Orders of the Day — Budget Resolutions and Economic Situation

– in the House of Commons at 12:00 am on 27th March 1972.

Alert me about debates like this

Photo of Mr Selwyn Lloyd Mr Selwyn Lloyd , Wirral 12:00 am, 27th March 1972

I know that about 20 hon. and right hon. Members wish to catch my eye during this debate. If there can be a little restraint by those who catch my eye, I should be able to call them all.

3.35 p.m.

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

In the week following the opening of the Chancellor's Budget the attention of the House—and of the country—is normally concentrated on economic affairs. This Budget is probably one of the most important, and certainly one of the most comprehensive, since the war, but its economic importance has to some extent been overshadowed by events even more compelling and by measures every bit as important and, we all pray, more hopeful in Northern Ireland.

The statement made to the House last Friday by my right hon. Friend the Prime Minister will necessarily involve some change in the framework within which Northern Ireland expenditure programmes will be approved. But there will be continuity in the administration of these programmes by Northern Ireland Departments, and the House will not expect me to deal with the administrative details in today's debate, nor indeed until after the passage of the Bill. All I would do today is to remind the House that the measures in my right hon. Friend's Budget are designed to expand and to sustain a steady expansion in the economy of the United Kingdom as a whole and to effect a steady improvement in the standard of living of all the people in the United Kingdom.

This, of course, includes Northern Ireland. We will continue to ensure that the financial arrangements relating to Northern Ireland make available the full amounts required for the social, industrial and other programmes in the Province; and, as my right hon. Friend the Prime Minister made clear in his statement, Her Majesty's Government will continue to give high priority to the rehabilitation of the economic life of the Province."—[Official Report, 24th March, 1972; Vol. 833, c. 1863.] In last year's Budget debate I had the pleasure of congratulating two of my hon. Friends in their maiden speeches. This year, with a sadness shared, I know, by the whole House I have to congratulate my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) on a superb swan song. It is not an accurate metaphor, for the swan is alleged to sing but once, while my right hon. Friend has for many years delighted the whole House with his speeches and discomfited his opponents with his debating prowess. We shall all miss him; but, if he will allow me to say so, I owe him a special debt of gratitude, for he was Chief Secretary when I first became a Treasury Minister and I owe much to both his precept and his example.

In his splendid speech my right hon. Friend paid tribute to the Chancellor as a reformer, a tribute that was echoed on both sides of the House. He also commended the Budget measures to the House as being about the most that any Government can do…"—[Official Report, 23rd March, 1972; Vol. 833, c. 1713–14.] towards the objective of a higher rate of sustained growth. They are indeed part of the process which my right hon. Friend the Chancellor began in his previous Budget and carried through in his subsequent measures. I am bound to say, however, that this aspect of the Budget did not attract the same universal approval as the measures of tax reform.

The comments vary; but the criticism of the Opposition has on the whole been remarkably muted. Even the New Statesman gave two cheers to my right hon. Friend. It is true that the right hon. Gentleman the Member for Birmingham, Stechford (Mr. Roy Jenkins) castigated the Chancellor for wasting time, and quoted his reductions in taxation as evidence of the failure of his policy. In doing so he remains conveniently blind to the fact that any failure was his own.

One has only to look at the record. Look at the right hon. Gentleman's first Budget. In 1968 a figure of £774 million revenue in the first year was followed in November by a 10 per cent. regulator increase yielding an extra £250 million revenue in a full year. Then there was, to quote one recent commentator, his unnecessarily deflationary £350 million in his 1969 Budget and his tiny timid Budget stimulus in 1970.

If the record is not enough, there are the right hon. Gentleman's own words. I refer to a recent policy speech, which had nothing to do with the leadership. In that speech he sought to explain or excuse his inability, over six years in all, to achieve my right hon. Friend's success over two years in translating reforming zeal into practical measures. He said: The main reason was lack of adequate sustained economic growth". He added that next time Labour must do better, but that in case it did not it must also have a strategy to deal with poverty, even if growth were disappointing—a tacit admission of past failure. That sounds curiously pessimistic about the future.

The right hon. Gentleman intends, I understand, to devote the next six months to the task of exposing the past failures of the Labour Government in order to exhibit his recipe for future success. It is a worthy task in which we wish him well. Meanwhile the Government will continue to put into action the policies set out by the Chancellor and my other right hon. Friends in this debate.

First, taxation reform. Budgets are in some ways rather like babies. When they first arrive they are a delight to the proud parents and objects of acclaim to an admiring circle of friends and relations. Later they tend to squawk and their inevitable short comings become apparent. But so far as our proposals for tax reforms are concerned I hope we have succeeded in exposing in advance such shortcomings as they may have and as far as possible overcoming these by the very full process of consultation which is made possible by using the technique of the Green Paper. This is a technique which, in the sphere of taxation at least, is as revolutionary—as a move to more open government—as the proposals themselves, and which enables the House of Commons in appropriate cases to play the fullest possible part by means of a Select Committee.

I hope that my right hon. Friend in proceeding in this manner has made it easier to see the various reforms proposed as what they really are; namely, as parts of a coherent and developing plan to reform and simplify the whole tax structure in what amounts to a major revolution in the system of taxation. This Budget is the centre-piece of the revolution. It is rooted in the past in that some measures taken last year are now coming into action and others, having been spelt out last year, are being revealed in detail this year.

This brings me to the present measures which the House will be asked to approve in detail, some coming into action immediately, some—V.A.T.—not until next year. Finally, it sets out future plans for continuing the process of taxation reform.

Although this process may make it a little harder for the House to disentangle the economic effects of the Budget in the longer term, I hope the House will agree that it has been a major factor in improving the detail of the changes proposed. Even the opponents of V.A.T. mostly agree that our version is as simple as possible and is not regressive. This is largely because the Customs and Excise took such immense pains and consulted all those concerned so carefully on the basis of last year's Green Paper.

Again, last year's Green Paper on corporation tax enabled all those concerned to give their views. It was referred to a Select Committee of this House under the Chairmanship of my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid). I would like to add my tribute to those which have already been paid to his Chairmanship and to the report produced by the Committee. Indeed, its recommendations are very largely reflected in the detailed proposals for corporation tax reform now being put forward. We shall continue this process and later this year we shall publish a Green Paper containing tax-credit scheme proposals as a basis for consultation. These proposals will need wide-ranging discussion and inquiry, and we shall welcome the appointment of a Select Committee to examine and report on this if the House so wishes, as I hope it will. We have already published—as a basis of consultation—a Green Paper on a possible inheritance tax in place of estate duty.

These measures of reform are not only important in themselves but are an essential framework for and part of the measures to attain the Chancellor's three main Budget aims. I have referred very briefly to the second of these aims—a faster rate of sustained growth bringing a steady improvement in our standard of living.

I turn now to my right hon. Friend's third objective, namely, to evolve a system which is more just. Although the taxation reforms are an essential part in attaining this objective, so is the accompanying public expenditure—and especially those measures of direct Government spending designed to reinforce, over the period of this Parliament, the Government's attack on the problems of poverty and social need.

My right hon. Friend has been criticised because his Budget does not do enough for low income families who do not pay tax. This criticism underrates both the concentration of last year's Budget on the family and the improvement, starting on 4th April, to Family Income Supplement, which will mean an extra £1 a week for most of the income levels concerned. When uprating comes into force next month, my right hon. Friend the Secretary of State for Social Services will launch a further publicity campaign to improve the level of take-up, and we shall continue to develop this benefit until it is superseded by our longer-term plans for a tax-credit scheme.

Among so many measures contained in the Budget it is easy for honourable and right honourable Gentleman on both sides of the House to pay too little attention to the increases in social security benefits announced by my right hon. Friend the Secretary of State for Social Services additional to and accompanying retirement pensions. My right hon. Friend referred to the extra increase of supplementary pension and to the fact that with annual uprating the old "ups and downs" anomaly is ended. He pointed out, too, that the present pension uprating after one year represents a bigger annual rate of increase than last September's uprating coming after two years. I only add to right hon. and hon. Gentlemen who are seeking an earlier increase than October that they are asking for a pension uprating every six months, despite the fact that their own pension plan allowed not even for an annual uprating but for one at two-yearly intervals, and that a regular increase every year is the best protection that we can give to retirement pensioners.

Even on the very pessimistic assumption that I read in the Sunday Mirror that the pensioner s cost of living is increasing by 10 per cent, a year—and I say "pessimistic" because there is no reason to suppose that the pensioner's cost of living is increasing any faster than the 5½ per cent. current annual rise in the retail price index—the present up ratings will bring, in the words of my right hon. Friend the Secretary of State for Social Services, …a real, though modest, improvement in buying power".—[Official Report, 22nd March, 1972; Vol. 833, c. 1506.] by October next. In fact, I believe, as my right hon. Friend does, that when we can measure the rise in prices between now and October, there will be an improvement in the proportion of pension to average earnings, and the fall in that proportion will have been halted and, I hope, reversed. This is necessary, and I do not think that right hon. and hon. Gentlemen opposite have any right to criticise my right hon. Friend on that score. Even the Fabian Society's publication "Labour and inequality" recognised the fact that Labour failed signally to turn promises into performance during the period in office of right hon. and hon. Gentlemen opposite.

The measures to which I have referred reflect in more general terms the development by this Government over their whole period in office of public expenditure programmes designed to give more selective and more effective help where the need is greatest, whether it be to individuals and families who are suffering most, to help deal with those parts of the country where unemployment is worse and those areas where older industries are declining, or to help developing industries and to open up opportunities for competitive industry in overseas markets.

When we embarked on these programmes we put into practice from the start the principles of selection and effectiveness which, judging from his speeches, the right hon. Member for Stechford seems at last to have accepted. He said the other day in the speech to which I have referred already that not only the very rich but also "the comfortable majority" would have to make their contribution. We have been able to make specific additions to specific public expenditure programmes for specific purposes. Much of this had already been begun when we published these programmes in last November's White Paper, and the programmes in that White Paper included extra provision rising to a peak of nearly £600 million in 1972–73.

Since the White Paper programmes were drawn up we have made still larger additions for the selective purposes of the Government, including those announced by my right hon. Friends in this debate. These additions amount in all to over £800 million in 1972–73. This means that the public expenditure programmes for the coming year are costing much more. They will cost at constant prices about 6½ per cent. more than those for the year just ending. This is a massive increase but it has been made for specific purposes, and the increases are selective, if I may so put it, not only in space but also in time, with a heavy concentration on the very short-term programmes.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

Can my right hon. Friend say what is the forecast of the proportion of total domestic resources pre-empted by the public sector after the latest increases?

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

If my hon. Friend had been a little more patient, he would have discovered that I was about to come to that. The 6½ per cent, is the increase in public expenditure programmes this coming year over last year. That rate of increase will slow down in 1973–74 to about 2¼ per cent., and in the two years after that to about 2 per cent. I must add that it has only been possible to increase public spending in the short term to this extent without losing control in the longer term because of the considerable and continuing improvements which have been made over the years in the methods of controlling public expenditure which themselves have been reflected in successive White Papers.

Large though this increase is, my hon. Friends will be relieved to know that it is not likely over the whole period to 1975–76 to be greater than a properly cautious Treasury Minister would expect the rate of growth of the nation's output to be, provided that the country responds to the lead and to the opportunity offered by the measures announced by my right hon. Friend in his Budget speech and by my other right hon. Friends in the course of this debate.

The growth of public sector demand on output in the period ahead will be at its greatest when most needed, in 1972–73. This is reflected in the rate of growth of the real cost of these programmes to the economy based on the net demand on output that they imply. The programmes set out in the November White Paper were estimated to embody an average increase of 3·2 per cent. per year between the years 1971–72 and 1975–76. After all the additions to which I have referred, this average annual increase over the period rises only to about 3·5 per cent. per year. It is because of this concentration on the short-term that the average annual increase over the whole quinquennium—the demand that public expenditure makes on resources about which my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) asked me—rises by only 0·3 per cent.

Since one of the main objects of all these measures is to achieve a rate of growth in the economy as a whole of some 5 per cent. per year, it means that even at the new rate of increase of public spending public expenditure as a whole over the years should be making relatively lower demands on the economy as a whole. I think that my right hon. and hon. Friends will agree that it is right that this should be so. It is in full accord with the general policies of this Government. It enables detailed plans to be made by the spending Departments within these limits with greater confidence, and it reflects the traditional prudence attributed to Chief Secretaries to the Treasury.

Photo of Mr John Nott Mr John Nott , St Ives

May I refer again to the question asked by my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne), who wanted to know what proportion of the gross national product, taking the predictions which my right hon. Friend has made, will be taken up in future years by the public sector?

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

I am afraid that I cannot answer that question without notice. I have not the figures with me. But I hope that I can reassure my hon. Friends that any extra amount that the public expenditure programmes take over and above that which they have agreed already in the White Paper is very marginal and far less than the increase in the rate of output that it is designed to achieve, and, therefore, the share of public expenditure programmes under present forecasts is indicated to be rather less than it would have been otherwise of the total rise in the gross national product.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

Surely it was a continual instance of Conservative criticism of the Labour Government that they were committing expenditure ahead before achieving the growth rate. Are not the Conservative Government doing exactly the same?

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

Not at all. The right hon. Gentleman's Government committed themselves to expenditure ahead of growth rate. We have committed ourselves to expenditure in the very early part of this year and next year. The expenditure to which we are committed is sustainable within the existing terms. It is the future growth where the public expenditure programmes have not been laid down. We have not, as it were, pawned the future to set up the Chancellor's present measures.

My right hon. Friend, in using both taxation and public expenditure, has succeeded in being sufficiently flexible to meet the short-term problems and at the same time has been consistent over the longer term in carrying out the Government's policy and programme for this Parliament.

Photo of Miss Irene Ward Miss Irene Ward , Tynemouth

In view of what my right hon. Friend has just said, may I ask whether it will be useful in Committee for hon. Members on this side to let the Government know what they would like taken into account for the future when the growth occurs? We shall then know with what we are dealing in future. I should find this very interesting, because I would like a lot of things done.

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

It is always a great pleasure to take account of anything which my hon. Friend would like to put forward. However, I must warn her against, as it were, following the Labour Party's example—

Photo of Miss Irene Ward Miss Irene Ward , Tynemouth

It was just a suggestion.

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

—and being a foolish virgin by spending savings before they have been made.

What I have said about the limitation on our programme in the short term in no way detracts from—rather it reinforces—the assurances given by my right hon. Friend to industry in announcing the new system of general and regional investment incentives. My right hon. Friend made it plain that such an assurance about the stability of these arrangements should be made so that industry can make long-term plans for investment and modernisation with confidence. This is the first of the Chancellor's three Budget aims, to which I have referred: namely, to give every encouragement to British industry to be efficient and forward-looking as we set out on our European venture.

The Government are now playing their part both by the stimulus of reflation, which, as my hon. Friend the Member for Leek (Mr. Knox) argued, is essential for increased investment, and by the more direct encouragement of investment. We have now introduced new policies to create a better climate in which industry can gear itself to meet the challenge of Europe. But it is even more important that a new impetus towards modernisation should come from the private sector itself. For this reason, I welcome the initiative recently announced by the Bank of England, as a result of consultations in the City and with the C.B.I., on ways of improving the direction and management of companies. I hope that it will lead to a situation in which investors will be able to exercise a more constructive influence and play a bigger part in the modernisation of British industry.

In the public sector, the Government have an equally constructive part to play as an investor of public money in industry both in relation to the nationalised industries' investment programme and in regard to public investment in the private sector. I do not seek to imply that the Government should interfere in the day-to-day management of these companies, but rather that they have a general responsibility, which stems from the provision of finance which they should and must make in the private sector, too.

It is important in this connection, in considering both the different parts of public expenditure programmes and their financing, to distinguish between those items which are broadly similar to private sector industrial investment and those other forms of public investment, including current public spending of various kinds.

It is important, too, in the present situation, that we achieve a high and sus- tained level of investment, both public and private, to match the high and sustained level of personal savings which it will be our continuing objective to encourage. It is better that the resources needed for increased investment should be released by voluntary savings, which enhance the security and independence of the individual, rather than by the forced saving of taxation.

I should like to say how spendid it is is that personal savings are doing so well. National Savings, in particular, have broken all records in the past year with an increase amounting to over £730 million, including accrued interest. I should like to congratulate the Chairmen of the National Savings movements in England, Wales and Scotland, Sir Robert Bellinger and Lord Birsay, and all those concerned with them.

My right hon. Friend has produced a massive Budget in which he has contrived to make the changes promised by this Government. It contains measures to encourage saving, to make it easier for earners to become owners and, in so doing, as the Secretary of State for the Environment pointed out, helps to bridge the gap between shareholders and management. It contains measures to lessen the burden of capital gains tax for the small saver in unit and investment trusts; to remove it from gifts to charities—charities which also benefit from estate duty changes—and to give relief as promised for widows and widowers. My right hon. Friend has introduced measures to help small companies, to lower the tax threshold, and, above all, to reduce taxation.

My right hon. Friend has extended and developed the fundamental reform of the whole tax system, including bringing forward the tax-credit scheme which I believe can not only eliminate most of the anomalies inherent in our present system of taxation and social security benefits but can be the most significant advance in social justice since the war.

At the same time, my right hon. Friend has combined the use of both taxation and public expenditure so as to deal effectively with the short-term problem without the danger of losing control of the longer term and thus encouraging a sustained as well as a faster rate of economic growth. In short, my right hon. Friend has produced a Budget of which he can be proud and which the whole country will welcome.

4.8 p.m.

Photo of Mr Dick Taverne Mr Dick Taverne , Lincoln

Some aspects of the Budget, as the Chief Secretary has observed, have been universally welcomed. Last year the Chancellor secured universal approval for his amalgamation of income tax and surtax, and, equally, the setting up of a Select Committee to inquire into a proposed tax change was universally commended.

This year I believe that right hon. and hon. Members on both sides of the House welcome the proposals of a Select Committee to look at the tax-credit scheme to which the Chief Secretary has just referred. The outline of the scheme, which the Chancellor showed—a scheme prepared by Mr. Cockfield—has at first sight many attractions and is, clearly, well worth looking into.

However, the main tests of the Budget must be, first, whether it will reduce unemployment in the coming year, and not just on a temporary basis, and, secondly, whether the general pattern of the tax reforms proposed and so carefully prepared by the Chancellor will help towards promoting a more just society.

I sympathise with the Chief Secretary in attempting to cast new light on these problems at this stage of the debate when it might lack the initial freshness of the first few hours. But on the whole he did not give a great deal of help on the first question. Hon. Memberson the Government side might be wise to temper their enthusiasm about the Budget with some caution. They were equally enthusiastic last year when the Chancellor's judgment was proved by events to be hardly above question. Last year the Chancellor thought his measures would lead to some decline in unemployment and we argued that inevitably unemployment would increase. It has increased dramatically. During last year's debate we argued that the Chancellor would have to use the regulator and we asked him to cut purchase tax at once and not wait for July, when we said he would have to use it, as later action would have to be more drastic and would be less effective. The right hon. Gentleman did have to use the regulator in July and it did prove ineffective except for a fairly short-lived consumer-durables boom.

In the Budget debate and elsewhere we repeatedly attacked the Government for their abandonment of investment grants, particularly because of the effect this would have on the regions. The Government have now restored investment grants to the regions.

We told the Chancellor time after time from this side of the House that with far from a more expansionist policy than he was proposing last year encouraging and adding to inflation, it would reduce the pressure on unit costs. The idea was ridiculed by the right hon. Gentleman. In this year's Budget speech he put it forward himself. I shall illustrate the last of these points by two quotations. During the debate on the regulator last May the right hon. Gentleman, when I suggested this very argument to him, said: The hon. and learned Member for Lincoln put forward what seemed the rather extraordinary idea that the answer to inflation was to put one's foot hard down on the accelartor and expand as fast as possible. This, he said, would lead to a fast rise in productivity and, therefore, as I understood his argumentt to a slower rise in unit costs. I guess that if he and his colleagues were in government now they would not be putting forward such wild notions."—[Official Report, 11th May, 1971; Vol. 817, c. 288.] In his Budget speech last week the Chancellor said: I do not believe that a stimulus to demand of the order I propose will be inimical to the fight against inflation. On the contrary, the business community has repeatedly said that the increase in productivity and profitability resulting from a faster growth of output is one of the most effective means of restraining price increases."—[Official Report, 21st March, 1972; Vol. 833, c. 1353.] So the Chancellor's judgment is not always above question.

The last thing we wish to see is the Government persisting in their errors. We welcome the conversion which they have now shown. But the past errors of economic management of which they now stand convicted, on their own admission, have infinitely worsened the problem with which the Budget has to deal. That should lead hon. Members on the Government side to exercise some humility and it might lead one to question whether self-evidently this time the Chancellor's judgment in his Budget is soundly-based.

Personally, and I say this with some regret, I have the gravest doubts whether even now the Budget strategy is right. Why was it, after all, that unemployment increased so heavily last year? It was because of the depression in the manufacturing sector. While services boomed, no net increase in output has been achieved in manufacturing since the beginning of 1970. The large surtax cuts and the policy of redistribution towards the better-off, which were to have provided the incentive for management and to set industry free, have proved totally irrelevant. The tax cuts and the increases in public spending have proved largely ineffective. We moved from a surplus in the public sector of £800 million in 1970 to a deficit of nearly £700 million for the last financial year, and one might have expected a great stimulation of economic activity. But there was almost no response from the private sector. Companies absorbed a considerable part of the increased demand in the form of rising profits, and they cut back their investment.

The more prosperous households got the bulk of the benefits but saved them, as a number of my right hon. and hon. Friends have pointed out. The poorest section of the community in many cases suffered an erosion of its spending power, partly through inflation and unemployment, or short-time working.

There is no doubt the handouts for the next year and the reductions in purchase tax and income tax proposed in the Budget will encourage another spurt of consumer spending, and this will operate particularly in durable goods, which are increasingly imported goods. But much of the handout will again be absorbed in higher savings. The Financial Statement implicitly realises this. Growth of the gross domestic product sufficient to reduce unemployment at a rate of a little over 100,000 is to be achieved by a massive public sector deficit of over £2,400 million, which is much the higher of any post-war figure. If this is combined with the fact that next year will still show a balance of payments surplus on the Government's estimates, then the figures in the Financial Statement clearly imply that private saving is expected to exceed private investment by a figure approaching £3,000 million. This means a large transfer of wealth from the public to the private sector.

The Chief Secretary congratulated himself on the increase in savings which he expected. But he and the Government are trying to have it both ways. If savings are to increase this year, it will mean that the stimulus which he is seeking to give the economy will not have its full effect.

There is no doubt that continued injection of public spending and tax cuts will sooner or later revive the economy and restore some measure of confidence to consumers, if not to producers, and it is notable that the manufacturers have been the least bullish about the Budget effects. But as and when the economy picks up we cannot fail to foresee a move into deficit on the balance of payments. There will be all the symptoms once again of a domestic boom based on a rising import gap. What the Chancellor has given us after all is very much the same remedy that we had from Mr. Heath coat Amory in 1959 and the present Home Secretary in 1963.The public sector deficit will then seem excessively large and increases in taxation and expenditure cuts will have to be imposed.

There is one major change. Every Front Bench speaker on this side has welcomed the Chancellor's readiness to alter the exchange rate. This is a major step forward, but interest rate flexibility, as the hon. Member for Oswestry (Mr. Biffen) will admit, is no cure-all. It eliminates artificial problems in the context of international trade and leaves us with real and fundamental economic problems. Our long-term employment prospects will still depend on the prospects of our manufacturing industry, on the share of trade that this achieves and on the level of investment that it generates. It is an illusion to suppose, with all the Western European economies tied together in an integrated network of trade, that our problems can be solved by domestic fiscal action alone. The measures in the Budget are essentially a relief programme. They may alleviate some of the present distress, but there is precious little in them to give the economy more lasting vigour and strength.

The basic cause of this is the doctrinaire belief of the Government in the free market, now perhaps somewhat modified, and their fear of discriminatory and selective policies which in shipbuilding and machine tools have themselves been somewhat modified. But the Government's past record gives little ground for confidence in the future.

It is true that we on this side have in the past been accused of intervening too much on the side of manufacturing industry, of a bias in favour of manufacturing. This matter should be cleared up. It is, of course, absolutely true that there is no moral basis whatever for distinguishing between manufacturing industry and private industry. A person who sells goods is not in some way inferior to or performing a less laudable rôle than someone who makes goods.

Second, the contribution to the balance of payments of invisible exports is, of course, acknowledged by everyone, and is enormous. Third, the growth of the service sector is a feature of every developed and, one would hope, more civilised community. But two fundamental problems remain. The fundamental weakness of the British economy has lain in manufacturing industry and its failure to maintain its position in the world. It is this failure which has basically caused our heavy unemployment. Manufacturing industry accordingly needs help in a way that the service industries do not.

There are two measures which the Government should have considered if they were concerned with the longer-term structure of the economy. These were a doubling rather than the abolition of the regional employment premium, and the possibility, mentioned by my hon. Friend the Member for Heywood and Royton (Mr. Joel Barnett) of a different form of finance for the national insurance contributions which have been raised.

Both would have been a signal form of help to manufacturing industry, exports and the regions. Without structural aid for British manufacturing industry, there is an increasing danger that we shall more and more become a nation of shopkeepers, buying and selling goods manufactured by others. There should be no illusion that we can achieve full employment without a strong industrial sector of our own.

I now come to the second test, the effect of the Government's taxation changes. I start with their defence of the value-added tax, because that illustrates some of their dogmas about non-selectivity. The Minister of State on Thursday night put forward the extraordinary defence that 6,000 extra civil servants was a small price to pay for a tax which was non-discriminatory and non-selective and which would end distortion.

It should be noted that one of the principal arguments in the past for the value-added tax was the resultant broadening of the tax base. The N.E.D.C. Report strongly implied that this broadening would be a principal justification for such a tax. This notion has disappeared. It is now the non-selectivity of the tax which is the main reason.

But why should taxation, including indirect taxation, not be selective? Why is it self-evident that children's clothing should be taxed at the same rate as fur coats? Why should not the indirect tax system, contrary to the implications of this argument, discriminate on grounds of health or pollution?

