Public Expenditure

Part of Orders of the Bay – in the House of Commons at 12:00 am on 10th March 1976.

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Photo of Mr Edward Heath Mr Edward Heath , Bexley Sidcup 12:00 am, 10th March 1976

I am glad of the opportunity to make an intervention that I hope will deal with major points in this debate. I do not particularly want to go into many of the details, which have been mentioned, quite rightly, by the Chief Secretary and which appear in the White Paper. I want in particular to look towards the future, because I hope that we may together be able to learn lessons from the past.

I am sorry that the Chancellor of the Exchequer has left the Chamber. I can quite understand that, having listened to a large part of the debate already, he has found it necessary to go. However, if he reads my speech I hope that he will not take it amiss if I say that I did not find yesterday's performance one of his better speeches in the House. I feel that the paste and scissors approach, whether it is from the Socialist manifesto to his hon. Friends below the Gangway or from the Bow Group to my hon. Friends on the Opposition side of the House, is not a satisfactory way of dealing with the enormous problems that face us with Government expenditure, particularly at such a crucial time in the economy as we find ourselves.

The Chancellor's dilemma is very plain. He is boxed in on every side. We all are. The decision which must be made is in which way he and the Government will decide to break out of this box. This is the crucial decision. I want to say something about the means of doing that later. However, I think it is important that we should all recognise the dilemma.

The Chancellor is boxed in on the side of public expenditure. He is boxed in on the side of unemployment. He is boxed in on the side of investment and of trade, and he is boxed in now on the rate of sterling, which has fallen below $2. I find it entirely incomprehensible that the Chancellor of the Exchequer could make a speech yesterday, in a two-day economic debate, without even mentioning the £ sterling and what has happened during this past week. I should have thought, as I have said, that it is one of the crucial aspects of the dilemma which faces him, yet we heard not a word about it. There was no explanation of his policy or the Bank's policy in regard to sterling, the lowering of interest rate, at the same time as the sterling rate was falling and deposits were flowing out.

We heard nothing of the Chancellor's views about the Nigerian decision apparently to diversify their holdings in sterling. I should have thought that this was an important matter, because surely it must be an indication to us all of exactly how vulnerable we still are the whole time with sterling deposits and the rate of sterling. It might also be taken as an indication to all of us in the House as well as to the country of the impact of British policy in Southern Africa on our financial and commercial interests and, above all, on sterling.

Perhaps I may add another sentence here. There are many in this House who have vivid recollections of 1956 and what happened then as regards sterling and the financial position of this country. Surely the problems that now face us in Southern Africa are just as difficult to handle there. Our interests in Black Africa are greater commercially and from the investment point of view than those in White Africa, and what we have seen as the impact of one sterling deposit from one country ought to be borne in mind in the whole of our policy towards Southern Africa. However, the Chancellor found it fit not to mention any of these matters or to give his view on the likely outlook for sterling.

The second dilemma—the problem of expenditure which we are debating today—is, of course, linked with the Budget and the next phase of incomes policy. In my view at present, it is impossible to disentangle these aspects of financial and economic policy. Therefore we are actually at a disadvantage when speaking in this debate, although perhaps we can emphasise some of the items which should be taken into account in the Budget and in the negotiations on the next incomes policy.

In his speech, the Chancellor put all the emphasis for his dilemma on the world recession. I do not accept his analysis. It is very dangerous that he should have done so because it leads all too easily to the conclusion—which perhaps some of the hon. Gentlemen below the gangway may share—that when we pull out of the world recession our problems will disappear and, within the time-scale of this White Paper. I also find that unacceptable.

The Chancellor did not mention the 35 per cent. wage increases in a year and the 26 per cent. rate of inflation which followed from that. It is this aspect, much more than the world recession, which has led to his problems of Government expenditure.

After all, in one respect the world recession has helped him. From February 1972 until February 1974 the Financial Times index of commodity prices rose by 182 per cent. That was the real problem which faced the Conservative Government, but today it is all too seldom remembered or spoken about. I hope that my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) will remember that when dealing with his analysis of inflation during that period. The index rose by 182 per cent. in two years. I have never yet met a monetarist who could explain to me how one could deal with a 182 per cent. increase in prices by reducing the money supply. However, I do not wish to enter into that particular argument.

