I beg to move, That the Bill be now read a Second time.
In previous years the Finance Bill has normally embodied in full the tax proposals made in the Budget speech. The House has, in some cases, discussed and voted on such proposals in relative isolation from other elements of economic policy—and sometimes it has subsequently been necessary to reverse or modify certain provisions to take account of shifts in the economy.
This Finance Bill is different. In a sense it is incomplete, because, as the House knows, it makes no provision for my Budget proposal to link tax reliefs to the acceptance of a pay limit for the next round which is consistent with a further halving of our inflation rate during 1977.
This conditional element in my Budget triggered a fit of instant opposition from the Conservative Front Bench. It argued that the Government's approach to getting a voluntary agreement on pay cut across the prerogative of Parliament to determine our affairs.
This argument was conclusively demolished by my right hon. Friends the Leader of the House and the Secretary of State for Trade during the Budget debate. It may still show a timid flicker from time to time in the correspondence columns of Conservative newspapers, but the country as a whole takes exactly the opposite view. The overwhelming majority of British men and women, whether they are themselves trade unionists or not, recognise that our approach, which accepts the crucial rôle of wage settlements in influencing the management of demand, gives Parliament and people the opportunity to take a more balanced and informed view of our judgment than if I had introduced a conventional unconditional Budget.
When the House comes to vote on the amendments to this Bill, which I shall move at an appropriate stage after we have published a White Paper on the pay agreement, it will be voting in the full knowledge of how those amendments relate to what will be a major factor in determining our economic progress for the next two years.
The level of wage settlements will determine not only how far and how fast we can reduce our rate of inflation to levels at least comparable to those of our competitors. It will determine also how rapidly we can bring down the level of unemployment and how soon the whole community can once again benefit from higher living standards.
The Government, unlike their predecessor, have based their strategy on the assumption that co-operation and not confrontation is the only way forward. This has enabled us to help the trade unions by guaranteeing that, through reduced income tax, the working population as a whole is no worse off by accepting a low rather than a high pay limit. Furthermore, it has enabled trade unionists, who must reach a decision on the new pay limit, to do so in the full knowledge of all the advantages of making it as low as possible.
There were those, of course, both inside and outside the House, who believed that my proposals were too complex to be generally understood. If so, I trust they have read the results of the National Opinion Poll published in last Thursday's Daily Mail. They confirm the evidence of earlier opinion polls that my proposal for linking tax cuts to a low pay limit is fully understood and overwhelmingly supported.
Similar support is quite clear from the vast amount of correspondence which I have received since presenting my Budget. It is not difficult to see why. The experience of the last 18 months can have left nobody in any doubt about the automatic link between pay, prices and jobs. It is an immutable fact that high pay increases are self-defeating unless there is a corresponding increase in national productivity.
If we insist on wages higher than the economy can support, people will be priced out of jobs. In the short run some people may be a little better off—but only at the cost of making others worse off or actually causing them to lose their jobs. Within a few months the advantage of higher wages, even for those who receive them, will be wiped out by the higher prices which must follow.
As I have often reminded the House, the increase in oil and other import prices in 1973 and 1974 reduced our real national disposable income by nearly 5 per cent. Our standard of living was not reduced by nearly as much. Overseas borrowing has helped us to cushion the impact of import prices on our living standards. In the meantime, we have to adjust to the new situation.
Most of the necessary adjustment has now already taken place and the outlook over the next 18 months is for living standards to decline by perhaps 1 or 2 per cent. This is part of the unavoidable price we have to pay for getting unemployment down.
The universal acceptance and observance of the £6 limit has been a striking demonstration of the extent to which these basic economic truths have been accepted by working people. There is now conclusive evidence that their common sense is bearing fruit. Last week's report from the Price Commission, for example, shows that in the last nine months we have halved the rate of inflation.
Moreover, it is now generally recognised that if we had not had the £6 limit, our exports would not have performed so well, our balance of payments would have become much worse, and unemployment would still be on a sharply rising trend. The £6 limit also guarantees that our rate of inflation will continue to fall for the rest of 1976. But there will still be a long way to go before we close the gap between our rate and that of our major competitors.
In the OECD countries as a whole inflation averaged 8 per cent. in the second half of last year compared with 14 per cent. in the United Kingdom. Changes in wages, prices and the exchange rate take time to work through the economy, so prices in 1977 will be influenced by recent movements in the exchange rate and by the impact of pay increases during the current round.
There will, therefore, continue to be a good deal of upward pressure on prices in 1977, and to reduce the rate of inflation further we must ensure that pay increases during the next round are much smaller than in the present round. We must use the benefits of higher productivity as the economy expands to reduce the inflationary pressure, not to increase it.
Hon. Members will not expect me to anticipate today the outcome of the current discussions on pay policy. All of those who are involved in the discussions are agreed on the objective—to halve the rate of inflation once again in 1977. That means, as I told the House in my Budget speech, that earnings must rise in the next pay round by under half as much as they rose in the current pay round. We understand well enough that unless we achieve this objective we shall not get the industrial recovery which, at the end of the day, is the only guarantee of higher employment and living standards.
Our necessary preoccupation with these domestic matters should not blind us to the international dimensions of many of the problems which confront us. In my Budget speech I said that the United Kingdom was taking the lead in international discussions of the common problems of the industrialised economies so that we can develop coordinated strategies for dealing with them.
I suggested to my colleagues in the EEC that we should make a fundamental examination of the question of unemployment, covering not just the short-term measures appropriate to the present situation but also the scale and nature of the problem in the medium term—up to 1980 and beyond. We made a very valuable start at our meeting in Luxembourg a week ago.
The most interesting point to emerge was that we were all agreed that the key problem is the management of overall demand and output in relation to production and potential—rather than what are sometimes called the structural problems of technological change, or regional and sectoral differences, important as these may be. Moreover—I hope the Opposiiton Front Bench will note this—we all agreed that it will be impossible for any of us to achieve the level of output required for full employment without some sort of incomes policy. On this basis we shall be carrying forward our discussions both within the Community—where a tripartite conference involving employers' organisations and the trade unions has been arranged for the end of June—and in other international bodies