Before calling upon the Chancellor of the Exchequer, may I say that I have the customary long list of right hon. and hon. Members who wish to speak in the debate. I merely inform the House of this so that those who take a long time will know that they are stopping other colleagues from participating.
I know there is deep concern on both sides of the House about the steps the Government had to take last Thursday. My speech this afternoon has two purposes—first, to describe developments in the economy since we last debated it over two months ago and to explain why the Government have decided to tighten credit and to apply to the International Monetary Fund for the use of further facilities; and second, to discuss the implications of these decisions and to answer in particular the questions on which I expect this debate will focus. Do the Government's recent decisions represent—or require—a fundamental change in the direction of their economic strategy? If not, is the strategy aiming in the right direction? And is there any alternative strategy which would better meet our economic needs?
First, I will give a short account of the background to the Government's decisions.
In the world economy at large, there has been a slackening in the pace of growth of output and of trade. In July, worry that the world recovery might be proceeding too fast was still widespread. Now it has largely given way to fears about the continued strength of the upturn. In all the leading industrial countries the growth rates in the second quarter of 1976 were below those in the first quarter. By the same token, the reductions in unemployment seen in many countries earlier in the year seem to have been checked or reversed, for the time being at least.
Yet Governments world-wide are still worried about the threat of inflation. The decline in consumer prices seems to be decelerating in most countries. In recent weeks interest rates have been raised in France, Italy, Sweden and Denmark. Moreover, France and Italy, among a number of other countries, have introduced comprehensive counter-inflation programmes in which the search for an incomes policy such as we have operated so successfully plays a central rôle.
Britain is no longer at the bottom of the inflation league. However, we are still at the wrong end of the second of the three divisions. In the United States and Germany, inflation rates are running around 4 per cent. or 5 per cent. a year. In Japan, France, Canada and the Benelux countries inflation is in the range of 8 per cent. to 15 per cent. This is the second division we have now entered. We still have a long way to go before we can enter the first division. But we have at least climbed well out of the third division in which Ireland and Italy now find themselves, with inflation well over 20 per cent.
Until very recently we were moving steadily towards our original target of single figure inflation by the end of this year. That this target is now out of reach is not due to our labour costs rising more sharply than provided for in our pay policy. On the contrary. It is the consequence of the sharp rise in commodity prices earlier this year, which has affected inflation in many other countries, particularly France, in recent months, and of the rapid depreciation of sterling. Though our relative inflation rate made some depreciation inevitable over time, sterling has fallen faster and further than we expected.
There may have been a rather less vigorous rate of growth at the end of last year and the beginning of this than seemed likely on the basis of earlier assessments. Moreover, in the second quarter of this year we clearly shared in the world-wide hesitation in growth. It may be that this was only a temporary dip in the rate of growth, similar to that which took place in Britain at the same point in the last cycle in the summer of 1972. The estimates for industrial production up to July suggest that the underlying trend of industrial output is still rising, although somewhat less than previously thought. The growth that there is is concentrated in the manufacturing sector. Latest three months on latest three months, manufacturing production was up by 1·4 per cent., or nearly 6 per cent. a year at an annual rate.
The increase in manufacturing production has already led to an increase in employment in manufacturing industries starting in June. This reversed the previous decline in manufacturing employment since the end of 1973. It is one of the indications that the priority we are giving to manufacturing industry is already having an effect. The large number of unemployed school leavers brought unemployment up to just over 1¼ million in August—an appalling figure—but total unemployment fell in September as school leavers moved into jobs. There are signs that seasonally adjusted unemployment for the United Kingdom, excluding school leavers, is now rising, if at all, only very slowly.
However, the prospect remains uncertain. Even though we are now getting a rise in employment where we most want and need it, there is not the scope there was in previous cycles for expansion in public and private service jobs. Like other countries we are still emerging from the deepest international recession since the war, and, as has become more and more widely recognised, there is an international dimension to curing unemployment. There is also a puzzling change in the composition of the unemployment registers. Men used to outnumber women five to one on the registers, but this ratio has now changed to only three to one. It may be that a higher proportion of women without jobs are registering than in the past.
There is now firm evidence that the measures we have introduced over the last 18 months or so to help in reducing unemployment are having the effect we intended. As the House knows, we introduced a further set of such measures a few weeks ago.
We now have the Temporary Employment Subsidy, the Job Creation Programme, the new Work Experience Programme and the Job Release Scheme; and the counter-cyclical training schemes which the Manpower Services Commission has introduced on top of its large existing programme. These measures are directed at those particular sectors of the labour market which have the greatest priority in a recession: the young, especially school leavers; those facing redundancy, or prolonged unemployment; and those in the areas where unemployment is highest.
It is important as we emerge from the recession that industry should be ready to cope with the new problems of the upswing: that trained work forces should be kept in being, that the level of skill training at apprentice level and the level of adult retraining should be maintained, and that those young people who have come on to the labour market for the first time should not have their morale weakened and their attitude to training and work soured for the rest of their working lives by the reduction in job opportunities that a recession brings.
These measures are already having a significant impact. Between the summer of last year and Easter of this year, 150,000 school leavers found work even though the general unemployment level was then rising fast. I would expect at least a comparable fall in unemployment amongst school leavers this year. And the level of training in industry has been maintained at the same level as in boom years. We estimate that the measures we have so far introduced will help about half a million people through this period of abnormally high unemployment.
Such measures have been widely adopted in other countries, but they can only be regarded as palliatives, alleviating the impact of unemployment.
The rate at which we return to full employment depends above all else on our ability to improve our industrial and sales performance so as to take full advantage of the export opportunities open to us as a result of the world recovery and the greatly improved ability of British goods to compete on price, both at home and abroad.
The record here so far is an encouraging one. The overall increase in export volumes in the 12 months to August has been well over 10 per cent., while exports of chemicals, metals, principal metal manufactures and other manufactures have all risen more than 20 per cent. Since this took place in a period when national output rose far less than this, it represents a substantial shift of GDP into exports, and that is one of the basic objectives of the Government's economic strategy.
Moreover, we have at last begun to increase our penetration of the more difficult markets in the industrial countries: right hon. and hon. Members will have seen this morning that our exports to Germany rose 24 per cent. in deutschemark terms between the first half of 1975 and the first half of this year.
We have always insisted that export demand must be the main foundation of our recovery, and so it is proving. For example, new engineering orders rose at an annual rate of more than 20 per cent. between the first and second quarters of this year—home orders at 10 per cent. and export orders considerably more. Similarly, the 20 per cent. increase in the volume of chemical exports to which I referred has contributed to a 12 per cent. increase in output over the period.
I note the hon. Gentleman's question and, of course, I shall he referring to it later in my remarks.
So far as home demand is concerned, we have insisted that any increase must come from investment. Neither private nor public spending can be allowed to grow until our economy is once more in balance. Despite political temptations at least as powerful as those to which previous Governments succumbed at similar stages in the cycle, we have maintained our determination to see that the increase in output goes where it is needed. The rate of consumer spending has not changed significantly for more than a year. The savings ratio remains high, at 13 per cent.
Expenditure by the public sector is now levelling off as forecast and, following the July measures, it is due to fall somewhat next year in real terms. Thereafter, it will take a steadily reducing proportion of available resources. We shall give priority to support of our industrial policies within the total of public expenditure available.
