As opinion outside the House has recognised, the measures I announced yesterday do not amount to a major correction in the course I set for the economy in my Budget last March. Such a correction, if it is needed, must wait for the Budget which I have promised in the autumn. For many reasons, which I shall explain, it would be a mistake, to make any major increase in the level of domestic demand at this time. Nevertheless, there have been some changes in the very uncertain picture of our economy that I painted on 26th March and I hope the House will find it convenient if I take this opportunity to describe them.
When I introduced my Budget at the end of March we had already brought the three-day working week to an end but it was too close for us to make any accurate estimate of its effects, as I made very clear at the time. Our best estimate then, which appeared optimistic compared with some of the estimates then being made by industrialists, was that the gross domestic product might have fallen by perhaps 10 per cent. in the first quarter and that the fall in the first half-year as a whole might be close to 5 per cent.
It is now quite clear that industry coped with the problem set by the then Government's decision to impose the three-day working week far better than it thought it was doing at the time. The latest estimate, which may still not be a final judgment, is that the fall in the gross domestic product in the first quarter was around 3½ per cent., and as there seems to have been some recovery in the second quarter, the fall in the first half-year looks like being quite modest.
The most encouraging aspect of our economy during the early months of this year was a surprisingly strong improvement both in trade and investment. On latest estimates, manufacturing investment actually rose by over 7½ per cent. in the first quarter compared with the second half of 1973, against all the predictions being made at the time. The volume of our export of goods and services rose by 4½ per cent., whilst the volume of imports actually fell. Consumers' expenditure, the largest component of domestic demand, fell only marginally.
Most significant—and, I confess, most surprising of all—was the comparatively low rundown of stocks. These fell £218 million, much less than was forecast at the time. The House will recall that in the Financial Statement in March we forecast that the gross domestic product would return in the second half of this year to a level of some 2½ per cent. up on the second half of 1973. This still looks about right but the pattern of demand is a bit different.
We cannot now expect restocking on the same scale as was forecast in March. Consumers' demand has shown some recent signs of weakness, although in the first half-year it was almost exactly as forecast. As I reminded the House yesterday, the new pensions increases are now adding to purchasing power. I expect the recovery in retail sales apparent in June to continue. Export demand remains strong and the momentum of manufacturing investment may exceed the 5 per cent. growth this year predicted by the latest Official Survey of Intentions. The prospect is still for further recovery during the rest of the year, but, without changes in Government policy, growth could still be a bit below our earlier expectations; and looking through next winter into next year the prospects seemed less encouraging unless policies were changed.
Domestic demand would continue some way below the growth of our productive potential. But against the prospect for domestic demand next year, a prospect more or less confirmed by recent studies carried out international organisations like OECD and the European Community, our prospects for visible trade are steadily improving. We now have the figures for the balance of visible trade in the first six months of this year and, as expected, they show a continuing heavy deficit on our trade in oil. The oil trade deficit in the second quarter averages £312 million a month, compared with less than £80 million a month in the third quarter of 1973, before the current round of oil price increases began.
This represents an annual deficit resulting from the increase in oil prices alone of nearly £2,800 million, two-thirds of the rate at which our overall current account deficit has been running this year. But we have made very satisfactory progress towards eliminating the non-oil deficit which was still rising steadily at the end of last year. In the second quarter of this year the non-oil deficit was 25 per cent. less than that recorded in the first quarter, and despite the difficulties of short-time working that was already 20 per cent. down on the deficit in the last quarter of 1973. Meanwhile, there has been an adequate flow of borrowed funds to finance the overall deficit and I expect no difficulty in financing it in the months ahead.
I told the House yesterday that I have not yet had to draw one penny of the $2½ billion loan negotiated at the time of the Budget and we have concluded an agreement with Iran for a further line of credit of $1,200 million to be drawn by public sector bodies. Meanwhile, the pound has remained stable, fluctuating over the last four months around a level only 17 per cent. below that fixed in the Smithsonian negotiations in 1971, and stronger than the average level in the eight months preceding the General Election. This gratifying strength of sterling reflects the continued inflow of funds from investors abroad who have confidence in our economy.
Our central problem is a rate of inflation which some say could have been 20 per cent. by the end of this year if I had not taken the action I took yesterday. This rate of inflation would have been due in part to the threshold agreements which the last Government made a central feature of phase 3 in their statutory wage controls. I doubt whether any right hon. Gentleman on the Front Bench opposite would deny that when the previous Government gave this central rôle to threshold agreements last October they expected commodity prices to level out. Instead, we have had a continuing rise in commodity prices and a fourfold increase in the price of oil. These increases in world prices will continue to feed through into our domestic prices at least until the end of this year, triggerinig off one threshold agreement after another as they flow out of the pipeline into the shopping basket.
When the present Government took power five months ago the rate of inflation was already over 13 per cent, It is now 16½ per cent. This is not due to excessive wages. The increase in earnings after tax has not run ahead of the rate of price increases. But six threshold payments have now been triggered off by these price increases. The total annual cost of these payments to employers—in the local authorities, the nationalised industries and private business—must have risen to some £1,200 million in a full year, with another £200 million to follow with each succeeding trigger of the threshold—and more if, as is likely, the number of workers covered by such thresholds rises above the 10 million who are probably already covered by now.
Apart from the impact of these agreements on the employer, the consequent increase in our industrial costs must reduce the competitivity of our exports and lead to further price increases in six months or so. It is for this reason that I felt it essential, without waiting for the autumn Budget, to take immediate action on the cost of living now. That is the central and sufficient purpose of the measures I described to the House yesterday. But before I describe them in more detail, I must comment on the secondary impact of the measures on demand in our economy.
All observers, both at home and abroad, agree that overall demand may fall substantially below capacity in the next financial year unless I take appropriate action in the interim. I hope that the House will forgive me if I lead it for a moment into the murky under- world inhabited by the theoretical economists who have recently been moving in increasing numbers out of their natural academic habitat into the public print. I fear that when they enter the arena of real life they tend to concentrate on those elements in an infinitely complicated human situation which can be most easily identified, and described with numbers, and to base their generalisations on far too narrow a view of the total picture.
I agree with a great deal that the hon. Member for Worthing (Mr. Higgins) said in a recent article in The Times. I would not deny that many of their insights are of immense and sometimes startling value to those, like me, who have to wrestle with the real world. But they provide no escape from the need to make judgments which can never be more than precarious as they concern a worldwide situation which even in its narrow economic aspects is constantly changing and can never be fully known at any time, still less fully understood.
At the present time most of the advice which floods in on me from these sources falls into one or the other of two broad streams of thought. There is one set of views strongly represented on the Opposition benches and in the Conservative Press, and well typified in one of its variants by the group of economists led by Professor Harry Johnson, who, having failed to make any impact on the previous Prime Minister, recently addressed a letter to my right hon. Friend They urged us at all costs to avoid the calamitous mistakes made by the previous Government and to concentrate our efforts on reducing the increase in public expenditure, on cutting the public sector deficit and on controlling the money supply.
I have some sympathy with their views, As the House will know, the money supply is now under the strictest control it has known for many years. In the current year, so far M3 has risen only 2.3 per cent. and M1 0·8 per cent. M1 actually fell last month. But members of this school usually go much further and ask me to cut overall demand far below capacity, far below what is needed to make room for the maximum increase in our exports and investments which can be practically conceived. They ask me blithely to plan on unemployment rising to 2 million or above, sometimes allying this with a recommendation that Britain should return to the gold standard—a quaint conceit fully worthy of its progenitor.
To take such advice, however, would be totally unacceptable to any democratic Government in Britain. Indeed, even the previous Conservative Government, in the most inhuman rigours of its Selsdon phase, took fright at the obvious consequences when unemployment rose to 1 million. I say again, as I said at Budget time, that the first principle which will guide the management of the economy as long as I am Chancellor of the Exchequer is that we must make the fullest possible use of the manpower and resources available to us.
The other main stream of current economic advice takes almost the opposite view. It is rightly concerned that one effect of the rise in oil prices is to deflate demand both in Britain and in the world economy. There is no chance for several years that the oil-exporting countries will be able to use the vast new sums of money they are receiving to purchase goods. This year the monetary surpluses of the oil-producing countries with the rest of the world will be between $60 and $80 billion and it is likely to be about that level next year as well.
Since this money is paid by the consumers but not spent by the producers, it represents a net reduction in world demand. Unless means can be found of recycling these surpluses so that the oil-consuming countries can spend them, we could be in for a world slump of 1931 proportions, and the risk would be compounded if the consumer countries adopted beggar-my-neighbour policies aimed at eliminating their oil deficits before the producers were able to absorb the goods needed for that purpose.
So far the international private banking system, working largely through the Euro-markets, has managed the problem of recycling with far less strain than might have been expected. But there may be a limit to the will and the ability of private banks to accept that deficit and then to lend this stupendous and continuing flow of short-term money. So discussions are already taking place, in the IMF, the OECD, the European Community and the Bank of International Settlements, with a view to establishing other means of handling these surpluses in the future so that the whole weight does not fall on the Euro-market. I believe that the new Iranian loan which I announced yesterday may provide one useful pattern for the future. I doubt whether, on reflection, the right hon. Member for Carshalton (Mr. Carr) will feel that the comments that he made yesterday afternoon—I agree that they were made at very short notice—were wise. They certainly would not serve the interests of any Government of which he was a member. In any case, it ill becomes a member of the previous Government to make them, because in the months up to the last General Election the previous Government encouraged the public authorities to borrow $2,600 million on the Euro-markets not to finance an oil deficit but to finance a deficit which rose overwhelmingly from trade in goods other than oil. That, it seems to me, is much less easy to justify than is borrowing to finance the purchase of oil, for which at present the producing countries are unable to accept goods in return.
I return, however, to the second main stream of economic advice that I have been receiving. Many of its supporters fiercely attacked my last Budget for failing to increase domestic demand sufficiently to offset the deflationary effect of the rise in oil prices. To some extent I accept that criticism. I made it clear at the time that if I were concerned with managing only the domestic aspects of our economy I should have preferred to risk having a bit too much demand rather than too little.
But to suggest, as some representatives of this school have done, that I should feed £2,000 million of extra demand into the domestic economy immediately, at a time when both inflation and the balance of payments deficit were running at record levels, would be no less a recipe for catastrophe than to follow the deflationist school. No one who knows the current state of thinking of those abroad on whose confidence our economy so largely depends could doubt that reflation on this scale at this time would mean a sudden increase in our trade deficit, the collapse of sterling and a domestic inflation of South American proportions. I preferred, therefore, in March, to err on the side of caution. The effect of my Budget judgment was in fact to reduce demand in the economy by about £200 million.
In the light of events since then, I believe that I was too cautious. The effect of the measures I announced yesterday will be to put back the £200 million of demand into our economy this year which I took out in March. I believe, however, that for the Chancellor of a country in Britain's position at this time it is always right to err on the side of caution. It is much easier, and more pleasurable—and, perhaps, more profitable—to correct that sort of error than to be forced into the sort of step which my predecessor had to take last December after nearly two years of profligate irresponsibility.
I must frankly tell the House that in my judgment if I made a mistake yesterday it was once again on the side of caution. But there will be an opportunity of correcting that error too, if error it proves to be, in three or four months' time when I expect to be introducing my autumn Budget. I believe that by that time the risks of a world recession will be far more visible to some of those outside Britain who at present prefer to ignore the warning signs. If so it may then be right for me to take more significant measures to ensure that our economy is not working too far below capacity next year.
Meanwhile, although there is at present need and scope for a modest in. crease in demand—a contingency of which I forewarned the House in March—the question which faced me was what means were likely to have the most beneficial effects on other aspects of our economy. Here the conclusion was irresistible. The current rate of inflation in Britain, though no longer by any means unique in the Western world, as it was last year, is now fuelled by the mechanism of threshold agreements. Threshold agreements may well play a useful rôle in guaranteeing the maintenance of living standards and reducing the fear of inflation at a time when world prices are stable. But I doubt whether anyone could deny—I shall be interested to see what the Leader of the Opposition has to say when he speaks tomorrow—that at a time when world prices are still rising rapidly they simply accelerate inflationary tendencies since every threshold payment will be reflected in price increases within six months or so. So anything I can do now to cut the rise in the cost of living by reducing the number of threshold payments will not only reduce the rate of inflation this year but produce a further reduction next year too.
I am most grateful to the right hon. Gentleman for giving way. He goes on about the terrible effects of pay increases through threshold agreements, but these are precisely the same as the effects of increases in pay negotiated in other ways. Would he not do better to talk about the effects of increases in pay in general?
No. There is a very big difference between monthly automatic pay increases and wage settlements made once every 12 months, taking account of increases over a long period, which is the intention of the advice given by the TUC to its members.
Will the right hon. Gentleman make it quite plain: is he in favour of threshold agreements or is he not? The Prime Minister strongly pressed me when I was Prime Minister to introduce threshold agreements, which we did in phase 3, and they were negotiated over a wide range of unions. The Chancellor has also said that the TUC has advised that pay increases should only keep pace with the cost of living, and first stage threshold agreements do precisely this. Will he say clearly: does he favour threshold agreements or is he opposed to them?
First of all, the essence of our policy on free negotiation and collective bargaining is that unions and employers should be able to decide through the normal process of negotiation whether they should use threshold agreements or not. But, in answer to the Leader of the Opposition's question, I indicated my view a moment ago. I think that once existing world price increases are fed through the economy there is a strong case for threshold agreements, but I do not think the Leader of the Opposition or anybody in the House can possibly argue that the introduction of threshold agreements on the eve of the biggest explosion of world prices in our history has operated, and could not otherwise operate, virtually to increase the rate of inflation imposed not by internal but by external factors.
The Leader of the Opposition knows as well as I do that if he had guessed last October that there was an explosion in world prices immediately to follow he would never have made these agreements a central feature of his compulsory wage control.
I really must get on. I have answered, very straightforwardly, I think, two questions which have been put to me and if any other right hon. or hon. Gentleman has different views no doubt, with your permission, Mr. Deputy Speaker, or that of Mr. Speaker, he will have an opportunity of defending his folly in the debate over the next two days.
That is why the main thrust of my measures yesterday was directed towards reducing the cost of living in the next three months up to the end of October—the period in which the last Government's threshold arrangements apply. I must confess that I had a slight feeling yesterday that some hon. Gentlemen felt there might be some other significance in my determination to concentrate reductions in the cost of living into the next three months. I can assure them that the time factor was inevitably determined by the nature of the legislation which hon. Members opposite forced through the House against our opposition last autumn.
I must confess I have been most surprised and disappointed, even to some extent shocked, by—what shall I call it?—the grudging welcome my measures received yesterday from the benches opposite. As for the amendment they put down, which we are to debate tomorrow, what a generation of vipers they are, Mr. Deputy Speaker! I would have expected at least a formal welcome for the relaxation of dividend control which they pressed on me so often, but perhaps they wanted it still pegged at 5 per cent. where they fixed it 18 months ago. It may well be that in current circumstances many companies might not choose to take ad- vantage of this relaxation to increase their distributions, but I believe that the prospect of a revived capital market will at the very least make some companies more ready than they are today to borrow money from the banks in order to increase their investment. I know that some hon. Members would have liked me to announce a modification of the Price Code now bearing particularly heavily. But, as the House knows, my right hon. Friend the Secretary of State for Prices and Consumer Affairs is now engaged on a major review of the Price Code and I think it would be a great mistake to preempt that comprehensive review by taking a major decision in this field at this time before all the consequences could be fully studied.
So far as I could follow the right hon. Member for Carshalton's rather incoherent criticism of my measures yesterday, it must rest either on the volume of public expenditure involved or on its composition. So far as the volume is concerned, the measures I announced yesterday will cost the Revenue £353 million in the current financial year and increase the public sector borrowing requirement by about £340 million. In both cases this does not include the cost of the increased food subsidies, which I announced yesterday, since this was already provided for in the March Budget. A small increase in the public sector borrowing requirements this year is not likely to have an unacceptable effect on inflation, the balance of payments or money supply.
The demand effect of the measures will be under £200 million at an annual rate by the end of the current year. This will fall short of much that the advice I have recently received was prepared to envisage. I accept that it is the Liberal Party's view that I should have gone much further but, for the reasons I have already given, I believe this is about right. In any case, I cannot accept criticism from the Conservative benches opposite that I have done too much, because during our discussions on the Report stage of the Finance Bill only last week they moved, voted for and in some cases carried amendments whose aggregate cost in revenue would have been some £500 million, all but £40 million falling in the current financial year.
The only amendment to which I referred for which the right hon. Gentleman did not actually vote last week was one involving a reduction of £300 million in the taxation of companies in the current financial year, and the right hon. Gentleman indicated his willingness to vote on that amendment, too, unless I succeeded in persuading him not to do so. I dare say that he is very glad now that I did so succeed.
Is not that what Oppositions always do when they move amendments? Is not that what the right hon. Gentleman used to do and what every right hon. Gentleman has done in moving amendments to Finance Bills? Of course it is. When we put down amendments in Finance Bills we do not know what the Government's reaction to them will be until they reply to the debate. That is perfectly normal. The Chancellor is not saying that our amendments involved £500 million. He has reduced his figure to £200 million, but he knows that it is much less than that because, on the Financial Secretary's own evidence, it was impossible to put into the economy in the current year £140 million of his figure of £200 million.
The right hon. Gentleman has a guilty conscience on this matter. He now regrets the frivolity and irresponsibility of the amendments he was pushed by his back benchers into moving on Report. I shall be delighted to return to this subject as often as the right hon. Gentleman wishes.
It is true that the distribution of this money would have been very different from that I chose yesterday. It would have gone exclusively to the company sector, to those living on unearned incomes, to landowners, land speculators and pools promoters.
Will the right hon. Gentleman stop using this word "speculators"? Is he not aware that before pressing that amendment we had a specific assurance from the Chief Secretary that the amendment we proposed did not in any way reduce, even by one penny, the tax on land speculation? Will he not talk about our moving an amendment in favour of land speculators?
I was using the phrase used by my precedessor, the right hon. Member for Altrincham and Sale (Mr. Barber), when he proposed the tax and undertook to introduce it at the highest rate of income tax when he made his statement to Parliament last December. The interesting point is that as far as I can discover the money which the Opposition's Report stage amendments would have involved would have been additional to and not alternative to the money which I am spending. Throughout the debates on my March Budget and ever since, spokesmen of the Conservative Party in the House and outside have attacked me because the total effect of the measures I took in. March was to increase the cost of living—and that was, indeed, the case.
Perhaps I may remind the House of the figures. The subsidies on food and rents meant a reduction in the cost of living of 2·2 per cent. This was offset by increases in indirect taxation, mainly in the excise duties, of 1·75 per cent., leaving a net reduction in the cost of living of only 0·45 per cent. This, however, was wiped out by the increase in the nationalised industry prices which added a full 2 per cent. to the cost of living leaving a net increase in the cost of living of about 1½ per cent.
Do these figures mean a reduction in the actual cost of living at that time or a reduction in what it would otherwise have been? There is a distinct difference there. The Chancellor has always misled the House and the country as to how much was the reduction in the actual cost of living.
It is a reduction in the cost of living in exactly the same sense as the £340 million yesterday is an increase in the public sector borrowing requirement. Of course, it is not an absolute reduction in the cost of living. I have made that clear repeatedly and I have never attempted to disguise it. I have pointed out that the cost of living has already gone up nearly four points since the General Election. The increases in the prices of the nationalised industries, which were long overdue and which the previous Chancellor had undertaken to make as far back as last December, meant a net increase in the cost of living of about 1½ per cent. These increases in prices arose because the previous Government allowed the emerging deficits of the nationalised industries to rise to £1,400 million by March. The increases in those prices that I announced reduced this deficit to £500 million.
Opposition spokesmen have been loud in their condemnation of these increases outside this House, but they have never dared to attack them in the House. They have taken refuge in the lame excuse that while they would certainly have increased nationalised industries prices, they were unable to say whether they would have increased them to the extent that I did. I therefore ask them once again—and there will be many opportunities for them to reply in the next two days—whether they believe that the £500 million subsidy is too little. If so, how much bigger do they think it should be? Or do they think that the figure is too much, in which case what further increases in nationalised industry prices do they recommend? Until and unless they answer these questions everything they have said on this issue is self-conscious humbug.
I doubt whether I shall ever get an answer to those questions, but one thing is for sure: the measures which I took yesterday wipe out practically the whole of the increase in the cost of living which resulted from the essential and overdue increases in March in the prices of the nationalised industries. The reduction in VAT and the help to the rates alone will produce a reduction of nearly 1½ per cent. in the retail price index as against just over 1½ per cent. increase resulting from the March measures. I had hoped that the Opposition, who have attacked me so often for the effect of the March measures on the cost of living, would unite in welcoming the fact that I have now cancelled that effect. Perhaps they would have sought to achieve the same effect by some other means, but if so, I hope they will say what these other means would have been. My impression is that they would not wish to quarrel with the reduction in value added tax. It was they who gave Chancellors the power to reduce tax in that way by means of the regulator.
My right hon. Friend mentioned it just now in describing the effect his action would have on the cost of living. Will he explain, on the basis of what he just said about the effect of reducing the cost of living in certain areas, how much his proposals will affect the cost of living in Scotland?
If my hon. Friend the Member for West Stirlingshire (Mr. Baxter) will put that question down I will seek to answer it. However, the reduction in the cost of living over Britain generally is likely to be just under ½ per cent., which is the figure I gave the House yesterday.
I was about to come to the point about rate relief. If the Opposition are not satisfied with the position on value added tax, no doubt they will tell us, but are they arguing against the relief I have given to the domestic ratepayer? Only a few weeks ago they joined a united House in voting through a motion to give precisely this relief. I understand from the newspapers that they were in the last stage of including it as part of the election manifesto. Leaders of both parties on the Opposition benches have many times in recent weeks expressed their desire for some sort of Government of national unity. Let them unite with us tomorrow in welcoming the help we are now offering to the hard-pressed domestic ratepayer.
What is left? There is a doubling of the rate of regional employment premium so as to restore its real value to what it was in 1967. The House will know that the regional employment premium is regarded by both sides of industry as an essential instrument for creating greater employment in the regions that suffer from higher unemployment than the average. There may be disagreement about the precise amounts of employment created by REP. The range accepted by those who have studied these matters varies between 20,000 and 50,000 at the 1967 rate.
Incidentally, I should make an apology to the House, and particularly to the hon. Member for Cornwall, North (Mr. Pardoe), because I unwittingly misled the House on the employment effect of the total package of measures I announced yesterday. The figure of 20,000 reduction in unemployment by the end of next year which I quoted is a bare minimum for the direct effects. The total effect is likely to be more than twice that, although I agree with the hon. Member for City of London and Westminster, South (Mr. Tugendhat) that such estimates must be open to great uncertainty.
