This debate, following on that of yesterday, takes place against the background of momentous international events, and I want to begin by briefly relating the health of our economy at home to our international views. I make two brief comments upon the Government's attitude towards the future of Southern Rhodesia. First, I very much hope that my right hon. Friend the Prime Minister, in his negotiations with Mr. Smith, will remember that political principle must in every case take precedence over economic expediency, and, secondly, that whilst the effect of British economic sanctions against Rhodesia is a factor in our economic problems, and any intensification of these sanctions will be an additional factor in the months ahead, they must not be exaggerated. They are significant only when seen against the background of a "phoney" balance of payments crisis.
We are debating economic affairs tonight in a year which has witnessed our ninth balance of payments crisis since 1947; this is our fourth attempt since 1955 to resolve the crisis by deflation. It did not work in 1955 under Mr. Butler—as he then was—and it did not work in 1957 under Peter Thorneycroft. It did not work in 1961 under the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd). In each case we found ourselves at the end of the day worse off than any other advanced industrial country in terms of production, productivity, investment, exports and prices. When expansion was resumed we found ourselves comparatively weaker than before.
When shall we learn our lesson? We have tried the solution not once, not twice, but three times in recent years under the Administrations of right hon. and hon. Gentlemen opposite. I see no reason to believe that deflation under a Labour Government will produce a significantly different result.
Hence the need to look for new solutions to our economic problems. These solutions are outlined in the Amendment which stands in the names of myself and 45 of my hon. Friends. It is a moderate, realistic and constructive alternative to the present course of policy which is being carried out by the Government. It might have been very much more radical. It might have contained demands for public ownership. I hope that in the lifetime of the present Parliament, with its majority of 94, the Government will be encouraged to take further steps along that line by fulfilling their election promise to take the water supply industry into public ownership.
It is argued that our alternatives are not realistic; that they have no immediate bearing on the balance of payments crisis. Let us consider some of the 20th July measures and see how relevant they were to the immediate problem of meeting the requirements of our balance of payments situation.
The restriction on office building, the further restriction on new private commercial developments, and the reduction of £150 million in public sector spending—these three things in themselves may have merits or demerits, but they have no immediate short-term effect on the balance of payments problem. The increased Surtax rates, while welcome to this side of the House, will not be payable before September, 1967.
The Government's steps of 20th July last were, of course, a mixture of short-term and long-term measures. Was the advice given to the Government at that critical juncture sound advice which we can test against the experience of the recent past?
My hon. Friend the Member for Stepney (Mr. Shore), who was formerly Parliamentary Private Secretary to my right hon. Friend the Prime Minister, was in no doubt about the quality of the
advice being served up to previous Governments and the present Government from certain circles. In his stimulating little book "Entitled to Know", he said:
The trouble is that, again and again, in the post-war period the wrong official advice has been supplied. … The advice tendered to successive Chancellors by the Treasury has been abysmally inept, as Britain's stop-go record so clearly illustrates. … A new Government, unhappily, doe not mean a new Civil Service elite. The counsellors of the past decade are, we can be sure, serving up much the same advice to the new Ministers.
In view of the policy of the present Government, there can be no doubt that this analysis is accurate.
Many of my hon. Friends are becoming increasingly critical of the advice being tendered to the Chancellor from high circles not only in the Civil Service, through the Treasury, but in the Bank of England. I go on record as saying that more and more of us demand that the Bank should be held more rigorously to the account of this House in its conduct, and especially in the public pronouncements of leading members of that institution. For we regard their advice to continue with a policy of deflation—a policy that has been carried out in the past and is being carried out now—as a stale, played-out remedy.
I now want to examine some of the basic problems confronting our economy and to put forward solutions in a flexible, almost a pragmatic, way, as one might say. It is argued that this country has a serious balance of payments problem. But the balance of payments problem in 1965 on current deficit was £104 million, after the Government had spent over £500 million abroad, of which about £278 million was the result of Government overseas military spending. To that £104 million must be added £215 million, the balance of long-term capital outflow; containing gross outflow of private investment abroad—when 1965 was allegedly a crisis year—of £312 million.
