Economic Affairs

Part of the debate – in the House of Commons at 12:00 am on 24th July 1967.

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Photo of Mr James Callaghan Mr James Callaghan The Chancellor of the Exchequer, Member, Labour Party National Executive Committee, Treasurer, Labour Party 12:00 am, 24th July 1967

As the right hon. Member for Enfield, West (Mr. Iain Macleod) said, we have had the traditional Motion moved in its traditional form in the traditional month and, if I may say so, with the traditional speech. If only the right hon. Gentleman had given freer rein to his capacity for invective and stayed off economic discussion it would have been a much more lively and interesting speech for most of us. I really enjoyed the last five minutes.

I had hoped, after hearing about the seminar which the right hon. Gentleman had arranged and to which he had invited us all, including myself—I apologise that I could not go and also apolo- gise on behalf of the City editors who thought it better to go to Lords than to spend the day with him—that after it we might have had a clearer exposition of the alternative credible policies that the right hon. Gentleman would give us. He seems, however, to have been surrounded there with a multitude of opinions and certainly a conflict of advice. But that is not surprising. If he had read what Mr. Stanley Baldwin once said he would have known that this is always the fate of those who conduct seminars of this sort. Stanley Baldwin told us that whenever he got six economists together he always found there were seven opinions. The right hon. Gentleman seems to have rediscovered the truth of that in his discussions last week.

But that in itself is not a subject for scorn, even though I take pleasure at reading, if it is correct, that the right hon. Gentleman was so disgusted with his colleagues that after having given himself 15 minutes in which to wind up at the end of the discussion he confined himself to two minutes and a vote of thanks. The very fact that there are so many opinions and so much conflict of advice about the state of the economy and the solutions that should be followed reflects both the complexity of the problem that the country is confronted with and the difficulty of getting agreement about a solution.

I welcome this discussion. I take no exception to coming here to discuss the Government's policy today—[Laughter.] I apologise if that is misinterpreted; it was not meant in any way except that I welcome the opportunity of coming here. As I was saying, I welcome the discussion, provided that it does not lead to weakness of purpose either in the country or in those who are trying to find solutions to the problem. What I deprecate very strongly is attempts to chop and change our policy at very short intervals before the effects of a given policy have had time to work themselves out.

The Opposition have put down the Motion of no confidence. Some people have indicated or thought that because this is so there is to be a new statement on economic policy. I want to disappoint the House straight away. I want to make clear at the outset that I have no proposals to announce or put forward for modifying the Government's basic approach to economic policy today. I recognise that the setback on our trading account in the second quarter of this year is a cause for legitimate concern. Nevertheless, I point out and remind the House that we had very satisfactory results both in the last quarter of 1966 and the first quarter of the present year both on trading and on invisible account. I want to meet the legitimate concern of those who are worried about the falling away in the second quarter. It is a matter of legitimate concern, but I do not forget that there are some who never accepted the Government's strategy and are using one quarter's figures as an excuse to discredit the whole strategy.

Before I come to a discussion on public expenditure, the balance of payments, the level of employment and economic activity, let me say a word about Government strategy in its broadest sense. The country has faced two necessities in the last three years. We should have faced them before. One has been to find a new place in the world commensurate with our standing and economic strength, and the second to restructure the British industrial system so that it is more flexible, less sluggish and more responsive, and so that it provides a proper standard of life for the British people through both the private and the public sectors of industry.

As to the first, finding a new role for Britain in the world, the new defence policy published last week will during the coming years bring into harmony British economic policy, British foreign policy and British defence policy. The three will march together for the first time since 1945. This dramatic approach, combined with the approach that is being made to the European Economic Community, gives Britain an opportunity to secure aviable position in the world and will enable her to earn her living and exert her influence for world peace.

The new defence policy, as it is carried out, will bring with it a substantial bonus to our economic strength. There will be less strain on the balance of payments. It will mean the release of resources for civilian purposes that are now locked up in military research alit. development. It will mean that increased numbers of scientists and technicians, now engaged in military operational and other warlike research, will become available for civilian research and development; and, although our commitments and our moral responsibilities to people overseas ensure that the process is not being carried out with irresponsible haste, nevertheless the beneficial consequences to Britain's economy will begin to be felt at an early date and with increasing impact in the later 1960s and the early 1970s. Last week's White Paper will, in my view, be regarded as a historical landmark in the success story of the Government's policy to reconcile military and foreign obligations with economic strength.

At home the Government's strategy has been expounded on a number of occasions together with our reasons for believing that it is possible to combine a growth rate of 3 per cent. per annum, the equivalent of £1,000 million a year in real resources, with a healthy balance of payments and an improvement in the standard of life of the people. But in doing so the Government have never attempted to hide the fact that during the years ahead this country will be walking an economic tightrope which needs a cool nerve; and a slip would have serious consequences.

The fact that this should be so and the fact that the margin of safety is so small represent the real crushing indictment of the failure of the party opposite to act in the years between 1951 and 1964. [An HON. MEMBER: "Stand on your own feet."] We are ready to stand on our own feet. It is a pity that hon. Gentlemen opposite did not stand on theirs. It is astonishing that the great Conservative Party should have so allowed this country to drift in the way it did during the 1950s. They failed to act when they had the power. I am not going to debate this, although I must say that it is rarely far from my mind.

