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Orders of the Day — Economic Affairs

Part of the debate – in the House of Commons at 12:00 am on 1st December 1966.

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Photo of Mr Edward Heath Mr Edward Heath , Bexley 12:00 am, 1st December 1966

I beg to move, That this House has no confidence in the economic policies of Her Majesty's Government. I emphasise the words "no confidence" because they are not just Parliamentary, technical words. I believe that they represent the situation accurately. I move the Motion in the name of my right hon. and hon. Friends and myself, but there is no need for me to be partisan about it. What yesterday's debate showed clearly is that this point of view is represented on both sides of the House. There was not a friend to speak up on behalf of the Government yesterday from any of the benches. I have read a great deal of the debate and, with respect to the Chancellor, I heard a considerable amount of it as well.

There are different reasons why Members have no confidence. Some want less control, some want more control, some want deflation to continue, and some want rapid reflation. Whatever the reasons, no one was prepared to speak up on behalf of the Government.

However, everyone wants to know what the Government believe will happen. In that, I believe that we reflect the position in the country, which is undoubtedly worried about the immensely serious situation. Individuals are worried, particularly those who are unemployed and those who fear that unemployment will overtake them. No one, be he businessman or trade unionist, has any confidence in the Government, and I must say frankly that one finds very little more confidence abroad than there is at home.

Let us, then, ask the Government what they believe will happen. So far, they have refused constantly to tell us, whether they be the Prime Minister, the President of the Board of Trade or, yesterday, the Minister of Labour. I hope that the Chancellor of the Exchequer at least will be prepared to give us his view of the future.

It is very strange that, just over a year ago, the Government were prepared to tell us in detail what would happen every moment in the next five years. Now they are not even prepared to tell us what they think will happen in five months. I believe that the Government are giving us less factual information about the situation, or indications of how they see it developing, than any of their predecessors.

That is not the way to restore the confidence of the business community or of people abroad. It is not the way to get the best out of the British people. What the country expects from this debate, and what it has not had so far, is a full and frank description of the position from the Government and how they believe their policies will meet it. What the rest of the world is looking for and waiting for is this, and I believe that it is fundamental to the whole situation. What they want to see is that changes are being made in the structure of the economy which will produce permanent and longterm results.

I am glad to see the Chancellor of the Exchequer nodding about that, because it means that we are in agreement about what is the key to the present situation. They want to see permanent results which will enable us to repay our debts when they are due, to meet the sterling area commitments, and to meet such other overseas commitments as the Government maintain. It is on the results of that that the future of sterling depends. As both sides of the House are agreed about the key to the whole of this, at least we have a criterion by which we can judge the Government's own policies.

From the point of view of restoring confidence, or of showing that these permanent changes are taking place, the Government are their own worst enemies. They have far too great a legacy in all too short a time of wrong forecasts, of unfulfilled undertakings, of faulty psychology and of the failure of their policies for anyone at home or abroad to accept lightly what they say.

The Government must recognise what a blow to confidence it was to find the complete reversal of every previous policy in their measures of 20th July. Whether one regarded their policies as right or wrong, the fact that a Government so recently returned at a General Election should completely and utterly change their policies at a moment's notice in the way that they did has undermined the confidence in any pronouncement which the Government may make, be it by the Prime Minister or the Chancellor.

We had warned what would happen, but the Chancellor repeatedly derided our warnings and from the Prime Minister we heard those famous words, "I see no reason for an increase in unemployment this winter". They must be ringing rather hollowly in the ears of the mounting unemployed. We were told that the National Plan would be carried through. When it came out I described it as "the biggest gimmick yet", and so it has turned out to be. The Government are still proclaiming this Plan and yet they are not prepared to give us a single figure on which they are basing their expenditure or their future policy; and they are not prepared even to carry out their own belief to produce another plan to take its place until the end of next year. How much store can be set by what they say?

We cannot underestimate the blow to confidence of the reversal of these policies. The Government have done very little since to dispel the gloom. The Minister of Labour, who yesterday, came along in his charming, frank, and honest way, and appealed to all and sundry for suggestions and ideas on how to deal with the situation, has not done anything to restore confidence in himself or his colleagues. It is against this background that I want to take a cool, hard look at the present position, and I believe that it can best be done by examining the situation on the balance of payments.

