I do not think the hon. Gentleman has understood the point I was endeavouring to make. It must be due to a lack of lucidity on my part, for which I apologise.
I am saying—and this is not a debating point but a point which I hope the House will take seriously—that in the management of the economy one should never get into a position in which the economy is allowed to become so flat and slack, as it did in 1971 and 1972, that we can afford, as in 1972–73, a huge public sector deficit of nearly £3 million without producing anything like full employment. Once in that position we are left with a huge public sector deficit which, without the most swingeing, dramatic and undesirable cuts in public expenditure or increases in taxation, will be with us for several years, possibly in very difficult economic circumstances, and will be gravely disadvantageous in the management of the economy.
I think that either the Chief Secretary or his hon. Friend the Financial Secretary asked my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) in the public expenditure debate, as though it settled the matter, whether the Opposition believe in higher or lower public expenditure. This is not the nub of the argument concerning the public sector deficit.
I believe in a high level of public expenditure. I do not believe in a number of the matters before us at the moment. For example, I do not think that the increase in real terms in defence expenditure is justified by the world situation. Nor, generally, is a great deal of planned spending on roads and motorways. I believe that a number of projects could be done more economically. But as a broad matter of principle I believe that more of our social problems are affecting communities, not merely individuals, and that they can be solved only upon a community basis and therefore they require community spending to deal with them
I am not saying that the present proportion of the national income is too high. I believe that public expenditure should be properly planned. It should not depend on this unwieldy and menacing public sector deficit and it should not be accompanied by the soft options of ill-placed taxation reductions which we cannot afford and have in no way earned.
How does the Chancellor propose to deal with the problem that he has created for us? I want to look at this problem under two heads: first, the problem of financing this public sector deficit and, secondly, the allocation of real resources.
First, let us consider the problem of financing this public expenditure deficit. Last Tuesday the Chancellor, a little defensively, said that the problem of financing the £2,800 million was not too bad last year, because our foreign exchange reserves had been run down by £1,600 million. It was a curious defence, but in a sense I suppose it had a certain validity. Presumably—the Chief Secretary will correct me if he thinks I am wrong—the Chancellor is not proposing to do the same this year. As I understand it, that is not part of the Government's plan.
Even with that plan, that we ran down by £1,600 million our foreign exchange reserves—such a running down does not lead to an increase in the money supply, but the reverse—the money supply rose in the last financial year at a rate which, if repeated, would be incompatible with the Chancellor not strongly stoking up the inflation about which he always complains so much. He said that last year bank lending to the private sector led to the 20 per cent. increase in the money supply. He dealt with the public sector by saying it was due to sales, non-gilt-edged, to the non-bank public, and running down our reserves.
What will happen about private sector borrowing requirements during the corning year? The Chancellor has an extra £1,500 million of public sector deficit to finance. He cannot run down reserves to anything like the same extent that he did last year, and presumably he wants investment to go up at its present miserable level.
The Chancellor's savings concessions, which, as my hon. Friend the Member for Gateshead, West (Mr. Horam) pointed out last week, are grossly egalitarian—there is no question but that they amount to a similar further tilting of the tax advantage towards the better-off—may divert some money from the private to the public sector, but I should guess not nearly enough, and at a cost of unprecedented interest rates upon mortgages, local authorities and the relative profita- bility of investing money in fixed investment as opposed to using it for purely financial purposes.
The Chancellor has a totally demoralised gilt-edged market, with Consols and War Loan standing at levels well below those which in 1969 aroused shrieks from nearly every hon. Gentleman opposite about the debauchery of Government credit. Incidentally, at a time when he is pushing up interest rates, with all the disadvantages involved, to ration credit, it is ludicrous for the Chancellor to continue with his repeal of my 1969 measure to disallow interest for income and surtax and, as a result of his change last year, himself as Chancellor to pay three-quarters of the charge to those with big incomes. It is near lunacy to be extremely worried about the general money supply and borrowing position and to allow interest rates to go to levels which only a few years ago would have been thought totally unacceptable and at the same time to encourage certain people to borrow by making sure by his own provision that they pay only 25 per cent. of the interest charges themselves.
