. I said that we ourselves, given the obligations resting on us under G.A.T.T. and other international agreements, are trying to see what can be done to give our exporters the benefits, advantages and positive assistance which, I remind the Committee, some of our allies and competitors who watch us very closely are themselves able to give. What I said was that we were conducting an examination and were not content with the present situation.

As the National Plan made abundantly clear, if we are to get this substantial rise in productivity, fundamental changes are required—and there is no escape from this, even though the right hon. Gentleman seemed not to recognise it in his speech—in the industrial struc- ture in Britain today, in industrial attitudes, in industrial techniques, in the level and direction of industrial investment and in our manpower policies. We believe that the Government are changing the policies in the direction for which the Plan argues and which industry itself recognises. What we must say to the country is that to succeed, these changing policies must call forth a response from everybody in industry.

The National Plan reiterated again and again two clear requirements. First, industry ought to plan its investment programmes on a longer time scale, so that it continued to increase capacity even when the economy temporarily turned down. This it did not do in the years up to 1964 and that is one reason why we were always caught out whenever the brakes were taken off. Secondly, the Plan made it clear again and again that there was likely to be a continuing shortage of manpower as far ahead as could be seen, the so-called manpower gap. Discussing what we were doing and the probable effects in manufacturing industry, the right hon. Gentleman left out of account the clear picture which the National Plan gave of the manpower situation in the years ahead.

It is fair to say that our policies have been successful, in that private investment in manufacturing industry throughout the difficulties of the last two years has been maintained much better than on previous occasions when the growth of the economy has had to be slowed down to meet balance of payments requirements. We hope that the measures now proposed, with their positive help to manufacturing industry, which I shall seek to justify in a moment, coming on top of the special direct help already given, for example through the new investment grant system and the regional policies, will assist in this process of planning industrial investment on a longer scale and maintaining it at a higher level.

The second problem, the manpower gap, was plainly shown to be one of our major problems. In a way, we have probably been the victims of our own clear statement of the difficulties. I think that it is reasonable to conclude that employers in many industries—and I accept that this is probably true in parts of manufacturing industry, too—have hoarded labour, with effects both on productivity—this is one of the explanations of the industrial index figures which are otherwise very hard to equate with what else is happening—and cost inflation, and in this situation, of course, it is easy for them to do so. As a result, there are continuing serious shortages, particularly of skilled labour, which are restraining the expansion of output and exports in some manufacturing sectors and leading to inefficiencies in the use of plant and equipment. Basic to this has been the inadequate training provision by private industry in many sectors to upgrade people and overcome the shortage of skilled labour.

When discussing the cap and muffler concept of Socialism, the right hon. Gentleman was identifying himself as a very old-fashioned figure. To distinguish between services and industry in modern society as though industry were all cap and muffler and services all bowler hat and pin-stripe trousers suggested that the right hon. Gentleman had not visited many factories in recent times. It is he who is completely out of date. Nothing gave the game away more than that example. There is no doubt that the shortage of labour in sectors of manufacturing industry, and highly important sectors, has been exacerbated by the extent to which the scarce labour supply has been channelled into the services sector. The figures which my right hon. Friend gave yesterday showed that very clearly.

Of course, much of what happens in the so-called services sector is desirable, useful and important, and nobody would deny it. There can never be black and white divisions so that one can be sure that one has all the sheep on one side and all the goats on the other. But what is also true—and I ask right hon. and hon. Gentlemen opposite to get this into their minds—is that what happens in the services sector by and large is much less likely to provide the early answer needed to our balance of payments problem and to our low growth of productivity than is the case with what happens in manufacturing industry. The difference in the output of the services sector which represents foreign currency earnings and the output in manufacturing industry which represents foreign earnings stands out a mile as showing that, broadly speaking, it is in manufacturing industry that we can get the larger part of the answer which we need to these problems.

Photo of Mr John Tilney Mr John Tilney , Liverpool Wavertree

Surely that cannot be true of the merchant exporters, who are responsible for many of our exports.

Photo of Mr George Brown Mr George Brown , Belper

If the hon. Gentleman is to take a particular part of the services sector, he must also take a particular part of the manufacturing sector. If he takes the best part of the services sector and compares it with the best of manufacturing, he will still get a picture like that which I have given. The test is not to take the best example in services and the worst in manufacturing, but to compare the two broad areas.

We must ensure that those industries on which our balance of payments mainly depends can expand when they need to do so. If hon. Members consider the figures in the annex to the White paper, they will see that whereas the natural growth and the accretion from declining industries in the last few years have given us more than 1,250,000 extra people, only 140,000 have gone into manufacturing industry, which clearly shows how unbalanced this is.

Of course, I agree with the right hon. Gentleman and others that the mere taking on of extra men and women is not a guarantee of extra production or extra efficiency, but we cannot ignore the repeated cries and advice and appeals from those managing and directing industry who tell us of the need to reduce orders and of lengthened delivery times, largely due to their inability in the present conditions of full employment to get the workers they need. I will not bore the House, but I could give case after case of companies, which would be accepted as efficient producers and managers and users of machines and labour, who say that this is absolutely true of their present situation.

Photo of Sir Spencer Summers Sir Spencer Summers , Aylesbury

If the argument which the right hon. Gentleman is advancing and the evidence he is quoting are true, what is the sense of subsidising and giving incentives to those in manufacturing industry to continue to hoard labour?

Photo of Mr George Brown Mr George Brown , Belper

That question shows precisely why I dislike giving way, because it has only anticipated what I was immediately about to say. As we have some more days of debate, it would be better if I were allowed to finish and I could then be criticised or attacked after my case had been heard in full.

It was thoughts of this kind which led us, not as the right hon. Gentleman said, hurriedly in the last few days, but over a very long time of discussion and looking for the whole package of new policies, to the idea of the Selective Employment Tax. The right hon. Gentleman quoted something I said in 1961 about the proposals then of the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) There is all the difference in the world between this Selective Employment Tax and the flat payroll tax applying to all industry which the right hon. and learned Gentleman proposed and all the difference in the world between the level of unemployment now and the level of unemployment then. If the situation now were as it was then, my arguments would be as valid and as powerful as they were when I made them. But the situation is different.

We have framed these proposals with the manpower shortage and the need to obtain a much greater rise in productivity very much in mind. It was necessary—and I did not gather that the right hon. Gentleman disagreed on balance, although he rather contradicted himself—to take some disinflationary action in the Budget, and we felt that the right action was to make use of the situation and to place a tax where it would most help to deal with the problem. In our view, a tax on employment in services should lead to a slowing down of the demand for manpower in that sector. It should lead to more efficient use of existing manpower and thus to higher productivity, and that should give us additional available manpower resources to overcome the current shortages in manufacturing industry.

We are not facing a situation in which we are afraid of unemployment, or where there are no jobs, either full-time or part-time, in manufacturing industry. Therefore, so long as we plan and phase the operation, it should give us the additional resources which can come from nowhere else. We believe that the pro- posals will give a positive encouragement to manufacturing industry so that costs will be slightly reduced, and this accounts for what the right hon. Gentleman found so inexplicable. If we are able in this way to give, however moderately, an edge to manufacturing costs which enables them to be reduced, it clearly must be an advantage to us in time to become more competitive both at home and overseas. The additional manpower made available in this way should enable economies of scale to be realised and better utilisation of plant throughout the hours of the day to be achieved. We believe that it will help, although moderately, to enable us to tackle our export markets more effectively, but I emphasise—and here perhaps the right hon. Gentleman and I walk together—that manufacturers in this situation must help themselves, too.

The Government can change policies and try to create a new climate and a new atmosphere, but that does not help if manufacturers or others act in a contrary way. The benefits of what my right hon. Friend is seeking to do will be lost if manufacturers merely seek to take on more workers without looking closely into their use of their existing labour force. Clearly, there may be and probably is misuse of labour, in manufacturing industries as well as elsewhere, and therefore a determined attack to get more productivity and thereby avoid the waste of workers is still necessary.

However, the right hon. Gentleman and his hon. Friends pushed the argument beyond the point of logicality. The right hon. Gentleman clearly recognised this himself, because in an aside he slipped it in. I do not believe for a moment that 7s. 6d. a week—and it is less than that, because some part will be osffet by the increased cost of services which manufacturers have to acquire—will make manufacturers employ additional workers at £17 or £25 a week. Nevertheless, I accept that it is up to manufacturing industry to recognise that it still has to make a determined attack to get more productivity in its establishments and to avoid the waste of workers.

Let me emphasise that even with this step we shall still be hard put to bridge the manpower gap in the years ahead. It is, broadly speaking, with all the rough edges and with all the problems to which the right hon. Gentleman drew attention, only in the manufacturing industries where our export improvements must largely come and where the manpower gap will be most inhibiting. Here the atttitude of industry to this is different from that which the right hon. Gentleman exhibited today, and I welcome very much the initiative which the C.B.I. is already taking to make its own study and attack upon the misuse and the hoarding of labour in industry.

This is why, both in our investment grant schemes and the Selective Employment Tax, we have deliberately made the measures discriminatory. In other words, we set out to help some sectors and not others. When one does this one creates the opportunity for the very kind of criticism that the right hon. Gentleman made. I make no excuse for this—it is the only way to get our economy right. We must tackle the problems in the sectors in which they arise and not by general measures with all their deadening results. In order to get the scheme going at all, we have inevitably had to use the weapons which were available to us.

This has inevitably led to a measure of rough justice and some very difficult borderline cases. In any discriminatory scheme it is very hard to avoid this. One of the problems from which this country has suffered repeatedly is the temptation to make the ideal the enemy of the good—never to get anything started because it is not too clear what complications arise from it. I would justify this, with all its imperfections on the grounds that one has to get this going this year, using the methods available.

We were inhibited by those methods which are available—the Ministry of Labour's classification, the Ministry of Pensions and National Insurance system. We had to work within these methods. As the Chancellor made clear, we have got it going, or we shall have soon. We shall have a new and imaginative, and ultimately a wholly acceptable new system of taxation in operation. In due course we can arrive at a more sophisticated scheme, as my hon. Friend said yesterday, which can deal with not only some of the problems raised by the right hon. Gentleman today, but also simplify the whole business of payment and refund. The important thing is not to wait for that—it is to get going. It is only the genuine reactionary, who is anxious to find difficulties in any scheme and come down against it.

The right hon. Gentleman spent a long time today talking about the effect on costs. I believe that he greatly exaggerated. I could not understand some of his figures—no doubt someone will clarify them for me. I saw the M.A.A.'s announcement, that putting 25s. a week on a garage mechanic will lead to an increase in cost to the motor car owner of 5s. an hour. Let me make of clear that if it does I shall regard that as a likely candidate for the Prices and Incomes Board because the mechanic could only be working a five hour week if 25 "bob" comes out at 5s. an hour.

That was the example given by the right hon. Gentleman. I saw it yesterday, but I did not fall for it as he did. If he divides 25s. by the normal working week of a garage mechanic, he will see it cannot come out at 5s. an hour. He quoted those who were pessimistic or gloomy. I am told that on the radio today, when some traders were interviewed, they gave quite a different reaction from that of the right hon. Gentleman as to what would be the effects on the prices which they would have to charge. They said that they would be unable to put up their prices. I draw the right hon. Gentleman's attention to an equally valid piece of evidence—I would have thought rather more so—in today's Daily Telegraph, where a spokesman for Marks and Spencer, who employ about 24,000 workers and have 239 stores in Britain, said that the company would try to absorb the payroll tax without passing increased costs on to the customer. Even in the most efficient companies it may be possible to absorb a little more increase in costs without increasing prices. That is the reaction. It gets matters no further, but that is the reaction of one large company, the chairman, Lord Sieff, being a member of the Conservative Party Association in his Harrow residence. He is at least equally valid as evidence as that which the right hon. Gentleman gave, and I hope that that will be a more normal reaction.

Photo of Mr Nigel Birch Mr Nigel Birch , Flintshire West

Surely the right hon. Gentleman said that it was necessary to produce some deflationary effect and that is why the Chancellor imposed this tax. If no one puts up the prices there will be no deflationary effect.

Photo of Mr George Brown Mr George Brown , Belper

Had the right hon. Gentleman been here earlier and heard my argument, he would realise that that question has been dealt with by me. It is usually better to be present if one wants to raise questions. The right hon. Gentleman greatly exaggerated the whole thing. The precise effect will depend upon the extent to which the service industries react to the tax, by attempting to save labour, increase productivity and reduce cost—such as Marks and Spencer—or by attempting to pass on the tax to their customers. We will do our very best to encourage companies to do the former.

I repeat what the Chancellor said yesterday—even if the bulk of them reacted the wrong way, taking into account all of the beneficial effects of this scheme on manufacturing costs, the effect on the cost of living would still be no more than two-thirds of one per cent. We would expect the increase to be much less and, as I pointed out to the party opposite, any form of deflationary action of a similar magnitude, taken through the old measures which it used, would have a far greater effect on the cost of living than this system can have. There are widespread opportunities for saving labour in the service industries and for using it more effectively. In the case of manufacturing industry there will be a reduction in costs, and in some cases it will help to offset recent unavoidable increases. In others it should enable prices to be reduced. We look to manufacturers to take the opportunity and we shall watch their actions very carefully indeed.

I would like to say a word about the problem of rising prices and of keeping money income and increasing national productivity in step. I accept what the right hon. Gentleman said. This is, as it has been throughout the last few years, a matter of paramount importance. Our policy for productivity, prices and incomes has been deliberately based on two main foundations. First, not to act as a temporary stop-gap or prices measure, but as a long-term policy, with all the difficulties which that involves, which would stand the test of time, and secondly, as a voluntary policy, based on co-operation, again with all the limitations that imposes.

On the same basis the T.U.C. and the C.B.I. have introduced important new arrangements designed, in their own sphere, to support and strengthen the policy. It is not exaggerating to say that there is a large measure of support in the country beyond the benches opposite for what we have been trying to do. Anyone who has looked at what has been happening at trades union conferences, even in the last few weeks, cannot have failed to have noticed this. It is only too clear, and the right hon. Gentleman never failed to mention the fact that money earnings have been continuing to increase. This is not only earnings from employment. Money incomes have been continuing to increase over the past year at a much faster rate than can be justified by the increased output.

It is no good pretending—and I do not pretend—that the policy is already solving our problems, but we should not disregard what has been achieved. The atmosphere on both sides of industry has changed and is changing markedly. There is a much wider understanding of the basic issues involved. I would commend a study of the debate at this year's meeting of the National Executive Committee of the Amalgamated Engineering Union compared with that of a year ago at Blackpool which I attended. There has been a marked change. This is true of the meeting of the Union of Shop, Distributive and Allied Workers a little while ago.

Secondly, we have in the N.B.P.I. an effective and generally acceptable instrument for assessing individual cases against the general policy background. Thirdly, we have, with the co-operation of employers and trade unions, an early warning system in operation which enables the Government to maintain a much more effective oversight of the whole field.

It would be very useful if right hon. and hon. Members opposite would pay tribute to this sometimes because their attitude to it is noted, but one of the most important developments has been the vetting procedure set up by the T.U.C. to consider the proposals of individual unions. That would not have been thought possible even twelve months ago. I have little doubt that in the years to come it will stand out as a landmark signalling the beginning of a vitally important development in the trade union movement. When right hon. and hon. Members opposite call for legislative action against trade unions, they should balance the case which they put by recognising the tremendous significance of this voluntary change.

As the Leader of the Opposition said yesterday, we have undoubtedly made some progress in slowing down the rate of increase in prices. I was not clear whether the Opposition were in favour of that or against it. It has been assumed much too easily that when costs go up it is right, proper and inevitable that prices should go up by an equal or, very often, greater amount. We cannot afford this kind of thing. Increases must be absorbed more and more by increased productivity instead of being passed on, and there is a much greater recognition of this.

I have some figures which have been circulated, but I should be happy to put put them in the OFFICIAL REPORT, showing what has happened to the wages and salaries bill in the last year and to retail prices which show how much progress we have been making. Therefore, from both aspects of the policy, we have achieved a a good deal more than is allowed for. We have a solid foundation on which to build for the future. But the need—and this can be regarded as common ground—is to have a solid foundation on which to build in consultation with the representatives of both sides of industry. With patience and good will, but with a good deal of determination, we have to develop the policy and to make it effective. At the same time, we must make it fair, and seem to be fair, between different sections of the community. This is why I deprecate excessive concentration by right hon. Members opposite on wages and salaries rather than on incomes as a whole.

Many of my friends in the trade union movement who are anxious to help are, nevertheless, genuinely worried lest, despite what I or my colleagues may say, the policy should in the end prove just to be another way of holding down wages. We are determined that it shall not be this. Indeed, one of its greatest claims for support—I say this to my hon. Friends in particular—is that it is the only way yet devised in which real incomes as distinct from paper incomes can rise. One has only to compare the notional increase which the trade unions have been securing over the last few years with the actual rise in real income to realise what nonsense the present situation is.

Secondly, it is the only way by which the lower-paid workers and those in exceptional circumstances, particularly in the social fields, can be identified and provided for without an advance over the whole sector which wipes out their gain. Dealing with one aspect of this point about fairness, we have been watching closely the substantial increase in the number of dividend payments made by companies in the first quarter of this year and the closing months of 1965 compared with previous years. It is clear that many companies paid extra dividends in the last fiscal year instead of waiting until the present year simply in order to secure tax advantage.

Photo of Mr George Brown Mr George Brown , Belper

In so far as this is a matter of bringing forward by a few months dividends which would have been paid in any case, it can be regarded as a temporary phenomenon which may not matter very much. But I am glad that my right hon. Friend the Chancellor of the Exchequer made it clear yesterday that Surtax payers could not expect to be relieved of the consequences of these decisions. That will be generally regarded as an example of making the policy operate fairly. But I want to go further. I can see nothing to justify a widespread or substantial increase in the level of dividends at this time. We are keeping a close watch on the figures and will not hesitate to take further action if that seems necessary.

This leads me to our proposals for legislation. As I have said, this policy has been developed on the basis of voluntary co-operation. We all want to keep it on that basis. But we cannot ignore the risk that an unco-operative minority may undermine the effectiveness of the policy and thereby create unfairness as between those who are willing to co-operate and those who are not, and thus destroy the advantage which the co-operators are seeking to achieve. It is therefore with these thoughts in mind that the Government will be reintroducing the Prices and Incomes Bill, not in an attempt to impose statutory controls, not to supersede the ordinary processes of collective bargaining, but to reinforce the voluntary basis on which the policy rests and to provide the essential pause in all significant negotiations during which those concerned can take the national interest into account.

One respect in which there is scope for an improvement leading to greater efficiency concerns structural change in British industry. Whether in the form of mergers or rationalisation, or both, there are large sectors of industry in which there is considerable scope for this. Anyone with any real knowledge of British industry, apart from what the Geddes and Plowden Reports told us, will know that this is so. This is why we decided to set up the Industrial Reorganisation Corporation, which has been so much attacked by right hon. and hon. Members opposite. We want to give fresh impetus and urgency to the process of structural change in industry because we think that only in this way can we get the breakthrough in management and productive efficiency which we must have.

I recognise that the market has achieved a good deal on this, but I do not believe that we can leave it only to the free play of the market, otherwise the Geddes Committee would not have found what it did find. Despite the efforts of more progressive managements, in far too many cases the impetus to change is lacking. The Industrial Reorganisation Corporation will be operating on quite different criteria from those which often guide individual managements. We expect it to make profits, but its main job will be to provide the driving force to carry through the structural changes which we need, in particular those which can quickly benefit our balance of payments.

