It is, I think, the wish of the House that we should today debate economic problems. I am very glad of the opportunity to open the debate.
Perhaps the House will forgive me if, before I turn to a new series of economic debates, I spend about 30 seconds in salute to people who are not with us today. Naturally, all politicians are delighted about every win for their party, and I was delighted that my hon. Friend the Member for Gloucester (Mrs. Oppenheim) won, but I think it right to say that Jack Diamond was a very remarkable parliamentarian and we shall miss his presence from these debates. Although he has only departed down the corridor, my noble Friend who used to sit for Flint, West, and who had a very sound judgment and an astringent wit, will I am sure be missed in our debate. I should like also to mention two more junior Members of the House. I think that Kenneth Baker made a very great impression on our discussions in a very short time. Jimmy Dickens used to lecture the Chancellor of the Exchequer and the Shadow Chancellor of the Exchequer with equal impartiality, and I have no doubt that if he had still been a Member he would have done exactly the same.
One of the subjects which has been discussed a good deal already in this Parliament is the economy as we, the new Government, find it. Last week there was some discussion about words which other people used in the election. I would prefer to use the words which I used when I was interviewed on "News at Ten" and to let the House judge whether they are a fair summary of the situation as we see it now.
I was being interviewed by Mr. George Ffitch. He asked whether Britain was
heading for a serious economic crisis".
My reply was:
'Crisis' is a word I am reluctant to use about my country…".
A little later Mr. Ffitch said:
Whether you use the word crisis or severe economic difficulty, are we heading for trouble?".
Trouble. Oh yes, of that I have little doubt, and I would have thought that if you take the view, for example, of somebody who isn't a Tory, Lord Kearton, who said much the same thing on television, very recently, I think few people doubt this".
Finally, Mr. Ffitch returned to the question of an economic crisis, and I replied:
'Crisis' is a word that we discussed a moment ago and I said I'd prefer serious economic trouble; let's hold it if I may at that".
Those are the words that I used—"serious economic trouble" facing whatever party had won the Election.
There is no doubt that by far the most serious problem that we face, not just as a Government but as a country, is inflation. As the Prime Minister said on Thursday in this debate:
It is no comfort to this country to say that other countries are suffering from inflation. There may be a country here and there where the level is worse than it is in this country, but these countries have higher levels of growth than we have had and higher ratios of savings. No country is as vulnerable to inflation as we are or depends more on international trade."—[OFFICIAL REPORT, 2nd July, 1970; Vol. 803, c. 88.]
We must not minimise the gravity of our sickness by proclaiming that others are also infected. The average rate of increase in wages over the past two decades was about 5 per cent. a year. It was lower—3 to 4 per cent.—in the early 1960s, and highest of all in 1951–52 following the boom in prices after the Korean War. But at present, contrary to past experience, we have the highest rate of wage increase for 20 years, although output is stagnating and unemployment remains high.
Prices have also risen much more rapidly in the last two and a half years. A long-term look at this is, I think, instructive. Between 1958 and 1964 we had an annual rate of increase in this country in consumer prices of 2·2 per cent. Between 1964 and 1967 that rose to 3·7 per cent. I will come back to those figures. Then in each of the years 1968 and 1969 they rose by 5 per cent. In the three months to May 1970, the retail price index was 5½ per cent. higher than a year earlier.
There is no single or simple answer. The facts that I have given to the House were, for the most part, known to my predecessor as Chancellor in the Budget
debate. It was a matter of wide and, I think, justified comment that he passed it over so lightly. But I at least, as Shadow Chancellor, said:
The Chancellor, in this most grave matter, has a duty not just of exhortation but of example. The Government are the biggest employers. He ought to proclaim that he will use his influence firmly and openly on the side of non-inflationary settlements."—[OFFICIAL REPORT, 15th April, 1970; Vol. 799, c. 1402.]
I do not see how any responsible politician of any party can dissent from those words, and I repeat them now as Chancellor. A good example by the Government is followed. Far from such a policy being an attack on the public sector, it is the best protection that public employees have in preserving their position in relation to more militant claimants.
I turn to a brighter part of the picture—the balance of payments—although we must see this in the context of our heavy external debts. As I undertook to do at Question Time, I should like to put the whole picture before the House.
We have indeed achieved a very good result in our balance of payments in the last year, although we will be watching with care and some anxiety the next few months' figures in particular as they unroll. As the Leader of the Opposition told us on Thursday, we have had a surplus on current account running at £500 million a year. But the recent improvement, welcome indeed, is an improvement from an extremely grave situation. We still have very large debts to repay. We must still, over the years, rebuild our reserves to a level which begins to be commensurate with the needs of a world trading nation. We have a very large outflow of export credit to sustain, apart from the regular flow of overseas investment, and we have substantial long-term official debts to repay. We have worldwide opportunities to earn a big surplus. But it is imperative that we keep competitive in our costs, and our customers must have confidence that we can deliver the goods, and do so on time.
This year sterling has been strong for most, although not all, of the time. There has been a surplus in the current balance of payments. Sterling area countries have been earning large seasonal surpluses and their sterling balances held in London have increased as a result.
We are now entering the seasonally less favourable second half of the year. The right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) warned in his Budget statement that there might be some temporary reversal of the flow of funds in the second half of this year. I accept that this may be so. After the large inflow earlier, it would not be surprising, because of these seasonal factors, if the reserves were seen to fall in some months between now and the end of the year, even though we continue, taking all the months together, to be comfortably in surplus on current account. If necessary, the normal central banking facilities as well as our reserves are available.