This priority was fully reflected in the decisions which I announced in the House in July. The cost of the measures we have since approved to relieve unemployment and to support industry will be within the limits set by the contingency reserve. The extensive application of cash limits to regulate expenditure in money terms combined with our refusal to sanction expenditure beyond the totals set for individual programmes and the contingency reserve should ensure that we have the most effective control of public expenditure achieved in Britain for many years.
I know very well the difficulties which this entails, in particular the problems involved for the local authorities. But the improved information system and the new methods of consultation have paid good dividends in our joint effort to bring local authority current expenditure this year more closely into line with the White Paper figures.
We are now approaching the discussions which will lead up to the Rate Support Grant settlement for 1977–78. Everyone involved in this operation knows very well that we mean to do everything possible to bring current expenditure for that year back into line with the White Paper plans and that the grant settlement will be directed to that end.
We have debated this on many occassions, and my hon. Friend will know that the Government have been approached quite recently by the trade unions working in the defence industry with requests that we should not proceed with some of the cuts in which we are engaged already.
Meanwhile, it looks as though total fixed investment may be rising a little from the very low level on the second quarter. Within that total, the key component is manufacturing investment. It now seems that the trough in manufacturing investment in this cycle has already come at about the middle of this year. Through our accelerated investment scheme, we have been trying to pull forward into the current year investment planned for 1977 and later. We have good success in this respect. Some rise in investment can be expected in the latter part of this year, and, as the CBI, the Financial Times and the Department of Industry surveys have recently demonstrated, a big increase of perhaps 15 to 20 per cent. is expected next year.
So far, apart from the unexplained dip in the growth of output in the summer months, reflected in the slower growth of export volumes in the same period, the evidence which has become available since July suggests that the real economy is developing in line with our strategic objectives. This point was made in a leader in the Financial Times a fortnight ago, and it is these hard facts of economic performance which have led so many foreign observers, like Chancellor Schmidt and the Dutch Finance Minister, to argue that sterling is under-valued. Yet the foreign exchange market has so far not taken that view, and we must live with the judgments of that market whether we like them or not.
It is in the financial or monetary field that the real problems have arisen in the last few months—and in particular in the interactions between expectations about the growth in the money supply and movements in the exchange rate.
Following the arrangement of the $5,300 million standby credit in June, the Government took steps to ensure that the PSBR is steadily reduced as we move out of the recession so as to control the pace of monetary growth and leave room for the increase in exports and productive investment that we need. Given the economic prospect as we then saw it, the July measures were designed to reduce the borrowing requirement from an estimate of £11·5 billion this year to £9 billion or less in 1977–78. On that basis, measured as a percentage of GDP at current market prices, the PSBR would be reduced by about one-third—from 9 per cent. this year to about 6 per cent. next year. Other countries and international comparisons often use an alternative concept of the general government financial deficit. I said that this would be halved—from just over 6 per cent. of GDP this year to 3 per cent. next year.
The size of the general Government deficit this year and the rate at which we plan to reduce it is fully in line with what we know of other countries' plans.
At the same time as I announced these decisions I made clear that the PSBR should be financed in a way which would not refuel inflation. I indicated that the increase in the money supply as broadly defined—M3—during the current financial year should be in the region of 12 per cent. Any significantly higher figure would risk repeating the experience of 1973, when the then Government printed money and the grossly excessive increase in demand led to a seizure in production and a rapid increase in inflation and the balance of payments deficit.
The 12 per cent. monetary guideline was fully consistent with the provision of sufficient finance to support the increase in exports and investment on which the Government's economic strategy rests—and with the figure of £9 billion for Domestic Credit Expansion which I forecast in December 1975.
However, it became apparent in recent weeks that we were not achieving sales of Government stock on the scale sufficient to ensure that monetary expansion would keep to the guideline I set. As the Bank of England explained last Thursday, preliminary indications about the growth in M3 during the three banking months to mid-September show that monetary expansion was proceeding—at an annual rate—considerably faster than would be consistent with our objectives. Besides the failure to sell enough gilts, bank advances have shown a rising trend.
The increase in bank advances in recent months seems to be associated in some degree with the financing of leads and lags and may also have been used to finance more imports than would be justified by the present and prospective rate of consumer spending. In other words, excess liquidity in the banking system may have been operating not only to jeopardise our objectives for the growth of money supply but also to undermine the needed improvement in our balance of payments.
It is probable that the foreign concern about our ability to control the money supply was a major factor in pressure on the exchange rate in the last few weeks. There was a fall of some 12 cents between 8th September and 6th October. This in turn had its effect on gilt sales and so on the prospects for the money supply, producing further pressure on the exchange rate.
We have faced a situation in which uncertainties about the exchange rate have led people in this country to expect further measures from the Government—and they have therefore held off moving into long-dated Government stock; and the resulting relatively high level of liquidity in the economy has simply confirmed foreign opinion in their view that monetary expansion in the United Kingdom was proceeding too quickly. Last month we therefore raised interest rates and called for 1 per cent. of Special Deposits. This did, for a period, improve the tone of the gilt-edged market so that we were able to sell a very substantial amount of stock.
The figures for monetary expansion in the banking month of September, which ended on 15th September, will be high because the massive increase in gilt sales came later. These September figures will be published on Monday next. In banking October, however, we have already achieved over £1 billion net of gilt sales, with the effect in this and future months of the new stocks announced at the end of last week still to come. That should mean in due course monthly figures for monetary expansion much more in line with the Government's monetary guideline.
In addition to these new gilt issues, we are improving the terms offered to the small saver on National Savings. There will be a new savings certificate, with a value of £5 rising to £7 over four years. These are generous terms related to present interest rates and the certificate will be on sale only for a limited period, from its issue in December to the end of March. The maximum holding will be limited to £1,500.
The rates of interest paid on National Savings Bank accounts will also be increased from 1st January 1977. The rate on ordinary accounts will be increased from 4 per cent. to 5 per cent. and on investment accounts from 9 per cent. to 10 per cent. In next year's Finance Bill I shall be introducing provision to make a corresponding increase in the amount of tax-free interest on National Savings Bank ordinary accounts and Trustee Savings Bank Ordinary Departments from the first £40 to the first £50.
These are important improvements for the National Savings Movement. They should both make a useful contribution to financing the PSBR and enable the small saver to share in the benefit from the general rise in interest rates in recent months.
Is not everything that the Chancellor has said a condemnation of the strategy outlined in his Budget speech? Does he remember my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) saying that if the public sector borrowing requirement were not cut, the Chancellor would have no alternative to skyscraping interest rates in order to finance his deficit? Has he not now admitted this and produced interest rates that will bankrupt the private sector unless they are cut soon?
I shall explain in detail why I do not agree with the hon. Gentleman and why all the employers I have met in the last few days share my view and not that of the hon. Gentleman.
The call for an additional 2 per cent. of Special Deposits, together with increase in interest rates, will make it considerably more difficult and expensive to obtain the sterling necessary to finance leads and lags or excessive imports. But by renewing the Bank of England's directional guideline we hope to ensure that productive industry will not be bearing the brunt of credit restraint.
The measures which I took last week were necessary to validate the economic strategy, which I laid before the House in my Statement of 22nd July. They should limit the growth of money supply—M3—to the guidelines which I announced in that Statement and ensure that we do not exceed our projected rate of Domestic Credit Expansion which I described to the House in December.
I cannot pretend that interest rates at current levels are in any way pleasing to the Government. They have already had a most unwelcome, though inevitable, effect on mortgage rates and, while they last, will put a strain on many parts of the economy. But it is quite wrong to suggest that they mean abandoning all our hopes for a rapid increase in our manufacturing investment and output. We do not want interest rates to continue at this high level and we hope that once the money supply is back on course any effect which the squeeze may have should not carry through to investment intentions.