The House knows from the White Paper the basis on which the Corporation will operate. Hon. Members are already aware that Sir Frank Kearton has undertaken to be Chairman of the Industrial Reorganisation Corporation. I thought that the House would like to know at the earliest opportunity the names of the other people who have accepted my invitation to form the Board of the Corporation.

In addition to Sir Frank Kearton as Chairman, there will be a full-time Deputy Chairman and Managing Director. I am very happy to say that Mr. Ronald Grierson, at present Executive Director of S. G. Warburg and Company Limited, has undertaken at great sacrifice to perform this service. The others who will be members of the Board are Mr. J. P. Berkin, C.B.E., Managing Director of Shell Petroleum Co. Ltd.; Mr. Bernard Boxall, C.B.E., Director of Lindustries Ltd. and a man with wide Scottish interests; Mr. Leslie Cannon, General President of the Electrical Trades Union; Mr. B. R. Cant, Managing Director of Hamworthy Engineering Ltd. and Industrial Adviser to the Ministry of Technology; Sir Joseph Lockwood, Chairman of Electric and Musical Instruments Ltd.; Mr. W. G. McClelland, Director of the Manchester Business School; Mr. Frank Schon, Chairman and Managing Director of Marchon Products Ltd.; Sir Donald Stokes, Managing Director and Deputy Chairman of the Leyland Motor Corporation Ltd.; and Mr. C. R. Wheeler, C.B.E., Chairman of Associated Electrical Industries Ltd.

Hon. Members:

All Socialists.

Photo of Mr George Brown Mr George Brown , Belper

In view of the reaction which the announcement of the I.R.C. raised on the benches opposite, I thought that there would be, as there clearly is, special interest and delight over there when I was able to announce the names of the distinguished men who have agreed, out of a different sense of public values from those held by hon. Members opposite, to undertake this work. However, whatever has been said in the past, I am sure that I can assure Sir Frank and his colleagues of the wholehearted wish of the Committee that they should succeed in their task.

By a whole range of economic, manpower and financial policies, we are putting British industry into a position to reorganise, rationalise and improve its efficiency and performance. But let us not underestimate the urgency of this. Time is not on our side in this connection. [Interruption.] Too much time was lost when the right hon. Member and others were responsible for policy. We cannot in this connection ignore the developments in Europe and the opportunities and challenges which face us as a result. To be able to grasp the former—the opportunities—we must be in a position to meet the latter—the challenges that will face us. Both require a much higher level of industrial efficiency than we have yet reached. We must not be inhibited from taking the right action in our long-term interests because of delay in putting ourselves into a satisfactory industrial condition.

Therefore, I strongly emphasise that we should use the period immediately ahead of us in which probing goes on about the possibilities of our future relationship with the Common Market to make up for lost time and put our industry—in fact, our whole economic structure—into a condition which will enable us to advance the moment it is open to us to do so.

The whole theme running through the debate—my right hon. Friend's statement yesterday and this speech today, I hope—has been the need for greater efficiency to enable us to solve both our internal social problems and our external problems. That is the only way that we can satisfy the right hon. Gentleman, increase the rate of growth and at the same time manage the balance of payments problem and arrange that in future dealing with the latter shall not inhibit advance on the former.

This Budget carries forward the previous measures which this Government have been steadily embarking on over the past 18 months or so. Its general reception outside the benches opposite, like the other measures before it, has been that it is "bold and imaginative". I ask all who can affect the decisions in British industry to make the utmost use of it.

5.54 p.m.

Photo of Mr Jo Grimond Mr Jo Grimond , Orkney and Shetland

The First Secretary expressed some suspicion of the Tory Party bringing compliments, but the whole Committee will wish to welcome the right hon. Gentleman back. We are all very pleased that he is restored to health, and notice that his wind at any rate has not been impaired by his recent illness.

The First Secretary told us that we must look at the Government's strategy as a whole and that we should find then that it was all of one piece. This is exactly what I fail to find. I thought that the right hon. Gentleman was at his least happy in defending the new Selective Employment Tax, and I rather feel that there will be a few Amendments to the Finance Bill even in the name of the First Secretary of State this year.

The right hon. Gentleman told us that it was extremely important that manufacturing industry should weed out any surplus labour. He told us that it was part of the Government's long-term strategy that we should make the best use of our skilled man- and woman-power. He seemed to me to be making an appeal to manufacturing industry to act from a voluntary agreement, so to speak, with the Government in the same way as we have often heard these appeals made before The Government's policy would appear to run quite against this. After all, they are to pay manufacturing industry 7s. 6d. a week for every male employee. It is quite impossible to reconcile this with a desire that manufacturing industry should weed out its labour force.

Further, one of the results of the policies of the last 18 months has been an enormous increase in services within industry attempting to compete with the tax changes and in the number of people employed by the central Government and by local authorities. There has certainly been no weeding out there. There will be no weeding out brought about by the Budget.

Next let us look at regionalism. The First Secretary told us that the Government attached great importance to their regional policy. However, the effect of the latest tax will be to hit the very regions in which the Government want more employment. One cannot think of anything which could more effectively damage agriculture and tourism than the Selective Employment Tax. I need not remind the Committee that agriculture and tourism are very important employers in many of the regions which require more employment.

Further, the First Secretary told us that one of the difficulties which the country faces or will face is an overall lack of labour. However, we are told this by a Government who have actually been stiffening up the immigration regulations and not encouraging more people to enter the country.

Then the First Secretary asked us to take into account the type of society which the Labour Government were trying to create. I notice that one of the things which is left out of the aims of the Government is the curtailment of inflation. In my view, a society which has endemic inflation is by its nature unfair. Inflation bears very heavily on the pensioner, on the professional man, on the people with fixed incomes; and these are the sort of people whom we think should be rewarded and not penalised in a decent society.

Further, we heard nothing from the Government about the need to spread either wealth or power. Here, too, as a Liberal I would look forward to a society in which both wealth and power are much more widely spread and are not concentrated either in the hands of a few individuals or, indeed, in the hands of the Government themselves.

Turning to the Budget itself, I regard it as a tragedy. I say that because it began so well. I wholly approve of the determination to remove the surcharge. I believe that the overall balance is about right. I think that most people would agree that the aim of the Chancellor of the Exchequer this year should either have been to have maintained a fairly neutral position on tax increases or to have slightly increased taxation, as in fact he did. So I make no quarrel with that. I believe that the 40 per cent. Corporation Tax is extremely high, but that is a legacy of the last Budget and not this one. Few people, I believe, thought that in this Budget it would be any lower. I agree with the Chancellor's determination not to add to the old indirect taxes or direct taxes in this Budget. Many people offered up a prayer of thanks when he did not increase the licence duty on motor cars.

Then the Chancellor came to the dramatic moment in the Budget when he seemed to be going to do something which was both new and acceptable. That was to put some taxation on services, which I do not object to, and possibly to introduce a payroll tax. There is a good deal to be said for a payroll tax. But, of course, it should be accompanied by other measures such as competition, and, indeed, by wider measures for retraining the people whom it is desired to weed out from unnecessary occupations.

Let us look at what the purpose of a payroll tax should be. It is, of course, essentially to stop industry retaining labour which it is not using to the full and which is generally described as hoarding. But hoarding goes on in manufacturing industry just as much as in services, probably more so. We are now going to have extraordinary situations as, for instance, that of the man who, in the General Election, made known that he was getting £30 a week for doing very little in the motor car industry. Yet now his employers would get an extra 7s. 6d. a week for keeping him.

Of course, it is true that this tax may not make much difference, but the point of introducing it was that it should make some difference. There is no point in introducing it at all if it is not to make some difference.

Another point about introducing a payroll tax is that it could be used to attract firms in regions where employment is scarce, and away from the regions with very high employment. But with this tax we cannot do that. Indeed, as I have said, one of the features of this tax is that it will hit hardest the very regions where we want more employment. Moreover, it will fall heavily on both agriculture and tourism and general services in many districts where these are the main employment.

Further, one can manipulate certain forms of payroll tax, I think, within the G.A.T.T. to help exporters, but not this tax. We need only look at today's papers to see that a company like the Distillers Company, which makes an enormous contribution to exports, will be benefited by this arrangement very little. So it is a tax which only contradicts many of the advantages which should come from a payroll tax.

Then let us look at its effect on the construction industries. This quarter, the first quarter of this year, there are 5,000 houses fewer completed than there were last year. This is an industry which is in dire difficulties. What is to happen? This will make certain that the building of houses and other forms of construction will be more expensive and it will encourage the proliferation of small contractors—one-man contractors employing either no labour or the minimum amount of labour.

I draw the attention of the First Secretary to the speech made by the hon. Member for Bethnal Green (Mr. Hilton) who referred to this on Monday and said that we now have a number of what the unions term 'pirates' in the industry, the labour only sub-contractors, who employ about four men apiece. There are 50,000 of them in the country, which means that there are 120,000 employing agencies all competing with each other for labour."—[OFFICIAL REPORT, 2nd May, 1966; Vol. 727. c. 1264.] When the Minister replied he referred to this and said that this was nothing short of horrifying.

This is going to encourage it. This tax will not stop it but will encourage it. Therefore, I would beg the Treasury to look at this whole tax again.

Furthermore, the method of collection, surely, cannot make sense. What is the object of collecting money from a nationalised industry to pay it back again? Why not let us make the tax neutral towards industry and not give a bonus for hoarding labour regardless of whether it is using it well, badly or indifferently?

I return to the point of this moral superiority which some people apparently feel manufacturing has over services. This seems quite incredible. Even Russia is coming to the point when it feels it must raise the status of people in services. There might be a case for extending Purchase Tax if it were desired to direct people away from services, but this discrimination against services while manufacturers are, indeed, paid a premium is indefensible. It seems a most extraordinary view that it is all very well to manufacture a motor car but not at all so good to put petrol into it, or that it is very good to make something but not so good to repair it, that repairing and servicing is not a very moral occupation—

Photo of Mr Jo Grimond Mr Jo Grimond , Orkney and Shetland

I should be delighted to give way in a moment to the hon. Member, whom we welcome upon his annual appearance—

Photo of Mr Jo Grimond Mr Jo Grimond , Orkney and Shetland

I omit the word "annual" and insert "summer" appearance on taxation matters.

Why should we discriminate in favour of the man who makes a gambling machine as against a skilled executive in banking or anyone else who may be making a very great contribution to exports? Indeed, invisible exports are ignored.

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

The right hon. Gentleman is as out of date in his comments on my attendances as he is in his economic thinking. The question I wanted to ask him was where it is he derives the argument—was it from the other side of the Committee?—that we are making a moral distinction between manufacturing industry and service industry. What has been said is that there is a general economic distinction to be drawn between them. It does not involve any moral distinction at all.

Photo of Mr Jo Grimond Mr Jo Grimond , Orkney and Shetland

If that is the argument, that there is an economic distinction, then it is even more a nonsense. It is conceivable that it might have been thought that manufacturing is a morally superior occupation, but to suggest that manufacturing a thing is economically superior to servicing it is folly, and the folly makes the argument worse. If the hon. Member would prefer that I should say that there is an economic distinction between them, then I will say that there are both distinctions and they are both equally wrong.

What exactly is the position of the various public authorities? Is it true, for instance, that the B.B.C. is going to have to pay this tax without its being refunded? Because that has been said in the papers. Or is it in the general category of nationalised industries, which, I understand, will pay the tax but get a refund?

Have we any idea of what the costs are to be of this tax—the costs of collection? There is already an increase in the number of civil servants and will not more be needed now? And, indeed, will not industry itself require additional staff to cope with the effects of this tax?

I have said that this tax is tragic. I think it is tragic because there was an opportunity for introducing a tax designed to increase the efficiency of labour. This could have been done, without this particular form of tax, which can be shot to bits, and will be shot to bits, and with it, therefore, the whole idea of a payroll tax.

There are one or two things I would say about the Budget. Most people would agree that if we can get further with German payments for defence costs that will be all to the good, but equally I think we should be told a little more as to what exactly it is hoped to achieve by making this further claim at the very moment we are hoping also to make an effort to get into Europe.

On investment in the sterling area, is the criterion laid down by the Chancellor to decide whether investment ought to be encouraged the only criterion? It has already been referred to by the right hon. Member for Enfield, West (Mr. Iain Macleod), who rightly questioned the idea of a full return in two or three years, but, even if it is possible, is it really the right criterion?

There is also the question whether such investment will enable us to forgo imports from other sources or make a substantial contribution to the balance of payments in other ways. There have been comments—the First Secretary himself made this comment—as to whether it is any longer useful to fix a certain day in the spring as the point when one estimates and lays down economic policy for the coming year. I fully agree with the First Secretary. I think it is not useful. What I think ought to take place is a much more continuing review of our economy, runing throughout the year.

But there is something more than that which needs doing. Conventional wisdom since Keynes considers that taxation is primarily levied to take some money out of the economy. Indeed, it has been argued that Budgets nowadays are not really concerned with raising revenue to pay for Government expenditure, but are much more concerned with getting the economy in balance. Now it is coming also to be widely said that if we attempt to take money out of the economy by raising indirect taxation the only result is to intensify wage, salary, profits claims. If this is so, of course it knocks the whole case for increased taxation on the head. The logic of this should be that at a time when we are faced with inflation we should reduce taxes. I certainly do not agree with that, but I do believe that we must have more information about what are likely to be the effects of increased taxation.

Have we reached that position where the only tax which will be effective within the incomes policy will be a direct tax? I believe that we should not put up direct taxation any more, and that we should try to move towards a wider base of indirect taxation, but if in doing that we destroy the chance of restraining incomes, it will be a serious matter for the First Secretary of State. I am sure that one of his difficulties is that instead of pushing in the same direction as budgetary policy, he is constantly trying to contain it.

The rise in the cost of living may be small or great owing to the effect of the Budget, but the Government have to decide whether they want some prices to rise as a consequence of the Budget and therefore take some money out of the economy, or to make less money available for buying other things. Most orthodox economists say that the purpose of extra taxation is to make some prices rise, but that will make the First Secretary's job even more difficult. This is a matter on which we need much more information. How far are wage claims based exclusively on the cost of living, and not by comparison with what other people are getting? How far is taxation any longer effective as a deflationary measure?

I do not know whether we shall be able to get round to considering the way in which we handle our financial affairs, but I believe that this is becoming more and more necessary. On this Budget I make no complaints about the overall balance. I make no complaint about the determination of the Chancellor to get away from the old automatic raising of tobacco and drink duty, Income Tax, and so forth, but I believe that having turned his thoughts in the right direction. it is a tragedy that he made an appalling muddle of his actual proposals.

6.12 p.m.

Photo of Donald Dewar Donald Dewar , Aberdeen South

It is with some trepidation that I find myself on my feet at this early stage. Many of my hon. Friends counselled a longer wait, but a maiden speech is an ordeal which does not improve with contemplation and I decided to take my courage in both hands and rely on the traditional tolerance of the Committee.

I am the first Member of the Labour Party to be returned for South Aberdeen, and I suppose it is fair to ask why the people in that area have decided to turn their backs on a well-entrenched Conservative tradition which has been energetically represented for 20 years by my distinguished and in some ways rather formidable predecessor, Lady Tweedsmuir.

I think that the answer is fairly clear. It is that in South Aberdeen, as in many other parts of the country, they were impressed by the priorities and programmes of the last Labour Administration, and particularly in my area by an Administration which could deal energetically with a serious financial crisis and at the same time manage to reduce unemployment and so eliminate that endemic plague, the unemployment spiral dictated by external balance of payments difficulties. It is that in particular which ensured the return to Parliament of myself and many of my hon. Friends with increased majorities. It is because I think that the Budget will continue these sensible and flexible policies which have brought about this increase in prosperity and stability in my part of the world that I welcome the Budget.

I think it is only fair and right that the basis of the taxation system should be broadened. I think it is right that the imbalance which allowed the non-manufacturing sections of the economy to escape their fair share of the burden of taxation should be put right. It is equally right and convenient that the Chancellor's catchment area should be increased. It is difficult to quarrel with any of these things.

I am impressed with the general engineering of the tax which will bring about a desirable switch in the deployment of labour in this country. I do not think that it will be dramatic, but it will be a trend which we can all welcome. I am very clear in my own mind that the objections coming fierce and fast from the Opposition benches on the subject of hoarding of labour are misplaced and wildly exaggerated. We know that in British industry there are many firms with old-fashioned ideas. We know that there are people who are not interested in the desirable movement towards capital-intensive as distinct from labour-intensive firms, and we all accept that there are people with the old-fashioned idea that one cannot install a machine until the plant it replaces has been written off at a rate of depreciation which is often arbitrary and ill-advised. All these things we accept, but it is a long step from saying this to saying that a marginal supplement for the employment of labour in manufacturing industry will radically encourage this state of affairs. Taking the tax overall, and looking at the employment picture, and the Government's policy on, say, investment incentives, there is no doubt that the merits of the measure far outweigh what is a very marginal argument against it.

I enjoyed my first Budget, because when I arrived at the House I got the impression that many hon. Members opposite were coming to gloat. They were looking forward to hearing a Labour Chancellor of the Exchequer having the unfortunate experience of having once more to flog the old pack horses of the economy, to increase direct taxation, to "have a go" at tobacco, beer, and so on. I got the impression that their smugness—I think that that is a fair term to use—began to turn to dismay as the proceedings wore on and they realised that that was not happening, and their minds were being asked to grapple with something which was new, something which was modern, and which they began dimly to realise was tailor-made to meet the requirements of the British economy.

At the end they were bemused, and some of them have not recovered from the attack and are using the same arguments and the same slogans which they have shouted against every Labour Budget for many years, and the tragedy is that as the ground has shifted, and as the arguments are different, their old slogans are even less appropriate than in the past.

Having said that I welcome the Budget, I must make it clear that as the Member for South Aberdeen I have certain reservations about specific facets of it which it is only fair openly to express. Some of the reservations have been mentioned by the right hon. Member for Orkney and Shetland (Mr. Grimond). I accept them to some extent, but only to some extent. I am one of the representatives of a city of 180,000 people which is almost entirely dependent on administration and service industries connected with a considerable agricultural hinterland, and although we have two important, though small, shipyards—important in the local sense—whose future we watch over anxiously, and certain pockets of machine tools and paper manufacturing industries in the area, it is basically true that the number of employers who will get the premium can be counted on the fingers of one hand, and it is therefore fair to concede that this tax will be initially unpopular and much misunderstood in my constituency.

The second great pillar and prop of South Aberdeen is tourism, and already we have heard sounds of grumbling discontent from the tourist industry which has been excluded from the Government's incentives, and I have no doubt that in the near future the discontent and grumbling will increase and will be a considerable embarrassment to Members like myself.

With this I sympathise and must say that I am worried about the tourist industry. In a city like Aberdeen, there will be a temptation to pass on to the customer the increases due to this taxation. If that is done this tourist trade which basically depends on internal tourism with people coming from other parts of Britain to Aberdeen, will become even more vulnerable to the ever-increasing plethora of cheap Continental holidays. I hope that the people in the industry will realise that it is in their interests to try to absorb most of these costs. But, on the other hand, I hope that the Chancellor will be receptive to what I know will be a great deal of pressure from both sides of the House to try to do something to help the tourist trade, particularly in areas like this.