My main point is that these are figures of the reduction of unemployment. The increase in employment may be three time as high, because experience shows that for every person taken off the register two others not on the register—often part-time married women—come into employment. Thus, the total effect on employment of all the measures I announced yesterday could be to increase employment by the end of next year by between 100,000 and 150,000. I apologise to the House for having given a figure so much lower than the true figure yesterday. [Interruption.] The Leader of the Opposition was once Minister of Labour, as that office used to be called. The effects to which I have referred were analysed and researched when he held that office. His right hon. Friend the Member for Carshalton will also know that they are true because he at one time—although one would not think it—held the same responsibilities.
The effect of the regional employment premium is not only to increase employment in the regions. It will improve both the cash flow and the profitability of companies in the regions. I understand that the Price Commission treats the regional employment premium as reducing unit labour costs for the purpose of calculating permitted price increases. On the other hand, the REP increase of £1·50 will enable a firm to avoid the equivalent of 75p of productivity reductions. In other words, the REP operates as a selective way of removing the productivity reduction from threshold payments in a way that reduces prices instead of increasing them. Therefore, it will give substantial help to company cash flows. But equally important is the fact that REP will operate so as to increase the competitiveness of our exports from the regions and will therefore serve to improve our balance of payments.
I hope that the Conservative Opposition in their new mood of national unity, in which they are casting so many of their other theological dogmas to the wolves, will now sacrifice their insensate opposition to the regional employment premium and join the CBI and TUC in welcoming the step I announced yesterday.
I do not claim that the measures I announced yesterday will have a major impact on the economy, but the modest improvements they will bring in demand, together with the impact of the doubling of the regional employment premium, will serve to assist us in dealing with some of the threats to employment in the shorter term.
I shall consider in the autumn, as I have explained, whether action on a larger scale is justified and possible in this field. But I believe that the impact of my measures on the rate of price increases will play an important rôle in launching the new system of freedom in collective bargaining and in ensuring that we can achieve a steady and significant reduction in inflation in the months ahead. For both these reasons, I commend them to the House
In discussing our economic situation, we must first be clear about our basic objective. I have no doubt—it must be a widely shared belief—that the most urgent and important need of the country is to get inflation under control.
Over the past four months prices have been rising at an annual rate of more than 20p in the pound. The Chancellor of the Exchequer said that he had been warned that if he did nothing that would be the rate reached by the end of the year. But it is already the rate. I repeat that over the past four months prices have been rising at an annual rate of more than 20p in the pound, and that is terrible. If it went on, prices would double about every four years. But, of course, if it went on it would almost certainly accelerate.
Reducing this rate of inflation is the clear top priority, because if we fail to control inflation we shall fail in all our other objectives—our objective of full employment and our objectives for the social services, for improving our environment and for our personal standards of living.
Of course the Chancellor declares that he shares this aim. He said yesterday in the early part of his statement that the first and main objective of his proposals was to attack inflation at source. In our view, his measures wholly fail to meet that objective. It seems to us that he is like a doctor trying to cure a wasting disease such as tuberculosis with a bottle of tonic. That is our basic, damning criticism, not only of the Chancellor's mini-Budget proposals yesterday but of the total effect of his and his colleagues' plans since they came to power in March. Domestically-produced inflation has accelerated and will continue to accelerate as a direct result of the Government's actions and plans unless they are changed.
Before developing criticisms of the Chancellor's measures in detail, I should like to put on record that there are two proposals of which I wholeheartedly approve. The first is the relief he is proposing on the burden of rates. The right hon. Gentleman might have been a little more honest if he had adimitted to the House that that is the direct result of the strong pressure of the Opposition in Parliament transmitting faithfully and fully the popular revolt against the rate bills that so many people have been receiving, some of which were greatly increased by the direct actions of his right hon. Friend the Secretary of State for the Environment.
The Government had stubbornly refused to do anything about that. Only last month, when they were defeated in the House on the issue by all the Opposition parties, they still took no action. The Secretary of State for the Environment was to adamant that nothing could be done about this that I understand from at least one of my hon. Friends that he took what I think all hon. Members would regard as an almost unprecedented step for a senior Minister to take. If he did not positively refuse to see one of my hon. Friends about the matter, which affected his constituency, he made it absolutely clear that he was so certain that there was no possibility of doing anything this year that it would be a complete waste of time for my hon. Friend to see him.
That has been the Government's attitude until now. The right hon. Gentle- man should be honest and admit that what he has done, welcome though it is, is something that has been done in the face of stubborn refusal and directly as a result of strong popular revolt. He must admit that that feeling was transmitted faithfully and fully in the House by the main Opposition and supported by all the other Opposition parties.
The second measure to which I give unqualified and wholehearted approval is the Chancellor's proposal to make an increase in the needs allowance which is used for rent and rate rebates and for rent allowances. It is directly in line with the belief that we held whilst in power, that the right way to deal with the stresses and strains of the hardships which inflation causes is not by huge general subsidies, which give so little to those in real need because their overall cost is so enormous, but by selective grants. That is in direct line with what we were doing when in power. I give an unqualified welcome to the Chancellor's decision to continue that method. It is a method of which I do not always recall him approving when he was in opposition.
I return to my criticism of the mini-Budget. One matter which stands out above all others is the extent to which the right hon. Gentleman has gone into reverse since March.
I am slightly overcome by the largesse which is showered on me. The right hon. Gentleman has not mentioned his approval of the relaxation of dividend control. Does he think that I should have kept at the 5 per cent. level at which his predecessor fixed it?
Let the right hon. Gentleman be a little patient. Perhaps I should give him a preview. Perhaps I should have done so earlier. I can assure him that I shall be welcoming that relaxation in due course. However, I do not think that he has done enough to help investment. I shall be dealing with these matters later.
The hon. Member for Fife, Central (Mr. Hamilton) will have to be a little patient. I shall also deal with that matter.
I return to my criticism of the mini-Budget. The first thing that stands out is that the Chancellor has gone into reverse. In March he charged off in one direction and in July he charges back, slightly less enthusiastically, in the opposite direction. Goodness knows in what direction he will charge if he is unfortunately the Chancellor in October. If this is what is called fine tuning of the economy, I can only think that the economy would be a lot better off with a little less fine tuning and a little more firm judgment and constant purpose.
Let us come to the specific contradiction between the Chancellor in his March mood and in his July mood. First, we have heard quite a lot today and yesterday about the triggering of threshold agreements. He has specifically mentioned that one of the purposes of his measures was, if not to avoid, at least to reduce the triggering of these agreements. In March the direct result of his activities was to trigger them sooner and more often than would otherwise have been the case. That was admitted in the official Press handout about the April increase in the RPI which was announced in May. That increase triggered threshold agreements three times in a single month. That is one enormous conflict.
The second conflict is the effect on prices to which the right hon. Gentleman has also referred. Yesterday he claimed that the eventual effect of his proposals of bringing in indirect savings of labour costs would be to reduce the RPI by about 2½ per cent., but the eventual effect of his March measures, which equally took in all indirect increases in labour costs, was to put up the RPI by about 2½ per cent. to 3 per cent. At best the financial effect of yesterday's measures on prices can barely if completely cancel out the damage which was done to prices in March. Meanwhile, we have suffered three months of prices at unnecessarily high levels. Therefore, thresholds have been triggered sooner and at a greater scale than was necessary by the Chancellor's statements and policies of yesterday.
The third example of specific contradiction arises in the level of the public sector borrowing requirement. In March the Chancellor laid a lot of emphasis on the need to reduce that requirement. Indeed, he made a lot of the specific measures that he was taking to reduce it this year by £700 million compared with what it would have been without his special measures. On many occasions—for example in the debates on the Finance Bill—the Chancellor has maintained the importance of those reductions, but now he increases the requirement by £340 million. In other words, he increases it by almost half of his much proclaimed reduction.
That is a substantial change. It is fascinating that yesterday he described the increase of £340 million as a relatively small amount. That was not how he described a much smaller possible increase in Finance Bill debates last week. Then a much smaller amount was, he said, a very large increase.
That also undermines the right hon. Gentleman's policy to reduce interest rates. He made clear in his Budget Statement that his ability to reduce interest rates would depend on restricting the public sector borrowing requirement at home. His present policy is a major reversal compared with what he was saying to us and the country in March. It is a reversal of policy on the importance of restricting the size of the public sector borrowing requirement, which brings us right to the heart of the rightness or wrongness of the Chancellor's actions.
The basic question is whether we are in earnest about putting the brakes on inflation. If we are in earnest about that, and about considering whether there should be any reflation at this stage, and if so of what kind, the question must be considered at two levels—namely, the level of the external balance of the economy and the need to maintain international confidence, and the level of the domestic economy, coupled with the overriding need to restrain the inflationary pressures within it.
At the external level one of the factors that the right hon. Gentleman must weigh in the balance is last month's balance of payments figures. They showed a large deficit but it was encouraging, as he said yesterday and today, that although there was a further swing into the red in the second quarter of the year compared with the first, it was happening primarily as a result of oil prices.
I accept that and I correct myself. That has come only as a result of oil prices. The non-oil deficit is improving steadily with exports rising at a faster rate than imports. That is very much what the previous Government predicted last autumn. In that sense the economy is still on the course on which we set it. The right hon. Gentleman looks quizzical about that. Perhaps that is not the right way to describe the smile on the face of the tiger. Whatever is the right word, let him look back to the public statements of my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) about that expectation.
I spent a good deal of time when occupying the present responsibilities of the right hon. Member for Carshalton in looking at my predecessor's statements. I noticed that he always predicted an improvement in the balance of payments position and that that was always followed by a deterioration.
That is one of those untrue generalities for which the right hon. Gentleman is becoming only too well known. It is right that the non-oil deficit is decreasing while exports are rising faster than imports. That is a thoroughly good sign.
I put to my right hon. Friend the Member for Carshalton (Mr. Carr) a matter that has been worrying me for some considerable time—namely, the tendency for many right hon. Members on both sides of the House to draw a distinction between the oil deficit and the non-oil deficit. Are we not to a considerable extent deluding ourselves and our country if we continually make that point? At the end of the day the deficit still remains. We are running a deficit of £4,000 million this year and it does not explain it away to our countrymen to say that the oil deficit can in some way be magically disregarded. That cannot be the position.
I should be the last person to say that it can be disregarded. What is valid to say is that it can and should be dealt with, not only by this country but by others, in a different way from the rest of the deficit. That is an important distinction. But if the intervention of my hon. Friend the Member for Horn-castle (Mr. Tapsell) allows me to say that I am in no way suggesting that it can be disregarded, I am grateful to him. He also gives me the opportunity to say how dangerous it is—and I fear that the Chancellor overdid this last night in his broadcast—to claim the prospect of our own oil as a sufficient reason for not dealing adequately with our problems in the intervening period. If we are not very careful, we shall have mortgaged the future which might come from our own oil before we get it. This is something else that we must talk plainly to our people about. We have an enormous opportunity in North Sea oil for a new prosperity and strength in the future, but that is no reason or excuse for not putting our house in order between now and the time we get it.
Another feature of our present position, despite the large deficit, is that we have drawn very little on our reserve and are financing our deficit by capital inflow. This is a preferable form of deficit financing, if it can be done, but it makes the maintenance of confidence of the greatest importance. It is inevitable, as a result of the oil price increases, that many other industrialised countries will this year be suffering large deficits in their balance of payments and, overall, the non-Communist Western countries are bound to be in substantial deficit.
Rightly, the Chancellor has said that it would be disastrous for each consumer country to try to achieve rapidly an overall balance in its external payments taking into account the oil deficit, because then we should indeed be in grave danger of slipping into a serious worldwide recession. That is perhaps another answer to my hon. Friend the Member for Horn-castle.
It is not a condition of confidence, therefore, that we move immediately to remove that part of the deficit resulting from oil, but confidence in our economy is inevitably bound up with what we are going to do about the non-oil deficit. That is why we must question whether Britain is the right country to go out in front of other countries, whose underlying balance of payments is a great deal healthier than our own, by taking reflationary action, however reasonable our own long-term prospects may be if sensible policies are followed.
All I want to say at this juncture is that it is essential to gain and then to keep the capital inflows which are so vital. To sustain the level of sterling in order to make sure of maintaining international confidence, it is better to err on the side of caution, particularly at this moment, when the outlook for wage increases is at best so uncertain.
Is it not inevitable that extra consumer demand will, to some degree, affect and drag in more imports as a result of what the right hon. Gentleman has done? Is it not inevitable that, to some extent, this will divert such little growth as we can achieve into consumption rather than into exports and investment? This leads me to believe that, if some injection into our economy is possible with safety at the moment, it should have been made in a substantially different way from that in which the right hon. Gentleman has made it.
This, of course, brings me to the second question the second level of consideration, the needs of the domestic economy. Presumably, the Chancellor is motivated by fear of unemployment. I agree that that is a real fear. I agree strongly also with the right hon. Gentleman when he says, as lie did last night, that he is not prepared to solve our problems through mass unemployment. What we have to ask ourselves is what is the greatest danger to full employment in present conditions. Surely the greatest danger would come from failure to put the brakes on inflation. That is what would lead before long to the most massive unemployment of a kind most difficult to cure, and that is the risk which we must not take.
It is, to put it mildly, not evident that the most serious threat to full employment comes from any general lack of demand in the economy. Indeed, there are still only too many signs of acute labour shortages in some areas and in some industries. Therefore, I would have thought that there was no real case for a general injection of consumer demand at the moment.
There is imbalance of employment demand, and that might justify selective help in the regions. The Chancellor has chosen to do it through the means of the regional employment premium. Views on the REP have always been and will remain conflicting. I still am very sceptical about it. At the same time, I have for long believed that, if one is to have a regional incentive, as I believe one should, there is a case for that incentive to include a labour-motivated incentive as well as a capital-motivated one. I simply doubt whether the REP is the best or, indeed, a particularly effective way of doing it, but to debate alternatives would not be appropriate now.
If the right hon. Gentleman believes that a labour subsidy is an essential feature of regional development policy, why did the Conservative Government threaten to abolish the regional employment premium and bring forward no proposals for anything to replace it?
The hon. Gentleman should be a little more sophisticated than that. Originally, when we were in Opposition previously, I expressed my dislike of the regional employment premium. We had not yet abolished it. The hon. Gentleman should have waited until we abolished it to see whether we had thought of something better to put in its place.
I am still very sceptical about the REP, but if the Government have decided to stick to it, I must ask whether it is wise to double it in the development areas. It seems to me that this accentuates the strongest criticisms of it. It increases the distortion between one firm and another and between one area and another, and one must not underestimate the anxiety which this very big increase will cause, for example, in the intermediate areas.
Therefore, if the right hon. Gentleman genuinely does not see a better labour-intensive subsidy for the regions, if he believes that he must stick to the REP, might it not have been better to spread it to all employees in the develop-men areas rather than to double the rate? I have always believed that this would be more effective. I think that it would reduce the degree of distortion. I have always believed strongly that, in the long run, if one wants to help development area policy, it is at least as necessary to encourage the more labour-intensive service industries as it is to encourage the more, and increasingly more, capital-intensive manufacturing industries.
The right hon. Gentleman is giving an interesting thought piece about this issue, and this point is strengthened by what he has said. The Government of which he was a member destroyed the value of the regional employment premium by saying that they would abolish it in October 1974. As a result, the extent of this incentive could not have affected new behaviour by industrialists following the announcement of the last Government's intention. What I am complaining about is that the Conservative Government, with only six months to go, gave no indication that they intended to put anything in place of the REP, and that this led to a fall in employment in the regions in recent years which need never have taken place.
I am sorry, but that is another flight of self-deception or misleading of the House. I have not come briefed to rebut that at the moment. We undertook to discuss the phasing out of REP and my hon. Friend the Member for Worthing (Mr. Higgins) in replying to the debate will gladly give chapter and verse to show that that is a misrepresentation of what we were doing. For the Government to talk about any failure by the last Government in regional policy comes a bit thick.
I return to my main point, namely that are we to do to safeguard jobs in the future. We believe that the main safeguard for jobs in the future lies in a higher rate of investment, and in stimulating demand. The Chancellor of the Exchequer's estimate of the effects of his stimulation of demand are bizzare. From experience I appreciate that this is a vague and difficult area. But the Chancellor has come to the House with a reflationary package, one of the chief motives of which must be his fear of unemployment. To be asked, as he must have expected to be asked, about what the effects of his proposals would be, and to give a confident answer that the effect would be 20,000 jobs by the end of next year and then, the following day, to say that he might be out in his calculation by a factor of five times is most extraordinary—
The right hon. Gentleman was not listening carefully when I intervened. I was making the point that the estimate I gave related to the direct effect on unemployment by the end of next year, but the right hon. Gentleman asked about the effect on employment, which, as I pointed out, was a different question. In answer to the original question which I was asked I mislead the House.
That is another argument for the House to consider. [Interruption.] The Prime Minister is wasting time. He has refused to give estimates or to ask for them. This matter will always be a bone of contention.
The degree of stimulation of demand which the Chancellor proposes seems most unlikely to produce the higher figures about which he is talking. The main safeguard to jobs must lie in a higher rate of investment. The lifting of the severity on dividend restraint is helpful, and we welcome it. However, the Chancellor would be wrong to think that REP is much help to investment. Above all, it does not help firms in some of our areas of greatest growth potential, such as the Midlands. If we want to encourage investment we must give industry both cash and confidence. The Chancellor by his measures in March took what industry estimated to be £1,000 million of £1,100 million out of its liquidity in the current financial year, and has since put little back. With regard to confidence, while the right hon. Gentleman has taken away cash, his right hon. Friend the Secretary of State for Industry, by threatening nationalisation and State control, has done a lot to destroy confidence.
If I felt it safe to inject more money into our economy at the moment I would put it mainly into industry. If the Chancellor feels able to increase the public sector borrowing requirement by as much as £340 million, it would have been safer from the point of view of international confidence, more effective in insuring us against the fears of unemployment and more productive in making our economy more competitive and buoyant in the future to have compensated the liquid funds of industry for at least part of what he extracted from it by his measures in March.
But the Chancellor, from the beginning of his term of office, has been too complacent about industrial investment and has underestimated the danger of decline. Only yesterday he spoke enthusiastically the Government took office—investment of investment in the first quarter, before which was based on decisions taken long before the Government took office. Again today he quotes, with a certain confidence, figures regarding likely investment this year. He does not seem to realise that the real cause for concern should be about future intentions. It is decisions taken this year which will materialise—or not materialise—into investment next year and in the following years. Therefore, we believe that if we are to inject more purchasing power into the economy at the moment there must be a higher rate of investment in industry. This is necessary to safeguard against runaway inflation.
For the reasons I have stated we say that the Chancellor has not lived up to his claim that to deal with inflation was his first and main objective. He has not dealt with it at source. He has done no more than tinker with it and, at best, may produce a few months less pain for our people at the risk of much worse inflation than would otherwise have been the case next year and beyond. We believe that the Chancellor has fundamentally failed to take advantage of the opportunity presented to him and to do his duty towards the country.
Most hon. Members would agree that the right hon. Member for Carshalton (Mr. Carr) was hardly in sparkling form today. The most unconvincing part of his speech was when he was asked a direct question, as well as for his comments, on REP. It is not good enough for a leading Opposition spokesman to offer the defence of not being able to say much about REP because he has not come briefed for the subject. After all, REP was one of the major announcements of my right hon. Friend the Chancellor of the Exchequer yesterday. The performance of the right hon. Member for Carshalton shows a breathtaking ignorance by a leading Conservative spokesman.
I shall remind him of some of the facts of life relating to the last Conservative Government and REP. He may not know that in October 1970 the Conservative Government said that they would phase out REP. They stuck to that policy throughout the period of their office, although towards the end there were signs that they were changing their minds, in that they were considering some other form of labour subsidy as a result of pressure from, amongst others, the CBI, which submitted a memorandum on the subject in February 1973. The last Conservative Government were committed to phasing out REP and they made no announcement regarding any alternative.
Action regarding REP is one of the most important features of the proposals of my right hon. Friend the Chancellor. We also applaud his plans regarding the cost of living. But for those of us from special development areas—such as my constituency where there is a dependence on the efforts of manufacturing industry—there is a warm welcome for the announcement that REP is to be doubled. My right hon. Friend's proposals mean that REP is to be rehabilitated as an important element of our regional development strategy.
Under the Conservative Government REP was under sentence of death and, as my right hon. Friend the Chancellor pointed out in an intervention, its value as an incentive was discounted because industrialists knew that it was likely to come to an end. They did not therefore take account of it in their calculations on where to site their industries. To that extent we were not getting the full value of public investment made in REP. At the same time the value of the premium was steadily being eaten away by the process of inflation. The premium was fixed in 1967 and its value by now is at least 50 per cent. down. It was fixed in 1967 at 7 per cent. of the average wage in manufacturing industry.
My right hon. Friend's announcement that REP is to be doubled will have the effect of at least restoring it to its 1967 value. REP is to be rehabilitated and industry moving into new areas can rely on it as an essential feature of Government regional strategy. Its value is to be restored. In simple terms it will mean that another £100 million will be going to development areas. As a Scottish Member I am particularly glad that it is to be doubled because that will mean another £40 million for Scotland. Because of its higher number of labour-intensive industries Scotland has always got the largest share of the regional employment premium. The £40 million is a welcome addition to the profitability and liquidity of Scottish businesses. I am sure that my hon. Friends from the other development areas share my satisfaction over the Government's decision. I am sure that it will be widely welcomed outside the House by both sides of industry.
To my mind the most curious feature of the argument about the premium is that the only people who have been unconvinced of its merits have been those within the Conservative Party. I have mentioned the Confederation of British Industry. It felt so strongly about this that it wrote to the Prime Minister in February 1973 and produced a most convincing memorandum showing the value of the premium, both in creating jobs in development areas and, perhaps more importantly, in holding back the rundown in employment in development areas.
The TUC has campaigned for the premium all along and has urged the Government to retain and increase it. The Trade and Industry Sub-Committee of the Expenditure Committee reported in the last Parliament in favour of the premium. Perhaps the most important thing it did was to take evidence from leading British firms as to whether they favoured regional employment premium. Among the firms which argued for it were Chrysler. Thomas Tilling, Guest Keen and Nettlefolds, Plessey and Dunlop.
Many of these firms have important factories in development areas. The officials of the Department of Employment who gave evidence to the sub-committee claimed that if we abolished the premium we might lose between 20,000 and 50,000 jobs in development areas. That is something which the right hon. Member for Carshalton, who was concerned with labour affairs when in Government, ought to have known.
Does the hon. Gentleman find it surprising that the firms he mentions should be in favour of regional employment premium when it has given so much to their cash flow, irrespective of whether it has had any effect on encouraging additional employment?
The evidence given to the sub-committee was that the premium did have an effect on employment and upon decisions about the location of industry. The hon. Member may be cynical about the evidence given by British industry. I am prepared to take it at its face value. If the companies say that it benefited them, I will not say they are liars. It strikes me as odd that Conservative Members should be suspicious of evidence given by British industry.