I want to put this in the context of our external debts. My predecessor announced in his last Budget that short and medium term debts reached their peak at the end of 1968 at £3,363 million—almost exactly 8 billion dollars. By the end of March 1970 they had been reduced to £1,654 million. The House is aware that there has been further progress since, and on this occasion, because I think it right that the House should know at once where we stand at the beginning of the new Administration, I will give the up-to-date figures now.
In the quarter just ended, the reduction of short and medium term debts was a further £193 million. There are, and will be for some time, pitfalls for both Government and Opposition in figures announced after a change of Government. For example, when my right hon. Friend the Prime Minister gave an indication not only of an increase in the reserves last week, but also of substantial payments, several hon. Members opposite almost burst with delight showing how marvellous was the economy that had been handed to us. A more accurate account appeared the next morning in the Times Business News which said:
Britain was able to pay off £63 million of international debts in June and still show a £10 million improvement in the official reserves at the end of the month…But it was only possible because of the heavy inflow of funds into Britain immediately after the Conservative victory in the General Election.
The result is that at 30th June the total outstanding short and medium term official borrowing was £1,461 million of which £992 million is due to the I.M.F.
I have given these figures now because everybody should know where we stand today. In future, I propose to follow the practice of previous Conservative Governments, to which the right hon. Member for Birmingham, Stechford announced his somewhat belated conversion, in publishing the figures for outstanding drawings on central banking facilities quarterly in arrears.
The total debt still to be paid is formidable. The weight of repayment of I.M.F. debt will begin to come on us from June, 1971. We shall, of course, see to it that our obligations are fully met. But the consequences of the heavy borrowings of recent years will be with us for a considerable time.
We should also—this, again, came into the exchanges at Question Time today—note the position in relation to long term debt which we have to service twice a year in June and December. The Government, after the war, borrowed on behalf of this country, £1,545 million long term, mainly from the United States and Canada. Repayments totalling £550 million were made over the years since 1951. But the sterling total still outstanding is £1,910 million, or £365 million more than the original sum borrowed—because of two Labour devaluations in 1949 and 1967.
The economy today shows two outstanding features. On the one hand, demand and activity are rather sluggish and unemployment is high compared with the post-war average. On the other hand, there is the strongly rising trend in wages and prices. This is a combination of stagnant production and cost inflation. As Shadow Chancellor, I christened it "stagflation". I cannot believe that even hon. Gentlemen opposite, however they wish to paint this picture, can be complacent about such a situation.
During the early 'sixties, between 1959 and 1964, g.d.p. rose on average by about 3·8 per cent. a year. The average rate of increase during the years of Labour Government was 2·2 per cent. The difference between those figures comes to many thousands of millions of pounds of lost growth. But there is another point which I said I would return to, because almost the exact mirror opposite is shown in these years. In our five and a half years, compared with five and a half years of the Labour Government, our growth rate was 3·8 per cent. and our price rise 2·2 per cent. Their growth rate was 2·2 per cent. and their price rise 3·7 per cent., almost the exact picture in reverse, and one does not need to look much further than that to see some of the difficulties that we are having.
After devaluation, it was hoped that we would get both a satisfactory rate of growth and an improved balance of payments. We did have reasonably rapid growth in 1968, but the real improvement in the balance of payments came in 1969, and in that year output rose by only about 2 per cent. My predecessor in his Budget, after he had made his Budget proposals, foreshadowed a rate of increase in the economy of 3½ per cent. between the first halves of 1970 and 1971. So far, as I said at Question Time, we have not been living up to that estimate, but only a comparatively small part of the financial year has gone, and unemployment remains high.
In trying to give a balanced picture I must tell the House that although that growth side so far is disappointing, there are some signs pointing the other way. Industrial production was rising at a reasonable rate in the four months to April and new export orders for engineering goods—a point which the Leader of the Opposition made—in January and April were well up on last year. I conclude, therefore, that although the recent performance of the economy has been disappointing, it would be premature at this moment to take action to stimulate demand.
There has been a good deal of speculation about an autumn Budget, whatever that may mean, and I answered that at Question Time. Perhaps I could repeat my answer for those who were not here then. In the sense of a Budget statement backed by a Finance Bill, I do not intend, and never have intended, to bring forward an autumn Budget, but I must be free, of course, like any other Chancellor, to take such action as may seem necessary at the appropriate time, and clearly it is more likely, unless the indicators change, that one will wish to stimulate demand rather than restrain it. As the House knows, a whole armoury is available to Chancellors, and some measures can be put into effect overnight. No Chancellor has ever been content to leave his own Budget untouched for a year, much less the Budget of another party, and I do not expect to be an exception to that rule.
I turn briefly to monetary policy. The right hon. Gentleman in his Budget speech said that fiscal and monetary policies are more effective if each works in harmony with the other. It is no part of my quarrel with the previous Administration to question that blinding glimpse of the obvious, but the prospect before us still requires reasonably tight monetary conditions. In particular, this means that I must ask the banks and finance houses to carry on observing the guidance given to them by the Governor of the Bank of England both as to the level and the priorities of their lending. The situation continues to call for the co-operation of the banks and other institutions.