I assure the hon. Gentle man that they do. I was talking about our liabilities for five years and less. The Chancellor has produced various figures making up our balance sheet to show a long-term surplus, although not a big one. If we are in a mess we will not get far by trying to flog a tea garden in Assam. A great many of our foreign assets are not easily realisable, particularly in the short term. This is disabling to us. It is no good saying, "But we have a tea garden", because to make that sort of remark does not make sense in that context.
Whatever the Chancellor may say about his predecessor, I have considerable respect for the present Home Secretary. He is a good politician and his heart is in the right place, although he is a bad guesser. He was sunk through the creation of the Department of Economic Affairs. We said at the time of its inception—we said it from the outside with foresight—that it would be fatal. I was interested to read an article by the right hon. Gentleman the Member for Battersea, North (Mr. Jay) in the Financial Times the other day in which, writing from the inside and with hindsight, he confirmed our fears and what we predicted—that this division of control had meant that no firm grip on the situation had been taken and that things had drifted on and on.
We still have the Department of Economic Affairs. We are told that it has been strengthened and certainly we have another Minister, as has the Treasury. It is a comment on inflation that now that the Treasury is split eight Ministers are doing what two Ministers used to do when we were solvent. The only thing to do with the Department of Economic Affairs is to do away with it completely and have the building scrubbed and fumigated. For greater certainty, a team of rodent operators should be instructed to go through it to ensure that nothing is left, for it has been a total disaster.
What are the prospects of success for the present Chancellor? He will almost certainly get an increase in exports. Indeed, he must. We must have a substantial increase to make up for the change in the terms of trade against us. We must do more to start repaying our debts and rebuilding our reserves, although that task is a long way off. However, I believe that he will get this increase, certainly in the medium term.
The right hon. Gentleman's real failure lies in the fact that although he made a genuine effort in January to control expenditure, that effort did not come off. In fact, the reductions in expenditure, in so far as they were genuine—and a lot of them were not—were overtaken by the extra expenditure caused by, for example, the Transport Bill, the Transport Holding Commission Bill, and the Industrial Expansion Bill. As the Governor of the Bank of England, Sir Leslie O'Brien—who is not very popular on the benches opposite below the Gangway—pointed out, if Government expenditure soars inexorably upwards, and we get into difficulties, the whole of our adjustments, monetary and fiscal, must be made in the private sector. The Government's efforts are self-defeating simply because the prospects for growth lie in the private and not in the public sector, a fact which they have failed to recognise.
The Chancellor therefore failed in what really mattered. One thing which he has done is to make an enormous increase in indirect taxation. There is a school of thought, to which I belong, which holds that it is a good thing to shift taxation to a certain extent from direct to indirect taxation. What we mean by that is that direct taxation should go down in parallel with the rise in indirect taxation so that savings and investment are encouraged. Here, however, we have had a colossal increase in indirect taxation combined with an increase in direct taxation—which will reduce savings. For this reason I do not believe that the right hon. Gentleman's theory can work.
We are, in effect, talking about Boyle's Law. Hon. Members who were in the House in the 'fifties will recall that when we increased indirect taxes at one period the right hon. Gentleman the present Prime Minister was extraordinarily scornful and dubbed our action "Boyle's Law." It was a favourite joke of his. He used it for four or five years. People tend to say that the Prime Minister is unreliable, but in some respects he is not. Birch's second law about the Prime Minister is that if the right hon. Gentleman says that something is wrong, and he will not do it, and if he says thirty times or more that it is wrong and he will not do it, one can be certain that he will do it. This is Boyle's Law cubed. It is designed to reduce consumption, but it is very difficult to reduce consumption.
A distinguished pamphlet was produced by Professor Hicks last year. It was called "After the Boom", and in it he traced this matter with a wealth of statistics. It is very difficult indeed to get people to reduce consumption. One can inflict some sufferings on the old and the poor, but most people who can protect themselves do so. They go in for more wages and, if that is stopped by legislation, they run down past savings or reduce their current savings in order not to cut their standard of living which they have come to accept as being their due and to be normal. In a year when the Government have calculated on the cost of living going up 7½ per cent., and it is almost certain to go up by at least 9 per cent. according to Professor Alan Day, this will not work.
The last theme I have is on the inflation caused by this high expenditure and what can be done about it. Lord Cromer, speaking in 1966, pointed out that as a result of this very high expenditure we always have a borrowing requirement or overall deficit. In so far as one cannot finance the borrowing requirement or the overall deficit by genuine savings and genuine borrowing, inflation results, "quasi-automatic", as he put it. He illustrated this by the example of 1965 when the money supply increased by 7½ per cent. whereas the national product increased by only 2 per cent. This went on last year according to figures given by the Financial Secretary when the money supply went up by 8 per cent., whereas the national product went up by only 1·6 per cent. We get this inflationary element all the time because we cannot borrow.