Since February 1974 and up to 8th March last—two days ago—there has been a reduction in the Financial Times commodity index of 22 per cent. The Government have had all the advantages of this improvement in the terms of trade. Therefore, the record of inflation during this period, with decreasing commodity prices, is all the worse.

I emphasise that what we have seen in the rise of Government expenditure and what we have to deal with is far remote from anything that we have had to do in the past. Then it was a question of tackling the particular problems of a project which we should not have embarked upon, or an increase in a year or two years hence which we wish to lower slightly. We are now dealing with a massive increase in Government expenditure in which the wage increases and the Government procurement increases, as a result of wage increases outside, are in fact enormous.

I have been able to analyse only the Defence Supplementary Estimates. It is indicative of the situation that the total Supplementary Estimates for this year, so far—they may now be final—are £6·1 billion, yet all this has almost passed without notice.

There are some hon. Members who can recall when the Chancellor of the Exchequer and two Ministers resigned over a difference of £50 million. I can recall the time, as a Whip, when the Government seemed to be in danger because there was a Supplementary Estimate of £96 million for a year. However, today we have Supplementary Estimates of £6·1 billion in one year. That is the scale of the problem with which we are dealing. I wish to emphasise this matter because so much of it springs from wage increases and from procurement increases containing wage increases from outside. That is the problem with which the Chancellor has to deal.

I wish to emphasise that some of the Chancellor's problems—a comparatively small amount—come from additional policies but if he is to tackle this problem then the wage increases must be shown to be the high element which are are. The Defence Supplementary Estimate is £140 million of which £92 million is in procurement—not, I am sure, for things which we did not plan to buy before but because of the increase in prices of equipment we were already committed to buy—£38 million on pay increases for the Services, ex-Service people and civilians employed, and £10 million on accommodation for increased rents. That is the make-up of the Defence Supplementary Estimate.

When dealing with Government expenditure we must ask ourselves which of those items can we reduce. No one would suggest that wages could be reduced for either Service men or civilians. In connection with procurement, we must either make changes, and that means delays which have other effects for industry and so on, or we must say that we shall not have the things that we want for the time being or put them right off altogether. Therefore, I want to bring home to the Chancellor and the House the enormous prospect with which we are faced.

Government expenditure has suddenly been jacked up to a very large extent. I do not believe that it can be dealt with other than by a strategy to cover a considerable period. In this respect I think that the White Paper is right, although I do not agree that the White Paper is an adequate strategy for dealing with the problem. I hope that we can realise the immense scale of the task when we talk about getting Government expenditure once again into balance.

On the general question of the proportion of gross domestic product, the Chancellor has emphasised that he wants to get it down to 53 per cent. Under the Conservative Government from 1970 to the beginning of 1974 the proportion of the GDP was kept roughly level. In 1970 it was 50·6 per cent.; in 1971 50 per cent; in 1972 50·1 per cent.; in 1973 51·1 per cent. It shot up in 1974 to 57·3 per cent. when the present Government abandoned Lord Barber's reductions in expenditure and embarked on their own policies. Therefore, in trying to get to 53 per cent. the Chancellor will in fact be trying to get to a figure which is still higher than any figure we have had in this country before the present Labour Government came into office in 1974. That is the task that faces the Chancellor.

At the same time, the Chancellor is carrying out a contradictory policy because he and his colleagues are constantly widening the public sector. By taking in the aerospace industry or the shipping industry or another industry they automatically widen the public sector. That is bound to happen. Therefore the Chancellor is pursuing a contradictory policy of trying to get the proportion taken by public expenditure down as far as he can—although not as far as it was before—and at the same time pushing it up by the responsibilities he is accepting in industry, including investment.

I should like to say a few words about the public sector because it seems to me that some people labour under a good many misapprehensions. People always say "the unproductive public sector". This is an over-simplification. What are coal, electricity and gas if they are not productive? They require investment. In this respect I have heard some strange views. It seems to me that if the steel industry were in private hands and if it were investing £500 million next year, we would go round patting members of the steel industry on the head, saying, "Well done, thou good and faithful private enterprise servant. You are investing £500 million." However, because it is a nationalised industry there is the common criticism that this is, in itself, unjustifiable.

