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The hon. Member for Louth (Mr. Jeffrey Archer) apologised for preceding a number of his right hon. Friends. I must tell him that, in view of what he has said and of the number of speeches we hear in the House from right hon. Members, there is no cause for apology in that respect.
We listened to the hon. Gentleman with great interest. We heard his very kind comments about his predecessor, the late Cyril Osborne, a very much-liked Member of the House who attacked a number of hon. Members and befriended many more. We listened with pleasure to the hon. Gentleman's remarks about his predecessor.
I took note of the point that the hon. Gentleman made about the effect of S.E.T. on apprentices in the building industry and the way in which he put forward his idealism on Christian Aid and his moderation on a number of other matters. These factors all prove that he will be of great value in our debates.
The first point on the Budget itself that I wish to make concerns the assistance, totally £30 million, being given to the building industry. This short-term incentive can be of great value, but we must understand more about the way in which such incentives can be used. Since some time ago we gave as much as 45 per cent. on plant and machinery in development areas, I am concerned that the relationship between the money given by Government and the working of the incentive arrangement has not been as close as we should like.
There is one useful way in which incentives can be brought to bear in persuading industry to act in certain ways which will be to the public good, and that is by way of short-term incentives. In the United States, when there was the threat of a withdrawal of 7 per cent. tax incentive, large investments were made. A short time ago in Britain the level of investment grants was raised by 5 per cent. over a limited period and industry made changes in its plans to take advantage of this relatively small amount involved. The situation is not that much different from the department store which has a sale and people take advantage of reductions for a limited period only. This is a useful method of counteracting the cycle of investment.
I am pleased that the Chancellor is putting S.E.T. on a percentage basis. We are in some sort of dichotomy here. We naturally want labour to be expensive, because it means that the manufacturer will think very carefully about the use to which that labour is put and will strive for efficiency. On the other hand, in the present situation we cannot expect very high levels of consumption resulting from high earnings sufficient to produce incentives towards modernisation and efficiency. But S.E.T., properly used, could do just that. As a percentage payment it could produce a high level of wage costs to the manufacturer and provide an incentive to reduce labour costs, which could be helpful to the economy without inflationary consequences.
I was sorry that my right hon. Friend the Chancellor did not take the opportunity to increase capital gains tax. The right hon. Member for Leeds, North-East (Sir K. Joseph) wants to see it sharply reduced, but as one who is concerned about the need to tax total increases in wealth I saw this as a suitable time to take the next step in bringing closer together the levels of income tax and capital gains tax. We are surely now at a stage when we can bring the two rates of taxation nearer together.
Much mention has been made about the level of inflation. I, too, am concerned about this matter. However, this is not peculiar to Great Britain, but is happening all over the world. If one takes five of the major industrial countries, the United States, United Kingdom, Germany, Italy and France, one sees that their inflation in 1966 was 3 per cent., whereas last year it increased to 5 per cent. Therefore, inflation is not only continuing but accelerating.
Our inflation is being matched by the experience of other developed industrial countries. It means not so much that we are likely to drive ourselves out of export markets—although there would be consequences if we were to inflate higher than other countries—but what is more likely is that there will be a world spiral of inflation which will lead to difficulty in international finance arrangements. In particular, it is likely to lead to exchange rate crises more frequently in the future than has occurred in the past, unless there can be some other method of adjustment. Floating rates look like becoming more acceptable because of the greater problems which are likely to face us in future.
This acceleration of inflation, which is a world phenomenon, is largely due to the increasing sophistication and understanding by the public towards inflation. Wage claims are now put forward on the understanding that a good part of the claim will be eroded. As the process of inflation is accelerated, the general understanding of it will become more sophisticated. This increasing sophistication in itself leads to an ever-increasing steepening of the curve of inflation. There are no answers to this problem at present, and nobody has suggested any which seems likely to be of value. We shall need to take this factor more into account in our international monetary relations since many countries now find themselves in the same situation.
I had hoped that the prices and incomes policy, proceeding step by step, would have been able to exert a growing influence of management and labour and lead to a situation in which the matter could be decided rationally. There is at present a queue of people jostling for position, and the only way that decides who gets the best place relates to the power of those concerned. We shall have to learn and understand the movements so that we can exercise more influence by means of the mechanisms which were first thought out in 1964 and 1965. This is as much as we can hope to do. Step by step, we can improve our understanding of the problem and in that way exercise greater control. This is a long and slow process, but it is the only opportunity open to us.
The statement by my right hon. Friend about growth has been supported by a number of right hon. and hon. Members opposite, including the right hon. Member for Altrincham and Sale (Mr. Barber). In this debate there has been more lip-service paid to growth than I recall in many Budget debates in the past. But there are a number of misconceptions which I should like to outline. The first is that if we do not accept that we must have an increase in the rate of growth greater than has occurred up to the present, it means we believe that in some ways industry, the abilities of our people, our talents and our advantages are in some way inferior as compared with other countries.
This may be so. But in a political assembly of this kind I should have thought that possibly the last conclusion which any hon. Member could bring himself to accept was that one. He must look for all sorts of other reasons before, in the fullness of time, over many years. this conclusion is forced upon him.
A number of hon. Members believe that the growth rate possible for this country is very limited and is much less than that of other countries and that therefore, in some indefinable way, we are inferior to other countries. What happens to growth can be related to what happens in factories and workshops throughout. Growth means that people are producing more in the factories and the workshops. It need not necessarily be achieved by investment. It can be achieved, and often satisfactorily is achieved, by new methods and a new insight into obtaining greater productivity from existing machinery. There is a direct connection between greater productivity and the changes which are taking place in the workshop.