Again, the service industries may also be tempted to pass on the increased costs. I hope that they will not do so, because thanks to the efforts of a Labour Government, the real problem in Aberdeen is not unemployment. The real problem is uncompetitive rewards, and a man in the North-East knows that he can get half as much again for the same job, and the same hours, by going to the Midlands or to the prosperous south of England. The result is that we are an open society in the sense that we can be raided, and are being raided by foraging parties for labour which drain off on enormous amount of the skilled manpower in our part of the country. I.C.I. and Stewarts and Lloyds are two recent examples, and I am worried that people, by unthinkingly passing on these increases in the service industries, will raise costs, even if nothing like as spectacularly as people say, but still significantly so, with the result that the level of wages will be even more uncompetitive.

There is a further danger that employers will use this as an excuse for keeping down the level of wages. If there is one section of the Aberdeen community which deserves criticism it is the industrial and commercial community, which has for too long been willing to accept comfortably low labour costs at the price of continuing local stagnation and emigration. I hope that local employers who will be affected by this tax will carefully examine their profit margins and the situation in which they find themselves before they glibly victimise their customers and ultimately themselves by just raising prices.

It has been said that the answer is to attract manufacturing industries to areas like Aberdeen. This is easily said, and I pay tribute to the great success of the Labour Administration in this field. The fact that I am here is a tribute to that success. The First Secretary reeled off a very lengthy list of such measures this afternoon, and I do not wish to repeat it, because it is familiar to us all. But I feel this will inevitably be a long-term business. It is by no means hopeless to talk about diversifying industry in Aberdeen. We can do it ultimately, but the basic shape of our economy will remain unmodified for a considerable time. Because of that we cannot look for a quick change, and we must face the possibility that this tax will have some unfortunate repercussions in the short term.

This will sound like special pleading, and so it is, but it will be heard not only from people in the north-east of Scotland but in the Highlands, in the Scottish Borders and probably in many parts of England from areas with similar problems. I hope that these pleas will be listened to carefully by the Chancellor. There are the real difficulties for the tourist and also the fishing industry, the status of which I believe is still a matter of discussion in relation to the new tax. I hope that the Chancellor will look at the whole problem of regional development. This new and imaginative tax—this novel weapon in the Chancellor's armoury—is a great improvement on the old rigid deflationary machinery in terms of flexibility, and it is used at the moment to favour manufacturing as against service industries. It could be used to encourage regional development as against the over-eager growth in more geographically favoured parts of Britain.

The point to grasp is that these two objectives are not incompatible, and it is wrong to try to pretend that we cannot achieve both. I hope that in the near future the Chancellor will listen with sympathy to the plea of the development areas, and see whether he cannot make this kind of concession. We have made enormous progress in areas where there has been traditionally little Labour support, because we have been able to convince the electorate that we stand for a controlled steady and all embracing growth which will benefit all sections of the population. We have an enormous record of achievement in this respect.

While I welcome this enlightened and important tax, which will do something to increase mobility of labour, stimulate productivity and bring economic sanity to this country, I hope that my right hon. Friend will slant it in such a way that it will not interfere with the general trend of Labour policy, which has been to help regions like mine. My right hon. Friend has an enormous amount to his credit. He can increase this by a few minor adjustments in this Budget. I hope he will make the effort and continue to aid, encourage and inspire growth and effort in areas for which he has so rightly done so much in the last two years.

6.23 p.m.

Photo of Mr Hugh Fraser Mr Hugh Fraser , Stafford and Stone

I sincerely congratulate the hon. Member for Aberdeen, South (Mr. Dewar) who, in his maiden speech, threw to the winds many of our conventions about being non-controversial. He did it with great success, and attacked equally my hon. Friends and myself and some of his right hon. Friends. I hope that we shall hear him on many occasions making as good a speech as he made this afternoon.

But he does not seem to be aware that some hon. Members on this side have advocated a payroll tax for several years. The burden of my speech this afternoon is that the conversion of hon. and right hon. Gentlemen opposite is late and rather ineffective. It is as though one had been teaching the pure gospel only to find that the first convert one made immediately lapsed into heresy. That is precisely what the Government have done. This is not a pay-roll tax in the proper sense of the word. It is a discriminatory poll tax, and has all the weaknesses of that form of taxation.

Many of the main points have already been made, but I want to make a few concerning the Budget in general and this tax in particular. Hon. Members must admit that there is absolutely no sense of urgency about the Budget in terms of the problems which face us today. Those problems remain. Listening to the Chancellor yesterday and the long speech from the First Secretary this afternoon, one could find no proper sense of urgency in facing the problems which still exist. The Chancellor of the Exchequer has done some juggling with the import flow by abandoning the surcharge.

The first payments under the new type of payroll tax will be a forced loan from a section of industry for the first few months, and what emerges quite clearly is that the Chancellor is pretending that the long-term effort will have swift results in terms of the deployment of labour. As the hon. Member for Aberdeen, South said, however, its effects will be slow, especially in the service industries, where people are very much more entrenched and will take time to move.

Secondly, there is the fact, which is not admitted by hon. Members opposite, that this tax will immediately increase costs and prices in those service industries which are concerned with our invisibles, such as the hotel industry, tourism, insurance, storage and export agencies. Costs in all these industries will immediately rise. Much more important, I suggest, as the right hon. Member for Orkney and Shetland (Mr. Grimond) suggested, is that a great opportunity has been missed by not making this an effective payroll tax. The first objective of such a tax is to ensure the movement of labour, but the second objective must be to see that there is a proper shift in order to make industry more labour-saving and capital-intensive. The third objective must be to use this tax as an instrument to simplify, by regional variation, all the masses of controls, regulations and contortions of the economy into which the Government have got themselves in trying to deal with regional problems.

The opportunity to achieve the last two objectives has been totally thrown away. There has been no effort to use the tax as a regional weapon. Indeed, as the right hon. Member for Orkney and Shetland has shown, this will lead to a positive depopulation, or the threat of depopulation, in certain areas.

As for building up labour-saving and capital-intensive industries, the Government have done precisely the wrong thing. The right thing would have been to put the burden of this tax on manfacturing industry at least to a higher degree than it is on services. It is a good thing that banks and insurance companies should use more computers. There should be some labour saving there. If we could devise schemes for making machines to cut our hair more effectively and at a greater speed, that would be very good, but there can be no saving in the hotel and hairdressing industries. The possibility of making a saving and of providing a new chance for investment where there is a need for investment is in the manufacturing industry. Investment there would be given a real boost if the people in it were also taxed on their over-use of labour. The whole thing is utterly upside down—

Photo of Mr Hugh Fraser Mr Hugh Fraser , Stafford and Stone

As regards the regional application, I believe that the Treasury has worked out a wrong system. This is not a payroll tax, but an additional tax on the national stamp. This inevitably means that little flexibility is possible, either regionally or nationally. It means that the use of part-time workers, especially women, becomes too heavy a burden for industry. It means that there is no control of excessive overtime, which would be possible by proper use of a payroll tax on the whole payroll. There can be no attempt to discriminate between sections of industry which hoard skilled labour and skilled management, as would emerge if there were a proper payroll tax as opposed to a tax on the stamp.

All these opportunities are being missed. I know that hon. Gentlemen would say that such a scheme as I propose would be too complicated. I do no believe that, because the proposed system is very complicated, and will mean an enormous load on the Ministry of Labour officials. I believe that a properly applied payroll tax could have had immense advantages over the clumsy method which the Chancellor proposes.

I will say nothing about the social priorities which have been laid down, but they seem essentially wrong in one point, quite apart from housing. The Minister of Housing and Local Government must be having a restless time, with the rate of house building apparently to be lowered, prices of houses going up and the building societies saying that they will have to increase their charges further. Nothing is done by the tax to assist—as the Prime Minister has insisted time and again—the native wealth of the country.

Nothing is done to assist forestry. In fact, it will be very badly hit. Little is done to assist agriculture and nothing to assist the extractive industries. All these things should have been fitted into the tax. They have not been fitted in, because the Government have adopted the simple principle that the sector to hit is the service industries. This has done great damage to the whole concept of a payroll tax. Such a tax had great possibilities, regionally, for general direction of the economy and, if needs be, for selected areas of the economy.

The Government have failed utterly to do this. Above all else, whatever has come out of the debate and in spite of the platitudes which the First Secretary issued—they seemed at times to be addressed to the C.B.I., at times to General de Gaulle, occasionally to the House, and generally to the world: a rodomontade both incomprehensible and totally immemorable—one fact has emerged. That is the inability of the Government to deal with the basic matter, the root of the economy: the question of restrictive practices, especially in manufacturing industries.

I am convinced that, properly used, a payroll tax could be an instrument to force the hand of the manufacturer and make him stand up to restrictive practices, By not applying the tax to manufacturing industry, it follows automatically that the manufacturer and management will not be under the necessary pressure to break and defeat restrictive practices. This is the root of our problem today, whatever platitudes right hon. and hon. Gentlemen opposite may offer about this or that. The root of the matter lies in manufacturing industry, in the productivity of our manufacturing industries, whose ratios are declining relative to the productivity of manufacturing industries in Europe and America. Right the way through can be seen the inability of the Government and of management to stand up to restrictive practices and useless and destructive strikes.

This is where a payroll tax, if properly used, could have been of value, but it has not been properly used. It will be used only in those areas of the economy where business and trade union organisation are weak. It will not be used in areas where big business is strong and where the big unions are strong. This is the fact about this Government—that, in spite of their enormous majority, they are not able or willing to stand up to the main issue of the economy. They are not prepared to fight on the issue of restrictive practices. They are not prepared to fight at all.

This is where this Government stand condemned. They had, in the payroll tax, the possibility of a real instrument for improving the structure of our industry. They have not done so. They are not prepared to fight on restrictive practices, and for this they must be roundly and totally condemned.

6.35 p.m.

Photo of Mr Robert Sheldon Mr Robert Sheldon , Ashton-under-Lyne

The right hon. Member for Stafford and Stone (Mr. Hugh Fraser) seemed to favour a greater discrimination in the Selective Employment Tax as we have it. I would ask him whether he is sure that his right hon. and hon. Friends agree with him on this, because I heard yesterday and today considerable differences of opinion between what we on this side of the Committee want to see and what his right hon. and hon. Friends want to see.

If he feels that he would be prepared to support further discrimination, I would advise him to wait until next year's Budget, by which time we will have had the experience of this measure in operation and when, perhaps, he could join us in the Division Lobbies.

Some of us were very pleased to hear the further names of members of the Board of the I.R.C. The fact that we were able to obtain men of such outstanding ability means that we are now sure that business has confidence in this Government, has confidence in the I.R.C. and has further confidence that the Labour Government are here to stay and intends to work with it. This is a great achievement and we should be very pleased with the work that the First Secretary has done in bringing this about.

For hon. Members opposite, one of the key facts of 1965 was the degree of inflation. This, as we know, coloured much of their thinking about the state of the economy and the sort of Budget they hoped to see. It is true, of course, that inflation was considerable last year, but in real terms, there was little diversion of our resources. Throughout the election, the Leader of the Opposition referred to the 9:5:1 ratio which suggested a gross imbalance between what we earn and how we spend it. The figures chosen were highly selective.

I would prefer to see a self-denying ordinance to the effect that statistics must not only be accurate but must be fair as well. However, I will not take this matter further on this occasion. But the 9:5:1 figures were grossly inaccurate, as well as being unfair. Like was decidedly not compared with like. The increases in hourly earnings should have been compared with the increases in hourly production, or earnings for the whole year should have been compared with production for the whole year. Also, in the figures quoted, production was given at constant prices, whereas earnings were not. Therefore, even accepting the period chosen, the figures should not have been 9:5:1, but 3:5:1, and for the year as a whole, in round figures, 3:5:3.

I apologise for bringing in figures like this, but I feel that they are important. They influenced many people in their view of our economic condition and their view of a Budget which they thought should be deflationary. The use of the grotesque figures 9:5:1 instead of 3:5:3 led many to the deflationary theories which I am pleased to see my right hon. Friend the Chancellor did not see fit to follow. The Chancellor was right to limit his tax increases to the Selective Employment Tax and the rise in Corporation Tax to 40 per cent.

The real increase in incomes last year was about 2½ per cent. and, with it, went a real increase in consumers' expenditure of 1·2 per cent. Those who wanted to see a severe deflationary Budget should, therefore, ask themselves what they would want to deflate. The 1·2 per cent. increase in consumers' expenditure? The level of consumer expenditure in Britain last year was not a problem—and increasing the surplus from £689 million to £1,047 million makes it less likely to be a problem this year. Throughout last year consumption and incomes were kept within the small increase in production. Our real problem, of course, is the slow increase in production. Our real problem is that of growth and our views on the Budget should be related primarily to that.

Any discussion about our economic position must be related to the need for rapid and sustained economic expansion. Growth, as we know, can be obtained by using machinery in factories to better advantage, by providing better ways of working and by the introduction of new techniques. But these are ways not easily open to Government to influence. However, what Government can do is encourage the modernisation of industry by providing certain incentives for investment. Growth, of course, is very closely related to investment; and the increase in manufacturing capacity should command our attention.

There has been among many people in industry a fear of surplus capacity which has influenced their investment decisions. These must be overcome. Surplus capacity, if it is created, can be a powerful weapon for increasing competition where little or none exists and the pressure of surplus capacity can lead manufacturers to seek further outlets overseas.

One of the major problems which we come up against time and again has been that early on in our business cycle production has too easily reached the limit of our capacity, and the consequence has been the lengthening of delivery dates, increased prices and the turning by manufacturers to a softer home market. This must be put right.

Page 55 of the National Plan states that investment lies at the heart of the Plan. To many of us this is what the National Plan is primarily about; and any action taken by the Government will be judged by its effect on growth and, hence, its effect on investment. In real terms, last year investment increased by 3·6 per cent. and I was dismayed to hear the Chancellor say yesterday that he expects little change in private industrial investment this year, although public investment will rise. The National Plan calls for a continual average increase of 5½ per cent. and unless there is a rapid improvement we may fail in what lies at the very heart of the Plan.

We have said many times that the National Plan is not a blueprint, but the increasing investment for which the Plan calls must remain a minimum commitment. Production may be lower, as the First Secretary said earlier, in the early stages of the Plan than what we hope regularly to achieve, but without such investment we will not provide for the production in subsequent years—and the hope which the Chancellor has for our increasing industrial strength may be unlikely to be realised.

The introduction of investment grants is of great importance in discriminating in favour of those investments which benefit industry. I welcome the extension of those grants to the construction industry and I will press for their extension to certain categories of business machinery as well. Investment grants are readily understood, act directly on investment decisions and are quickly paid. The Selective Employment Tax may help marginally to relieve manpower in manufacturing industry, and if this happens it could mean the more intensive use of our investment in plant and machinery.

Also of great help to our investment is the National Plan itself. The overall targets set by the Government are not likely to be completely ignored by industry in formulating its investment policy. This is one reason why it is important to keep faith by continuing a policy of growth and investment as shown in the National Plan. But however much we may persuade industry to invest in plant and machinery through investment incentives and however much industry may decide to invest because the National Plan encourages a longer view, fundamentally industry is not likely to expand for long if it sees little possibility of selling the increased products its new equipment is able to manufacture.

At the end of the day investment decisions are bound to depend on industry's assessment of the economic future and, hence, its assessment of the Budget statement yesterday. That is why increased Purchase Tax would almost certainly have been the worst way of providing for increased taxation, because it would have produced uncertainty in industry and encouraged the short-term view rather than the long one, with its hopes of increasing investment and saleable production.

Yesterday the Chancellor said that one of his Triple Objectives was a strong £. He said that the Government had a major responsibility to play by keeping overseas expenditure on defence and aid within the limits of our economic strength. It is a pity that the £500 million which our east of Suez rôle is costing us is thought to be within the limits of our economic strength and I hope that the dissipation of our resources over the next few months will become increasingly apparent to the Government.

I welcome the attempts to reduce capital investment in the developed sterling area. I realise the problems of compulsion, but I must confess to some doubts about the success of a voluntary scheme. I believe in further direct action to correct the balance of payments. What I think my right hon. Friend now needs are further measures, permitted under our treaty obligations, variable in their effect and certain in their impact on our balance of payments difficulties. Import quotas satisfy these requirements and we may ultimately have to introduce them.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

Is the hon. Gentleman serious suggesting that after 18 months or two years of an import surcharge which is against the rules, our foreign trading customers would accept an import quota over and above that?

Photo of Mr Robert Sheldon Mr Robert Sheldon , Ashton-under-Lyne

I said that they were permitted under our treaty obligations, but I think the hon. Gentleman will find that I will answer the question he has in mind later.

By announcing the six months' period the Chancellor will, I believe, be able to cut down the import bill as imports slow down by November, and there will be a considerable relief afforded in these six months. But even now imports are more than we can afford and only an exceptional optimist would consider that our difficulties in this matter are likely to be over by November, so enabling us to accept a very much increased import bill which would accompany the removal of the surcharge.

I know of the frustration caused by the application of quota restrictions to the goods which we sell overseas. To world trade they are an undoubted evil. Although we may press for them to be operated flexibly, the flood of applications that the Board of Trade will receive claiming special consideration will make flexibility very difficult. So when I advocate quotas I understand fully the difficulties they bring.

But what we now require is certainty, and if we can control imports, then, as exports rise, quotas can be increased up to their eventual removal. Success in exports, when it comes, can lead to the relaxing of quotas. Imports can then keep in step with exports, and what we buy can be closely aligned with what we sell. This, then, is the certainty that import quotas can provide, within which expansion and growth can proceed. Before the next Budget of my right hon. Friend the Chancellor of the Exchequer I believe that he will want to turn towards such certainties.

6.51 p.m.

Photo of Mr John Nott Mr John Nott , St Ives

In rising to address this House for the first time, I should like to ask for the indulgence of hon. Members. In accordance with tradition, I first want to mention my predecessor, Mr. Greville Howard. For over 15 years he represented the St. Ives division of Cornwall with loyalty, integrity and a high sense of duty. I know that the House will wish him well in his retirement and will also hope that he has a long and happy life.

Hon. Members:

Hear, hear.

Photo of Mr John Nott Mr John Nott , St Ives

The St. Ives division of Cornwall, covering the Isles of Scilly and the Land's End and Lizard Peninsulas, together with the towns of Penzance, St. Ives, Helston and St. Just, must indeed be one of the most beautiful constituencies in the whole of this country. But, as well as beauty, it has a great and fascinating history, because for centuries the Cornish people were cut off from the mainstream of life in these islands, and they earned a bare living from the land, the sea and the tin which still lies unexploited in the granite rocks today.

Even today West Cornwall is in some strange way another world, because it has a sense of community life and a real feeling for religion which is so absent in some of the great towns of this nation. But I am afraid that men's stomachs cannot be filled with the view, nor can they be filled with history. The fact is that we in West Cornwall have about the lowest incomes of the whole of the country. The average wage, which is difficult to calculate in Cornwall, is somewhere in the region of £12 a week, against a national average of £19. We have a large elderly population whose savings have been eroded by constant inflation. This situation is aggravated by the fact that our distance from the main towns and centres of population means that the cost of living is also much higher than it is in most other parts of the country. There is, therefore, considerable poverty in West Cornwall, and I, of course, would like to see it corrected under the regional policies of the present Government. It is a sad commentary on the state of our communications that I find it quicker to go from my office in London to New York than I do to go from this House to my constituency which is only 300 miles away.

I hope that during the course of our coming debates I shall have an opportunity of raising a whole host of matters which touch upon the prosperity of West Cornwall and my constituency—in particular—communications, roads and railways. I hope to ask the Chancellor of the Exchequer, in due course, how it is possible to reconcile policies of regional development with the abolition of tax allowances for tourism and with the variable employment tax on services which was imposed yesterday. How is it possible to reconcile regional development with the abolition of tax allowances for tin mining, for sinking new mineshafts? Our tin saves about £2 million a year on foreign imports. I should like to ask why it is that our industry, primarily light industry, which was previously in a development district and is now in a development area, should be worse off than it was before. I welcome the Government's regional development policies, but I do not see as yet that we have derived any advantages from these policies during the last two years. However, these are controversial matters, as indeed is the variable employment tax, and, therefore, I will not touch on them today.