This is not just the attitude from one side of industry. Both sides think the same. It comes from Government Departments and from everyone who wants a balanced regional development policy. The only people, apparently, who are still unconvinced are those in the Conservative Party, although I thought that there were signs of a conversion in the right hon. Gentleman's remarks. It is a reasonable deduction that if the Conservative Party had won the last election REP would not now be in the process of being doubled. It would be in the process of being completely phased out. The result would be that the development areas would be losing £200 million and Scotland in particular would be losing £80 million.
The advantages of REP are clear. It introduces a strong element of labour subsidy into our strategy. It means that firms which want to qualify have to employ people. One of the dangers with development area strategy has been that it has been too capital-intensive. Large amounts of Government money have gone into big capital-intensive projects without producing very much by way of local employment. The regional employment premium has an important balancing effect. It means that if the Government are paying out a lot of money it is at least being related to the creation and retention of jobs.
The premium benefits large firms as well as small ones. During the recent difficulties I know that many small firms—I have talked to some in my constituency—found the premium a useful prop to their liquidity. It encourages them to keep labour when they might otherwise be tempted to shed it. It is of equal value to incoming and existing industry. That is one of the problems with regional development policy. Sometimes we favour incoming industry at the expense of existing industry, which has been doing a good job in difficult circumstances and preserving employment. It is the existing firms, the older-established firms whom I have found are most keen on REP because it is the one benefit they share with incoming industry.
If this were not enough, all the academic studies of REP show that it has had a marked effect on the creation and retention of a high level of employment in the development areas. I refer specifically to the work of the Department of Applied Economics at Cambridge which has done a considerable amount of research on this, and a pilot project carried out in Northern Ireland in cooperation with the Confederation of British Industry. It is from these studies that the Department of Employment accepted that the minimum job loss if REP were abolished would be 20,000 jobs, possibly rising to as many as 50,000 jobs.
I am glad that, as a result of the Labour Government's decision to retain REP and to double it, we shall not only prevent a potential job loss but look forward to increased employment as the money works its way through the development areas. As a Scottish Member, I see this as part of a general strategy of the Government. In the past two to three weeks there has been a succession of decisions of benefit to the Scottish economy. The Offshore Supplies Office of the Department of Energy is to be sited in Glasgow. The headquarters of the British National Oil Corporation is to go to Scotland. There has also been the announcement of the creation of the Scottish Development Agency, to use the revenue from North Sea oil to sponsor the re-creation of the industrial heartland of Scotland in the West and to improve the environment of that area. We look forward to an important announcement on the dispersal of Civil Service jobs in the reasonably near future.
It is clear that the Labour Government are putting regional development and regional growth and prosperity hight on the priority list of tasks to which they have set their hand. We in Scotland, and I am sure my colleagues in the North of England and other development areas, are most satisfied about this. One of the great differences between the Labour and Conservative parties is that the Labour Party is genuinely and sincerely committed to regional development and prosperity. It is one of its major priorities. We do not just talk about it, we do something about it—as is evidenced by the decision on REP.
The Government were right to double the rate for the premium. The time is now ripe for a wider study of the rôle which a labour subsidy ought to play in our regional development strategy. For instance, there is a case for asking whether it should be extended beyond the bounds of manufacturing industry and into service industries. Those of us representing areas of high unemployment who are constantly looking for new firms to go to our areas have noticed that it is often the service industries which provide more jobs than manufacturing industry. Manufacturing industry tends to be more automated. I am glad that the right hon. Member for Carshalton mentioned this. It was one thing he did know about REP and that is important.
There is scope for considering whether we should widen the system of labour subsidies and apply it to other industries. It is time to decide whether REP is the best way I am wholly committed to some form of labour subsidy because a capital subsidy alone is nonsense. There is, however, room for argument about whether REP is the best way of providing this subsidy. Let us study this. We shall not study the problem if the premium is under sentence of death. It is better to put it up to the level intended in 1967 and, while maintaining this important support to the regions, we can set about examining the best way of creating a labour subsidy.
There must be a labour subsidy if employment and the maintenance of employment are to remain part of the central strategy for regional development policy. Because the Chancellor's announcement reinforces and strengthens the commitment of the Labour Government to prosperous development of the regions, entitled to their full share of the economic benefits and prosperity of this country, we welcome what he told us yesterday. I welcome his announcement, on behalf of my constiuents who live by manufacturing industry in a special development area. People who work in the factories and those who employ them will welcome what my right hon. Friend has done. Much more than that, all of business will welcome the sensible, courageous and forward-looking decision which emphasises the Government's commitment to regional prosperity.
I have total sympathy with the local patriotism of the hon. Member for Lanarkshire, North (Mr. Smith) in his wish to do well for his constituents. I am sure that the whole House shares that sympathy. On the other hand, he is wrong to assume that he individually or the Government have a monopoly of good will in this matter.
We have had a good deal of discussion about the regional employment premium. All my experience leads me to believe that special incentives are of vastly less value in encouraging employment in the development areas—the hard-pressed areas—than is a generally high level of economic activity. The hon. Gentleman was right to make a case for the service industries and to say that the dispersal of offices from London is perhaps one of the most important and significant acts of aid which any Government can give to the regions.
To turn to wider matter, it was a matter of particular disappointment to us all on both sides of the House that in his substantial speech today and in his announcement yesterday the Chancellor of the Exchequer mentioned inflation only once. On the other hand, my right hon. Friend the Member for Carshalton (Mr. Carr) began his speech with a substantial and strong reference to inflation. How right he was.
Inflation is the enemy. I do not say that in our society there is no other. I should not be a West Country man if I did not believe ardently in the cause of reform, but I say that inflation is the chief enemy, the most insidious, the worst, and the most evil. It disturbs values, imposes burdens on the weakest, makes for injustice and is disruptive of our society. Its course is never new. It alarms capital, so sorely needed to be put to practical work, and diminishes legitimate enterprise. It encourages, as we have seen in the property world par- ticularly, malinvestment, thriftlessness and speculation, all at the expense of production.
The cumulative arithmetic of inflation is terrifying. At "only" 10 per cent., a phrase that is sometimes used abroad, prices double in seven years. At 15 per cent. prices double in five years. The current rate is higher. With continuing 10 per cent. inflation a man earning £40 a week at the age of 25, if his real income is to rise annually by no more than 2½ per cent., a modest enough target, surely, on retirement at age 65 would be earning no less than £250,000 per annum. A pensioner retiring at 65 on the basis of two-thirds of salary will find it worth only one-sixth by the time he is 80.
I speak as one who has responsibilities in managing pension funds. I warn the House that if inflation continues at present rates most funds in this country may not be able to meet their obligations. Our recent record of inflation is the worst of all of the countries in OECD.
Does anyone recall these words of Mirabeau in 1788? They were not written of inflation but might have been. He said:
a misery of tyranny, corruption and delusion, a veritable debauch of authority in delirium".
Those are strong words, and I quote them deliberately, for Mirabeau, who might have been the saviour of France, changed his mind and lost his way, as I feel that we in this country may have done. Never was there in that period of history a French parliament with abler or more patriotic men—as there are in the House of Commons now—yet disaster struck all the same.
It is fair to judge any Chancellor by the deligence with which he intends to contain inflation and the success he is seen to have. I no more accept inflation as an inevitable human condition than I accept poverty or unrelieved misery. The House of Commons does not and will not tolerate the latter. It must not tolerate the former. It is possible to have some sympathy with the Chancellor in one respect. The fear that the present sluggishness of the British economy will lead to recession in 1975 is widespread and genuine. That it exists is perhaps a criticism of the Chancellor's Budget judgment of four months ago, but the need, surely is to increase investment rather than consumption for its own sake.
I do not believe that the people who work in industry and commerce are idle. They are not. They work harder and more loyally than do workers in any other nation in the world. They are certainly over-disrupted, but that is another subject. The point I am concerned to make is that they are grossly, wantonly and disgracefully under-capitalised, and the economic race will be won by those nations which bring the maximum capital to the worker's elbow.
I agree substantially with what tile hon. Gentleman has just said, but is he not aware that under the Conservative Government investment rose not at all in the three years between 1970 and 1973?
I am less concerned to make party points than to talk of the future and of what it is necessary to do now. To increase investment it is necessary to achieve a satisfactory level of business confidence, which in turn depends on a sympathetic climate of opinion of which the Government of the day, whatever their colour, are the arbiter.
In this respect, in their regard for the essential national interest, the Government's carelessness borders on the criminal. We are accustomed in politics to the experience that the only certainty is uncertainty. It is the duty of the House and the Government not to create uncertainty for those who have practical work to do. Yet there are many examples. Look at the uncertainty in pensions, look at the uncertainty about defence orders, look at the almost wanton destruction of the property market by successive Governments, look at the threat of State ownership hanging over so many sectors of British industry, look at the change in banking controls—one moment one does not see them and the next one does—look at the vagueness in the control of insurance companies. I have interests in banking and insurance.
This on-off philosophy will not do, whether we speak of Maplin or the Common Market. I have always had my reservations about the latter, but, the House having taken the decision to go in, for heaven's sake let us work to make a success of it. Do other hon. Members reflect, as I do, that the greatest need in our country is to bring a degree of certainty and stability into our affairs so that businessmen and traders can plan ahead? In my adult experience we have suffered too much in the way of change which is often wrongly dignified with the title of reform.
How do we encourage the manager, the entrepreneur, the risk-taker in Britain today? We tax him higher than any of his overseas counterparts and, for good measure, promise him additional discouragements in the autumn. "Let him try to save some money", we say. "Let him accumulate capital." But we will not have that. In their sum, the intention of the Chancellor's measures is clear. It is the total erosion of private savings and their transfer into the hands of the State. Not for the first time I am reminded of the experience of M. Voltaire when he visited London for the first time and was dismayed at hearing that the Royal Navy had shot Admiral Byng—"…pour encourager les autres", remarked Voltaire. How does one encourage people if one constantly discourages them?
Has the Chancellor seriously considered how his personal taxation policies encourage inflationary expectations? For example, a man whose money income rises finds himself forced into paying at a higher tax rate. The average wage earner needs an increase of 13 per cent. or more in gross remuneration to keep him in the same position after a 10 per cent. rise in prices. At higher remuneration levels the figure will be 30 per cent., 35 per cent. or more. It is surely time to consider seriously the indexing of all fiscal norms if taxation is to be socially just; but the most socially damaging aspect of all in the economic scene is the expectancy of inflation.
The index of basic wage rate rose 3 per cent. in June, or 16 per cent. above the level of a year ago. There is now a fear of a wages explosion, added to by the "news" on the tape this afternoon. It is not surprising that many of our fellow citizens hade a real fear of inflation—inflation which the Chancellor mentioned only once in yesterday's statement. A Chancellor who seeks to reflate the economy in those circumstances does not so much to discourage inflation as encourage it.
How unhappy a spectacle it is to see authority plan to aggravate or cause in the long run the very evils which it seeks to avert or ameliorate. I know as certainly as I am standing here that the result of the Chancellor's actions in the long run must be to increase rather than decrease unemployment.
Sometimes foolish men wish that they could foretell the future, but what is foresight? Is it mere knowledge of economic forces and laws as revealed by history? History shows that inflation either will be controlled in this country or will rise to pre-war German proportions.
What is to be done? There is no single remedy. Since the fashion in the House is for abbreviation and short speeches, I am concerned to do two things only. Above all, I wish to point to the danger of inflation, to state it, to restate it, to shout it if need be again and again till all listen.
I should like now to make a pair of complementary recommendations to the Chancellor. He has a clean sheet on which to draw his strategy. I wish him success, for his triumph would be our country's welfare and prosperity. With his able lieutenants to help him, he should set a style which would be an example to his country.
The first is a practical matter simply stated. Let us get better value from all Government expenditure. I truly believe that not less than one-eighth—and perhaps more, as much as one-sixth—of all Government expenditure is wasted, or badly spent. Much of this money could be saved. I have, if I may mention it, an unusual experience in this House since I was the first Chairman of the Public Expenditure Committee and I am now Chairman of the Public Accounts Committee. I speak not like the academic economist to whom the Chancellor referred and on whom he spent so much time amusing himself. I speak from what I know and from what I am sure is so. For less money we might well have services at least the equal of the present, if not better.
It is so easy to say. I do not pretend it is so easy to accomplish. It requires readjustments of habits, styles, methods and the like, but, when achieved, it must substantially relieve the inflationary pres- sure on the British economy. It would permit vastly lower taxation. The fact that the nation's housekeeping were obviously well done would be the greatest economic encouragement to our people yet, in the years since the war. It can be done. Let it be done.
My other recommendation is also simply stated. I can put it to the Chancellor in three worlds: tell the truth. Tell our people what we can afford and what we cannot. Tell them that there is no lasting substitute for honest endeavour. Tell them that he who borrows in the end must repay. Point out that the man who takes more from the community than he creates is a man who would steal from the weakest in our society.
Encourage the producers—tell people that investment can come only from surplus on trading, and that profits are to be welcomed when honestly earned, and that we believe in high profits, high wages and a high investment economy. Teach our people the need to create new wealth before we discuss how to share it better. While being solicitous for those at the bottom end of the living scale, encourage those who will be the winners in the fierce trade battle that exists international-ally. Tell our people that their destiny is in their own hands, for better or for worse. My hon. Friends and I insist that it shall be for the better.
I am an optimist. The opportunities for our country are as vast and as exciting as the climate of opinion is gloomy. The need for us all is to raise our mental sights not a little but a long way. It can be done, given the right political and economic leadership. My regret is that the Chancellor of the Exchequer's measures yesterday seem to me, in this crucial scene, to be a mere trivial irrelevance.
I welcome the statement made yesterday by my right hon. Friend the Chancellor of the Exchequer. It contains a number of useful measures, both to slow down the rate of inflation and to ward off possible increases in unemployment in the year ahead.
As a Member for a northern constituency, I particularly welcome the doubling of the regional employment premium. With other hon. Members, including my hon. Friend the Member for Lanarkshire, North (Mr. Smith), I have argued for some time for that measure and for an increase in its value.
No, I will not do so yet. It is well known that the value of REP in real terms has been halved since its introduction in 1967 but that is not the main argument for increasing the REP now. The real case for increasing it now is that at a time when this country faces an unprecedented level of inflation as well as the prospect of increasing unemployment, an increase or doubling of REP offers the quickest and most effective way available of protecting directly those areas which are always worst hit when unemployment increases.
Just a moment. That applies to the North, Scotland and Wales without overheating the rest of the economy. All the evidence, including statements made by a number of leading firms to the House of Commons Expenditure Committee, indicates that, despite the effect of inflation on the value of REP, many firms in development areas have come to rely on REP as an important factor in their profitability. In terms of job creation, between 1968 and 1970, REP created between 20,000 and 50,000 new jobs, and my right hon. Friend has estimated that his total package, including REP, will result in about 120,000 new jobs.
Will the hon. Gentleman accept that not only the North can be assailed by unemployment? Does he realise that the North-West is badly assailed, and that the intermediate area and the North-West will suffer very badly as a result of this doubling of the rate of REP? The hon. Gentleman said that it would not hit the rest of the economy, but it will hit places such as Lancaster very hard. Does he not appreciate that it is a policy of robbing Peter to pay Paul?
I have no doubt that the hon. Lady's point will be noticed in her constituency.
The whole point of REP is that it is selective between certain areas and others. It is because of this that it has the effect that has been observed.
REP is not only useful in creating new jobs. It is also useful because it is an overall subsidy to all manufacturing industry in development areas, and it protects existing jobs. It is probably this side of the increase in REP which will be of most value during the coming months. The TUC has estimated that the total package, including the REP especially, will save up to 200,000 jobs during the coming year.
I am not arguing that REP is a perfect instrument. It is both too general in that it applies to all manufacturing companies, whether or not they are efficient, and yet too narrow in that it does not apply to the service industries. It is therefore right that the Government should be looking at alternatives. But the fact remains that altering the value of the REP is the only method that my right hon. Friend had of protecting jobs in the regions, and that is why Government supporters welcome that measure very warmly.
It is accepted on both sides of the House, I think, that the main—perhaps the overriding—problem facing the country is the rate of inflation. Inflation at the level that we have at the moment is not only socially divisive—not only does it redistribute towards the rich away from the less well-off—but it could, if it persisted at its present level and rose to South American levels, undermine the democratic basis of the country.
Since coming to office, this Government have taken a number of important steps. They have frozen the level of rents. They have introduced food subsidies. They have put pressure on distributed profits. Now my right hon. Friend has reduced the level of VAT. However, there are a number of powerful inflationary factors in the economy—the increase in oil and other commodity prices—which have been working through the economy, and these have been accelerated by the threshold agreements.
I have been in favour of threshold agreements but that was when inflation was at a very much lower level, and there is no doubt that at the moment the threshold agreements are acting as an additional inflationary factor. These are the problems facing us.
As for incomes, the main part of the Government's strategy is based on the social contract. Members of the main Opposition party spend a lot of time carping at and criticising the social contract before it has come into operation. But what would they put in its place? Would they have higher unemployment? Surely their experience in 1971 and 1972 ought to have warned them off that course. We now know that, without an entirely unacceptable level of unemployment, we cannot get an effect on the rise in prices in that way.
Would they have a statutory incomes policy? The Labour Government tried this in 1966 and 1967 and it led to a bottling up of pressure which burst through when the statutory controls were removed or reduced. The previous administration's disastrous statutory policy led to a major confrontation with the unions, a three-day week, and that Government's defeat in the General Election.
I have, as a research officer with the General and Municipal Workers' Union, worked under the incomes policies of both Conservative and Labour Governments. It is my conviction that a voluntary policy based on consent is the only policy that has a chance of success. I believe that the TUC's voluntary commitment to restraint in wage demands is one of the most hopeful experiments of recent years.
Instead of the carping that we get from the Opposition, I believe that the social contract deserves the support of all parties and all groups in society, including the trade unions. It must get that support.
I make two points in conclusion. I believe that there is now a widespread public demand for a clear lead on the economic problems facing the country. People want to know the facts about the economic situation. They also respect those who, like my right hon. and hon. Friends, are prepared to put the issues clearly before them.
I deplore those, especially those amongst the fraternity of professional economists, who adopt a fashionable doomsday approach. It is one thing to face up to reality. It is quite another to imply that we do not have the intellectual, social and political capacity to overcome our problems. Despite the difficulties facing us, I remain optimistic about this country's future, provided that we in this House have the courage to give the lead that is expected of us.
It is an interesting fact that the speeches which we have heard so far from Government supporters have been devoted largely to the subject of regional employment premium. The hon. Member for Lanarkshire, North (Mr. Smith) devoted the whole of his speech to the subject, and the hon. Member for Chester-le-Street (Mr. Radice) also devoted a good part of his speech to it. For that reason, before going on to the more general matters that we are discussing today, I wish to make a few comments about REP arising from my own experience.
I am the chairman of a group of companies which, as it happens, is located in a development area. We have been beneficiaries of REP ever since it was first introduced. I have been interested to see what effect REP has had on employment and on the encouragement of new industries into development areas.
I find it very difficult to get any hard evidence about the really beneficial effects. It is hard to put a quantitative figure on the number of jobs which it has created. I do not think that anyone can say accurately how many new jobs have been created by REP which would not have been there but for it. Nor is it easy to discover how many new firms have gone to development areas encouraged by the existence of REP. There are many other reasons. In my constituency, for instance, the employment situation is such that there are five or six times as many vacancies as there are unemployed. In consequence, firms are seeking to move away to development areas where there is more labour available. They would move to those areas whether or not REP existed. They are searching for labour.
My real objection to the use of REP is its wasteful way of achieving a desirable result. We are trying to build up economic activity in development areas, but, in doing so, we are providing a subsidy for firms which have been there for years and would continue to be there and to employ labour with or without the subsidy.
I have argued in the past that it would be far better to spend the money which we spend on REP on improving the infrastructure of the development areas—building roads, improving services and making places more attractive to industry. We would not then have to give subsidies to persuade people, sometimes against their better economic judgment, to move their enterprises to those areas.
In North Lanarkshire and West Central Scotland the infrastructure has been drastically improved during the last 10 years. We have a very good road and communications system. Yet we still lack a spark of growth in economy in that area. It seems to me from that experience that the infrastructure is far from enough. We need direct assistance and benefit to industry. Building roads is only part of the problem.
I agree that that is not sufficient by itself. We still have areas which, for a number of reasons, are not attractive to industry because they are regarded as uneconomic, whatever inducements may be given. REP will have no great effect in encouraging boards to change their policies in that respect. REP is a wasteful way of achieving a limited result.
I will now turn to other aspects of the general debate on the economic situation which we are supposed to be having today and tomorrow. Referring to yesterday's mini-Budget, I admire the Chancellor's dexterity. This neat injection of reflation, presumably designed to induce a temporary euphoria in the electorate in anticipation of what I assume is likely to be an early General Election, is enough to take the Government over that phase until we get the awakening which will be preceded by the autumn Budget about which we have heard.
Some measures in the Budget I welcome, as did my right hon. Friend the Member for Carshalton (Mr. Carr). I welcome the introduction of domestic rate relief. As my right hon. Friend said, there was considerable pressure from both sides of the House for something to be done to relieve the pressure of rates which has been imposed in the last few months upon domestic householders. My fellow Buckinghamshire Members and I have made representations to the Minister on more than one occasion drawing attention to the hardship that has been caused in the country. Therefore, we are gratified that this action has been taken by the Chancellor. Had the Government not entirely reversed the action taken by the previous administration which gave differential grants to different parts of the country, we in Buckinghamshire would not have had to press for this relief because it had already been given.
Although I welcome the relief which has been given to ratepayers, I still think that, against the background of this debate, it should have been offset by variable grants, by a reduction of public expenditure in other directions, or by an increase in taxation in one form or another, not given as an additional contribution towards the demand factor.
I welcome to a limited extent the decision to abolish VAT—to reduce, not abolish VAT; it was a slight Freudian slip—only because it has a small temporary effect on the cost of living. But I wonder how far it will go.
The problem of working out 8 per cent. VAT on items of small value will be considerable. Shopkeepers will be confronted with a difficult problem. I fear that the difference may be taken up by increasing the retailer's or the wholesaler's margins. For example, many items produced by my firm are sold at between 15p and 20p. It is difficult to add 8 per cent. VAT to such items compared with the old 10 per cent. VAT. The calculation will not be easy for the shopkeeper. I do not necessarily oppose the reduction of VAT, but I think that it will contribute to the inflationary trend at a time when we want nothing that is likely to do that.
My right hon. Friend the Member for Taunton (Mr. du Cann), who made such an excellent and distinguished speech, drew attention in his closing remarks to the fact that this Budget is completely irrelevant to the situation now facing us. Like all doses of inflation, it will give
pleasure to some, but in the end the national health will be worse than it was. It reminds me of the old rhyme about the Queen of Spain, which will be known to many of my older colleagues. For those who do not know it, perhaps I may repeat it:
It's a hell of a life ', said the Queen of Spain,
'Five minutes pleasure and nine months pain,
A few weeks rest and you're at it again.
It's a hell of a life', said the Queen of Spain.'
