However, the Chancellor of the Exchequer did one thing which was quite unexpected and, I think, unprecedented. He enunciated a new economic principle which startled many of his hon. and right hon. Friends as much as it startled us, namely, that the best way to reduce inflation is to increase prices. I am afraid that his tortured and painful efforts to explain why that was so had no effect whatever on the House. I shall return later to that point.
Throughout the Chancellor's tenure of his very high office, he has preferred popularity inside his own party as a smart political operator to the solid reputation which he might have gained by building on the firm foundations left to him by my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins). We all agree that the Chancellor is very quick on his feet; he can spin round from back to front faster than anyone. But the staggering thing in his behaviour over the past 3½ years has been his inconsistency. Throughout his tenure of office his economic policy has been neither firm nor fair.
The right hon. Gentleman started by renouncing altogether responsibility for controlling the economy and left it all to the struggle in the market place between capital and labour, subject only to the laws of supply and demand. That led to over 1 million unemployed within 18 months, the collapse of economic growth and investment in this country, soaring prices, and the devaluation of the pound. So in the middle of 1972 he decided to repeal the laws of supply and demand in the Counter-Inflation Bill. He decided that the Government should fix all wages by law and all prices except those which matter most—the prices of food and housing.
But throughout these reversals of the right hon. Gentleman's policy there was one constant theme, and that was an unremitting hostility to the trade union movement. During his "market" period, he sought, through the Industrial Relations Bill, to cripple the unions by destroying their power to negotiate. The result was that we lost more days in strikes in 1972 than in any year since the General Strike in 1926, and we had the biggest wage inflation since the war. Now the corpse of the Industrial Relations Act is rotting on a slab in the Department of Employment waiting for the next Labour Government to give it a decent burial.
During the right hon. Gentleman's second period of policy—the statutory control of prices and incomes—he tried to cripple the unions by withdrawing their right to negotiate. I do him this credit: it worked for a year because the unions saw the prospect of economic growth. Last year average earnings were kept down to the increase in the cost of living. But the operation of the right hon. Gentleman's incomes policy led to very serious distortions in the economy. Public industry lost labour to private industry; factories working on time rates lost labour to factories working on piece rates; large firms lost labour to small firms which were less carefully monitored by the Pay Board; people employed in industry lost out to the self-employed, particularly those working on the lump in the building industry; and, as a generalisation, manufacturing industry lost labour to the service industries where, again, the operation of the Pay Code was less easily controlled.
But the growth which led to a degree of reluctant acquiescence in the policy by the unions has turned out to be largely an illusion. It is true that there was a spurt in growth between the end of 1972 and the beginning of 1973, but we now know that that was achieved almost entirely by taking up the slack created by the 1 million unemployed in 1971 and 1972. In the second half of last year the annual rate of growth had fallen to 1 per cent. There were two reasons for that: first, growing shortages of skilled labour and materials in manufacturing industry; and, secondly, a 5 per cent. fall of productivity in the service industries which it is impossible to attribute to anything except the abolition of selective employment tax. If the Chancellor has another explanation for the fall of productivity in the service industries, we should like to know what it is.
Nevertheless, although growth was falling and the economy was overheating in many sectors, the Chancellor continued to pump demand into the economy when it was fully stretched through tax increases to the better-off, which sucked in imports and diverted exports to the home market. I defy the right hon. Gentleman to give any other explanation for the fact that at the end of last year the balance of payments deficit was running at nearly £2,500 million a year, that during 1973 we had a trade deficit with the industrial countries of the Common Market of over £1,000 million, and, worst of all, although the export industries had made heroic efforts to raise the volume of exports by 26·7 per cent. between the third and fourth quarters of last year, that the volume of imports rose nearly twice as much between the same quarters—by 47·9 per cent. The fact that devaluation was then bumping about between 18 and 20 per cent. turned this deficit in volume into a colossal deficit in money terms.
Those are the consequences of the policy followed by the Chancellor of the Exchequer in the last few years. The central problem was well defined by the Governor of the Bank of England in a notable speech on 15th January this year when he indicated that the non-oil deficit now represents 4 per cent. of our gross national product. We must during this year reduce it, though not—and here I agree with the Chancellor—eliminate it, and try to produce the investment which has consistently eluded the Government during their first three-and-a-half years of office. The result is that there will be less of the national output available for consumption in this country.
Economists knew these to be the facts well before the end of last year, but the sudden public recognition of the oil crisis presented the economic problem in a completely new dimension to public opinion. By the end of last year there was a general recognition by men and women throughout the country that we had once again been living beyond our means, that we faced a period—perhaps years—of substantial national sacrifice, and that the Government must give a lead to the people in two ways. On the one hand, they must take direct control of the resources available to the nation and use them so as to maximise growth and employment. On the other hand, as sacrifices are inevitable, the Government must redistribute income and wealth so that the burden of sacrifice is fairly shared.
The Chancellor rightly said that I had suggested that some tax increases are necessary. That is true. They are necessary to redistribute the burden of sacrifice, and the revenue from taxes on the better off and on less essential goods must be used to keep down the price of essential foodstuffs, housing and public transport. I am glad to say that an increasing number of the Chancellor's hon. Friends have come to this conclusion purely on an objective study of the nation's plight.
Although we all sense the public mood to be one of readiness to accept a lead and to make a sacrifice, the Chancellor threw away the most remarkable opportunity he has had since the Second World War. As I said on another occasion, the whole country was ready to put its shoulder to the wheel and the Chancellor simply took the wheel away.
Apart from long overdue restrictions on hire purchase—which, incidentally, were not extended to cover tax-free loan interest, which is an even greater source of inflation but which affects the rich whereas hire-purchase restrictions affect only the average man—the Chancellor put the whole burden of reduction of demand on cuts in public expenditure which were to fall late in the year and fall more heavily on the poorer parts of our community who make much greater use of public services than do the rich and which, incidentally, have a minimum direct impact on foreign exchange.
Nevertheless, the Chancellor recognised that cuts must come also in private consumption but, fearing loss of popularity—the loss of the only one of his achievements so far untouched, his reputation as the man who cut taxes—he made it clear by the extraordinary new principle which he enunciated this afternoon that he intended those cuts in private consumption to come from organising affairs so that in the coming year prices rise very much faster than do wages. That is the only basis on which his policy now rests. He wants to throw the whole burden of adjustment to the failure of his economic policy on the wage-earning section of the population.
I tell the Chancellor that this is not on. To begin with, the Chancellor cannot hope to achieve his objective without withdrawing from phase 3 and introducing a phase 4 of his incomes policy which has no threshold provisions and probably involves a wage freeze.