We are still a great nation in terms of national wealth, primarily due to the thrift and foresight of our ancestors. But much of our inheritance and, in particular, our investment in plant and machinery is woefully out of date. I also, like the hon. Member for Ashton-under-Lyne (Mr. Sheldon), was dismayed at yesterday's statement that private investment is holding up well. This is not good enough. What we require in this country is a vast increase in industrial investment so that our industry can be modernised and put on a more up-to-date footing.

The basic problem in this country is that although we are an inventive nation and although our businessmen are not as stupid nor our working men as lazy as some people would have us believe, every time industrial investment in this country really gets going, the economy overheats, imports rise and so we have another balance of payments crisis on our hands and a consequent deflationary Budget along the lines of the one presented yesterday.

For the past seven years I have worked in a City merchant bank, and I was delighted to hear the First Secretary say this afternoon that one of my colleagues has been appointed managing director of the proposed Industrial Reorganisation Corporation. Although I do not wish to prejudge or comment upon the idea of a State merchant bank, I nevertheless know that the Government have made an excellent appointment. I believe that the Government are in need of expert financial advice, because one small matter struck my eye in the newspapers of the last two days. It was the announcement that the British Government's holding of Amerada Petroleum shares, sold for approximately £30 million a few days ago by the Government, was bought by an American company called the Hess Oil Company, and yesterday on the New York Stock Exchange the shares of Hess Oil rose by nearly 30 per cent. The new York Stock Exchange went down yesterday by about 10 points, but the shares of the company which bought the British Government's holding of Amerada Petroleum shares rose by nearly 30 per cent. Certainly the American public seemed to think that the British Government conducted rather a poor transaction in this case.

I hope in coming debates to be able to play some part in financial, banking and fiscal matters of which I have some small experience. But today I should like to concentrate on the two basic problems which beset this country. First—I do not want to dwell on this matter—there is the whole problem of export incentives in this country. I do not believe that we yet have proper export incentives. But this is a whole subject in itself, and what I want to mention briefly now is the other side of the balance of payments, namely our imports into this country and the whole question of currency saving which is so vitally important.

This is vital because our imports and currency saving are so much more under our control—perhaps "influence" is a better word—than are the export markets into which we sell our goods. In 1963 we imported £700 million worth of temperate food products, and without much difficulty we could undoubtedly have grown in this country £250 million worth of these temperate food products ourselves. It seems to me that the days have gone when this country was the natural exporter of manufactured goods. If only we were to adopt a positive agricultural policy in this country, rather than a restrictive agricultural policy, there is little doubt that within a period of years we could grow at least £250 million worth of those temperate food products ourselves to the huge benefit of our balance of payments. We must give greater consideration to encouraging, by greater investment, those industries in this country—tourism is another example which would save us foreign currency in future years.

But, even assuming that export incentives and currency savings could really correct the basic disequilibrium in our balance of payments, there is then the second most important matter—the hon. Member for Ashton-under-Lyne referred to it—the whole question of encouraging industrial investment. This can be done only by a huge switch from consumption to investment, and I do not believe that the Budget presented to the House yesterday will achieve this object.

Today, the monopoly power of the unions is such that the wage earner is protected against inflation. I do not imagine that anyone will deny that that has been so, certainly over the past year. But savers in this country have no protection against inflation. When a person who has saved a few pounds out of his taxed income and done his best to invest them in order to protect himself against inflation comes to sell that investment, he has to pay tax again, Capital Gains Tax, on what, very often, is a loss in real terms. This is not generally realised. It is an absolute nonsense to have a situation in which people are paying a tax on losses, losses in terms of the real value of money. No amount of gimmicks with National Savings Certificates or anything else will correct this problem because National Savings Certificates draw savings out of one source into another.

What we must do is persuade the British public to save where it is not saving now. We must increase the propensity to save of the British public. This is the only way by which we can really encourage and expand industrial investment. It was the inability of the middle income groups in other countries—Germany and Austria are two examples—which caused the disintegration of these societies before the Second World War. It was the inability of the middle income groups to protect themselves against inflation which was among the prime causes as, I think, most historians will recognise, of the rise of Fascism in Germany. I do not for a moment suggest that that could happen here, but, if people are unable to save and protect themselves against inflation, it could have serious effects upon our whole society.

I fear that, in attempting to check and catch 300 speculators, we are in process of decimating 3 million small savers, yet it is upon these small savers that the economic survival and prosperity of this country will largely depend.

7.3 p.m.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

I am delighted to follow the hon. Member for St. Ives (Mr. Nott) and to congratulate him on an excellent maiden speech, which showed him to be very knowledgeable and well informed on his subject. I am sure that we all greatly look forward to hearing him again during the course of our long Finance Bill debates. I am glad to have this opportunity to pay this tribute to the hon. Gentleman, because it was not so long ago that I made my own maiden speech, thought I must say that the last 18 months seems a long time, and we have had quite a few debates on financial matters in the period.

Due to the Chancellor's ingenuity, the Budget seems to be nothing like so bad as I had feared or as many people, both inside and outside the House, had feared. But, of course, the Budget cannot achieve everything. This is the mistake of many contributors to our debates. We cannot view the Budget in isolation. We must look at it together with all the other measures of the Department of Economic Affairs, the N.E.D.C., the "Little Neddies", the Prices and Incomes Board, the Ministry of Technology, and so on. Massive action once a year is no way to regulate the complex economy we have in this country.

We must get away from the rather silly jokes about this being my right hon. Friend's ninth or tenth Budget. The sure way to lurch from crisis to crisis is to regulate the economy, as we have done so often in the past, by one massive action once a year. There is a great deal to be said for regular Financial Statements. We could then, perhaps, demote the annual Financial Statement, and Budget Day, with all its pomp and tradition, could, perhaps, go, along with the trousers of the Serjeant at Arms.

In considering the Budget, it is right to ask how it deals with the various problems facing us, the problems of exports, imports, investment, savings, public expenditure, the balance of payments, and—perhaps most important of all—the question of growth and increasing production and productivity, without which we shall be back in the old dreary round. I am not one of those who believe or have believed that it was necessary in this Budget to take huge sums out of con- sumption. After all, according to the Financial Statement, we have taken about £694 million without any changes at all. Consumer expenditure has not increased by more than about 1 per cent. There is some evidence that activity is declining, and, as was said, in rather contradictory fashion, admittedly, by the right hon. Member for Enfield, West (Mr. Iain Macleod), there is the possibility of a further decline in the course of the next few months.

I am glad, therefore, that my right hon. Friend has resisted the siren voices which he must have been hearing to increase Purchase Tax, Income Tax, Surtax and the rest. But the increases have, none the less, been severe, and we should not be misled by the ingenuity of it into thinking that there is not a large measure of deflation here.

I shall come back to that in a moment, but I wish first to examine a few of the measures introduced by my right hon. Friend. First, the gambling tax. The other measures have tended to overshadow this and there has been little mention of it because we had a reference to it on an earlier occasion. I am sure that I am not alone in thinking—I imagine that there are some hon. Members opposite who take the same view—that this tax should, perhaps, have been rather heavier.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

On the other hand, I think that the Chancellor may well have been right in fixing the level of this new type of tax rather low now. There is always room for improvement, as it were, on later occasions.

Photo of Sir Gerald Nabarro Sir Gerald Nabarro , Worcestershire South

While he is talking about the gambling tax, will the hon. Gentleman give us his view on why this new gambling tax should be at the nugatory rate of only 2½ per cent., that is, 6d. in the £, whereas the punter on the football pool pays 6s. in the £ and the punter on the greyhound track pays 3s. in the £?

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

If he had been listening, the hon. Gentleman would have heard me say that I thought that it might usefully have been fixed at a higher level. But, clearly, the hon. Gentleman is concerned only with points which he himself might wish to raise, regardless of what he hears or does not hear.

The Corporation Tax has been fixed at 40 per cent., and, clearly, this is an increase. I think it might have been honest to have said so. The right hon. Member for Enfield, West asked a straight question on this, and it is certainly true that at 40 per cent. there is an element of increase. Having examined the Financial Statement since yesterday, I must say that I find it a little difficult to calculate just how much is represented by this increase. But, as I say, I feel that it would be honest to concede this, because, of course, there will be an effect on dividends by the Corporation Tax generally and by the rate. But, if they were to be fair, hon. Members opposite ought to concede that, if we are to ask workers, as I believe we should, to accept a prices and incomes policy, dividends too must make a contribution.

This Budget will of course, always be thought of in connection with the imaginative new tax, the Selective Employment Tax. My complaint about this new tax is that one of its main purposes is to raise revenue and restrain consumer demand this year. There can be little doubt that this is, as has been stated, one of the major purposes of the tax this year. While I welcome the broader base of this type of tax, therefore, I would have preferred there to have been rather more given back, perhaps by way of personal incentives, although I am aware that, psychologically, this is not exactly the best time for giving any tax concessions. Our creditors might misunderstand. But that, of course, is just one more reason for making sure that we get out of debt just as quickly as we can.

Another reason why I find the payroll tax attractive is the possibility—I put it no higher—that it may make for more effective use of labour. I do not expect miracles, but I believe that there will be a small, marginal but none the less important effect particularly in manufacturing companies. Every manufacturer I know and meet daily complains bitterly of how difficult it is to get labour. They spend thousands of pounds on advertising for new labour without any success at all. They may now, however, get just a few, perhaps some of the part-time people who may be put off from the service industries. As I say, I do not put it very high, but I think that there could be a small, marginal but none the less useful effect.

It is true that the premium will be an encouragement to hoarding. I do not think we should play with words. It will be an encouragement to hoarding. But, on the other hand, I can appreciate the Chancellor's dilemma here, faced with the need to offset any possible increases in manufacturing costs by increases which the service industries might pass on. Therefore, he wanted to try to help manufacturing companies. I should have thought that this could have been understood by hon. Members opposite. For my part, I would have much preferred to give the premium back by way of increased cash grants for investment in new plant rather than in the way proposed, and, moreover, my right hon. Friend might have brought forward the date when the payment of the new cash grants could be made. I feel that that might, perhaps, have been a more useful way of dealing with the matter.

I like the flexibility of the new tax, and I hope that the Chancellor will not hesitate to adjust it as and when he needs to, adjusting it by industries, by regions, by types of labour, male female and according to age. This is very important, but it is equally important to understand that, in introducing so new and revolutionary a tax, it was impossible to make it as refined as one would like. I readily accept that it was better to have the new tax brought in in its broad conception and wait for a later occasion to make the further refinements which I believe to be essential. I cannot understand why hon. Members opposite do not appreciate the value of this new measure in our system from both the financial and industrial point of view.

I believe that the Budget as a whole might marginally have been helpful to production, but, on the other hand, there is nothing new in the field of exports, savings and public expenditure. We have had a little on the restriction of capital outflow, and, here again, I cannot understand the attitude of hon. Members opposite. If we have a serious balance of payments problem, it is no use pretending that we can just leave things as they are. Everything that hon. and right hon. Members opposite have said in the past 18 months indicates that they would have made no changes whatever from the way they managed, or mismanaged, this sector of the economy before.

Yesterday, we were told that there would be further attempts to improve our balance of payments situation by negotiating with the West German Government to get back the £90 million a year by way of an offset agreement. I hope that my right hon. Friend will forgive me for being a trifle sceptical about this. We have been negotiating and waiting for a very long time, and we are still a long way short of having the money for the two years to 31st March, 1966. Of course, they might willingly concede by the autumn some figure to put in the accounts which we should have in the years 1967–68–69–70, but on this basis, by 1975 we shall still be waiting for the figure for 1967. I think that we shall have to be very tough in our attitude in the negotiations.

Nothing has been done in the Budget which will be particularly helpful to improve the imports situation. This situation is not likely to improve. I believe that we have taken too much in this Budget in extra taxation, and I hope that the Chancellor will not hesitate to take swift action by using other measures available to him to reverse any trend which he may see so that he ensures that we do not get into the situation which we have had so frequently in the past of a deflationary period, unemployment, and all the effects associated with it. In those circumstances in the past we have waited too long to take action. The Purchase Tax regulator may not have been intended for use in the opposite direction, but I hope that my right hon. Friend will bear in mind that it can be used downwards to reduce taxation. I hope that in the Finance Bill when the new selective tax is introduced, there will also be introduced a possibility of reducing it as and when we need to do so. The Chancellor has machinery which he can use by way of hire-purchase deposits, relaxation of the credit squeeze, the Bank Rate and so on—and all these things can nullify some of my fears about the amount of extra taxation which he has taken.

Yet despite the measures in the Budget and all that we have done in the past 18 months, we still have a serious balance-of-payments problem, and it is no use hon. Members opposite intervening to make petty political electioneering points. The balance-of-payments problem has a dampening effect particularly on growth, which is still at the very heart of our economic situation. Surely what we need is direct action. The old deflationary measures have failed in the past. Why on earth should we believe that they will now be any more successful? I hope that hon. Members opposite will get away from their idea of the past 18 months of always making electioneering speeches and will appreciate that we are making a genuine attempt to get away from the old, dreary, deflationary ideas.

But in order to deal with the balance of payments I believe that we must take direct action. We must do this in order to get the balance-of-payments situation straight so that we may get on with the job of increasing production and productivity. Like my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), and despite knowing all the defects, I would plump for import controls. I believe that they cannot be avoided at least for the next year or two. I am certainly not a protectionist and I realise the difficulties in which this action would involve us with E.F.T.A., the Commonwealth and other trading nations, but deflation, devaluation and recurring crises will help our trading neighbours no more, and direct action will at least provide some certainty in our economic position.

My right hon. Friend's announcement about the surcharge, while it will undoubtedly help considerably between now and November, is bound, I am afraid, to open up a flood immediately afterwards. I therefore cannot see how we shall be able to do other than take direct action about imports, along the lines I have suggested.

Turning to exports, none of us is happy that there was nothing in the Budget by way of additional export incentives. But it must be appreciated that export incentives cannot have an immediate effect on the balance of payments. Those with some knowledge of trying to sell abroad recognise that, incentives or no incentives, it takes time to sell abroad, and time is the one thing we do not have in this context.

I note the reference in the Budget to public expenditure. I agree with those who want to see it cut, but I do not want it cut in the social services. I should like to see a cut in defence, and at the risk of boring the Committee I would submit that maintaining an overseas force east of Suez is the worst of all possible worlds. A world rôle on borrowed money is not a rôle at all; it is a dream, and an unnatural desire in a Labour Government, a desire for long gone days of Imperial grandeur.

But perhaps the greatest disappointment of the Budget is that comparatively little has been done for savings. I welcome the new Post Office savings account, the National Development Bonds, and the new National Savings Certificates. The Chancellor rightly told us again that we can keep taxation down if we increase savings. Why not encourage savings on a massive scale? This seems to be a sensible way to look at it, and I hope that he will look at it in that way. To have State unit trusts purchasable in a post office would, I think, be a winner. In addition, amendments to the Finance Bill might be made to give some relief, perhaps on the first £100, from Capital Gains Tax. The cost would be small and the good will created very large. These are other small gestures of a similar nature which we could make and I hope we shall be able to make in the long days and evenings on the Finance Bill.

But because I put growth at the top of my priorities, while I am not perhaps as unhappy as I expected to be, I am nevertheless greatly concerned that in the three years from 1964 we seem likely to have a growth rate not as high as 2½ per cent. per annum. What will happen? Clearly it is not high enough. It is the measures which the Government can take which will help. Taking all these measures together, they can, I believe, be of some help in achieving the target which in fact can be achieved only, as my right hon. Friend said this afternoon, by industry itself.

Many organisations are, of course, dealing with precisely this problem. We have the Department of Economic Affairs, N.E.D.C., the Little Neddies, the Prices and Incomes Board, the Ministry of Technology, and the Treasury. It seems to me that we need some co-ordination. There seems to be a disturbing lack of control. We seem to be taking too much of a pragmatic approach. Too many of our economic problems seem to be handled on a day-to-day basis. I hope that we can co-ordinate the measures, many of them very good measures, which are being taken and which have been taken. I hope that we shall co-ordinate all these measures in one direction—the direction of a consistent and higher rate of growth, for without it all the measures would soon be irrelevant.

7.28 p.m.

Photo of Mr John Hill Mr John Hill , South Norfolk

I certainly agree with the hon. Member for Heywood and Royton (Mr. Barnett) in some of his strictures on Government policy. It is too pragmatic and it seems to be too opportunist. I should like to see much more emphasis on savings, and I am sorry that the Budget does not go nearly far enough in that respect.

We are all agreed that, whatever statistics we choose to use, they all point in one direction—to a shortage of labour and relative stagnation in production. I believe that it is essential to make more effective use of our manpower, and therefore to me some kind of payroll tax is broadly acceptable. I have grave doubts whether any such tax should be selective at all and I strongly oppose the Chancellor's first essay in selection.

It seems to me that the power to select administratively the incidence at which the tax should be levied could at its worst be wholly inconsistent with the maintenance of a free society and could arbitrarily penalise private enterprise and increase State intervention. In other words, it could be used as a Socialist weapon. But in practice and more immediately it is much more likely to produce economic distortion through mistakes or misjudgments on the part of the Government, whose errors tend to be grievous because of their large scale.

A further objection to the practice of selection seems to me to be that it results in endless controversy between who should and who should not be the object of favour or discrimination, and that means inevitably a great multiplication of administrative complexity. We know that still more civil servants are needed, and each civil servant has to be matched by at least one or more professional or clerical worker on the private side of the argument if we are to meet the growing requirements of regulations, restrictions, applications and all the rest. One has, therefore, the great disadvantage of thus using up some of the precious labour which is most in short supply.

Until yesterday secrecy precluded any discussion of this new Selective Employment Tax, but the wires were buzzing from the evening onwards, and it has been quickly apparent that there is very little support for the idea of discrimination in favour of manufacturing and against services. There is no merit in manufacturing as such unless it satisfies human needs. There is no more sense in buying and using raw materials and labour to make goods which people do not want to buy than there is in farmers growing food which people do not want to eat. It seems to me that it is just as important and useful—and sometimes easier—for Britain to sell services, including the tourist and hotel services, to foreign customers as it is for her to sell goods.

It has been said that an advanced society increasingly relies on efficient services to mark a rising standard of living, but it also generally enables people to give maximum time and effort to their own jobs. High taxation, especially taxation on services, may encourage a great deal more "do-it-yourself", but that discourages important marginal extra effort at work. If we did not subsidise manufacturing industries but had a level rate of employment tax it would have the advantage that the whole of the economy would bear a lower rate of tax. The scale of tax could be a good deal lower. Because we take out manufacturing industries and give them a subsidy, everyone else has to pay proportionately more. Broadly speaking, I believe that the Government ought to be neutral as to the use to which labour is put except where there is a clear national need. I accept that there may be a requirement for discrimination in respect of regional use and, obviously, to encourage exports.

I very much doubt whether the present proposals will do anything in particular for exports. After talking to the largest industrialist in my constituency, I suggest that what is wanted is a strong personal incentive to make it worth people's while to go out and get exports. The simple idea put to me was that if Income Tax were remitted on that pro- portion of a company's dividends which matched its export profits, that in itself would be a powerful incentive both to those in the company itself and certainly to the shareholders to keep up pressure for it to go for exports and to inquire why, if any, there was a falling off in effort.