However, it is the Government's conviction that the economic strategy on which we are now embarked, together with the change in our defence arrangements, will enable us to follow a successful policy and one that is right; and that it would be frivolous to be deflected from our present course because one quarter's trading figures are not as good as we would like and because the temporary closure of the Suez Canal has worsened our balance of payments. It is a long-term operation that we are engaged in. [An HON. MEMBER: "The Government have been blown off course."] Blown off course? The economy and the £ are much stronger than they were in 1964 to sustain the closure of the Suez Canal—much stronger. When I look back over the last three years I reflect how sterling, for example, has come through the Middle East crisis, and I realise that it could not have done it either in the summer of 1964 or even subsequently, this is a measure of the progress that is being made.

Going back to last winter, our trading results were so good that they led in some unofficial quarters to a much higher degree of optimism than I shared. Unofficial balance of payments forecasts for 1967 were published that even then seemed quite unrealistic. The right hon. Gentleman referred to the pledge that I gave the Labour Party conference in 1965 to obliterate the deficit by the end of 1966. He is right; we failed. [Interruption.] I will go through the figures again. If hon. Gentlemen opposite raise this they will have to have them time after time.

The deficit in 1964 was £761 million. It was reduced in 1965 to £315 million. It was reduced again in 1966 to £189 million. This year I have said up to the time of the Suez Canal temporary closure that we should have a balance. [An HON. MEMBER: "Now the Government will not."]

I do not know how the hon. Gentleman can be so certain about that. But the real question, and the question that I want to discuss in a moment, is how far temporary factors of this sort, which we are now in a much better position to sustain than we were, can be allowed to influence our policy and the economic progress that we are making.

Invisible earnings have been very good in the first quarter of this year. At £80 million—seasonally corrected—they were nearly as much in three months as in the whole of last year. There were exceptional factors at work in both years but even so the level of invisible earnings this year looks like being of considerable help to us.

The export position has been affected in recent months by the level of world trade and that, in turn, has reflected a much lower level of production in the major industrial countries. The right hon. Gentleman pointed out that our industrial production index was stationary and that is true, but he might have gone on to point out—as he did not, I will do so—that the United States' industrial production index has turned substantially downwards and that the German index has also turned downwards. Indeed, a lower level of production is common throughout such important customers of ours as Canada, the United States, France, Germany and the Netherlands. The only two countries in which the turn of production is upwards are Italy and Japan.

Therefore, our recent exports to each other in the O.E.C.D. countries have not risen as strongly as they did in recent years, although I am glad to say that this trend has been offset to some extent by improvements in our exports to the sterling area. Indeed, it seems as if the rise in total demand and output throughout the whole O.E.C.D. area may be only 2 per cent. in the first half of this year, which is a much smaller rate of growth than for some years. The result is that British exports, which started so well, have flattened out during the last two or three months.

The important conclusion for policy here is that this falling away in British exports does not represent a loss of competitive power by British industry. The evidence is to the contrary. Our competitive position and our industrial productivity are both improving substantially. I will give two figures. From the first quarter of 1965 to the first quarter of 1966, output per operative hour in manufacturing increased by a little more than 4 per cent. per year—that is, in productive efficiency. From the first quarter of 1966 to the first quarter of 1967, output again per operative hour in manufacturing rose by a further 3½ per cent.

So there is no reason why we should regard these adventitious factors such as the decline in activity and the lower level of world trade as indicating a worsening of Britain's competitive position, but rather the reverse. We are holding our own despite factors which might otherwise have operated much more significantly against us.

The next important policy question is, does this slow-down of world trade, on which we depend so much, represent a long-term decline or is it no more than a pause? I naturally picked up this question when the Finance Ministers of major countries came here last weekend and we had a number of informal discussions about it. My conviction, and theirs—and it is a reasonable conclusion to all of us—is that we should be able to look for some resumed growth in world industrial activity during the next 12 months—notably and rather sooner in the United States and to a lesser extent and rather later in Germany.

The pace of world trade should be accelerating during 1968 and it is not unreasonable, therefore, in looking at our future progress, to expect a resumed rise in United Kingdom exports by the end of this year, followed by a rise again in 1968. In both 1965 and 1966, reflecting to some extent this substantial and significant increase in productivity, our export increase was well above the average rate for the preceding ten years. In 1965, there was an increase of exports of 7 per cent. over 1964; in 1966, there was a further increase of 7 per cent. over 1965. This compares with the previous decade, when we had an improvement of about 4½ per cent. per year on average.

So the competitive position of Britain is improving and despite the slowing down in world trade during the first half of this year there was a further increase of exports of 5 per cent. over the level of 1966. Therefore, I repeat that there is no reason to believe that our exports have become less competitive.

Imports have been distorted since last autumn because of the effects of the removal of the import surcharge at the end of November. They were low in the fourth quarter of last year and rose considerably in the first half of 1967, although I am glad to say that they are not running now at anything like the level of 1964. The removal of the surcharge has led to an increase in manufactured and semi-manufactured imports and we shall need to watch very carefully this import pattern and be ready to encourage British industry to provide competitive substitutes for imports.