The suggestion of the hon. Member for Aberdeen, North (Mr. Robert Hughes) that a Socialist Government might be a panacea for all our ills sounds a little thin and I doubt whether he will persist in that belief, because there are real problems which cannot be dealt with by any amount of Socialism or intervention. That is why I am very pleased that the Government have acted on the deficit in our national accounts, which has not so far been talked about. My right hon. Friend was right in saying that at the moment it is impossible to forecast how demand will go. We do not know about the price of our oil supplies, about the duration of the three-day working week, about the shortfall in spending or about fiscal drag. However, to take £1,200 million out of the deficit through reduced public spending is as good a guess as can be made at this stage.
Also, we do not know, but I imagine that there will be a large extra reduction of demand due to the high price we shall have to pay for oil from the Middle East in the year ahead. If these two factors are put together they will have a considerable effect upon the Government's borrowing requirement next year which will in turn have a moderating effect on inflation in times to come. That seems to me to be not only a good conversion of thinking, but a jolly good guess in so far as it is possible to guess right at this stage.
However, I do not believe that it is possible to conclude on the balance of payments front that the action can possibly be adequate. I am not being critical here, just analytical. The balance of trade is already very seriously wrong and is unlikely to recover in a short period. Added to that we shall have the major extra cost of oil which will be across the exchanges. The adverse balance of trade will not be put right by reducing Government expenditure at home in the coming year by £1,200 million. Some massive deflation would be necessary if we were to right the balance of trade under these circumstances.
Of course, the Government have hinted that they think that the balance of trade will be matched by borrowings from the Arab world, as has been happening up to now. We have been financing our trade deficit by borrowing, and that is to continue. The Arabs have so much money and nowhere to put it that they will be only too happy to lend it to us, we are told. When I consider the hypothetical election that is to be fought on the issue of who runs the country—Labour Members say it is the multinational companies, my hon. Friends say it is the trade unions—I feel that if we borrow their money for very long it will be the sheiks who own the country. I do not think it is wise to cover excessively high standards of living by borrowing.
Of course, North Sea oil will come to our rescue. But the reason the action which the Government have taken appears right on the domestic demand scene, but appears inadequate on the balance of payments scene is, that the extra payment for Arab oil will make essential a reduction at least in the growth of our standard of living and possibly in the standard of living. Therefore we have to choose between reducing the standard of living by means of hyperinflation or by means of deflation designed to help us to export to pay for our oil. That is the basic choice which faces us. To me that is by far the most important aspect of the debate.
Why, therefore, do we not acknowledge that this is the real point? There seems to be one reason, and the hon. Member for Ashfield (Mr. Marquand) was very close to it earlier today. It is also enshrined in something called stage 3 which says that our standard of living will grow by 11 per cent. or more in the year ahead. At the same time the nation's wealth will grow by 3½ per cent. It is quite clearly no longer consistent or realistic to apply these growth rates in the light of what has now happened.
I wonder what service stage 3 now renders. The Government believe that in a way it is useful to restrain "excessive wage increases", but in a way it is very damaging because it encourages other wage increases which otherwise might not take place. Everyone will demand his 11 per cent. and no one will go with less. It is also creating the illusion that growth of both the economy and of earnings are still possible.
It would be very easy to replace stage 3. I can imagine, my right hon. Friend the Prime Minister, just like the ancient medieval herald, coming into the Chamber and saying, "Stage 3 is dead. Long live stage 4." Stage 4 would have greater flexibility and it would make it possible for my right hon. Friend the Secretary of State for Employment, whose eloquence and good intentions impressed the House so much today, to use that power, that charm with which he achieves the compromise and conciliation for which he is so famous, to settle the miners' dispute.
It would enable us to reduce the settlements which others might receive because it would be tougher in some places and weaker in others. It would enable those essential price rises, such as oil and petrol, which we know have to happen, and gas and electricity, which are enshrined in the Government's proposals, to take place whilst restraining other price rises which we believe to be economically less essential. In that way stage 4 would come nearer to reality, with prices a function of supply and demand—the scarcer the goods the more expensive, the greater the supply, the cheaper—and wages a reflection of the relative value to the economy of different groups of people at different times. If stage 4 or 5 or even 6 bring us to the point where we may openly acknowledge these economic forces, although the Pay Board and the Price Commission may still be trying to put the stamp of official approval upon market forces, I for one will be content. I am prepared to go along with the shadow so long as the substance is real.
However, these are but some of the difficulties of continuing with the system of stage 1, 2 and 3. Many hon. Members today have tried to suggest some other way of dealing with the matter, and it is this tendency of the debate which has worried me most. We are all saying that phase 3 is dead and some of my hon. Friends are talking about some form of commission. Labour Members were talking about some participatory arrangement under which wages could be agreed and other hon. Members have been putting forward other types of prices and incomes control.
I do not believe that we should be looking for substitutes for the defects in stage 3. We should acknowledge that the control of prices and incomes, whether by agreement, by statute, by diktat, or by the exercise of ministerial power, charm and arm-twisting, is not the most desirable way to fix these things. It is better to allow them to find their right levels in society and to accept the inevitable consequences. If that can be the transition that we accept out of stage 4 into the later stages, I am content to suggest that it should stay as long as the economic reality is allowed to be understood.