When considering the incidence of this tax, I am worried by its likely impact on certain activities which are not in themselves profitable but are both highly prized and very beneficial to society. For example, the Government are rightly keen to encourage the arts and amenities. What is to be the position, therefore, of a large symphony orchestra, perhaps employing 100 musicians? This may be a detail but it is of the sort that requires urgent consideration.

Much greater is the effect on education. It is said that the tax will be offset for local authority finances, including all educational establishments maintained by the local authorities. Paragraph 27 of the White Paper says: Universities will receive a refund of the tax through the University Grants Committee. It is the effect of the tax on the private sector of education that will be very important. The White Paper admits the need to consider special arrangements for grant-aided educational establishments. That is a reference, I take it, to direct grant schools, because they cannot increase their fees without sanction. As the tax begins to run next term, it is urgent that the problem should receive detailed consideration without delay.

The best solution would be to follow the pattern proposed for the universities and refund the tax, if, in the first instance, it has to be collected for administrative reasons, and it should be refunded in whole. Otherwise many good schools—certainly several in my constituency—will be very hard hit at a time when they are working continuously to improve standards while keeping cost increases down.

The impact of the tax will obviously hit hardest small enterprises working on narrow margins of profit, many of which are in the countryside. But the strongest opposition in the countryside, certainly in the rural areas, will arise from the proposed treatment of agriculture. Since this is a new Parliament, I re-declare my interest as a practising farmer. Paragraph 17 of the White Paper says: Agriculture, horticulture and forestry will not be exempted from the tax—though, as in other industries, this will not be charged in respect of the self-employed. In agriculture the Government intend to offset the effect of the tax on the industry, so far as practicable, through the normal machinery of the Annual Review. The Annual Review will be a very imperfect instrument for making good to farmers the very heavy burden that is to fall on the industry. So far as I can calculate, it will not be less than about £25 million a year. That will be direct tax on the employed persons in agriculture. But, of course, there will he a further indirect burden arising from the effect of the tax in increasing the prices of the goods and services which agriculture purchases itself by way of input. These amount to as much as £1,000 million a year.

The first objection to the Annual Review procedure is the delay. The costs will run with effect from September, whereas any benefit coming back via the Review cannot take effect until at least the following year. But the Annual Review has never given full recoupment and therefore no farmer can operate on the basis that he is likely to avoid the penalty that the tax is bound to impose. Furthermore, the Annual Review only covers review commodities and much agricultural produce as well as horticultural produce is outside the Review. There will be no compensation for them.

There are great disadvantages in seeking to counteract the effects of the tax through the review because this can only result in increasing the guarantee payments. The effect of higher guaranteed prices is bound to increase the size of the deficiency payments, because the level of home market prices is largely dependent upon the wholesale prices of available imports, the production of which would be free of tax.

Therefore, there is bound to be an increase in the annual Treasury support bill at the end of each year, no doubt bringing in the remark so disliked by farmers, "Handing another £x million to the farmers". On these grounds alone, the method of payment—if that be the right word—is bound to be most unwelcome.

The position of the British horticulturalist will be gravely weakened as against foreign imports, since his labour will become very much dearer, and one of the strongly competing factors which tariffs have only partly cancelled has been the cheaper labour enjoyed by foreign competitors. Therefore, the tax will force up costs for British horticulturalists unilaterally and it is not enough to say, as the White Paper says, … the effects of the tax will be taken into account in the development of horticultural policy. How and when can it be taken into account? The tax will hit home producers in September. Because of the tax they will need a relatively higher market price than will their foreign competitors. Unless the Government have some scheme for the rapid upward adjustment of tariffs, I do not see how the British horticulturalists can possibly suffer anything but sad injury.

There are also longer-term ill effects which I hope the Government will consider before coming to any final conclusions. The effect of the tax will tend to cause neglect of the proper maintenance of our farm land, working against the rules of good husbandry and estate management. Maintenance is costly and it is the first thing that can be cut in the short term. I fear that putting a heavy direct tax on agricultural labour means that some of the things that ought to be done will be left undone at greater future cost.

There will be harmful social effects in the countryside. Undoubtedly there will be a tendency to dismiss the older and less skilled men, especially where, hitherto, they may have been kept on permanently through the winter and through bad weather. It is a bleak prospect for the pensioner who may want to remain working after the normal retirement age and, of course, for the disabled person. There is a strong case for exempting the disabled from the tax.

Moreover, the rural labour that is likely to be dismissed is largely immobile. There is little suitable alternative employment. Factories on the whole want the younger and abler workers. They will now be subsidised to take them from the farms at the farmers' expense as the farmers will be contributing to the manufacturing subsidy. It is clear that the suggested method of using the Annual Review instead of a direct refund has been chosen because it is the Government's intention only partially to compensate the effect of the tax on agriculture. There is pressure on farmers to sack their men presumably because it is thought to assist the National Plan, in which one of the main objectives of present agricultural policy is to run down the labour force in the industry.

But agriculture is not hoarding labour. Most farmers are desperately short of labour and have to go to the same anxious lengths of advertising and search as industry must do. They are short of labour largely because of the great disparity between agricultural and industrial earnings, which the tax is likely to accentuate.

Perhaps it was a slip of the tongue but it was certainly a revelation when the Secretary of State for Economic Affairs spoke of agriculture when referring to declining industries. Agriculture is not a declining industry—far from it. It is expanding and growing but with a declining labour force. That is very much to its credit. In the last five years, agriculture has increased its net output by 15 per cent. with a reduction in the labour force of 20 per cent. The output per man has averaged an increase in productivity of 6 per cent. annually.

The only conclusion one can fairly draw is that agriculture is making good use of its labour. It has no restrictive practices, despite a smaller margin of profit than in manufacturing and despite lower earnings for the agricultural workers for what I consider to be the greater volume of skill, energy and hours that they contribute.

Finally, agriculture is making an indispensable and still growing contribution to the solution of our balance of payments problem. Yet the present tax proposal is only the latest in a fair list of injuries which the Government are doing to agriculture. On Friday, no doubt, the Government will hear criticism of the effect of the new investment allowance, but already Corporation Tax and Capital Gains Tax are biting on the small farming company and the Selective Employment Tax may also fall on the wages paid to the farmer's wife and family. These all seem to be manifest errors which need correction. I do not know whether they arise from ignorance or intent.

Earlier in the day, the Prime Minister talked about the need for men guiding agriculture to have mud on their boots and wisdom in their heads. I do not believe that there is much mud on the Government's boots, and I have doubts about the soundness of the policy in their heads.

I am sorry in a sense to be critical, because agriculturists as a whole are conscious of the need for growth and greater efficiency in the national economy. Agriculture can fairly claim as much as any other industry that it has responded to the demands made upon it and conformed to the criteria of the prices and incomes policy. But such success should be rewarded by some more tangible encouragement. Like the rest of the nation, agriculture would respond more effectively to greater incentives and less penal taxation. Unfortunately, the Government are offering the reverse and that is why I am certain that substantial amendments must be made if great harm is not to be done to the countryside.

7.46 p.m.

Photo of Mr Frank Judd Mr Frank Judd , Portsmouth West

As the new Member for Portsmouth, West, I find it appropriate to speak in this Budget debate, because my constituents follow the remarks and concerns of the Chancellor of the Exchequer for two special reasons. First, he spent his youth in Portsmouth and was educated there. Secondly, during the war he served in the Navy.

During the recent campaign, we had the rare privilege of having the Chancellor in our midst. He attended a school meeting one evening, a very full and lively meeting, when, to everyone's delight, he spent a lot of time reminiscing about his early days in Portsmouth. The next day, the Portsmouth Evening News produced a cartoon on its front page depicting the Chancellor back at school. I am happy to say, having consulted a representative cross-section of my constituents since the Budget, that it is clear that they are highly pleased with his refresher course during the election.

Portsmouth, of course, is primarily a dockyard city and it is fair to say that my predecessor never permitted the House of Commons to forget that fact. In its capacity as a great naval dockyard it has served the nation extremely well in the past and it is the hope of all living there that ways will always be found in future for it to serve the nation in its new problems equally successfully.

There seem to be two outstanding characteristics about the dockyard city of Portsmouth. First, in its history it has built up a great reserve of skilled manpower. Secondly, on the other side it has a great and almost exclusive dependence on the dockyard as the only large-scale employer of labour in the area. It so happens that the Government's new plans for the Navy, with their concentration on highly versatile and modern forces, will provide full employment in the dockyard in the years ahead, but if we are considering the problems of this great city seriously, we should not permit present naval policy, or the present general prosperity within the south-east region, to conceal the inherent weakness in the city's economy, which is that it is largely dependent on one large-scale employer of labour.

The warning signs are already present. The city is not sharing in the region's general prosperity. The city's amenities lag behind many other centres of population in the region. Its social problems, particularly housing, are severe, because people with limited incomes there are constantly facing in their day-to-day lives the major problem of finding new accommodation as reconstruction and redevelopment sweep through the town. They also have to meet constantly rising and perhaps excessively high council house rents. Increasingly the young and well qualified people are beginning to look elsewhere in south-east England for future prospects.

None of these things needs to be so. The Chancellor has expressed concern about the insufficient emphasis within the economy on manufacturing industry. Clearly, with imagination and research it should be possible to use the skill and engineering experience of Portsmouth as a growth point in the economy. Partly this cart be done by attracting the right sort of new large-scale alternative industry to the area. This might be done through the scientific application of the Selective Employment Tax in ways not suggested by the Chancellor yesterday. But it could also partly be done by directly using the existing basic facilities of the dockyard itself.

It is not altogether a revolutionary thought that, with planning and leadership, the dockyard could be employed in producing capital goods for export and for overseas aid and even employed on industrialised building in the drive which we all want to see on the housing problem. By its very nature, as a naval dockyard it cannot be working to capacity on naval commitments in normal times. We must examine positive ways of overcoming this difficulty in the interests of the nation and the economy as a whole.

I am afraid that I am not a merchant banker. I lack the specialist experience of some of those who have spoken in the debate about finance. However, as a new Member I am deeply concerned with the human problems which lie at the basis of the economic difficulties with which we are confronted. In Portsmouth and elsewhere people are beginning to realise that productivity is the key to our future economic strength, and in the debate considerable stress has been laid upon the responsibility of management and workers operating in harmony to produce the results which are fundamental to our future strength.

In saying this, one must realise that an important distinction must be made in our observations on human reactions to the challenge being put to them. This distinction must be drawn between the importance of the personal involvement, psychological involvement, of employees in production, a sense of individual responsibility, and, on the other hand, the theory of consultation which is frequently so glibly mentioned, because in essence consultation is not really a method of partnership between management and employees.

Looking at this matter in a wider social context and considering the challenge of the whole social problem in Britain at the moment, it can be seen that we are living in a complex technological society. It has been suggested by the cynic that the key to success is to know more and more about less and less until finally, to be absolutely successful, one must know everything about nothing.

It sometimes seems to be forgotten that basically the trouble which results from this situation is the breakdown in communications between those with technological "know how" and the mass of the population upon whom they are dependent. This is clear even in the operation of trade unions themselves. Trade unions have become complicated and large structures and it is clear that the ordinary individual members are increasingly feeling not involved in the deliberations of union policy. If we are to face this problem, we must fundamentally reconsider the relevance of the education policy and especially the Newsom recommendations as primarily concerned with the economic problems which we are now discussing.

The majority of young people leave school with the minimum of educational qualifications simply equipped with the minimum faculties to go unquestioningly into the economic machine, becoming smaller and smaller cogs in an ever bigger industrial and economic machine. If the majority going into industry, as the result of their lack of preparation for social responsibility, are inclined to put the responsibility for the success of the economy exclusively on the shoulders of the specialists, they cannot be altogether blamed.

Last weekend, I had the pleasure and interest of going round with the management a new and dynamic factory in the south of England. The management took great pride in employing the most modern management techniques. There were excellent working conditions and the best facilities in the buildings which were being erected. There were consultative committees, bonus schemes and schemes for workers' shares, everything one could possibly imagine. Yet the management was bewildered and puzzled because somehow it was still not getting from the employees the response it had expected.

I re-emphasise that fundamentally it was because the employees did not feel directly involved or in any way responsible for the success of the undertaking, let alone the success of the economy as a whole. They were consulted, but they believed that the final responsibility was not upon their shoulders.

We have heard earlier that the Government propose impersonally to move sections of the working population from one area to another. I put it to hon. Members opposite that their concentration on the frequently discussed management and modern techniques of management is the very same thing, because it is in this impersonal approach to industrial relations, this speaking of better methods of using workers by management, that we destroy the opportunity to enlist the full, positive and free co-operation of the working population in our economic plans.

In this situation, every serious politician must have nothing but admiration for Ministers who give their time and energy to touring the country and trying to work up a sense of responsibility for economic recovery, but in the long run we must start at grass root level and get the situation into perspective. Involvement is the key to the difficulty of the economic situation, but a general atmosphere of economic involvement is only one part of the whole picture.

Apart from action within the formal educational structure as recommended by Newsom and others, we must recognise the importance of a host of new experimental voluntary endeavours which are rapidly developing in Britain. These are offering opportunities for young people to accept positive social responsibility by taking a real part in society. At the local level, in my own constituency I have been very happy to see the activities of an organisation called Youth Action, in which young people from different areas in the city have been actively participating in their spare time in making a direct and personal contribution to social problems in the city. Of perhaps greater interest than this activity was the enterprising endeavour which they carried out recently in making a social survey of the needs of the elderly there.

Some hon. Members may say that this is all far removed from the debate on the Budget, but I am convinced all this is highly relevant because it is through techniques of this sort that we are engaging the imagination of young people. Once we have found a point of contact with them we can extend this into a wider sense of social responsibility and commitment. I should like to make one small observation on the function of these voluntary organisations. Their potential is increasing every day. There are many national organisations about which we frequently read in the Press. They have plans for still more rapid development to include a more representative cross-section of the community. It would be most unfortunate if the new employment tax hindered their development plans, because most of these organisations are working on minimal budgets. I am quite certain that the Chancellor will look at this problem if approached.

Any encouragement he can give to social mobilisation, particularly among younger people entering upon life, coupled with real and meaningful changes in management-worker relationship, will prove the soundest investment in progress and development for Britain and its economy.

8.2 p.m.

Photo of Mr Hugh Wilson Mr Hugh Wilson , Truro

It is my pleasant duty to congratulate the hon. Member for Portsmouth, West (Mr. Judd) on his maiden speech. His predecessor was a well-known figure in this House for many years and was popular, despite his rather forceful method of speaking. The hon. Member for Portsmouth, West has spoken fluently and we shall look forward to hearing him again on many occasions. If he serves this House as diligently as his predecessor, I am sure that we shall be glad to see him and hear him in the future.

Almost every speaker has concentrated almost entirely on the Selective Employment Tax, and it is inevitable that that should be so because it is controversial and novel. It is one which attracts the most attention in the Budget. I have grave doubts as to whether the principles behind this tax are sound. In an earlier part of the debate my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) remarked that he thought that this tax was a reversion to the "cloth cap and muffler" type of Socialism. That caused some derision on the benches opposite, I think through a misunderstanding.

As I understood it, my right hon. Friend was meaning, not that nowadays any factory worker is dressed in that costume, which was the traditional costume of 30 or 40 years ago, but that 30 or 40 years ago the Labour Party concentrated almost entirely on the belief that the factory worker was the important person and that other forms of employ—ment were more or less parasitic. It seems that there is some substance in the belief that the principles of this tax are rather a reversion to that theory, because it appears to be based on the supposition that only the manufacturing industries are concerned with exports, and balance of payments, and problems of that sort, and that the other forms of employment, particularly service employment, are of the "candy floss" nature, of which the Prime Minister so often complains.

I do not know that that is true anywhere. I very much doubt it, and it is certainly not true in the West Country, which has a very substantial contribution to make to exports and the balance of payments in three respects. There are, first, invisible exports, secondly, the export of raw materials and thirdly, the negative value of imports saved. One of my hon. Friends dealt at length with the problem of agriculture, which is a great saver of imports. It was pointed out how much could be saved if we increased agriculture. In my constituency, and in Cornwall generally, all the farms are very small. The average acreage in my constituency is 100 acres or less. Nevertheless, these small farmers, engaging in dairy work or mixed agriculture and horticulture, employ in most cases one or two men.

It is the small man who will find it difficult if he has to pay this tax, starting in September, in the vague hope that he will be recouped at some later date, as a result of the February Price Review the following year. He is likely to regard that as rather derisory, and certainly the horticulturalists will not be very enthusiastic about the wording of this White Paper, which gives a very vague promise that something will be done to help them to meet the tax. If there is any slackening-off in agriculture it will go against the balance of payments, because it will reduce the amount of agricultural production. It will really affect the small man, who is producing the bulk of this country's food.

The china clay industry has been discussed. This is a very big industry in my constituency with 75 per cent. of its two million tons' production being exported. When I came into the Chamber I received the following telegram from the china clay industry: First estimate of cost to English China Clays Group of Selective Employment Tax is in excess of £500,000 per annum. Consider this imposition gravely detrimental to our export trade. 75 per cent. of total output"— that is the export trade of two million tons per annum— calculated to increase manufacturing costs in consumer industries of this vital raw material. Bulk of industry is concentrated in development district. Cannot but increase costs very significantly and exports must be affected. English China Clays is Queen's Award for Export, 1966. That is what they think of it, and it would be most unfortunate if an industry like that, which is competing on pretty tight margins, and fighting for pennies, exporting to the most difficult areas, such as the United States, had to increase prices and decrease exports.

The third big industry concerned with exports and the balance of payments in the West Country is tourism. There have been many references to hotels and the tourist trade in speeches in this debate. I do not think that anyone has drawn attention to the size of this industry.

It is not generally appreciated that the tourist industry is our fourth biggest export earner. The number of foreign visitors to this country last year was 2,165,000, of whom 1,316,000 came from Europe and 674,000 from the United States. The tourist industry is a very big dollar earner. Last year it earned about £81 million worth of dollars, which is more than the value of the dollar sales of the motor car industry and aircraft industry put together. It is twice as much as the value of the sales of whisky to the United States and more than the earnings of any single manufacturing industry. It is astonishing that a bonus should be given to a manufacturing industry on the supposition, presumably, that it is helping the export trade when a very big earner like the tourist trade is to be hit even further.

Photo of Sir Gerald Nabarro Sir Gerald Nabarro , Worcestershire South

Would my hon. Friend add to his figure of £81 million in earnings from the United States last year the total earnings of tourism of £322 million last year?

Photo of Mr Hugh Wilson Mr Hugh Wilson , Truro

Certainly. I was talking about dollar earnings in particular. The figure which my hon. Friend mentioned includes earnings from other foreign visitors. The tourist industry is a much bigger industry than most people think.

Photo of Mr William Baxter Mr William Baxter , West Stirlingshire

Will the hon. Gentleman concede that visitors to New York or other parts of America are called upon to pay a tax when they go there not only in the hotels but in the restaurants? What is good for the goose is surely good for the gander.

Photo of Mr Hugh Wilson Mr Hugh Wilson , Truro

I am complaining not about the tax but about the general proposition that it is necessary to give a subsidy to a manufacturing firm in the Midlands when a much bigger export industry is penalised. It is done on a mistaken basis. If we want to tax the incoming tourist, that is different, but to assume that only industries which make things are concerned with the export trade is to return to the cloth cap and muffler type of Socialism which assumed that only the worker wielding a hammer was doing anything useful.