I want to add two qualifications to that. The first qualification is the question how effectively public investment is used in a nationalised industry. The problem which faces every Government concerns the means of ensuring that public investment is effectively used. There is the problem that these industries are usually monopolies and therefore they do not have the pressure upon them which most private enterprise firms have. Secondly, once one starts checking and counter-checking one increases the bureaucrats ad nauseam, slows up the process of decision-making, and in the end it becomes more expensive than it was in the beginning.

My second qualification is that whether or not these industries can have the investment depends on the Government's capacity to borrow. I have never had much sympathy with the idea that we put this matter under a holding company and it does the borrowing. All it means is that we borrow the same amount of money but pay 1 per cent. more for it. Alternatively, the Government guarantee the holding company, but once again we are in the same position. What the nationalised industries can have for their investment depends on what the Government can raise in their borrowing.

In connection with the administrative sector perhaps my colleagues will recall the sort of problems we had in trying to reduce the administrative side of Government. They were very great problems. None of my colleagues liked the idea of an across-the-board cut. I had every sympathy with them. None of them liked the idea of cutting down on their own Departments by cutting back on policies which they wanted to retain.

The plain fact about the administrative Civil Service is that it cannot be reduced substantially unless policies are radically changed, and that means that services are wiped out. There are two ways in which the number can be reduced substantially. One is to introduce a system of self-assessment on income or general taxes in the same way as the Americans. We would then save probably 10,000 or 15,000 of the jobs involved. But that has never appealed to the British. It is not that they do not trust each other. It is that they prefer others to fill in the forms.

The alternative is to have a tax credit scheme, which would save a very large number of jobs. The cost of it would depend on the extent to which the Chancellor proposed to fill in the benefits. To say that such a scheme automatically would cost a certain amount is wrong. The Chancellor must decide on the figures to fill in, but, once introduced, the scheme would be infinitely simpler for people to use and would save a considerable amount of administrative work and personnel. In those two respects great changes could be made, but, failing those, we would need a more efficient system of administration, and that would take a certain amount of time.

Just what does it mean when public expenditure is jacked up in this way? It means a continuing reduction in the standard of living of the people of this country. There is no alternative. The reason for the jacking up is that with a 26 per cent. rate of inflation and a 35 per cent. rate of wage increases we have paid ourselves paper, and now we have to get production up to correspond to that paper. Until that happens there will be a reduction in our standard of living. That has already been happening to a considerable extent. In the debate last July I said that this would necessarily happen, and it will continue. The judgment that the Chancellor must now exercise with his colleagues is to what extent this can continue while at the same time he carries through the incomes policy upon which he is embarked. This is bound to be a matter of judgment and understanding by the trade unions as to what the real situation is. That is the importance of not producing alibis but of explaining the real situation.

One of the alibis is that the Conservative Government were responsible for the inflation. I do not accept that. The Chancellor will see from the figures from 1970 to the end of 1973 that the increase in gross domestic product was 44 per cent. while the increase in Ml was 38 per cent. The increase in M3 was greater because of foreign deposits. I have never heard anyone suggest that we should keep out foreign deposits. These are the figures which should be taken into account against the background of the 182 per cent. increase in the price of commodities to which I referred.

Let us try to show the trade unions that this process must, alas, continue until these factors are in balance again. What are the alternatives? They have to be reflected in the incomes policy, and that means a very tough approach—much tougher than anything we have had so far. Some of us said that the £6 limit would not reduce inflation at a pace which would enable us to get the borrowing rate down to a suitable level. That limit was imposed, however, and we shall now move on to the next stage. Unless we are to face even greater problems, that phase will have to be even tougher.

The other method of dealing with it is not by direct but by indirect taxation. If it is done by indirect taxation, which does not affect our export prices, that must be acceptable to those who are carrying out the wage negotiations, and that is a matter for negotiation by the Government with the trade unions about what they are prepared to accept in recognition of the situation.