Moreover, it is already clear from reports of industrial reaction from all over the country, well reported in the Financial Times of Saturday and yesterday's Sunday Times, that a failure to act so as to restore confidence would have been far more damaging, since the level of confidence does far more to determine investment decisions than the level of interest rates.
The bulk of manufacturing investment in fixed capital is drawn from a company's own resources. Where external borrowing is required, the rate of interest is usually less important than the degree to which capacity is already fully used and the manufacturer's prospects for the future. There was a steady increase in investment following the credit squeeze which my right hon. Friend the Member for Birmingham, Stechford (Mr. Jenkins) introduced in 1969, particularly in the export industries on which our recovery depends. The continuing pressure of export demand on existing capacity is likely to ensure that the investment intentions already declared in so many surveys are carried through in fact.
In sum, the recent measures that the Government have taken to tighten credit and to ensure that their published guidelines for growth in the money supply are met in the current year are a necessary element for the fulfilment of their economic policies. They do not put their industrial strategy at risk.
It is on the basis of this broad stance of policy that I announced nearly a fortnight ago that I would be applying to the IMF for the remaining tranches of credit available to us. The Government believe that it is prudent to make this application in order to ensure that their drawings on the June standby can be repaid and their external deficit financed in the coming year without undue strain on the reserves. [An HON. MEMBER: "What are you going to do about next year?"] I will explain about next year.
I expect a team from the Fund to visit London early in November for the usual joint examination of our prospects with the Treasury and the Bank of England. The team will then report to the Executive Board. Since the amount we are seeking is large and will require the Fund itself to seek supplementary resources under the General Arrangements to Borrow, established among leading industrial countries many years ago, time must be allowed for discussions between the Fund and those countries.
The timetable for consultations, following the normal pattern for a substantial standby, will not be completed until towards the end of December. We shall, of course, be repaying earlier than that—on 9th December—amounts we have drawn under the standby arranged in June by our fellow members of the Group of Ten industrial countries. These repayments—there has been exaggeration in some quarters about the amounts involved—will be met from our reserves, which we shall then replenish from our initial IMF drawing. Meanwhile, I am satisfied that the resources we currently have available, boosted by the on-going foreign currency borowing programme for public sector bodies, will meet our needs over the next two or three months.
I have been greatly encouraged by the response of Governments of other countries to this application, and particularly appreicate the warm remarks of leaders of the American and German Administrations, because those two countries will be important contributors under the General Arrangements to Borrow.
Is it true, as is widely rumoured in Manila from where I have just returned, that the IMF has already privately informed the Government that it would wish to see the public sector borrowing requirement reduced from £9 billion to £6 billion next year?
No. That statement is totally untrue. I am surprised that the hon. Gentleman should give currency to a statement for which there is no foun- dation in fact. That type of rumour mongering by people who should know better—I believe that the hon. Gentleman has some rôle in the financial community—is one of the factors which has damaged sterling consistently in the last year.
The basic condition for the granting of assistance of this kind by the IMF is that the country which applies for it must present a satisfactory programme of policies to ensure restoration of its balance of payments. I have made it clear that this is the objective of the Government's present policies. Equally, I have emphasised that this implies both the determined maintenance of those policies and, within the framework which they set, such adjustments as events may require from time to time to ensure that they are carried through successfully.
Such adjustments may be painful, but this Government will not shirk from making them if the situation requires it. We did not shirk last week. As I have made clear time and time again, to negotiate within the framework of existing policies means accepting a great deal which is unpopular as well as a great deal which is popular. It may also mean a readiness to adapt elements in our policies to harsh realities if the main thrust of policy is to be preserved.
I announced our objectives in my economic statement last July when I said:
Our overriding priority is to restore the prosperity of the British economy through the regeneration of our industry and to provide the essential conditions to bring down, and to keep down, the intolerable level of unemployment. To do this we must ensure that manufacturing industry has sufficient resources available to take advantage of the exceptional opportunities now open to us in the export field; we have got to get our rate of inflation down to the level of our competitors and hold it there; and we have got to do both in a way which will protect the poorest and weakest of our people and retain the social consensus on which the success of all our policies depends."—[Official Report, 22nd July 1976; Vol. 915, c. 2010.]
No. I have made it clear that we have not as yet had any discussions with the IMF. A team from the IMF staff will be visiting this country in a few weeks and discussions will begin then.
I have just quoted the framework of objectives within which all our policies must fit. Circumstances may threaten one objective or another from time to time, and we must react appropriately.
On 22nd July I announced a number of measures to bring about a better balance in both the public finances and the economy more generally. Without them our industrial strategy was at risk. With respect to the right hon. Lady the Leader of the Opposition, the cuts did hurt. As her right hon. Friend the Member for Sidcup (Mr. Heath) said last week, public expenditure cuts do hurt. Those affected by them, whether they are civil servants or private employees, have wives and families. For the right hon. Lady to suggest that cuts of £5½ billion to £6 billion can be made in public expenditure, as the vice-chairman of the Tory Party suggested the other day, without hurting, as she suggested to Mr. Robin Day, is gravely to mislead the people of this country.
Last Thursday's measures were essential to our attack on inflation. They are hurting, too. If further developments were to threaten any of our objectives, we would not hesitate to take any measures which were required to keep our policy on course.
But there are two elements in our strategy which must be preserved if it is to achieve its aim.
The key to the success of all our economic policies is the preservation and development of the social contract between the Government and the trade unions and the improvement of our industrial performance to which the CBI, the TUC and the Government have pledged themselves collectively in the industrial strategy which is being developed through NEDC.
The social contract is no fool's bargain. It is the basis on which any hope of recovery must rest. Its achievements are of critical importance to the success of our industrial strategy. Whatever right hon. Gentlemen opposite may claim to believe, they know that it has won universal admiration from this country's friends abroad.
This time last year we were only in the early stages of putting into effect the joint decision to keep pay increases during the year beginning last August within a limit of £6. At that time many people were doubtful—I do not blame them—whether a voluntary policy of this kind could be made to stick and whether or not it would achieve a dramatic reduction in the rate of inflation.
Now we can look back over the complete pay round. The £6 pay limit was universally observed. The reduction in the rate of inflation, which has been associated with it, has been dramatic. Whereas the increase in prices in August 1975 over the corresponding months of 1974 was about 27 per cent., the figure for August 1976 was under 14 per cent.
We are now well launched on the second round of the pay policy. Over 1½ million people have already settled firmly within the TUC guidelines. This includes the important settlement for local authority manual workers which has a bearing on other major agreements. I hope that the whole House will welcome the recent decision of the Trades Union Congress to seek a policy for the pay round after this which will enable us to maintain the attack on inflation and unemployment while seeking greater flexibility in pay bargaining.
The social contract has transformed the climate of industrial relations in Britain, too. In 1972 nearly 24 million working days were lost in stoppages. There were just over 6 million in 1975. Nor is that the end of the story. So far this year days lost are running at only half the levels of 1975, or only one-fifth the levels of 1974. The number of stoppages is the lowest for 20 years.
It is difficult to exaggerate the benefit this reduction in stoppages is bringing to the industries concerned, and to the economy as a whole. Disruptions in the chain of supply and delivery have in the past been a major cause of bottlenecks in industrial output and of lost sales at home and abroad. They still play far too prominent a rôle in the difficulties of the motor car industry. But over the broad spread of British manufacturing their disappearance has now transformed the prospect both for sales and output.