I want to put these figures to the Chancellor, and I hope that he will give us his comments about them. I apologise to the House for giving some statistics, but it is essential if we are to get to the heart of the problem. If we compare 1964 with the latest figures which we have for a full year, which is mid-1965 to mid-1966, we see that there was an improvement in the balance of payments of £463 million. This is a substantial sum. I shall not today go over the arguments which we have had in the past about the 1964 position, but that was an improvement in the balance of payments.

But what happens when we get down to an analysis of the position? We find that about £390 million of that £463 million was due to temporary, short-term fortuitous circumstances. This is very important. The effect of a 3 per cent. improvement in the terms of trade accounts for £150 million. The effect of the limitations on exchange control accounts for another £100 million. The effect of the import surcharge, which was temporary, and which has now been removed, accounts for £100 million at least, and some would say £150 million.

The importance of the figures is that they show that any change in the balance of payments due to fundamental structural alterations is very small indeed. I would put it at a maximum of £70 million out of the improvement in the balance of payments, and if the import surcharge was more effective than the figure I have given it may be less.

That surely points the key to the real problem with which the Chancellor is confronted, because the National Institute forecast, just before the last Budget said that the situation required an improvement due to basic structural alterations of £300 million a year in the balance of payments. This is what was required to meet the situation, and against it one has to offset the fact that over the latest period it is only a small proportion of that. This is really the problem with which the Chancellor has to deal.

I agree with the President of the Board of Trade about the efforts of our manufacturers. I welcome what he has done to encourage them further. I pursued similar policies at the Board of Trade. The right hon. Gentleman has carried them further, and I agree with this, and welcome it, but it does not alter the fact that there is this basic problem of structural changes which are required in the economy to produce this scale of the balance of payments.

Looking back, we can see quite clearly the real failure of the Government from 1964 to 1966. They failed to manage the level of demand in the economy at a level which was in line with what the balance of payments would stand. Of course, the balance of payments has to be taken into account with the degree of confidence in the Government, but their fundamental failure was to manage the level of demand.

I suppose that the best interpretation is that they overestimated the effect of the direct measures which they were taking, and they underestimated the effect of the pressure of demand. We constantly pointed this out to them. We said that they were running an inflationary economy, and that the pressure of demand was too great. The worst interpretation is that they did it for electoral reasons, but, as I am today being non-partisan and non-controversial, I shall give them the benefit of the doubt and say that this was a double failure of judgment.

The crisis came when it was seen that, because of their policy, the balance of payments could not be met by the end of 1966, and they would not, therefore, be able, in 1967, in all probability, to have a surplus on the balance of payments which would enable them to repay the debt. It was recognised that the Government were not achieving their objectives, and as this was recognised in the second quarter of July, the crisis came.

I believe that the vital point in this argument—and I emphasise it—is that there must be a much greater structural change in the economy, and that what has taken place so far is very small. We, and, therefore, the country, must not deceive ourselves that by good monthly figures here or there, or by the confidence of the Chancellor on television, or the President of the Board of Trade here last night, that the problem has been surmounted, or is being surmounted, because I do not believe that that is the case. Has the Chancellor any evidence about the situation which I have described? If he feels that he can contradict it, let him do so, but I do not believe that the figures are controvertible.

The surcharge has been removed. What calculation has the Chancellor made about the impact of this on our balance of payments in the coming year? Has he made any calculation of the consequences of his action in the present deflationary situation? First, there is the question of the distortion as a result of imports being held back, and, secondly, there is the impact in the longer term of the removal of the surcharge.

Can the Chancellor say what is happening to the proportion of imports to total home sales? Can he give us this as an indication of the way imports are likely to move to deal with the balance of payments and the likely movement of exports? Can he also say what is likely to happen to our share of world trade in world exports? Is the decline in any way being stopped or slowed down? This is the second vital equation in trying to foresee the future of the balance of payments.

It is on those fundamental points that we must judge the real trading position; and I emphasise again that it is essential to look at the long-term underlying trends if we are to have a satisfactory basis for policy.

The results of the crisis, in the measures of 20th July, are well known. The Leader of the House, in one of his most carefully prepared statements, said the other day that it would be wrong to transform a carefully calculated cutback into an unplanned crisis of confidence. There was nothing carefully planned about that cutback. It was done at a few days' notice. It was done in panic, and in extreme measure.