I am one of those who believe that there is a connection between productivity and production. To put it another way, we are more likely to increase productivity when we are producing a large volume of goods than when we are restraining industry and producing a small number of goods. If we increase output, if we take the brakes off to some extent, and we increase demand in the country, we are more likely to achieve productivity increases than if hardly any changes in production take place year by year.
There is some, although not very detailed, support for what I am saying in the situation which existed in 1964, 1959 and 1955, when, not by accident, we had consumer booms prior to a General Election. In those years there were great increases in production. There were also great increases in productivity. If we are to be serious about growth, we need to understand this connection.
What has held us back in the past has not been any inherent national weakness. There is no national weakness in the body politic or in the people. I see a weakness in the ways in whch we have operated the economy to the disadvantage of industry. In particular, I point to the enormous expenditure on overseas defence. The economy was distorted by Government expenditure of £450 million overseas, a large part of which was military expenditure east of Suez.
I remember trying, as a newly-elected Member in 1965, to discover how much expenditure east of Suez amounted to. To my horror, I was told that nobody knew. Nobody knew the answer to one of the crucial questions of the economic situation. After a number of months, and after constant prodding, the Secretary of State for Defence gave some of the horrifying answers, the true extent of which was revealed only as recently as some months ago. Anybody who thinks that he can turn back the clock and accept again one of the great limiting factors in the performance of the economy must need his head examining. We must not go in a backward direction when so much is at stake.
The other reason why our economy did not perform so well was due not to the basic weakness of the people, but to the reorientation of our exports from Commonwealth countries to other countries. Commonwealth countries which were subservient to us, which accepted our orders, which were largely controlled by us, which had in their palaces Government officials appointed by us who created the trade agreements and the tariffs in our favour and which were of enormous importance to us, as they became independence began to look for fresh trade links outside the Commonwealth, and we started to lose the great advantages which at one time we had.
These Commonwealth countries increased their imports very rapidly, but did not increase their imports from us to anything like the same extent. This was a natural consequence of the ending of empire, and there was nothing that we could do about it. Fortunately, that situation will shortly be coming to an end. There will be a levelling out at the lower part of the curve.
In 1964, we found ourselves with these two enormous brakes on our progress. Unfortunately, we waited several years until we achieved the right exchange rate for the £ and provided that special incentive to exporters which was needed above all else to encourage them to change and to profit from the change of direction from Commonwealth markets to other markets. To bring about this fundamental rehabilitation of British exports a great incentive was required which was not given until devaluation in 1967 provided it.
The right hon. Member for Altrincham and Sale spoke of the difficulties which he saw in increasing rates of growth. He talked about taxation and the proportion of wealth taken by the State. This was the situation before 1964 and the Conservative Party did nothing about it. Taxation was then still being levied at a high rate. The proportion taken by the State, far from falling, was increasing. This is an old story. It is not something which the Opposition have suddenly realised. If they then believed what they believe now, they were culpable and negligent in not taking action to change the situation. But I do not believe that the Opposition's argument is serious.
The lesson which we should learn from the events of 1964 is that the boom engineered by the right hon. Member for Barnet (Mr. Maudling) in 1964 never had a chance of success because it started too soon. We still had very heavy overseas defence expenditure. There was still need for reorientation of trade. The boom was engineered before the kind of devaluation which would have encouraged that change in direction of exports.
The lesson which we should learn—and it is a valuable and important lesson—is not that the right hon. Member for Barnett started a boom which should not have been started in any circumstances, but that he started it without the basic qualifications being present. He started it without the correct exchange rate and the kind of incentive to the reorientation of trade which was an essential part of the economic recovery which we are beginning to see.
The lessons which we should learn is not that we should be too cautious. It was a lesson which every succeeding Chancellor learnt. The danger is that we have become over-cautious by overreacting to the mistake made in 1964. Far from over reacting, we should realise what was basically wrong. Have we cured what was basically wrong? If we have, we can dispense with the caution of which we have seen too much. We have had devaluation. We have seen at last the end of our east of Suez role. Although the savings are not great at the moment they are bound to become larger. In particular, I note that in the fourth quarter of 1969 Government expenditure overseas dropped to £104 million—the lowest quarterly figure we have had for many years. It needs to come down still further. The advantages have not yet all been reaped.
We have seen the advantages, too, from the restructuring of industry. I have always felt in a macro-economic sense that this was not of very great importance immediately and that its greatest importance would come over a period of years. I believe that we shall see this. I believe, however, that the most important lesson is that the productivity which is the function of inventiveness and of organisation is something upon which we should be able to depend.
I would not readily accept the argument that we must wait until we see what is our basic level of production. This is the chicken-and-egg argument. What do we do first? Do we increase demand and then hope for productivity, or do we wait until we see whether productivity increases and then let loose the reins of demand? What happens is that economic take-off is made that much more difficult.
Reinforced, as this argument is, by the excessive caution that succeeding Chancellors have learned, they have adopted the second course of waiting for the cycle to break itself before interfering with the cycle and saying that the necessary lessons have been learned and that we can go back to the pre-1964 period, when the ideas were right but the timing was wrong. That is what we should now turn our attention to.
I do not believe that our basic inventiveness is lacking in any way, or that there is any shortage of confidence in what we as a country can do. What we need now is to make use of the lessons that we have learned over the past five years.