The House will have noted the results of the Survey carried out by the CBI which is reported in The Times today. Sixty per cent. of our customers all over the world said that there had been an improvement in delivery by British companies over the last 12 months. This is the best possible foundation on which to build the regeneration of our manufacturing industry.
Meanwhile, whatever massive disadvantages it certainly has in other fields, the depreciation of the pound has given British industry enormous advantages compared with its competitors both at home and abroad. Eighty-eight per cent. of our customers in the CBI Survey now consider British prices competitive. Exporting has never been so profitable. I trust it will not be very long before new investment following increased profits will generate both additional sales and additional employment.
I hope that the whole House will at least unite in affirming support for the new industrial strategy to which both sides of industry have already pledged their commitment. It is on these improvements in performance in the individual factory and sales office that the future of our economy depends.
Surely it is not too much to hope that the Opposition Front Bench spokesmen today will at least echo the generous tribute paid by the right hon. Gentleman the Member for Sidcup last week to the patriotism and common sense of our trade union leaders. I hope it is not too much to ask that the right hon. and learned Member for Surrey, East (Sir G. Howe) will at least renounce his customary sneers at ageing, prejudiced, doctrinaire trade union leaders. Whatever he may think of the social contract, that sort of talk is not really the best basis on which to realise the dreams of the right hon. Gentleman the Member for Lowestoft (Mr. Prior) of the Conservative Party and the trade unions walking hand in hand towards the sunset.
I do not deny that some of the adjustments we have had to make to keep our policy as a whole moving forward have imposed severe strains on the social contract and on the industrial strategy. It is not surprising that some have begun to wonder whether the broad direction of our policy is right. With respect, I think that most of these critics fail to recognise the magnitude of the change in our economic behaviour as a nation which was required when this Government took office. With hindsight, I must confess the Government themselves did not then recognise the full scale of the task which faced them.
I ask the House to reflect on the following words, about the present situation, from a source which I think the whole House will accept as politically independent:
To see it in perspective we need to go back to 1973. In that year, money supply on the broader definition increased by not far short of 30 per cent. Inflation over the year was 12 per cent. and accelerating. The government of the day was shaping up to its confrontation with the miners, which it was going to lose. The way was being prepared for the wage explosion of 1974. In other words, not only was Britain pointing in the wrong direction in almost every aspect of its economic management. But the country seemed determined to move even faster down the wrong road. …
The writer then goes on to discuss the situation today. He says:
Most of the figures—wage increases, inflation rates and, above all, government borrowing requirement—are still frightening. But three years ago all of them were moving in the wrong direction. Most of them are now moving in the right direction.
But the point to focus on is the largely unsung change in direction which has already taken place in Britain. So far it has taken place without revolution or even without the social collapse which was being widely predicted two or three years ago. The danger remains. But it was three years ago that the rest of the world should have been going short on Britain. Not now, when we are making progress—if slow—in dealing with the consequences of that period of collective insanity.
These are not my words. They appeared in the leading article in the Investors Chronicle 10 days ago commenting on our application to the IMF. I believe that they represent the views of the great majority of thinking people of whatever party who have watched the performance of our economy in the last three years. I believe that they represent the secret views of the vast majority of hon. Members opposite. The task facing the right hon. and learned Gentleman who will follow me in a moment will be to convince the House, indeed to convince his party, in the light of all that was said—and not said—in Brighton last week, that in fact a future Conservative Government would have anything different to offer from the last 18 months of Selsdon Park followed by an abrupt reversal of policy and another dose of the policies so well described by the Investors Chronicle. That is not "The Right Approach".
There are those, on the other hand, who believe we should take steps which would, in fact, cut us off from the international community on which we depend both for the exports on which our manufacturing industry must base its growth and for the help we need to carry out the regeneration of our economy at a pace which does not threaten the stability of our society. I understand and share the anxieties of those who see their livelihood threatened by unfair foreign competition. We shall continue to take steps to protect them in such cases.
But I cannot believe we would ever achieve that transformation of our industrial performance which is our common aim if we adopted a policy for protecting our less efficient and declining industries at the expense of stunting the development of our most efficient industries, by risking the denial of the worldwide markets which they are already capturing and on which their growth must rely.
I do not believe, once the facts are faced, that any real alternative will be found to the course on which we are now set, the long and painful road towards restoring balance in our economy and reversing the secular decline of our manufacturing industry. It is a journey which we cannot hope to complete except in partnership with unions and employers alike, and unless we remain as loyal members of the international community.
It is already clear that if we are to maintain the necessary rate of progress we shall have to accept in the coming year at least some further fall in the real incomes of the British people as a whole. But we are now beginning to see, not only in the broad magnitudes of trade and output figures, but in individual plants—factories up and down the country—that we are beginning to get the results that we need.
There will, no doubt, be further difficulties on the way which we cannot now foresee. If so, the Government will not flinch from taking the measures, however painful, which are needed to overcome them.
But if we are to derive some comfort from the alarms of the last few weeks it is that the British people have shown once again that they are prepared to face the facts and to make the sacrifices needed to see this country through.
The Chancellor of the Exchequer has treated the House to a speech as characteristic as it was inadequate. It was a combination of ineffable and unshakeable complacency with his own disastrous record and unspeakable impertinence to anyone who has dared to criticise him over the years. He responded quite characteristically to the interruption by my hon. Friend the Member for Horncastle (Mr. Tapsell), who asked him a serious question about what was going on at the IMF. My hon. Friend expected to be told, but all he received was a denunciation of his lack of patriotism. We are fed up with the Chancellor denouncing Conservative Members for lack of patriotism when all we have done has been to warn him at each step along his path that the course to which he is committed would lead to the disastrous consequences we now see. It is not the critics of the Chancellor who has sapped confidence in the Administration: it is the facts of his record and his performance.
The Chancellor began by talking, but with less confidence than before, about the record of this administration on the cost of living. No wonder. In 1974 he was saying that his target of single figures would be reached by 1975. In 1975 he said that the target would be reached by 1976. Today we had not a word. The target is now apparently out of reach. It is out of reach, as the Chancellor acknowledged, because of the collapse of the currency, because of the panic level of interest rates he has now introduced, which will compel him to push that single figure target heaven knows where. As the Chancellor began so he has continued.
His dreadful record of deceit and of targets indefinitely deferred is matched only by his disgraceful assertion, which the country will never forget, that the inflation rate was running at 8·4 per cent. in September 1974. When he came into office the pound was at $2·30. Today it is $1·66. It is small comfort to hear the Chancellor boasting that foreign statesmen believe that the pound is today undervalued. According to him they were *** saying exactly the same thing in May this year when he made his foolish boast that the pound would soon bounce back to a higher level. We know that it bounced back—back down 10 cents. It is small comfort for the Chancellor to say that this has caused some increase in export volumes when we reflect that for every 10 motor cars exported to buy foodstuffs and commodities in 1973 British workers and manufacturers have to export no fewer than 15 today.
The pound has fallen by more than 2 cents for every month that the Chancellor has been in office. That is the judgment of the world and its markets upon his mishandling and mismanagement of the economy. No one any longer believes a word that the Chancellor says. During his years at the Treasury the present Prime Minister presided over a devaluation of 14 per cent. and the Government had to be rescued from that mess by the right hon. Member for Birmingham, Stechford (Mr. Jenkins), who has now abandoned them. But at least the Prime Minister, when faced with that situation, had the decency to resign. The present Chancellor has presided over a devaluation of the pound more than twice as great as that of his right hon. Friend.