Against this background, two basic reasons for the balance of payments crisis become obvious. As Mr. Fred Catherwood, Director-General of the National Economic Development Council recently reminded us, one is the heavy expenditure on overseas defence and the outflow of capital. Another is the chronic inadequacy of the rates of new capital formation. For example, this country between 1955 and 1964 invested 12·7 per cent. of the gross national product, excluding new dwellings, in new capital expenditure. Japan spends 21·5 per cent. of her gross national product, Germany 18·4 per cent., Italy 15·6 per cent. and Sweden 17·4 per cent. Thus, ours is one of the lowest figures of any advanced industrial country.
It is riot just that we are spending, in the current financial year, almost £300 million in foreign exchange, maintaining overseas bases from Gibraltar to Hong Kong, which are far in excess of our resources, but rather that defence is a high and rising burden on the economy. This was made clear in chapter 19 of the National Plan which set out the impact of defence on industry:
… at home, the defence effort pre-empts a large part of the productive potential of some of the most important and technologically advanced industrial resources and is a large user of skilled and unskilled manpower.
To be precise, the defence programme takes 7 per cent. of our national output at factor cost. It requires the services of 1¼ million men for manning and equipping. We spend as much on defence as we do on investment in industrial plant and machinery and more than we spend on durable consumer goods. Almost 40 per cent. of our total national research and development expenditure goes on defence, which also employs one in five of all our qualified scientists and technologists. Apart, therefore, from the burden on the foreign exchange, the weight of defence on industry is a major hindrance to economic growth.
We spend 6·7 per cent. of our gross national product on defence. The Chancellor, in his disappointing and complacent speech this afternoon, seemed to regard the level contained in the Defence Review as reasonable. We regard this as highly unsatisfactory and want an early, and a real, significant reduction. The Common Market countries on average spend 4·7 per cent. of their cumulative gross national product on defence. This means that they, vis-à-vis this country, have a bonus each year of about £500 million to £600 million to spend on investment and the modernisation of industry. This obviously must be taken into account in discussing the balance of payments problem.
I want the Armed Forces, by 1970, to number no more than 300,000 men. I want us to have left Malaysia. Singapore, the Persian Gulf and Western Germany and to see our overseas commitments confined to modest garrisons in Hong Kong, Gibraltar and West Berlin. We on this side expect to see defence spending at not more than £1,750 million in 1970, at 1964 prices.
The second aspect of the problem is the outflow of capital. This is, of course, a grave handicap to domestic economic growth. Just over £11,000 million worth of British overseas investments is often described by right hon. and hon. Gentlemen opposite as of a great benefit to this country. It is assuredly a benefit, but the National Plan puts the balance of benefit very well: it said that it yields for Great Britain a return which is on average
… considerably less, from the point of view of the national economy, than the return on home investments.
Clearly, the seed corn does not rest abroad but here at home, and it is here that we have to build it up.
Despite this view in the National Plan, between 1954 and 1964 this country invested £2,700 million abroad, notwithstanding the fact that during that decade we had to thrice deflate the economy to meet short-term balance of payments problems. In 1965, no significant improvement was made, because in that year—again allegedly a crisis year—we exported £312 million of scarce capital abroad. In the first six months of this year, the figures show only a fractional improvement, from £169 million to £167 million, over the first six months of 1965. Indeed, the figures for the second quarter of 1965, at £87 million, were some £18 million higher than the equivalent quarter of 1964. This must stop. These figures are appalling, and I hope that there will be a drastic reduction in the second half of 1966.
The Amendment also proposes that we should liquidate a section of our overseas portfolio investment and has excited some interest. It was mentioned yesterday and today by right hon. and hon. Gentlemen opposite. Perhaps it is not too much to expect a Government statement on this point in the winding up speech tonight. Certainly, it is not enough to dismiss this notion as irresponsible. It has been advanced by Mr. Andrew Schonfield, a noted economist, for the past eight years. It does not mean that we unload £11,000 million of British owned foreign securities tomorrow. We say that some of this portfolio section, totalling £3,600 million at the end of 1964 and which may be considerably higher now, could be sold and turned into foreign exchange.