It is argued that there will now be no distortions. I should be very surprised if there are not. Every exemption will introduce a distortion. Those who offer financial services, and who will now be exempt, will be tempted to take on for themselves certain transactions on which they would have to pay tax and would be unable to reclaim tax if they were done by others. The whole pattern of house sales without their contents will now be affected. I predict with some confidence that more and more anomalies will come to light in Committee and as the tax is introduced.

The Government then suggest that the value-added tax in its present form will not be regressive. In the first place, this will require the most detailed analysis, which has not yet been possible, but in the second place it will depend to a large extent on its effect on the cost of living.

I fear that the Minister of State on Thursday was far too optimistic about its impact on the cost of living. Does he really argue that the cost of living rise in Denmark was entirely due to the fact that the tax was increased? Prices rose by 7·9 per cent. in six months. What about Holland, where prices rose 5 per cent. in three months, or Norway, where they rose 6¼ per cent. in six months, or Belgium, where the T.V.A. is known as the tout va augmenter

I have no doubt that measures could be taken to mitigate the impact of the tax on the cost of living, but there is nothing like the Decimal Currency Board which supervised the transition to decimalisation. There is no longer a Prices and Incomes Board which could exercise some control over price rises—but perhaps in his next speech the Secretary of State for Trade and Industry could re-introduce the Prices and Incomes Board in a modified form under another name.

In any event, there has already been a shift towards indirect taxation which is regressive in itself. My hon. Friend the Member for Farnworth (Mr. Roper) has pointed out that selective employment tax and purchase tax at the present level raise about £1,500 million but that, according to Financial Statement, if one takes into account the special tax on cars, the yield from this tax and value-added tax in 1973–74 is expected to be £1,600 million. So there is an increase in the proportion of the tax which will be taken by indirect taxation despite the fact that we have, bar Denmark, the highest proportion of gross national product taken by taxes on consumption of any nation in Europe.

The other long-term tax changes which have been definitely introduced in the Budget cannot be regarded as anything but regressive. They include the change in corporation tax with much higher dividend payments. The change in tax on unearned income means less tax on these larger dividends. They include the benefits for unit and investment trusts, which have turned out to be bigger than anyone in the City at first realised, and even than the Financial Secretary predicted in an answer he gave in the past about the relief which was asked for by the trusts themselves. They include the allowances of tax relief on loans.

A great deal has been said about the first two. I want to add a word about the last. First, there is no question but that the tax relief on loans is selective and discriminatory in the wrong way and goes directly against the recommendations of the Crowther Report on Consumer Credit. That report said: In any changes that are to be made now, therefore, we urge that regard be had to the two main principles of the Report—that all consumer credit transactions, whatever has hitherto been their legal form, essentially partake of the nature of the lending and borrowing of money; and that all transactions serving a similar purpose should be treated alike. That is a very long way from what has happened.

Second, let no one regard this as a minor measure, because the amount of tax involved is said in the Financial Statement to be some £3 million this year and £7 million in a full year. The £3 million represents the tax on loans which is paid now, but, of course, since 1969 far fewer loans have been taken out. From now on, as every financial commentator has said, there is likely to be a great bonanza. The attractions will be greater than in 1969, because there will be higher dividend payments and a lower rate of tax on these dividend payments.

The only difference from the pre-1969 position apart from this is that one form of speculation—or, rather, of certain gain—through buying gilts will be legislated against. But it will pay even those on the standard rate of tax to take out a loan and borrow for investment. This will offer a splendid opportunity to those on higher tax rates.

My hon. Friend the Member for Islington, South-West (Mr. George Cunningham) has pointed out some of the possibilities. In fact, it is a speculators' charter, of which even many City commentators feel somewhat ashamed.

As my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) pointed out, the regressive nature of these various tax changes is particularly serious from a long-term point of view, and I close my remarks by giving some personal reasons why I believe this to be so.

The Chancellor's main aim is growth, and at this juncture I agree with his aim, though not with all the methods by which he hopes to achieve it. At present the only way to cure unemployment is to go for the maximum growth. We cannot be the only industrial country inside, or, for that matter, outside, the Common Market without growth. Indeed, if we were the only nation without an expanding economy when all other industrial economies were expanding fast, we as a nation would move backwards, just as those who have been unemployed in the last year have found their standard of living moving backwards.

In the longer-term we shall have to review our attitude to growth and concern ourselves more with quality than with quantity growth or G.N.P. I recognise that this is not a popular view in the House. Nor is it popular with business men, who exist to maximise profits, or with economists, who, like politicians, are professionally dedicated to achieving the maximum G.N.P. To tell them that their central aim may be harmful to our long-term well being is like trying to convince tobacco manufacturers that smoking causes cancer. The consequences of altering our attitude to growth look unpleasant, and I certainly agree that they will create huge difficulties. It is argued, therefore, that they cannot be true; but, alas the consequences do not follow.

The majority of scientists who specialise in environmental questions may be right, and I fear that they probably are. Dr. Mansholt may be right. The Club of Rome may also be right. If so, there is a limited time within which the advanced and developed countries must change the principles on which their economies are managed.

This will mean far more attention to labour-intensive industries, and, once again, the intended abolition of R.E.P. is a step in the wrong direction. It will make the redistribution of wealth both more difficult and more urgent. It will call for a greater degree of selectivity and intervention by the Government generally and it will make the philosophy of the present Government, with their non-interventionist view of industry and their policy of social redistribution in favour of the wealthy, not only irrelevant but positively harmful.

4.33 p.m.

Photo of Major Sir Henry D'Avigdor-Goldsmid Major Sir Henry D'Avigdor-Goldsmid , Walsall South

The hon. and learned Member for Lincoln (Mr. Taverne) has endeared himself to hon. Members on both sides of the House by his lucid exposition of any argument, by his clarity of thought and by his ability normally to see both sides of the question. Were I involved in assisting the police in a serious matter I would certainly desire to have his services in pleading in mitigation because no one could put a bad case more eloquently and agreeably.

On this occasion, however, we missed the clarion call, which would be customary at this time from the speaker from the Opposition Front Bench, before heralding the vote in the Lobby at the end of the debate. Although the hon. and learned Gentleman was supported by the few but fit behind him, they were unable to feel that even his endeavours must drive one to vote against this Measure, in respect of which the hon. and learned Gentleman, with his keen sense of fairness, evinced a great many more arguments in favour than against.

I wish at the outset to comment on the Report of the Select Committee, which has received many favourable remarks. In our main conclusions the Committee was pushing against a very open door. I do not feel, on consideration, that we were asking the Revenue to accept anything very different from what it originally had in mind, and to some extent this was a sham fight, and it has been well argued that it was not a real contest.

The Committee was asked to report, and it did, in favour of an imputation system. This was the main burden of the report, but some by-products were thrown up which were of value and which my right hon. Friend the Chancellor of the Exchequer has noted.

My right hon. Friend took note of our recommendations in respect of capital gains on unit and investment trusts, on the special treatment of building and co-operative societies, on what are called statutory and non-profit-making companies, all of which came within our purview, and special consideration has been given to small and close companies.

Many kind things have been said about this report, and it would be less than civil if I did not acknowledge them on behalf of my Committee. Credit is due to its members, who co-operated dramatically, and special mention is due to my hon. Friend the Member for St. Marylebone (Mr. Kenneth Baker) and the hon. Member for Farnworth (Mr. Roper), both of whom have taken part in these debates.

I understand from some of the speeches that have been made in these deliberations that some of our recommendations will be hotly discussed in Committee on this measure. While I understand that hon. Gentleman opposite need something to discuss, I do not think it will be a profitable discussion because I always remember my old friend Lord Rhyl, who used to adorn our debates, saying that hon. Members were not at their best in striving to act as tax lawyers. This, I am afraid, is something that is in store for us in Committee if hon. Gentlemen opposite insist on discussing this matter at length.

However, in case my head was turned, I at least had the advantage of the advice of the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins), who commented: Equally misguided is the change in corporation tax.…There is no help in what is proposed to a higher rate of investment".—[Official Report, 22nd March, 1972; Vol. 833, c. 1531.] If the Select Committee had been asked to advise on fiscal means of inducing a higher rate of investment, it would indeed have been an interesting discussion, but with the best will in the world, and we had a lot of good will, a unanimous recommendation would have been highly improbable.

Our brief was set out for us in the Green Paper, Cmnd. 4360, which postulated the Government's intention to reform the structure of corporation tax so as to remove the present discrimination against distributed profits. Thus, in criticising us, the right hon. Member for Stechford is in the distinguished company of Professor Kaldor, who, in Appendix 15 of our report, put in an interesting letter suggesting that it was wrong to reform the existing system within the context of our brief. The hon. Member for Farnworth pointed this out in his speech, and his remarks on this subject can be found in the Official Report of 23rd March, 1972, in col. 1777. My right hon. Friend the Chancellor gave a clear brief and we sought to interpret it. Because we had a clear brief and directive, I am glad to think that our recommendations at least cast some light on the situation.

There are two matters which are allowable to be put before such a Select Committee. One is the question—my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams) has been at enormous pains to produce a strikingly effective scheme—of what is now called the tax-credit scheme, which most of us know as negative income tax. My right hon. Friend said that he thought that this was eminently suitable for examination by Select Committee, because it was acceptable in principle to hon. Members in all parts of the House. If that is so, I absolutely endorse what my right hon. Friend has said: that it is suitable for examination by a Select Committee.

However, on the other suggestion, of changes in estate duty, on which my right hon. Friend has published a Green Paper, I doubt very much whether this is susceptible of being profitably examined by a Select Committee, because there are two quite different views on this. One could not get a unanimous report on the changes in estate duty because right hon. and hon. Gentlemen opposite are not interested in reducing estate duty. We should not have a very profitable Select Committee discussion if there were not a clear directive from the Chancellor as to the direction in which our thoughts should be guided. Therefore, like V.A.T., which my right hon. Friend mentioned last year, this is something that is probably best dealt with by the Government and upon which the Government should express their views and intentions.

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

I am not sure whether I have understood my hon. Friend aright. I thought he was saying that we had suggested that both Green Papers should in due course be considered by a Select Committee. I understood him to say that, but that was not what I said in my Budget Statement. I made no observations about the Green Paper on a possible inheritance tax. It is for the House to decide, and it is certainly not for me to give any guidance as to whether it would be appropriate. I think there is something in what my hon. Friend says. It was on the other Green Paper, and only relating to that, that I thought it was, in this case, particularly appropriate for consideration by Select Committee.

Photo of Major Sir Henry D'Avigdor-Goldsmid Major Sir Henry D'Avigdor-Goldsmid , Walsall South

I am much obliged to my right hon. Friend. It seems that our thoughts have led us both in the same direction; that is to say, that the second of these two matters is one on which a Select Committee would not be able to add much to the Government's thinking.

So much for the Select Committee. I turn to one or two other matters. The first question is one of unemployment. My right hon. Friend has said that he is looking for a permanent improvement in both employment and living standards."—[Official Report, 21st March, 1972; Vol. 833, c. 1344.] All of us, obviously, have lived with this problem and have seen it growing. I wonder very much whether there is really a necessary correlation between unemployment and the level of Government expenditure, because when one gets down to grass roots one does not find the likelihood of great extra employment in industries one knows about. During the last week I have had the advantage of talking to half a dozen farmers. To each of them I said "Suppose the Government gave you £10,000. How would you spend it?" They thought of various kinds of machinery they would wish to buy and of additions to their buildings. I said "Which of you would employ one man more?", but none of them would employ one man more. Agriculture does not come within this measure, and I do not question that.

My hon. Friend the Member for St. Marylebone made a very interesting point when he said that the catering and hotel trade employed exactly the same number of people in 1970 as it did in 1960. Considering the enormous increase in investment in those trades, that is a remarkable statistic. Just to confirm that, in the last months I have had the opportunity of investigating the affairs of the National Dock Board. I am certain that the increase in investment in the docks would not add anything to employment; quite the opposite. I do not wish to pre-empt what my Committee will say, but if every dock were given an extra £1 million, it would probably add to its containerisation and would, therefore, reduce its demands on labour. This is a phenomenon we have to live with. We shall not increase employment simply by extra Government expenditure.

Except for the war years we have not really had full employment. We did not have full employment until the late autumn of 1940, and then we had a dislocation and the recovery from the war years. Then we had the feeling that there was a shortage of labour—as there was. Employers hoarded labour. Therefore, it was only relatively recently that the plenitude of labour was discovered. Mr. James Griffiths, who is much respected in the House, wrote a letter to The Times referring to The Times editorial: If this Budget turned out to produce only 4 per cent. growth and output per man is growing at 4 per cent., there will naturally be no change in the level of unemployment. Commenting on that editorial, Mr. Griffiths said: As an old trade unionist, I am disappointed that, so far, none of my trade union friends has revived what was once our cure for shortage of work—share it. These are obvious truths which we ignore at our peril.

We have to find not financial but social remedies for this particular situation. First, we must have a higher school leaving age, which means an expansion in the education services. In this connection, I quote very briefly an article by Evelyn Cox in the Sunday Telegraph of yesterday about the Young Volunteer Force, in which Mr. Speaker has directly interested himself recently. School-leavers have been the least affected. Of the 450,000 people who left school last summer, only one in 50 was still unemployed in December. That is very interesting. The article continues: The Young Volunteer Force has also noticed that more and more teenagers are just 'hanging around' their offices. In fact, they have become such a nuisance at the Newport (Mon.) branch that the Y.V.F. has been forced to bar them altogether. This force has been seeking to employ these young people and has had to turn them away. This adds to the numbers of unemployed and is likely to add, in the not-too-distant future, to the numbers of the unemployable.

A direct effort in this matter might have some result. Mr. Steen, director of the Young Volunteer Force, is getting £500,000 from the Department of Employment this year for experimental schemes to provide community education and for other matters. I shall not go into that now because it is not necessarily germane to what we are talking about. But we err very gravely if we think that we shall materially affect the numbers of unemployed only by pouring grants into industry and putting money at industry's disposal.

On the third of my right hon. Friend's Budget aims, he has made a most brilliant start; that is, the problem of increasing investment and the confidence in investment. The maintaining of these investment incentives until 1978 is a dramatic step forward because it gives an added dimension to those investment decisions. Over the last year or so too many investment decisions have been held up by doubts as to whether the present Government's policies may or may not be frustrated by a successor; if so, that would mean making an investment which in two years' time could no longer be viable. Nowadays, my right hon. Friend has taken the bull by the horns and has said that these grants will be maintained until January, 1978. By any standards, this is a dramatic step upon which I deeply congratulate him. I am certain that the return of confidence to investment is vital to us. This is something which, if done deliberately and bravely, would be of great benefit to the people of this country.

As I represent a West Midlands constituency, I am naturally particularly interested in the raising of the limit on industrial development certificates. This is a very useful measure for moderate sized workshops and factories that want to expand but have not got the men or the material to do so near at hand. They can now do so near home. I congratulate my right hon. Friend on having taken this step.

Lastly, Mr. Nicholas Davenport, who is not normally a great friend of this Administration, in the Spectator described this as a saint-like Budget, an economist's dream. Who are we as mortal beings to intrude on this hallowed ground? I congratulate my right hon. Friend on what he has done.

4.51 p.m.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

I am sure that the whole House, such as it is, listened with interest to the account given by the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid) of the work of the Select Committee.

The Budget speech to which I want particularly to address myself is that of the Secretary of State for Trade and Industry, although I will not leave the Chancellor of the Exchequer entirely out of account. There has been some discussion about whether in regional and industrial policy the Government have not walked off with our clothes—or perhaps our cast-off clothes—but the Government are busily denying this.

Whether the Government deny it or not, what is absolutely clear is that they have changed their methods. I do not refer particularly to their attitude to "lame ducks". I never thought that they would carry through that policy. Many other people never really believed that the Government would carry it through. I quote from the Economist: …there is no particular reason to expect the Tories to be any sterner towards companies with financial problems than Labour was when in office. On their past record the Tories are likely to be every bit as soft a touch… That was the Economist of 10th October, 1970, which shows that the Economist was on that occasion showing unusual foresight.

The point on which the Government have certainly changed in part is in their attitude to disengagement. This was to be the great philosophy in their attitude to relations between Government and industry. They have now abandoned disengagement in part. They have departed from it, although without apparently knowing very clearly where they have arrived. Do they want to use free market forces? They are in a state of total ideological confusion, a confusion manifested both in the means they have chosen and in their failure to define their objectives clearly.

The speech of the Secretary of State for Trade and Industry on Wednesday showed every sign of constituting a policy which has not been properly thought out. What the House needs—I wish we could get it—is the Department of Trade and Industry's Programme Analysis Review. We want to see what the Department is aiming at and how it proposes to get it. This we have not achieved as yet.

I take, first, the character of the Government's selective instrument. Perhaps I should not complain about the creation of the Industrial Development Executive. After all, in a speech in the House on 10th December last year, when I was proposing the creation of a State Holding Company, I said that I had no doubt that the Civil Service had ready a plan of action to put before Ministers when it thought that the psychological moment was right, when it thought that Ministers' psychological retreat had gone far enough.

Here it is. I was absolutely certain that the Civil Service had that plan, because, after all, the Civil Service is the continuously learning element in our system of government. Politicians go in and out. Civil servants remain, and they have to learn to use their knowledge and to advise Ministers. I was absolutely sure that in the situation they then faced they were preparing a plan of this sort; because it has been revealed over the years that there is in Britain a real need to build up capacity for selective action.

The difficulty with the Industrial Development Executive is that it is unclear how far even yet the Government's ideological preconceptions have made parts of the plan which they were probably presented with unacceptable to them. I take, first, the question of the resources which are to be given to the Executive. I speak now of the resources for selective purposes, not the general grants that are being thrown around in all directions. We do not know—we have not been told, though we have asked—how substantial these resources will be. Why do we not know at this stage? After all, this is a Budget debate.

The reason given for the Executive being within the Government instead of outside the Government, as I would have thought better, is that these resources are substantial and therefore must be subject to ministerial control. But the plan is brought before the House and the Government cannot even tell us what the expenditure by way of resources on selective action is to be.

The Secretary of State for Trade and Industry is not able to tell us whether the Executive will be able to hold equity and says we must wait for the Act. Why cannot the Secretary of State tell us? It is of fundamental importance, particularly to hon. Members opposite, whether the Executive will be able to hold equity. The Financial Secretary said the other day that the great difference between the Executive and the I.R.C. was that the I.R.C. was an instrument of public ownership whereas everyone could have an absolute guarantee that this was not an instrument of public ownership. The Financial Secretary was talking nonsense. As a matter of a fact, one of my criticisms of the I.R.C.'s remit was that it was not permitted to hold equity long term.

It is important that an Executive of this sort should have that power, first because equity happens very frequently to be the best way of giving selective assistance, and, second, because there is a need for continuing supervision over those helped. So here again, there is this fundamental question, and no answer was forthcoming from the Secretary of State for Trade and Industry when the point was put to him. Is it simply that he was afraid of frightening his hon. Friends even more than he did last Wednesday afternoon?

Then there is the question whether the Executive should be inside government or outside government. Here, at any rate, we have a clear answer. The Executive must be inside government because of the need for ministerial control and responsibility. I question that. I do not believe this is the best answer. Is this the sensible and the best way to get the right people to do the job, to achieve the necessary speed of action, to make possible the necessary risk taking? Do the Government want my right hon. Friend the Member for Manchester, Cheetham (Mr. Harold Lever), as Chairman of the Public Accounts Committee, whom I am glad to see here, breathing down the necks of the Executive all the time?

The first thing that the Secretary of State for Trade and Industry did with enormous care when he was announcing the creation of the Executive was to say—"The name of the accounting officer is so-and-so", so that my right hon. Friend the Member for Cheetham should be happy with the existence of lines of responsibility. Of course it will be all right as long as my right hon. Friend is there. He has a very clear view of the relationship which should exist in cases such as this.

I believe that the Government, in putting the Executive inside Government instead of outside it, have made a mistake. I compare the case of the Executive with what the Government are doing in the case of the National Training Agency. After all, this is not such a dissimilar body; it will have similar problems—the problem of helping industry; the problem of handling public money; the problem of getting the right people.

I quote one relevant paragraph from the Government publication "Training for the Future" on this very question whether this sort of body should be inside or outside government. I quote paragraph 127 on page 40: Much of the Agency's work would be…directly concerned with providing an advisory service to industry". Very well. Much of this work has not previously been within a government department and requires staff with personal experience of particular industries. The professional training staff of the Boards might well find a move to an independent agency easier than to an agency within the civil service". Again, relevant to the Executive which is to be set up. Moreover, the subsequent interchange of professional staff between the Agency and other employment might also be easier". Exactly the same point is relevant to the new Executive. In addition, more continuity of higher management might be achieved than is always possible with services run by civil servants whose careers may lie in a wider field". Then, in paragraph 128, it is said: …an independent Agency might also achieve more flexibility in day-to-day operation than could easily be secured even within a departmental agency". The provisional conclusion, therefore, is that that Agency should be outside the Government.

Similar considerations apply to the establishment of the Government's new Executive; so why should not such considerations lead them to the conclusion that this Executive, too, should be outside the Government?

For my part, I thought that the Industrial Reorganisation Corporation was too independent of the Government. I should have liked to see greater control. But it seems to me that by their programme for a National Training Agency the Government have established the right sort of compromise between the independence of the agency, on the one hand, and Government control, on the other.

I think that the real reason why the Government have decided to put the Executive inside the Government is that they do not want to admit that it is really the I.R.C. created once again. That is the first area in which the Government reveal total confusion in their plans.

I come now to the Government's attitude to investment incentives, another distortion of market forces. At least, certain points are agreed. First, the main impetus to investment comes from the prospect of profitable demand. It is in that connection that the Chancellor's statement about the exchange rate is so important, for it tells those proposing to construct capacity to meet export demand that they do not have to worry about whether they will be made uncompetitive by an unwise adherence to an exchange rate. That is of fundamental importance, though I still wonder whether all will be as easy as might seem when the Chancellor says it in his Budget speech. Nevertheless, it is an advance.

The second point on which we are now, apparently, agreed—at any rate, the Government are agreed—is that it is sensible to discriminate against services and in favour of manufacturing industry in development areas. We have heard the Secretary of State for Trade and Industry use precisely the same argument as we used to defend this discrimination, that services in development areas are carried along with the development of manufacturing activity. So on that, too, we are now agreed.

But what is the Government's view of the purpose of investment incentives? Is it simply to reduce company taxation, to make it possible to have a higher apparent level of company taxation but a lower actual level? Or is it to encourage investment to some degree? Is the development area differential intended simply to redeploy investment, or to increase investment?

The Secretary of State for Trade and Industry gave us his view. Free depreciation, he said, increases investment, encouraging modernisation, whereas the development area differential simply redeploys it. That remark did not get into the right hon. Gentleman's speech by accident. It was repeated—free depreciation encourages investment; the development area incentive simply redeploys it.

If that is the right hon. Gentleman's view—it seems to me nonsensical—why is he giving the differential to companies already there? The truth is that he has not thought the matter out. The development area differential encourages some investment, just as free depreciation encourages some investment. The cash grant system will encourage some investment because it cheapens it and makes it easier to make a profit on it. One example of this is what happens with inward investment, investment coming to this country from abroad, for which there is, and may well continue to be, increasing competition among the European countries. Inward investment is both redeployed and encouraged as a result of having cash grants in the development areas.

One question which investors will ask the Government has been answered; namely, how permanent all this will be? I am grateful to the Government for at least having given an answer to that.

My third example of the confusion in the Government's planning is this. Why have they reintroduced large cash grants in development areas? Why have they reintroduced incentives not related to profitability? Their great cry was that incentives must be related to profitability. The Financial Secretary has told us how the existing package of incentives is three times as encouraging to someone who is making a profit in a development area than to someone who is not making a profit in a development area. The real point is that he is giving cash grants to people who may not be making a profit, and that is a decided change.

I suppose that I should be grateful for what the Government propose, since, speaking from our Front Bench on the Finance Bill last year, I told the Government that if they wanted free depreciation in development areas they should add cash grants to it. Now they have done it. To that extent, therefore, I should be grateful. The Government have now restored and increased the differential; the cash flow to the development areas which we created is restored and increased, in plenty, and in despera- tion, the Government hoping, no doubt, that something will happen as a result. All the points I made last year have been fully attended to, so, as I say, I ought to be grateful. But for what purpose has it been done?

There are two possible purposes in having a cash grant system. One is to create employment. The Government have broken the employment link in the Local Employment Acts to which they formerly attached such importance. I remember questioning the Financial Secretary on this point when a large part of their proposed differential was to come from the operation of the Local Employment Acts. I asked how this could conceivably be done. They went ahead, they tried it, and now, two years later, they have decided to abandon it.

In his great "lame duck" speech on 4th November, 1970, the Secretary of State for Trade and Industry, speaking of the Labour Government's development area policy, said: It reminds me of trying to put the cream in your coffee by spraying a jugful of cream around the room in the dark".—[Official Report, 4th November, 1970; Vol. 805, c 1218.] Now look at the largesse of cream sprayed around, with complete lack of any discrimination. It is almost embarrassing to see the great jugful of cream which the Secretary of State is spraying around.

Photo of Mr William Hamling Mr William Hamling , Woolwich West

Gone sour now, perhaps.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

The set of incentives now proposed is more capital-intensive than ever before. As the hon. Member for Walsall, South said, why should anyone believe that these incentives will create more employment than they will destroy as a result of their capital-intensive nature? If the object is the creation of employment, or even the maintenance of employment, there should be some link to employment at least at the higher levels of cost to the Exchequer.

If that is the objective, the Government should do as my hon. and learned Friend the Member for Lincoln (Mr. Taverne) proposed, that is, preserve the regional employment premium as a minimum, double it if possible, and not just pussy-foot about it and talk about phasing it out.

The regional employment premium has one great advantage over other regional incentives such as the cash grant; namely, that it does not depend so much on the economic climate. The trouble with investment grants is that they are most useful when the economy is looking up, so most useful when they are least needed, whereas the regional employment premium steadily sustains activity in the development areas.

A second possible objective for cash grants—as I say, the Government have not defined which objective they have in mind—is deliberately to subsidise capital-intensive industry and make it more competitive internationally; in other words, to use the excuse of regional policy in order to subsidise exports and import saving.