The office of Chancellor is one of the oldest and used to be one of the highest in the land. Its holder used to be respected throughout the world. But in the last two and a half years the Chancellor has not only devalued our currency; he has devalued that office as well, and it is high time for him to follow the Prime Minister's example.
Let me turn to unemployment. At the 1974 election the Chancellor said that he was confident that we could get through 1975 with well under 1 million unemployed. Within nine months that figure was surpassed, and today's figure is almost 400,000 higher still. We now have the highest rate of unemployment of any major country in Europe, and it is still rising.
The Chancellor told the House today—and no wonder—that the prospect remained uncertain. I say "no wonder" because the policies to which the Chancellor has now been driven are deliberately pushing the figure still higher. We have heard enough of the cry that lower public spending destroys jobs. We have now reached the situation where we can see that exactly the opposite is true. The Prime Minister knows that, just as inflation is the father and mother of unemployment, so high public spending by a Government borrowing one pound in every five is the father and mother of inflation itself.
We have repeatedly warned the Government that public expenditure is too high and should be reduced. They have stated that that could not be done because it would destroy jobs. However, last summer we saw the proof of where their high spending policy is taking the working people of this country. The Chancellor announced then—apart from cuts in public expenditure, which are bound to be hurtful, as both he and my right hon. Friend the Member for Sidcup (Mr. Heath) have said—a 2 per cent. tax upon employment. Characteristically, he described it euphemistically as an extra employer's national insurance contribution. But he admitted that that would destroy 60,000 jobs, and his officials have put the figure two or three times as high. How does he expect employers to pay this tax on jobs without laying off workers and increasing unemployment?
The same will be true for every firm and company in the land, and it is clear that the Government's failure to cut public spending is now destroying jobs. Last week we saw further proof, because the minimum lending rate has been raised to the highest level in the history of the bank of England. Why? It is because the Chancellor can now find no other way in which the Government can hope to raise the money which he remains determined to overspend and over-borrow.
It is not the slightest use the Chancellor's arguing that our public sector borrowing requirement or the general Government deficit is comparable with that of other countries. The fact he has to face is the one of which we have warned him every month—that it is and will be too high for him to borrow in a way consistent with keeping inflation down. He conceded that domestic and foreign opinion saw that the money supply in this country was going out of control exactly as we had predicted. Last week we saw a desperate and destructive attempt to get it back under control. It is essential to do something, but what a catastrophic way to have to choose. What a situation the Chancellor has left himself with!
He is afraid to raise taxes—although we may not have heard the last of that yet, because on present policies he may have to do just that—because he knows that the nation is already grossly overtaxed. He is unwilling to do now what he will be driven to do, and that is to make substantial reductions in Government spending. He has introduced an interest rate that only the Government can afford to pay at an immense cost to future generations.
The Chancellor said that he could not pretend that the Government are happy with present interest rates. He can say that again. He can remember his own description of 13 per cent. interest rates as disastrous. He can compare our interest rates with those of other countries—Japan 6½ per cent.; the United States 5½ per cent.; Germany 3½ per cent.; Switzerland 2 per cent. It is hardly possible for him, against that background, to describe the present situation as a crisis of capitalism. It is a crisis of a Government who have mismanaged the economy in a disastrous way.
How can the Chancellor still talk, as he does, about investment being past the trough and picking up again? Does he not read what others have to say about the impact of this 15 per cent. rate on investment? The President of the National Union of Mineworkers has said,
It will knock hell out of the Labour Party politically at the next election.
He is right about that. He said,
It is another hold-back on investment in industry.
He then asked—and the Chancellor should listen to this—
Who can afford to borrow at 15 per cent. to invest in industry?
I do not know about all the employers whom the Chancellor has been meeting. They must be a very different group from those I have been meeting. Alan Fisher, another trade union secretary, said very crisply that dole queues would lengthen as a result of this crisis catastrophic level of interest rates, and the Chancellor knows that perfectly well. Of course, he is right. Stockpiling will be cut. Invest-
ment will be clobbered. On the best estimate that I have seen, the higher interest rates are likely to destroy well over 100,000 jobs, at least as many as the 2 per cent. tax on jobs that the Chancellor has introduced.
What is more, these changes cannot any longer be brushed away as though they were the result of some chance result of economic forces. They are a self-inflicted wound by the present Government. They represent the true price of the social contract. Of course we welcome a reduction in the number of industrial disputes. Only the Chancellor could pretend that it had nothing to do with the fact that unemployment is now running at 1½ million. However, the real evil of the social contract is that it was, and is, a sure prescription for deficit financing. It was bound to have the very consequences that we now see.
It is all very well for the Prime Minister to be complaining now that public expenditure has risen by 18 per cent. while gross domestic product has risen by only 2 per cent. But who started it? It is all very well for the Chancellor to speak now about the records of previous Governments. Let him remember that the Government of which I was a member, under the leadership of my right hon. Friend the Member for Sidcup, had put in hand reductions in Government spending of £1,300 million. It was the right hon. Gentleman's Government who deliberately reversed that trend and set about increasing public spending by 14 per cent. in their first year in office. The responsibility lies there, on that side of the House.
The truth is that more than 300,000 jobs will be lost because of the tax on jobs introduced by the present Chancellor and because of interest rates running at their present catastrophic level. Unemployment has more than doubled under the present Government just because public spending has doubled under the present Government. The policies to which the present Chancellor is now committed will probably treble the figure for unemployment before they have run their course. He has not been slow himself to call for sacrifices from the rest of the nation. The time has come for the Chancellor himself to make a sacrifice—for himself to join the ranks of the unemployed.
Just over a year ago, the Chancellor told the Parliamentary Labour Party that the public spending cuts that he was then considering—too little and too late—were necessary if we were, in his words, to avoid crawling to the International Monetary Fund on our hands and knees. Only two months ago the Chancellor told the nation that the long-awaited economic miracle was within our grasp. No wonder the Leader of the House of Lords last week described that statement as a false dawn—the understatement of the century.
Only two weeks ago, the Chancellor told his own party's conference that he would be negotiating with the IMF on the basis of our existing policies, not on the basis of changes in policies. Why did he not tell his party then that he was this week going to introduce the most savage squeeze in history? Was it that he did not know what he was going to do and is less far-sighted than we believe, or was it that he dare not tell his party conference the truth? He would not have got a standing ovation if he had told it that.
Either way, it is the actions of the Chancellor, which he did not disclose to that party conference, that have now produced what Clive Jenkins describes quite rightly as the collapse of Labour's economic strategy. The reality is that the Chancellor deceived his party conference and deceived his parliamentary party, just as he has probably deceived his Cabinet colleagues. Above all, he has deceived the nation.
The Chancellor has spent the last two and a half years wandering around the world with a begging bowl in his hands. He ought now to drop the begging bowl and carry the can instead.
Mr. Eric S. Heller:
The right hon. and learned Gentleman has referred to my right hon. Friend as deceiving the nation. Will the right hon. and learned Gentleman explain to the country precisely the amount of extra unemployment that would result if the savage cuts that he and his hon. Friends are suggesting were put into operation? Will the Opposition come clean and explain to the nation that the further cuts in public expenditure that they are proposing must mean further mass unemployment?