During the last three years the overall deficit has not been financed in any way by genuine borrowing. It has been financed by printing notes, minting coins, borrowing money overseas and running down reserves, and by recourse to the banking system. This produced devaluation, rising prices, debts and the rest. It is no wonder that Pierre-Paul Schweitzer was so insistent that we should control our overall deficit. I am glad that the Chancellor has reduced it, although I am a little sceptical about the figures which have been given. We were told that the estimates last year were very tightly drawn and I strongly suspect that they are more tightly drawn today. There are other things, such as the financing of the steel industry, where I rather mistrust the figures.
We have the difficulty that we have not been able to finance overall deficit by genuine borrowing. Why not? There are two reasons. One is the slaughter of the market in Government securities. The other is the large sums borne on the Budget for capital expenditure of local authorities and nationalised industries. On the gilt-edged market, it is not unnatural that the difficulties are so great. Take what happened to the Treasury's 2½ per cent.s, commonly known as "Daltons". Lord Dalton introduced them in 1946 at 2½ per cent. at 100 and now they are just over one-third of that price. Meanwhile, the value of the £ has decreased by more than 10s. in the £. A man who saved £100 in 1946 now has, in 1946 money, just over £16. He has been getting interest meanwhile at 2½ per cent. less tax.
We cannot wonder that people are losing their nerve. The rate of interest is not attractive if the cost of living is going up by 9 per cent. What can we do? In local government borrowing there have been a number of changes since the middle 'fifties. Then the policy, which I think was correct, was that local authorities could go only to the Public Works Loan Board as a lender of last resort and they had to pay the full rate. Now the policy has gradually shifted and local authorities can go more and more to the Public Works Loan Board and get a privileged rate. This puts a large amount of money on the Budget. If we make local authorities borrow on their own credit and fish around for the money, as many successfully do, we ensure that the capital expenditure by local authorities is matched by genuine savings, whereas, if it comes from the Budget, or is raised as much, as scandalously, as it has been by the supply of seven-day money lent by the gnomes at up to 10 per cent. interest or whatever it may be, this is not matching expenditure to savings.
As to nationalised industries, the thing is not to nationalise things but to de-nationalise where we can. Incidentally, the nationalisation of steel has put an appalling burden on the country. The steel industry is not likely to earn the interest, or anything like it. It has been financed entirely on the money market. The whole industry has been monetised with three-year borrowings. Some is in the issue department of the Bank of England, the rest is in the money market, and this has to be coped with in two years' time. We have these nationalised industries and the Government have to finance them as best they can. It is no good saying we shall issue gas stock or electricity stock unless we can sell those stocks. They are harder to sell than straight Government securities.
It all comes back to the point that if we are ever to get taxation down and savings up and be able to finance our overall deficit, we must get people to buy in the gilt-edged market again. This is a very difficult thing to do. The only way I can suggest of getting it started is by the Government giving some degree of fiscal privilege to those who invest in Government securities. This exists in many countries, and to some extent here. The first suggestion I make is that gilt-edged securities should not be subject to Capital Gains Tax.
I raised this question as a matter of equity some years ago and I was partially successful, but a quite incredible result was produced—no doubt by Professor Kaldor—that some stocks were totally free of tax, some were partially free, and some were wholly subject to tax. That was not a logical situation. I suggest that we should go the whole hog. I cannot believe that the Government have been so foolish as to think that they would get any Capital Gains Tax to speak of out of the gilt-edged market.
The next point might cost more, but I think it would be far more effective. As a result of Professor Kaldor's introduction of Corporation Profits Tax—why is he not a Life Peer?—the holder of gilt-edged securities is worse placed than he used to be in the sense that the income from gilt-edged securities is not deemed to be franked investment income. If an institution bought a preference share it would be deemed to be franked investment income because the company of whose capital it was a part had already paid Corporation Tax. We get the ludicrous situation that preference shares yield less than war loan and Government securities. We could introduce a privilege either in whole or in part that the holder of gilt-edged securities would be held to be holding a franked investment income.
My last suggestion is this. There are a number of tax concessions on savings movement securities, such as savings certificates, Defence Bonds and Development Bonds. It is for this reason that the amount any one person can hold is, I think in all cases, restricted. Chancellors have often increased the amounts that can be held. I think that I am right in saying that the Chancellor did that in this Budget. I believe that one of the few ways in which people's appetite for gilt-edged securities could be increased is by providing that the holdings of these privileged securities in the National Savings Movement could be very much larger than is now permitted. These privileges would do something to reduce interest rates and—much more important—they would reduce inflation by getting the bonds sold, instead of having to print the money. This is the way in which we shall check inflation.
I have made a few suggestions. I think that our situation is dangerous. I do not think that it will blow up yet, but the sheer length of our financial crisis is what worries me. The sterling crisis started in November, 1964. Now, in April, 1968, it is still continuing and, in some ways, is rather worse. The Chancellor made a good speech, but that is not quite the same as actually succeeding. I do not think that he has broken out of the vicious circle. I do not think that he has got out of his strait-jacket. We shall have to wait with breathless attention to see what happens. I am afraid that my peroration about him will have to be the same as it was about his predecessor: I believe that the job can be done, but I very much doubt whether he can do it.