If the Government are doing that, all right. Perhaps they do not want to say so. But if that is what they are doing—I suspect that there is a large element of it in what they are doing—at least they should not charge it to development area policy and tell us that it is the development area differential.

These are the reasons why I say that the Government are still in total confusion on their industrial policy. These are the questions to which they have not thought out answers, and this is why I want to see the Department's Programme Analysis Review so that I shall know what the Government think they are doing by this kind of method.

Finally, what effect do the Government expect this machinery to have, over what time scale and at what cost? They are, of course, two years late anyway. They threw away all they had at hand instead of turning it to their own purposes, as they might reasonably have been expected to do. The new machinery will take time to get going—more time because they have put it inside the Government rather than outside. Therefore, the main burden will fall on the reflationary policies. Even the Chancellor will not forecast what effect he expects. After years of operating at below capacity, the possibilities for increasing production without increasing employment are, I suspect, very large. Therefore, I suspect that at best we shall have a very small fall in unemployment with neither adequate selective machinery nor ade- quate reflation. In short, it is a poor outlook for the unemployed.

5.12 p.m.

Photo of Sir John Hall Sir John Hall , Wycombe

No one can complain, when listening to the right hon. Member for Birkenhead (Mr. Dell), that he is not very interesting and he is certainly always very amusing. Most of his speech seemed in a sense to be deploring the fact that my right hon. Friend the Chancellor of the Exchequer had taken the right hon. Gentleman's own advice given in previous years.

Photo of Mr Edmund Dell Mr Edmund Dell , Birkenhead

Without understanding it.

Photo of Sir John Hall Sir John Hall , Wycombe

I think that my right hon. Friend showed that he understood it only too well.

I am sorry that the hon. and learned Member for Lincoln (Mr. Taverne) is not here. At the end of his speech, he made a remark of considerable interest. He said that we must in future get away from emphasis on growth of the national product which everyone, whether politician or economist, pursues, considering instead the environmental quality of the civilisation in which we live, which will mean, among other things, the development of more labour-intensive industry.

That is interesting, because it means that the Labour Party is departing from what I thought was its policy—that we should endeavour to reduce the hours of work, to reduce the size of the labour force necessary to provide the high standard of life we can get for ourselves so that we can enjoy more and better-occupied leisure. If we are to go back to the days of labour-intensive industry, that is surely a departure from Opposition policy. I should like at some time to hear the hon. and learned Gentleman develop the theme, and I am sympathetic to the idea behind it.

At this stage in the Budget debate nearly everything that can be said about the Budget has already been said, inside and outside the House. The process begins with the instantaneous comments made immediately after the Chancellor has sat down, either on the television or in the Press. I sometimes think that it might be better if we withheld public comment on the Budget until the following day, because so often the blow-by-blow comments on television can be misleading and sometimes dangerous. But it does mean that by this stage it is difficult to find something fresh to say.

I was somewhat alarmed when my right hon. Friend the Chief Secretary to the Treasury introduced the baby metaphor, because my experience of picking up babies is that one is happy to put them down quickly again and this is not, I know, such a Budget. After all, I recall no other Budget which has cut taxation by £1,211 million in the initial year, with well over £2,000 million in a full year. This is indeed a tremendous cut. If any hon. Member can remind me of a Budget in which cuts have been made on a similar scale, I shall be delighted to hear about it.

The parts of the Budget I found of greatest interest were those relating to further tax reforms, among which the proposed negative income tax system is particularly interesting. A negative income tax system, or tax credit system, whatever one might call it, is something which some right hon. and hon. Members on both sides of the House have been urging from time to time. I remember raising questions about it and being told that until we had developed our computer organisation to a greater degree of sophistication, it would be almost impossible to introduce this tax. I am delighted that my right hon. Friend has found means by which he thinks he can merge the present income tax and the social security tax. It is a step in the right direction which will introduce a much fairer and more easily understood tax and social security contribution system.

Another reform, partly introduced and partly foreshadowed, is the reform of the death duty system. This has been long overdue. Chancellors from both parties have been under constant pressure to do something about it for many years. For my right hon. Friend to introduce the cut in death duties this year and to foreshadow a possible change to inheritance tax is very much to be welcomed.

The Budget Statement appeared to suggest that we are approaching nearer to a free floating pound. This is something which I and many colleagues on both sides of the House have been pressing for a long time and, just as the right hon. Member for Birkenhead is pleased to know that his suggestions have been accepted, it is nice to know that one's pressure on respective Chancellors can have success, even if one has to wait for some time.

Like the right hon. Gentleman, I want to direct my attention to the additional industrial and regional assistance to be given and to the industrial and regional development plan announced by my right hon. Friend the Secretary of State for Trade and Industry. It is a far-reaching, ambitious and, I think, an expensive plan. It seems to me that it can tot up in the end to £1000 million. Theoretically, added to the other Budget measures, it should reverse the downward trend of industrial investment and theoretically therefore should create further employment. I hope that the theory is borne out in practice, although I am not entirely convinced. I remember that in the last full year of the Labour Government about £250 million was paid out in regional schemes of one sort or another, and it is difficult to show that the country got the value for the money thus spent.

I have never been convinced that this form of investment grant or incentive—call it what one will—is likely to be fully productive or to give value for money. I think that it is generally accepted that before an industrialist decides to invest he wants to be sure that the investment represented by plant, machinery and buildings, combined with manpower and management talent, is going to be supported by reasonable sustained demand growth, not only at the time of investment but in the future. Unless industrialists have that kind of confidence, it does not matter what the investment grants are, they are not going to invest. This is especially true today when so many companies throughout the country have spare capacity.

If, as I believe, confidence is being created again today, I think that many industrialists will still wait to see how things are developing before they invest further, because they still have a good deal of spare capacity, both of machinery and factory capacity, to take up before they need to invest further. There will be a time-lag, in my view, before any real advantage is taken of the present and new scheme of industrial incentives.

Some firms will be encouraged to take advantage of the grants enabling them to modernise plant and get rid of some old factories and out-of-date machinery, and that must be, in the long term, good for the economy and, in the short term, of benefit also to the machine tool and, perhaps, the construction industries. That is also likely to create further unemployment. If people are to use such grants to modernise plant and machinery they will do it on the basis of labour saving developments. Unless an industrialist intends expanding productive capacity considerably in anticipation of increased turnover he is likely to end up with a labour force which may be smaller than the one with which he began.

The success of these proposals—which impinged on me with some surprise last Tuesday—will depend to a large extent upon how far the Budget strategy creates confidence in industry so as to persuade industry to take advantage, very quickly, of the incentives given to it.

The success will depend also upon how far, if at all, the value of those grants might be reduced by excessive wage claims leading to higher prices, and it will depend above all on the energy and imagination shown by the new Industrial Development Executive. It is a fascinating and challenging task.

There is little doubt that the Budget and the ancillary measures announced will stimulate economic growth and I see no reason why the Chancellor should not attain his target. It could also create roaring inflation, especially if he cannot get an adult understanding in all sections of industry about what should be done to ensure that wage demands do not out strip productivity. While inflation can be corrected, in the short term it has disastrous consequences on those unable to protect themselves from its effect. This is something the Chancellor must watch as the effects of the Budget become more apparent.

What the Budget will not do is to cure unemployment. It will make a contribution towards it, that is clear. I remember some months before the last General Election that in speeches in my constituency I was forecasting that we would reach 750,000 unemployed by June, 1971, which was not a bad forecast to make just before the General Election. I even suggested that we might, perhaps before the end of that year, reach the break-through figure of 1 million.

Photo of Mr David Marquand Mr David Marquand , Ashfield

The hon. Gentleman thought that his party would lose the election.

Photo of Sir John Hall Sir John Hall , Wycombe

I would have made the prognostication with even greater confidence if I had thought that. It was clear at the time from the policies adopted by the Labour Government and the way in which wage demands were beginning to take effect that the scale of unemployment was bound to increase, as night follows day. It took no great economist or even an outstanding politician to forecast that unemployment would follow and that it would be difficult to cure. There were lots of reasons for that apart from the traditional ones.

First, with mounting wage costs, developing rapidly in the latter part of 1969 and through to 1970, industrialists knew that they would have to start reducing their labour force, irrespective of whether they wanted to. The drive for greater managerial efficiency which had been going on for a long time, encouraged by all Governments, was beginning to take effect; people were beginning to use the labour forces more effectively and efficiently; industry was beginning to discover that for many years it had been over manned and was finding ways of reducing its labour force. Quite apart from introducing additional labour-saving machinery it was planning its work more intelligently.

The continued immigration over the years which had added to our labour force was beginning to have an effect and it was clear that unemployment would increase and would present a difficult problem. My own feeling about the Budget is that it may well have an effect on unemployment, it will create greater consumption and stimulate industrial activity, but I do not see the unemployment figure falling much below 750,000 to 800,000 by about the middle of next year. It will be difficult to get the figure below that. If we are to reduce unemployment to any considerable degree and to use this source of human wealth, we must find other ways of deploying it and I do not necessarily say that we will have to return to developing labour-intensive industries.

There are many jobs to be done in the environmental sphere, about which the hon. and learned Member for Lincoln was so concerned, where additional labour is required. There are many jobs still to be done in improving the environmental quality of our country which will require a great deal of labour and money. There is much outstanding work which any Ministry can turn up, held up for lack of funds and labour. We also have to consider how we are to plan to reduce the working week, so that we can get the same amount of production from fewer hours. Employing a larger labour force might be part of the answer. We have above all to consider how we will deal with the growing problem of the young unemployed.

Many people leaving school today find it extremely difficult to get a job. Work is a habit which has to be developed. None of us really likes work for its own sake. We get into the habit of working but if that habit is not inculcated when we are young it is hard to develop later. One of the snags over recent years when there has been this dfficulty in finding jobs for young people is that there has been a growing tendency for them not to want of work. This has come up in various social survey reports in recent months. There has been a scheme started called the Community Industry Scheme designed to encourage young people, at commercial rates, to take on such work as laying out adventure playgrounds, helping old people, clearing canals and such things. This might be looked upon as one way whereby we can usefully employ the available labour force.

One measure suggested in the Budget which I must confess I do not like very much is that of giving a moving grant of £100 to encourage people to move into areas of low unemployment. This creates some difficulties. For example, my constituency has something like 1·6 per cent. unemployed and vacancies have only comparatively recently been fewer than the number of unemployed. It is an area into which people from high unemployment areas should be encouraged to move. But if this happens we immediately need additional housing and schooling. We must provide the social services necessary for an influx of people. There are all these ancillary difficulties involved requiring great expense. The best thing is to develop new industries and provide new job opportunities in areas of existing high unemployment if possible.

Apart from this one important proviso about the effect of the industrial development schemes and my doubts as to whether the Budget will do a great deal to solve the unemployment problem, the Chancellor must be congratulated upon producing a Budget that is not only far-reaching but which foreshadows new measures of taxation reform with which successive Chancellors have struggled in vain for years. He has managed to get these through the Treasury in ways I know not how. He has managed to be imaginative and practical in his approach to the problem and all hon. Members, whatever views they may hold about the fiscal side of his taxation proposals, must wish him well in implementing these future tax reforms.

5.29 p.m.

Photo of Mr William Rodgers Mr William Rodgers , Stockton-on-Tees

Every Budget produces euphoria, but some Budgets produce more euphoria than others. Whether a Chancellor of the Exchequer takes back £1,000 million or gives £1,000 million away, the initial reaction is very much the same. We marvel at the size of the figures and the apparent boldness. If the Chancellor's speech is long, we are impressed by his endurance. If it is short, we are impressed by his economy of style. We stumble out of the Chamber shell-shocked because we feel that we have lived through a great occasion.

But, as the Chancellor knows very well, as spring turns to summer, as the flowers fade and the leaves begin to fall, it is often a different story. The right hon. Gentleman will recall the Budget of Mr. Butler in the spring of 1955 and the autumn of that year when, six months after sixpence had been taken off income tax, we had a series of very dismal measures. We all recall the Budget of my right hon. Friend the Member for Cardiff, South-East (Mr. Callaghan) of April, 1967—the "steady-as-she-goes" Budget—which was largely welcomed by the then Leader of the Opposition, now the Prime Minister, which was only six months away from devaluation.

I am sure that all Chancellors of the Exchequer do a tough job according to their lights, but it is a precarious existence, and I hope that the right hon. Gentleman will enjoy himself while the sun shines, because it may not shine for long.

On the other hand, I listened with great and growing amazement to the Secretary of State for the Environment, who intervened, if I may put it that way, last Thursday, as he seems to be intervening so often—and his right hon. Friends must sometimes feel that their noses are being put a bit out of joint—and spoke of a successful year for the economy. He flatly contradicted the Secretary of State for Trade and Industry, who had more honestly referred on Wednesday to the present level of unemployment, investment and industrial production as being "unacceptable".

I sometimes wonder, reflecting on the remarks of the Secretary of State for the Environment, whether the Government have a Machiavellian cunning beyond all normal belief. Their failure has been so great and they have sunk so low that every constructive action will shine like the fresh bright morning after the long bleak darkness of night. We must hope that repentance and recovery will not be mistaken for vision and achievement.

I turn to regional questions and say something very much in parallel with the penetrating remarks of my right hon. Friend the Member for Birkenhead (Mr. Dell). I am on this occasion, as on others, in alliance with him. We are looking back on 20 years of disappointment in regional affairs. The 1950s was a period when the Government did not believe that the problem existed. The 1960s was a period marked by alarm and good intentions. Clearly, without the efforts of successive Governments, the position would be very much worse today. But our best efforts have meant running on the spot; we have not moved forward.

With luck, the broad measures in the Budget may reduce unemployment over the next 12 months by perhaps a quarter. I was interested in the remarks of the hon. Member for Wycombe (Mr. John Hall), who took a very realistic view of the possibilities in this respect and made some constructive and useful comments on the nature of unemployment. But, even if unemployment drops by 1 or 2 per cent. in the North, Scotland or Wales, the regional situation will be precisely the same.

The test is not whether unemployment falls but whether the present relationship between unemployment in the development areas, in the South-East and in the country as a whole remains the same. On Tees side in December, 1961, male unemployment was3·6 per cent. In December 1971 it was 95 per cent. But the problem was precisely the same: it was the failure to recognise the problem in the apparently good years which allowed it to persist and made it intolerable today, and the failure then—it is important to say this—lay with the Conservative Party. When it woke up to the problem, there was a fuss comparable to the fuss we had last week. The present Lord Chancellor dashed off to the North-East and not long after, in October, 1963,the present Prime Minister acquired the cumbersome title of Secretary of State for Industry, Trade and Regional Development and President of the Board of Trade.

I commend to the House for quiet, reflective reading two speeches which the Prime Minister made shortly afterwards—on 14th November and 3rd December, 1963. Right hon. and hon. Members will read them with a wry smile. It is all there. There was the need for growth, modernisation, continuity and partnership. There was the firm Government commitment to a sustained effort for many years to come". There was even a reference to machine tools. There were two White Papers—one better than this time. There was a new Regional Development Division within the right hon. Gentleman's Ministry, and there was himself as Minister for Regional Development.

For the Conservative Party, everything changes but everything remains the same. After two years of pulling away from regional policies, force of circumstances has again produced a crashing of gears. But the formula in 1972 is not unlike the formula of 1963.

The White Paper published last week opens with sentiments of singular un-originality. We are told in paragraph 4: The economic performance of the United Kingdom has been falling behind that of other major industrialised countries for a long time. Paragraph 5 states: The Government's overriding purpose is to achieve a sustained and high rate of national economic growth". Paragraph 6 states: The problem of the older industrial areas is deep-seated and long term". I find, as my right hon. Friend the Member for Birkenhead did, much of the White Paper either ambiguous or vague and unconvincing. My most generous feelings do not rise above scepticism.

First, I should like to say a word or two about the new Industrial Development Executive. "Executive" is one of the jargon words of the present Administration. It is meant to convey a sense of action and of the thrusting world of business. But we must examine the organisation chart on the back page of the White Paper and compare it with the existing structure of the Department, which is to be found in the Annex to the published Minutes of the Trade and Industry Sub-Committee of the Expenditure Committee. The new headings are all there. Vehicles and mechanical engineering products, chemicals and textiles, machine tools and manufacturing industry, shipbuilding, paper and printing are all under one Deputy Secretary. They are all under a Deputy Secretary on the organisation chart of the new Industrial Development Executive.

There is already a division for regional industrial development and one for development grants. Only the division for small firms is new, and that arises, not from the White Paper, but from the Bolton Report. The area of responsibility of the Industrial Development Executive and its division of functions is merely part of the present Department of Trade and Industry tarted up.

A new element seems to be the so-called Development Unit, but its rôle as described in paragraph 41 of the White Paper is obscure. I welcome the appointment of Mr. Tindale, from the I.C.F.C., as Director of Industrial Development and the prospect of staff being recruited from industry and the City. But there is nothing new about this. The Department of Economic Affairs, eight years ago, had a high-powered group of industrial advisers, and the present Government have boasted since June, 1971, of the business team they have brought in. But Mr. Tindale will be on secondment and therefore presumably his appointment will be temporary. As for the Industrial Development Board, it is good window dressing, as every advisory body tends to be. It may also provide useful cover for the Secretary of State when he needs a defence against the ideologies on his own Front Bench, because no doubt there will be a backlash in due course. I refer to the Secretary of State because it is he, in Cabinet, who will make the major decisions and be answerable for them to the House.

This is my second point about the White Paper. The new Minister will operate, as the Secretary of State has said, under the broad direction of the Secretary of State. He will be a junior Minister on a par with the other right hon. Gentleman installed as a second rank in the D.T.I. Good luck to him. He may enjoy it. He may have a lively job. But essentially he will be a public relations man, travelling round the country and putting on a brave face. It is nonsense to believe that the appointment of a separate Minister will significantly affect the overall problem.

If we had a separate Department or, better still, a separate Department with a Minister in Cabinet, it would be more credible. But the Government have elected to go for huge conglomerate departments, and this is one of the consequences. I issue the warning that I do not believe the House will be any more satisfied in future than it has been in the past if the Minister for Industrial Development seeks to answer in the House for the Secretary of State when the Secretary of State in Cabinet has been responsible for the decision.

Third, there is the most important question of precisely what the new Executive is meant to do and, as my right hon. Friend the Member for Birkenhead said, what resources will be at its disposal. As I understand, the regional development grant will be as of right according to fixed criteria. That is presumably what the Chancellor meant when he referred to the need to re-establish the regional differentials and provide a system which was more easily understood and more certain in its application than are the present incentives. He went on to say that these general incentive schemes will be supplemented by continuing selective assistance. In turn, the Secretary of State, in an untypically waspish phrase, referred to his intention to take powers to help industry to modernise, adapt and rationalise, but beyond that he took refuge in saying that the instrument for selective assistance would be the Industrial Development Executive and its regional boards and that shipbuilding and machine tools would be at the top of the agenda.

The Secretary of State should have spelt out the form and functions of the new apparatus in the White Paper, and it is wrong that he has failed to do so. If this is to be a significant instrument, it is potentially much more important than most of what the White Paper contains. If it did not deserve adequate explanation in the White Paper, we have every right to be extremely sceptical about its prospects.

I am puzzled about what is to be the rôle of Mr. Gordon Richardson, as chairman of the board and, presumably, chief of the advisers. What is the area of his advice and how does it match this new selective instrument? Will he have a part to play at all? It has been suggested that Mr. Richardson will have a rôle equivalent either to that of Mr. Villiers or perhaps more likely of Sir Joseph Lockwood as chief executive and chairman respectively of the I.R.C. Is this so? What has he been told?

It would surely be without precedent and wholly contrary to the rules and practices of the House if Mr. Richardson had already been told the contents of legislation that is to be set before us. I hope it is not so. But if Mr. Richardson has not been told, he has been sold a pig in a poke. He has been asked to fulfil a rôle which has not yet been defined, and this is a very unsatisfactory aspect, both of the appointment and of the lack of information which was given to the House. I hope the right hon. Gentleman will make a specific and clear statement this evening on what Mr. Richardson's rôle is to be and will reassure us that he has not been told more of the Government's future intentions than are contained in the White Paper.

On 11th February my Regional Development Corporation Bill received its Second Reading. I described my proposals as being for a new agency, aggressive, committed, highly professional, which could be a dynamo for development. I am certainly not wedded to every dot and comma of the Bill; it is capable of improvement; but I believe that any proposal the Government may unveil when the legislation is published will achieve a significant impact on the regions only in so far as it provides for powers, functions and resources similar to those of my corporation. I share my right hon. Friend's scepticism about an instrument lodged within Government for the reasons which he suggested, but it will arouse not only scepticism but the gravest possible doubt unless the powers and resources of the Industrial Development Executive are as great as those of my proposed corporation.

Will the right hon. Gentleman when he replies update the figures contained in Table 2.7 of the Public Expenditure White Paper, Cmnd. 4829. In column 2 of that table giving the estimate for 1971–72, a gross figure of £77 million is put down to promotion of local employment. I take it that some of that amount will be redistributed and the operational and building grants amounting to £30 million at present included under that heading will be subsumed in the basic regional incentive. This leaves £47 million gross as the starting point for the total for selective expenditure. Calculations must have been made and it is right that the Chancellor should indicate to us this evening how this table should be revised in the light of the policy decisions which have been made.

I emphasise that the only significant bonus for the regions in the Budget is the Government's proposal which is still hidden from us. Everything else merely restores the differentials with some little acts of charity on the side. As an offset there is the dangerous relaxation of I.D.C.s. As the House will know, if there is a hint that Ministers are more tolerant than hitherto to the granting of I.D.C.s. the feeling is quickly conveyed down the line. We know equally that the power to restrict development in parts other than the development areas has been a powerful factor in regional development in the past. I am bothered also that a decision has not been made and clearly stated to maintain the regional employment premium beyond the date proposed for its rundown.

I am glad that the Government have realised the seriousness of the situation in the regions, and I welcome the extent to which they have acknowledged their failure. I hope for the sake of the country that their new efforts will succeed, but I am unconvinced. The regions may benefit as a result of the Budget as a whole, but I have little confidence that their relative position will be improved. When the euphoria of the Budget is finally dispersed they will, unhappily, find themselves very much where they are now.

5.46 p.m.

Photo of Sir Brandon Rhys Williams Sir Brandon Rhys Williams , Kensington South

There are three aspects of my right hon. Friend's Budget which I welcome with the warmest enthusiasm. There is also one omission which deserves comment because it is possible that in due course it will be rectified.

From the point of view of outside observers, the most significant statement that my right hon. Friend made was his commitment to growth. Perhaps in future we should know him as "Mr. Five-per-Cent." He has undoubtedly made an important break with tradition in committing himself to maintain the activity of the economy even if as a consequence the exchange rate for the £ has to be allowed to slide. This is a very different line of thinking from that which has been advanced from the Treasury Bench since the 1940s and 1950s.

On the question of the variation of exchange rates, we are in the process of committing ourselves to narrowing the bands in common with the Common Market countries. Very clear thinking is needed on the question of the way in which parity changes are handled in future. I hope that we shall never again see changes of 8 per cent., 10 per cent. or even as little as 5 per cent. at a time, but that we shall develop a far more mature and businesslike approach to the management of exchange rates, so that when parity changes have to be agreed they can be made in stages of 1 per cent. or 2 per cent. at the most at a time. Then the foreign exchange markets, both for futures and on current account, can take note of the change without major upheaval.

What we want are managed exchange rates which move like a piano scale, touching different notes which are close to each other. I would not go so far as to suggest a chromatic violin scale with the £ floating painfully up and down and no one able to determine exactly what the note is at any one moment.

When one considers that the Government are refusing to place quotas on imports, have relaxed credit restrictions dramatically, are not concerned with overkill taxation, and are eschewing the statutory regulation of incomes, one must recognise the extent of my right hon. Friend's audacity in trusting the people with a return of £1,200 million of their own money. This is a great act of faith. My right hon. Friend is depending on the industry and enterprise and moderation of the British people if his plans are to succeed.

The note of regret that I must express is in regard to family allowances. The House knows that for many years I have been a campaigner for an increase in family allowances. It is important to draw attention to the fact that we are becoming more and more preoccupied with the cost of living index, but without recognising that it is an extremely blunt instrument. Let me take an elementary example. An increase in the price of bread may have a determinable effect on the cost of living index, but one must also look at such a change from the point of view of families of different sizes. A girl in herteens may consume only a single slice of bread a day, and any increase in the price of bread will not be very significant for her. But for a family containing a husband, a wife, children and perhaps an elderly dependant an increase in the price of bread may be ten times as significant.

We should look again at the use of family allowances as a selective means of reaching people who suffer when inceases take effect in the price of essentials, such as food and clothing. My preference would be to see family allowances introduced for the first child. In this way, without undue cost to the Exchequer, we could introduce a new factor into the family expenditure pattern which I believe would lead to a moderation in wage increases—and to other benefits besides.

I come to what I regard as a most exciting aspect of the Budget, namely, the introduction of positive tax credits, or, as they may well become known in the future, the "Barber allowances". Some hon. Members have been kind enough to mention my name on account of my campaign for a reform of this kind. We must await the Green Paper before drawing any conclusions as to whether my right hon. Friend's recommendations correspond with the particular reforms that I have myself been recommending lately. It looks as thought they are in line with my proposals, and I shall be most delighted if this proved to be the case. I can discern certain places where my right hon. Friend may differ from some of my own suggestions, but he always has an opportunity to think again. I hope he will again be receptive to ideas at this point, as he has been receptive to so many others in the past.

It would be proper here to give credit to Mr. Norman Macrae, the Deputy Editor of the Economist, who has done so much to prepare public opinion for a change of this kind. Although he will not claim it publicly, he was, I believe, the originator of the phrase "positive tax credits". It would, I think, also be useful to try to differentiate between negative income tax and the idea of positive tax credits. A number of commentators in the Press and elsewhere appear to be uncertain of the difference, and some hostile reactions to my right hon. Friend's statement have undoubtedly arisen because people have assumed that what he has recommended is a classic negative income tax system of the kind which has been much canvassed in the United States and which is well known here through the writings of Professor Dennis Lees.

In fact, a negative income tax is a system that makes P.A.Y.E. effective below the tax horizon by instituting a mirror system which can be described as "receive-as-you-need". If anything, it would lead to greater complexities and would do little to cure family poverty, which is a preoccupation of hon. Members on both sides of the House.