I think that the pain that will follow this Budget, if we are unfortunate enough to have a Labour Government again after the General Election, will last far longer than the nine months to which she was referring.
One is sometimes forced to ask whether Socialists have a vested interest in encouraging inflation. Indeed, I am encouraged to ask that because of a comment made by the hon. Member for Chester-le-Street. He pointed out that continuing rapid inflation is bound to destroy private enterprise and to destroy parliamentary democracy as such. I should have thought that those objectives would be welcomed by many members of the Socialist Party, but not, I trust, by the Government Front Bench who are no doubt trying to introduce policies which, mistakenly, they think will prevent that evil overcoming us.
In the belief that there is a real desire to deal with inflation, which my right hon. Friend the Member for Taunton said was the most important problem facing us, I should like to make a few suggestions covering not only the immediate future but I hope the much longer term.
The danger which always faces us when we discuss these matters in confining ourselves to the current year or perhaps a year or two ahead and not thinking of the developments which are likely to take place some years hence, Once result is that we tend to be overtaken by events.
It is platitudinous to say that inflation is worldwide. What is a platitude but a truth that we are tired of hearing. Basically the reason is the rapidly increasing world population demanding an ever-increasing standard of life, using resources at a faster rate than they can be produced or won from the earth, and using some basic materials at a rate which will exhaust known reserves by the end of the century.
I put down a Question asking about the fate of certain essential metals and how long known reserves were likely to last. Although the answer that I got from the Minister was very cagey, it is clear that, as far as we know, existing reserves will not last longer than the end of this century. After that period we shall be forced either to do without them or to have found substitutes.
It is estimated that the world population will double by the end of the century to 6,500 million and double again in the following 40 years unless we have any disastrous wars or cataclysmic natural disasters. It is unrealistic against that background to expect that the cost of food and other essentials of life will not increase, whatever technical advances we may make in the meantime.
For example, water, a commodity that we take for granted in this country, will be in short supply before the end of this year. The Water Resources Board estimates that, by the end of the century, there will be a deficiency of over 12 million cubic metres a day in the public water supply. Although there may be alternative methods of making good that deficiency, energetic action to develop them does not seem to be taking place.
Over the long term, the essentials of life are bound to get dearer. With the great mass of increasing population in the undeveloped countries naturally demanding improvements in their standard of life and a greater share of the diminishing and inadequate world resources, it is inevitable that the standard of life of those in the more advanced countries in the western world will be reduced. It is not just a question of our standing still.
All Governments in this country have been at fault in creating in people an expectation of a continuing improvement in their standard of life and in disguising the vulnerability of our position. A good example of this is the shock we had when the oil-producing countries suddenly increased their prices so considerably, with the almost immediate result that our standard of life was reduced.
As in most countries which import a great part of their requirements, inflation in Britain can be imported or internally generated or a combination of both. World commodity prices, which are responsible for the greater part of imported inflation, may level off in the short term—indeed, there are some signs that in some respects prices are now levelling off—but if the population trend estimates are anything like accurate, those prices are bound to rise with increasing rapidity in the long term.
That applies particularly to food. At present, the production of food stocks is not keeping up with the increase in world population. That may not seem a matter of great concern to us at the immediate moment, but it will be as the years go by. Although there may be temporary surpluses, generally because of faults in distribution or artificial interference with distribution, in the long run the production of food stocks, without new techniques which have yet to be developed, will lag behind the demands of an increasing population and must affect food prices in this country.
Our agriculture is in a parlous state, I have just received a deputation from my local branch of the National Farmers' Union who pointed out the inevitable increase in the price of home-produced meat as up to the present time it has been a very poor hay year, the fact that they will have to buy a large quantity of feedingstuffs at high world prices, the fact that they have ceased many of their activities and reduced many of their herds will all have a marked effect on the price of foodstuffs produced here this year and next. Unless additional help is given to the industry the situation could get even worse.
We have to regard the fight against inflation as seriously as we regard a war. It can be as dangerous and as destructive in its social effects as any war. To offset the effect of inflation, if we are serious about trying to cure it, we must introduce measures to encourage food production as we did in the last war. This does not seem immediately relevant, but if we look far enough ahead we see how relevant it is. We should encourage people to grow food in their gardens, start allotments again and bring back into production land which has gone out of production. We should try to make ourselves much less dependent on food imports.
We should also examine the philosophy behind food subsidies, which have always seemed to me a wasteful way of giving help to comparatively few people. They are indiscriminate in their effects and, because they disguise the true cost of food, they are bound to lead to waste of scarce resources. As a matter of urgency, we should encourage the reclamation and recycling of products which use scarce materials. As I have said many times, we should reduce our dependence on imported fuel as quickly as possible and should particularly press on with the search for fuels which will make us less dependent on fossil fuels.
Internal inflation, given a determined Government and a people willing to accept the rule of law, should be easier to control than imported inflation. I go back to my earlier question, whether there is real seriousness about dealing with this problem. After all, inflation is of great value to Chancellors. They are reluctant to give it up because it increases the yield from income tax and surtax by pushing people into higher tax brackets. They obtain, both through corporation tax and through capital gains tax, a tax on profits which are non-existent—paper profits which result only from inflation. Inflation reduces the amount of outstanding debt in real terms. Even the most recent of the Government-sponsored loans are a fraud on the public because the rate of interest does not enable them to keep pace with inflation.
For various reasons, then, inflation is not entirely frowned on by a Chancellor. It enables him to do things without the people being aware precisely what he is doing. But if any Chancellor could steel himself to surrender those advantages, he might examine the possibility of introducing indexation over a wide field. My right hon. Friend the Member for Taunton referred to one form of indexation when he talked of indexing the tax scales, but I think that it should go even further.
We already have indexing in a crude way in threshold agreements and the TUC has apparently accepted the principle indirectly by agreeing to try to restrict wage demands to a figure which increases, point for point, with increases in the cost of living. I would not suggest that indexation is a cure-all; it is only the lesser of two evils. It is better than the present bad management of money.
Indexation would be likely to induce a greater sense of security among the wage and salary earners, it would tend to remove the fear at the back of many extravagant and extortionate demands by various sections of the community and increasingly to lessen the pressure for wage demands when people began to realise that the real value of their earnings was protected. It would also reduce the revenue obtained by Government through inflation and might therefore give them less incentive to inflate.
To be effective, indexation must be comprehensive, covering wages and salaries, fees, social service benefits, tax scales over the entire range and future savings. Its one fundamental weakness is that it cannot protect past savings. I do not know how we can do that.
We should also have to introduce inflation accounting. This system is too complex to discuss in a short speech, but I know that the advantages—
I apologise, Mr. Speaker. I will draw my speech to a close. I so rarely speak in this Chamber that I have been led to speak longer than I intended.
The advantages and disadvantages of the system are as well known to other hon. Members as they are to me. If one were to introduce it one would need to take adjustments into account no more than half-yearly.
In response to your appeal, Mr. Speaker, I will refrain from continuing with something I wished to say on that subject, and perhaps hon. Members will forgive me if I jump immediately to the last point in my speech. The dangers facing us are very real, as everybody understands. They will get worse unless we take determined action, explaining to people exactly what we are facing. As my right hon. Friend the Member for Taunton said earlier, we must tell the people the truth. Our problems cannot be solved by electioneering Budgets such as we have had or by party policies which alienate large sections of the population, whichever party's policies are concerned.
I do not believe that the dangers which face us, which are perhaps more serious and far-reaching than most of us are prepared to admit, are likely to be solved by any one-party Government. To deal with these problems successfully we have to have a policy which is acceptable to the vast majority of people in this country. Whilst I do not feel it realistic to expect that we can evolve any form of national policy this side of a General Election, if we do not do so afterwards I shall be apprehensive for the future.
I listened with great interest to what was said by the hon. Member for Wycombe (Sir J. Hall) and I heartily endorse much of what he said. I agree with him that the dangers which beset our country at the present time are very grave.
I recall the words of the right hon. Member for Taunton (Mr. du Cann), who delivered what was in many respects a very fine speech, that the responsibility of each Member of this House should be the search for truth, irrespective of whether it helps our party or ourselves. It is one of the great calamities of this Parliament in which we have the honour to sit, that we are apt to forget our responsibility to a greater or higher cause, the cause of truth. I would hope that the right hon. Gentleman's words will be re-echoed in the hearts and consciences of all hon. Members of this assembly.
Let us not blame one another for the problems we have created over the years since the war, but rather let us try to find solutions to those problems. I would hope that in the years that lie ahead succeeding Governments will resolve to try to follow that line of approach. This will be the last Parliament in which I shall sit and I wish to make it abundantly clear that if there is one thing in which I have been disappointed it is the terrific amount of time we waste in blaming one another for faults and failings which actually rest in ourselves. Whenever we change the sides the tune changes accordingly.
The right hon. Gentleman said one of the principal problems that has confronted this country for many years but is now gathering in momentum is the problem of inflation. There can be no doubt of that. I can claim that in every speech that I have made in this House, though I may not have made many friends on my side, I have tried to draw attention to the great problems that confront us. We have never got down to trying to solve them because we are hidebound by out-dated ideas and ideology.
We have failed to realise that we have to play a rôle different from that which our fathers and grandfathers had to play, and that is because of the changing nature of the world in which we live. I well remember that when I was a young man in a county council 42 years ago honest and sincere men were diametrically opposed to many of the things that we all take for granted today. They were sincere and honest enough, but we have seen a transformation in the whole outlook and basic principles of the life of man. We have failed to realise that the scientific and technological advancement of man has far surpassed and gone beyond the political thought or political aspirations of man. This is the calamity which we see enacted before us, that we who seek to be leaders of men are hidebound by out-dated ideas and concepts.
Today we have listened to speeches from hon. Members on both sides of the House that are of very little moment or importance and are not worth the paper on which they will be printed; nor, I have no doubt, will mine be. But we have the great honour and responsibility to chart the course of the ship of State. I can only puff a little wind behind or against it, as I feel inclined, but we have this great responsibility, this great opportunity, that does not come to the lot of many men, to make a great mark in the history of the human race. I do not see it being done by either side of the House.
There is, therefore, a need for a new look, a new belief, a new concept and a new inspiration, if we as a nation are to go forward and uplift our people into a higher realm of responsibility based upon the principle enumerated by the right hon. Member for Taunton—truth. Whether it hurts us or is in our favour, truth should be the predominating issue in this great and wonderful assembly.
What have we seen in this great new Budget that was to rectify the wrongs that have afflicted us for so many years past? One penny off the pound. Will that have any impact? One penny off petrol. Will that have any effect upon the future march of this nation? We hear of the rate relief that is to be applied. It will be applied, though in a most unreasonable manner without any rhyme or reason, unrelated in any shape or form to the services being provided by the local authorities.
I make so bold as to say that in the country of which I am a member, Scotland, we shall not get a penny piece from this rate relief because there is no local authority there with a 20 per cent. increase, due to the fact that our rates system is based upon a method different from that applying in England. Any hon. Member who cares to look at it will find there will be no local authority in Scotland with a 20 per cent. increase, but many will have a higher rate burden to bear than the highest in England.
Yet this is the height of our imagination, seeking to be equitable and fair in our rating system. The subject is not worth the time I am devoting to it because, as you know Mr. Speaker, time is not on my side. You want short, crisp speeches, and I have digressed to some extent from what I was to say.
Another thing about which I am greatly worried, which was mentioned by the hon. Member for Wycombe, is food subsidies and other things of that kind. These will have no fundamental effect upon rectifying the basic wrongs that exist in this country at the present time. I read the speech of the right hon. Gentleman the Minister of Agriculture who came back from Brussels telling us what he had done to stimulate the agricultural industry. He said "Keep your beasts a little longer and we will give you a bonus. Keep them longer still and we will give you a higher bonus." What does that mean? It means farmers will be feeding those beasts money, the most valuable commodity there is; for it is costing a fortune to buy food for them. What they get from the other end they will spread on their fields as manure. It will be the most expensive manure ever spread on any field anywhere in the world. That is not the way to approach this problem. That is the height of madness. Anybody who knows anything about farming knows that one gains nothing by continuing to feed animals. There is an old term, a little old-fashioned, which I will use: if ever there was bullshit it is the stuff we are being fed at the moment.
This is the most amazing method of government that I have ever met. It is time that that was said in the quest for truth. If the proposals made yesterday and the agricultural message that came from Brussels are the height of our imagination and the brain power of those who seek to represent our interests, shame upon us and shame upon them.
I know, Mr. Speaker, that you are looking at me with some degree of concern. I have probably overstayed my welcome. I should have liked to have said a great deal more.
I have a passing acquaintanceship with the business community. If some of my hon. Friends had any knowledge of that, they would have looked at the great problem which confronted many businesses, especially small businesses, when the previous Government floated the pound. I am not being critical about the floating of the pound. There may be some justification for it. Nevertheless, that added to the very high cost of raw materials and commodities coming into this country and it put out of focus the calculations of many companies over the last three years. It brought many to bankruptcy and many to the verge of bankruptcy.
If my right hon. and hon. Friends had wanted to do something useful they would have looked at the problems of many honest, sincere and hard-working people who have put their life savings and their activities into building up businesses but then seen them disappear almost like snow on a dyke on a warm day. Over the last three years we have had little or no regard for the many people who have small businesses. Many of them are now in liquidation, and many businessmen are in such a state that they know not to whom to turn.
Businesses have no control over threshold agreements. They come along every month now. If one sets a price for whatever one is contracted to supply, how will one Pay for that? But again, we have the silliest thing that was ever thought up in Parliament—companies paying tax based upon this year's calculations of profits which it is supposed they will earn next year. This will mean that many people will have to go to bankers and beg to get enough money to keep them going. This method will undermine our basic industries. It is from those small industries that this country obtains a great advantage in many ways. To destroy them is the worst thing that we can possibly do.
We talk about our oil and say that we should exploit it as quickly as possible. But the hon. Member of Wycombe rightly says that there is not an unlimited supply of oil, copper, gold, silver and all the basic materials throughout the world. We should be very careful to conserve them. But what are we doing today? None of us is concerned about the balance of payments deficit that is caused by the importation of oil. We have swept that under the carpet. But if we have no regard for that and do not look at the problem carefully, that alone can undermine the economy of this country.
I appeal to this assembly—to the few of its Members as are present listening—to realise that time is not on our side. The sands of time are running out. We must see the necessity for taking resolute action, irrespective of the immediate consequences. The beef subsidy will help me by about £1,000, but it should not be paid. These are the facts of life. As I have said, it will produce the most expensive manure one could put on the fields. Let us recognise the facts of life and do what is right, and then all other things will fall into their proper places.
What has been wrong with previous Governments is that they have been more concerned to retain their little precious position in this House than with the broad well-being of our nation. The call should go out to all good men and true that now is the time to serve not our party but our country.
We on the Opposition benches have listened with great interest to the hon. Member for West Stirlingshire (Mr. Baxter). I would only express regret that so few of his hon. Friends were present to hear his speech. That is in no way a reflection upon the hon. Gentleman but a reflection upon the lack of interest in the debate on the part of his hon. Friends, or upon their measure of shame at the actions of the Chancellor.
The hon. Gentleman criticised the party slanging match in the House. I agree strongly about that. The electorate is becoming increasingly disillusioned with both major parties because of this tendency we have to criticise what the other party has done, knowing full well that we would have done exactly the same had we been in office in the same circumstances. It is important that we should vigorously debate those things on which we disagree fundamentally, but we ought not to slang each other merely for the sake of it. If we carry on doing this as we have in the past. I suspect that the disillusionment of the electorate with us and with this place will become much deeper and that will place democracy under very severe strains.
I should like to concentrate mainly on the measures announced yesterday in the context of the general economic position of this country. Those measures will be judged mainly on their effect on inflation, though in my view their effect on unemployment, on investment and on growth is also important. I want, therefore, to talk mainly about inflation, though inevitably I must touch on the other subjects.
Most people in Britain recognise the seriousness of our present situation. Inflation is forging ahead at a rate of about 20 per cent. The prospects for the immediate future are very bad if things go on as they are going. A recent OECD report has predicted that Britain will have the highest rate of inflation of the six leading non-Communist countries in the first half of 1975. It is not enough for us to sit back and accept this. Something must be done, and done quickly.
However, before taking any action to deal with our current inflationary problem, it is necessary to understand clearly the nature of that problem. This involves a distinction—I am sorry to have to return to this point—between demand inflation and cost inflation, because they are different and they call for different cures. In post-war Britain, too often has our inflationary problem been wrongly diagnosed. Too often has it been assumed to be a demand-inflationary problem. Indeed, too often has demand inflation been assumed to be the only kind of inflation. Too often have remedies been introduced to cure a demand inflation which have merely aggravated a cost-inflationary situation.
What is the difference between the two kinds of inflation? Demand inflation is where total effective demand in the economy as a whole exceeds supply potential. Prices rise to bring supply into equation with demand. The remedy for a demand inflation is to reduce demand, and this can be done by imposing credit squeezes, increasing taxation, and so on.
Clearly our present inflation cannot be a demand inflation. There are well over half a million people out of work, and unemployment is rising quite steeply at the present moment. There is plenty of spare capacity in British industry. If the three-day working week proved nothing else it proved conclusively that our capital equipment was capable of producing far more than it had been producing, in particular, capital-intensive industries are operating in many cases below break-even point, and so are threatened with bankruptcy. All this means that today there is no demand pressure encouraging investment, which explains in part at least why there is the fall in investment.
Obviously, then, demand at the moment falls short of supply potential and is very sluggish. I believe the Chancellor recognised this and so introduced his modest measures to reflate demand. I welcome these measures, but I will just sound this warning: there is a time lag between the introduction of reflationary measures and their becoming effective, and the Chancellor is too late to stop unemployment rising this year; he is too late to halt a slump in output; and he is too late to stop the fall investment. These things are going to take place and nothing that happened yesterday will change that.
But to return to the analysis of our present inflationary problem—since this is not a demand inflationary problem it must be a cost inflationary problem, and this is where import costs or labour costs rise and so force prices up. It is fairly obvious that when import prices rise the only thing that can happen is that our internal price level rises. But some people would dispute that labour costs can rise except in demand inflationary situations. I agree that at one time—10 years or more age there was a great deal of truth in this, but I think that today, with monopolies in the form of trade unions and professional bodies in the labour market willing to use their power, this argument can no longer be sustained. Indeed, at the present moment cost inflation is taking place in circumstances where, as we have seen, there is no demand inflation.
So I come to the gap in the Chancellor of the Exchequer's statement yesterday. He did nothing at all to deal with our current cost-inflationary problem, which is an incomes cost inflation. In the years up to the summer of 1972 cost inflation in Britain was caused by excessive increases in incomes—wages and salaries. In the period from mid-June 1972 to February 1974 cost inflation was caused mainly, though not exclusively, by a massive rise in import prices. An increase of 108 per cent. in commodity prices for a country that has to import almost all its raw materials and half its foodstuffs is bound to have a serious inflationary effect. During this period from June 1972 to February 1974, as the Economist has shown, income cost inflation in Britain was kept well under control by the statutory prices and incomes policy at that time in being. Since February of this year there has been a decline of about 10 per cent. in commodity prices and we hope that this will continue. But the increase in incomes has again started to become a serious cost-inflationary factor.
It is at this point, oddly enough, that the right hon. Member for Ebbw Vale (Mr. Foot) has chosen to lift the statutory incomes control. He is, as he ought to know from previous experience, releasing flood gates, so that the benefit of the fall in commodity prices, which should continue, will be lost completely in the floods of massive and uncontrolled wage and salary increases.
Indeed, it is this complete absence of measures to replace phase 3 that is the great weakness of the statement which the Chancellor made yesterday, for it inflation is to be controlled in this country it is not enough merely to reduce marginally indirect taxes, however welcome such reductions may be. There must also be the limitation of wage and salary increases by an incomes policy—an incomes policy that if possible, should be voluntary, but, if it is not possible, must be statutory.
Today, for better or worse, trade unions and professional bodies in a free market position will use their monopoly power in a way they were not willing to use it 10 years or so ago. Whatever some people may think, it is just not possible to break that monopoly power either by legislation or by economic measures. The last Labour Government found it impossible to introduce industrial relations legislation. The last Conservative Government found it impossible to implement very moderate industrial relations legislation. With such experience it is hardly conceivable that legislation could control that monopoly power of trade unions or professional bodies. So that is clearly out.
On the economic side, recent Governments have found from experience, as my right hon. Friend the Member for Chipping Barnet (Mr. Maudling) said in his excellent article in The Times last Wednesday,
that the effect of an old-fashioned credit squeeze by whatever modern name it is disguised is not to halt cost inflation, but to halt investment, to halt output, to force cash-hungry companies to give way to wage demands and to create unemployment for many, while those who can exercise industrial muscle still forge ahead".
The only means of dealing with income cost inflation is an incomes policy. The sooner the present Government recognises this the better for everyone.
Of course, some people will say that what happened on 28th February was a rejection of a statutory incomes policy. But in fact almost 18 million people voted for the Conservative and Liberal Parties in that election, and so voted for a statutory incomes policy. Only 11·5 million people voted against such a policy. And, after all, if one looks at the last Government's statutory incomes policy, phases 1 and 2 both worked and phase 3, apart from the miners, worked fairly well too. Of course, phases 1, 2 and 3 were not perfect, but they were a great deal better than nothing, and they were a great deal better than the alternative.
They were certainly better than nothing, and it is precisely because this Government offer nothing—no real incomes policy at all—that their economic policy is doomed. And it is precisely because the Chancellor of the Exchequer yesterday offered no incomes policy that this package is doomed as well.
I have been successfully induced to take up some of the comments of the hon. Member for Leek (Mr. Knox). I do not agree with everything that he said—not by a long way—but in some of his earlier remarks I think there is a lot of truth which is relevant to our situation today, particularly in respect of the three-day working week and the capacity within industry shown to exist at this time. There is spare capacity which is not being used and the question arises, what is it necessary to do in order to get that capacity working on an ongoing basis? We saw that during the period of the three-day working week—in that period of crisis—people were willing to pull together, whereas in the normal context, unfortunately, that is not the situation. The question which everyone, including the Chancellor of the Exchequer and the rest of the Government, must be asking, is, what is it necessary to do in order to get people to pull together to use the spare capacity that exists in the economy? I think that that is a fundamental question.
It is a question that comes to me with particular relevance because, representing a constituency in Wales, I am only too aware of what can happen when, as the hon. Member for Leek said a moment ago, unemployment grows and spirals. It has been said that when England sneezes Wales gets a cold. Unfortunately, in the past this has been true. Not only would we suffer from any increase in unemployment: we would suffer unduly from inflation for two reasons. First, the level of personal incomes is some 10 per cent. to 15 per cent. below the average for the United Kingdom, which means that inflation hits particularly hard. The number of people on fixed incomes in Wales is higher than elsewhere and they are badly hit by inflation, too. In Wales the level of personal wealth—and to some extent personal wealth is for many people the bulwark against inflation—is only 72 per cent. of the average for these islands. These measures, therefore, are particularly relevant for Wales and for any other part of the United Kingdom which suffers from an insufficiently developed economy.