It is a modest suggestion. We put it to the House that we should start to repay our debts, which total £900 million—a quarter of this figure—from this source. The first payment of our debt is due this year and the remainder over the period to 1970. We say that it is infinitely preferable to realise a quarter of these immense assets which are rapidly appreciating than to indulge in the stale, played-out, moth-eaten policy of deflation at home.
We say that we should decide to pay these debts by acquiring, at the going market price in sterling, some of these securities—I put the figure of £900 million—which our private citizens own abroad, and gradually and selectively we should sell them. This means that we take due regard of prevailing market conditions in the countries where they are held. The Government have shown how simple this can be, for they have recently sold off a few hundred million dollars' worth of American securities.
It has been argued in the debate that this would be destroying a valuable foreign asset. Mr. Schonfield took this up in the Sunday Times on 18th September last when he said:
The reactions to this proposal are predictable—final confession of moral defeat, killing the goose that lays the golden eggs, eating the seed corn. Not a bit of it. The real seed corn is British investment in renovating the physical structure of our own country here at home. It is this which is now being thrown away to pay foreign debts.
It is also worth making the point in passing that between 1962 and 1964 the capital value of these securities appreciated by £1,150 million or £250 million more than our total outstanding international debts. This suggestion should be seriously examined by the Government. I look forward to hearing a considered reply to it tonight. This is where we stand on this question.
There are many other aspects of the present crisis which are dealt with in the Amendment. The First Secretary said to me yesterday that I should pay attention to the fact that in this country the level of unearned income is a determining factor in the level of private investment. That may be true, but there is no necessary correlation between them. The House will remember that, between 1960 and 1964, the amount of money paid out in dividends rose by 60 per cent., which was far and away the highest level in any country of Western Europe and over three times the rate of increase in national productivity.
Despite this, the rate of new net capital formation in this country over the same period was the lowest in Western Europe. There is certainly no necessary relationship between high dividends and high investment. Quite the opposite. Many of the dividends were going abroad during that period. The solution to this problem is to set up a National Investment Board with wide powers over investment in the private sector. This would mean taking supervisory powers over investment, particularly by insurance companies which, as Professor Richard Titmus reminded us, are acting in a socially irresponsible way. Unfortunately I have no time to develop that point in detail tonight.
Among the other suggestions outlined in the Amendment is that we should review the rôle of sterling as an international reserve currency. We regard this as a played-out relic of British imperialism, a factor which has continued from the nineteenth century into the twentieth century. Its rôle is finished. I know that there are serious technical problems to be solved in arriving at a new international currency but we hope that the Government are taking every step to move towards transforming the International Monetary Fund into a new international central bank.
We have suggested measures of income distribution which we hope will not be lost on the Chancellor. I leave the Chief Secretary to the Treasury with this point. A wealth tax, as he is well aware, is a commonplace in Western Europe. There is ample room for one in this country. The Economist in January estimated that 7 per cent. of all taxpayers in the country are responsible for 84 per cent. of the country's wealth and 88 per cent. of the taxpayers possessed slightly over £100 each on average. A wealth tax in Britain of 1 per cent. on estates of £20,000 and above would bring into the Revenue a sum of £175 million. This would be a modest start. Denmark does this at 2½ per cent. at a much lower level, but we could improve on the 1 per cent. on estates of £20,000 and above in later years.
The imperative need in the present situation is to end this policy of deflation with its high and rising level of unemployment. Not only is unemployment creating needless distress to thousands, but in the view of many of us it is shortsighted and most socially undesirable as a way of trying to resolve a problem which could be resolved by other methods. We want to see the Government ending the policy of deflation and embarking now, as a matter of urgency, on planned reflation of the economy.
These measures, taken overall, constitute a constructive alternative to the Government's policy. Of course they assume a change of attitude within the Government. They assume that the Government will stop their present timidity in economic affairs and adopt a new, bold, and much more decisive attitude in the months ahead.