Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 1st April 1971.

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Photo of Mr Patrick Gordon Walker Mr Patrick Gordon Walker , Leyton 12:00 am, 1st April 1971

It is just conceivable that one reason that the Germans do not have so many unofficial strikes is that they get more time off. We do not know, but certainly the increase of holidays has on the whole tended to reduce strikes.

If the Prime Minister looked at his doctrine of high wages with rather less prejudiced eyes, he would see that there is an important element of truth also in the converse of his proposition, because high wages are caused by inflation. Trade union wage claims inevitably include safeguards against future and assumed inflation. Every one does this in the country—every one who can—and it is natural that trade unions do it. So the attack on inflation must include, if not start with, an attack on prices.

If the Chancellor had really wanted to lower prices, he would, as my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) said, have cut purchase tax instead of S.E.T. We had an argument about whether the S.E.T. cut will reduce prices. I am dubious about it, but what is certain is that an equivalent cut in purchase tax would have reduced prices much more effectively and clearly. Then, as my hon. Friend the Member for Heywood and Royton (Mr. Barnett) said, in his very able and trenchant speech, the Government have themselves put up the cost of living by the charges which they have imposed on the people.

It is to be welcomed that the Chancellor has accepted that some reflation is necessary, but I have come to the conclusion, after a lot of thought, that he is much too cautious. The worst thing about this Budget is that the highest goal that the Chancellor has set himself is to leave unchanged the intolerable level of unemployment. I am doubtful whether he will even attain his limited goal. Of course, the cut of Bank Rate, which I welcome and which I think overdue, will help by easing credit, but there are important factors on the other side which the Chancellor cannot have taken into account, if one listened to his argument.

First of all, the increased purchasing power provided through the Budget is largely nullified by the social insurance charges announced yesterday. Second, continuing inflation will erode real increase in purchasing power. But there is a third factor which has not been much noticed or mentioned in this debate.

Economists and Governments tend always, like generals who fight the last war, to fight the last depression. But every depression has new and different factors in it, because it concerns human beings, and human and psychological reactions are different. In this depression, it seems that the new, unexpected and paradoxical phenomenon, which is borne out by experience so far in the United States and here, is that any given increase in purchasing power tends to go much more than in previous depressions into savings, and much less into consumption.

It is much against theory, of course, that people should increase savings at a time of inflation, which erodes savings. Nonetheless, it is happening. The cause may be the Damocles' sword of unemployment, the fact that all classes and income groups are frightened of the sudden coming of redundancy and feel it right to provide, even though their savings may be somewhat eroded, a nest egg against this—right through society, wherever people are employed.

But whatever the causes of this new phenomenon, the consequences are clear. We need a rather greater infusion of purchasing power than in previous depressions to secure any given degree of reflation. Therefore, the Chancellor has been over-cautious and should have reflated on a greater scale.

But I feel that he is, like almost all previous Chancellors since the war, inhibited by certain conventional and orthodox fears and arguments. Of course it is a very respectable argument that, to get increased exports, one needs a flourishing home industry, but the first result of a flourishing home industry is an increase of imports before any corresponding increase in exports. That endangers even a large balance of payments surplus—as we have seen in the past—which leads us in due course into a balance of payments crisis and from that to the conclusion that it is therefore safer to keep the economy at half throttle. This is the conclusion which the Chancellor drew in the analysis on which he based this Budget.

The real problem facing us, therefore, is how to get out of this dilemma, how, in effect, to get the ideal which we never seem to get hold of—an export-led boom. This needs some Government guidance and encouragement of exports, but it is hard to expect that from this Government, who do not believe in any interference in the economy. But even if there were Government help and guidance to encourage the production of exports, to try to balance this first effect of stimulating the home economy, I still do not think that it would be enough. The only way in the end to be sure of getting an export-led boom is if export prices fall and import prices rise.

Therefore, the right course is to reflate on a greater scale than the Chancellor has so far risked, so as to get a more buoyant home economy, within which exports will gradually rise to use the balance of payments as a cushion, in the hope that it will preserve us, as it well may, because it is a very large one, but, if necessary—I do not think that it would be necessary—to be ready to resort to small adjustments in the exchange rate instead of waiting for some great, forced, large-scale devaluation.

Of course, if one were ready for those small adjustments, that would lower export prices and increase import prices at that point. This is a very unorthodox thing, which will be decried, but for the last 20 years we have tried every other possible solution, every variant of all other possible solutions, and every Government in turn, including our own, have come unstuck on this.

The policy which I have proposed is the only way that I can see by which this country can get out of this straitjacket which has for so long and so perniciously stultified economic growth. After all, economic growth is the only fundamental remedy for inflation and unemployment.