I do not know when one will make the hon. Gentleman understand that a Government who have presided over this level of public spending have laid the foundations for this kind of inflation and this level of unemployment. There is no escape from that whichever way we go. The present Government, by neglecting our advice, by failing to reduce public spending sooner, as every other Western Government have done, are themselves now destroying more jobs by higher taxes on the private sector and by higher interest rates on private investment. [HON. MEMBERS: "Answer."] No one who has discussed this issue responsibly, none of my right hon. Friends—not even the Chancellor himself—has attempted to conceal the fact that the necessary reduction in public spending must lead to some increase in unemployment. What we now complain of is that it is the increase in public spending, the still higher taxes to be imposed in the name of the social contract, that will produce much higher levels of unemployment than are necessary in this country.
Where does that leave the Government and the Prime Minister? The Prime Minister made a brave speech to his party conference, just as he made a bold broadcast to the nation when he was elected. However, both that speech and that broadcast were in total contradiction of the policies and methods by which he and his party came to power in the first place.
The question is how far the Prime Minister and his Government intend to put those brave words into practice—how far, indeed, is the Prime Minister capable of doing so. I was not much encouraged to see in yesterday's News of the World the Prime Minister saying that he had no doubt that with our present strategy we are in a better position to build a strong economy than we have been for a very long time. If he believes that, he will believe anything.
What has he done to put substance to his words to the nation? Throughout his party conference, the Secretary of State for Energy—who is not in his place here today—did everything in his power, by word and gesture, to undermine the policies that the Prime Minister had spelled out. Meanwhile, the Minister for Overseas Development—who is in his place here today—as though he was not in enough trouble already with the Labour Party of Newham, was courageous and rash enough to spell out in public what he thought the Prime Minister believed. The Prime Minister left the Secretary of State for Energy quite undisturbed, and he rounded on the Minister for Overseas Development in a most disgraceful way. By that response the Prime Minister did more to destroy his own credibility than anyone else's.
The right hon. and learned Gentleman refers to a speech of mine. Will he accept that what I have constantly been trying to urge is that we need from politicians of all parties, including himself, helpful and constructive suggestions as to how the nation can get out of its difficulties and not cheap debating points such as the right hon. and learned Gentleman has been making here and elsewhere?
If the right hon. Gentleman does not like the record of his Government, which he still supports in his present office, being pointed out, I am sorry. I shall come very quickly to the constructive points.
The right hon. Gentleman knows and the Prime Minister knows what has to be done to put the nation back on the road. The question is whether the Prime Minister will do it. The day after he declared that we could not go on living on borrowed money he authorised his Chancellor of the Exchequer to apply for the last brass farthing available from the International Monetary Fund. The Chancellor described that as prudence. If that is the hallmark of prudence, God save us from his folly. The Prime Minister continues to refuse to cut a single penny from his party's spending programme, and by so doing he has done his best to prove that he did not mean a word of what he said.
The day after the party which he leads voted overwhelmingly to nationalise the banks and insurance companies, what did the Prime Minister then do? He spoke to its National Executive Committee and, without a word of argument to suggest—as is the case—that such proposals would be disastrous to the nation, he merely pointed out that they would be an electoral albatross for the Labour Party. It is too much in line with the conduct that we fear from the Prime Minister—too great a tendency, even in this present hour of desperate need, to put the interests of party unity before the interests of the nation.
That is the Prime Minister's real dilemma. His party is now so deeply divided—we see it here on the Benches opposite—that he dare not do what the nation needs. The Prime Minister should not be worried so much as the Chancellor is about riots in the streets as about riots on the Benches below the Gangway on his own side. It is now beyond the capacity of this Government to retain the confidence of our overseas creditors on the one hand and their own left wing on the other. The time has come for the Prime Minister to choose whether he will serve the interests of his party or the interests of the nation.
In the interests of the nation, there is only one course left to the Prime Minister—to give overriding priority not to the advancement of Socialism but to the restoration of national solvency and self-respect. Let him realise, even if members of his party do not realise, that he has no choice about these matters. Let him realise the truth of his position—that beggars cannot be choosers.
That is the situation facing the Government. If they are to retain the support of the House, let alone the support of the country and the rest of the world, every policy and every action which is not directed to the restoration of national solvency should be ruthlessly set aside, and those members of the Labour Party who understand it should act to ensure that that is what happens.
By those standards let the Prime Minister now act. Let him determine to bring the money supply back under proper control, to restore a proper balance to the economy—not through higher taxes, through endless Government spending and through Dickensian money rates, but by making the large cuts in public spending that are now inescapable. Let the Prime Minister set out now to reduce the huge and indiscriminate subsidies on food, housing and transport to which his Government are still committed. The fruitless expense of those subsidy programmes has raised the cost of borrowing and cut the value of the pound by far more than in the end it has reduced the cost of living.
Let the Prime Minister subject to ruthless reduction every aspect of Government spending except defence, police and help to those in real need. Let him now abandon the expensive and destructive commitment to the nationalisation of the land; he cannot afford it, and the nation does not want it. Let him this week drop the Bill to nationalise the aircraft and shipbuilding industries. Let him listen to the pleas of many in his own party and abandon the Dock Work Regulation Bill. Let him cease the disruption of the school and health services by calling off the vendetta against pay beds and the grammar schools.
The nation is far more ready than many in the Labour Party to recognise the harsh realities of our position. People are looking to the Government to do what is necessary. Indeed, I believe that the majority of right hon. and hon. Members would wish the Government to act in the interests of the nation and to abandon their Socialism. So, possibly, does the Prime Minister. But if the Prime Minister's Government are unwilling or unable to take the action which is necessary in the interests of the nation and nobody else, to let actions match his words, it is high time for them and him to make way for a Government who will.
I think it deplorable that we should have had almost nothing but cheap debating points from the right hon. and learned Member for Surrey, East (Sir G. Howe). I much prefer, and I believe that the country would prefer, to hear the hard economic facts such as we had from the Chancellor of the Exchequer instead of the forensic extravagances of the right hon. and learned Gentleman. Indeed, I believe that it would be good for Parliament and welcome to the public if we had a little more serious analysis of the facts and less wild partisan talk about crisis, disaster, the end of the road, and the rest. That sort of talk not merely suggests a superficial state of mind on the part of its authors but can do a great deal of harm in the financial markets of the world.
What has actually happend since last summer in the real economic world as opposed to partisan rhetoric? The British balance of payments deficit has been reduced, the rate of inflation is substantially lower than it was a year ago, and a new pay agreement has been achieved. Those are the hard facts of the present situation. They suggest to me that there has been a major psychological element in the recent upheavals in the exchange market, excited, I would guess, first by the threat of a seamen's strike, also, perhaps, by some of the wild rhetoric at the political conferences, by fears of a revaluation of the German mark, and, above all, by the absence of any firm agreement on pay restraint in this country after August 1977.
To meet those short-term disturbances in the exchange market, the Government were, I believe, justified in the temporary monetary measures which they took last week, unpleasant though they may be. Nevertheless, the underlying unsolved problem has not altered, and I believe it to be this—to achieve in this country a long-term pay restraint policy which is at once firm enough to avoid intolerable inflation and flexible enough to enable a mixed economy to work.
That is the problem which faces this country, and many of the other advanced industrial countries as well. I believe that a solution of it is possible, but I am even more sure that, if we failed to find one, immense difficulties really would threaten us. I therefore urge the Government as strongly as I can to achieve an agreement as early as is practicable, preferably in weeks rather than months, if the exchange value of the pound is to be kept under reasonable control.