I have mentioned three industries which greatly affect my part of the country. It is extraordinary that a development area should come so badly out of the Budget.

I hope that it will he possible to give an answer to one point before we have the Finance Bill. In the definitions in the White Paper, use is made of a rather unusual expression. The White Paper reads: The unit of definition will generally be the establishment at which workers are employed. In my experience, "establishment" is an unusual word to put in a legal document or statute. I do not know any definition of it. Further down the White Paper states: Manufacturing establishments making goods for use in non-manufacturing activities, for example materials, components and prefabricated units for use in the construction industry, will be classified as manufacturing. That seems to imply that "establishment" applies to part of a premises and not the whole industry. Will the 7s. 6d. bonus which manufacturing industry will receive be in respect of people employed in buildings or parts of the works which are not in the factory premises? Very often the head office is miles from the factory works, and the factory itself may be situated in two or three different places. People employed on computers, for instance, will probably be at the headquarters and nowhere near the factory. Would employers receive the tax rebate in respect of those people? That is a small point which I mention in passing. I think that it will arise again and that people will be asking about it.

I hope that these matters will be looked into and that this tax will not work as unfairly as it appears it will work in my part of the country.

8.16 p.m.

Photo of Mr David Watkins Mr David Watkins , Consett

Every hon. Member who rises, as I now do, to make his first contribution to the Committee's discussions does so against a most remarkable background of advice from hon. and right hon. Members as to how he should set about it. I have found that in the Palace of Westminster there is a grave shortage of desks and filing cabinets and many other essential facilities which are needed by hon. Members to discharge their functions. But one thing of which I have found there is no shortage is advice. [An HON. MEMBER: "Good advice."] As my hon. Friend says, "Good advice", and I would certainly not dispute that.

I have been advised to make my maiden speech at the earliest possible moment, and I have been equally advised to hold back to the last possible moment. I have been advised to make my speech short, and I have been equally advised that I must not hesitate to develop any arguments which I might wish to develop. I have been advised that I must be noncontroversial, and I have been advised that I should make a point of being controversial. I have come to the conclusion that the only way to deal with this advice is to weigh it most carefully in the balance and finally to make up one's own mind about how one should make his first contribution to the Committee's deliberations. It will be for the Committee to judge, as I know it will judge, how I have reacted in the face of the advice poured on me from all directions.

I have the honour to represent the constituency of Consett, and, before coming to the main part of my remarks, I want to pay a tribute to my predcessor, Mr William Stones, who for 11 years represented Consett and, in that time, made valiant efforts on behalf of his constituents. I use the word "valiant" particularly, because in the latter years of his membership of the House he suffered from increasing ill health which caused his comparatively premature retirement from membership. I am sure that all hon. Members will join me in paying tribute to his efforts on behalf of his constituents, particularly since they were latterly at least often conducted in the teeth of considerable personal ill health and discomfort.

The constituency of Consett has far too long been mainly dependent on only two major industries—steel and coal. With the changing pattern which is brought about by the impact of scientific advance in the present age and tae changing demands for fuels and the bringing in of new demands, it may well be that over the next five years every coalmine in my constituency could De closed. I emphasised that this is the result of the impact of scientific change.

It means, however, that the livelihood of many of my constituents is at stake. The matter upon which I want to concentrate the bulk of my remarks this evening is the development of existing industry and the bringing of new industry to my constituency. In his very able exposition of his Budget yesterday my right hon. Friend especially emphasised the need for growing economic strength and full employment and the need for labour in manufacturing industry. Notwithstanding the conflicting opinions held in some parts of the Committee, it seems that these are matters which are singularly relevant to the needs of my constituency and of my constituents.

Many of my constituents whose jobs will fold up under them with the reorganisation of the coal industry are men who are 55 to 60 years of age. It is not reasonable for us to expect men of that age who have worked all their lives and given of the best years of their lives to this industry, automatically to have to travel 20 to 30 miles daily, with not particularly adequate communications, in order to earn their livelihood; let alone that they should be expected to uproot themselves and move to another coalfield in another part of the country.

Many of my constituents so affected are also sufferers from pneumoconiosis, which I have recently heard described appropriately as the scourge of the coalfields. Many of them are disabled 20 per cent. or more. These are the people whose livelihood is very much at stake in the reorganisation to which I have referred. The imperative necessity for my constituency is that new and expanding manufacturing industries should be brought into the area to provide alternative employment.

I have often heard miners represented in some quarters as being Luddites who are opposed to change and to the modernisation of industry. Such a point of view often arises from a lack of knowledge of mining and of miners. I came into a mining constituency as one who had never been down a pit in his life. One of the very first things that I did on becoming associated with the constituency was to visit a pit. I took care to see that I was not just taken on a conducted tour but was shown the pit in its entirety, so far as that was possible.

It is a salutary experience to go down a coalmine for the first time in one's life. It is an experience which lives in the memory. There is the silence and the utter darkness of the seemingly endless tunnels through which one walks towards the coalface. At the coalface itself there are the roar and tumult of the cutting machinery as one crawls on one's stomach in the sludge and the muck of the 25-inch or even smaller coal seam. All around one the dust is like a dense fog and in one's mind is the knowledge that a fair proportion of that dust is in the lungs of every man who has worked for years in those conditions.

It is brought home to one as the cutting machinery moves into the coalface that every person there has a job to do and must know how to do it and when to do it. If he does not know that and does not do the right things at the right time, a situation disastrous to life and limb could very easily and quickly develop. I was told time and again by these people who are so often represented as being opposed to the changing nature of their industry—"This is no place to work. This is no way to earn a living".

I must report to the Committee that it was put to me in rather more unparliamentary language than that, but I know that the Committee will appreciate the point I am making and will understand what is meant.

Amongst the mining community in my constituency there is a realisation that change is taking place and that change must take place. There is also a realisation amongst my constituents—it is one in which I would most strongly support them—that their livelihood must be safeguarded in the future in the changing conditions which are taking place and that new industries and the training facilities to retrain people for those industries must be brought on a growing scale into the area which I have the honour and privilege to represent.

I am aware that the planning framework and the finance for the north-east of England were provided by the Government in the last Parliament. I know that new industry has gone and is going into the north-east region. The difficulty in relation to my constituency is that new industry wants to be located near the Al trunk road and the main London to Edinburgh railway line because of the obvious easy access of communication. This is 15 or 20 miles from my constituency. There is a special difficulty in my constituency in the matter of communications and particularly as regards roads. I take this opportunity of urging on my right hon. Friends in the Government the need to pay particular attention to the economic and employment problems of the Consett division.

I said in the earlier part of my remarks that steel and coal are the main industries in my constituency. I have not spoken about the steel industry, because I am given to understand that this may be a matter of some controversy and that one must not be too controversial in one's maiden speech. However, I hope that the Government will provide hon. Members with the opportunity to debate the future of the steel industry in the not too distant future, because I can assure the Committee that this is also a matter upon which my constituents have most strongly expressed themselves.

In conclusion, I emphasise that what is at stake is the very livelihood of my constituents, their families and their dependants. They look to this Committee to ensure that their position is safeguarded in this great era of change in which we are living and which they so much appreciate. They will judge this Committee, not on any fine words which might be uttered either by myself or by any other member of the Committee. In the final analysis, they will judge this Committee on the actions which it initiates which are relevant to their everyday lives.

8.28 p.m.

Photo of Major Sir Henry D'Avigdor-Goldsmid Major Sir Henry D'Avigdor-Goldsmid , Walsall South

It is always very agreeable to congratulate a maiden speaker, and it is particularly so in this case and to congratulate the hon. Member for Consett (Mr. David Watkins) because over the years we have appreciated the contribution which the mining community brings to us and the extremely well-informed speeches which Members from the mining community make when they do speak to us. I think we can say to the hon. Gentleman that he is keeping up the very high standards of the mining world which have always been such a feature of the House of Commons. I have no doubt that the next time he addresses us we shall have something to argue with him about, but for the time being, anyway, I should like to give him a very hearty welcome.

I should like to begin by saying it is a particular pleasure to us to see in front of us the Financial Secretary to the Treasury, because we have not had the pleasure of the presence of a Treasury Minister here for about an hour and a half. The Under-Secretary of State for the Colonies, who is now leaving us, is my neighbour Parliamentarily, but I still do not regard him yet as being a spokesman for either the Treasury or the Department of Economic Affairs, and I think it would be reasonable, when we consider that there are at least three Treasury Ministers and two or three of the Department of Economic Affairs, that one of them should spare the time to be present during these debates—these long-drawn-out debates, I know, we have to sit through; but the Treasury Ministers are lucky, for they have per year only one series of debates when they have to be here.

Photo of Sir Gerald Nabarro Sir Gerald Nabarro , Worcestershire South

Hear, hear. Dereliction of duty.

Photo of Major Sir Henry D'Avigdor-Goldsmid Major Sir Henry D'Avigdor-Goldsmid , Walsall South

First, I should like to congratulate the Chancellor because we had a new style of Budget speech this year. We were spared a lot of history. He dived straight into what he proposed to do in future. I was slightly struck by the resemblance to the new form of company accounts one often sees, where instead of a rather plain profit and loss account one gets a large, elaborate brochure giving pictures of factories and chemical laboratories and that sort of decoration which, to me, rather tends to obscure some of the actual truth contained in the company's report. That was a little the case with the Chancellor's speech. If we go back over the past year I think we find things he ought to have dwelt on.

I am not going to say anything about the Selective Employment Tax, for that is something which has been dealt with very fully in the debate. I really doubt, after a lot of informed criticism which we have heard from both sides of the Committee whether this tax will stand up to legislation; it will have to be so severely modified that I think it a waste of time for me to start dwelling on its imperfections. However, I should like to congratulate the Chancellor on this, that at least this tax came to us without preliminary bombardment, without a preliminary barrage, without leaks, without special consultations with confidential officers of the Ministry. This was a great improvement, and, after all, there were no confidential advisers backing into the limelight this year, as we had last year, when, I think, we had three announcements of Corporation Tax and Capital Gains Tax before we actually got to the Budget. Then, when we remember the history of the four months which followed and the number of attempts to reshape it, it is quite clear that when the Chancellor got into his sledge with Corporation Tax and Capital Gains Tax last year the wolves began to chase the sledge and as they began to catch up two rather bulky passengers were dropped to the wolves and as the journey continued the number got thinner and thinner.

We saw this slimming course going on, and even some concessions will be made in the course of the coming months, I am glad to hear. I think the same thing may be said of this Selective Employment Tax. I only hope we shall have finished with it by this time next year. However, as I said, it has been very fully discussed, and many of my hon. Friends are hoping to speak, and so I shall not go over ground which has already been covered.

I want to come to some of the things in the speech which attracted less attention. First, the removal of the import surcharge in November. I remember very well that when we had the import surcharge imposed 18 months ago I suggested that it was not the way to slim for a fat lady to put on a tight corset, because in fact the bulge is just transferred to another portion of her anatomy, and that the only way to get one's weight down, by my experience, was to reduce the food intake. There is no sign of that in the economy; the import bill is as high as ever it has been, and I see no sign of its being reduced.

We have given a clear warning to our overseas suppliers that in November the 10 per cent. surcharge is to be removed. I really think some crash slimming cure is absolutely essential if we are not then to be inundated with imports. I see no sign of that in anything that has come from the Treasury Bench though we had speeches about import quotas from two hon. Gentlemen opposite. I believe that these are dangerous weapons. They are of the two-bladed sort where there is no handle and where one stabs oneself if one tries to administer it to somebody else, so I feel that we cannot regard import quotas as a cure for this disease.

I want to draw attention to the Chancellor's words about the cost of keeping our Army in Germany. The cost is £90 million, and the Chancellor said that he was taking steps with a view to … securing relief from the whole of the foreign exchange cost of keeping our forces in Germany."—[OFFICIAL REPORT, 3rd May, 1966; Vol. 727, c. 1449.] I wonder how the Chancellor proposes to do this, because, first, we are under a treaty obligation to keep forces there. We are part of the N.A.T.O. Alliance. We have undertaken an obligation to do this, and we cannot unilaterally get out of that engagement, especially as we are flirting with the Continent of Europe in a way in which the right hon. Gentleman has not considered doing for a long time.

As one of my hon. Friends reminded us, £90 million represents a vast amount of goods to sell. It is as much as the total exports of cars and aeroplanes. How are we going to persuade the Germans to buy £90 million worth of cars and aeroplanes? How will we persuade them to take it up—in whisky, the total exports of which are less than that, £81 million? What does the Chancellor mean? Will he threaten to remove these forces? Surely it is not for the Chancellor to take this sort of action. This must be done by the Prime Minister, and by nobody else.

I still wonder what the position would be if the Germans said, "All right, we will pay". In the years after the war when we had an Army in occupation, it was living on the German economy. Following the independence of the Federal Republic, we had to pay the costs ourselves. The Germans are not a defeated nation now. They will not take us on their economy, and if they do we shall be in a position where we might be considered to be mercenaries. Are we to be the mercenaries of Germany?

This is a rather curious situation if one looks at it historically, because during the American War of Independence, 200 years ago, Lord North was severely criticised for using German mercenaries to fight our war in America. Are we now, in order to please the Americans, to become the mercenaries of the Germans? I expect the Committee will remember A. E. Housman's epitaph on the Army of Mercenaries. Perhaps I might bring it up to date: Their shoulders hold the pound suspended They are the Bank of England's stay What de Gaulle abandoned these defended And saved the N.A.T.O. pact for pay. I propose to direct the main burden of my remarks to the question of savings. If we look at the Financial Statement for 1966–67, which was furnished to us after the Budget debate, on page 16, at Table 9, we see what is called the "National Accounts Classification of Central Government Transactions" and I want to go through this. It shows that in 1965–66 there was a reduction in National Savings of £115 million. There was a positive dis-saving of £115 million on National Savings, and a dis-saving of tax reserve certificates of £59 million. Direct borrowings from overseas Governments and institutions amounted to £403 million, and there was an increase in indebtedness to the Bank of England of £183 million. There was an increase in notes and coin in circulation of £193 million. This adds up to a sorry story. It does not add up to the prospect of a boom in National Savings this year. The Chancellor said that in this jubilee year of the National Savings Movement he wishes it well. I am sure that all hon. Members do. He said that he was confident that this jubilee year would be celebrated with new records. I hope that he has better cause for confidence in some of his other statements, because only today we learned that building societies are clearly having to increase their interest rates to 7 or 7¼ per cent. and it is idle to think that this will be a boom year in National Savings in circumstances in which we have national inflation and a rise in prices of 4 per cent. and probably 5 per cent. this year.

It is clear that the great truth has sunk in, and that our people have given up their interest in savings. The Chancellor said, "More savings, less tax", but we have the biggest tax burden ever this year, and it is clear that this is because the people are not saving. They are not saving because, through Government policies of one sort or another, they see the value of their savings deteriorating. My right hon. Friend the Leader of the Opposition made a very good point, when, in answer to the Budget speech, he pointed out that he noticed nothing in the Chancellor's intentions concerning the maintenance of stable prices. Without some attempt to maintain stable prices what hope is there for savings?

Are we, year after year, to be subject to this sort of pre-Budget buying boom, with everybody hurrying to get his money out of the banks and out of savings in order to buy commodities of one sort or another? This is an unhealthy state of affairs. I notice the Minister of State for Wales on the Government Front Bench—the former Minister at the Home Office. He cannot possibly approve of this programme, which lays no emphasis on the maintenance of stable prices.

The Government have every responsibility for and every interest in keeping prices stable, and I regret that the Chancellor did not see fit to include any mention of stable prices in his speech. I know that several hon. Members wish to speak and I shall refer only briefly to the action of the Chancellor in damping down investment in the sterling area. This is a disaster, because anyone with business experience must realise that it is nonsense to expect industrialists to earn 33 per cent. per annum. It does not make any sense at all. I do not know how this is to be interpreted, but I hope that whoever has the right to interpret the statements made by the Chancellor in these matters will be more forthcoming than merely to give an emphatic nod of the kind we had from the First Secretary and his Parliamentary Secretary today. When my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) raised this point, they nodded their determination that all investment should be recouped within three years. What sort of investment pays 33 per cent per annum? What investment can do that after paying taxes?

Photo of Major Sir Henry D'Avigdor-Goldsmid Major Sir Henry D'Avigdor-Goldsmid , Walsall South

My hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) is an expert in these matters. It would be very much more honourable for the Chancellor to say, "I have decided to stop investment by companies in the sterling area". If he had said that I wonder what sort of crisis of confidence he would have had to face. The sterling area balances are up. The sterling area is free to take them away at any time. It is always understood that private capital and Government money is available for investment in the sterling area in suitable circumstances. If this is no longer to be the case, I cannot believe that the Australian Government, however well-intentioned, will keep the sort of sterling balances with us that they have today. What good is that money to them?

I should like to conclude by saying what pleasure I have in seeing sitting on the Front Bench three of my hon. Friends, two of whom have not been in the House 18 months, yet they are in this prominent position in these debates. I look forward to hearing from them and also from their charming companion, my hon. Friend the Member for Finchley (Mrs. Thatcher).

8.45 p.m.

Photo of Mr Alex Lyon Mr Alex Lyon , City of York

The hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) will forgive me, I hope, if I do not follow him in his argument. By one of the curious conventions of the Committee and the House, where, according to the Leader of the House, I shall speak on only two or three occasions this Session, on the first occasion I must be so uncontroversial as to be meaningless. I shall eschew the temptation to follow the argument of the hon. Member for Walsall, South, because it seems to me that any discussion of the Selective Employment Tax is bound to be controversial. Therefore, I hope that the Committee will forgive me if I divert from the general line of the argument during the afternoon and evening.

I can spare the Committee a conducted tour of my constituency, at any rate. There must be few people in the House or without who have not at some stage in their lives been round my constituency. York is justly proclaimed as the second city in the land, and we in the constituency like to regard it as the first city in the land. Indeed, it enhances my trepidation in making this maiden speech that I am speaking in the long line of my illustrious predecessors, who go right back to the first Parliament of Simon de Montfort. I was interested to see in the Library of the House that when that Parliament was summoned only two cities were mentioned and one of them was York. The others were simply classed as also-rans, and this is how it should be.

I am intrigued to see that the third Parliament was called to sit at York itself, and it seems to me that we might very well revert to that practice on some occasion. There is a real need for a true devolution of the proceedings, not perhaps of this House, but at any rate of Government, into the regions. One of the places which would amply fit the bill would be York, with its central location in the Yorkshire region, its good transport facilities and, particularly, its excellent amenities.

Although I therefore pass over the conducted tour, I wish to say something about the constituency, because one of its disadvantages is simply that so many people call for the odd afternoon or day and see there a cathedral centre with its historic mediaeval centre and streets and they think that that is all there is to the city. In fact, of course, it is an industrial city of about 100,000 people, with very particular and peculiar problems of its own. I shall be ventilating these in the Chamber from time to time as long as I am here, but I should like to put some of them shortly tonight and to re- late them to the general discussion on the Budget Statement. So much of our problem can be solved only by assistance from central government and from central government funds.

One of the problems we face in my constituency is that there is a low rate of unemployment and a high demand for labour. It is in this context that I, at any rate, make no grumble on behalf of my constituents about the Selective Employment Tax. It will benefit particularly the chocolate industry in my constituency, remembering that this industry has had difficulty in trying to find labour in the surrounding areas. If this tax has the effect of shifting labour from the service to manufacturing industries, it will benefit the chocolate industry in my constituency considerably and it will, therefore, benefit our exports, because it has made a notable contribution to the export drive.