I have never looked at the classic proposals for negative income tax as other than a sort of laboratory curiosity, an interesting talking point, but as something never likely to be put into effect. But what my right hon. Friend is suggesting in the way of universal positive payments could be begun right away. Perhaps it would be advantageous if he let it be known that even in his Budget next year he would make a statement on the amalgamation of the family allowances, which are already familiar as a form of positive credit with, the child tax allowances brought in originally by William Pitt.

The idea of paying positive credits to families with breadwinners in work is not new, and lately we have had new benefits such as the attendance allowances which work on the same principle. But it is the idea of cancelling the corresponding negative allowance hidden within the tax system at the same time that makes the whole proposal practicable and economic.

A number of different approaches have been adopted to this type of reform. It is worth while considering briefly the ways in which it can be tackled. In the first place, the replacement of the child tax allowance by positive family allowances was recommended by Lord Keynes in 1940 in "How to pay for the War". The factor which concerned him was the need to adapt taxation to the ability to pay. My mother's work in this field is now beginning to be forgotten since it was done so long ago; but it was, I think, important, and historians of the subject are coming to recognise it as an energetic and worthwhile contribution. Her interest was to ensure that there were proper incentives to work at the same time as adequate benefits for people out of work.

Living in South Wales before the war, she was well aware of the tragic malnutrition and hardship caused to people who were unemployed for long periods, or who strove to make a living on low wages. She campaigned for unemployment benefits to be increased; but people said that there would then be no incentive for those people to return to work. It is very much the same problem that we have today.

My mother's commitment to the idea of a minimum income guarantee arose from the need to provide a continuous basic income whether the recipients were at work or not. This was meant to provide them with the maximum incentive to earn and so to escape from the tragic net of unemployment which closed round them in those days. Her interest in the reform of P.A.Y.E. came later, because P.A.Y.E. was not introduced until a couple of years after she wrote her first pamphlet on this subject in 1942.

She was also interested, as I have been, in a reform on the same lines as my right hon. Friend, because of the need to confer a positive cash benefit in return for citizenship. This is the principle that she called the "New Social Contract". I and others have sought lately to differentiate clearly between the various claims that can be made to entitlement to welfare benefits. It is important to bear in mind that in providing welfare payments for the relief of need the community is simply acting as an enormous charity; when it offers benefits related to contributions the state is only acting the part of an enormous insurance company; but where benefits are paid by virtue of the recipient's citizenship, the State is acting in a way in which no outside, private body can. The State is then undertaking the redistribution of income on civilised lines.

In the original social contract put forward by my mother she recommended a free health service; free secondary and higher education; death grants; grants for re-training and re-settlement; incomes for housewives; housing allowances assessed according to the level of rents prevailing in the district; and family allowances. In 1942 this was a futuristic and comprehensive social programme. She hoped that it would be paid for by tax at 40 per cent.—very much the same sort of figure as that towards which we are now working—with our income tax at 30 per cent. on earned income and national insurance contributions on top related to income.

She worked out this programme because of an intimate knowledge of the lives of working people and of the unemployed in South Wales in the depression. I shall always be grateful to her because, although I was only a boy at the time, she made sure that I was well aware of the conditions in which my contemporaries were living in South Wales.

The fourth approach is possibly the one which my right hon. Friend has favoured, namely, the business-efficiency approach. In introducing Mr. Cockfield to the task, my right hon. Friend has brought in the very best man for the job. The money-transfer industry in this country is vast; it is immensely meticulous; it is generous and painstaking; it clings to the highest traditions of the Civil Service; but it is infinitely too numerous, and it is not as efficient as it needs to be. On the latest count, there are 76,000 people in the Inland Revenue and, by a strange coincidence, there are also 76,000 people in the Department of Health and Social Security. In addition, one has to remember that employers are obliged to play an active part in the system of P.A.Y.E. and that there are probably thousands or even tens of thousands of private people also employed basically in this job of money-transfer.

News has been filtering through to hon. Members of disasters at the Inland Revenue's computer installation at East Kilbride. I have also heard distressing and disturbing stories about the problems at Reading where a computer was installed for the Department of Health and Social Security. Behind the scenes, there may be a degree of anxiety with this question of business-efficiency in both Departments which has helped prepare the ground for my right hon. Friend's campaign for modernisation.

When Sir Paul Chambers reviewed the possibility of introducing a weekly tax on the lines of P.A.Y.E. during the war, he was reported to have said that of all the schemes he considered only two could have worked. One was his own, which was the one he subsequently introduced: the other was the scheme put forward by my mother. I recognise that hers was too futuristic to be adopted in the middle of a major war. The Chambers system was ingenious, and it has carried us through until now. But it will not go on much longer. Now we have fortunately in Mr. Cockfield a second Chambers who has come to the fight, and to the rescue, of the tax and benefits systems.

There is a danger in applying this reform simply on the basis of business-efficiency. There are important social and political implications which are inescapable in a reform of this magnitude. I hope that my right hon. Friend will give special consideration to the problems which are likely to arise if we reverse the money-transfer system which has grown up between husbands and wives. At the end of the war it was a commonplace view among social observers that wages had gone up and prices had gone up; but that it was the men who had had the wage increases and the women who had had the price increases. The Government introduced family allowances and food subsidies to help the housewives, and put heavy taxes on beer and tobacco which, for the most part, were bought by the men. This was an attempt at a primitive money-transfer system between husbands and wives. The recent increases in wages and the cost of living have given rise to the very same problem as was tackled in that relatively crude way in the middle 1940s.

I suggest that this is not the moment at which to recommend that family allowances should no longer be drawn by wives but should be paid through their husband's pay packets instead—if indeed that is my right hon. Friend's intention. I do not think that we should place too much emphasis on the business-efficiency advantages of using employers as the sole purveyors of positive tax credits. I have made the suggestion that tax credits might be paid through the Post Office Giro: no doubt there are other ways which might be considered. But I must warn my right hon. Friend that if he takes family allowances away from the wives, the ladies will fight, and the ladies will be right.

Finally, I welcome the appointment of a Select Committee to discuss this whole matter. My right hon. Friend is popular in all parts of the House because he takes the opinions of hon. Members into account. It is of special importance in this case since the rules of order make it impossible for hon. Members to discuss a reform of this kind properly. They are not allowed to put forward recommendations either for increases in taxation or for increased benefits. It is inevitable one should be able to do so if one is to have a serious discussion of any system of positive tax credits.

The late Iain Macleod had a frustrating time when he tried to initiate a debate on this subject during the passage of the last Finance Bill on which he was Opposition spokesman. He asked me to draft an Amendment which would give rise to such a debate. Having spent the whole day in the Public Bill Office, I came up with a recommendation for an Amendment which was so oblique that the Chair was unable to apprehend what might arise from it, and it was not selected. I hope that the Select Committee will have every opportunity to develop the themes in my right hon. Friend's Green Paper and that there will be constructive and non-partisan debates.

Some people may feel that after this subject has been worked over by its pioneers and others for 30 years there are not many aspects left to be considered. But the implications are so wide and the possibilities so various that there is something fresh to be learned every day.

My right hon. Friend has introduced an audacious and generous Budget, but it is also a wise one. He has gone a long way to re-establish the concept of "One Nation". I hope that the British people will respond by a greater devotion to the themes of community and common purpose.

6.6 p.m.

Photo of Mr Robert Sheldon Mr Robert Sheldon , Ashton-under-Lyne

I, too, welcome the appointment of a Select Committee to look into how the tax credit system might be implemented. However, I hope that its terms of reference will not be as narrow as those of the Select Committee on corporation tax. In that case, the position was quite disgraceful. We were prevented from discussing so much which might have been discussed. One of the worst features of that Committee was that it did not see fit to invite Professor Kaldor to give evidence as the author of the existing scheme. Whatever one might think of his abilities, the fact that the Committee did not invite him to give evidence was a poor reflection of the work of the Committee and the terms of reference that it was given.

From right hon. and hon. Members opposite we have heard continuous praises showered on the head of the Chancellor of the Exchequer. They have been echoed by various commentators in the Press and elsewhere. It is incredible that a Chancellor of the Exchequer with the highest unemployment level since the war, in excess of 1 million, with a very low level of growth of less than 2 per cent., with a massive inflation of 9·4 per cent. in 1971 over 1970, and with manufacturing investment in continuing decline year after year, can come to this House and be praised. For that to happen to a Chancellor with that kind of success it seems as if our values have become completely distorted. I am not sure what is the basis of it, unless it be a hope for years to come.

For me, the first priority in this Budget would have been to reduce the high level of unemployment. The second would have been the extent to which it was likely to succeed in terms of growth. The third would have been how successful it was likely to be in reforming the tax system. Hon. Members will notice that I do not mention redistribution. That is not a matter that I should expect from a Conservative Government.

Hon. Members will have noticed the order in which I place those three items: unemployment, growth and tax reform. I speak as someone who is addicted to tax reform. I am a participant in these discussions. I am even an enthusiast. I look forward to receiving new tax reforms. I welcomed capital gains tax. I welcomed corporation tax. I look forward to examining the unified personal method of taxation which I and others put forward year after year. I look forward to seeing the tax credit system. I appreciate the work of the Chancellor of the Exchequer and the Treasury team in putting pressure on the Inland Revenue to bring about reforms which are very difficult to initiate and bring to fulfilment.

However successful the Government may be in matters of tax reform, we must always remember that tax reform in itself must have a lower level of priority than the other items which I have mentioned—in particular, full employment and growth. No industrialised country has achieved success purely as a consequence of tax reform.

At the end of the day the Chancellor will not be judged by how successful he was as a tax reformer, but by how successful he was at reducing the bitterness, disillusion and waste of resources which have come about as a result of the high level of unemployment. He will not get praises for the unified personal taxation system or even for the tax credit system if, at the same time, he does not bring about the changes necessary to counter our diminished rôle in the world and the problem of paying for the social services which have been with us because of lack of growth.

It is important to stress, again and again, that the economic strategy pre- occupations of the Chancellor must come first. By comparison with his heavy responsibilities in these matters, tax reform must be put in its place.

One worry that I have is that the energies of the Treasury Bench have been too much occupied with tax reform rather than with the problems of economic growth and reduction of unemployment. In these matters it may be that the judgment of Tory back benchers might be as good as, if not better than, the Front Bench. I particularly draw to the attention of the House the fine speech made by the hon. Member for Leek (Mr. Knox)—the hon. Gentleman is not in his place at the moment—who had the kind of dedication to continued high levels of employment which were the mark of the late Iain Macleod. It is important that hon. Gentlemen opposite should feel as well as say that they are unable to accept anything other than full employment.

In this connection, the Prime Minister made a remarkable pronouncement in his speech on 24th January, reported in HANSARD at column 1026, when he pointed out, to his apparent surprise, that there was more production in Britain today than two years ago with 400,000 fewer men. Some of us in that unemployment debate recall the astonishment with which that comment was greeted, because that is what industrial growth is all about. Of course 400,000 fewer men producing the same amount as two years ago is an inevitable consequence of industrial growth. We should have produced the same with not 400,000, but 2 million fewer men if we were to match the growth targets and results of other European countries, or, if we take Japan, with 4 million or 5 million fewer men.

To think otherwise is to think like the Luddites, who never had such powerful support as that which they got from the Prime Minister on this occasion. The Luddites never realised that investment and productivity were the natural consequences of industrialisation, those natural consequences being to produce the same amount of goods with fewer people year after year. The economy keeps going and men and women are kept fully engaged in the factories by producing newer goods to meet newer demands. This is where the Government have failed. They have failed because they should have brought forward demand to utilise the spare capacity and the available men and women.

I was particularly pleased about the commitment on the exchange rate. I believe that in settling for 2·60 dollars we made a bad bargain with an 8 per cent. revaluation against the dollar. By comparison with other exchanges weighted, it is not so bad, but we must make the comparison between ourselves on an 8 per cent. revaluation and France which has an effective 4 per cent. revaluation with a much weaker case than ours.

The reason is that we have run our balance of payments position appallingly. We had a massive balance of payments surplus at precisely the time when we should have had a massive balance of payments deficit, having used it to maintain economic growth. The Government should have taken those risks on the side of expansion at the time that they came into office.

Photo of Mr Robert Sheldon Mr Robert Sheldon , Ashton-under-Lyne

I argued for it at the time. It would not have been too bad if it was three months late. However, it is unforgivable to be 21 months late. That is what the Government are being blamed for.

We have to consider why, over a period of nearly two years, we still have this low level of economic activity. In this matter the Government cannot escape from blame. It is they, with their tough speeches, who frightened both industry and workers. There was much talk about lame ducks and people standing on their own two feet. We may have taken it as a joke in this House, but the message went out to people in industry and to the country as a whole that this was to be a rough, tough Government and that they would have to learn to live with them. That was the message that the Government intended and that was the message that the people received. So we had people running for cover, stopping spening, and carrying on saving at a high level, in which the Government peculiarly, even now, take some delight. How they can delight in large levels of saving and at the same time deplore the low levels of spending is a matter which completely escapes me. Perhaps they will explain.

The Government consciously tried—and they succeeded—to frighten industry and workers with their toughness. The obvious consequence was that we had high levels of unemployment. We had to pay the price of 1 million unemployed while the Government learned how to run the country. They have not suceeded, but at any rate they are now moving in the right direction and this is something which we should welcome.

Reverting to the exchange rate, I believe that the commitment given by the Chancellor will be easier to give to this House than to put into effect. It is necessary that devaluation should be ahead of time. It is no use waiting until the last moment, because one then has given a commitment and Ministers feel that their political integrity is at stake. We require to do it in the way that the French did it, and how any sensible modern Government do it. They anticipate in advance of the weakening of the £ sterling what will happen and then take the decision to devalue. It is not enough to have figures of 1 or 2 per cent. suggested by the hon. Member for Kensington, South (Sir B. Rhys Williams). I suggest that steps less than 5 per cent. are pretty meaningless. We have to take a view on how the economy will go and some months, or even longer, beforehand make the decision to devalue. Although I welcome the clear assurance on these parity changes, I am not convinced that the Government have sorted out exactly how those commitments will be implemented.

I turn now to the level of investment. I was particularly pleased when the Secretary of State for Trade and Industry, in a comment which was laughed at at the time, but which represented something rather more serious, on 22nd March, pointed to what he said was the absence of doctrinaire points of view".—[Official Report, 22nd March, 1972; Vol. 833, c. 1555.] That was a momentous occasion because many of us have always thought that was what the Tory Party was all about; absence of doctrinaire points of view, running the country in the way that they felt to be necessary at the time, having made sure in advance that the rewards for running it went to their closest friends and supporters. It was a momentous day when we reached the position where Government intervention in industry became not a matter of party politics but a matter that could be discussed passionately by both parties. We reached a new consensus whereby Government intervention in industry became, once again, something on which we could have meaningful debates in a way that has not been possible over the past two years.

We are now dealing with the details as to how the money is spent and on which firms. My right hon. Friend the Member for Birkenhead (Mr. Dell) and my hon. Friend the Member for Stock-ton-on-Tees (Mr. William Rodgers) got these discussions going, and the fact that we are suggesting alternatives which cannot be condemned by the Government now as doctrinaire is an indication of how far we have gone. It will be very important to industry that we get this consensus from both sides of the House. Industry has never been in a position to carry out long-term commitments, whether to invest or to proceed with a certain kind of planned production, when they were unsure what the next Government would do and this has bedevilled our industrial policy. It bedevilled the R.E.P. and investment grants. Industry could not take a long-term view because it felt that if the Tories came into power some of these measures would be dispensed with. One of the problems facing the House and democracy in dealing with industry is that it is so much more difficult to get this kind of consensus between the parties, not on the rates of particular incentives, but on the general aims to assist industry and help it with its investment and planning.

I was pleased that the Chancellor gave the rates for V.A.T. this year. He said that he would not, but he changed his mind and we will now have a most valuable run-in during which purchase tax can be phased out and V.A.T. brought in. I see that the Minister of State, Treasury is here. I am particularly disappointed that he did not make available in the way I suggested to him in a question the discussion papers that were circulated to industry about how the V.A.T. would apply to it.

It is quite disgraceful that certain papers for discussion, made freely available to industry, are denied to this House, and any attempt at open Government should at least bring papers like this into the open if they are asked for. I agree that many of them could be too detailed or could be unnecessary or might not be required. But it is not up to the Minister of State to deny them to the House. It is up to hon. Members, having seen them, to say that they are not of interest. The Minister of State must be more forthcoming over future tax changes.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

We could not have been more forthcoming. We did our utmost to take into account comments from everyone possible on this tax, but to issue these papers would have been extremely deceptive because most of them were prepared for a set occasion and set discussions. To have read them out of context and out of the framework within which they were taken would have been very misleading and could only have confused the issue.

Photo of Mr Robert Sheldon Mr Robert Sheldon , Ashton-under-Lyne

Hon. Members are the best judges of whether they are deceptive or not. It is not good enough to justify that decision by saying that it is in the best interests of the running of the country that papers are circulated to industry but not made available to the House. On reflection, perhaps the hon. Member will feel that what he has said is not worthy of his aim to make hon. Members better informed on these matters than they have been in the past.

I felt all along that there was a possibility that the Chancellor might have settled on one rate for V.A.T. and I see his obvious desire to bring in one rate is for simplicity. But this will not last very long because we will run into problems of anomalies, selectivity, distortion and so on. I am not sure why the luxury rate applies to motor cars only and I do not see the reasoning for it. Is the motor car the supreme luxury of our age? The rate has oviously nothing to do with the level of imports because it will apply to imported as well as home-produced cars. I would be very happy and willing to see some distinction if it were possible because of my fear for the level of imports of motor cars. Does the Chancellor believe that this luxury element is much more important than diamonds, expensive jewellery, fur coats and so on? I cannot see why he has included motor cars, particularly as he has said that the motor car industry was one of the main sufferers of the the distorting effects of purchase tax.

I note with great interest the suggestion by the Chancellor for a purchase tax-free period during the changeover. I look forward with very great interest to hearing the details of how this period will operate. It is obvious that there will be a massive rush to get the goods into the shops and there will be a massive sales boom. I am concerned not with the sales boom but with the decline of ordering which will occur just before the boom. I know this only applies to certain categories where there cannot be a sale-or-return situation. But it seems to affect sufficient categories of goods to lead to distortion of buying in anticipation.

We must be under no illusion about the value-added tax because it will present not a simplification of the tax system but much more complexity. We are creating a new system and the anomalies will be numerous, as indeed they were under the old purchase tax system. They will be as numerous because they are newer. We have learned to live with the old anomalies, but if we had come face to face with them as did the hon. Member for Worcestershire, South (Sir G. Nabarro), when he took this subject up, there would have been a much greater outcry. Under the new system we will once more see the Treasury attempting to defend the indefensible until eventually, perhaps over several years, we will settle down to a new status quo—to the differentiation between the zero rate, exempt rates, full rates and the rate plus luxury rate. The Minister of State must be under no illusion about some of the difficulties that he will face before the tax settles down.

This has been a momentous Budget debate. It has witnessed the awakening of the Government as to how they can run the country. They have learned a lot, but I believe they have a lot more to learn and I would be much happier if I felt the Government realised this.

6.27 p.m.

Photo of Mr William Clark Mr William Clark , East Surrey

I was glad when the hon. and learned Member for Lincoln (Mr. Taverne) paid tribute to my right hon. Friend for his reform of tax, the unification of tax and the position of positive tax credits. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) and I have different approaches to tax reform. On this side of the House reform of taxation does not mean extra taxation, whereas I fancy that to him and his hon. Friends taxation reform always ends up with increased taxation. My right hon. Friend is to be congratulated because he has grasped the nettle of reform of taxation and has not been deterred by any administration or Treasury objections.

To listen to the advice offered by hon. Members on the other side, one would think they knew all the answers, but this was not apparent between 1964 and 1970. I fancy the Socialists say to themselves that Socialism has many faults but being wrong is not one of them. But in their advice and criticism on the Budget they seem to be carping, perhaps not so much today but on previous days. They talk about this as being a handout to the wealthy, and so on. This must betaken in its context. The old-age pension has been increased, and the personal allowances have been increased. It is all very well to say that inflation is increasing, but at least there will be another £1 a week in take-home pay for those in the tax bracket. All this must be rubbed in.

Over the past 21 months the Chancellor has reduced taxation by about £3,000 million, whereas during the previous Labour Administration taxation was increased by a similar amount. So let us get this into context. What do the Opposition want? Did the hon. and learned Gentleman expect my right hon. Friend to do nothing, as the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) ostensibly did in 1970, when he allowed wage inflation to rip? This is something from which we are suffering at the moment.

I agree that unemployment is one of the main problems. We mislead ourselves if we talk simply about the cost of wages in this context. An industrialist considers not just the basic wage bill but the amount he pays in national insurance, fringe benefits, and so on. I do not complain of those benefits, but it is nonsensical to consider unemployment as if the whole question were merely one of wages.

Many parts of our economy are running at only 85 per cent. or 86 per cent. capacity. Until we take up this slack we shall have increased production by the same number of men. As the slack is taken up, unit costs come down and profitability goes up. Only when we get 95 per cent., 96 per cent. or 97 per cent. capacity can we look for some dramatic increase in investment.

Why does the industrialist invest, to create more jobs? I do not entirely agree that creating new factories and allowing for the buying of new machinery does not create new employment. Of course it must—for instance, there are the men who make the machinery and build the factory extensions.

Why does an industrialist invest at all? He considers his future sales and his manufacturing capacity along with his profitability. We must accept that industry has been overtaxed; I do not blame all Governments for this. Consequently, there is very little incentive for the industrialist to expand, particularly if he is working at less than capacity.

The other item that the industrialist takes into account, of course, is confidence in the Government. I am making no political point—there has been a lack of confidence in all Governments over the last six or seven years.

By this Budget and his previous one, my right hon. Friend has injected a good deal of spending power into the economy. We can look to expanding home sales, reductions in taxation, and, I think, an increase in our exports. One can rehearse the arguments about entering the E.E.C., but world trade looks as if it will go up and we should play our part in these increased exports. If we accept the premise that industry will expand and that, at the moment, it is not working to capacity, how can we persuade the industrialist not to wait but to invest now, so as to cut unemployment?

Corporation tax, with the imputation system, will eventually assist in this respect, but this does not come in for a year. That leads me to the question of free depreciation. I would urge that free depreciation is rather a misnomer. It is free only for the first year. It does not always pay an industrialist, when making his tax computation, to take the whole cost of a new machine as free depreciation for the year in which he incurs the expenditure. If he is prepared to write off say 50 per cent. in the first year, he should then be able to write off the other 50 per cent. in the following year. This is not how it works. This is an anomaly in our tax system and it has a deterrent effect.

I welcome the fact that free depreciation has been extended outside the development areas, but I should have preferred the extension to the rest of the country to have a time limit. Otherwise, with the slack in industry, industrialists may procrastinate in taking up the slack by means of free depreciation outside the development areas.

If we can convince the industrialists that the boom is coming, my right hon. Friend must do all he can to accelerate that investment. It will not cost the Exchequer any more money, because, in the long run, if something is written off, no matter whether it is done in one year or in ten, to the Exchequer it is exactly the same.

We should not get too much of a fixation about unemployment. I am not being callous but, with this slack in our industry and with the capital intensive industries coming up, we must consider some additional way of dealing with unemployment. We should not think that everyone who is unemployed is suffering all that much hardship. Of course it is regrettably too high, and his standard of living has come down, but we should not over-emphasise this.

All Governments are inclined to take temporary measures which do not solve the problem long-term. I would much rather the decrease was soundly based. Temporary expedients can be overdone. If we get expansion, some people who are working because of the temporary expedients may not be available when wanted, and there may be a shortage.

One thing that we must do about employment generally is take a different approach to the service industries. I am always astounded that one seldom sees someone from this country in the tourist industry. It is in this industry and other service industries that we need a different approach.

As for industrial development, my right hon. Friend is being consistent. He is not saying that this will be a bonanza for propping up any unviable industry. But this country, particularly compared with Germany and Japan, needs modernisation. It is possible, it is feasible, and in the long run it is economically sound to help the older industries which can be modernised and enabled to meet overseas competition. We do this in overseas aid. The Overseas Development Association gives aid in the form of soft loans and grants mainly to build up industries in developing countries.

We must have a business approach to industrial development. It will be a challenge, but it is worth trying and hon. Gentlemen opposite should agree that there is a distinct difference between this suggestion and the old I.R.C., which was interested only in the structure of industry. This concept is far more basic. It in fact takes a long-term view of an industry—shipbuilding, machine tools or any other—with the aim of modernising it to make it viable.

There are a number of other matters to which I would have referred had time been available. I shall adhere to my promise to be brief because a number of hon. Members still wish to take part in the debate.

I regret that my right hon. Friend has not done something about phasing out capital gains tax. I hope that we can return to this matter in Committee. I would not mind how many years it took to phase it out, but phased out it should be because capital gains tax is a tax on inflation.

I was interested in the suggestion of my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter). We will miss him when he leaves the House and we wish him well in his new job. He made some interesting comments about estate duty, particularly when he questioned whether a widow was less valuable than a home for cats and dogs. This, too, is a subject to which we can return in Committee.

There are two factors about which we must be particularly careful. One is public expenditure and the other is money supply. These are aspects which must be examined coldly because in the long-term the idea of any Government must be to build up a sound economy.

The Chancellor has tried to build an efficient, expanding nation which is fair to the taxpayer. I accept that there is a difference in approach between the two sides of the House; to put it rather unkindly, that we reduce taxation while hon. Gentlemen opposite increase it. We are for helping the capitalist system while they are for more and more State control. This is a difference in philosophy.

There is a risk in this Budget and my right hon. Friend made it clear in his Budget Statement that he accepts it. In a year or so the balance of payments position will need careful review. Fortunately we have the cushion of invisibles and it does not seem as though this cushion, which is worth about £600 million a year, will disappear.

Industry must grasp this opportunity because the Government have gone out of their way to help industry to help itself. One would imagine, listening to politicians, that any Government could legislate for prosperity. That is absolute nonsense. The Government can only set the scene for prosperity. This my right hon. Friend has done, and I congratulate him for doing it.

6.43 p.m.