I speak as one who has advocated full employment and expansionist policies for a lifetime. But to anyone who now calls for reflation without pay restraint, I would say this: it was the pay inflation of 1973–74–25 per cent. and 30 per cent. increases all the way up the scale—that forced the Government into the inescapable dilemma of either letting that continue and accelerate, or else accepting this period of unemployment that we all deplore.
If anyone denies that, I think he has failed to understand the basic fact in this situation, which I summarise as follows: if pay rates increase faster than output, prices must rise; and if an attempt is made in the next pay round to recoup the loss of real income due to the rise in prices the rise in prices will accelerate. Any Government in that situation is then forced into the dilemma of either maintaining full employment by allowing prices to rise faster than ever, or else restraining the rise in prices at the cost of temporary unemployment.
There is no escape from that dilemma in that situation, and it is for those basic reasons that the pay inflation of two years ago must be counted as the cause of the present unemployment. It is this that has forced us into the absurd situation in which we are paying thousands of people to do nothing because present rates make it impossible for us to pay them all to do something without plunging us back into price inflation.
In order to get buck to full employment—which I assume is what the great majority of us want to do at the earliest possible moment—I urge the Government to reach a long-term agreement on pay restraint as soon as they can, and I therefore welcome the statement by Mr. Jack Jones, which some people may not have seen, reported in the Evening Standard of 1st October, that
we are not going back to a wage explosion or a free-for-all, but we are going to try to deal with the problem of productivity and the necessary incentives to make industry efficient.
Mr. Jack Jones would probably agree—I hope so—that experience shows that the sort of new long-term restraint policy that we need must also achieve at least two things. It must allow, not merely differentials for skill, but relativities between different trades and different industries, to vary more easily over time than they have in the pure pay freeze of the past. I do not see how, in the longer period, that can be done until we have set up some sort of referee of last resort who can, in disputed cases, give final rulings, even without sanctions to enforce them. But if anyone can suggest a better way of overcoming that problem—the Government or anyone else—I shall be glad to hear it.
If we resolutely follow the sort of course suggested in those words of Mr. Jack Jones, and prevent another explosion there is no reason in principle why we should not get back to full employment in a year or two or why we should not maintain it thereafter. With the right level of costs, and the right exchange rate, there is hardly any limit to the potential exports which this country might achieve, because there is no limit to the needs of the world as a whole. Indeed, some people, in using all this extravagant language, forget that we had a major balance of payments surplus in this country as recently as 1970 and 1971. However, one is bound to add that, unhappily, we have inflicted one gratuitous burden, which we need never have done, on our balance of payments.
The only means of achieving long-term solvency in our balance of payments is to buy primary commodities as freely as possible in the world at the most economic prices and restrain the import of manufactured consumer goods. We did that after the war up to the 1950s with a good deal of success. But, unhappily, our terms of entry into the EEC are forcing us to do exactly the reverse—to force up prices of essential foods and to buy manufactured consumer goods from the Continent without any restriction. We are, to put it summarily, not allowed to buy beef from Australia, and we are forced to give free entry to cars from Germany, France and Italy. The imbalance that that is causing, on top of the oil cartel, is the main reason for our continuing balance of payments deficit and the underlying weakness of the pound in recent months.
I give the figures only briefly. According to the EEC Commission's own statistics, it would have cost the United Kingdom in 1975 about £800 million more on the balance of payments to buy our food imports at EEC prices rather than world prices. We are saving at present, so far as I can calculate—and if the Treasury has a better figure I should like to know—about half that £800 million through the so-called "green pound" and "monetary compensation arrangements". But few people believe that this can continue for very long. It is such a precarious and curious structure that it seems not likely to last.
The balance in manufactured goods is even more striking. Our balance on visible trade in manufactured goods—other than diamonds—with, first, the EEC Six and, secondly, the rest of the world has changed as follows between 1970 and 1975. With the world, other than the Six, we had a surplus in manufactured goods of £2,194 million in 1970, and £4,800 million in 1975. With the EEC Six we had a small surplus of £95 million in 1970, and a deficit of £1,090 million in 1975. Our balance with the non-EEC world has vastly improved, and our balance with the EEC has heavily deteriorated. That is due to free imports of largely manufactured goods from the Continent in the past two years, and it is that balance, coming on top of oil prices, that is maintaining our balance of payments deficit and causing the weakness of the pound. We cannot afford to go on importing manufactured consumer goods from the Continent on this scale.
My constructive advice, therefore, to the Government this afternoon is this. First, agree on a long-term pay restraint policy with the TUC and the CBI as the immediate first priority. Secondly, keep the Budget deficit and the money supply, as the Chancellor is doing, within very strict limits. Thirdly, let us now have the proposals for a fundamental reform of the CAP which we have been promised over and over again but still have not received. Fourthly, let the IMF politely understand that if it cannot—and I hope it can—lend on reasonable terms the sums that we need, we shall be bound to limit imports of manufactured consumer goods—at least from the richer countries—because we cannot afford to do otherwise.
The Chancellor of the Exchequer pretended in his speech that we were going through a financial and monetary problem rather than an economic crisis. For example, he said that the pound was undervalued. I dare say that that is true, if we look at the purchasing power of the pound in some markets and the selling value of our goods in some markets, looking at the pound as a medium of exchange. But it is certainly not true that the pound is undervalued if considered as a store of savings or value, because people do not want to keep their money here. They do not want to hold sterling.
The right hon. Member for Battersea, North (Mr. Jay) suggested that this was a relatively short-term problem, caused largely by the failure to announce now an incomes policy for the future. But I think that the lack of confidence goes far deeper and is far more important to our country than the right hon. Gentleman's diagnosis suggests, much though I respect his judgment. I think that it comes about because we cannot yet sell our goods successfully abroad, despite the price advantage that a depreciated pound gives us, despite the fact that we have idle manpower resources and, until very recently, idle money available for investment.
We are still late on delivery dates. Our quality is not good and our reliability as producers and salesmen is questioned throughout the world. To deal with that takes a little more than jiggling with the figures or pretending that we face purely a financial and monetary problem, however serious.
What is wrong is that for a long time we have been putting too much of the total effort of our manpower, skilled and unskilled, management and professional people, and too much of our money and investment, in the wrong place. We have concentrated too much on producing non-marketable goods and services. I do not think that it is, as the Chancellor suggested, simply a matter of changing the balance in favour of manufacturing industry. After all, many of our services, particularly financial services provided by the City and others, are very marketable overseas and bring us great foreign currency earnings. Besides, most developed countries have a long-term trend to increase the ratio of non-industrial to industrial effort.
I shall take the period 1961 to 1974 to show, I hope, a lack of political bias and a sense of the national problems that we face. During that period in Italy there was an increase of 10·3 per cent. in non-industrial output compared with industrial output. In West Germany the increase was more than 14 per cent. In the United States it was 15·4 per cent., and in France it was 18·6 per cent. But in the United Kingdom it was 33·9 per cent., a vastly greater increase in the ratio of non-industrial to industrial production than in any of the other countries.
That did not happen because of a switch from goods to marketable services, as is shown by the figures for people employed in services generally. The increase in the number of civilian employees of central Government in that period from 1961 to 1974 was 35 per cent. The number of local government employees went up by 54 per cent. But the employees producing marketable services increased by only 13 per cent. As a result of the change from industrial to non-industrial production and the great increase in non-marketable services, the Government's pre-tax claims on marketed output—nothing to do with transfer payments and nothing to do with taxation—rose from under 40 per cent. in 1961 to over 60 per cent. in 1974.