In addition, we have the difficulty that we in York have a few large employers of labour and that the general level of wages is about 6 per cent. below the national average. We therefore urgently require some diversification of industry in the constituency so that there may be more competition between employers of labour, thus pushing up the level of wages.

As the Financial Secretary will know, we in York are particularly interested in the siting of a P.A.Y.E. computer centre for the north-east region, which is within the ambit of the Treasury's approval. If we succeed in getting it sited in York—and I have high hopes that we shall—this will benefit the constituency by raising the general level of wages and by diversifying the opportunity of employment there.

The crucial question in York is transport and traffic. It is inevitable that, with a large rail centre, having within its boundaries the administrative headquarters of the north east region, the people of York should be primarily concerned about the effects of the rundown of the railway system and about the possible alternative policies which are now being prepared by my right hon. Friend the Minister of Transport. If she is successful in attracting back to the railway more freight and passengers, this will have a beneficial effect on the prospects for employment in my constituency.

I come, finally, to the main problem I wish to ventilate; the question of buses in York and in the provinces generally. I will explain briefly how I came to be involved in this problem. We had in York, as in many other provincial areas, an application by the local bus undertaking for an increase in fares. This arose out of the recent award of a 40 hour week to the men and from a sickness pay scheme. The local Labour Party opposed it and I was instructed to appear before the Traffic Commissioners to put the case for the party.

I found, on investigation, this curious state of affairs; that the company would, even after it had paid the increased labour costs, be able to make—and this is directly relevant to today's discussion—a profit of £25,000 a year, but that it wanted to make a profit of £50,000 a year because it had been used to a return of 10 per cent. on its capital. This company, which is owned by British Transport Holdings, has 20,000 buses in its provincial fleet, although it owns in all 27,000 buses. If it had had its way, the company would have put up its fares to double its profits so that that profit could then go to my right hon. Friend the Chancellor and be used to lessen the burden of general taxation. So I looked into the result of this over the nation generally, and I find that the profit accruing to the British Transport Holding Company from this kind of service is about £7 million—in other words, a fleabite in the whole of the tax apparatus in this country. It would not be missed if my right hon. Friend were to say that he will in future do without that profit from buses in the provinces. But the effect upon individuals who use those buses would be tremendous.

When I was considering the case to put before the Traffic Commissioners I found that there were many people whose fare allowance out of their wages would rise by as much as 33⅓, per cent. This enormous increase in their outgoings could only be met by further pressure for wage increases in the constituency. This is directly relevant to the efforts of the First Secretary to try to promote a prices and incomes policy. Why should we take money out of the pocket of the bus passenger with one hand, in order that we can put it back into his pocket as a taxpayer, with the other?

I have written to Mr. Aubrey Jones asking him to consider this matter in his appraisal of the provincial bus services which he is undertaking at the moment, and I raised it with my right hon. Friend the Minister of Transport when she came to speak in the constituency. We benefited much by her appearance there, and it seems that she also has benefited, because I notice that she has been talking about it in the country since. I hope that the Chancellor will consider this matter because it is relevant not only to my constituency but to the country outside, and it would be of direct benefit to many hard-pressed fare-paying passengers. For this reason I suggest that this matter should be taken up at the earliest opportunity.

I am grateful to the Committee for bearing with me for these few moments. I trust that I have not wasted my time in speaking and that I have not spoken for too long. I notice that it is a tendency which grows on one after being here for some time.

Hon. Members:

Hear, hear.

8.58 p.m.

Photo of Mr John Biffen Mr John Biffen , Oswestry

It is my very pleasant duty to congratulate the hon. Member for York (Mr. Alexander W. Lyon) on his maiden speech and, in particular, to congratulate him on his acute observation that brief speeches are extraordinarily welcome in the House, although I must confess that it is a rule about which one is prepared more to generalise on than to particularise in one's own instance. The hon. Member spoke with an engaging charm. As he rightly said, he set aside controversy, but I am sure we all look forward to hearing future speeches from the hon. Gentleman when he will marry charm with controversy.

The hon. Gentleman's speech reminded me in a sense of my own maiden speech way back early in 1962. I recall that thereafter I sat in silent contemplation on one of the benches opposite, and heard a succession of eloquent speeches from people such as the Home Secretary, the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins), the Secretary of State for Education and Science, and a number of other spokesmen no less eloquent from the Labour Party, arguing that the strategy which Labour had for the solution of our economic difficulties lay in the rapid expansion of the economy. They argued that this remedy could be applied even if we were in balance of payments difficulties. Indeed, it was often argued that it was the futility and the timidity of the Conservative Party which led them to apply policies of restraint whenever confronted with a balance of payments situation. One of such tender years and experience as myself might, therefore, have been forgiven some surprise at the lack of enthusiasm with which the Labour Party tackled the economic inheritance in 1964, saying that, despite all that had been said hitherto, it was nevertheless reverting to the somewhat traditional methods of setting about it.

The more I meditate on these matters, the more convinced I am that it is a perfectly fair analysis to say that the Labour Party has argued that greater and more detailed economic planning would itself produce more rapid economic growth. That analysis has remained true today. It was reinforced only last week in the speech of the Minister of Technology, when he said: The basic decision which the country took in October. 1964 … was … to endorse instead a new and radical policy of selective intervention."—[OFFICIAL REPORT, 25th April, 1966; Vol. 727, c. 383.] The right hon. Gentleman is undoubtedly right in arguing that this is a characteristic of the Labour Government. We saw it in the Queen's Speech. We saw it in the continuing commitment to an incomes policy and to a National Plan. We have seen it in arguments for a Selective Employment Tax, and we have heard it reinforced from the back benches opposite in calls from the hon. Members for Ashton-under-Lyne (Mr. Sheldon) and Heywood and Royton (Mr. Barnett) for import quotas.

My first observation on the argument that a Labour Government would produce more rapid and steady economic growth is to point out that it is not happening. This is the first simple but reasonably demonstrable observation. In fairness to hon. Members opposite, I take an area which is usually presented as being favourable to the Government's case, that of exports. We are often told, "Ah, but there has been a very significant rise in exports over the last year or so". This is true of export despatches, but what would be much more valid and helpful to know is what is happening to export orders. This is what will be reflected in our economic performance during the latter half of this year and next year, but we have no evidence. I am not blaming the First Secretary of State or the Government statistical service, because, by the very nature of things, these figures are difficult to come by. But the Government have published one figure which may help us to have some idea of what is happening on the export order front.

In the Board of Trade Journal, Vol. 190, published on 29th April, we are given some estimates of the volume of export orders and despatches for the engineering industry, which probably covers about 25 per cent. of our total exports. I say all this to put the matter in perspective and not in any sense to be accused of "knocking" Britain or our export performance. But the fact is that, comparing the index of export orders for 1965 against that for 1964, there is a fall in engineering export orders of about 4 per cent.

There is one other export order figure published, this time with rather more confidence because it is put in value terms and not as a volume index, and that is the one for machine tools. I was told from that Despatch Box yesterday that export orders for the machine tool industry for the second half of 1965 are something like 16 per cent. lower than for the second half of 1964. To my mind, this cast considerable doubt upon the extent to which we are booking export orders in anything like sufficient quantity.

The second and much more serious accusation against the Government, maintaining the observation that the economy is not expanding, as promised, arises from the Presumed overall growth of the economy. We know from the Preliminary Estimates of National Income that in 1965 the gross domestic product rose by rather less than 2½ per cent. This, of course, is well below whatever has been promised in the National Plan. But what would be interesting to know is the expected growth of the gross domestic product this year. On 10th February, the First Secretary of State was asked a question on this, and he then said: It would not be appropriate for me to forecast the expected increase during 1966."—[OFFICIAL REPORT, 10th February, 1966; Vol. 724, c. 602.] The right hon. Gentleman belongs to what I would call the Pentecostal school in economics and he is not normally averse to talking of the future and where we are going. I remember his classic words on the publication of the National Plan. "At last", he said, "we now know where we are going". All we want to know—it is a fairly simple request—is by what amount he expects the gross domestic product to increase in 1966. We have had no indication whatever from any authoritative Government source of what they think that increase will be.

But others are not necessarily so coy. We hear about the "Gnomes of Zurich," but my particular gnome comes from the Mid-West of the United States, a Mr. Bentley J. McCloud, senior vice-president of the First National Bank of Chicago. I quote from the Financial Times:A leading U.S. banker has forecast that Britain's gross national product may rise by only 1.5 per cent. this year. That is a depressingly low figure, and I for one would not claim competence either to support or contest it. But at least we might expect from the First Secretary of State or whoever is to answer at some stage what the Government think the increase in the gross domestic product will be. Of one thing I am quite sure—it will not fulfil the expectations which might have been raised by confident Labour talk in 1962-63 and the expectations which might have been raised by the publication of the National Plan.

My second observation is that the failure of the economy to expand as we had been led to believe it would under treatment from a Labour Government is being tactfully ignored by the Government whenever they feel it suitable so to do. For example, there were two vital figures which were linked to the growth of 3.8 per cent. in the gross domestic product, which was the key figure in the National Plan, and those two figures which flowed from that central judgment was an incomes policy norm of 3 per cent. to 3½ per cent. and a public expenditure rate of increase of 4½ per cent. One is entitled to come back to this argument, because only this afternoon the First Secretary said that the National Plan remains the central core of the Government's policy. I took that remark down, and I think that it is a fair representation of what he said.

What we want to know is, will either of those figures, the incomes policy norm or the public expenditure increase, be revised in the light of the failure of the economy to grow at anything like the rate suggested in the National Plan? Will the First Secretary of State still go round on his campaign for the incomes policy using a norm which has been totally invalidated by performance in the economy and add yet one further nonsense to the compound of nonsense in that policy?

More serious in the context of the debate upon the Budget is the trend in public expenditure. We are told in Command Paper 2915, Public Expenditure: Planning and Control, paragraph 70, that it might be slightly less than 4¼ per cent. On the figures which have so far been made available it looks as though this probably will be so, but not all the figures have yet been released. Only this afternoon we had the announcement on doctors' pay—I am not quarrelling about the decision—which must necessarily cast a great deal of doubt upon what might be the outcome of public expenditure during the coming year. One thing which is quite certain is that whatever may be the behaviour of the economy, inexorably public expenditure will go the way that has been forecast in the National Plan, quite independent of everything else.

This leads me to my third observation. If public expenditure continues at that rate it must mean higher taxation. A great deal of our discussion yesterday and this afternoon has been in terms of the increase in taxation as it affected the struggle for the balance of payments. This is a valuable consideration, but there are other and, to my mind, equally important considerations, one of which is that we need this increase in taxation to sustain the level of public expenditure on which the Government have set course.

To my mind high taxation is the most visible and ultimately the most hurtful manifestation of the philosophy that the State is so much better at doing things than are individual citizens, whether they are consumers or business men. It seemed to me that nothing had greater validity than the assertion by my right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) that there must be a new attack on Government expenditure.

The area of Government expenditure which I think we need to scrutinise with the greatest care and the greatest scepticism is this growing welfare state for industry, which we have seen gradually evolve over the last 18 months, with the investment incentives, the Selective Employment Tax with its remission to manufacturing industry, the Industrial Reorganisation Corporation and the procurement activities of the Ministry of Technology. All these are adding up to a sizeable element of public expenditure extracted from industry and redirected to industry by Government on the philosophy that the Government know best and that by so reacting on industry they can produce a higher and more sustained rate of growth in the economy. In my view this Whitehall attitude is totally alien to what I believe is necessary in the economy, and one thing is quite certain—it will be a very expensive process.

The alternative, as I see it, must be to restrict the activities, the ambitions and the assumed responsibilities of Government, and I believe that this Parliament will give the Conservative Party an opportunity to deploy, to argue and to reassert the case for that alternative.

9.16 p.m.

Photo of Mr Alf Morris Mr Alf Morris , Manchester Wythenshawe

It is not my intention to follow the hon. Member for Oswestry (Mr. Biffen) in his argument, except to say that he is, of course, a strong opponent of any kind of prices and incomes policy. He is also opposed to the whole idea of economic planning. But at least he is a very honest and straightforward opponent of such policies and at least we must honour him for that.

I think it was the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) during his time as Chancellor of the Exchequer who first prompted me to think about the logic of having more than one Budget a year. I remember speculating about the dates of Conservative Budgets and the way in which there was always one before Royal Ascot and one afterwards. Whatever the reasons for their choice of dates, it is not, in my view, wrong that there should be more than one Budget speech a year. Indeed, I hope that by the end of this Parliament we shall have cast away the false drama of the ritual that the Chancellor performed yesterday and will fit Budget speeches into a continuous process of purposive economic planning.

From the manner in which my right hon. Friend has comported himself, and the signs we have already seen of his willingness to cut through traditionalism, I am sure that he himself is not unsympathetic to this view. He has, of course, confounded those who took part in the psuedo-debate about how deflationary the Budget would have to be. One had scarcely ever heard such gloomy comment before a Budget, and the Jeremiahs have been proved wrong in their lamentations. The only consolation for them is that none of the Jeremiahs was as badly wrong as the hon. Member for Worcestershire, South (Sir G. Nabarro) in his literary jottings in the News of the World.

I want to refer to two of my right hon. Friend's proposals that are specially welcome to me. The first is his decision to initiate further negotiations with the West German Government about relieving Britain of all the drain of foreign exchange caused by the cost of having our troops there. My right hon. Friend the Chief Secretary, who I am pleased to see here, did an excellent job in the Anglo-German negotiations last year and one hopes now to see relief from the whole of the foreign exchange costs of keeping our Forces in Germany. If this is not achieved there will clearly be increasing pressure for the withdrawal of our troops.

It was Robert Lowe, one of the more distinguished vice-presidents of the Council on Education in the nineteenth century, who said that he would see to it that if education were not efficient it would be cheap and if it were not cheap it would be efficient. That approach could very usefully be applied to defence expenditure. Notwithstanding all the stress there has been on cost effectiveness, there is still a widespread feeling that our activities in this field are neither cheap nor efficient. I trust that there will be increasing vigilance to cut unnecessary expenditure on arms.

The second proposal that I applaud is that which provides for Income Tax and Surtax to be imposed on the difference between the price paid by directors for shares and the actual value of the shares at the time. There is considerable controversy about certain other methods used by directors to increase their remuneration.

Many people, including shareholders, have been deeply disquieted by recent disclosures concerning the Garda Trust and the Second Premier Investment Trust. It is hardly surprising that people should have posed the question of whether it makes sense for a public company to raise money at 7½ per cent. and then lend it to a privately-owned investment trust, in which the directors of the public company have a personal interest, at 5 per cent.

This is precisely what British Insulated Callender's Cables did in 1963. In May of that year, the group raised £6·2 million gross by a rights issue of ordinary shares. And in September it invested one-tenth of this sum in 5 per cent. debenture stock of the Garda Trust Company, a privately-owned investment trust of which Sir William McFadzean, Chairman of B.I.C.C., had become a director in the July of that year.

In my view, it is not the business of any public company, certainly not without the approval of its shareholders, to provide long-term finance for a private concern in which its directors have a personal interest affecting their remuneration. Nor is it becoming of any director whose income has benefited enormously from such a manoeuvre to be lecturing trade unionists on the need to put the national interest before their own private interests. It is incidents of this kind that debase any discussion of incomes policy and I know that the Government will keep a close watch on the activities of directors who seek unfair advantage by manoeuvres of the kind to which I have referred.

The Selective Employment Tax, while it says much for the willingness of my right hon. Friend to innovate, raises a number of important questions. In particular. there will be anxiety among those who know industry well about the relevance of this tax to the problem of curing the disease of overtime. One of our principal aims must be to relieve working people of the necessity to work long hours of overtime in order to earn a living wage. In the debate on the Budget Statement of 11th November, 1964, I informed the Committee that workpeople in my constituency were as apprehensive of losing their overtime as they used to be, or their fathers used to be, of losing their jobs. This remains true today.

As I have emphasised previously, he was an acute observer of contemporary industrial life who remarked that overtime is no longer the jam: it is the bread of life for millions of working people in Britain today. I am pleased that it is now more widely recognised that an industrial society based on excessive over-time could soon become a tired, ineffective and, if I may say so, an ugly and demoralised society. One of my fears about the Selective Employment Tax is that it is unlikely to make an early contribution to the solving of this important problem and in certain trades it may indeed exacerbate the problem.

My right hon. Friend does not claim that the new tax is a panacea for all our industrial ills, and he has rightly placed emphasis on the responsibilities of those in industry for tackling many of the industrial problems we confront. I am sure the whole Committee would like both sides of industry to tackle the problem of overtime and that all of us would like them to succeed. There is not much wisdom in saying to a man that he could do in 40 hours what he is now doing in 50 hours. In most cases today his answer would be that he could not live on 40 times his hourly rate of pay. If hon. Members refer to the overtime he works as contrived overtime, I am sure that his answer would be that it is necessary to contrive overtime in order to earn a living wage.

I now come to another serious aspect of informed discussion about this new tax. I refer to its implications for the distributive trades. These trades, by their very nature, are labour intensive. It is much easier to use labour-saving devices in manufacturing industry than it is in the distributive trades.

There are three criticisms of the tax which I should like to make from the standpoint of the distributive trades and, in particular, of the Co-operative movement, with which I am proud to be associated. First, the tax does not appear to discriminate between different types of manufacture: it is not selective enough. Secondly, it assumes that distribution is less desirable or less important than manufacture, whereas the one is essential to the other. Thirdly, it imposes a penalty on the distributive trades while denying them the financial assistance to become more efficient and labour-saving. I must emphasise here that the Co-operative movement has suffered very seriously indeed from the loss of investment incentives.

Photo of Mr Alf Morris Mr Alf Morris , Manchester Wythenshawe

It is no good hon. Members opposite seeking to make petty points out of a serious matter of this kind.

Photo of Sir Douglas Glover Sir Douglas Glover , Ormskirk

We agree with the hon. Gentleman.

Photo of Mr Alf Morris Mr Alf Morris , Manchester Wythenshawe

The Co-operative movement stands to lose some £11 million from this Selective Employment Tax and it will find this a very difficult figure to meet. One cannot say that the Co-operative movement has not been prepared to save labour. Over the past six years, the labour force of the retail co-operative societies has declined by 15 per cent. It has declined steadily year by year. I hope that some consideration will be given to the problems of the movement as we consider the tax in more detail.

I say that because I regard the British Co-operative movement as one of our great agencies for social change and social ownership in this country. I believe that hon. Members will agree with me that the British Co-operative movement has a great tradition of service behind it and that it deserves a great future. I hope, therefore, that we can have some assurance that the effect of this tax on the movement will be seriously re-considered.

Finally, I hope that the Finance Bill will be published very soon. This may seem masochistic in view of our experience with the last, but I hope that we shall have the Finance Bill very soon so that we can see these proposals in far more detail, and I hope to see that there has been some acknowledgement of the points made in this Committee on behalf of the Co-operative movement.

9.28 p.m.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

This has been a strange Budget and in some respects it has been a strange debate. As the debate has gone on, it has been apparent that the speeches from Government back benchers have become progressively more and more critical of the proposals of the Chancellor of the Exchequer, so that we finally had the hon. Member for Manchester, Wythenshawe (Mr. Alfred Morris) devoting the last half of his powerful speech to a sustained attack on not one, but several measures of Government policy which he regarded, in my view quite rightly, as harmful to the economy.