I have an interest not only in Wales but in manufacturing industry, in which I worked for 10 years before becoming an MP. I welcome the fact that at last we are getting away from the agrarian concept of having not more than one Budget a year and of having only one touch on the accelerator or the brake. That is a ludicrous situation. In a modern economy it is necessary to have periodic touches on the accelerator and the brake, in order to ensure that policies meet changing circumstances. Within the limits of effective administration and broad stability of policy it is essential to have more than one look at the Budget in any year.
On the need for broad stability, I should like to impress upon the Government and, for that matter, upon the Opposition, the need for some continuity of economic policy, particularly on the question of development area incentives. In 1970 the Conservative Government acted with undue haste in scrapping the regional incentive scheme of the day, and within two years they found that a similar scheme was needed and introduced it, albeit with different terminology. Such a switch back and forth is confusing for industry, and I hope that in future there will be a long-range strategy as well as the short-term tactics which are often needed to meet changing circumstances.
I welcome the increase in REP and I trust that the Government will stand by their commitment to maintain the premium for a substantial period ahead. A long-term commitment is necessary for industry not only over REP but on many other matters. Industry will be looking generally for a four- or five-year payback period for its investment plans and it needs to know, for the duration of that period, whether it can count on certain incentives which may be available for development areas.
I welcome REP as a form of regional devaluation in terms of competitiveness, and I am glad that it is permitted by the EEC. It is, after all, only a compensation for failings in the industrial infrastructure, certainly as it affects Wales. I was interested to hear a Scottish Member saying that in central Scotland the industrial infrastructure is now right. It is not right in Wales. Wales needs better roads to encourage industrial development. It needs better railways, certainly electrification, and it needs industrial growth centres and all the services which are necessary for modern industry. This means dealing with problems which prevent industry from coming rather than compensating it for the on-cost it incurs when it comes. We therefore need integrated economic planning to overcome the problems.
In the context of seeking such a strategy I press the Government to commit themselves to economic plans for Wales, Scotland and the regions of England. In the early and middle 1960s there was a false dawn, in terms of economic planning. In Wales that dawn was crudely shattered by the publication of "Wales: The Way Ahead" in 1967. That document failed totally to establish the targets it was necessary to set for the Welsh economy, let alone explain how to get the strategy for meeting those targets. It was a non-plan, and it was a damper on the enthusiasm of those who sought progress in terms of economic regional planning. I hope that in their future consideration of economic regional policies the Government will bear in mind the need for such a plan.
It has been estimated that between now and 1976 Wales can absorb as many as 200,000 additional jobs. There is an economic potential which is being wasted in terms of the people who are at present under-utilised. We have the economic potential, and it is a matter of using it. If these jobs can be provided the GDP of Wales could be increased at least to the level of the United Kingdom average. We are now something between 12 per cent. and 15 per cent. lower than the per capita GDP level for the United Kingdom, and if we are to increase personal incomes in Wales we must have economic growth.
May I put a proposition to the Chancellor? Between now and his next Budget, will he give serious consideration to ways of raising the level of personal incomes in Wales? To reach parity with England we need an injection of about £400 million a year into the Welsh economy. Perhaps I may draw the right hon. Gentleman's attention to the words of the Foreign Secretary at the meeting of the Council of Ministers in Luxembourg last month. He said:
A possible principle might be based on the recognition that a member State with below-average GDP per head should be
accorded appropriate treatment in respect of resource transfers under the Community budget.
The same could be valid about the relationship of Wales with the United Kingdom, and resource transfer should take place in order to raise the levels of personal incomes in Wales to the levels pertaining within the United Kingdom.
A start may have been made with REP, but it is only a modest start. We value it probably at about £20 million per year, out of the £400 million we are seeking. This concept should be christened the "GDP equalisation policy." It has the advantage that if the level of economic activity in Wales is increased by the Government's strategy the per capita figure of GDP will automatically increase and the need for an injection of finance into Wales will diminish. This servo-mechanism is built in.
I urge the right hon. Gentleman to consider more imaginative tools of regional development. He might consider a differential corporation tax in favour of profits earned in development areas. This would give a permanent advantage to companies located there, and would not restrict the advantage to the first year, during which they make their investment. There has always been a danger of potential lame ducks coming into the Welsh economy in order to get ready funds. However, in the long term we want those firms which are profitable and which will stay there and grow. This would help to redress the balance.
The right hon. Gentleman could also consider extending the period of payment of corporation tax in development areas. Such incentives might be applied specifically to companies which relocate their head offices in development areas. There is a real danger of securing only factory floor jobs in development areas, with the office jobs and more lucrative posts staying in London. That development could have a serious effect on a local community. I urge that the development agency recently announced for Wales and Scotland in connection with oil development should be established without delay. The Secretary of State for Energy said that it could be established in Scotland without having to wait for a drop of oil to flow. The same could be true in Wales. This agency has sufficient powers to lead in the battle for securing the economic growth necessary for Wales.
We welcome the Chancellor's announcement of rates relief. In Wales we have suffered phenomenal increases in our rates, particularly our water rates, and I hope that Wales will get some relief in that direction.
There are several other aspects of the economy and the Budget as it affects Wales that are particularly pertinent, and we are looking particularly for a strategy to lead us out of the present situation. Not only in the Welsh and other regional contexts, but overall, one of the important things for the Government to do now is to examine their spending levels and consider whether, in modem circumstances, we can justify spending between £2,500 million and £3,000 million a year on defence, or whether we must use the money available in the best possible way to develop our economy. If that is done wisely we can build on the potential in Wales and elsewhere to secure a worthwhile future. Unless we look very hard at the details of ways of doing that, our people will suffer unduly.
I entirely agree with the call of the hon. Member for Caernarvon (Mr. Wigley) for more stability and continuity in our national economic policy. However, when he went on to demand an extra £400 million-worth of public expenditure for Wales I thought he might be falling into the same trap as the Chancellor of the Exchequer fell into, in making something of an electioneering speech. Given the present state of our economic fortunes, we need a little less electioneering and a little more statesmanship. We certainly had statesmanship this afternoon in the very different oratorical styles of my right hon. Friend the Member for Taunton (Mr. du Cann) and the hon. Member for West Stirlingshire (Mr. Baxter).
There is an old saying that the difference between a statesman and a politician is that a statesman is someone who thinks of the next generation, whereas a politician thinks only of the next election. On yesterday's showing there can be no doubt that the Chancellor of the Exchequer firmly puts himself into the category of opportunist politician. The bromides in his speech may well fool some of the people for some of the time, but his proposals came as a great disappointment to those who appreciate the true gravity of Britain's present economic position and who were hoping for some signs of more serious statesmanship from the right hon. Gentleman.
However, perhaps we should be thankful for small mercies. After all, in the short space of 4½ months Denis the Socialist Menace has transformed himself into Denis the genial chemist, dispensing a selection of placebos and cosmetics as instant cures for the very ailments which his own misguided earlier prescriptions created.
Some of the right hon. Gentleman's measures will be welcomed on both sides of the House—a little painkiller to relieve the anguish of ratepayers, a tranquiliser to quieten the unemployed in the regions, and a small stimulant for beleaguered shareholders. But our national economic sickness is far too deep for such irrelevant electoral mini-cures. If we are to tackle the present economic crisis with the urgency it deserves, the first essential is for the British people to be told the grim facts about the revolution of falling standards and expectations we now face. I entirely agree with my right hon. Friend the Member for Taunton that the people must be told the truth—and the truth is that Britain is on the verge of going broke.
Virtually every national economic indicator is pointing to danger. We have a £4,000 million-a-year trade deficit, which is rising steadily despite the arcane arguments about the difference between oil and non-oil deficits. We have 20 per cent. inflation, and it is rising. Our output and productivity are stagnant. Business confidence is in a state of collapse. A growing number of commentators of all shades of political opinion, headed by the apocalyptic Mr. Peter Jay of The Times, believe, as I do, that we are on the brink of an economic catastrophe which can lead only to a major recession, with unemployment figures perhaps being as high as the low millions for the rest of the decade—a situation that could lead to the suspension of parliamentary democracy itself.
It is clear from the Chancellor's speech that he shares none of this pessimism. To hear him this afternoon, one would think that everything in the garden was rosy. Let us hope that the right hon. Gentleman is right—but, so far, the optimism of successive Chancellors of all political parties about the robust good health of the British economy has proved to be a triumph of hope over experience. Surely the time has come to lower our Westminster mask of political make-believe about the good prospects for the economy and to proclaim fearlessly that there are no painless ways of winning the battle against inflation.
It has often been said that the British are at their best when their backs are to the wall. It has been the worst failure of contemporary politicians that we have failed to show the people where the wall is. Let the word go out from now on that the battle against inflation in the 1970s will be almost as unpleasant as, and no less crucial to our national survical than, the Battle of Britain in 1940. The weapons to fight and win the battle are available. They are such measures as a continuing reduction in the growth of the money supply, a determination to balance the budget within the next three years, and an end to threshold agreements being abused just as springboards for larger wage increases, and a swing away from the illusion of reflation towards deflationary policies.
The consequences of such measures will certainly be unpleasant. There will be an inevitable decline in everyone's living standards for two or three years. There will be several company bankruptcies, and a sharp rise in unemployment, although a rise in unemployment of that size will be much less severe and unpleasant than the rise that could come if the situation is allowed to go on as at present.
All these effects, brutal though they may be, will be less disastrous than the situation that hyperinflation or continued inflation will produce. At the end of the day, when some element of stabilisation has been achieved, at least there is a hope of renewed prosperity for all our people.
I have said enough to indicate that I am one of the lonely and unpopular Cassandras who believe that Britain is on an economic "Titanic", and sinking fast. There is still time to slam the watertight doors and keep the ship afloat, but we need an Iron Chancellor at the helm, giving the necessary firm orders for disinflationary policies. Instead, we have been treated to nothing more than an electioneering striptease on the quarterdeck.
Economic realists will know that yesterday's acts of electioneering appeasement, at a time of serious crisis, may cause the present Chancellor to go down in history as the economic Neville Chamberlain of the Labour Party. Even that disgrace will be of no consolation when the waters of hyperinflation go over all our heads, as they certainly will if the present policies continue.
I have no intention of following the hon. Member for Thanet, East (Mr. Aitken) along the path of his apocalyptic metaphors. I want to explore a line of argument that has been unpopular, or at least out of fashion, for some time, and one to which we should devote more attention in the near future.
It is time we concentrated our attention in economic matters on the importance of physical resources and the physical control of resources, rather than being obsessed with the manipulation of money—of interest rates, the flow of money, and so on—which has been so fashionable in the past six or seven years and so disastrous in the management of our economy.
It is not altogether a coincidence that the inflation fever has affected not only this country but many other industrial countries in the past two or three years. One reason was the straightforward physical crisis that hit world agriculture in 1972, when harvests around the world were the worst for many decades. Between 1971–72 and 1972–73 stocks of cereals fell from 49 million tons to 29 million tons, and stocks of rice were almost entirely exhausted in that period.
We had an almost unprecedented situation, in which adverse weather simultaneously affected the harvests in the Soviet Union, China, India, Australia. West Africa and South-East Asia. It was a world-wide blow at agricultural production.
The consequences were that Russia came into the market for cereals on an enormous scale, a world shortage was created, and world cereal prices rocketed in 1972 and went up again in 1973. There was a chain reaction on food prices generally, as cereal prices obviously affected the price of feeding stuffs for animals. That chain reaction seems to have carried through into commodity prices generally. The trigger mechanism was not a monetary factor; it was not any fault in the International Monetary Fund arrangements; it was not any sudden change in monetary policy by an industrial country; it was the physical chaos in agriculture in 1972 resulting from adverse weather conditions, around the globe, of a quite striking and unprecedented nature. Of course, the effect of that pressure was particularly savage on the British economy, as we have to import half our food and nearly all our raw materials.
The point of quoting this aspect of economic matters is that I want to emphasise the importance of physical resources and the necessity to pay attention to trends in world physical resources in managing our economy. We should not suppose that tinkering with monetary mechanisms will necessarily offset the kind of effects that I have mentioned. Obviously no one pretends that the Chancellor can forecast the weather, or do anything about it. In managing our economy we must pay more attention to trends in agriculture. Those trends in the next few years are not at all good in terms of world production balanced against world population. We must pay attention to those trends and to the production of other raw materials which are so important to our economy.
I noted that the Common Market recently had little inhibition in imposing controls when it suited the French farmers to keep out the supply of beef from Common Market countries. That is not an example which I would praise, but it indicates some realism in terms of the control of supply when it happens to suit a particular pressure group.
There are three important components in our internal physical resources. The first component is plant and machinery, the second is the raw material that we need and the third—the most important—is manpower. In this country plant and machinery for industrial investment takes up, to a striking extent, a much lower proportion of our gross domestic product than it takes no in the economies of our major competitors. According to the figures kindly supplied to me by the Library, in 1970–71 and 1972–73 consumer demand ran at about 63 per cent. of our gross domestic product. In France the comparable figure was 59 per cent. In Germany it was 54 per cent. and in Japan, 52 per cent. Industrial investment, on the other hand, took up 15 per cent., of our GDP, whereas it took up 23 per cent. in France, 22 per cent. in Germany, and 26 per cent. in Japan. Those two sets of figures go a long way to explaining why our industrial competitors have done so much better in world markets in recent years than this country, and why it is that our balance of payments has contrasted so disastrously with the balance of payments of Germany, France and, until recently, that of Japan.
In terms of the resources devoted to plant and machinery in manufacturing industry, in 1964, when the Labour Government took power, the sum expended was £863 million. By 1970, it had risen to £1,500 million These figures are based on current prices. Expenditure fell in 1971 to £1,495 million. It fell again in 1972, to £1,362 million and rose slightly in 1973, to £1,600 million. Whereas we had a reasonable time with some fluctuations from 1964 to 1970, there was almost entire stagnation from 1970 to 1973. Expenditure on plant and machinery, as a percentage of our gross national product, was 2·9 per cent. in 1964. By 1970 it rose to 3 S per cent., and it fell to 2·6 per cent. by 1973. That is part of the explanation of our depressing performance in international markets compared with that of our major competitors.
It is of the highest priority that we improve our physical resources in terms of the modernisation of plant and machinery and industrial development. If, as seems the case, that is not regarded as in any way a necessary fact of life by private industry, clearly we must press on, as I believe we should, with the construction of national institutions and national bodies such as the National Enterprise Board. We must do so to ensure that capital is available for investment and that it is directed to those parts of the economy where it is most urgent and most necessary.
In the context of the Chancellor's mini-Budget, I am slightly surprised by his use of the regional employment premium, although I appreciate its value to some parts of the country. I am surprised that it is not being supplemented by the supply of money for advance factories or extra grants for machinery and equipment for those industries which are situated in the less favourable regions. It is a mistake to suppose, because we supply money direct for jobs in the form of the REP, that we are doing better with the REP than by supplying money for the purchase and installation of plant and machinery and the modernisation of industry, which in itself generates jobs and has a considerable spin-off. That is important in giving the British worker the necessary power at his elbow to compete with his colleagues in France, Germany or Japan. I hope that the Chancellor will supplement in October what he had done in July with the REP by making some further effort to stimulate investment in plant and machinery in the regions by additional incentives to industry.
Obviously, we have less control over raw materials than we have over consumption. I have the impression that the commodity price typhoon has blown itself out and that we shall get slightly more comfortable weather, in terms of commodity prices, for a short time ahead unless something goes seriously adrift. But it is clear that oil prices will not go back to what they were in September 1973. They may stabilise at their present level, but they certainly will not fall significantly. Therefore, I am astonished that the Chancellor should have taken action to cut the price of petrol at a time when I would have thought that some discouragement in demand for that commodity was necessary.
It would not be difficult to discourage consumption if road fund taxation was switched to the price of petrol. That would encourage the use of smaller cars and lower consumption. It would not increase the cost of motoring for the ordinary chap with a Mini or a Ford Escort, but it would increase the cost for the man with a 3·5 litre Rover. It would lead to a real saving of petrol consumption and, therefore, to a saving on the balance of payments. I hope that some attempt is made to consider that matter when we come to an October Budget.
I am bound to say that in general terms I find it a rather dubious policy that we should borrow money to pay for raw materials. It does not seem to me to be fundamentally sound, however useful it may be as a tiding over process. It does not seem fundamental to our needs to be borrowing massive sums to buy a raw material which is essential to the whole economy, because we are then relying on confidence in an emergency to maintain our international position. It may have been forced upon us in the short term, with the violent escalation in oil prices, but in the longer term it would seem to be more sensible to curb the fairly substantial consumption in various ways of a commodity which is so appallingly expensive.
I echo the remarks made by the hon. Member for Horncastle (Mr. Tapsell). It is all very well to differentiate the non-oil deficit and the oil deficit in the balance of payments, but the oil deficit is nevertheless real and somewhere along the line of the borrowing we are going to cover it with as a temporary measure will be a charge on our balance of payments, perhaps one which we will find embarrassing and difficult in the future.
The third physical resource of our country, and by far the most important, is our manpower. The regional employment premium may be useful in maintaining employment, particularly in Scotland and the North, but I suspect that in some ways its main effect will be to help the liquidity of certain companies rather than to create new jobs. It may prevent firms from going out of business, but how far it will create new jobs is more debatable.
The great problem at the moment is the shortage of skilled manpower. The British Steel Corporation is desperately short of men in certain areas, particularly Scunthorpe, and there is a serious shortage of skilled manpower in the engineering industries in Sheffield and also in a sector of enormous importance to the country—offshore engineering and the huge programme for structures that we shall require to produce our indigenous oil. There is now a serious shortage of welders and other skilled workers to create the rigs and other machinery we shall want in order to exploit the North Sea.
I do not think that the Government training places we have are anything like enough to make up the deficit in skilled manpower now emerging. Government training places in England in January totalled 11,174; in the Yorkshire and Humberside area, there were 1,746—a ratio of one to every 1,700 employees. Of course, training of all kinds goes on within industrial establishments, universities, colleges of advanced technology, polytechnics and so on, so it is not fair simply to quote the figures of Government training places. But I am fairly certain that the effort we are putting into training is nowhere near commensurate with the need, and it is unfortunate that every time we have some expansion of industrial activity we have serious labor shortages in key areas where engineering and other industrial processes are important.
I would have been somewhat happier had my right hon. Friend, instead of doubling the REP, or as a supplement to doubling it, devoted more resources and effort to manpower training so that over a period of time, since it does not have immediate effect, we could overcome the shortage of skilled manpower which arises as soon as the economy starts to move into gear.
I welcome my right hon. Friend's relief to ratepayers, which is sensible and possibly the only interim cure for an impossible situation in local finance, and I welcome the increase in food subsidies, but I look forward to an October Budget which will do far more for industrial investment, for manpower training, possibly something for family allowances, and will see us on the road towards national solvency and industrial efficiency.
I want to follow the hon. Member for Sheffield, Heeley (Mr. Hooley) on two points—first, his scepticism and some anxiety about the amount of foreign borrowing the Government are undertaking and, secondly, the need for greater economy of fuel.
One point which both sides of the House seemed to enjoy yesterday was the Chancellor of the Exchequer's announcement of the borrowing facility from the Lord of the Peacock Throne himself, the Shah. Indeed, the Chancellor seemed to enjoy the announcement, and to enjoy rebuking my right hon. Friend the Mem- ber for Carlshalton (Mr. Carr) for not talking about the Lord of the Peacock Throne in sufficiently respectful terms. Had the Shah been able to be present yesterday to examine the security against which his loan is being made—the British Government—he would have been somewhat puzzled by the hilarity with which the announcement of the borrowing facility was received in the House of Commons. He might also have been puzzled by the general hilarity and frivolity at a time when this country is facing an acute economic crisis.
I do not think that the Shah would have seen very much evidence from yesterday's goings-on in the Chamber to persuade him to transport from here to Iran some of the parliamentary and democratic institutions we value so highly. Yesterday, we saw democratic politicians at their worst and failing to live up to the situation of crisis confronting their country.
It is dangerous for a politician of one party to accuse those of another of party politics, but surely in times of acute national crisis one is entitled to expect partisanship to be modified to some extent. What we saw yesterday was in reality a blatant piece of electioneering. We saw that minority Governments are not the blessing that some Liberal Members have suggested they might be.
I agree with the Prime Minister on one thing, if on no other—that it would be much boner for this country if we could have a Government with an overall majority, and there is no doubt in my mind that the uncertainty in the economic situation has been made much worse by the uncertainty in our political situation.
Added to that, we have a Prime Minister who appears to display less and less interest in government, and a Chancellor of the Exchequer who seems to be anxious about his own reputation in his party and to put himself in a high place in it so as to fill any vacancy which might occur in its leadership. Add all these elements together and one has an extremely dangerous political situation on top of an extremely dangerous economic situation.
Why was it necessary to have a mini-budget at all? What has happened since March? The Chancellor says that perhaps he underestimated the effect of the three-day working week. He had thought that the effect on the build-up of stocks would have been much greater because the impact of the short-time work had been much greater. But one thing which I think is certain in economics is that an interruption to production by industrial action should be made up. That is self-evident. It is not surprising that production should have been made up as quickly as it was. If that comes as a surprise to hon. Members on the Government side one at least hopes that the Prime Minister's gramophone needle about the three-day week will at last come unstuck.
Many people are sceptical of the type of fine tuning to which the Chancellor seems addicted and to which he is likely to continue to be addicted. He announced this afternoon that within a few months he could come back and if he had not got it quite right he could have another stab at it. Such an absurdity was carried to an extreme when after inadvertently announcing yesterday that the effect of all the measures he was taking was to create 20,000 jobs at the end of next year, he today corrected the figure to 40,000. Does anybody think it possible to fine tune the economy at short intervals as precisely as the Chancellor proposes? If the situation were confused at the time of the last Budget it is still confused and all the economic indicators are still giving conflicting signs. Against rising unemployment figures unfilled vacancies are almost at an all-time record. The Financial Times industrial survey, which the Chancellor is fond of quoting, indicated yesterday that most firms in this country are more concerned about the difficulties of fulfilling their order books than of obtaining them.
It would have been much better had the Chancellor waited longer to see what the economy looked like in the autumn. Perhaps one reason at the back of his mind—he did not say so very directly yesterday, although he did rather more directly today—was the fear of rising unemployment. But it is precisely because Opposition Members are also concerned about unemployment that we regard it as necessary that top priority be given to controlling inflation. The effects of reflation on employment are likely to be temporary and delayed—employment is determined by more fundamental factors—while the effects of reflation on inflation are likely to be quicker and more difficult to reverse and are likely, ultimately to do more damage to employment
It is because of repeated attempts at fine tuning in the past and at reflation if there were the slightest upward trend in unemployment figures that we have had accelerating inflation around a trend of rising unemployment. Inflation increases with every inflationary bound; but in period of restraint we are lucky if inflation even levels off. It is because the Opposition are concerned about employment that we feel that the Chancellor would have done better to concentrate simply on the single goal of fighting inflation. If he had wanted to do something about employment it would have been better for him to do something to help business confidence, to do away with price controls and to drop nationalisation proposals.