I reinforce what the Chief Secretary said about direct taxation. But he indicated that he thought that the case for reducing it was greatly overemphasised. Many of us now have all too many examples of British citizens who are working abroad for firms based in this country when the firms are unable to bring their people back home because of the great difference between what they are being paid abroad, with the tax they pay there, and their take-home pay here. In all reasonableness they could not be expected in those circumstances to accept promotion and to come back to headquarters. I could give the Chief Secretary individual examples of what is happening and examples of the nonsenses which are taking place in the way in which firms are trying to run their businesses when, because of the heavy burden of taxation, they are unable to bring their best talent back to Britain. This situation must be changed, but the question must be left until the Budget to see whether the Chancellor will be in a position to do that.

Fundamentally we come back to the fact that this situation will mean a continuing reduction in the standard of living for our people. They must be told why and how it is happening, and the weakest in our society must be protected. It means that adjustments which are made must help the weakest—and I am sure that my right hon. Friend the Member for Leeds, North-East, in proposing adjustments in subsidies, social service benefits and so on, had this in mind—in order to tide them over their difficulties during a period in which there will be a general reduction in the standard of living.

I turn now to the debt, and the servicing required for it, because that leads on to the borrowing requirement which is in many ways my main concern about the consequences of the White Paper. We shall have to find an additional £3 billion in servicing debt to the end of 1976–77, and that is an enormous sum. A large part of that has to be serviced abroad. The Chancellor said yesterday that the proportion was 30 per cent., but I strongly suspect that debt incurred in the last two years, and which will be incurred in the coming year, requiring servicing abroad will be a much higher proportion. As sterling falls, the servicing of that debt will become more expensive because in almost every case it must be done in the currency of the country of origin or in a foreign currency. That is an immensely heavy burden which is increasing as sterling depreciates.

It is sometimes said that North Sea oil will look after all this, but how much North Sea oil shall we have to export above our own requirements in order to meet a debt servicing of £3 billion a year? How much profit must we make from the oil industry at home in order to cover that £3 billion of indebtedness and so allow Government expenditure a better chance of coming into balance? These sums are enormous, and to talk lightly of their being dealt with by the oil industry is to disregard the figures with which we are dealing.

I come to the conclusion, therefore—and here I warn the Chancellor and the country—that the right hon. Gentleman is gambling on getting his borrowing requirement for these coming years, with probably another £12 billion for this year, from the oil producing countries. Yet they will have far less money available than in the past two years. He is gambling on the rate of sterling taking the strain entirely in this coming year. He has not cut Government expenditure this year and therefore sterling will take the whole burden.

I find myself faced here with a moral problem. We are incurring debt at a rate which will be at least £30 billion over the three years from 1974–75 to 1976–77. That indebtedness will be paid for not only by our generation but by the children and grandchildren to come and by the generations after that. Are we morally entitled as a generation to embark upon indebtedness of this kind from which future generations will get no benefit but which we have incurred because we are enjoying ourselves beyond our means? This big moral question colours my whole attitude towards getting the Government borrowing requirement down.

My hon. Friends have been saying that if Government expenditure is reduced, taxation can follow suit. That may help on direct taxation, but if the borrowing requirement is also to be reduced there will be a limit on what can be done, and we should not delude ourselves about that either. The Chancellor is gambling on obtaining his borrowing requirement. If he does not, there will be an inflationary situation, apart from other considerations, and he will reduce the value of sterling still further.

What means have we at our disposal for dealing with these problems? First, I do not believe that the modern Cabinet system is admirably suited to dealing with all our present problems. The system was developed in the nineteenth century to deal with political problems, and it was admirably suited to dealing with them. It was developed so that political decisions could be taken in a collective fashion, and people stuck by those decisions.

That applied until recently, when it seemed that a variety of views could be put forward. But when dealing with modern times we are involved to a large extent with the allocation of scarce resources and the problems of priorities. As any Chancellor and his colleagues will know, the Cabinet system makes it immensely difficult to determine priorities.

I believe that there are two means of avoiding the difficulties presented by the Cabinet system. I established Programmes Analysis Review to examine all departmental activities and to ask "Are they any longer justified?". Departments like to increase their activities and to adopt new policies. They like to have the money to carry them through. In my experience Departments never examine policies established 20, 30 or 50 years ago and ask "Are they still justified?". I believe that the present machinery should be used to the full, and even more than we used it after embarking upon it.