Photo of Mr Patrick Duffy Mr Patrick Duffy , Sheffield, Attercliffe

I regret that the hon. Member for Surrey, East (Mr. William Clark) underestimated the present grievous level of unemployment and, even worse, sought to discount its social consequences. It is significant that each of my hon. Friends who has spoken has mentioned this factor.

Photo of Mr William Clark Mr William Clark , East Surrey

I am sure that the hon. Gentleman does not wish to misrepresent me. That was not the inference I was seeking to make. Of course I regret the present unemployment level, with 1 million out of work, but my case was that we should not reduce the figure by temporary expedients. There is no point in sending a man back to work for one, two or three months if he will find himself unemployed again shortly afterwards.

Photo of Mr Patrick Duffy Mr Patrick Duffy , Sheffield, Attercliffe

I accept that, but it is significant that while each of my hon. Friends has not merely dwelt on the subject of unemployment but has suggested that it might be the most serious miscalculation the Chancellor has made, some hon. Gentlemen opposite have not treated it in this way. The hon. Member for Surrey, East was one of them. He may agree that some of his hon. Friends have exposed themselves to the criticism that they are not as concerned as they should be with the present high level of unemployment.

I recognise the contribution which the Chancellor has made to tax reform. Indeed, he may go down in history as a tax reformer. One cannot overlook the importance of his three Budgets in this respect. Those of us who handle the Bill in Committee will have ample opportunity to discuss these items.

Because unemployment is such an important issue I shall confine my remarks to examining the Chancellor's Budget judgment in this context. As my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) said on Wednesday, the Chancellor may be a good deal less strong in the sphere of economic management. He may make a great contribution to tax reform, but on economic strategy the right hon. Gentleman is suspect, and that is why I wish to draw to the attention of the House certain aspects of the Chancellor's statement.

The right hon. Gentleman, in recognising that a further boost to demand is required, acknowledged in his statement on Tuesday that a number of considerations had to be taken into account. He spoke of the Government's determination to reduce the level of unemployment, which I freely concede, the dangers of inflation, the outlook for the balance of payments, the paramount need to avoid stop-go and the desirability of laying the foundations for a sustained period of growth.

I recognise that the national income, industrial production and the retail sales figures are all important economic indicators, but the best indicator of the direction the economy is taking has usually been the labour market. There can be no dodging the significance of the March returns, published last Thursday. The long, inexorably upward trend of hardcore unemployment from late-1970, after halting in February, has re-emerged in March, and this has had a considerable effect on my hon. Friends.

An assessment of the Budget's economic strategy can hardly rest on one month's figures, but those figures call into question the Budget point of departure. As The Times said on 24th March: While it is not practicable to form fresh comprehensive appreciations at less than about quarterly intervals and while it will take at least a year for Mr. Barber's Budget to achieve its full impact on the economy, there is still the task of checking and rechecking the point of departure. The Chancellor said last July that that was what went wrong with his 1971 Budget. It seems as if the right hon. Gentleman is erring on the side of too much unemployment for too long.

Hon. Members can call on their local experience. Some have already done this and I hope that the House will bear with me while I mention some figures relating to the City of Sheffield, which enjoyed a very low level of unemployment for much of the post-war period. The March period constituted the highest unemployment total since 1940. Since January of this year the number wholly unemployed has risen to more than 10,000 and, taken with the figures for women, boys and girls, the wholly unemployed total is now over 12,000.

Assuredly the new regional policies are extremely welcome. They have been deservedly welcomed in principle on both sides of the House, and nowhere are they more welcome than in my City of Sheffield, where a powerful new regional director of the type announced by the Government has for some time been called for. A new minister for industrial development with a junior minister and an advisory board is just what we have recognised as being needed in the Yorkshire-Humberside region. It is precisely the kind of setup for which the Sheffield Star has crusaded for several years. The Star ran a campaign in South Yorkshire and North Derbyshire in the late 'sixties that called for just such a highly specialised department, without which there cannot be a basis for proper regional planning and development.

There must, therefore, be a welcome also for the decision to allow bodies like the Yorkshire and Humberside Board to have funds of its own and to plan certain development in the region. I hope that my right hon. Friend the Member for Birkenhead (Mr. Dell) will not mind my welcoming the more relaxed and liberal use of industrial development certificates.

The Government, indeed, are to be congratulated on overcoming much of their aversion to interventionism. There is just one omission: they have not yet had the courage to create a body on the lines of the I.R.C. Only such a body, empowered not only to administer grants and loans but to provide funds at risk can attract, certainly to my own region, the science and technology based industries which it badly needs. I therefore hope that the Government will keep an open mind about public investment and public enterprise in the regions.

Also welcome in the Yorkshire and Humberside region were the announcements of the acceleration of the new motorway routes, especially as they are now reaching out towards the east and the east coast; the special housing improvement grants, and substantial increases in financial assistance to environmental improvements in local authority general improvement areas.

But I must point out that all that is essentially a long-term affair. Meanwhile, unemployment, especially among young people, is with us as the hon. Gentleman the Member for Wycombe (Mr. John Hall) recognised. We were all most interested in what the hon. Gentleman had to say about unemployment, and I was especially interested in his references to young people because Sheffield last year saw the highest level of unemployment since the local youth employment service there was started. The annual report of that service presented last week to the education committee showed more than 900 boys and girls unemployed in July compared with a previous high of 746 nine years ago.

This, as I said in a Question to the Prime Minister just a week ago, highlights the problem of youth unemployment. I asked the Prime Minister whether the Government would not levy some kind of grant for industrial training and whether more grants could not be given to education authorities for career education. I pointed out that of 32 comprehensive schools in Sheffield only 12 were equipped with careers rooms.

I know that the Secretary of State for Employment has conducted an investigation into employment and its nature, and that he has announced that he can find no evidence of an underlying distortion. This can only mean that the present level is due to deficient demand, so I want to look now at growth and ask whether the Chancellor can achieve his target of a 5per cent. annual rate of growth. Although it is the same as the figure proposed by the National Institute, it assumes a more buoyant pre-Budget forecast. Between the first halves of 1972 and 1973 the National Institute forecast a 1·9 per cent. expansion "pre-Budget", and argued for a stimulus equivalent to 3 per cent. of G.N.P. to achieve 5 per cent. The Chancellor only claims to have injected 2 per cent., and even that sound's rather high in relation to the nature of the measures which he announced.

After £400 million of "fiscal drag" is deducted from the cash effect of the Budget—just under £1,400 million—and after allowance is made for the usual leakages into savings and other taxes, as well as for the multiplier, can it really be accepted that the Budget will produce an extra £1,000 million—2 per cent. of G.N.P.—of extra spending? If the National Institute's pre-Budget forecasts were right and if the T.U.C. is also correct in estimating productivity growth as high as 4½ per cent., unemployment could remain stubbornly high.

That leads me to consider the balance of payments. The high level of unemployment could be consolidated once the surplus of balance of payments evaporates and runs on the pound develop. For, despite the Chancellor's forecast that …current account is expected to continue to show a satisfying surplus, but it will not be as large as in 1971…"—[Official Report, 21st March, 1972; Vol. 833, c. 1350.] it is beyond 1972 that the danger lies. It is the prospect for 1973 to 1975 that is in question. It is in that period that, as the Cambridge University Economic Policy Group argued so convincingly in its recent study, and as Peter Jay pointed out in The Times last week, the Government are likely to face the choice between a big devaluation and an indefinite perpetuation of unemployment above 3½ per cent.

On the other hand, as has been freely acknowledged in this debate today, the Chancellor has pledged that unrealistic exchange rates will not be persisted in to the point of constraint. If this is so, one is tempted to ask whether a possible payments problem later could not be better headed off by floating the exchange rate now.

Finally, what about the outlook for inflation? A vital precondition for continued price moderation by industry has now been fulfilled. The C.B.I. asked for and presumably has been presented with a reflationary Budget package. Now comes the crunch. Over the next few weeks the C.B.I. must decide whether its present price initiative which constrains its members to increases of no more than 5 per cent. should be continued in some form beyond the end of July. It is of vital importance that it should do so.

Price restraint has worked, it must continue to work, and it is likely to create a deeper impression, not merely on housewives but on wage-earners, and therefore on industry generally, than any other single development in the short term. In the second six months of 1971, wholesale prices increased by 1 per cent., compared with 5 per cent. in the first six months. The annual rate of increase of the Index of Retail Prices had fallen from more than 10 per cent. in mid-1971 to just over 8 per cent. in January, 1972. I acknowledge that it would be a major step forward if Mr. Victor Feather could come up with concrete proposals on behalf of the T.U.C. Here I want to refer to the other half of the Budget Statement, though I pledged myself earlier not to do so.

Has Mr. Feather been given in the tax content of the Budget sufficient encouragement to do that? Perhaps I may mention one indication. Will the Budget narrow what had become in 1971 a widening gap between the poor in work and the median wage-earner? Without that kind of assistance, how can the T.U.C. cooperate with the C.B.I. and with the Prime Minister when the second round of talks begins? This reminds us that the initiative cannot rest with Mr. Feather any more than with the C.B.I. The Government should stop being coy and should openly collaborate with both sides of industry in fashioning an equitable pay and prices policy.

It is election year in the United States. Despite the recent successes of Mr. Wallace in the deep South, I do not think that any hon. Member believes that either bussing or the curent I.T.T. scandal will be an embarrassment to Mr. Nixon in the autumn; but his recent fumbling attempts at incomes policy-making will be, and the recent announcements by the A.F.L./C.I.O. leaders must have impressed Mr. Nixon more than any other current development.

That is why I say, in conclusion, that without such a pay and prices policy on the part of the present Government the problems of inflation will continue to upset even the best laid plans.

7.0 p.m.

Photo of Mr Jock Bruce-Gardyne Mr Jock Bruce-Gardyne , South Angus

I do not entirely share the enthusiasm of the hon. Member for Sheffield, Attercliffe (Mr. Duffy) for the renewal of the C.B.I.'s price initiative, principally because of its effect on the financing of the nationalised industries. That is a point to which I shall return later.

Like his hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), the hon. Member for Sheffield, Attercliffe took the view that the reform of our system of taxation should be a very low priority for my right hon. Friend the Chancellor. I take it that both hon. Members consider that the Chancellor is better employed on fine tuning the economy than in long-term reform of the tax system. I take rather the opposite view.

My right hon. Friend is enormously to be congratulated on the remarkable programme of long-term tax reform which he has undertaken. Frequent comparisons have been made between my right hon. Friend and some of the great tax reforming Chancellors of the past. I think the name Gladstone has been several times mentioned. This is not unreasonable. My right hon. Friend has established a reputation as, perhaps, the first major tax reforming Chancellor whom we have had in this century. I shall not go through the details of the latest batch of tax reforms because we shall have opportunities of discussing them later.

I hope that it will not be thought carping if I mention a slight reservation on one reform, the decision to confine the concession on corporation tax to very small companies, evaluated by turnover. I cannot help feeling that the real line of distinction should come at the point of quotation because, while I accept entirely, and, indeed, I am very keen to see, publicly-quoted companies being encouraged to raise their capital requirements from the market, private companies, by definition, cannot do that. We need a wider concession here, particularly bearing in mind the great importance of private companies in parts of the country including many of the major development areas, such as Scotland. I shall return to that matter shortly.

That brings me to the question of regional policy. I shall try to be fairly brief, if only because it may be a case of least said soonest mended. Hon. Gentlemen opposite have struck me as being a little ungracious today. The Government have done a great many of the things which hon. Gentlemen opposite have been urging them to do, and one would have expected that the Government would get a word of thanks for it. Needless to say, that expectation has been totally unfulfilled. I suppose that from some of my hon. Friends the Government would not expect a tremendous amount of enthusiasm for some of the steps announced last week.

When I study the map at annex "C" of the White Paper, "Industrial and Regional Development", I begin to wonder what type of hatching the Government will choose next to decorate the map. They must be getting very near to the bottom of the barrel. We have already had what might be described as black-black areas, black-grey areas, grey areas, and now what might be called "sub-fuse" areas, the new derelict land clearance areas. I am told that the Belgians have 26 different grades of development area. At the present rate of progress we shall soon be able to match that achievement. But our experience shows, I believe, that each of these gradations is more successful stimulating the jealousy of the next grade lower down than in satisfying the expectations of those who enjoy the particular privileges relating to them. So I have rather limited enthusiasm for this extension of the development areas.

As to investment grants, I was a critic of them under the Labour Government, and investment grants do not look much more attractive now. I cannot see what good purpose could be served by providing cash grants for the installation of capital-intensive machinery, labour-saving machinery, in areas of high unemployment. I suspect that most of these grants will go, as Dr. Jeremy Bray used to remind us, to firms that would have made the investment anyway; and when on top of that the distinction between service industries and manufacturing industries is renewed, it appears to me that a Hungarian goulash by any other name does not smell more sweet.

If we were to go in for a reappraisal of policies, I should have thought that the R.E.P. was a better case for such a reappraisal than investment grants. At least R.E.P. is related to the requirements of labour-intensive industry and encourages the retention of labour, which I should have thought a more desirable proceeding than the encouragement of labour-saving machinery in the development areas.

Equally, I am not particularly enthusiastic about the proposition that we should choose this moment to remove the link which has always existed between financial assistance under the Local Employment Acts and the number of jobs thereby created.

As to the Industrial Development Executive, it is quite wrong to suggest that it is the I.R.C. come to life again. If anything, it is perhaps a little more dubious in its intentions than the I.R.C. What particularly worries me is the proposition that it should apparently give selective financial assistance, perhaps, to one firm operating in an area such as mine, but not to another firm in the same industry in the same area in a competitive position. I am sure that my right hon. Friends are right to have a Minister answerable to the House for the activities of this Executive; he may have a certain amount of answering to do.

Better than any of these things, I believe, would have been moves directly to lift some of the burdens imposed by the Labour Party on the economy of the development areas, such as Scotland; things like the appalling increase in the tax on the road haulage industry and road transport—that would have been far more constructive than what we have decided to do—and to eliminate some of the burdens on small companies to a greater extent than we have.

But, at least, I express a very hearty welcome for the decision to accelerate orders from the Royal Ordnance factories, and other institutions, for the machine tool industry. This will be a genuine help. It makes good sense. My only question about it is whether it could not have been carried a little further and extended to a very extensive re-equipment of the Royal Ordnance factories, some of which I understand could do with it.

I turn now to the whole question of the central Budget strategy. Last week the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) was severe with my right hon. Friend about this and said that he had got it wrong in virtually every dimension. The hon. and learned Member for Lincoln (Mr. Taverne) repeated the accusation today.

It might be instructive to see what sort of advice my right hon. Friend has been getting from the right hon. Member for Stechford. The right hon. Gentleman is strong on hindsight. On Wednesday he said that by the autumn of 1970 the evidence had become overwhelmingly clear that movement in an expansionary direction was needed.

"Overwhelmingly clear" to whom? Not to the right hon. Member for Stechford. He said this in November, 1970: It may or may not be a good thing to insert some reflation into the economy…"—[Official Report, 4th November, 1970; Vol. 805, c. 1120.] When—in November, 1970? No—in April, 1971. That was all that the right hon. Gentleman had to say about the case for reflating the economy in November, 1970.

Come the 1971 Budget and the right hon. Gentleman identified as his first priority, not the stimulation of employment, but the achievement of a rate of prices increases for 1971 significantly lower than that for 1970."—[Official Report, 31st March, 1971; Vol. 814, c. 1529.] By the time that the July mini-Budget came along the right hon. Gentleman was able to tell us that he had long thought, and said, that the Chancellor should have acted, and acted much more directly, in the autumn of last year, to produce a more rapid rate of growth… It seems a pity that at that time the right hon. Gentleman kept his thoughts to himself rather than unburdening them to the House.

The right hon. Gentleman's verdict on the July mini-Budget was that it represented— a considerable switch of strategy…I think that it is right, and I have always thought so… The right hon. Gentleman certainly did not dream of suggesting that it was not enough at that time. On the contrary, he said that if the Chancellor were later to decide that more was needed— '…quite what he would then be piling up for the future I am not sure."—[Official Report, 20th July, 1971; Vol. 821, c. 1280–7.] Finally, if the right hon. Gentleman were to read again what he said in that debate, as reported in columns 1288–9, about the immediate prospects for the economy at the time of the mini-Budget, it would not be unfair to say of the right hon. Gentleman, as he said of my right hon. Friend last week, that almost all his appraisal of the problems and likely developments of the economy were false."—[Official Report, 22nd March,1972; Vol. 833, c. 1523.] I do not altogether blame the right hon. Gentleman for getting these things wrong, because I rather doubt whether it is given to man to achieve such a nicety of fine tuning as we sometimes like to imagine. But the track record of prophecy of the right hon. Gentleman himself seems to fit him well for the job of editing the Cross Bencher column of the Sunday Express.

We tend to expect far too much of the fine tuning approach to the economy Lord Beeching once said that managing the British economy was like trying to steer the "Queen Mary". I cannot help wondering whether we should not accept that in the first two years of any Government's period of office the condition of the economy is governed largely by the course of economic management pursued by the previous Government. It is difficult for Governments to accept this with only a five-year life. It is much more complicated if their senior civil servants apparently adhere to a passion for fine tuning notwithstanding past experience. I urge anybody who doubts that to look up the evidence of Sir Douglas Allen to the Wilberforce Committee of Inquiry last year, which was highly instructive.

Therefore, I approach all short-term forecasts with a fair amount of caution. I have studied with interest the forecasts that my right hon. Friend gave in c. 1352. I still find it a little hard to square his forecast of the likely outturn of stock building, when my right hon. Friend suggested that the rate of increase in stocks would slow down before the end of the coming fiscal year, with what is said in paragraph 24 and Table 4 of the Financial Statement, which seems to suggest a rate of stock building building up, as I would have expected, throughout the next 18 months to two years.

Equally, my right hon. Friend seemed to suggest that public sector expenditure would be tailing off as the private sector came in to take its place as of the next financial year. My right hon. Friend the Chief Secretary filled in some of the details this afternoon and described how we should have a sharp increase in public sector expenditure this year and then a rapid drop in the rate of increase in the next two years.

I was sceptical about this essay in curvaceous development when it was first outlined in the Public Expenditure White Paper last autumn. I remain somewhat sceptical. I wish my right hon. Friends the best of British luck, but I am doubtful about the prospects for the achievement of these precise targets.

I say all that particularly against the background which we now intend to create, a background of a net borrowing requirement forecast at £3,100 million, and, I suspect, later to exceed that, and a background of a monetary policy which can only in all fairness be described as passive—in other words, a policy designed to supply the money that is required to finance the going rate of inflation, whatever that may be.

I find it somewhat disturbing when on top of that we are apparently busily engaged in renewing the C.B.I. price initiative and thereby presumably ensuring that the nationalised industries will meet their requirements, capital and current, from the printing press. I also see alarming suggestions that we may even look favourably on a form of institutionalised inflation known as "threshold" wage agreements.

I suppose that the hope in all this is that we shall obtain from this distribution of prizes a response from such trade union leaders as Mr. Jones, Mr. Scanlon, Mr. Daly, and even Mr. Jimmy Reid, who to some in recent months or years have seemed to be more interested in upturning the mixed economy than in securing the maximum benefits of a mixed economy for those members they sup- posedly represent. I suppose that the expectation is that we shall get now a change of outlook from these gentlemen and their friends. Stranger things have happened.

What happens if we do not? I suppose that there are, broadly speaking, two alternatives. One is that we shall move on to a prices and wages freeze, always assuming that my right hon. Friends can persuade the House to accept such. We know from bitter experience that it works for only a brief time and then makes the situation infinitely worse than it was before.

The second alternative, which is somewhat more serious, is perhaps contained in the passage, which right hon. and hon. Members on both sides have referred to frequently in my right hon. Friend's speech, about a more flexible attitude towards the exchange rate. I confess that, unlike many of my hon. Friends, I have always had reservations about floating, precisely because I have feared that it would remove the external restraint on the propensity of democratic government to indulge in unlimited and self-defeating inflation. My fears on this point have not been entirely dissipated by my right hon. Friend's remarks.

Even here, if we were to go on to successive depreciations of the currency, I do not believe that we would solve the underlying problems created by inflation; because the truth is that, if we have another inflationary stampede, starting from a very high level in, say, 12 months' time, I believe that we shall find, as we have before, that companies in the private sector cannot cope with the escalation in their costs and will be forced once more into laying off labour, perhaps on a substantial scale. Then, the end result might be worse than the first—and there is a limit to the number of companies in the private sector to which bailing-out techniques can be applied.

Two or three weeks ago, an interesting collection of the writings of Professor Hayek was published by the Institute of Economic Affairs, under the title, "A Tiger by the Tail". I earnestly hope that my right hon. and hon. Friends regard that pamphlet as their bedtime reading, because I regard it as a highly prophetic and instructive collection of comments from the professor's writings. What worries me—I hope that my fears are unjustified, but I have a nasty feeling about it—is that we are feeding the tiger. I remember the sad tale of the lady from Riga, and I hope that we shall not emulate her fate.

7.21 p.m.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

I found it a pleasure—I suppose that I should not have done—to listen to the hon. Member for South Angus (Mr. Bruce-Gardyne), and I shall take up two of the points that he made.

The hon. Member was rather scathing about the White Paper outlining the various types of area to which the Government are to give assistance. I hope that the scheme will be extended a little further. I do not much care what the hatching is, but I remind Ministers that just to the south of the north-western area lies my constituency. My constituents only half-listened to the Budget. Having the greatest goalkeeper in the world in their football team, and having the greatest football team, too, about to set up a new record of two successful visits to Wembley in one season, they are consumed with something of a football fever. Nonetheless, what the Secretary of State for Trade and Industry said was a matter of some seriousness for them.

We accept all that the Secretary of State has done in helping an area like Stoke-on-Trent, but I ask him to consider once again the extension of intermediate area status to Stoke, for although we have not at the moment—

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

Yes, this is a piece of unashamed special pleading. I want the line drawn a little further to the south, although, as I say, I do not mind how the hatching goes.

In my area at the moment we have what is now called the modest level of unemployment of 4 per cent. Our adjectives change in significance as time goes on. Unless there is some forward planning we shall face a much more difficult situation in the future. We have a substantial coal industry, which can hardly be regarded as one of the growth industries of the future. We have our pottery industry, which, though very lively, will be subject to more rationalisation and, perhaps, loss of employment. We have a steel industry, employing about 3,000 people, which exists at present under a cloud. It is essential to look carefully at an area like this before anything drastic happens by way of planning and so forth.

In parenthesis, to take up the theme of open government on which my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) touched, I can only say that the way in which the long-term and short-term programmes for the steel industry are being pursued is absolutely intolerable. There are no facts; there are only rumours. People working at the Shelton iron and steel works in my constituency are deeply concerned about the future, and we cannot get the facts. Yet I can listen, as I always do, in search of enlightenment and education, to "The World this Weekend" on Sunday and hear a lecturer in economics tell Mr. Hardcastle that he has in his possession a secret document showing which 24 steelworks in this country are to be closed by 1980. This is not the way to conduct the nation's business.

I realise that the Department of Trade and Industry is not only attempting to give succour and help to lame ducks but is trying to stem a growing number of leaks from its documentation department. I hope that it will do better in future. It is too much to ask, of course, that a list of that sort could be given to Members from the constituencies concerned.

I urge the Secretary of State for the Environment to make Stoke-on-Trent one of the six large urban areas which he is to make the subject of special study and investigation. My special pleading ceases at this point. Stoke-on-Trent is a good example of an older urban area which presents problems which are common to many such areas in this country. It has pioneered many developments of one sort and another, in land reclamation, in education, and so on. I earnestly recommend the Secretary of State to name Stoke-on-Trent as one of his special study towns.

I turn now to a matter on which several hon. Members have touched but have then seemed to fight shy of, namely, that part of the Chancellor's speech—it is column 1347 of HANSARD—in which he talked about monetary developments. I gather that to talk about the money supply is "old hat" nowadays, and I should hate to be accused of being dated in my economic thinking. I did kid myself at one stage that I really belonged to the avant-garde, having discovered Professor Friedman a year or two earlier than some hon. Members did.

It is a remarkable state of affairs that we should have in the Chancellor's Budget speech a statement that monetary policy will be an integral part of the general management of demand. The Chancellor went on to say: Because one of the main qualities of monetary policy is its flexibility, I do not propose to lay down numerical targets".—[Official Report, 21st March, 1972; Vol. 833, c. 1347.] There have been a number of slightly sarcastic comments on that interesting statement. That terrible journal of public opinion in matters of statesmanship and economics, the Economist, said: This assurance would have carried more weight if the Bank of England had shown in 1971–72 that it was controlling money supply by some guideline more apposite than the seat of its pants—a very inefficacious altimeter hereto. The economics editor of The Times said that what the Chancellor had said offered an "open sesame" for money supply.

Plainly, the Chancellor has thrown monetary policy out of the window. Of course, he has got his fall-back. He says "This does not really matter because we are now converted to flexible exchange rates."

The right hon. Gentleman did not give the source of his conversion. Quite a few hon. Members opposite have claimed that they were the source of this change in his thinking. Let the credit go where it is due. But having spent, like others, some time talking about crawling pegs, devaluation, gliding parities and Heaven knows what, I must say that I do not think that this exonerates the Chancellor of the Exchequer in any way. Some people argue that it is all right. I hate to criticise my hon. Friend the Member for Ashton-under-Lyne, although he is always criticising me, but he says, "Let us feel our way towards it; let us have a crawling peg, a 2 per cent. approach." He has been supported today by an hon. Member opposite. But this will not happen in terms of practical politics.

Photo of Mr Robert Sheldon Mr Robert Sheldon , Ashton-under-Lyne

I am sorry that my hon. Friend is misquoting me on this occasion. I am not in favour of the crawling peg. I believe in managed exchange rates, but anticipating requirements in advance.

Photo of Mr Robert Cant Mr Robert Cant , Stoke-on-Trent Central

That is the same sort of thing. At the same time, I withdraw all my criticism of my hon. Friend.

