Perhaps I might continue. This is not an easy speech.
As regards incentives to investment in industry, whatever the value of tax allowances and grants, and so forth, may be—businessmen always want taxation reduced, but I am talking of incentives intended to produce certain increases in investment, and so forth—there is little evidence that they have much effect compared with the level of profitable demand. In 1963, the right hon. Member for Barnet (Mr. Maudling) increased investment and depreciation allowances and the Opposition have frequently claimed since we have been in power that this led to the subsequent boom. If that is true, it also led, of course, to the balance of payments crisis in 1964.
The point is, did it in fact lead to that boom? No, it did not. By far the greater effect was on home demand created by reductions of personal taxation, plus the substantial increase in public investment. Out of the total tax reduction of that year, estimated at £269 million in the first year, capital allowances were estimated to come to £11 million. They were estimated to rise to £130 million in 1966–67. It was the rise in demand, in this case in home demand, which caused the boom and the subsequent rise in investment, as well as the troubles from which we have suffered ever since.
Even in regional policy, I believe that the much maligned policies of the Board of Trade have been by far the most effective—the I.D.C. policy, the loans and the advance factories. Nevertheless, I welcome the proposals on the selective employment premium which have been tabled for discussion by my right hon. Friends but I hope that, in addition to our discussion and that in industry and throughout the country, full surveys will be undertaken, perhaps by the Government's own Social Survey, to try to test the validity of the hypothesis on which this proposal is based. To come back to my original point, economics is not an exact science and hypotheses are not proven theories.
There are two other ways in which it is often suggested that we could resolve our dilemma. One is the reduction of Government expenditure—at home, mainly proposed by the Opposition, and overseas, mainly proposed by my hon. Friends on the Government benches. I agree with the importance of a rapid and substantial reduction of defence expenditure, both for its effect on home public expenditure and also for its effect on overseas expenditure.
I also believe in a very selective policy, which, I believe, would be accepted in the City, on overseas investment. The case for this has been completely made by the Reddaway Report. The right hon. Member for Enfield, West (Mr. Iain Macleod) took this altogether too easily. I do not think that he has studied the Report properly or realised its implications which are for a selective policy on overseas investment. I believe in both these things—not merely for one year, but for a very long time—until we have got this thing right.
If those things were done they would reduce the burden which our exports have to carry. They would, however, bring no immediate relief. If the long term is connected through the medium with the short term, we must try to do something much more quickly. Nor do I believe that by themselves those measures would produce a permanent solution.
A proposal which is frequently made, generally by some of my hon. Friends, is for import restrictions or quotas. Apart from the effect of this on confidence in sterling following the end of the import surcharge, I believe that the general effect would be harmful. It would protect inefficient industries, it would involve further substantial administrative costs, it would be a difficult exercise, it would increase the rigidity of the economy and it would invite retaliatory action abroad the result of which is impossible to estimate.
When I was in the Department, I tried to see whether we could not do a theory of games exercise on this problem such as is done at the Rand Institute in the U.S.A. The question would be, if A takes a certain course, what is the likely response of B? I was told that it would be impossible to make any sort of calculation to ascertain what effect the imposition of controls on imports would have on those with whom we trade overseas. In any event, if such restrictions were imposed, they could be for only a very short time.
We face in the end the situation, which we all understand, that however much by increased competitiveness we may to some extent reduce our imports, we must have a far greater rate of increase of exports. The truth is that our proportion of world trade in manufactured goods is still declining, and still at the rate at which it has been declining for the last several years.
This year we face a serious situation, mainly because one of the areas in which our exports have been rapidly increasing—Germany—now has its own economic difficulties, with the result that our balance of trade with Germany has been reversed. Presumably, exports could be made more competitive by a successful and rigid prices and incomes policy. Although I am in favour of the Government having reserve powers in this matter, nevertheless such a policy must be essentially voluntary. The most that we can hope to do with it is to restrain the annual rate of inflation to a more tolerable level. We cannot do more than that.
Moreover—and here I come to some extent to the arguments of the right hon. Member for Kingston-upon-Thames—we lack any strategy for incomes, taxes and social benefits taken together. I believe that some work is being done on this. If, however, it is not already being done, I beg my right hon. Friends to make a thorough examination of all these matters, not separately, but taken together, as they must be. Within this I include the question of incentives for effort, to which the right hon. Gentleman referred. In passing, I think that it was a mistake to introduce so many tax changes before such a strategy had been worked out.
So far I have not been very constructive, and I now come to what may not be very popular on the Treasury Bench. I am forced to the conclusion that the only way we can achieve in any reasonable period of time an increase in the rate of our exports is by a change in the exchange rate. I believe that this is the only solution. It would not only improve the competitiveness of our exports and reduce the tendency to imports, but, even more important, it would increase the profitability of exports and, therefore, encourage manufacturers to go after exports harder.
In a debate in the House last July, the right hon. Member for Barnet (Mr. Maudling)—obviously he was moving towards that—said that he would have preferred a floating rate for the £. At the present time, however, and given existing circumstances, I doubt whether that would have the effect that is needed. The situation is now different. We are in a deflationary situation and most people agree that a measure of reflation is needed.
If a change in the exchange rate were made, the slack now existing in the economy would be taken up in the only way that is acceptable and the only way which would not lead in the foreseeable future to another balance of payments crisis—by profitable exports. The investment would then follow. Investment will only follow the opportunity of profit, and the only profitable demand which we can afford to increase is that of exports. The investment would follow the increased demand and in the industries which most need it.
I see no alternative to what I am suggesting. Unless an alternative is found or such a policy is adopted, I believe that we are in for a prolonged period of slow growth. Unless people are willing to forgo all increase in personal consumption, there can be no real improvements in social services beyond the relatively small amount that a reduction in defence expenditure would temporarily provide.
The political and social dangers of such a course are serious. Just as I believe that the Suez debacle exposed our people suddenly and without warning to our military weakness and led in the following week or two to the most nasty mood which I have known in this country for a long time, and, possibly, to the loss in national confidence which we have also suffered for some time, so I believe that if now the Labour Government fail to achieve what the Opposition failed to achieve, if we cannot achieve a reasonable rate of growth comparable to that of our partners among the advanced industrial nations, we shall get a serious feeling of frustration. The electors will not necessarily turn to the party opposite, but perhaps to irrational political experiments.
Fundamentally, I believe that in spite of the decision which has undoubtedly been taken by the Government to try to get into the Common Market, we have not yet as a country faced up to our true position in the world. We are still clinging to illusions about our political and our financial power. The responsibility for the course which we are following is that of my right hon. Friends in the Cabinet and nobody else. I beg them to bestir themselves before it is too late.