I have come to the conclusion that we shall not see our economic affairs properly managed and Government spending kept under control unless we have a different Treasury arrangement. The Labour Government tried a new arrangement in 1964 by establishing a Department with responsibility for Economic Affairs, but they got it the wrong way round. We require a man and a Department to deal with economic strategy over a considerable period. That is essential.

On the other hand, there must be a Minister standing in his own right who will deal with the budgetary aspect of income and expenditure. I realise that I am being highly controversial. I am being tendentious, but I do not have to consult anyone now. If there are two finance Ministers in the Cabinet, one may try to argue against his colleagues on expenditure only to find himself let down half an hour later when the Chancellor takes a different view, agreeing with his colleagues and coming to a different decision. The present system is not working satisfactorily, and I do not believe that it will do so until we have a proper arrangement for economic strategy and budgetary matters.

The present Government, if they stay in office, will find themselves faced with the same problems that we had from 1972 to 1974. I hope that they will reconsider some of the things that they said in Opposition. The world will pull out of recession much more slowly than either President Ford or Chancellor Schmidt would like, but when it does so commodity prices will begin to rise. When we were in office they increased by 182 per cent. They have now dropped by 22 per cent. but when the world pulls out of recession they will begin to rise.

Britain will begin to make its recovery after two major trading powers—namely, America and Germany—have made theirs. It will be a much more difficult recovery. The Americans now have the dollar in a position in which it provides an immensely strong balance of payments and in which it can protect their home market. It will be more difficult for Europe, and especially for Britain, in the American market.

When we begin to pull out of the recession our industrialists will recognise that they have probably the lowest stocks that this country has ever had. They will then start stockpiling like mad. It will be too late, but they will do so. They will then put an enormous burden on our import bill. We have been through this before. It is foolish for the Government Front Bench to continue jibing at Administrations which had to face the same problems. We shall never get the economy on a sound footing unless we face the facts.

There was a chance of achieving a sound economy in 1973. We would have done so if we had not suffered the oil crisis. It was not possible because of the quadrupling of prices. The Government will have to face a problem that has been faced before, but they will be in a much more difficult position. They are much further behind and they have a currency of a much lower value. I suggest that they begin considering the problem now and not wait until it arrives.

We should have learnt by now that our recovery from a recession takes much longer each time. After this recession the industrialists will need even more convincing that they should invest before they do so. The period taken will be longer than it was from 1969 to 1973. That was longer than was taken following the previous recession.

Perhaps the Chancellor is thinking about what he should do in the Budget about inducements and incentives. I have come to the conclusion that provided inducements are reasonable, it is the state of confidence in industry that really matters. Let the Chancellor recognise that there is a considerable time lag.

We now have to import 50 per cent. of our food and almost all our raw materials. We are not able to get the full benefit of a depreciating currency as can a country such as France. We know that France does not have to import the great mass of its requirements. When it has a depreciating currency its export prices decrease and it immediately enjoys an advantage. When we are in that situation export prices improve, but we never have a real chance to get the upswing or, to use a technical phrase, to get on the "J" curve.

We have been in the present situation for some years and I believe that it will continue. It is a psychological factor involving the nation as a whole, and the trade unions I believe that a floating currency has a purpose to perform. I believe that we were right to float when we did. We preserved our reserves, and we could not have done the things that were done subsequently unless we had done so.

However, there are situations in which a floating currency is extremely dangerous. It is dangerous because it does not force the Government and the country to take the action which is necessary. When there is a fixed parity and there is a crisis it is generally recognised that there is a crisis. The Governor rings up to say that he wants to see he Chancellor privately at No. 11. When he has spoken to the Chancellor he rings to say that he wants to see the Prime Minister privately at No. 10. The Prime Minister sees the Governor and the Chancellor and they explain the situation, telling him what must be done. If he is wise, the Prime Minister calls the Cabinet. If he is not wise the Prime Minister asks "Do this or else what?" The Chancellor replies "Or else I go, the Governor goes and the Court of the Bank goes." Then the Prime Minister calls the Cabinet.