I do not believe, first, that this is a practical doctrine. I believe that we adopt policies of this kind only in moments of crisis. It is rather like having an operation. One puts it off as long as one can and then it just becomes more serious. Instead of having 2 per cent. or whatever the figure might be, we should finish up by having another 15 per cent. devaluation. Surely no one can contemplate a 15 per cent. devaluation just like that, in the knowledge of all that happened in 1967, and knowing the burden and constraints in terms of consumer power, unemployment, cost explosion, and so on. One cannot devalue without there being a powerful influence on costs. None of us can regard devaluation as an easy way out if the fires of inflation are built up by what I regard as a quite unnecessarily casual approach to monetary policy.

In 1971, the Chancellor said: …the supply of money must not be so plentiful as to produce an additional boost to demand.…Nor must it accommodate any further impetus to the rise in costs and prices."—[Official Report, 30th March, 1971; Vol. 814, c. 1371.] If he has changed his mind, why does he not explain, again in the interests of open government? I will not quote the figures, but we all know of the fantastic growth of money supply between October and January. It reminds me of the Governor of the Federal Reserve Bank who, in a similar situation for the United States, was asked, "How did this happen?" He replied, "The wrong figure got into the computer". We hear a lot about this sort of thing. When I read that, I could not believe it, but the Governor was nevertheless quoted as saying so. I can only believe that the 25 per cent. increase in money supply in the four months from October to January happened only because the Chancellor had decided to ignore completely the growth in the supply of money.

I cannot understand it, because it seems to me totally unnecessary. There is all the difference between adopting a Friedmanite approach to money supply and adopting an approach such as the Chancellor has done. One can say that money supply can rise quite reasonably to accommodate a certain measure of inflation, but that is different from saying that we should have a disproportionate increase which is going massively to enlarge the liquidity of the country.

People say, "Does this really matter?" I think that it matters a great deal. It is obvious that, with rising income, not only does demand for money grow but it expresses itself in terms of growing savings, which of course again is a function of the fear that people have about the future. If any one were to ask me why house prices have rocketed ahead as they have, I would say that it is because the building societies have been put in a position, as a consequence of the irresponsible growth in money supply, in which they have had so much money that anyone coming along could have all he wanted. The result is simply that builders begin to ask fantastic prices.

I want the Chancellor to get to grips with this problem and to give a direcive to the Bank of England—if he is shy of targets—that the growth of money supply this year must be within certain reasonably defined limits. If he says that and says also that we must have a reduction in Bank Rate, he will go some way towards solving the inflationary problem, which I still think is perhaps the major problem facing the country in terms of demand management.

If the right hon. Gentleman does that, the first thing that will happen is that that part of the money supply which is not domestic credit expansion will diminish, because the dollars will begin to flow back to the United Slates. This will have an indirect effect. It will underpin the international monetary agreement that we had last year: the relative overvaluation of the currencies of Europe will be reduced and the dollar made relatively firm. This could operate as an indirect effect of reducing money supply and the Bank Rate in this country.

I do not believe that the control of money supply, any more than the flexibility of exchange rates, is a solution to the British problem, which I think is far more deep-rooted than that. I think, however, that money supply is connected with it because our failure to control it is not only a result of the ineptitude of the Bank of England and the Treasury and the politicians; it is a consequence of the fact that we have reached the stage in our economic life when we are submerged by hot money, with dollars which no one really wants, and that this is making inflation a common experience of all Western industrial countries. The money supply of France, Germany and Italy is going up at the same time. Taken together with the problem of the multi-national corporations and the way they move money around—and the way they move international capital investment around—this is something that the Government should have a look at

I sum up briefly. I hope that Stoke-on-Trent will be included in the intermediate areas and will be selected by the Secretary of State for the Environment as one of the towns for study. Above all, being Friedmanite and impartial, I hope that the Chancellor will be less light-hearted about monetary policy and will begin to offer some directive to those responsible for implementing this policy.

7.40 p.m.

Photo of Mr Robert Hicks Mr Robert Hicks , Bodmin

I hope that I will be forgiven if I do not follow the hon. Member for Stoke-on-Trent, Central (Mr. Cant) in the intricacies relating to money supply. I represent a constituency, 75 per cent, of which is located within the South-West development area, while the remainder is within the Plymouth intermediate area, and thus I want to concentrate the majority of my remarks on the subject of the Government's regional policies. Many hon. Members have referred to this, and I hope to comment on some of the statements made by the right hon. Member for Birkenhead (Mr. Dell) and the hon. Member for Stockton-on-Tees (Mr. William Rodgers).

I have two general comments to make, the first concerning value-added tax. I was pleased and relieved to hear that with one exception we are to have only one positive level of rating, namely 10 per cent. I fully appreciate the desire of my right hon. Friend to keep the mechanics associated with the implementation of this tax as simple as is practicable. Thus, he will be determined in Committee to keep to an absolute minimum the number of commodities that have a zero rating or are exempted altogether.

My right hon. Friend will recall that I have already made representations to him suggesting that non-edible horticultural crops should be zero-rated as will be horticultural food crops. I make this submission on the basis of the following three arguments.

Edible and non-edible crops are grown on the same market garden unit. They will appear on the same invoices, and this surely will give rise to unnecessary complications. It will be difficult in practice to decide when a grower buys a new piece of farm equipment, fertilizer or whatever, whether it is to be used for the production of food or non-edible crops.

Secondly, my right hon. Friend the Minister of Agriculture has already stated that compensation will be available to those growers who as a direct consequence of entry into the Common Market may be put out of business. I am certain that the Chancellor would not wish to contribute to a situation in which because of the incidence of this tax he makes growers non-viable and thus liable for Exchequer aid in another form.

Thirdly, this House will be aware of the vulnerable position in which many horticulturists today find themselves, irrespective of the implications of Europe. This industry comprises a large number of small business units, but in the main not small enough to qualify for total exemption. No section of British industry or agriculture can be more aware of the problems associated with operating within narrow profit margins than growers. I would be very worried if I felt that the addition of this tax, by my Government, would have disproportionate effects on the economic return of growers and possibly jeopardise their whole livelihood. I therefore ask my right hon. Friends to bear this point in mind.

My second general comment concerns the stated intention of the Chancellor to investigate the possibilities of bringing together into one system the payment of social security benefits and personal taxation. This will be most welcome. As a representative of a low income area I know that such a system will do much to eradicate the many difficulties and anomalies, both real and apparent, which arise and are frequently brought to the notice of Members.

I turn now to the various proposals and announcements made about regional matters. Speaking on the final day of a debate such as this, one has the advantage, or disadvantage, of being able to read what has been said before and to note the week-end comments of political and economic commentators. As one who used to lecture in regional policy before coming to the House, I can claim to have some knowledge and understanding of this subject. While I welcome the majority of the proposals of the Secretary of State for Trade and Industry and all that is involved in the basic decision to allocate a higher proportion of our resources to the assisted areas, I believe that hon. Members should realise that my right hon. Friend was quite correct in stating that Regional policies alone do not substantially create investment or enhance economic activity, though they can contribute to a better use of national resources".—[Official Report, 22nd March, 1972; Vol. 833, c. 1537.] When former students of mine, and now constituents, ask me why I am such an enthusiastic supporter of regionalism and regional measures and why we as a nation should spend such vast sums of money on regional aid—let us not forget that the figure increased tenfold during the six years of Labour Government, from £30 million in 1965 to over £300 million in their final year of office—my stock reply is, "So that each and every region of the country can both contribute to, and share in, the national prosperity."

Having defined the purpose of regionalism and the justification for such extensive Exchequer support, it is necessary to make two qualifications. First, the maximum benefit from regional expenditure will be derived only if the national economy as a whole is expanding. Secondly, this expenditure can be justified only if the economic well-being and social environment of assisted areas improves at a rate comparable to, or in excess of, the average figures for the nation as a whole. What I am trying to say is that not only is it essential that we get correct the global sum of money available for various regional aims in relation to the needs of the nation as a whole but we must make equally certain that we are spending this money wisely and in the best possible manner.

The Leader of the Liberal Party touched on this point when he drew attention last week to an article that appeared in the Financial Times in November, 1971, which showed that the disparity between the incentives in development and special development areas, on the one hand, and non-development areas, on the other, in Britain was probably smaller than that prevalent in any other leading Western European country. I think that that conclusion is correct, but the lessons which can be drawn are even more important. My researches indicate that in the United Kingdom, in spite of the large expenditure on regional aids during the middle and late 1960s, the average level of income in development areas rose more slowly than did the national mean, while the gap in unemployment between the national average and that in development areas widened in most instances and, at best, stayed consistent in two examples.

Comparing this regrettable situation in the United Kingdom with that prevalent in E.E.C. countries, we find that the gap in terms of income and unemployment disparity in those countries decreased between their own national figure and that for their assisted areas despite the fact that in global figures European countries tend to spend less on regional development policies.

My conclusions are confirmed by the statement of the Deputy Leader of the Labour Party, the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins), on 22nd July during the debate on the E.E.C. He came to the conclusion, as shown in column 1700 of HANSARD of that date, that Europe had a better regional policy record than we had, despite the amount of money we were spending.

This is the magnitude of the problem facing the new Minister for Industrial Development and all the people connected with the new Industrial Development Executive. I welcome the fact that this unit is to be answerable to Parliament and is to have a truly regional structure, although why the assisted areas in the South-West are to have only an office at Plymouth and not a similar organisation to that proposed for the other assisted areas baffles me.

Photo of Mr John Nott Mr John Nott , St Ives

I hope my hon. Friend will allow an intervention from a fellow Cornish Member. I did not interpret the White Paper in the same way as my hon. Friend. The South-West has been put in a separate category, but I understand that we are to have our own regional development board, like the other regions. However, does my hon. Friend agree that the new regional incentives give, for the first time, a large differential between the development and non-development areas? Under the previous Labour Administration and under the system which existed when the Conservative Party was last in office, the differential between the development and non-development areas has been extremely narrow. I have been working it out today on a discounted cash flow basis and for the first time since regional investment incentives were invented the differential is now very substantial.

Photo of Mr Robert Hicks Mr Robert Hicks , Bodmin

I must confess that my interpretation of what is said in the White Paper about regional development is not the same as my hon. Friend's. However, I take the point that the disparity between development areas and the rest of the country has widened. My calculation of the difference is 35 per cent. I should be interested to see after the debate whether my hon. Friend and I agree on that figure.

If my interpretation of the future organisation for the South-West is correct, it cannot be that we are not to have the full benefit for the reason that my right hon. Friend thinks that our problems are any less severe than those of other regions. I remind the Government that after Scotland the South-West development area has the highest unemployment figure of any development area. Because we are largely a rural area with only scattered industry and mining development we have peculiar difficulties not associated with those of the older industrial regions. No doubt we can pursue in depth the question of the precise organisation during the Second Reading debate.

In conclusion, I wish to express a regret. It is not the first time that I have expressed it in this context. I am genuinely sorry that this new section of government is not be given the status of a separate Department, with a Secretary of State in the Cabinet in charge. It has always struck me as a little odd that, for a function as important as regional development, not only in the context of the present needs of the United Kingdom, but also from the point of view of the implications inherent for regional development when we enter the Common Market, we should have the Secretary of State for the Environment in charge of the general administration of regional affairs, and responsible for the regional economic planning boards and advisory councils, and also for implementing one of the two major instruments for promoting regional balance, namely, grants for the improvement of the infrastructure, while a separate Department, the Department for Trade and Industry, is responsible for implementing the other main instrument in the strategy of achieving greater regional equilibrium, namely, the instrument for taking decisions concerning the location of industrial investment.

I should have thought that those two key functions could have been brought together as the responsibility of one Minister within the Cabinet. This is an aim which I shall continue to seek to foster.

7.58 p.m.

Photo of Mr David Marquand Mr David Marquand , Ashfield

I hope that the hon. Member for Bodmin (Mr.Hicks) will forgive me if I do not comment in detail on his remarks, which I found extremely fascinating and interesting, but time is short and there are still two of my hon. Friends who wish to speak, Therefore, I shall try to be as brief as possible.

I wish first to say a word or two about a topic which reared its head at various stages earlier today, namely, the question of Select Committees and, particularly, a Select Committee to examine the taxation system. Like other hon. Members, I welcome the statement of the Chancellor of the Exchequer that he wishes to set up a Select Committee to examine the tax credit idea. It is almost inconceivable that any hon. Member could fail to welcome a Select Committee to consider a subject as important as this. But the time has come for the Government to be more radical in their approach to this problem. We had the setting up of a Select Committee on corporation tax last year. We are to have another ad hoc Select Committee on the tax credit system.

I was a member of the Select Committee which considered the question of corporation tax. I found it a fascinating and worthwhile exercise. Within the very narrow limits of our remit, we did a useful job, but the limits were very narrow. We were asked only to recomend whether one or two possible changes, which most of the Labour members on the Committee did not think necessary, was the better change. That was inevitable in the circumstances in which the Government set up the Committee. The Government had already committed themselves to making a change in corporation tax. If a Select Committee had been set up to examine the desirability of such a change once the Government had committed themselves the Select Committee would have divided on party lines and its report would have been valueless. If one asks a Select Committee to look at the way in which a commitment is carried out one is bound to give it a narrow, pettifogging rôle.

The experience of the corporation tax Select Committee demonstrates that it is possible for Members of Parliament who have strongly opposed philosophies on taxation to consider this subject in detail without necessarily dividing on party lines. It demonstrates that it is not enough simply to ask the Committee to consider something on which the Government have already committed themselves. It also demonstrates that there should be a permanent taxation committee as part of that on-going machinery of the House for scrutinising the Executive. I have said this often in the past and shall no doubt say it again in the future. The albeit welcome small steps which the Government are taking in this direction should be speeded up, and become much more extensive.

Most of my hon. Friends who have spoken, with the possible exception of my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant), have welcomed what the Chancellor said about the exchange rate. We are glad that the Chancellor has accepted that it would be lunatic to get this country once again into the position where the needs of the domestic economy are sacrificed to a rigid exchange rate. What the Chancellor has said is a welcome step forward, but it seems to me that the difficulties are greater than he acknowledged.

What is needed by the world as a whole is the acceptance of small and frequent parity changes as a reflection of the fact that each country, for historical and social reasons, is bound to inflate at a different rate. The best way to accommodate the world to that fact of life is to accept the need for small and frequent rather than big and disruptive parity changes. To move to that, as my hon. Friend the Member for Ashton-under-Lyme (Mr. Sheldon) pointed out, would involve having to make parity changes before a crisis situation arises, before there is a major balance of payments problem and before speculative capital movements have accentuated that problem as happened in Britain in the 1967 devaluation.

We therefore face a political difficulty in international relations. We are asking our trading partners to accept an exchange rate change which may be adverse to them before we can demonstrate that there is an unanswerable case for it in terms of a major balance of payments disequilibrium. To put it mildly, this will not be an easy job.

In the context of Europe the way round this difficulty is to develop much more effective regional policies at the European level. This will be the precondition not only of a move towards greater monetary union in Europe but of a reasonably stable international monetary system. So far the British Government have been coy about their attitude towards the development of regional policies within the Community. The Community's regional policies are at the moment in the melting pot; they hardly exist. If Britain has the political will and the drive to do so. she can play a major and effective part in this. The Government owe it to the House to explain their view of the development of regional policies in Europe. This will be one of the major ways in which Britain can eventually benefit from membership of the enlarged Community and also play a part in solving the problem of exchange rate instability.

I am unconvinced by the strategy that the Chancellor has announced for dealing with unemployment. The experience of the last 12 months demonstrates that the conventional method of dealing with un- employment which has been accepted by both parties and by the Whitehall Establishment in general since the end of the war has now reached breaking point. We have reached the extraordinary paradox that when the level of unemployment is high and a major stimulus is needed the conventional method of providing that stimulus fails to work. The method by which the stimulus is supposed to work is that the consumers purchase more goods, which means that eventually manufacturers will invest and workers will be given jobs. But last year consumers failed to consume on the expected scale. The reason may be in doubt by academic economists, but it is not in doubt from a common sense point of view. Consumers failed to consume because they wanted to put by any spare money they had for a rainy day, in case they were unemployed next week. So when unemployment is high consumer confidence is low, and the method of stimulating the economy by means of consumer pump-priming is most likely to fail.

The public sector has to play a larger part in the exercise that the Government have admitted. There has been a certain amount of window dressing from the Treasury Bench about the expansion of public expenditure to deal with unemployment, but it is clear from the figures in the red book that public expenditure is playing a comparatively minor part in the expansion which the Government expect to produce by means of consumer reflation. According to the red book total public expenditure on goods and services between the first half of 1972 and the first half of 1973—which is the critical period—is to rise only by 2·4 per cent. That is what all the marvellous window dressing comes to—a 2·4 per cent. rise in public expenditure on goods and services as part of the war on unemployment. It is nothing like enough.

I accept that public expenditure is a cumbersome weapon to use. One cannot just turn on the tap and suddenly decide to build a hospital and to employ a number of building workers on the project. It takes time and planning, and a long elaborate process has to be gone through. If the Government find themselves in a critical situation, as they are now doing, and have no plans in the background, it is too late for them to do anything about the situation. They must rely on consumption-led growth. This is all the more reason for criticising heavily the Government's failure to prepare adequate plans of public investment in the building of hospitals and schools which are so badly needed so that they may be built in advance of reaching a crisis situation, such as that which led the Chancellor of the Exchequer to make massive tax cuts last week.

I should like to mention something of the underlying philosophy, if I may so call it, of the Chancellor's speech and the whole strategy of the exercise. In his speech to the House last Tuesday he said: …the main threat to the quality of life in this country has come from the inadequacy of real incomes, from social problems such as unemployment, and from those consequences of slow growth such as a persistence of bad schools, of old hospitals, of slums and urban squalor. The fact is that both the cause and the solution of all these problems lies in our economic performance."—[Official Report, 21st March, 1972; Vol. 833, c. 1344.] That is a fine expression, concise and effective, of the conventional wisdom of politicians in both parties and of establishment opinion generally on the quality of life and possible deterioration in the environment.

I strongly agree with what my hon. and learned Friend the Member for Lincoln (Mr. Taverne) said at the beginning of today's debate. I, too, believe that conventional wisdom is no longer enough. It is no longer enough to say, "We must go for growth" and then spend the proceeds of growth on cleaning up pollution and improving the quality of life. There is now increasing evidence that by going for the kind of growth which has reached its fullest extent in the United States irreparable damage may be done, not only to a nebulous thing called the quality of life but to hard, tangible realities. Therefore, it is necessary to develop a concept of the quality of growth and to steer growth in directions which will be beneficial to the environment, or neutral towards it, instead of in directions which will damage it.

I accept that nobody at all in my experience has the remotest idea of how to achieve this. Nobody has yet the administrative tools; nobody has developed the economic concepts. Nobody has even agreed on the technical facts. Nevertheless, we must now accept that we shall never develop these tools until we accept the philosophical shift—which is to accept that it is not enough to go for growth and to spend the profits on cleaning up the results of growth, but that instead we must steer growth in the right direction.

That passage in the Chancellor's speech, as probably will be accepted by the vast majority of hon. Members, ultimately will appear to future generations to be the most extraordinary and questionable passage of all.

8.15 p.m.

Photo of Mr John Biffen Mr John Biffen , Oswestry

The hon. Member for Ashfield (Mr. Marquand) devoted the earlier part of his speech to exchange rates, and I should like to devote some of my remarks to that subject a little later.

At this stage of a Budget debate it is tempting to take up some of the rather good-natured and urbane arguments which are being tossed to and fro as the evening shadows lengthen. I was fascinated at the speeches of the right hon. Member for Birkenhead (Mr. Dell) and the hon. Member for Stockton-on-Tees (Mr. William Rodgers) as they developed an almost medieval scholastic argument as to when centrally directed funds are somehow or other different, depending on whether they proceed from an institution once called the I.R.C., or hereafter from an institution called a Government Department. It may be a distinction with a difference, but it is one to which I am certain the House will want to address its mind. If I desist from the temptation this evening, it is out of a sense of continence rather than from cowardice.

First of all, I should like to congratulate my right hon. Friend on a major reforming Budget. Whatever judgment one may have about the rôle it will eventually play in the major economic determinants such as employment or inflation, none of us can doubt this is a Budget which will last in fiscal history. Succeeding generations will look back on the Budgets of both last year and this year as being the fruits of careful and constructive work carried out in opposition and of work executed with great determination by my right hon. Friend when he attained his present office.

My congratulation is unstinted, particularly as this year I am delighted that in respect of estate duty he has made the kind of reforms which are of particular value to small businesses and to agriculture and which have a constituency interest peculiar, though not necessarily exclusively peculiar, to North Shropshire.

I am glad that the investment surcharge is relatively modest; it is high time we brought more equity into our treatment of investment income. Naturally, I am also very pleased that we have now made a long overdue move to free depreciation.

Finally, as one who is not particularly enthusiastic about value-added tax, I am delighted that my right hon. Friend has drawn it at a single rate and on the whole has been generous in the exemptions—a generosity which is expressed in a way as to make this as unregressive a tax as possible.

One of the myths which has been peddled assiduously by some of the wild men opposite, particularly by the hon. Member for Fife, West (Mr. William Hamilton), is that the present Government have been viciously manipulating the tax system for the benefit of the wealthy and to the disadvantage of the poor. In order to get a well-documented refutation of that myth, I turned to the Institute for Fiscal Studies, which has recently commissioned a work by C. V. Brown of the Department of Economics, Institute of Finance and Investment, University of Stirling. I quote from page 14, where he summarises the combined effects of the three Conservative Budgets and says: In percentage terms, however, the largest gains are in the lowest income household,…it is also fairly clear that in general the gain in terms of both money and per cent, of final income falls off as income rises, except at the very highest levels… Therefore, I was disappointed earlier this afternoon to hear the hon. and learned Member for Lincoln (Mr. Taverne) castigate my right hon. Friend for having a policy involving redistribution to the better off. He should read his own publications.

As I have said to the hon. Member for Ashfield, my main concern is to return to the subject which, without question, has caught the imagination of the House in this debate—namely, the Government's attitude to exchange rates. This is fascinating. No one can doubt that we have had a Budget the tax-changing consequence of which is almost unprecedented in our political lifetimes. Yet, repeatedly, hon. Members have come back to a particular quotation from the speech of my right hon. Friend the Chancellor of the Exchequer on 21st March, when he said …it is neither necessary nor desirable to distort domestic economies to an unacceptable extent in order to maintain unrealistic exchange rates, whether they are too high or too low."—[Official Report, 21st March, 1972; Vol. 833, c. 1354.] The right hon. Member for Leyton (Mr. Gordon Walker) said that was …the most significant phrase in the whole of the Budget speech."—[Official Report, 22nd March, 1972; Vol. 833, c. 1608.] My hon. Friend the Member for St. Marylebone (Mr. Kenneth Baker), who is no half-timer in these matters, described it as …what I consider to be the most important economic statement made in this House since the war…"—[Official Report, 23rd March, 1972; Vol. 833, c. 1775.] No one contradicted him. Indeed, my hon. Friend the Member for Horsham (Mr. Hordern), who is chairman of the Conservative Parliamentary Finance Committee, said …in the last resort, we must insist on managing our own exchange rate to perfect our own domestic economy. This seems to me to lie at the heart of the matter."—[Official Report, 22nd March, 1972; Vol. 833, c. 1583.] My hon. and learned Friend the Member for Dover (Mr. Peter Rees) said I hope it follows…that we shall be able to contemplate adjustments in the exchange rate with perfect equanimity."—[Official Report, 22nd March, 1972; Vol. 833, c. 1604.] To round it off, we had the speech of my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) who was referred to in deservedly generous terms by my right hon. Friend the Chief Secretary earlier today. It is a great loss for this House that my right hon. Friend is leaving us, but at least his valedictory speech could not have been better. He left with us this one reflection above all else which I am certain was intended for our consideration: In my submission, a free and floating rate is the perfect instrument for maintaining the balance of the national economy".—[Official Report, 23rd March, 1972; Vol. 833, c. 1715.] As I reflected on all those statements culled from a casual reading of the first two days of the Budget debate, I thought of the beautiful cadences of the 1660 Prayer Book, "Hear what comfortable words." Indeed, they are. But I wonder whether the significance which has been invested into this statement of my right hon. Friend has not been offered almost uncritically. I am sure that my right hon. Friend will wish to answer this point later this evening. This cannot come up in the Committee stage of the Finance Bill. It is exactly the topic which deserves a reply in the wind-up speech of my right hon. Friend.

There is a tendency to feel that one can have alterations on the exchange rate as a result of going for growth, as though that is what invests the whole thing with respectability: "We are going for growth and, if that means an adjustment on the exchange rate, it is all in a good cause." However, our past experience does not demonstrate that it is going for growth which causes countries to alter exchange rates. It is differential rates of inflation which are more likely to cause alterations in exchange rates. Therefore, when my hon. Friend the Member for Cambridge (Mr. Lane), who no one could accuse of being flint-hearted, said Inflation is still right at the top of public anxiety"—[Official Report, 22nd March, 1972; Vol. 833, c. 1612.] I think that he went right to the heart of the matter.

The threat to the exchange rate which we contemplate quietly, considerately, and soberly, does not derive from any likely dash for growth on the part of this Government, or a sudden awakening of this country's economy to evolve in a way which has not been its wont in the past, it is more likely to derive from domestic inflation.

There are three reasons that I advance to give some further weight to that consideration. They are three which I have adduced almost casually. I apply no weight to them. I say merely that they are points to be considered quietly and unemotionally.

First, there was the evidence which was given to the Expenditure Committee, presided over by the hon. and learned Member for Lincoln. I quote from the summary of that which appeared in the Financial Times. It referred to the two witnesses, Mr. Francis Cripps and Mr. Christopher Taylor of the University of Cambridge's Department of Applied Economics, and it said: The possibility of a United Kingdom balance of payments deficit of £2,000 million by 1975 was forecast by two Cambridge economists yesterday when they appeared before the general sub-committee of the Commons Expenditure Committee. I know that economists are sometimes regarded as professional pedlars of gloom, and I know that one can take issue with the figures used by those two economists. But we should not disregard the evidence that was put to that important House of Commons Committee by these gentlemen. It is exactly signs like these which I suspect will multiply as time goes by.

My second reason was reinforced somewhat by the earlier part of today's debate. It is that, for better or worse—and I make no judgment on it—the Government will increase substantially the demands of the public sector of the economy over the next 12 to 18 months. My hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) sought by generous cross-questioning to elicit a little more information. As far as I can judge from the answers, the public sector is expected to increase by 6¼ per cent. over the coming year.