Today the Chancellor tended to play down the economic impact of his measures. Perhaps he was trying to be realistic, but there can be no doubt that his measures are immensely damaging psychologically. People used to complain when Mr. Macmillan was Prime Minister that he lowered the tone of politics with bonanza Budgets and his "never-had-it-so-good" attitude, but at least in those days there was something to give away.
The way the Chancellor presented his proposals yesterday was objectionable. I can imagine how differently the present Home Secretary—who I believe was one of the most distinguished Chancellors we have had—would have put forward the same measures, had he still been Chancellor. He would have said that the country was facing difficulties, one of which was thresholds being triggered, and that for this reason it was perhaps necessary to have a cut in indirect taxation and to stem the tide of threshold agreements. We would have been under no illusion. He would have left us with a clear impression of the true facts of our economy today. But we have not had that from the Chancellor, nor did we have it from the statement by the Secretary of State for the Environment when he said that the situation had changed and that the Government were now able to make some provision for the relief of hard-pressed ratepayers.
The Chancellor in his analysis of the economic situation hardly went into some of the hard, uncomfortable facts. It was an extraordinary contrast with the speeches he made in Opposition. He has talked about commodity prices and the difficulties arising from oil prices. In his speech he appeared to be doing precisely that of which he used to accuse my right hon. Friend the Member for Altrincham and Sale (Mr. Barber). He appeared to be waiting and gambling on a fall in commodity prices later in the year. He appeared as a sort of inverted Mr. Micawber waiting for something to turn down. If commodity prices do fall, it will not lead to a double six—a six for inflation and a six for the balance of payments. If production grows by only 1 per cent. or 2 per cent. next year and wages—if the criteria of the social contract are observed, which is quite an assumption—grow by 16–20 per cent. a year, can anyone expect even with a fairly dramatic fall in commodity prices a marked slowing down of inflation?
The Prime Minister was speaking in the right direction in at least one respect when he said the other day that we should do well if we managed to maintain our living standards. If the Prime Minister is prepared to go as far as saying that hon. Members opposite can be sure that that was an underestimate.
Our balance of payments outlook will not prove to be as rosy as the Chancellor has suggested. There has been an improvement of our export performance recently. The non-oil deficit has improved, but we did not hear from the Chancellor about the way in which the oil deficit has worsened considerably. At the time of the Budget we were told that the oil deficit this year would be £2,000 million, but on the basis of recent figures it looks like being £3,000 million. That is why I agree with the hon. Member for Sheffield, Heeley (Mr. Hooley) that we must look at ways of saving fuel.
Borrowing will not be an easy way out. We have mortgaged our North Sea oil many times over. We are getting into the position of becoming a secondary bank for the rest of the world. We are involved in a high-risk strategy. If sterling depreciates it may be difficult to meet our interest and repayment obligations. We may think that we can delay putting our house in order, but we may find suddenly that our credit lines are exhausted and that the rest of the world expects us to bear the same burdens as they are prepared to bear.
The Government's top priority ought to be to control inflation. Everything else should be subordinate to that aim. Every weapon ought to be used in the fight against inflation, in terms of both monetary and incomes policies. There is no wall of China separating these two. But the Government seem to be retreating from almost every anti-inflation device. They are doing away with pay restraint at a time when wage claims are accelerating. They are depending on the social contract—which is not a contract in any realistic sense—and are now adding to the borrowing requirement and moving from the declared objective of having fine control of the money supply.
The Chancellor is like a man on a trapeze. When he does his first somersault we admire his skill. When he does his next somersault without a safety net we draw our breath. Finally, when he does a somersault without either a trapeze or a safety net we are entitled to feel apprehensive.
It is impossible now to exaggerate the seriousness of the threat of inflation. We are on the point of hyper-inflation. We are at the situation where the strains on society have become intolerable, where one group in society will turn against another. We must face the seriousness of that situation. We must face reality before reality faces us. What we need is a policy that takes account of our national interests rather than the National Executive of the Labour Party. We need a strategy rather than short-term gambles and, above all, we need to have the full facts of our economic situation spelt out rather than having a false sense of security created which will be as dangerous as it is deceptive.
One of the prices which Members have to pay for having been in this place for a few years is that when they listen to a debate of this kind they sometimes say to themselves, "I have been here before." I cannot count the number of times I have taken part in or listened to debates of this kind over the past 20-odd years. I have heard forecasts that the end is nigh, that there will be no recovery, that there will be oblivion for the entire nation. Somehow we struggle back, only to get into another crisis. What is perfectly true is that no matter how vicious the ills and sicknesses of our society the British nation refuses to die.
I have no doubt that in 12 months' time anyone reading the report of this debate will say, "Isn't it remarkable that right hon. and hon. Members who took part in the debate could have been so pessimistic?" I do not doubt that the position is fairly serious. I am the last man in the world to try to hide uncomfortable facts from my people. In my election addresses I have never promised my people tax reductions. I have told them that I cannot build the kind of Jarrow or the kind of Britain I want on the basis of tax reductions. They are commonsense people and they have accepted my advice. That is why I have been returned with an increased majority at each election. I have spelled out to them what are the issues and said, "These are the choices."
If the Chancellor had been here today listening to all the things that had been said about him in the short time that I have been listening to the debate he would have been amazed. He has been accused of being an opportunist politician, of blatant electioneering and of introducing a mini-Budget. The hon. Member for Kingston-upon-Thames (Mr. Lamont) has been here for, I think, two Parliaments. In that time how many Budgets did the right hon. Member for Altrincham and Sale (Mr. Barber) introduce when he was Chancellor? He was never satisfied with one Budget a year. Sometimes he was not satisfied with two. If anyone has set an example for my right hon. Friend to follow it is the right hon. Member for Altrincham and Sale. He was always introducing mini-Budgets. Always one cancelled out what the other had attempted to do. It is not for the hon. Gentleman to accuse my right hon. Friend of setting some precedent just because he has introduced two Budgets this Session and says that he may introduce a third in the autumn.
If my right hon. Friend had not introduced this Budget, what would right hon. and hon. Gentlemen have been doing dur- ing the election? There has been nothing more dishonest in British politics than what has happened from March until now with regard to the attitude of Conservative Members towards rates. It was their Acts of Parliament—their policies—which raised rates. As soon as they lost power every one of them tried to transfer the responsibility to this Government. Whether it is the general rate, the water rate or the sewerage rate, Conservative Members know that the increase follows as a result of their legislation. For them to go round the country raising howls as though this Government were responsible for the high level of domestic rates is as politically dishonest as anything I know of.
The same is true when they complain about the inflationary effects of threshold agreements. These agreements come from their legislation. It is true that most of my right hon. and hon. Friends agree with that policy, but it was the Conservative Government who passed that legislation. Conservative Members ought not to complain too bitterly about the effects produced by the legislation. If threshold agreements are inflationary, the responsibility lies with the former Government.
We have had a reference to the monopoly powers of the trade unions and the suggestion that they were bound to cause inflation. Nowhere has inflation been greater than in the price of land. I did not hear a single Conservative Member complaining about the indefensibly high price of land, which has risen more than any other price in the last four years except that of oil.
No hon. Member opposite ever makes any complaint about the extortionate demands of landowners when someone needs to buy a piece of land. The same can be said about property. The inflation on the property market has been astronomical. There have not been many complaints from hon. Members opposite about that. Nor did they do anything about it when they had the power. It is no good saying that the Shell workers are greedy because they demand and ultimately get the sort of wage settlement agreed recently. They can see what the profits of the oil companies have been. The lads at the refineries and elsewhere have made those profits. Unless we are prepared to condemn profits of such magnitude we cannot say that the men who do the productive work should stand aside and do nothing. If they feel that their work is creating untold wealth for those who own the company and that those profits will not be used for social benefits, in the free-for-all they will, in the words of Frank Cousins, be part of the "free".
It is unfair that all the problems which beset Britain should be placed upon the shoulders of the trade unions. No matter how much Opposition Members may decry the social contract, what my right hon. Friend has done this week has made that contract into a reality. My right hon. Friend is trying to create a climate in which the trade unions will act responsibly and play their part in getting Britain back on its feet. With the help of the trade unions we can accomplish that. Without their help we cannot. So Opposition Members should attack the trade unions a little less and encourage them to act more responsibly than do some of their friends in financial and land circles. If we can get that response from the trade unions it will be beneficial to the nation in general.
I do not want Opposition Members to think that if the unemployment figures reach 1 million or 2 million, as has been suggested in some speeches, the country will remain peaceable. In pre-war years it may have been possible to keep silent men who walked the streets seeking the job that did not exist. If anyone believes that in the 1970s we can go back to the climate of the 1930s, he has another think coming to him. Nothing is more likely to give rise to a rebellion than 1 million or 2 million men, able and willing to work, being denied the right to work. I hope that no one believes, whatever our problems, that the solution can be found in putting men out of work.
Some of our problems arise from the actions of the previous Government. I forecast that if we went into the EEC we should pay a tremendous price, and we are paying a tremendous price. I forecast that the EEC countries would send to us more exports than we should be able to send to them. That, too, has happened. The imbalance in our trade with the EEC is growing monthly, and will continue to grow. That is why I have never believed that our entry into the EEC was a good bargain.
Similarly, I believed that we should not give to an outside authority powers which should lie with the House. The House did not decide that the price of British steel should be increased last November; that was a decision of the European Iron and Steel Community, which told the British Steel Corporation to put up the price of its steel because it was below the Community price and we therefore had an unfair competitive advantage. That is the kind of advantage we need if we are to increase our exports. Similarly, it was not by a decision of the House of Commons that we put levies on imported food. Those decisions, which forced up the price of British food, were made outside the House.
From beginning to end the bargain we struck has been a bad one. If we are faced with such terrible problems, will someone explain to me why the British people should continue to carry a heavier arms burden than any other country in the EEC? What more have we to defend than the other countries of the EEC? Why should we ruin ourselves by spending on defence a far greater percentage of our gross national product than does any other member of the EEC? If cuts have to be made in public expenditure they should be made in defence. Real savings could be made there.
To what purpose should we devote those savings? I should start by restoring the cuts in public expenditure made by the previous Chancellor last December. We cannot get out of our difficulties by cutting the housing programme, the hospital programme or the school building programme. That is not the way to overcome our difficulties. That policy results in many people becoming even more impoverished.
In my constituency and in most northern and Scottish constituencies there is a legacy of old industrialism that will take decades to overcome. That is why I am glad that the Chancellor has doubled the regional employment premium. Unemployment hits first and hardest at development areas—
The right hon. Gentleman is keen on cutting defence spending, but does he not realise that to do that would put a large number of people out of work—not merely soldiers but people who work on defence contracts in factories?
We should not put them out of work; we should do precisely what we did between 1945 and 1949, and transfer them to peaceful production. There are many men engaged on armament production who could be found work in the shipyards and on oil rigs. There would be jobs for many trades, including welders, boiler makers, electricians and platers, in the manufacturing export side of British industry. Those men could be using their skill to increase our export potential. They are denied that because they are undertaking work which the hon. Member for Thanet, East (Mr. Aitken) thinks is the only job they can do. They are trained and skilled men. We are short of those men in British industry, and there would be little problem in finding them jobs in which their skill could be better utilised. This would not only save Government expenditure; it would enable those workers to make a greater contribution in increasing our much-needed export trade.
I end as I began. I have trodden this road many times. I have no doubt that, with good luck, I shall be here when the next crisis arises, but until then I still believe that we shall survive and pull through. I believe that the measures announced by my right hon. Friend yesterday will be welcomed by the public and by the electorate when the General Election takes place in the next few weeks.
The right hon. Member for Jarrow (Mr. Fernyhough) said that he has listened to debates on previous disasters which were to come but which never arrived. To some extent I share his view that we have cried "Wolf" on many occasions. However, what arises out of the present economic debate is that we have allowed the debate to go on over the years and, although we have satisfied ourselves that the current crisis had been put right, the underlying situation has been getting progressively worse. That is the situation we are now facing. Even if we get over the present situation, as I am sure we shall sooner or later, we must tackle some of the underlying problems. They will not go away. Guesses vary as to how long it will be before we come to a real "crunch" situation, but not many will give us much over 10 years before this happens.
I have listened to many economic discussions both in the House and outside it. When listening to experts who draw their examples from other countries with their varying political systems, the impression I have gained over the years is that many of these matters are not as translatable to this country as some people assume. Experts quote examples on money supply in South-East Asia, others talk about public expenditure in Sweden, yet others talk of indexation from Brazil. We also hear much comment about the position of the United Kingdom in the league table of growth set by various European countries. The hon. Member for Sheffield, Heeley (Mr. Hooley) mentioned investment in Japan, Germany and France. However, these examples are not immediately translatable to the United Kingdom and one assumes that there are psychological factors involved in these various countries. It is no good our assuming that we can apply a specific policy without seeing how it will affect the different mentality of people in the United Kingdom.
There are three mainstreams in our political discussions which are of great importance. One was exemplified by the right hon. Member for Jarrow—namely, our memories of the past. Representing the constituency of Jarrow, the right hon. Gentleman has good reason to think about the importance of unemployment at the back of our minds. I would not attempt to diminish the importance of that factor, but it is clear that the circumstances which led to the evolution of the policy which we have all been pursuing since the war have substantially changed. Even the nature of unemployment has changed. It is possible for us to consider ways which—if it became necessary for us to adopt a policy leading to higher unemployment, as it may—would make it more acceptable. It is possible to imagine a situation in which we were prepared to consider wholly different levels of unemployment benefits if unemployment reached beyond a certain level. That is a feasible policy which could be varied from region to region.
I do not know whether we have reached that situation, but we carry on our debates as though that situation will never arise. Whether we approach the question by deliberate actions by deflating the economy, or whether we continue our inflation year after year until companies go bankrupt, we shall face a situation in which levels of unemployment are a real element in our economy and we should devote time and thought to what that concept means.
There is another underlying feature of the situation to be considered—namely, that not all unemployment is the same. The hon. Member for Sheffield, Heeley mentioned lost opportunities in the use of scarce skills. This affects the situation where each time the economy is able to grow we are brought to a stop because we fall short in certain skills. This is another matter to which we should give careful attention.
A further feature of the situation is the assumption that the electorate is impatient, that it is not prepared ever to wait. But I do not believe that it is necessary for the cynics always to be right. When we are discussing education, the National Health Service or whatever it may be, hon. Members make grand proposals, all of which must lead to expenditure. We are dab hands at this process when we are anxious that new duties should be laid on local authorities. We pass the matter over to local authorities and say, "Get on with it". We are then surprised when we discover that it requires additional manpower or increased rates. We can look at the question the other way and consider that not merely public expenditure but private expenditure is the right way to spend that money.
I have examined some recent research into the way in which young people think on these matters. It is often argued that the younger generation is happy to accept higher public expenditure because young people have a strong social conscience and that there are many things which they wish to put right. I am sure that is true, but it is also true that they enjoy, as we do, a desire to build up their family situation. It may mean a new outlook on the family, but there is a desire to make a personal expression in terms of housing and the wider enjoyment of many things that their fathers did not have—a desire which involves private expenditure.
One element in the psychology which we must consider at some stage is the extent to which we can continue to pile on public expenditure and take away the right of people to express themselves in the expenditure of their own money. We must first consider how to put the lid on the proportion of national income that we are prepared to spend on public expenditure. Secondly, we must examine the amount of taxation we take from people before it becomes a serious disincentive. An article in The Economist recently made the point that we have now reached the stage in the present rate of inflation where the same people who draw social security benefits nevertheless simultaneously pay tax. We are reaching a situation in which more and more people are being put into the tax bracket, with serious consequences.
I think that we can persuade people to postpone their desires provided that we take a clear decision. We should be prepared to put limits on public expenditure both by Government and by local authorities.
The third point in our psychology is one for which both parties have been responsible. We have been willing to speak rousing stuff about pulling in our belts, straightening up our backs and facing the current crisis. The words sound tough, but frequently we shy away from the action consequences which should flow. We are still up against this. I am sure most hon. Members will have read Peter Jay's article in The Times. I do not agree with it all, but it contains one statement which is very true. It is that we have shown a deteriorating trend because of the desire to postpone decisions, and we are now reaching a situation, where we are again willing to postpone decisions. This time we are looking now at the Holy Grail of North Sea oil which we believe will bail us out. This evasion continues even in the situation of the mini-Budget.
I am not seeking to make life unnecessarily unpleasant. I am not one of those who believe in the self-flagellation school of economics. But although there is a danger of world deflation and a slump which could arise if we started panicking as a result of the balance of payments situation arising from oil, nevertheless we are in a hopeless position if we try to keep the world's business going on our own. We are the last country to undertake reflationary action when our serious competitors have found it necessary to keep their own economies dampened down. We shall be in grave danger if we try to go it alone and suddenly find ourselves out on a limb and regretting it.
I recognise that in these circumstances almost anything that one can say is of infinitesimal value because the problems are so great. But the most important message which could go out from this House as a result of today's debate is to ask people to try to give up the third of our tendencies, which is our infinite capacity for self-deception. If I may give one example of what I mean, we have in the mini-Budget nothing which will eradicate the likelihood of a rise in unemployment. We have the REP, which will assist, but it will not eradicate what seems likely to happen in the coming year. Yet we shall make great play with it.
Meanwhile, we are continuing with a price code which contains in it much great dangers of unemployment where companies are being squeezed very seriously and are in great difficulty. We have not yet had any proposed amendments to the price code. We are asked to say that this Budget and the subsidies of the Secretary of State for Prices and Consumer Protection will do this or that to the odd 1 per cent. or 2 per cent. of the RPI, but to the housewife they are a drop in the ocean. If we simultaneously running price codes which entail real risks for the future, we are in danger of applying a short-term cosmetic to a long-term difficulty.
If any message leaves this debate, I hope it is that people will try to speak more clearly. I hope that, as a result of these two days, we can forget the possibility of an election in October and consider what we shall do after the election, bearing in mind the decisions that we are likely to have to take. Nothing that I have heard from the Chancellor of the Exchequer leads me to believe that we are likely to get much of that.
I have no hesitation in declaring this Budget to have been a lost opportunity. It is clear to those of us who live in areas which have not been blessed with high employment and prosperity in years gone by that there are dangerous trends developing. There is an incipient recession. Already in our constituencies we begin to notice that firms are laying off workers, or considering doing so. There are certain industries in which this is becoming apparent.
One of the first indicators, usually, is the building industry. On Friday, I discovered from a firm in my constituency that it faced a slump in the modernisation of houses as a result of the December cuts in public expenditure which it thought would be followed by a change of policy by the present Government. Although those cuts were of a three-monthly duration and were supposed to be reconsidered after the election, and although this Government have had time for the reconsideration, unfortunately nothing much seems to have been done. As a result, the firm of which I speak has been forced to cut its work force. It is a small joinery firm. At its peak it employed 160 workers. Now it is down to 102. Within a month or two it is feared that it may be down to 20 as a result of the cut in the market.
After hearing that news, I made inquiries from a quantity surveyor in my constituency, who told me that the situation was endemic on the east coast of Scotland. Then I made inquiries of a large electrical contracting firm in Glasgow, only to find the same situation. Unfortunately, there are suggestions that when people come back from their holidays at the end of the trade weeks they will receive dismissal notices.
In the textile trade, employment is slowing down. In the holiday trade and tourist industry generally, again we find the threat of recession. Again it appears that they may have to cut employment. Therefore, when the Chancellor of the Exchequer speaks of the need to take some steps, he sadly under-estimates the effects of the coming recession. I hope that it never reaches us. I trust that what the right hon. Gentleman has done will prevent it, but I doubt it very much.
As the right hon. Member for Jarrow (Mr. Fernyhough) said, it is the areas which in recent years have been economically weakened which are the first to suffer whenever a recession begins to hit home. Again and again this has happened in Scotland, and we have found people put out of work.
There is growing anger about the way in which we in Scotland feel that we are left at the end of the queue. I know that this is not a problem which relates solely to Scotland. Other parts of the United Kingdom are suffering as well. I looked at the July unemployment figures. They showed a dramatic increase in my area. Scotland has 4·2 per cent. unemployment. That compares with 1·4 per cent. in the south of England, 1·8 per cent. in East Anglia and 2·1 per cent. in the West Midlands. These are the better figures. Northern England has its problems. It has an unemployment level of 4·6 per cent. I am sure that if and when a recession comes, the north of England, Wales and Scotland will be the first areas to feel the pinch.
It is not as though there is any slack in the economy to take up in our areas. One of my colleagues put a Question to the Prime Minister today referring to the situation in Norway. The Norway News Digest of 26th June revealed that
In May the number of unemployed persons in Norway fell by 3,400 to 6,400. An Employment Directorate spokesman says that the labour market is now tighter than ever before. The number of unemployed represents 0·4 per cent. of the work force.
Yet the July figure for Scotland was 4·2 per cent. So there is very little slack to take up. Once a recession takes place it will hit us very severely.
May I direct the hon. Gentleman's attention, if he has not read it, to the leading article in the Glasgow Herald, which points out that, despite the figures that he has mentioned, at the same time employers are finding shortages of the kind of labour that they require? Will he deal with that aspect?
I am aware of that point. I am glad that the hon. Gentleman has brought it forth. We cannot take too simplistic a picture.
There are dangerous underlying trends in the economy, which can be looked at in two ways. The first is the general economic position whereby the Scottish, the Welsh and the Northern English economies have, generally speaking, been less active than those in other parts of the United Kingdom. The second is the failure of successive Governments to become actively involved with retraining. With a shortage of skills and a large flow of unemployed it takes time to retrain people and to bring forward the numbers available for redeployment and re-employment. Therefore, we must look at the position from these two viewpoints.
I wish to concentrate on the general economic situation. Looking at the current situation in Scotland, there are fears about what might happen in the autumn. I hope that the Chancellor's efforts will meet with some success, but I doubt it.
I was disturbed by the tittering which greeted the offer of the loan by the Iranian Government. When there is talk of the recycling of general finance from the Arab countries into the Western European countries, that kind of reception for credit of 1,200 million dollars may be ill-received by those who are making the credit available. When news comes of money being made available from sources which may seem unusual, I think that hon. Members and others outside this House should be grateful that somebody has had the confidence to make the loan.
I should like to turn to what I hope the Chancellor may do, perhaps not now but in his autumn Budget, if this Government are then operating—because we do not know when the General Election will be called.
The first mistake in macro-economic planning within the United Kingdom is the assumption that there is a single United Kingdom economy. In fact, there are several economies, some of which operate to a degree of over-utilisation and can overheat and others which are under-utilised and where there is underemployment and under-production.
I hope that the Government's economic policy can. on the one hand, be directed to restrain development in areas which are overheated and yet, on the other, have a flexible approach and go towards encouraging areas which require development.