The danger of a floating currency is that there is never a crunch. It may float downwards because of inflationary pressure, but there is never a point at which the Governor or the Chancellor are forced to take the necessary action. Nor is there a point at which the country is confronted with something which it really recognises as a crisis, although some would say that that is an old-fashioned view. The action that has to be taken must be extremely unpleasant.

That is the grave danger which we have faced during the past year. We are sliding and the Government have not succeeded in showing the nation that it faces a crisis of the most dangerous sort.

I am glad that there has been emphasis on growth. People must have hope if they are to live through a dark period. In many circles growth is now, quite unjustifiably, a dirty word. But unless we have growth in the economy we can never achieve anything we want in any sphere—social, cultural or otherwise.

The Government say that they want an average manufacturing growth rate of 8½ per cent, for three consecutive years. To think that they had the nerve, when in Opposition, to accuse the Conservative Government of going hell bent for growth regardless of anything else! To think that they now come forward with the proposition of a growth rate of 8½ per cent.!

We were also accused of reducing unemployment at any cost. I have recently read the leading articles in the national newspapers about the Budgets of Lord Barber. They now make interesting reading. I recommend them to some of the columnists. One leading article in The Times said that the Conservative Party, after five years in office, would be judged on the extent to which they reduced unemployment. Certain views have changed since then. The Chancellor is aiming at a total of 700,000 unemployed. That is very near the target at which the Conservative Government were aiming over three years. But we were starting from a target far lower than 1¼ million, or whatever it will rise to.

Now, the Chancellor says that he can get the unemployment figure down with a growth rate in manufacturing industry of 8½ per cent. for three years—5½ per cent. overall. One must take leave to doubt that statement. If he is really going for that target, he will have even greater problems than we had.

What worries me is that so little is being done to make this progress possible. The Government are rightly increasing training, but by a minuscule amount compared with what we need from the point of view of industry. The Chief Secretary talked of bottlenecks, but the mobility of labour is now even less than it was five years ago. I agree I find little is being done for housing in enabling labour to become more mobile for industry which has the need and is able to expand.

All this is another reason for organising the Treasury properly to have the control and to put drive behind the whole of this movement so that we have an economy which is adaptable and mobile, in which we get investment and in which those who have job opportunities can take them up. We heard so much about this in 1966, after the July measures, and up to 1970. We heard it again from the Chancellor yesterday—"We must make room."

But the process is no longer automatic because the resistances are in-built and so great, and until we overcome them we shall not be able to produce results and we shall find ourselves with the same problems but in a much weaker position to tackle them.

I urge upon the Government that they cannot just sit back and think that automatic processes will work. There is no time in the modern trade cycle schedule to enable such processes to work effectively in this country at the moment. Therefore it is right that industry should be helped by regional devices and other means to make the changes which are necessary. There is not the time otherwise.

What worries most people in industry is that there is now a very grave risk that we shall just about miss—it will not be a boom—most of the world's improvement from recession. When that improvement starts going down again, we shall have missed it. It is worrying industrialists that, in the modern time schedule, we shall not be able to be in a position to take advantage of the world pulling out of its present trade recession.

I want to conclude by speaking generally of our financial position—and again I am speaking out bluntly. We know that so many of our problems come from the position of our currency, our indebtedness and sterling balances. Many of the things that hon. Members worry about would not worry them if we had not got that situation. Nor would the Government worry. Nor would any Government. There is only one way out of this end of the box—and that is through Europe.

But if we are to have an arrangement in Europe which helps us to get out of the box we have to be prepared to make our contribution towards it. A great chance was missed in 1973 when the main speculation was against the dollar and going against the German mark. Herr Brandt and the West German Government could, if they had decided, have got Europe then to pool its resources. We could have "done in" the speculators and had the strength of European currencies in a move forward in the unity of Europe.

There is only one solution in the long term—and I hope that it will be as short as possible—and that is to arrange for Europe to work together in a united pooling process. It will be a shock to Europe, and therefore we have to work into it with our partners, and show them what we can contribute, if we are to benefit in this country. I do not now see any way out of this problem of the box unless we work with Europe. These are the long-term problems facing the Government, and all I ask is that they should face them honestly.