Whatever we may feel about the public sector, one fact is beyond question. It makes only a minimal contribution to direct exports. Therefore, I am a little apprehensive about our likely export performance if we have a rising share of our total resources devoted to public sector expenditure. I am not arguing that public sector expenditure is to be welcomed or otherwise. I am saying that in the context of the balance of payments that has to be considered soberly.

My third point is that the latest index of engineering export orders, which is the only export order index that we possess, shows that for 1971 over 1970 there was a drop in the volume of orders by 12 per cent. and, for the last quarter, a drop of 21 per cent. The engineering index covers about 25 per cent. of our total exports. If we say that the movement of that order index today is a reflection of the export delivery performance of the months and years ahead, we have some reason to be a shade apprehensive about our trading performance. Therefore, there are very good grounds for believing that we may return to the old exchange rate problems and the need to invoke the therapy of a flexible rate to deal with the problems which might flow therefrom.

Surely this is where the House deserves reassurance in the wind-up speech tonight. How is that equated with European monetary union? Do we intend to narrow the band of exchange rate fluctuations for the currencies within the Community? The answer must be self-evident. We do. Far from moving towards more flexibility, we are moving towards more rigidity in that instance. This is not a negligible point. On the trade figures available for the calendar year 1971, we are speaking of about 31 per cent. of our visible exports and 32 per cent. of our visible imports which we conduct with the proposed enlarged Community.

That takes us to the second question: is it feasible for sterling to be fixed and locked with Community currencies and yet on its own to move flexibly in relation to currencies outside the Community?

Photo of Mr John Biffen Mr John Biffen , Oswestry

The right hon. Gentleman, who, after all, is almost the European authority, shakes his head. He says that it is not feasible. Of course it is not. Then we only have to look at the agonies through which the Community has been proceeding in recent months in regard to its common agricultural policy. I agree that in part is because the form of flexibility chosen was an actual floating rate. However, one has only to consider the difficulties of the German border tax, which derive merely from a straightforward movement in a fixed rate, to realise that the whole of the institutional pressures within the Community will be away from the kind of flexibility in exchange rates which were dangled before us by the Chancellor of the Exchequer in his Budget speech. I find it difficult to equate the move to flexibility referred to by my right hon. Friend with his remarks at another point in his speech when he said: Meanwhile in Europe I have been having discussions about the progress of the enlarged Community towards economic and monetary union."—[Official Report, 21st March, 1972; Vol. 833, c. 1349.] It would be the very least service that this House could perform if it avoided self-deception, if, because what it had heard was what it was hoping to hear, it did not ask the more difficult questions.

When the Chancellor talked about more flexibility, with one or two notable exceptions—my hon. Friend the Member for South Angus was one—the chorus of approval was almost embarrassing in its unanimity. However, hardly anyone stopped to ask: "How does this reveal itself? How will this most important change since the war come about?"

Some hon. Members have said that there will be technical difficulties. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) was one who underlined the kind of difficulties. The worst that could happen would be if we were left not with the taste of some new departure on our lips, but with the ashes of ambiguity. I fear that the ashes of ambiguity may prove the abiding taste which we must ensure is not the taste that remains.

I make no apology that on 28th October and 17th February I voted for the advantages of national Governments and the nation State as a means by which to proceed in, broadly speaking, determining economic policy and promoting international economic co-operation. At times as I listened to and read the Budget debate it seemed to me that in the enthusiasm for flexible exchange rates I could welcome that there were new voices to my view. Naturally, I hope that hearts and eventually feet will follow those voices.

But, above all—perhaps more than making any hopeful anticipatory debating comments upon the processes of the European Community legislation—what we can most productively require from the Executive and the Treasury Bench in this debate is a clear statement as to what the new-found regard for flexible exchange rates really means in the world in which we shall have to live during the next couple of years.

8.34 p.m.

Mr. William Handing:

It is always a delight to follow the hon. Member for Oswestry (Mr. Biffen) and, particularly tonight, to hear at least one dose of common sense and clarity on this question. We have had a succession of speeches today from pro-Marketeers who, it seems to me, have dodged many of the fundamental issues which lie behind what my hon. Friend the Member for Ashfield (Mr. Marquand) earlier called the philosophy of this Budget. The hon. Member for Oswestry has torpedoed one of the illusions. But I take issue with him when he says that this is a major reforming Budget. I do not know whether reform becomes reaction or reaction becomes reform, but I call this a major reactionary Budget, particularly because of the philosophy behind it which is that loss of representation is part of the price this country will have to pay for entering the Common Market.

But before I develop the point I should like to take particular issue on one matter, because it seems unlikely that my hon. Friend the Member for Oldham, West (Mr. Meacher), who is one of the great authorities on it, will be lucky in speaking, at least tonight. [Interruption.] If I spoke for as long as some hon. Members certainly not another back bencher would get in, but I do not propose to take that long and I have my eye on the clock.

I wish to refer not only to the tax concessions of this Budget but to those in last year's Budget. A single person earning £1,000 a year paid tax in 1969–70 of £186. In 1972–73 he will pay £123, a reduction of £63. I do not know whether the hon. Member for Oswestry regards that as a generous concession, bearing in mind the euphoria on the Government benches at the reduction of income tax both this year and last year. A single man earning £10,000 a year paid in round figures £4,285 in tax £1969–70. In 1972–73 he will pay £3,859, a reduction of £425.

I do not know whether that is an example of the lower-paid man receiving a far more generous tax concession than the wealthier man, especially as the man earning £1,000 a year in1969–70 will have to earn over £1,200 a year in the current financial year in order to keep pace with inflation and will pay £183 in tax on it. I do not know whether that is regarded by the hon. Member for Oswestry as an example of the Government's tax reforming zeal.

The main point I wish to develop is that the Budget represents part of the price we will have to pay for the Tory terms for joining the Common Market. We have heard a great deal lately about helping the poor. I have quoted figures on income tax but the poor do not pay income tax and they will not be helped by those proposals. Taxes on food—is that an example of the reforming zeal of the party opposite, of a contribution towards helping the poor? The common agricultural policy, which will be accepted by the House with virtually no debate, no inquiry, and no investigation—is that reforming zeal? I regard that as reactionary zeal. Reverting to the Corn Laws of 1846 is not reform but reaction. What about the value-added tax? Is the payment of tax on school children's boots and shoes an example of reforming zeal, because that is what will happen? The same applies to taxes on clothing and on household necessities

One of the actions by the Government in their disregard for Parliament is that customs duties will be imposed on this country outside the Budget as part and parcel of the European Communities Bill. This House is losing control over taxation. I do not know whether the hon. Gentleman regards that as reforming zeal. I do not and I am sure that, in his heart, he does not either. We are abandoning control of taxation and economic policy; it is being given to bureaucrats outside this country who are not even elected to any Parliament. I do not regard that as reforming zeal.

This is part of the philosophy behind this Budget. The Budget is not the whole story. It is becoming more and more only part of the story—and a diminishing part. In recent years, economic strategy has become less and less answerable to the Budget. We will tax cheap food imports and imports of cheap raw materials from non-E.E.C. countries. Yet we are a great manufacturing country which has traditionally relied on the import of cheap raw materials. This is not reforming zeal but a strategy for the reduction of this country's influence, not only in Europe but throughout the world.

The issues are not discussed. They have not been discussed in this debate as they should have been. The people are being lulled into a sense of false security by a conspiracy in the Press and elsewhere to avoid any real discussion of these fundamental issues affecting Parliament and the people. As a result of this and other Budgets by this Government, there will be a permanent change in the incidence of taxation. The Chief Secretary talked about a tax revolution in this Budget. He said that this revolution was rooted in the past. How right he was—a return to the reactionary taxation policies of this country when the larger basis of taxation was regressive, with taxes on consumption and not on income.

I should have preferred to see hardly any reduction in income tax. I should have preferred large reductions in indirect taxation if any reductions at all were to be made. We are promised a new inheritance tax. Everyone who has studied the document on this matter knows that it will mean that the large estates will pay less tax.

At the same time, there has been a complete reversal of the Government's main economic strategy. They have lost their nerve and their direction. The Prime Minister now invites Trades Union Congress leaders to meet him at No. 10. Instead of clobbering the unions, we now invite their co-operation. The devil is sick and the devil a saint would be. This Government are sick and are making overtures to the very people whom only a year ago they were describing as the greatest enemies of the country when we were debating the Industrial Relations Bill.

The Government's policies have collapsed into complete confusion. They now talk about steadying prices—but they are the Government who pushed up prices as a deliberate act of policy and who, through value-added tax, and the common agricultural policy, will deliberately increase the prices of food and household necessities.

At the time of the election in 1969 the present Prime Minister said that a Conservative Government would completely reject the idea of an incomes policy. "Let us have freedom for the unions", he said. "They must have freedom to get what they can through their economic strength. "That is not what the Government are saying now. All sorts of kites are being flown and stooges put up to float new ideas for economic policies to get the Government out of the hole into which they have got themselves.

We all know of the incomes policy which the Tories have been using in the public services to keep wage settlements down in that sector and indirectly, by that means, influence wage agreements in the private sector. Instructions have even been given to negotiating bodies not to offer more than a certain percentage. This is not an incomes policy which is viable, and the Government know it.

In some cases there has been a refusal to conciliate, while in others there have been no actual negotiations because the management side has not been thinking of, for example, the teachers, or has not had power to offer more than what the Government are willing to concede. The Government are standing in the background like Big Brother telling the management side in the teaching profession not to offer more than 7 per cent. Real negotiations are not taking place.

The miners presented a special case, we are told, but what was not special about the postmen or agricultural workers? Only the bargaining and industrial strength of the miners formed the basis of the alleged special case which they presented. Have the Government learned from the miners' dispute? Not in the least. Think of the ruinous effects of that dispute on industry. The ultimate wage agreement was far more inflationary than could have been obtained months before had the Government not been so thick-headed.

There is no real sense of priority in the Government's incomes policy. They are not displaying any sort of equity or justice. One cannot have an incomes policy by itself. There must be all sorts of other considerations. For example, one must have price control, which the Government have thrown away by their other disastrous policies associated with the Common Market.

Above all, one must have a guarantee of full employment. There must be co-operation in industry and the Government must stop clobbering the unions politically through the Industrial Relations Act, which they should scrap and show that they mean to have proper co-operation. We must have real and effective regional policies dealing with the catastrophic increase in unemployment in Scotland and elsewhere. We must have welfare policies which are conciliatory instead of having two nations within a so-called welfare policy. A second sector is growing up in which some people have "top hat" pensions while the rest live on bread and dripping.

These are the realities of the economic policies which we should have been debating but which have not been discussed properly in this debate. When one looks at the whole picture and at the ruinous industrial and economic policies of the Government, it is clear that one cannot expect any success from even a last-minute change of mind on the part of the Government.

8.50 p.m.

Photo of Mr Ralph Howell Mr Ralph Howell , North Norfolk

If my praise of the Budget is brief it is none the less sincere. I congratulate my right hon. Friend the Chancellor of the Exchequer on a most reforming Budget. By removing this large slice of oppressive taxation he has prepared the ground for us to take our opportunities when we enter the E.E.C.

I praise him particularly for the help he has given to pensioners. My constituency has a very high percentage of pensioners, and I know that they will be extremely grateful. The yearly increase in the pension, the raising of the tax threshold and the changes affecting unearned income will be of immense help to pensioners, and particularly to those who have tried to help themselves. They will also go a long way to making saving worth while.

I am very glad, too, that my right hon. Friend has done so much in raising tax thresholds generally, but though I say this I must add that I am very concerned about the very low paid workers, who will get very little benefit. It is time we thought about this problem more seriously and took action to look after those very low paid people, because we now have the idiotic situation of the wage trap where people can have wage increases of over £2 per week yet find themselves worse off than before. The only solution is a minimum wage.

I am delighted that my right hon. Friend has taken the great reforming step of declaring his intention to create a tax credit system. That is a tremendous step forward, and I hope that when the Select Committee is set up and the Green Paper is considered we shall have a built-in minimum wage because that is absolutely essential in operating such a system. I also hope that we will go further than has so far been suggested and will incorporate rent rebate in the scheme as well, so that we get all the social benefits and taxes related in the one scheme.

I have two reservations about the Budget. I am very disappointed that we have not been able this year to reform the present P.A.Y.E. system. Even at this late stage we should consider altering it, because it is quite scandalous that we should be squandering £175 million worth of taxpayers' money in unfair tax rebates, and doing tremendous harm. That £175 million was the figure last July: by now it is probably nearer £300 million.

We must tackle this problem. We are told that the new reform cannot possibly come into operation until 1975, and it is quite intolerable that we should carry on with the present P.A.Y.E. system for another three years. It is doing so much to discourage regular workers, particularly the lower paid workers, who often find that they are worse off than people who are not working at all. The sum involved is large, but the effect of the system is much worse because of the tremendous discouragement it causes.

My second reservation is that some of the basic judgment of the Budget is mistaken. Much of the Budget strategy is designed to alleviate the tremendously high unemployment level. I have as much sympathy as any other Member for the unemployed, but the unemployment figure needs analysing much more thoroughly than it so far has been. I call on the Government to do some basic research into the subject. There may be 1 million people unemployed, but there are nothing like 1 million people wanting to work. It is a very different thing.

At least 200,000 of this 1million figure of which we are so frightened are people who have retired early, on pension, and have no intention of taking another job. They are merely registered as unemployed because they wish to avoid paying a National Insurance contribution. That is one big sector. Another large sector, of probably another 200,000 people, is formed by those who for one reason or another are virtually unemployable. This fact should be recognised, and we should not continue to lump together these various categories.

There are other sectors. Many people, because they live in low wage areas, cannot afford to work. Many people in my constituency are in that category. Another category is those who have discovered how to reclaim P.A.Y.E. by having periods of unemployment. Some people are free-wheeling on redundancy benefit. If all these categories of people were analysed, we may find that not more than 200,000 to 300,000 people genuinely want work at present. The Government should look seriously at this matter. We may be making the wrong judgment simply because we see the vast figure of 1 million and take action wrongly.

Photo of Mr Charles Loughlin Mr Charles Loughlin , Gloucestershire West

I am very interested in the hon. Gentleman's analysis. One can offset the hundreds of thousands who do not register. If his analysis is correct, can he tell me why there have been persistently high levels of unemployment in certain regions?

Photo of Mr Ralph Howell Mr Ralph Howell , North Norfolk

In my particular area, which perhaps has more experience of a high level of unemployment, as we have been running at a rate of between 5 and 6 per cent. for years, the problem is to get people to come off the labour exchanges and to work.

It seems very strange that 155,000 construction workers are registered as unemployed at present when housebuilding is taking place at a tremendous rate and firms are having great difficulty in recruiting sufficient people. We must not deceive ourselves by these figures.

8.58 p.m.

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

I hope that the hon. Member for Norfolk, North (Mr. Ralph Howell) will not be disturbed if I do not comment on his argument. It would appear from it that I should have to cover a wide area. The different categories removed from the unemployment that was worth taking into account by the Chancellor would have to be examined throughout the country. We should presumably have to psycho-analyse our people and ask ourselves not merely about those who are unemployed on the register but the many hundreds of thousands who for some reason were willing to work when there was a bigger demand who are not working at present and who are not in receipt of any benefit. Perhaps the hon. Gentleman has some explanation which we could examine at greater leisure.

Almost every speaker in the debate has congratulated the Chancellor on his efforts to achieve structural reform of our taxation system, more particularly en the most promising advance of all, the proposed new tax credit system which, if successful, will certainly provide better mechanics for tackling the problem of poverty and helping low income groups generally than we have ever possessed. Everything will depend upon the will to use these mechanics, but they could be turned into the most effective instrument of social justice, perhaps not under a Conservative Government. In any event, I thank the Chancellor in advance on behalf of any Labour Government after this valuable reform.

I readily join in the congratulations which have been showered upon the Chancellor as a tax reformer. I believe that in this area of structural reform the right hon. Gentleman will deserve to go down as one of our most outstanding Chancellors. I wish I could continue in other areas with precisely the same good will.

There are a great many things that I shall not deal with tonight—things like the Chancellor's regressive redistribution at certain points. I will not labour those, because we shall examine them in great detail in the debates on the Finance Bill.

I recall that in 1962 there was a Chancellor who lifted the starting rate of surtax on earned income from its prewar level of £2,000. Who, recalling the anger that Chancellor then earned, would believe that the same right hon. and learned Gentleman would be presiding, bewigged and benign, over our proceedings as Mr. Speaker and looking more like, if you will forgive my saying so, Mr. Speaker, Red Riding Hood's grand-mother than the wolf he was then depicted to be. I certainly had not intended to give any offence—

Photo of Mr Selwyn Lloyd Mr Selwyn Lloyd , Wirral

Order. I was becoming rather worried thinking of the fate of Red Riding Hood's grandmother.

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

This debate in other respects has been dealt with in detail very effectively by many of my right hon. and hon. Friends. On the question of regional policy, my right hon. Friend the Member for Birkenhead (Mr. Dell) and my hon. Friend the Member for Stock-ton-on-Tees (Mr. William Rodgers) so crumpled the Government's White Paper that for some period its likely resting place will be the wastepaper basket. I will not go into this and many other detailed questions.

I want to deal with three important questions of central character arising from our debates. First, why have not the Chancellor's reflationary attempts worked so far? Second, has he now reflated to the right amount and in the right way? Third, how will he reconcile the unusually high rate of expansion which he is seeking with our balance of payments needs? I wish to deal first with this last question.

The Chancellor's answer was quite correct up to a point. He said that, in relation to this, the heavily under-employed state of our economy was an advantage, that our potential growth of productivity was greater now than it was on any other occasion of attempted advance, that our reserves in the current balance of payments were stronger than at the beginning of any previous expansion. It gave us a unique opportunity to secure a fast rate of expansion over a considerable period of years.

I pause to note that the Chancellor has always attributed any present difficulties in the economy to the misdeeds of his Labour predecessors. The immense opportunities that my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) presented to him in the form of a balance of payments surplus and strong reserves are taken as due to the virtues of a Tory Government. Apparently these arose rapidly, whereas the malaise is taking some time to cure. All the debits are ours. All the credits belong by divine right rather than logic to the Tories.

The Chancellor makes no mention of the increase in exchange protection which we possess as a result of my right hon. Friend's action in stabilising sterling balances in the Basle Agreement of 1968. The most significant statement that the Chancellor made, and which received a wide, largely uncritical, welcome here and outside was his bald statement that he did not believe that there is any need for this country to be frustrated on the score of balance of payments to maintain unrealistic exchange rates.

I confess that my faith in the House grows with the years that I sit in it. You can fool some of the House for some of the time, but you cannot fool the House for very long, as has been evidenced today. There is an inverse ratio between the distance of time in reflecting on the Chancellor's Budget statement and the level of applause that he received for it.

I do not believe, and have never believed, that any deliberate under-employment of the economy should ever be countenanced to improve the balance of payments. But the Chancellor's bald statement has inevitably been taken to mean that if, in reflating the economy to full employment, we meet balance of payments difficulties, he will blandly solve the problem by devaluation. Thus, having miscalculated demand to a point at which we have a dreadful level of unemployment and dangerous waste of our resources, the Chancellor announces that he will carry on pumping up demand as required until we reach the stage of full employment, and if this produces balance of payments difficulties—hey presto!—he will devalue.

I say nothing about the extraordinary somersault that the Chancellor's attitude represents from the stand which he took in opposition, save to say that both then and now his words were damaging to the prospects of sterling. It was the impressive strategy which I have just described, however, which brought right hon. and hon. Members opposite to their feet, cheering and waving their Order Papers. I am sure that it was all spontaneous—at least, when it was first thought up in the Whips' Office.

If the Chancellor's task were as simple as that—pump up demand, and then devalue if we run into balance-of-payments trouble—I wonder why we put up his salary recently instead of replacing him by any reasonably intelligent sixth form school boy. In fact, the task is one of the greatest difficulty.

A good many of my hon. Friends as well as hon. Members opposite—I am lucky that there is no party line or party Whip on this issue yet, though I may be embarrassed at a later stage—gave such a cordial welcome to the right hon. Gentleman's statement, as though it were the new revelation, that I am constrained to remind the House that he made a rather similar statement in discussions at the I.M.F.—a far more appropriate context in which to make that kind of statement than the context of a Budget speech in which he announces massive reflation of the economy. Not only is the context of his words in relation to what happens as one reflates on that massive scale important. When one examines them one sees that they mean all things to all men. In obscurity, they make some of the most cloudy utterances of the Delphic oracle seem positively lucid.

What does the Chancellor mean when he says that he will not support an unrealistic parity? Did he define an unrealistic parity? Certainly not. We heard nothing about that. Let me make my position clear, if it needs to be made clear, to my hon. Friends, if to no one else. I believe that we should get our economy running normally—that means with full employment—then, after a period of running the economy normally, assess our balance of payments, and, then, by its duration and volume, assess whether any parity change, upwards or downwards, is required.

I denounce the absurd doctrine that under-employment in any long run is ever a sustainer of parities. In any long run, under-use of resources makes one less competitive and, hence, undermines one's parity.

It seems that we are now told that this may be true of other countries—Germany, Japan, France, and so on which can run at a high rate of growth and use of resources—but not for Britain, which suffers from the English disease. The moment the economy has a prospect of running at anything like its full capacity there will always be brilliant economists from Oxbridge who will attempt to foresee the future three or four years ahead and paint a most damaging picture of looming disaster. If I were to describe the English disease in relation to our financial affairs, I should say that it resided in the areas of academic certitude among those who profess to know the unknowable distant future.

The Chancellor has not declared any strategy for ensuring that we have our balance of payments in reasonable shape. On the question of unrealistic parity, he has not told us whether he regards short-term capital movements, including leads and lags, and speculative and inter-State movements of capital, as factors which have to be taken into account in deciding unrealistic parity. Is it unrealistic to try to ensure that speculative movements of capital shall not determine the parity at which one trades or that one cannot defend against them? As some hon. Members, including my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant), have pointed out, in no country in the world has devaluation or even revaluation taken place after this calm appraisal of what is or is not a realistic parity. The approximate cause of devaluation has always been short-term capital movements, and if the Chancellor does not intend to allow short-term capital movements to force him to devalue, he will have to finance them, and if he is to do that we ought to know something about his contingency plans, because those plans become more urgent in view of the statement he has made.

There is another problem, especially British. It is that when we move from stagnation to a higher level of production, we find that the balance of payments tends to turn sour. The trouble in the past is that we have never been allowed to get on to a plateau of normal, full employment because the Chancellor of the Exchequer, before we have climbed on to that plateau, has taken deflationary action. Do we understand that the right hon. Gentleman is going to view a rapid decline in our balance of payments surplus with equanimity, bearing in mind that this is inevitable because of the belated and necessarily speedy reflation we are undertaking? Or will he regard it as realistic to change the parity as we move, as we may well have to move, into a trading deficit in the period from stagnation to expansion?

Is the right hon. Gentleman going to regard as realistic a parity which accommodates unlimited capital movements, as we did for so long, into the sterling area? Is that realistic? If it is, we have given up any sort of control over our own parity. It will be decided for us by freely chosen, unrestrained movements of capital into the sterling area.

Another aspect of the Budget Statement is that the right hon. Gentleman has freed long-term capital movements. That may be proper in itself, but was it an appropriate place in which to make the announcement having regard to his statement on parities? He should tell us also whether realistic parity includes the idea of having a parity which allows net capital investment to occur—in other words, to accommodate an overall surplus for this country. He should bear in mind that the new strategy coming into the minds of progressive thinkers in money and trade matters is that no country should maintain a persistent surplus. If that be so, what we should look for is to pay our way in the world, and if we are to pay our way in the world and not much more than that, we cannot have long-term capital investment net. I wonder whether we are to have a parity, as in the past, which accommodates long-term capital movements.

The right hon. Gentleman was asked whether his policy would mean a floating £, which has been advocated, among others, by the hon. Member for Oswestry (Mr. Biffen). There is a little objection to the floating £. We have international obligations, including obligations to Europe. Unlike the hon. Member for Oswestry, I hope that the right hon. Gentleman will give a categorical denial that he ever conceived of floating the £ as a means of adjusting our parity. Not only would this be a repudiation of our international obligations, but a declaration of unilateralism. It would be a declaration that we had abandoned the intention to co-operate with other countries, and this question of floating the £ arises whether or not we go into Europe.

Photo of Mr John Biffen Mr John Biffen , Oswestry

The right hon. Gentleman would not wish to misrepresent me. I did not on this occasion advocate floating the £. What I did was to quote my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter). I fully accept that my right hon. Friend the Chancellor of the Exchequer has talked of more flexible rates. A great many of the objections concerning monetary union refer as much to more flexible rates as they do to floating rates.

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

The hon. Gentleman should not disclaim his oratorical offspring. Of course he advocated floating. He quoted his right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter) with the warmest approval and it is silly for him to say that he did not advocate floating. He specifically quoted that phrase in his right hon. Gentleman's speech with the warmest possible approval. He can look at HANSARD and see how foolish it was to intervene and to say otherwise—[Interruption.] Read HANSARD tomorrow, and I will apologise or the hon. Gentleman will.

Is the Chancellor a unilateral anarchist who wants to float whatever his commitments are and does he despair of the lack of international monetary co-operation that has been brought about? We have recently reached an accommodation of parities, when the world was on the borderline of monetary and trading anarchy, when we were on the borderline and moving into a state of retaliatory trade measures as a result of monetary difficulties. We have all agreed a package which has restored order to the world monetary and trading system and bought time for the necessary major reforms we have to undertake in those monetary and trading spheres.

Does the Chancellor intend to use that time for that purpose, because the paramount task in the world is to make that accommodation last long enough to allow us to undertake the necessary reforms by international co-operation in our systems? I do not like to rub the hon. Member for Oswestry up again, but he was quite open about it; he wants to take a simple, nationalistic position. It is a fine old 19th century viewpoint, and he is quite open about it. He thinks that in the modern world our nationalist achievements can best be made without co-operating with other countries, and that is why he likes the floating rate and is a unilateralist. I believe in supporting the national interest, but I believe that the national interest is best obtained by co-operation between like-minded nations for the welfare of all.