If I may make one plea to the Government, it is that, although they are committed to certain proposals in the mini-Budget, they will still consider relaxing borrowing consent for capital development by local authorities and others in areas like Scotland—for example, in the modernisation of old houses and improvements in the infrastructure—and ensure that some Government incentive is given to the Scottish economy.
I believe that the Government should consider releasing bank deposits—money held by the Bank of England from Scottish banks to prevent over-lending—so that this money may in turn be recycled into the Scottish economy. I do not see why that should not happen within Scotland, because we have our separate banking system. The Government, through the Treasury, will be able to impose the necessary controls and make sure, by devious sleights, that the money released in Scotland does not find its way back into the money centre in Scotland.
Another idea suggested earlier was that there should be a differential corporation tax. Again, that would seem to involve the benefit of flexibility. If the situation improved in a given area the differentials could be changed.
I am disappointed that the Government have not announced what money they propose to put into the kitty, so to speak, of the Scottish Development Agency. I could make partisan points about the amount of oil revenues that will be taken away from Scotland prior to Scotland's getting self-government, but I shall not do so now. Will the Minister tell us how much he proposes to put into the Scottish Development Agency? That might be of some assistance to industry in Scotland and might give a degree of confidence that would prevent Scotland's going into a recession this autumn or later.
The overall problems of the United Kingdom are very grave, Any hon. Member who minimises them is doing himself and others in the United Kingdom a grave disservice. Only yesterday, I received from a Minister a league table comprising 16 OECD countries in terms of income per head in pounds sterling at current exchange rates. The information goes only as far as 1971, so it is not complete, but it shows that in 1955, for instance, the United Kingdom was number six on the list, surpassed only by the United States, Canada, Sweden, Finland and Belgium.
In 1960, there was a relative improvement, with the United Kingdom up to number four, surpassed only by the USA, Sweden and Canada, but in 1965, the United Kingdom was down to number seven; in 1970 it was down to number eleven, and it was still in eleventh place in 1971. I do not know what has happened in the last three years, but there is no indication from the management of the economy or from the present crisis that the British competiitve position has improved.
Therefore, whatever happens, the Government—be it this one or their successor—have to do some tough rethinking about the structure of the British economy. This is something that we can only commend to the House. In view of the poor rate of progress over the last few years and the minimal effect which the mini-Budget will have on the Scottish economy, I am more and more convinced that only by self-government will Scotland ever be able to develop an economic policy which will give conditions of expansion over a period.
Over the last 20 years, we have suffered from stop-go policies with Britain's overall economic activity being determined by the Midlands and the southeast of England. When one looks at a country like Norway, which is akin to Scotland in size and many other ways, and sees the progress that it has made, with unemployment standing at 0·4 per cent, when ours is 4 per cent., one wonders how long Scotland can afford to wait for self-government.
I agree with much of what the hon. Member for Dundee, East (Mr. Wilson) said about the problems of regional development. I am glad that he gave a sympathetic glance towards the Northern region, part of which I represent. However, when Gateshead United recently applied to join the Scottish League, it was firmly rebuffed, which I took greatly amiss. I do not, of course, agree with the hon. Gentleman about self-government. It would be one of the tragedies of our time if the United Kingdom were to split up, whether it was a split away of Northern Ireland or of Scotland, Wales or the North of England. We should be all the worse for that.
The central point of this debate was rightly emphasisted by the Shadow Chancellor, the right hon. Member for Carshalton (Mr. Carr), in a speech which I followed with great interest. That is, should we or should we not have had a stimulus of the economy at this time? Those who have argued against it have done so on two grounds. The short-term, low key view is that such a stimulus will only add to inflation, either directly or indirectly through the sterling exchange rate.
Then there is a more apocalyptic view which some hon. Members, including the hon. Member for Oswestry (Mr. Biffen), take, that all this fine tuning and demand management by successive Governments is irrelevant, that the problems are much greater and that we must ultimately accept a more Draconian solution. This is where the monetarists come into their own.
On the short-term question, those who argue against what the Chancellor has done have to acknowledge, first, that a 'cut in VAT—one of my right hon. Friend's principal measures—will immediately reduce prices to some extent. Some of it may go in profits, but some will certainly be passed on in reduced prices. That is directly anti-inflationary. Second, some thresholds—we do not know how many: possibly only one, possibly two—will not be triggered and that, too is directly anti-inflationary. Thirdly, there might well be some effect on the wage negotiation process this autumn as a result of my right hon. Friend's measures. Those are two certain effects, and one possible effect, which are anti-inflationary. Against this it is argued that economic activity will rise and that that must offset the direct anti-inflationary measures.
I believe it would be hard to prove that economic activity as such will rise to such a level as to overcome the direct anti-inflationary consequences of my right hon Friend's mini-Budget. It is more likely not to be true when we have to acknowledge, as we must. that we have at present a situation in which some of out resources are under-used. The hon. Member for Kingston-upon-Thames (Mr. Lamont), amongst others, mentioned The Financial Times industrial survey which came out on the day of the package. It was pointed out that some companies are having difficulty in fulfilling orders and are short of labour. That is true, but it will be seen that those companies are all at the capital equipment end of the industry, which is naturally under strain at the moment following the reflation of the right hon. Member for Altrincham and Sale (Mr. Barber) and the three-day week. At the consumer end of industry there is a shortage of orders and slack in the economy, which shows that we are at a classic stage where we need a fillip to demand, whereby unused resources can be adequately employed without inflationary effects.
My right hon. Friend has also directed measures towards the regions by improving the regional allowance which has been mentioned often, possibly ad nauseam, from this side of the House during the debate. We feel that these are the right kind of measures which will take up resources which certainly are under-utilised at the moment. On both these counts it is hard to argue that one will add a serious measure of demand inflation on top of any cost inflation resulting from wage increases. That is a hard case to argue, and I have not heard a convincing case from the Opposition on it.
With regard to the effect on sterling and the possible consequences for the terms of trade, any package at this time will have some repercussions on sterling. We cannot now know what those will be. We are all gazing at a crystal ball. But the Chancellor did what he could in presentational terms, in his emphasis on the anti-inflationary nature of the measures and also in the shape of the loan from Iran, to put the emphasis in such a way as to mnimise any likely effect on sterling. I believe that, by and large, he will achieve that minimising effect. He has also probably limited the total package in some respects to take account of the likely effect on sterling—and that is an aspect of the measures which concerns me.
With hindsight, his March Budget was too deflationary. But we cannot exactly put back in July what we did not put in last March. Time has elapsed. It was clear even before March that the emerging problem was that of recession. The traditional problem of the balance of payments and even the problem of inflation seemed then to be already improving in some respect. The recent figures we have had—those from OECD only today—bear this out. It is forecast that there will be a significant improvement in the balance of payments next year. Even for price inflation, the figures show, thankfully, a significant improvement, down to a rate of 12 per cent., which is not very low but is considerably lower than we are experiencing at present. Only in respect of employment do they show a significant worsening.
That was before my right hon. Friend's measures of yesterday, and it is before any further measures he may take in the autumn. That forecast is, therefore, to an extent already dated. But it shows that the emerging problem was one of recession.
In all these things we are in the danger, in economics, of fighting the battles of yesterday or today but not the battles of the future. Given the time lag of economic cause and effect, one has to anticipate as best one can the likely problems of the future and to concentrate on those. The problems which loom so large today are largely problems which one can do very little about because it is already too late.
In a way, this underlines the mistaken approach which so many hon. Members of the Opposition seem to be adopting, from what I have heard today. The constant theme throughout their speeches is that inflation is so important and terrible that we must subjugate every other aim of economic policy to doing something about it. Yet we already see from the economic indicators that while that problem is scarcely receding, other problems are emerging more fully into view, such as the problem of world recession. Therefore, to some extent they are tackling the problems of yesterday.
This sort of mistake, which we have made so often, of concentrating on what seems worst today, when it is the emerging unseen problems which we should be looking at, is one reason why the previous Government were so erratic in then management of the economy and why they were so unbalanced in their approach to the economy and so unsteady in their conduct of affairs. That was the pre-eminent feeling which came from their management, with too many U-turns and too hazy an idea of what the money supply was like. All these things added up to an extraordinary exaggeration of the economic cycles. That is something which we must try to avoid. My right hon. Friend the Chancellor has conducted his affairs so far with some more attention to steadiness. Steadiness is good in itself and good for the economic community as a whole.
Finally, I come to the question of the more deep-rooted problem, about which we have heard a great deal from the Opposition benches. What the monetarists seem to be saying is that inflation is so bad that we must concentrate on it at all costs. In their view the only way to do this is successively to reduce the money supply until it rises at no greater rate than the national increase in productivity, subject to a certain limited and restricted amount for inflation. In their view, this will then lead to employers either being unable to pay wage increases—or paying them and going bankrupt—or laying off workers and, therefore, the stark choice between wage inflation and unemployment will be firmly and clearly presented to the nation.
This seems to be, as they put it, not merely an economic point but a point about democracy and the rule of law. They are saying, "We observe the trade unions and their modern power and we must set against this the only remaining weapon of the Government, which is the money supply, and we shall watch the two combat each other and the nation will see the consequences." That seems to me to be an untenable policy for any Government. One cannot simply say, "We shall watch people pull down the house and when they have pulled it down we shall say 'We told you so'." It almost has overtones of the debate about whether to withdraw the troops from Northern Ireland. This is ultimately an irresponsible and untenable position for a Government. If a Government tried to go ahead with that sort of policy, the natives would revolt. I think we should find that the people became too disenchanted before we had any chance to have any of the sort of effects which were hoped for.
I think also, if one is saying that Britain has deep-seated problems—and it would be difficult to deny that on the economic record—one must accept that these do not relate simply to inflation. They relate to the whole complex of economic and political problems. Lack of growth has been the most outstanding characteristic of the British economy since the war. We have grown more slowly than most other nations in Europe. Only two or three years ago we talked about a growth plan, but now it is solely inflation and combating inflation, and every other economic question is subordinated to that.
Also, there is the question of Britain's place in the world. We have not got it clear—and this is partly the result of the debate on the Common Market—whether we are a European nation or not, whether we are an Atlantic nation or not. I think that what we have got to face is that, however it has come about, part of the problem is that we in Britain have not got an agreed philosophy. What a businessman might believe is right for the country would not be acceptable to a militant shop steward. Equally, what a militant shop steward believed was right he could never convince a business man made sense. It is certainly true to some extent of other countries, but it is less true of West Germany, for example, and it is less true perhaps of America. The divide has become so wide in Britain that we have almost reinforced the traditional "two nations".
I think the temptation for hon. Gentlemen opposite, therefore, is to say, let us unite the moderates and isolate the Left Wing, the militants, and exercise them in some way. Then we can get back to some sort of West German type pattern of economic growth. Certainly that is one way of running an economy and a country and it can be said that it has been successful in other countries. I would not agree because I believe there is an unacceptable degree of inequality about it, as well as other problems. But maybe those countries have some things which are better than the things we have, and one must accept that it is a way of governing a country.
But I would pose the question whether in fact we have gone too far in this country; whether the Left, the militants—whatever you like to call them—those who do not believe in a moderate mixed economy have not got too great a hold on power, so that the moderates cannot be united, because there would be too much opposition to their point of view. I wonder, therefore, whether we have to come to a far more creative, purposive approach than the rather negative clash of these two thoughts and ideologies. I think we have to come to a point at which some party or individual or group has to make a massive leap forward, akin perhaps to the leap into the dark which Disraeli made when he enfranchised a whole new sector of the electorate without any knowledge of the way they would vote, or which was made when the Corn Laws were repealed, to take an earlier example. We may have to try this. I may be wrong. We may be able to muddle through, may be able to avoid this apocalyptic future which the doomsters have pointed to in this Chamber this afternoon and which has been repeated in the Press outside. I hope we can avoid these desperate choices. But the more we go on the more I doubt whether some really fundamental change of this kind can ultimately be avoided.
In my fill-in rôle I cannot say very much, but I take great pleasure in taking part in a debate in which the right hon. Member for Jarrow (Mr. Fernyhough) has spoken, for I believe that he exemplifies the primary consideration which has ruled the British economy since 1944. In representing Jarrow he represents the commitment to full, and sometimes over-full employment. I dare say that the younger Members of this House, of which I believe the last speaker and I are fair examples, can show ourselves to have very conflicting views about the important considerations which should control the economy.
At present there is no agreed philosophy, and it is wrong to go on in this situation. Notwithstanding the easy, optimistic way in which the right hon. Member for Jarrow spoke, there is doom ahead. It is wrong to suggest that the situation is not serious. There is a 20 per cent. rate of inflation, and if that continues over the next four years the value of money will be halved. If we take into account the social and economic effects of inflation we must conclude that our whole way of life—the whole cohesion of our society—is under attack. It is wrong to pretend that there is the prospect of some trade-off, some choice between inflation and unemployment. As we approach the Weimar rates of hyperinflation we do not have the choice of some inflation; we have the reality that this hyper-inflation will itself cause massive unemployment.
I am concerned not merely with bare economic matters. In the last four months we have seen the erosion of the British character. A society which was compassionate, kindly, considerate and decent has become angrier and angrier, and more and more ill-tempered. Our society, which obeyed the law and understood the concept of the rule of law, has become more and more fretful. That tendency has shown itself over the rates issue. Decent, ordinary, kindly people who, above all else, wished to obey the law and understood the concept of the rule of the law, have said that because of the rate of inflation they will not pay, that they will disobey the law. That is the beginning of the severe social distress which occurs with a 20 per cent. rate of inflation.
There is also lingering envy and malice in our society. We see it when Labour Members, in a muddled and wholly wrong way, blame property speculators for inflation. We see it when Conservative Members, in a muddled way, blame trade unionists for the inflation. We see on every side that inflation is smashing all that everyone of us believes to be dear in our society.
The message we must therefore send out tonight is a simple one. There has to be, in the future, an attempt to secure an agreed philosophy, and over the next two or three years that philosophy must be to contain inflation. We all know that this is not a technical economic problem, but a problem of political will. It could be done if we accepted that it must be done. It is not good enough to say that the economists are supplying us with a variety of suggestions. That is because economists start from a variety of assumptions. If we said to the economists, "Control inflation; all other objectives of the management of the economy are to be subordinated to that one vital aim," they could do it. The reason for the conflicting advice is that they start from differing assumptions.
The message we must send out tonight is that for once the doom men are right, and the nation must concentrate its mind upon the continuing 20 per cent. inflation. If it does not, it is not just the British economy that is at risk; it is the whole British character.
The debate has been conducted in a variety of contrasting styles. We had a distinguished speech by my right hon. Friend the Member for Taunton (Mr. du Cann). We had what I imagined may be the swan song of the hon. Member for West Stir] ingshire (Mr. Baxter), whose attack on his own Front Bench can only be described as earthy. I shall await with interest seeing, when HANSARD is eventually printed, whether the expression "expletive deleted" has entered the British political vocabulary. I have rarely heard an attack on a Member's own Front Bench made with such feeling. The House listened to the hon. Gentleman with great interest.
We also heard a calm and closely argued speech by my hon. Friend the Member for Manchester, Withington (Mr. Silvester), and a similar speech by my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen). Almost without exception, speaker after speaker has expressed deep concern at the inflationary trend, and many have expressed concern at its implications for employment.
In June, the latest month for which figures are available, the retail price index was 16½ per cent. higher than it was a year earlier. Inflation over the first three months of Labour Government has been at an annual rate of over 20 per cent.—the highest rate of increase ever experienced in this country.
It is against this terrifying background that we must judge the Chancellor's statement yesterday, and his March Budget. We must consider the two together. For example, it was absurd for the Chancellor to say on television last night that he had cut value added tax, and that his proposals yesterday were expected to reduce the yield on value added tax in 1974–75 by about £140 million, whereas his Budget raised the expected yield in 1974–75 by £205 million. The fact is that, taking the Budget and yesterday's statement together, we find that the yield on VAT is expected to be higher in the current year than it would have been if we had had neither the Budget nor the Chancellor's so-called mini-Budget yesterday.
As a result of what we are having from the Chancellor, we seem to be going up, not down, a roller coaster. The effect of successive fiscal measures is that prices are sometimes going up rather faster and sometimes rather slower, but they are always going up. This is an extraordinary situation in which to find a reversal of policy in the very short period between the Budget and the mini-Budget. After all, we finished considering the Finance Bill at only about 2.30 this morning.
I should like to give just one other example. We are told that the effect of yesterday's mini-Budget will be to reduce the price of petrol by 1p a gallon, whereas the Budget put up the price by 5p a gallon. In his speech we had remarkably little explanation from the Chancellor why it should be right to put the price up by 5p in March and put it down again by 1p in July.
We rather concentrate on the non-oil deficit trend. The Paymaster-General might like to explain why there is this up and down effect in oil and petrol prices. We should be concerned about the trend in the oil deficit as well as the non-oil deficit. What is happening to the trend of oil consumption in this country?
My first point concerns the extraordinarily erratic way in which the Chancellor has been conducting the country's economic affairs since he came to office.
My second point is by way of quotation from the Chancellor's speech yesterday, in which he said:
The first and main objective of the pro. posals I shall now describe is to attack inflation at its source.
He went on to make reference to the TUC guidelines, to which I shall refer later. It is important to consider the social contract and the TUC guidelines against the underlying economic situation, which the Chancellor described in his Budget Statement and which is reflected in the Red Book and the estimates made by the National Institute of Economic and Social Research of what is likely to happen, this year, to real incomes.
Of course, as the Chancellor will know, the indications that he has given are that there is little scope for any increase in real earnings. It is against that background that we must consider the TUC's proposals and the side of the social compact which is concerned with the overall national interest. It is necessary to ask exactly what rate of increase in money incomes the Chancellor feels is justified. At the moment we have what amounts to an incomes policy, but we have no quantification of either what the norm or the limit should be for wage increases. We have no yardstick by which to judge the performance of the so-called social contract.
The Chancellor has said that the feeling is that money incomes should go up only in line with the cost of living, although in a revealing passage this afternoon he said that it would be much better if there were a 12-month lag between an increase in the cost of living and an increase in wages rather than a situation in which there are monthly increases. That was an interesting and revealing statement.
I understand that. The right hon. Gentleman's comments on threshold agreements are interesting, but we have not had a clear statement from him. We did not get such a statement in answer to an intervention this afternoon as to whether he believes threshold agreements are a good thing and whether he is in favour of them or whether he believes that they are not a good thing and that he is against them.
The reality of the situation is that in present circumstances we are getting many wage claims and settlements far in excess of the increase in the cost of living. We hear of settlements of 22 per cent., 27 per cent. and higher. This is a matter of grave concern because, as the right hon. Gentleman has pointed out, the effect of such wage increases must be to increase prices later.
Against the background which I brought out earlier, if certain powerful groups get increases far in excess of the increase in the cost of living, in terms of real incomes, that can only mean that other groups must suffer a cut in their standards of living. Previously, with the rapid rate of economic growth, such increases have meant that other people's incomes have not risen quite as fast as have those in powerful groups. In present circumstances the result will be a cut.
It is true that over the years there has been a constant battle for labour to seek to increase its share of the gross national product. At present the scope for redistribution is very low. Despite the right hon. Gentleman's pre-Budget statements, it is clear that the scope for soaking the rich, as he so elegantly put it, and redistributing any significant amount to the population in general, is very slight. We saw that clearly in his previous Budget, in which the impact of the taxes which he imposed fell on a wide range of incomes.
Of course the people who suffer most in such circumstances are those on fixed incomes, and they are the least protected. That is why the Opposition were right, on the Finance Bill, to carry our amendment restoring the investment income surcharge limit to the £2,000 which my right hon. Friend the Member for Altrincham and Sale (Mr. Barber) had originally suggested.
The other point which needs to be taken into account in considering redistribution is the effect that inflation and the Chancellor's tax system is imposing on middle management. Some weeks ago, the Economist had a remarkable article showing how someone now earning £10,000 a year would, at the present rate of inflation and at the present tax rates, need to be earning £40,000 by 1978 in order to maintain his real standard of living. Of course he would not get it. It is not just people already at £10,000 but a number of people coming up into higher money income brackets who find that the effects of progressive taxation hit harder and harder. We are in real danger of creating a crisis in management.
There is another factor which reflects the general trend of wage claims. My right hon. Friend the Member for Taunton (Mr. du Cann) stressed that the British worker, in comparison with workers overseas, is under-capitalised. If we get an increase in money wages of the kind I have described, this will inevitably hit savings and investment in plant and machinery and the future rate of economic growth. There is grave cause for concern about the overall position with regard to wage inflation.
It is worth quantifying the effects of the Chancellor's new proposals. Yesterday, he said:
The measures I have announced today will eliminate all but 0.14 per cent."—
a fantastically precise estimate for one who does not believe in making fore-casts—
of the increase in the cost of living arising from the March measures, an increase which was wholly due to the increase in nationalised industry prices.
The House was surprised by that statement. We know that a number of the price increases caused by the April Budget were due not simply to increases in nationalised industry prices but to the increase in VAT. The right hon. Gentleman's statement was simply untrue, and I hope that he will feel able to apologise for it.
At all events, it is clear that an increase in the cost of living was caused by the Chancellor in April by increases in taxation and other measures. Now we have something of an offsetting arrangement. But simply switching back and forth between April and now does not cancel out the effect, because the threshold has been triggered, and once one pulls the trigger the bolt has gone.
The reality is that, overall, if anything the net effect of the two sets of proposals together has been to raise the cost of living rather than reduce it. But, of course, last night on television the Chancellor put forward a reassuring and happy scenario. His measures, including the ones in April, were going to have the effect of offsetting the inflationary trend; they would avoid a further triggering of the threshold; better commodity prices were around the corner—the right hon. Gentleman seemed to imply that he would take some credit for that expectation and its fulfilment—and a little later North Sea oil would be flowing and all would be well.
I was reminded of the magazine thriller. The writer of one episode left the hero tied to a railway line with an express approaching and every conceivable obstacle to his rescue in the way. The man who began the next episode got over the difficulty by saying, "With one splendid leap our hero extricated himself from his predicament." That is like the Chancellor's performance on television last night, and reflection on the figures shows how optimistic his scenario is and how his measures do virtually nothing to improve the situation. In anything but the very short term they may well make the position substantially worse than what it now is.
On the basis of the Chancellor's own calculations, and taking an optimistic view of the extent to which reductions in indirect taxation are reflected in a reduction in prices, it is claimed that the eventual effect of the Chancellor's proposals, allowing for the effects of thresholds and so forth will be to reduce the retail price index by about 2½ per cent. But in the last four months the index has gone up by 0·9 per cent. in March, 3·4 per cent. in April, 1·4 per cent. in May and 1 per cent. in June. The average is between 1·6 per cent. and 1·7 per cent. per month—or let us be fair to the Chancellor and call it 1·5 per cent. Even on that basis it must be the case that the effect of the Chancellor's measures will be cancelled out in a short time, perhaps in two months or in only six weeks. Therefore, to put forward the kind of optimistic scenario which he presented on television last night is to a considerable extent to cloud the real problems facing the country and to cloud the fact that for reasons which I shall show in a moment his proposals are irrelevant to the country's fundamental problems.