The House will probably say that the Government, in the position into which they had got themselves by their miscalculations, had no real alternative if they were to save the £. This was the consequence of their own mismanagement and misjudgment, but what happened was that this unwise deflationary action was added to what the Chancellor had planned, prepared, and carried through the House, the Selective Employment Tax. It is the consequence of the double dose of deflation with which the Government and the country now have to cope, and this is where we want further indications from the Government.

The third thing which the Government did was to impose the freeze. I think that we ought at this stage to look rather carefully at the real purpose of the freeze. Was it deflationary? No, it was not. The freeze was equally on prices as well as on wages. It was not, therefore, a deflationary effect. Was it to enable those in industry to change their attitudes and provide a basis for longterm development of the policies that the Government were pursuing?

It is difficult to believe this, because the Government, obviously, had no idea that they were going to pursue these policies at the freeze. They demonstrated that time and time again, and they still have no idea how they are to pursue them later. What they have done is to damage industrial relations and to make the prospects of voluntary co-operation in the sort of things that we want, such as productivity agreements, less favourable than they were; and the Government were so foolish as to stop productivity agreements during the freeze.

The real reason for the freeze was to appease foreign opinion, and this, too, is now absolutely clear. What was the reason for this? The Government, mistakenly, in my view, had placed such emphasis on the prices and incomes policy of the then First Secretary, as to make it appear to be the be-all and the end-all of their policy. The result was that when it disastrously failed, again as we pointed out during the election, the only way they could cope with the problem, to try to maintain confidence in them, was to impose the squeeze in order to appease foreign opinion. The Government's problem is now to unwind. At the end of the next six months they will, in fact, be facing disaster.

In fairness to the Chancellor of the Exchequer, he always said that the freeze was not necessary. He said that the other measures which were being taken would achieve their end, and, at The Hague, said the freeze was, after all, a bonus. So one can say that he believed in the deflationary measures—a double dose—and that he has never really believed in all the pain and grief, the friction and irritation caused by the freeze. Perhaps the Chancellor might tell the House exactly how much he thinks the freeze has been worth in the balance of payments. The calculations which were published last Sunday indicate that the overall value of the complete freeze has been comparatively small.

Let me turn now to the economic prospects at the moment, in order to come to the policy pursued by the Government. First, the problem of unemployment, which reached 541,000 last month. By purely seasonal increases, unemployment will reach just over 600,000 by February—that is, by purely seasonal increases. Since May unemployment has increased, allowing for the seasonal increase, by 20,000 a month, and this is very steep indeed. If, therefore, this progression continues, added to the seasonal unemployment, the figure may well be up to 650,000 by February. In fact, this is allowing that it will not go on at quite the same rate.

The Prime Minister, usually when confronted with the steepness of the progression, says, "Of course, the figure is far less than November, 1962, or November, 1963". But that is not the right point of comparison. The Prime Minister took his measures on 20th July this year and we are now in November. My right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) took his measures in July, 1961, and the right point of comparison is November, 1961. That is the point in the cycle, because it is five months after the measures were taken.

But, of course, we cannot compare the same stage in the cycle a year ahead. If the Chancellor looks at the figures five months after my right hon. Friend took his action, what will he find? In July, 1961, the figure for unemployment was 258,000 and by November it was 387,000. The right hon. Gentleman took his measures in July this year when unemployment was 264,000, or 5,600 more. Now the figure is 541,000, which is an increase of 154,000 over the similar point of the cycle in 1961.

There are two aspects which have to be considered. The first is that it is now becoming accepted that in the management of economic policy the rate of progression is of the greatest importance. One should then deal with this matter of reflation or deflation with as much gradualness as possible. That is the first thing.

The second point is that, with this steepness of progression, what is to be the position a year ahead? The general view is that we shall not see the peak of the measures which have been taken until the winter of 1967–68. I do not believe, with great respect to the right hon. Gentleman, that anything which he has announced today really will affect that peak, when it comes, either its size or its position. That is the point which I put to him. He must take into account the very steep progression of unemployment which he has created by the double dose of deflation.

It is also extremely interesting that when my right hon. and learned Friend took his measures in November five years ago, sterling stood at 2·81¼. Yesterday, five months after the right hon. Gentleman's measures, the £ stood at below 2·79—it was 2·7815/16. This is also an extremely interesting point about the efficacy of the right hon. Gentleman's measures and the problem with which he has to deal.