It is a pretty amazing thing that the Chancellor should speak as lightheartedly as he did in the context he did about devaluation. People ought to be quite clear about this. I am not a theologian of the exchange rate; I am not opposed to changing the rate when it has to be changed. But to speak of it lightly as if it were a triumph or a neutral matter is absolute balderdash. People ought to recognise what devaluation is—a failure to remain competitive. It means that we are overpaying ourselves and we have to achieve a cut in real wages. It does not matter what agile mechanics we think up when we devalue, the only purpose whether it is done by floating or any other means is to cut real wages so as to bring our trade into balance.

Our target should be in the terms stated by the Chancellor, to remain competitive while enjoying sustained expansion, but the Chancellor has unnecessarily and in advance indicated a lack of confidence of achieving that. All I can tell him is that as a result of his statement and the attitude he has been taken to adopt, the run on sterling will arrive earlier and will be larger than if he had not done this. This must rank among the most foolish statements ever made by a Chancellor in this House—[Interruption.] I think it is. That I do not intend this as a light criticism is evidenced by my mentioning the competition which he has had to meet!

I want to deal as rapidly as I can with some other points. I turn to the reason why the Chancellor's measures of last year have not already had an effect upon the economy. Many erudite commentators have sought to speculate on the basis of dispute in this area and to say that perhaps something strange and not understood has been occurring in our economy. All sorts of new supposed diseases are said to exist and a corresponding number of crackpot remedies have been suggested for them.

The question which I must ask is: why do we have 1 million unemployed a year after the Chancellor of the Exchequer's last Budget? The main reason is—and the Government did not intend to have 1 million unemployed—that in the last Budget they budgeted to have 800,00 to 850,000 unemployed. So that is a good way on to explaining why we have 1 million unemployed, allowing for the fact that there is no great accuracy in control and prediction in our Budget efforts. That begins to explain the 1 million unemployed without any new inventions which try to exhume the corpse of Keynes in order to hang him.

There is a number of perfectly clear reasons why the Government's target rate was not reached and why we have even more unemployed than the unacceptably high rate which the Government aimed for. First, the savings ratio was somewhat higher than they counted on. Secondly, the stock position turned out adversely compared with their expectation. Thirdly, although the Government undoubtedly counted on fiscal drag in their estimate of the reflationary effect of the last Budget measures, I doubt if they counted on the combination of fiscal drag with the high rate of inflation we have had this year.

Fiscal drag, strictly speaking, is the increased tax take which results from the growth of real income in a progressive tax system. Another drag is the increase in the tax take which is due wholly to an erosion of currency values which expresses the same real income in the higher money value which become subject to the fiscal drag.

We need a new word for this, and I recognise the very strong claims of the Chancellor of the Exchequer to have it named after him. One could call the new drag which goes on top of fiscal drag in a period of record inflation, "Barber drag". So as not to be too offensive directly—because I must be careful after my last experience—we could call it razor drag, to remind the inner circle where it comes from. But with the total desire to be objective and not to stain the right hon. Gentleman's name unduly in history, I call it "inflation drag".

The effect of inflation drag in combination with fiscal drag has been widely commented upon from the point of view of exposing the bogus nature of so much of the Chancellor's generosity. But what has received insufficient attention is the economic effect of inflation drag upon demand. I therefore ask the Chancellor: did the Treasury take into account the expected inflation when calculating in 1971 the impact of tax concessions? If it did, it involved making an estimate of the rate of inflation expected in the year following the concessions. If the Treasury thought that the last Budget concessions would produce a 3 per cent. growth rate and, hence, 800,000-plus unemployed, but did not allow for the effect of inflation drag—even if everything else had been accurately guessed—that alone would account for a shortfall in the growth target.

Did the Chancellor of the Exchequer, in presenting his last Budget, allow for inflation drag? If so, at what rate? Has he allowed for it in this Budget? If so, at what rate? In neither case can the demand impact of this Budget be realistically assessed if constant prices are used and no estimate is made of the likely erosion of money value.

These points readily account for the shortfall in the growth target. Indeed, they more than account for it. Other factors turned out more favourably than have been estimated in the last Budget, notably the Chancellor's later measures. In so far as these have had time to take effect they have served to mitigate what would otherwise have been an even graver under-employment of the economy. The Treasury appears to have counted, last April, on a national increase in productivity of about 3 per cent., which appears to be significantly higher. The National Institute's figure is about 3·7 per cent. Even if the economy had grown by a full 3 per cent. last year, as budgeted for, that alone would mean that unemployment would be standing at this time well above 800,000.

Has the Chancellor of the Exchequer in this Budget reflated by the right amount? Is the economy set to achieve the sustained growth that he has promised industry and the people? Does his target mean that he will not be deterred from expansion to full employment of the economy by achievements in the field of cost inflation? The change from a 3 per cent. to a 5 per cent. growth target implies this.

I contrast his gratuitous statement on parity in relation to full employment with his almost total silence on the more proximate danger to the full employment of the economy. I guess that he made his statement on parity in a misguided attempt to reassure industry that this was not just a "go" period in a "stop-go" policy and that full employment would not be prejudiced by balance of payments problems. But what industry needs more urgently to know is whether it will again be prejudiced, as it was last year, because of price inflation and his policies to deal with it, namely, under-employment of the economy.

Coming back to the question whether the Chancellor has the right amount in his Budget judgment, I do not have the Chancellor's scientific means of guessing wrong. I wonder what makes the Chancellor confident that the Treasury estimates of the demand effects in the population from his proposed actions are likely to be more accurate this year than they were last year. I ask him again: has he allowed for inflation drag in estimating the effects of his action, and at what percentage? Does the Treasury think that the shake-out of labour is still continuing, and at what rate? There has been much talk of open government, but until we have the assumptions upon which the Budget is based we cannot make any real attempt to assess whether the right hon. Gentleman has done enough, too much, or too little.

Leaving aside the amount of the Chancellor's concessions, are the concessions the right ones? In making the centre-piece of his tax concessions the earned income relief he has done exactly what I would have done had I allowed matters to get into their present state. If, however, he had recognised in deed instead of in words the crucial importance of the battle of price stability, he could this year have relieved both employers and employees of the increased contribution to social security benefits. This will have effect on prices and wages respectively. This is typical of the muddle of the demand strategy which my right hon. Friend the Member for Stechford has already analysed. At least it is not as bad as the previous aspects of this muddle prejudicial to keeping down inflation, such as the notorious milk and school meals and the much more important proposed rent and other increases.

In short, this Budget is an improvement on last year's both in its targets and in its structure. The Chancellor has moved from the divisive party line programme which started with the mini-Budget to a more realistic position. The main credit for this is not the Government's or the Chancellor's. They have been forced from their old position by the resolute action of the trade union movement. Whatever criticisms I could make of some of the demands of the trade union movement, I have always firmly supported two of its central demands. First, it has said that before it can co-operate with any Government that Government must be firmly committed to the target of full employment in our economy. Second, it must protect its members' standard of life in a period of price inflation.

The Government have given most of the work force a wage increase of £1 a week which does not have to be added to prices. The Government are entitled to ask that this extra money should be taken into account in future wage negotiations. But, remember, the lower-paid workers get nothing or only a part of this £1, and these employees are certainly entitled to have this fact fully taken into account. The Government are always talking about setting an example. They are the major employer of low-paid labour in the public sector. I hope they will set an example to private industry and that those lower-paid workers who have had little or nothing out of this beneficence of the Chancellor will have this taken into account when their wage claims come to be considered. Perhaps he will say a word on this. If he did so, this would take the Government still further away from the misguided and indeed wicked policies with which they started and bring them a little nearer to meeting the reasonable demands of the trade union movement.

I hope that nobody thinks I am answering the absurd attacks on the trade union movement which have been made in some quarters. The whole value of our democracy is that we have balances and checks that prevent the Government arbitrarily imposing their policy upon us. One of those balances is our much maligned trade union movement. It has been fighting a battle for the standard of living and employment prospects of its members. It has been fighting not against the interests of parliamentary democracy but, as we can now see, in its interest, because this is in the interest of the welfare of the British economy and the British people.

It is by no means the fault of many of our trade unionists that they have been compelled to exercise pressure on a foolish and obstinate Government in ways that have been unhelpful to the welfare of the economy as a whole. If the Gov- ernment will now pledge themselves to full employment and to ensuring that the workers get their full share of increased production, I have no doubt that our trade union movement will respond.

The trade union movement would welcome, as I would welcome, constructive policies aimed at getting us off the treadmill of rises in wages which are rendered meaningless by inevitably rising prices. This Budget and its implications move some way under pressure of the workers of this country towards repudiating the sins and follies of the past two years. Hence, it goes some way towards making possible voluntary arrangements with our working people and their leaders. To this extent, but with many reservations, I give the Budget a cautious welcome.

It has many obvious flaws, some of which I have mentioned and many of which have been mentioned by my hon. Friends. I advise my hon. Friends that we can best symbolise our feelings in one vote on the Budget Resolution, without pulling over-excited Tory Members through the Lobbies on numerous occasions. They have been exhausted enough by their emotional demonstration when the Chancellor of the Exchequer sat down. Therefore, I advise my right hon. and hon. Friends to vote against the first Budget Resolution on V.A.T. I make clear that we do so not merely to show disapproval of that Resolution but as a symbol of our protest at the many shortcomings of the last Budget and the weaknesses of the present.

9.32 p.m.

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

We have just heard from the right hon. Member for Manchester, Cheetham (Mr. Harold Lever) a characteristically agreeable speech, and we know that he speaks with the considerable knowledge which flows from his own governmental experience. One pregnant observation fell from his lips when he said "You can fool some of the House for some of the time, but not for all the time." I thought that in the context of his own speech and its reasoning that was a very valid point.

The right hon. Gentleman approved of what I said in Washington about our approach to the balance of payments, but apparently took the view that my remarks about exchange rates were inappropriate in my Budget speech. The short answer is that, unlike some previous spokesmen, we propose to continue to say the same thing at home and abroad.

A good deal of the right hon. Gentleman's speech was taken up with dealing with the passage in my Budget speech in which I referred to exchange rates. Perhaps I could remind the House of two quotations. The first is a passage in which I said: But we should not delude ourselves. There can be no soft options if we fail to get a grip on ever-rising costs."—[Official Report, 21st March, 1972; Vol. 833, c. 1354.] The second quotation is from the right hon. Gentleman the Leader of the Opposition, in which he said: The draft I had prepared on the train back from Liverpool was sombre in tone…At Friday night's meeting of ministers and my private office staff on the eve of devaluation I was pressed, above all by Dick Crossman, to alter the tone of the broadcast, and to drop the references to set-back and defeat, and almost to exult in our decision. I believe I was wrong to accept this advice. Many years ago, I was invited to second the Motion at the beginning of the debate on the Address. Mr. Attlee was then Leader of the Opposition. He paid the usual courtesies to the mover of the Address. When he came to me he said that I had done my very best to make bricks without any straw. It was a phrase which came back to my mind immediately as I listened to the present Leader of the Opposition on Tuesday because, to put it mildly, he was very hard pressed to criticise many of the proposals that I had put before the House. The right hon. Gentleman generously—

Photo of Mr Harold Lever Mr Harold Lever , Manchester Cheetham

Before the right hon. Gentleman passes from his comments about the parity, does not he intend to answer the question asking what his statement about "realistic" parity means? Does it include accommodated short-term capital movements? Does it include long-term capital movements? Will the right hon. Gentleman answer his hon. Friends? Does it mean floating rates? Does it mean repudiating our obligations to Europe?

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

It means precisely what I said, and we have no intention of repudiating our international obligations.

The Leader of the Opposition generously said some kind words about what he called the clarity and lucidity of my speech. I was grateful to him for saying that, because I went to a great deal of trouble to ensure that my speech, long though it was, was not arcane.

I must apologise for not having been in the Chamber before today as much as I should have liked. Last week we had another and most serious problem to deal with, and I know that the House understood.

Of all the speeches that I was sorry to miss, there was none that I was more sorry to miss than that of my right hon. Friend the Member for Kingston-upon-Thames (Mr. Boyd-Carpenter), who shortly will be leaving this House. I served under my right hon. Friend when he was Chief Secretary. He will be remembered by his colleagues in this House and especially by those who worked with him in the Government as a man of determination who was always scrupulously fair and who always put first and foremost his public duty.

My hon. Friend the Member for Horsham (Mr. Hordern) drew attention to the size of the prospective borrowing requirements for the public sector in the coming year, £3,358 million. The hon. and learned Member for Lincoln (Mr. Taverne) also referred to it. It is a big figure and it reflects in part the major steps that I have taken to boost demand and to reduce unemployment. But it is again important to realise that this borrowing requirement does not arise from any excess of current spending over current revenues. In the year ahead the public sector is expected to show a current surplus of more than £3,000 million. That is the amount of its saving. That is the excess of its revenue over its current expenditure. This saving will go a long way towards financing the investment programme of the public sector. But it will not go the whole way. Nor should it. It is right and wholly appropriate to the economic situation which we face today that the public sector should borrow a substantial part of the funds that it needs to finance its investment and its lending to other parts of the economy.

It has been pointed out that the forecast of the borrowing requirements for the nationalised industries is larger than it would have been had there been no price restraint. It was my hon. Friend the Member for Horsham who referred to this point. This is so, but it is not the sole cause of the estimated increase. There is the increase in the additional net borrowing forecast for 1972–3 which is due to increased redemption of stock by the Gas Council, and for the industries generally there is an expectation that working capital requirements will increase as the level of economic activity grows.

These two items alone account for over £400 million of the estimated increase of £663 million in the figure for nationalised industries net borrowing forecast from the central Government for 1972–3 as compared with the estimated outturn for 1971–2.

A great deal of interests has been shown in the proposed tax credit scheme not only by hon. Members on all sides in this debate, but also by people outside this House. Over the past 20 years or so many different schemes have been put forward, yet each one has served only to demonstrate the immense difficulties that there are of making progress on this area.

The main practical problem is that successive Governments, Labour and Conservative, rightly and compassionately have raised the level of subsistence provided by the various social benefits, so that it now stands at very little below the general level of wages earned by lower-paid workers in this country and, at any rate until last week, very little below the tax threshold. It is important that the House should recognise this difficulty.

In present circumstances any scheme must inevitably have a rate of progression which involves some disincentive. Some schemes of negative income tax which have been put forward appear to overcome this problem of incentive by postulating a low basic rate of subsistence. Obviously that would be unacceptable to both sides of the House. Other schemes have attempted to solve the problem by postulating a more gradual tapering off of social benefits and a far higher starting point of tax. The cost of that would be impossibly high.

We have a most intricate system of tax allowances and social benefits which has been devised, amended and improved, certainly during the 20 years or so that I have been a Member of this House, largely by the ingenuity or right hon. and hon. Members on both sides of the House, in an attempt to meet almost every variety of need and hardship. The problem comes in trying to replace this tailor-made system with a simpler, but more general system.

This whole subject has been considered in the past by right hon. and hon. Members in all parts of the House. I think, in particular, of the right hon. Member for Sowerby (Mr. Houghton), who for many years has been concerned and spoken about these matters, my hon. Friend the Member for Kensington, South (Sir B. Rhys Williams) and many others, and, of course, the Liberal Party has also made a notable contribution over the years.

I think that the whole House will be grateful for the welcome which was given to this subject by the Leader of the Opposition and by the right hon. Member for Cheetham at the beginning of his speech. The hon. and learned Member for Lincoln opening this afternoon for the Opposition, agreed that this matter should be looked into by a Select Committee, and his views were echoed by the hon. Member for Ashton-under-Lyne (Mr. Sheldon) and by my hon. Friend the Member for Wycombe (Mr. John Hall).

I want to say something in a moment about the family income supplement, but it has been pointed out that of necessity under the existing system the substantial income tax reductions which we have made do not benefit the non-taxpayer who is by definition the lower paid, the poorer member of the community. We can and have given help through uprating pensions, the family income supplement, and so on—I shall come back to this matter—but clearly it would be much better if the non-taxpayer could share automatically in the benefits going to the taxpayer. As the Leader of the Opposition pointed out, this is a matter which hitherto has eluded the ingenuity of successive Governments. We believe that we have now found the answer in the tax-credit scheme which achieves this objective. Therefore, I am sure that in principle all right hon. and hon. Members will want to support it on that account alone.

I should answer one of my hon. Friends who, earlier in the day, when talking about our proposal, seemed to imply that this scheme had been put forward against the natural predictions of the Inland Revenue and the Department of Health and Social Security. It is right, therefore, that I should point out that when the scheme was put to them, after very considerable study by senior officials in both those Departments, they were firmly of the view that the proposals were both practicable and desirable. I think that this augurs well for the future.

In order to keep the length of my Budget speech reasonably short, or at any rate to between two and two-and-a-half hours, I deliberately cut out, wherever possible, references to changes which had already been announced. In one respect I frankly admit that that was a mistake. I should have referred to the announcement which was made last December about the family income supplement, and frankly I was astonished to hear the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) say on television last Wednesday: Furthermore, there is nothing at all, even with the huge out-pouring of concessions, for those at work who already pay no tax". That quite simply is not true, and the right hon. Member for Cheetham made the same mistake this evening.

Last December we announced the uprating of the family income supplement with an extra £1 to poor families below the tax threshold, and this will take effect next month, in fact I think it is next week, before the income tax reliefs come into operation. If anyone on the Opposition Front Bench wants to know the full details they will find them on page 12 of today's Daily Mirror. The result of this is that while all taxpayers above the new tax threshold will benefit from the Budget by £1 a week, almost all families below the new threshold will also benefit by £1 a week.

The effect of the increase in allowances combined with the increase in the family income supplement at make-up level and the higher level of contributions is to give the biggest percentage increases to the poorest families. Let me give an instance: a man with two children earning about £17 a week will have his net take-home pay increased by 5·5 per cent. as a result of the increase in the family income supplement. A similar family with earnings about the industrial average will, as a result of the increase in allowances and after allowing for increased contributions, be about 3·6 per cent. better off.

The family income supplement gives more help to those in need than would a straight increase in family allowances. It gives help for the first child. But we have always made clear that it was a temporary scheme, and one object of the new tax-credit system will be to replace the family income supplement and to provide help for poor families without all the obligation for means testing and without any need to apply for the benefit.

Since the right hon. Member for Stechford raised the question of family poverty, it is right that he should know what the Child Poverty Action Group said when they made their representations to me before the Budget. They said: The Government inherited a situation in which there was for many groups among the poor a widening gap in living standards between them and the rest of the community… They went on: Since 1964 there has been a continuous decline in the relative living standards of the lowest decile of male manual workers. In fact, the position reached in 1968 and 1970 is the lowest recorded since 1945 The right hon. Gentleman ended his broadcast last week by saying: We need an overall strategy to abolish poverty I think that was pretty rich coming from, of all people, the right hon. Gentleman As last week's Tribune pointed out: Until Mr. Jenkins explains much more about why he brought in measures which contributed to the growing gap between the rich and poor in Britain, his protestations will certainly fall on deaf ears inside the Labour movement… They might have added: And outside the Labour movement The truth is that the right hon. Gentleman and his Government—for it was not his responsibility alone—have a particularly bad record in this field. The right hon. Gentleman now urges me to raise family allowances, but what did he do in his only Budget which cut taxation in 1970? It would have been perfectly open to him to help poor families in 1970 by raising family allowances, as he now presses me to do, but of course he could not find it in his heart to do this. What is more, in 1970, the claims of the pensioner went quite unheeded. So it hardly lies in the right hon. Gentleman's mouth to criticise me for lack of a sense of social justice.

My hon. Friend the Member for Norfolk, North (Mr. Ralph Howell) was right to express his approval of the increase in the retirement pension. Those hon. Members opposite who have criticised the help which we are giving to pensioners would do well to remember three things. First, the increase of 20 per cent. last year, plus 12½ per cent. this year means that, altogether, the pension has been increased by over a third since this Government took office, and that this autumn it will have the highest purchasing power that it has ever had—

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

I will tell the hon. Gentleman for how long. Those who complain that its purchasing power is likely to be eroded by rising prices would give very much more force to their argument if they did not at the same time support every conceivable inflationary wage claim.

Third, I would remind hon. Members opposite that if we were still following the policy of the Labour Government there would have been no increase at all for pensioners this year. The situation would have been precisely like that in 1970, when, in the right hon. Gentleman's last Budget, there was nothing at all for the pensioners.

I should now like to refer to some aspects of these changes which affect industry and commerce—first, the changes as they affect industry generally, second, some points which have been raised about regional policy and, third, our proposals for small businesses.

It is recognised on both sides, I think, that our hopes for a faster expanding economy and for the prosperity of the British people depend upon a thriving industry and commerce. There can be no doubt that the decision to introduce free depreciation throughout the whole country has been almost universally welcomed. Also, as a means of breaking down differing treatment of capital ex- penditure and revenue expenditure, it is yet another example of simplification.

My hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), who was Chairman of the Select Committee dealing with corporation tax, said this afternoon that they felt that their recommendations were pushing at an open door. He and his colleagues from both sides on that Committee were too modest. I can tell them now that, had it not been for the Committee's recommendations and for the advice which we received from other quarters last year, I would certainly have favoured a two-rate system rather than an imputation system.

As for regional policy, the Leader of the Opposition asked for an assurance that the new policies were in no way inconsistent with the rules of the E.E.C. I can give that assurance. The second point is that, in the development areas, the new incentives are considerably more profit-related than under the scheme of the previous Government. To put it concisely, under their scheme, about a third of the incentives were profit-related; under our proposals, two-thirds will be. To put it another way, the incentives for plant and machinery in a development area will be worth three times as much to a company with profits as to one without. The regional differential under our proposals is now worth more than ever before.

There was more I wished to say about our proposals for assisting small businesses, but, alas, time prevents me from going into these details. Perhaps I should, however, mention a point which I think will be of considerable interest to the House. One of the principal purposes of this Budget has been to cut taxation. It is informative to consider how the burden of taxation as a percentage of the national income has varied over the years.

The first figures I shall give refer to gross domestic product at factor cost, and they exclude national insurance contributions. In 1951, at the end of six years of Labour Government, central Government taxation as a proportion of G.D.P. was 32 per cent. By 1964 the figure was down to 25 per cent. In 1970, after six years of Labour Government, taxation as a proportion of G.D.P. had bounded up again from 25 per cent. to 35 per cent. This coming year there is every reason to expect that it will already be down to well below 30 per cent.

If national insurance contributions are included, these are the figures: taxation and national insurance contributions as a proportion of G.D.P. in 1951 amounted to over 35 per cent.; by 1964 we had got the proportion down to 30 per cent.; by 1970 it had risen to over 41 per cent.; and in the coming year it is already expected to be down to about 35 per cent.

The right hon. Member for Stechford will not mind my saying that at times he seems to adopt a sort of condescending manner, and it was rather in that manner in his speech last Wednesday that he read me a little lecture about not paying sufficient attention to economic strategy. His repeated complaint is apparently that I did not take action to stimulate the economy early enough, but last Wednesday he said, and I give him full credit for saying it: with the benefit of perfect foresight…it would have been right to start reflation in the autumn of 1969. He went on to say, quite honestly: Still more, the Budget of 1970—and I say this frankly—should have been bolder".—[Official Report, 22nd March, 1972; Vol. 833, c. 1526.] As the Leader of the Opposition said last week, at the beginning of our debate: there is more rejoicing in the Kingdom of Heaven and on the Opposition benches over one sinner that repenteth, particularly when he is a right hon. sinner".—[Official Report, 21st arch, 1972; Vol.833, c. 1392.] The right hon. Member for Stechford is, in effect, now frankly telling us that at least part of the present unemployment is due to his failure to reflate the economy soon enough. [Interruption.] I must say that, in the circumstances, I find it rather ironical that the right hon. Gentleman, who was too cautious and timid to wet even his little toe in the expansionist water, should now spend his time complaining that I did not at the first possible moment jump right in at the deep end.

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

No. I will not give way. [Hon. MemBErs: "Give way."]

Photo of Mr Anthony Barber Mr Anthony Barber , Altrincham and Sale

No.

This Budget gives a larger stimulus to demand than has been given by any Budget. As a result of the changes we have made—[Interruption.]—we can go forward to our European venture with the biggest tax incentives for investment and for modernisation that we in this country have ever had. We are making the largest ever rise—[Interruption]—in the starting point of tax, and the further cuts in purchase tax, taken with the cuts of last July, represent the largest ever reductions in this tax.

If the Opposition vote against this Budget tonight we shall make sure that the nation does not forget.

Photo of Mr Selwyn Lloyd Mr Selwyn Lloyd , Wirral

I am now required under Standing Order No. 94(2) to put successively, without further debate, the Question on each of the remaining 17 Ways and Means Motions, the three procedure Motions and the Motion relating to finance, all of which are brought in by the Finance Bill. I propose, instead of reading out each Motion in extenso,to follow the procedure used in recent years, and first state the title of the Motion and then put simply the Question, "That the Motion be agreed to."

Question put and agreed to.

Resolved,

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but this resolution shall not authorise the making of—

  1. (1) amendments of the enactments relating to purchase tax, other than amendments for or in connection with the abolition of the tax, and other than amendments making the same provision for chargeable goods of whatever description, or for all goods to which any of the several rates of tax at present applies; or
  2. (2) amendments of the enactments relating to selective employment tax so as to give relief from tax—
    1. (a) by way of exemption from, or a reduction in the rate of, tax except in respect of all persons of the same descriptions relevant for determining the rate of the employer's flat-rate contribution with which the tax is combined, whether that contribution is under the National Insurance Acts or under the corresponding enactments in Northern Ireland; or
    2. (b) by way of providing for payments to employers of an amount equal to the whole or a specified part of the tax paid if the proposed provision—
      1. (i) is in respect of employers in, or at establishments in, part only of Great Britain; or
      2. (ii) extends to employers in, or at establishments in, Northern Ireland; or
      3. (iii) is in respect of all persons in any particular description of employment in all parts of Great Britain, and relief in respect of the whole of the tax paid could be given in respect of that description of employment by an order under section 9(1)(a) of the Selective Employment Payments Act 1966 adding that description of employment to the employments to which section 1 or 2 of that Act applies; or
    3. (c) by adding or removing any employer to or from the employers to whom section 3 of that Act applies, or
    4. (d) by amending the provisions of Schedule 1 or Schedule 2 to that Act.