I turn now to the real resources aspect of the matter. The balance of payments has clearly already gone seriously wrong. I find it impossible to believe—indeed I do not think that the Chancellor believes—that it will not get substantially worse in the course of the next year. This will have to be put right some time, and some time fairly soon, and we should be in no doubt that putting it right will require a heavy switch of resources. Exports, less imports, in the jargon, will have to go up faster than ever in our history to maintain or reachieve a tolerable balance of payments position. This costs resources. So does the increase in fixed investment that the Government must be looking for. Therefore, on a big scale it means an increase in stock building which at this stage of the cycle seems overwhelmingly likely.
Let the Government be in no doubt—I cannot believe that they are in any doubt when they consider these matters coolly—that the present boom is already more dangerously unbalanced than that in 1952–53, that in 1958–59 or that in 1962–63, because it is led by consumpton to a much stronger extent and, even in its early stages, it is pulling in imports to a much stronger extent than in any of these three previous booms, all of which led to considerable difficulties.
Even if we do not accept all the quantities given in the independent surveys—whether the London and Cambridge or the National Institute, and I certainly agree that nobody can ever be certain about quantities—we cannot escape the logic—I think that the Chancellor will regret having tried so firmly to do so—that a substantially slower growth in personal consumption than in the national output will fairly soon become necessary.
Even if we get the projected growth in national output—which for the time being I believe and am glad to think we shall—it is a total fallacy to believe that this problem of resources in relation to the balance of payments and other competing claims is in any way solved by floating the pound. Floating the pound is probably right. It probably has been right and will continue to be right in certain circumstances, although I attach somewhat greater importance to trying to get a multilateral solution than do perhaps some hon. Members on both sides of the House.
I take that view not primarily because of my European views. I regard the present position as so serious that if I thought it would help I should be happy to put progress on this front into cold storage for some time. I take that view much more because I think that there is a certain tendency to underestimate the fundamental seriousness of the monetary crisis b the world, to underestimate the extent to which the world monetary situation has changed in the last three or four years. The basis of Bretton Woods has gone. The basis of that agreement was the hegemony of the dollar, the extremely powerful position of the dollar. That has gone once and for all, and cannot be recreated. Therefore, in a real sense we do not have a world monetary system. We have a chicken running around with its head cut off. This situation could have grave dangers both for the future of world trade and, because of our dependence upon it, for the future prosperity of this country.
Floating temporarily eases certain difficulties, but by no means all. It does not mean that we can go on allowing the balance of payments deficit to amount. It does mean that as the pound floats downwards not only does that exacerbate the main problem of internal inflation but also, because of a deterioration in the terms of trade, it increases the strain on the resources involved in getting the balance of payments right and in preventing the float from becoming a steady and unacceptable sink.
In my view, the Chancellor has quite new problems ahead of him. So far he has been a tax change and a tax reduction Chancellor. That, combined with his natural buoyancy and skill, has meant that his personal reputation today is probably higher than many people, including myself, thought it would be when he took over two years and eight months ago. I gladly give the right hon. Gentleman that. But he has never yet had to face the hard problems of demand management, with the difficult and inevitably unpopular choices there involved. In future, the right hon. Gentleman will have to face those problems. I hope that he is girded for them because he will need to be, but in my view there are not many signs in this Budget that he is.
The most characteristic change which he announced was the abolition of the tax upon sweets, ice-cream, lollipops and potato crisps, at a cost of £110 million. I know why the right hon. Gentleman did it. The effect on the retail price index is pretty terrific, and also it gets a fairly easy cheer, but when I think of the social priorities and of the real poverty in this country I conclude that it was a frivolous concession. It would have been far better to increase—