Against a background in which the harriers against wage inflation have been steadily reduced by the Government and in which the Secretary of State for Employment seems positively to be encouraging wage increases, we must take account of the effect of the Chancellor's measures on the level of demand. I wish to spend a moment or two dealing with what the amendments would cost which we carried as a Conservative Opposition on the Finance Bill, with the support of other parties. It is becoming boring to hear the Chancellor going on and on about a figure of £500 million, which has no foundation. Four amendments were carried, most of them—
I am sure that the hon. Gentleman will agree that I have always quantified this as the cost of the amend- ments put down. I hope that the hon. Gentleman, even if he is prepared to deduct the cost which would have arisen from an amendment on which in the end he wisely decided not to vote, will at least include the cost of the amendments on which he voted but failed to convince the House.
With respect to the Chancellor, he cannot hope to get away with that. I have been speaking rather longer than he has on Finance Bills, or at least from the Front Bench, and I know that nobody adds up the total cost of all the amendments put down in order to establish a point or to get an answer from the Government. I trust that the Chancellor will not try to wriggle out of the main point.
We had four amendments carried. One related to charity pools and this, on the Chancellor's own admission, represented a cost of £1 million. Another related to relief for small businesses from corporation tax, which involved a cost of £15 million. Another dealt with the restoration of the investment income surcharge which, according to the Chancellor. would cost nothing this year but £40 million next year. The remaining amendment dealt with value added tax related to leasing and it is clear from what the Financial Secretary said, and if the case involved in this matter is fought in the courts, that the cost this year will be nothing. The sum total involved in those amendments for this year is £16 million. It is important to get this clearly on the record.
The Chancellor bumbled on about benefits for speculators. As my right hon. Friend the Member for Carshalton (Mr. Carr) pointed out very clearly this afternoon, we were most careful to establish that speculators would not benefit at all. The Chancellor goes on about pools. I must point out that it is charity pools with which the amendment was concerned. It cost £1 million. It is grossly deceptive to bandy around the word "pools" in some pejorative sense without putting in front of it the word "charity".
Is the hon. Gentleman aware that his figure of £16 million could have been substantially reduced if the Government had accepted our amendment on mortgage relief, because it has now been confirmed in answer to a Question that the sum involved would be £15 million? We would have saved the Government £15 million so that the total cost of our amendments this year would have been £1 million.
That is an interesting point which the House ought to consider.
There is another point I wish to raise. I had occasion to say this to the right hon. Gentleman when he was in Opposition and I am rather surprised that the Treasury has not given him better guidance on the matter since. His debating technique in this House is simple. It is to make one statement after another which is not true. If he is interrupted he stands up and disputes it—
I will finish this point. If the right hon. Gentleman is interrupted he disputes it, and if he is pressed he eventually concedes that the point is not as true as he suggested—then he does exactly the same thing again. He does this time and again because he knows that the House will not tolerate innumerable interruptions. Sooner or later he wears down the opposition and gets away with it. He extends this technique. If someone else is on his feet he does the same thing again and again, making an assertion which breaks up someone's speech completely. I am prepared to take the risk so I will give way.
The hon. Gentleman is making a very serious and I think un-parliamentary allegation. He has said that I have been making statements that are not true. I challenge him to quote one remark I made about the effect of the amendments moved by the Opposition which was not true.
On a point of order, Mr. Deputy Speaker. The hon. Gentleman has just accused me of making a statement that was not true. He has totally failed to substantiate that statement. I should be grateful if he would now quote any statement that I have made on the Government's behalf during the Report stage of the Finance Bill which is not true. If he cannot, I seek your assistance in requiring him to withdraw his allegation.
I give the right hon. Gentleman the example I gave a moment or two ago. He must not get so worked up about it. I quoted the argument about whether one of the amendments benefited land speculators. It is clear from what the Chief Secretary said, it is on the record of the Committee HANSARD, that the amendment which was carried did not have the effect he suggests. The right hon. Gentleman's technique is to make this kind of intervention and to break up a speech. I invited his intervention and I am happy to have knocked it down.
No. On the contrary, I have substantiated my point 100 per cent. The right hon. Gentleman asked for one example. I have given him one and I will not weary the House with more.
I come now to this question of the pattern and level of demand as affected by the Chancellor's measures. He said that under the previous Government there had been profligate irresponsibility relating to increases in demand. In reality the situation last autumn, before the three-day week and the oil crisis, was such that the rate of increase in demand was coming down from an increase of 5 per cent. a year, which was intended to mop up unemployment, to 3½ per cent. It was not profligate irresponsibility to achieve that objective.
The level of demand was going up roughly in line with productive potential. More particularly, the increase in consumption had come down from 6½ per cent. to 3½ per cent. Investment was gradually improving and exports were going up. This is a quite different situation from that which the Chancellor is promoting with his measures. The Chancellor is increasing consumer demand, whereas the Conservatives laid emphasis on investment and exports.
The right hon. Gentleman asked me to give another example of his misleading the House. In the Budget debate this year we discussed the question of investment intentions related to the CBI survey. The Chancellor gave a totally false impression of what that survey showed. He saw it a few minutes ahead of everyone else. When we looked at the survey we found that it was not nearly as optimistic as the Chancellor led the House to believe.
In the April Budget, and in the Chancellor's proposals now, there is clearly an attack on profitability in British industry. There are massive increases in ACT and corporation tax. There is a basic difenece in attitude between the two sides of the House, and it is necessary to trace why that is so. The Chancellor should have heard the speech made by his hon. Friend the Member for West Stirling-shire (Mr. Baxter) on the subject of small businesses. The Chancellor clobbers various parts of industry and his right hon. Friend the Member for Bristol, South-East (Mr. Benn) says that industries are not profitable. One only has to think back to his policy on Beagle aircraft at the time of the previous Labour Government to realise what a bad judge of these matters is the right hon. Gentleman. Instead of encouraging industry, instead of relieving the burden of taxation which he imposed on companies in his April Budget, the Chancellor has gone for an increase in consumer demand.
I turn, finally, to the balance of payments. We welcome the fact that the non-oil deficit is falling, but we always believed that it would fall, and we said so time and again. We thought it right to sustain growth and to borrow to cover the deficit in the meantime. We said that the J-curve effect would eventually come through. Come through it has, and we welcome it. But will the measures which the Chancellor proposed yesterday improve that situation?
By increasing consumer demand it is likely that the Chancellor will suck in more imports, particularly of consumer goods. By increasing consumer demand it is likely that he will reduce the incentive to export. One of his many changes in policy between the April Budget and now is that, instead of saying that we must have reasonable investment to meet the export demand, he is putting more emphasis on domestic demand, which is dangerous for our balance of payments position.
The right hon. Gentleman is right to stress the danger of a world slump. Anything that we can do by way of inter- national co-operation to avert that danger we should and must do, and the right hon. Gentleman will have our support in that. But, as my hon. Friend the Member for Manchester, Withington said, there are limits to the extent to which we can go it alone. We must proceed by international co-operation. There are grave dangers if we tend to reflate when our competitors are not doing so.
In his television broadcast last night the Chancellor said that too many people were talking down Britain. The Opposition are not talking down Britain. We are asking the Chancellor to appreciate that we are in a deeply serious situation. We need to encourage industry and, above all, to restore confidence.
I do not think even the Chancellor of the Exchequer, looking at the Press this morning and business reaction in many sections of industry, can believe that the measures which he proposes will succeed in restoring confidence. For that reason my colleagues and I deeply regret the measures the Chancellor has taken. We believe that they amount to a lost opportunity.
The debate in many ways has been revealing. We have had from the Opposition Front Bench, though less from the Conservative back benches, the claim that when we took over in March we had an economy running in perfect balance. The hon. Member for Worthing (Mr. Higgins) made a somewhat desperate attempt, with a few figures selected out of the air, to substantiate that claim. Instead, we faced a grave situation.
The hon. Gentleman said that the present situation was deeply serious. I do not deny that. But it did not become deeply serious on 4th March or at any time subsequently. The situation which we took over when we became the Government was serious. I am sure the Conservatives will not deny that. The claims made by the hon. Gentleman were not substantiated by his Conservative colleagues on the back benches. On those benches there was a deeper realisation of the real position we faced.
I should like to recapitulate the situation we found when we took over. We faced the largest balance of payments deficit in history. Our country had been brought to the brink of collapse by the greatest piece of generalship since the charge of the Light Brigade. The public sector borrowing requirement stood at record levels. We have recently had the splendid sight of a former Treasury Minister in the Conservative Government telling up how valuable it is to have a balanced Budget.
The right hon. Member for Carshalton (Mr. Carr) said this afternoon that my right hon. Friend was like a man attempting to cure the wasting disease of TB with a bottle of tonic. The right hon. Member for Altrincham and Sale (Mr. Barber) had something better than a bottle of tonic. He had a £4,400 million public sector borrowing requirement to act as the tonic on the economy. The money supply bounded ahead, despite assurances from the then Treasury bench and from the former Prime Minister. This was an assurance which has recently been reflected in an appendix to a letter by the monetarist economists. It was that money supply was to be brought under control and that it was a great objective of the then Government.
We also saw under the Conservatives a race of inflation—a rate which did not begin on 4th March 1974. The hon. Member for Worthing sought to question what my right hon. Friend the Chancellor of the Exchequer said earlier this afternoon about the effect of nationalised industry price increases. That was the substantial fact which resulted in the total overall effect of the Budget being to produce a price increase. Without the nationalised industry price increases, there would have been a slight positive effect on the retail prive index—namely, a slight reduction. But it was the nationalised industry price increases—increases which the right hon. Member for Altrincham and Sale confessed were required—which put the figure up by 2 per cent. and produced the increase to which the hon. Member for Worthing referred. There is no doubt about those figures. They have been published.
I find that an extraordinary argument. What the Chancellor said yesterday was that the increase in the cost of living arising from the March measures was an increase wholly due to the increase in nationalised industry prices. A number of things can go to make up an increase and one can say, "We shall count that one and not the other". It depends which one is put on top of the pile. But it is nonsense to suppose that VAT had no effect on the rise in prices in April.
My right hon. Friend in March in introducing his Budget had to take into account, along with the price increases resulting from VAT, price reductions resulting from food subsidies and the rent freeze. But the positive effect of that was cancelled out because we had the duty—a duty shirked by the Conservative Government—of putting up the prices in the nationalised industries to reduce their deficit—namely, to reduce the subsidy we otherwise would have had to pay on their products to a figure of £500 million. This was the record of the previous administration. This was the situation that we inherited. It was mitigated only by the December measures—the last minute attempt to wrench round the bearing of the country's economic policy by means of public expenditure cuts and the supplementary scheme.
There has been considerable discussion today about fine tuning. The hon. Member for Kingston-upon-Thames (Mr. Lamont) was one who made this point, and the hon. Member for Caernarvon (Mr. Wigley) advanced the opposite argument. There has been an expression of scepticism about fine tuning. May I put to the hon. Member for Kingston-upon-Thames a recent classical restatement of the conventional wisdom about fine tuning which came from the Leader of the Opposition on 26th March after my right hon. Friend's Budget statement? The right hon. Gentleman said:
Perhaps it is time every right hon. and hon. Members stopped pulling the leg of successive Chancellors if, at different times of the year, they propose to take action to alter the course of the economy … we may accept the difficulty of keeping the economy working with a reasonable momentum and accept that, particularly in the uncertain state of the world today, Chancellors will have to adjust from time to time and that it is right that they should do SO."—[OFFICIAL REPORT, 26th March 1974; Vol. 871, c. 333.]
What better blessing could my right hon. Friend have than those words for producing this slight adjustment to the course that he chose last March?
The Leader of the Opposition made a speech yesterday in which he instructed the people to beware of politicians bringing gifts. I approved of that message. I repeat it: beware of politicians bearing gifts. But the right hon. Gentleman instructed my right hon. Friend the Chancellor of the Exchequer to come bearing gifts. if necessary to keep the economy working "with a reasonable momentum". That is what the right hon. Gentleman said, and that is what my right hon. Friend has considered it necessary to do on this occasion.
The economic justification for this package and for the slight adjustment that it involves to the March Budget judgment is, first, the unusual uncertainty of the position last March at the time of the Budget statement: for example, the amount of deflation working through the economy and the exact effect of the three-day week. Secondly, there is the fact that my right hon. Friend inherited an economic situation arising from a policy which was the product of two contradictory forces—the vast reflation launched by the right hon. Member for Altrincham and Sale at the end of 1971 when he was fearful of unemployment reaching totally unacceptable levels, and then, in the opposite direction, the large public expenditure cuts last December.
Today, the right hon. Member for Carshalton gave us a lecture on the need for firm judgment and constant direction. The hon. Member for Worthing has just accused my right hon. Friend of taking an erratic course. These are all no doubt wise guidance for Chancellors of the Exchequer. But they come a little oddly from the Opposition.
In the circumstances of uncertainty arising largely from the three-day week and from these conflicting courses selected at intervals by the right hon. Member for Altrincham and Sale, it was right for my right hon. Friend last March to have a neutral Budget and to warn that probably he would need to amend his course during the year. I noticed that even Mr. Wynne Godley, with his preference for fixed reference points, sees the need for some adjustment now. In fact the adjustment is not a major one.
Much of the debate has been taken up with the problem of inflation. Obviously this is a serious problem. It is perhaps the greatest problem now, but there is no need to rank it among our problems. Great emphasis has been laid on it and it is certainly a grave problem.
The right hon. Member for Taunton (Mr. du Cann), in an impressive speech, laid emphasis on the problem of inflation. As my successor as Chairman of the Public Accounts Committee, I wish him well. I confirm what he said about the value of the Public Accounts Committee in ensuring value for money—and, incidentally, value for North Sea Oil. The right hon. Gentleman said that inflation was a serious problem, but he was less strong on remedies than on analysis of the problem. He emphasised the need to tell the truth. Of course we must tell the truth. I wish that the problem were so simple that that alone was enough But we have one fortunate fact in the situation which the House should not underrate. The TUC has told the truth. It has said that there is no room for a general increase in the standard of living this year. That is a most valuable statement of the truth.
I would make two points about our present problem of inflation. First, this package should not provoke demand inflation. That point was excellently made by my hon. Friend the Member for Gateshead, West (Mr. Horam). It will not put the economy under any strain.
Secondly, to deal with inflation we require both power and influence. We are exerting influence through the social compact. The Government are fully delivering their part and have delivered more in this package with the increase in the regional employment premium and the direct action that we have taken on prices. Direct action on prices is particularly valuable because it prevents some triggering of the threshold. On some occasions we can be a little uncertain about the effect that direct action on prices will have on an inflationary situation. There is an automatic consequence here. It prevents some triggering of the threshold.
The other factor that the Government must have and conserve is their power: for example, through price control—as the House knows, the price code is being reviewed—and through their control over the money supply which we believe will not be greatly affected by the increase in the public sector borrowing requirement and to which my right hon. Friend has emphasised he attaches great importance. But I agree with my hon. Friend the Member for Gateshead, West that the money supply cannot be used as a bludgeon against one section of the population.
Fortunately, we see signs of a fall in commodity prices. These should help to fight inflation. To say that is not to gamble on a fall in commodity prices. It will or it will not happen. At the moment there are signs that it will happen and, fortunately, we may be able to take advantage of it.
My hon. Friend the Member for Sheffield, Heeley (Mr. Hooley) called for an increase in trained manpower. That is an important point which is also relevant to the fight against inflation.
Reference has been made to the balance of payments situation and how my right hon. Friend's package of measures will affect the outlook. My right hon. Friend explained that this is a prime objective and that nothing that he has done should change the fact that there should be a substantial fall in the deficit next year. Indeed, one of my hon. Friends quoted the OECD forecast today.
The hon. Member for Worthing told us that the package will reduce the incentive to export. Any such reduction, given the short-term demand effect of the package, must be small. I emphasise that there is nothing in the package which should prevent a substantial fall in the balance of payments deficit next year.
It is essential to deal with that deficit. One strong reason is that we must limit borrowing as far as possible. A great deal of borrowing will be inevitable if we are not suddenly and rapidly to bring the economy to a halt in a desperate attempt to correct the imbalance. But it is essential to limit it because borrowing can expose us too much to movements of foreign confidence, it is increasingly costly and the total cost of large borrowing can of course be a drag on any improvement in the situation that we can achieve over the years.
On the other hand, it is not true, as the hon. Member for Kingston-upon-Thames said, that we have mortgaged the North Sea several times over. Nor must we do so. We must bring the balance of payments under control, but not too rapidly, having regard to the consequences of what we do for employment. In any case, we have to bear in mind, for some years ahead at any rate, that the problem of bringing the balance of payments into better balance will be exacerbated by the limited import capacity of at least some of the oil producers.
We should like to see an adjustment in the restrictive policies of some developed countries, so that we can all achieve better equilibrium in our balance of payments. But if that does not happen, we must do what we can to safeguard our own position.
One question of major importance is how industry will respond to the pressures and opportunities of this time. We have heard the usual grudging comments of the CBI on my right hon. Friend's package. We listened to their advice carefully and we know that even when we take it we must discount their sour words in advance. They wanted only a mild reflation, so I am not sure what more they could have expected my right hon. Friend to do. But to be fair, whatever the sour words of the CBI, industry has been responding in exports, although less in terms of investment. Now industry should have more liquidity as a result of the regional employment premium increase and other reasons. The lower commodity prices should also help liquidity.
There has been a modification of dividend restraint and some additional domestic demand. But my right hon. Friend has not received much recognition for the relaxation in dividend restraint that he announced yesterday. There is an interesting quotation in this morning's Guardian from a Mr. Colin Mitchell, a stockbroker, of Sheppards and Chase:
Many companies were happy with the 5 per cent. limitation because it helped to improve their liquidity position.
It is always better to be able to blame the Government; that is a typical response from too much of industry.
However, my right hon. Friend's power to increase domestic demand was limited. While such an increase might have been some encouragement to industry, it would have been the wrong form of encouragement. His power was limited by the fact of overseas confidence and the need to give priority to exports. Also, the unit cost argument which industry has so often advanced as a justification for relaxation of control over domestic demand in order to promote exports has not always been a good one.
I would simply say to the spokesmen of industry that we are in a difficult period, with a high balance of payments deficit and a high rate of inflation, but that not everything depends on the Government. Industry has a rôle too. It has been said that there is nothing in the package to encourage investment. It is not just for Governments to encourage investment; decisions about the planning of investment are for industry to make. Exports are 30 per cent. of manufactured production, and swiftly rising exports should encourage investment. Industry is ill-advised to turn too frequently, too avidly and too expectantly to any Government. The best answer to criticism of industrial management in the United Kingdom would be success, not a catalogue of excuses for failure.
The right hon. Member for Carshalton said, for about the tenth time, that my right hon. Friend the Secretary of State for Industry has sapped industry's confidence. I would say to him that the whole economic position of this country would have been transformed had industry during the Tory years invested with confidence. There has also been criticism during this debate that the element of expansion of demand included in my right hon. Friend's package could lead to long-term unemployment, or unemployment in the long term, whatever it did to the cost of living in the sort term. This, apparently, would happen through the mechanism of inflation.
First, the emphasis is not on consumption. For example, because we wish to avoid such an emphasis we have not relaxed hire-purchase controls. The regional employment premium will give a stimulus to employment in the regions and help with company liquidity. I was grateful to my hon. Friend the Member for Lanarkshire, North (Mr. Smith) for pointing out the emphasis we have placed on regional policy in our concern for the regions. Secondly, a large part of the problem at the moment is not excessive consumption but that there has been a large adverse movement in the terms of trade, the result of increases in the price of oil and other commodities. We cannot balance our payments all at once because the oil producers cannot buy enough. Therefore, there is danger of unemployment coming through from the deflationary effects of oil price increases.
Thirdly, in so far as there is truth in the comment that increases in domestic demand can lead in the long term to greater unemployment than can the effect of deflation, it is better directed at the Front Bench opposite. Ill-advised demand management measures bringing about consumption-led booms have again and again in the past distracted industry from the need to improve the balance of payments and thus to give full employment a more secure place.
The hon. Member for Worthing attempted to defend the profligacy of his right hon. Friend the Member for Altrincham and Sale. He attempted to defend the public sector borrowing requirement in 1973 and its demand effect at a time when the competitive exchange rate should have been pulling resources far faster into exports. When the right hon. Gentleman suggests that my right hon. Friend's minor increase in domestic demand will divert from exports, I would throw back at him the question: what else could have been achieved by his right hon. Friend's policies? To me that policy of his right hon. Friend seemed a kind of macro-economic lame-duckery parallel to the Industry Act of 1972 which was intended to deal with the problems of particular firms. This was dealing with the problem nationally. He took the whole economy as his farmyard. At the time, it semed to me, it was evidently the judgment of the right hon. Member for Altrincham and Sale that all this great deficit was necessary, even with a competitive exchange rate, to bring unemployment down even to 500,000.
My own view is that full employment is not secure when it is dependent upon Budgetary extravagance of this kind. This is where we have arrived through nearly 20 years of Tory demand management. It is not Labour Chancellors of the Exchequer who typically have unleashed consumption-led booms. Labour Chancellors have endeavoured, often at considerable political cost, to force the movement of resources into the balance of payments. What in the end does produce the secure long-term basis for full employment is a better balance in our affairs internationally.
We are emerging from a period of Tory rule. We have seen a period of complete irresponsibility in running cur economic affairs. Nothing which can be said by hon. Members of the Opposition can alter the inheritance which we had to accept in March 1974. We have had a deliberate or misguided generation of inflation and an import boom. Again, I cannot know how hon. Members of the Opposition can disguise the effect on our balance of payments of the import boom generated by the policies which were followed under their Government. We have had the printing of money turned into an instrument of policy. For these people to turn on my right hon. Friend for the slight adjustment in his March Budget judgment shows how far their appetite for power has outrun their capacity for it.
The hon. Member for Worthing put to us the question of what we think about threshold agreements and whether we are in favour of them. I shall give him a simple answer. When the Conservative Government introduced the threshold agreements last October they expected a fall in commodity prices, and they assumed that there was a possibility in the period following of quite a substantial increase in the standard of living of the people of this country. Otherwise, there was no justification for the first 6 per cent. stage in the system under which they introduced the threshold agreement. To introduce it in those circumstances could only fuel inflation. That is what they have done and that is what we have inherited. To have as a result of free collective bargaining a threshold system in circumstances in which commodity prices were under control would be an entirely different situation. We do not rule that out in that situation. It is no use just throwing the question at us and pretending that in all circumstances threshold agreements are wise.
The introduction of threshold agreements by the Tory Government was just one more example of the way in which their policies have fuelled inflation and have created the situation with which we now have to deal and with which we shall deal—with which we had to deal previously, and dealt with successfully previously. We shall lead this country into a better situation in its affairs, with full employment far more securely based than anything which has been achieved by right hon. and hon. Members of the Opposition.