We have also had a number of maiden speeches and, if I may do so without presumption, I should like to congratulate the hon. Members concerned. The hon. Member for Aberdeen, South (Mr. Dewar) spoke with extreme fluency and criticised the Selective Employment Tax which, he said, would be very unpopular in his constituency. I hope that it will. The hon. Member for Portsmouth, West (Mr. Judd) referred to his constituency. I was particularly pleased to hear from the hon. Member for Consett (Mr. David Watkins) and I enjoyed his graphic description of his first trip down a coal mine in that constituency. I have always felt that the market place in Consett was one of the coldest places in the world and on a date in mid-March, when the wind was blowing straight off the Polar Cap, I did my best to make sure that the hon. Gentleman was not returned to the House of Commons.

The hon. Member for York (Mr. Alexander W. Lyon) chose, very wisely, a Budget debate in which to make his maiden speech. I was reminded that York was the site of many of the original social surveys on which a great deal of early economic thinking was based. I should particularly like to congratulate my hon. Friend the Member for St. Ives (Mr. Nott) who made a most informed and valuable contribution to the debate. It was particularly interesting to hear that he was a colleague of the very distinguished gentleman who had been chosen to be Vice-Chairman and Managing Director of the Industrial Reorganisation Corporation. I should like to take this opportunity of saying on behalf of my hon. and right hon. Friends how much we welcome the list of distinguished businessmen whom the First Secretary has been able to persuade to join the Board of that Corporation.

I should like to add that when we were in office it was a perfectly normal and regular thing for trade unionists, and others who certainly did not share our political views, to be invited—and they readily accepted—to join all sorts of boards, commissions and corporations, and no one suggested that by doing so they were agreeing with everything, or indeed anything, on which the Government were then engaged. The contrast with the fuss that is made on the other side of the House because they happen to get a few businessmen to join one of their corporations is very marked. We welcome this list and we wish these men well. The Government have, as my hon. Friend the Member for St. Ives said, a need of sound financial advice. The example he gave of what appears to be the recent mishandling of one transaction certainly points to that.

This has been a strange Budget. After all the speculation and all the conflicting advice, after all the apparently contradictory indications of recent weeks, after all the gloomy warnings of the risk of runaway inflation at home, of a deteriorating balance of payments overseas, the Budget seems to have left everyone, as one newspaper said this morning, "mildly stunned". I have sensed that this atmosphere has somewhat coloured our debate. Some people, inside and outside of the Committee, have been deeply confused by the Chancellor's proposals. The morning papers make this very clear.

A good many commentators, when asked by the Press for their comments on the Budget, flatly refused to give them, saying that they must have much more time to study it. For instance the Confederation of British Industry was extremely non-committal and would require much more study before opinion could be formed. One commentator, the President of the National Union of Small Shopkeepers, who, one might have thought, could have expressed some view upon the new tax, contented himself with saying that he welcomed the Chancellor's proposal to abolish the licence to sell postage stamps.

The debate has shown that the Budget poses many more questions than it answers. In the face of this it was surprising to read in HANSARD this morning, for such was the turmoil at the end of the Chancellor's speech that it was impossible to hear everything he was saying, that he said at the conclusion of his speech: & the message of this Budget is clear and unambiguous."—[OFFICIAL REPORT, 3rd May. 1966; Vol. 727, c. 1460.] I must say that whatever else it is, it is certainly not that.

One must give credit where it is due, firstly for the removal of two major uncertainties, which we welcome for that fact alone. In the first place the future of the surcharge now appears to be tolerably clear. In the second place the rate of Corporation Tax is now fixed and known.

As has been made clear by my right hon. Friend the Leader of the Opposition and my right hon. Friend the Member for Enfield, West (Mr. lain Macleod) that we welcome the announcement that the surcharge is to be allowed to lapse next November. There is no doubt that it has had the effect of putting up industrial costs in this country, for, despite the lengthy debates we had at the beginning of the last Parliament, many of the products on which the surcharge was levied were industrial intermediates, raw materials in the sense that they were raw materials of industry in this country. The removal of the surcharge will help industry in that way.

But, worse than that, the surcharge infuriated our trading partners, even to the state of a mild case of incendiarism. It had the effect—this is its most severe criticism—of substantially reducing competition which our own industrialists should face in this country. Whatever the Government might have said about its intention, the effect of the surcharge was to operate as a protective duty. To that extent, for as long as it has been on—and it will be on for most of the rest of this year—it has been operating to defeat the Government's intention that industry should become more efficient. Anybody who talks to industrialists making products on which if exported the surcharge is levied must recognise that they regard it, in effect if not in intention, as a protective duty.

Welcome though the decision is that the surcharge should be allowed to lapse, has the Chancellor of the Exchequer really reckoned what the effect of his long early warning will be on imports? It may well be that he is looking forward to a substantial diminution in imports over the next few months—a sort of diminuendo as the date on which the surcharge is due to come off approaches. But what will be the effect the minute it has come off? On the last occasion that it was reduced, from 15 to 10 per cent., there was a substantial reduction in imports for the few weeks beforehand and the goods piled up at the docks, causing great congestion. There must be a grave risk that this will happen to a greater extent, partly because the surcharge will be, we hope, coming to an end for good, partly because the reduction will be double—10 per cent. and not 5 per cent.—and partly because of the very early warning. In addition, the Christmas trade, the tail end of which will still be in the docks in November, is likely to cause grave disruption of the handling of goods at the docks. I hope that the Government will give very careful thought to ways in which they can even out the flow in order to avoid this trouble.

I come now to the Corporation Tax. While the fixing of the rate will end the uncertainty, which has been very damaging over the last year—and the Government should be well aware of that—40 per cent. is depressingly high. The right hon. Member for Orkney and Shetland (Mr. Grimond) made this point very forcefully. We welcomed his support. The hon. Member for Heywood and Royton (Mr. Barnett) lent his support, as on so many other occasions, when he indicated that this was a high rate.

Photo of Mr Joel Barnett Mr Joel Barnett , Heywood and Royton

I was making the point—and I am sure that the hon. Gentleman would not want to do me an injustice—that it represents an increase. But I went on to say that hon. Members opposite should be fair and recognise that dividends should also make a contribution to the incomes and prices policy.

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I apologise to the hon. Gentleman if I misinterpreted his remarks. I wrote down the word "high", and I fancy that he must have said it at some stage, but I accept his explanation entirely. It represents an increase, and one of the criticisms which my right hon. Friend the Member for Enfield, West made, and which I hope the Chief Secretary will answer, is that we do not know how much the increase is because it is impossible to divine it from the Financial Statement.

The rate of 40 per cent. will cause increasing dismay among those in industry as they realise what the effect will be. At the moment the dismay is muted, because industrialists were led to believe that there was a chance that it would be 42½ per cent. Therefore, there is temporary relief that the rate is not as high as that. But 40 per cent. is high and it will certainly discourage investment; it must have this effect.

After all, we had these arguments nearly 12 months ago, but I wonder whether the Government even now realise the effect of a Corporation Tax at as high a rate as this, or, indeed, the whole impact that the new Corporation Tax system must have on investment. If the calculations are done entirely on a pre-tax basis, the new system does not make any difference. If tax is not taken into account, then it does not make any difference, or it does not appear to make any difference. If, on the other hand, as more and more companies are doing, advanced, sophisticated methods of quantifying returns are employed—discounted cash flow, or other techniques—it is at once apparent that the change to the new system has made a substantial difference to the relative attractiveness of investment projects. There is no doubt about that at all.

In one company where I have studied the calculations which the company does on a computer using discounted cash flow, the effect of the 40 per cent. Corporation Tax rate, the change from the pre-Corporation Tax to the new, has meant that the company has had to increase the required rate of return element in the calculations from 10 per cent. to 14 per cent. The Parliamentary Secretary to the Ministry of Power was good enough to show me another case. We entirely agreed on this. He was considering a case where the write-off period was rather longer, where the increase in the required rate of return was from 7 per cent. to 10½ per cent. On D.C.F. calculations those are very substantial increases indeed, and are entirely due to the change and the new system of Corporation Tax, coupled with a 40 per cent. rate.

Some attempts have been made at giving answers to this.

Photo of Mr Jack Diamond Mr Jack Diamond , Gloucester

The hon. Gentleman says that these are due partly to the change in the system as well as to the increase in the rate. Is it now the Opposition's official view that they do not believe in the Corporation Tax?

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

I should have thought that the Chief Secretary had sat through our debates long enough last year to realise that we intensely dislike this Corporation Tax. The answers which have been put up to this are these. The first answer is that, although the investment allowances were devalued, the Government have now given us the investment grants. I should have thought that this has now become a pretty tatty answer, because it has become apparent that it is only industrial companies in manufacturing industry which are in development areas and not in development districts that stand to gain anything substantial out of the new grants. Almost everybody else is worse off.

Another answer has been to say, "Companies have it in their own hands. They can reduce that required rate of return figure by distributing a lower proportion of their profits and reduce their dividends". That answer entirely fails to understand how public companies, often with hundreds of thousands of shareholders, must conduct their affairs. It is totally impracticable for them, while they are continuing to make profits on, one hopes, an increasing scale representing the increasing capital in the business, to reduce their dividends. They have a duty to their shareholders, many of which are important institutions representing tens of thousands, if not millions, of small investors or insurers. They must maintain their dividends if they are to ensure the new capital they need.

Above all, it is certainly no answer, as might be suggested, to say that manufacturing industry will get the premium on the Selective Employment Tax. Some rather interesting figures were published in the Press this morning—the right hon. Member for Orkney and Shetland referred to one of them—showing just how little the premium is worth to certain big manufacturing companies. The example was given of I.C.I., to which the premium will be worth less than £2 million a year—about £1,800,000; whereas the difference between a 35 per cent. and 40 per cent. Corporation Tax represents about £4 million a year.

Another more extreme example, one which was mentioned by the right hon. Member for Orkney and Shetland, was that on a gross profit of about £45 million the difference between a 40 per cent. and a 35 per cent. rate of Corporation Tax represents £2¼ million. The amount of the premium which that company can expect to recover under the Selective Employment Tax is only £315,000, or just over one-eighth of the extra tax paid because the Corporation Tax is at a rate of 40 per cent. and not 35 per cent. So that is clearly no answer at all. I should add that none of these figures takes account of any extra costs which the premium is intended to offset.

The 40 per cent. is a disappointing—indeed, a depressingly high—level of Corporation Tax and will certainly inhibit investment. This is really one more nail in the First Secretary's coffin. I should, perhaps, hasten to add, not his own coffin, but the coffin in which the National Plan, which was so very powerfully attacked by my hon. Friend the Member for Oswestry (Mr. Biffen), must now lie. That Plan requires a 7 per cent. annual increase in manufacturing investment—every year from 1964 to 1970—if the target is to be achieved: 7 per cent. annual increase in real terms.

I would agree with those, including a number of hon. Members who have spoken in this debate, who have expressed grave disappointment at the increase in the level of investment last year. It was very substantially less than that in 1964, and, of course, the prognosis, the forecast, this year, 1966, is even more depressing, for it appears that there is to be no increase—not only not a 7 per cent. increase, but no increase at all—in industrial investment. The Board of Trade's own survey carried out last November showed that, and it was reinforced by a survey which the C.B.I. published in February, which showed quite clearly that "capital investment in plant and machinery is not expected to change substantially over the next 12 months."

The First Secretary was unwise enough to repeat again this afternoon that the Plan was a blueprint—a blueprint for action. He was directly contradicted by his hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) who said it was not a blueprint. I am bound to say that I must agree with the hon. Member rather than the right hon. Gentleman, because if the First Secretary really believes it is a blueprint he is rather like the man who proudly announces to his friends that in the next two years he is going to have three children, and announces it when he knows his wife is not immediately expecting a child and when there is no history of twins in the family. I am bound to say that the Chancellor has now finally put paid to any hopes that the right hon. Gentleman may have had of achieving his target. He seems to have called him up and sent him overseas for two years.

Having dealt with the certainties, and welcomed the news about the surcharge, and expressed disappointment with the Corporation Tax, let me turn to some areas of uncertainty and doubt and, indeed, of confusion. First, I should like to say a few words about the balance of payments. We are, I believe, inclined from time to time—and this has certainly been so in the last two or three years—to fall into the error of being too sensitive to the month-to-month or even quarter-to-quarter fluctuations in the balance of payments. I think we run the risk of turning ourselves into economic hypochondriacs. It does no good at all.

This point was very forcefully put the other day by Mr. John Davies, Director-General of the C.B.I., who, talking in Copenhagen, said: Britain persists in talking herself into an unnecessary state of crisis over external exchange problems. She is rather like wealthy men who give themselves the appearance of people in whom one should have little confidence. He went on: Does anybody seriously imagine that Britain, backed by the immense strength of its overseas investment, is really on the rocks? What nonsense it all is—cooked up from a state of affairs which no self-respecting company would tolerate for five minutes. There is a great deal more that Mr. John Davies said very much to the point, and which could well be laid at the door of hon. Members opposite who have so pictured it ever since they came into office in 1964.

While I agree we should not get all steamed up about the month-to-month fluctuations I believe that it is right that we should keep alert to the trend. My right hon. Friend the Leader of the Opposition referred yesterday to the rapid changes of forecasts which the Chancellor has been putting out in recent months as to his expectations whether we should be in balance at the end of this year or not. As he said yesterday, he seemed quite content with the trend. It is a fact that no one now seriously expects us to have struck the balance in the balance of payments by this year.

To look a little further ahead, what about 1967? In this connection perhaps I might draw the attention of the Committee to an important article in the Statist of 22nd April which drew attenttion to what appeared to be a marked connection between the level of increase in wages and the level of exports. The article illustrated the theme with a telling chart which showed how, over the last twelve years, the growth of our exports seems to have varied inversely with the rate of increase in earnings, though after a lag of about two years. If earnings rise very rapidly, then two years later one can expect the growth of exports to fall. If earnings remain stable, then two years later there follows a very encouraging surge in exports. This appears to have been the pattern over the last twelve years and it concludes that marked changes in hourly wage earnings appear to have a decisive effect upon the percentage growth in exports about one to two years later. If one is to take the figures for earnings from the Economic Report—and here I am mindful of the remarks of the hon. Member for Ashton-under-Lyne who accused us on this side of the House of fiddling the figures—it is plain to see that the increase in 1965 over 1964 in average hourly wage earnings—this is on page 24, if the hon. Gentleman wants to check it—was 10·1 per cent., and in giving his figure, which he suggested should be much lower, he seemed to be indulging in the remarkable gambit of deflating this increase in earnings by reference to the Cost of Living Index, which seems an extraordinary way of dealing with it.

The annual increase of 10 per cent. last year, which shows no sign of slackening off, appears to have the gravest possible implications for our exports in 1967. As the Report says: Last year was one in which our unit labour costs increased at above a trend rate", which I should have thought was the understatement of the year. Stagnant output and soaring wage costs create a very serious situation indeed, and, as I understood the First Secretary, he did not seriously deny this.

What is the Chancellor's expectation of exports in 1967 and 1968? Is he banking on the present fairly encouraging trend continuing? My hon. Friend the Member for Oswestry also sounded a warning note. I ask that because on the figures in the Statist article there is no doubt that the increase which we had this year was due to the stable and encouraging conditions which existed two years ago, and by 1967 we may find that that trend has been reversed.

That brings me, inevitably, to the incomes policy, about which I have one or two comments to make. Apparently this is still to be the main bastion against inflation. It is still intended to be the main weapon which the Government are trying to use to keep the economy in check. The right hon. Gentleman may have had some success with prices, but he has had none, or virtually none, with earnings, with the result that increased demand has been injected into the economy, and the Chancellor has had to come along with his Budget and take it out again. The First Secretary lets it go in, and the Chancellor takes it out.

As I saw the First Secretary sitting beside the Chancellor while he was making his Budget Speech yesterday afternoon, I could not help feeling that he, at any rate, was conscious that the measure of deflation which the Chancellor had to introduce was to some extent due to the failure of the incomes policy. Indeed, he may still be smarting under the unkindest cut of all, in that the President of U.S.D.A.W., Mr. Hanes, justified his union's decision to back the incomes policy by saying it was splendid, and they had had the biggest increase they had ever had in the history of the union.

I can tell my hon. Friends that all that is to be changed. An entirely new broom is to come in to deal with this whole problem. The First Secretary has at last decided to recruit an expert on prices and incomes to the Department of Economic Affairs. On 27th April, last Wednesday, the following advertisement appeared in the Financial Times: Prices and Incomes Policy. A new appointment in The Department of Economic Affairs … concerned primarily with the further development of prices and incomes policy. This paragon will no doubt be a welcome reinforcement to the First Secretary's armoury, but it comes just at a time when the day-to-day responsibility for the prices and incomes policy has been entrusted to other Ministers.

On a more serious note, I want to make one observation, which picks up the point made this afternoon about unemployment by my right hon. Friend the Member for Enfield, West. With an unemployment level as low as 1·2 per cent. or 1·3 per cent. it is idle to expect any sort of incomes policy to keep prices and wages in check. It just cannot be done, especially when one remembers that according to the Minister of Labour Survey a substantial number of the roughly 300,000 registered unemployed are virtually unemployable, for personal reasons—people who cannot be expected to do any job. This means that we are trying to run our economy on a frictional unemployment level of about 0·5 per cent. I put it to the First Secretary: how can be expect his incomes policy to work in those circumstances?—because if he does, he is doomed to failure.

Photo of Mr James Tinn Mr James Tinn , Cleveland

Would the hon. Member care to say what level of unemployment he would recommend?

Photo of Mr Patrick Jenkin Mr Patrick Jenkin , Wanstead and Woodford

The hon. Member for Cleveland (Mr. Tinn) should have been here this afternoon, when he would have heard my right hon. Friend suggest that what we want is a new 1944 White Paper in order to try to get a more realistic definition of full employment. I say that on our present definition we cannot hope for an incomes policy to succeed with the level of unemployment on which we have been trying to run it.

The Selective Employment Tax has been exhaustively discussed and powerfully criticised by hon. Members on both sides of the Committee. There are many other points which could be made and which will no doubt be made in this debate.

My last point concerns the new restrictions on overseas investment in the sterling area. This point was covered by my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), whom I thank for his compliment to myself and my hon. Friends on the Front Bench. I can understand the logic of the Chancellor's move, but I believe that it is misguided. The study that is being carried out will show that the return on foreign investment is vastly greater than anything on which the Chancellor based his decision last year and his recommendations this year. The real return has been considerably underestimated.

This attitude to overseas investment is indicative of a much wider and deeper issue of principle between the two sides of the Committee. It affects not only our attitude to overseas investment but to the home economy. Are we to develop into a closed, self-sufficient, insulated, inward-looking economy, restricting all investment overseas, hostile to foreign investment in this country, casting admonitory eyes at overseas travellers—those who holiday abroad—keeping high tariffs against imports, and trying increasingly to plan, manipulate and manage our own economy, insulated from the economic influences in the rest of the world—or are we to become an outward-looking, competitive economy, welcoming the free flow of goods and the flow of capital round the world, and opening our ports to trade from the rest of the world, seeking to sell our products in fair and free competition with the rest of the world?

That is the choice, and that is the real issue between the two sides of the Committee, though that may be a matter of degree rather than of principle. We have had welcome signs from the Government in the Budget. They will scrap the surcharge and make a determined effort to join the Common Market. These are welcome signs. But are they conclusive? Are they really going to espouse a liberal philosophy? The key is the Government's long term attitude to foreign investment. From the Chancellor we would like to know whether the restrictions on foreign investment and the relief from double taxation are intended to be transitional and temporary measures, or permanent measures, because it is on his answer to those question that the issue will be truly tested.

It being Ten o'clock, The CHAIRMAN, left the Chair to report Progress and ask leave to sit again.

Committee report Progress; to sit again Tomorrow.