Many people wish to speak, and I should like to finish my argument, so I shall not give way.
The facts that I have just stated provide clear evidence that there are too few producers of real wealth and that too little effort has been devoted over the years to creating new wealth.
That point, and the effect on total employment, become even clearer if we divide the period from 1961 to 1974 into two. From 1961 to 1966 the Government created new jobs in the non-marketable goods and services sector at the rate of 91,000 a year. At the same time, new jobs in industry and commerce were created at the rate of 101,000 a year. The real return on capital was 7·8 per cent. In the second period, from 1966 to 1974, the Government created 116,000 new jobs in the non-marketable goods and services sector, and there was a decrease in jobs in productive industry and commerce of 173,000. The real return on capital was only 4·6 per cent.
That failure to create new wealth has had its effect at home and on our exports, perhaps increased by changes in the terms of trade. We have not yet developed our invisible exports to balance it out.
I chose the period 1961·74 to try to present a relatively balanced and unprejudiced case. In fact, matters have become much worse since 1974, as can be seen from the increase in overseas debt and the public borrowing requirement, higher unemployment and more inflation. In this situation, the Chancellor's policies have proved disastrous.
Labour Members will have to accept that, no matter what system we use, public spending on the non-marketable sector must decrease. Now, with the minimum lending rate at 15 per cent., even the Government's attempt to switch public spending towards productive industry is taking away with one hand what they give with the other. There is an effect on private investment, on the capacity to finance increased working capital. Every time a firm increases its proportion of exports to home-sold goods, it requires more working capital to finance a longer period of waiting for payment. There are also effects on the building trade and on confidence.
The Chancellor and the Government have missed the basic point that we must transfer effort from the non-marketable to the marketable sector. Even if we had a fully Marxist State, the problem would remain. There would still be no way out of it.
I believe—and the Government and certainly the right hon. Member for Battersea, North take this view—that we in this country get on better with a mixed economy, and with a healthy private sector. We are too dependent on overseas markets in too many different places for what we buy and sell. We may disagree, as the right hon. Member for Battersea, North indicated, about where those markets lie, but they are many and various. We are too dependent on those markets to make a fully centralised and socialised economic policy practicable. We cannot rely on the apparatus of the State to dictate investment programmes to meet those markets and to provide the home base that is required to fulfil them.
I ask the Chancellor and the Government to tell us the truth. Whatever fears we may have about the hardship and difficulties caused by facing the truth, it is better to take that course than to run away. We are seeking a cutback in public spending on the non-marketable side which will not necessarily be permanent, except expressed as a proportion of the national income. It will be a cutback for four or five years, and as our productivity increases, as our markets expand, and as we sell more successfully, the amount we need to do in terms of social services, education and other matters which the whole House would like to support will become a tolerable proportion of our productive effort and not such as to endanger full employment.
The present level of Government spending—63 per cent. of gross national product—constitutes a grave danger to democracy. If it is extended into further control of investment and spending, there is grave danger of destroying our productive potential and of jeopardising any hope of getting back to collective bargaining. We must put more effort into the creation of wealth. That is the only way to restore confidence, to prevent a permanent lowering of our standard of living, and to avoid permanently high unemployment. However tough may be the process of getting the situation right, the process will not last for ever. But if we fail—and my right hon. Friend the Member for Sidcup (Mr. Heath) said this in a different context—we shall have come to the end of the road. Therefore, failure now would be truly disastrous.
To many people the present crisis may appear to be the re-run of an old film. Certainly to me, as a Member who came into this House in 1966, it appears that we have experienced such crises at fairly regular intervals. On this occasion the event has been invested with all sorts of descriptions that point to the fact that in a sense it is more of a crisis than those that went before.
My right hon. Friend the Prime Minister said at the Labour Party Conference that the cosy world was over. The right hon. Member for Sidcup (Mr. Heath) at the Conservative Party Conference—although I was not present on that occasion—spoke of the end of the road. It is important that we appreciate the fact that in some senses this crisis is rather different, although some people have said that it is just another hiccup with a secular, downward trend.
One of the ways in which the crisis is different was well illustrated in an article by Mr. Eltis in the current issue of Lloyds Bank Review. He saw this as a point of time in our history when we have to pronounce distinctly that Keynesianism is dead. Some people have been monetarists for years. I vividly remember the occasion in November 1967 when the present Prime Minister, as the then Chancellor of the Exchequer, received a letter of intent from the IMF. That brought our nation for the first time face to face with the fact that there were certain evil spirits in the monetary world who were trying to resurrect the old quantity theory of money that seemed somewhat archaic. We have reached a point when we can no longer accept advice from the Bank of England or the Treasury to the effect that Budget deficits, inflation and other factors do not matter.
My right hon. Friend tells me that nobody said that, but it is certainly true that for a generation and more that is the kind of advice we have been receiving. Whether we accept all the various facets of monetary thinking about lags and velocities of circulation, I think that all of us, including the Chancellor of the Exchequer, have come to the view that there is a financial framework within which we must try to conduct the affairs of the nation and that we go beyond that at our peril. We have reached a point when we must pay a great deal more attention—and this applies to hon. Members in all parts of the House—to financial considerations and the economy will be a great deal healthier for it.
Another point that has come home to roost at long last, with serious policy implications, is simply the fact that we are desperately inefficient as an industrial nation. This fact manifests itself in many ways. We know from recently published figures that we are among the lowest industrial nations in the league table of wage payments. We also know that we are almost at the bottom of the productivity tables. We are faced—not for the first time, but this time perhaps with an element of drama and finality—with the fact that we have to regenerate our industry, that we must make it more efficient, and that we must change the balance of the use of our manpower.
I do not want to speak for too long, but I wish to emphasise that many of my Labour colleagues below the Gangway, with one or two honourable exceptions, tend to resort to the usual solutions each time we get into a crisis. [Several HON. MEMBERS: "Where are they?"] I hope that their absence means that they intend to support my right hon. Friend the Prime Minister in the Lobby.
It is important to realise that many of the solutions put forward by my right hon. Friend are put forward in moments of crisis and are not heard very much about when the economy is doing reasonably well. I do not want to speak of the pound. I have views on this. I do not know whether the foreign exchange markets develop a neurosis when the Labour Party Conference is being held or whether this activity is stimulated by the Chancellor so as to get his point of view across. On any serious analysis of what has happened in the foreign exchange markets in the past two or three weeks, I do not think it can be said that we had been desperately speculated against, that leads and lags were a worse than normal problem, that there was more hedging than usual by the multi-national companies or that the oil sheiks had moved anything out of this country after about 30th June.
We who come from the provinces are finding it increasingly difficult to explain Government policy to some of our constituents. We are faced with protest meetings by those who threaten to go on strike if there are any more cuts in Government expenditure. We have to get across, not just a general message that on this occasion we are faced with the need once again to make sacrifices—this time with hope—but some more specific policy decisions. Had the Chancellor been here I would have wished to speak to him as someone who has kept one foot in the local government camp over these years while I have been in the House.
We are talking about the need to cut public expenditure. The Government are saying that local authorities must make some sort of economies but that there must be no redundancies. I have sat through many meetings of the policy and resources committee at county level. We have tried to cut. But the Government will have to answer one question before we go much further in asking local authorities to make these cuts. Local authorities are massive spenders. I have enjoyed every year that I have been in local government, when spending went up by 8 per cent. a year. We were spending money on excellent things, town halls as well as old people's hostels.
In the Financial Times today Mr. Samuel Brittan was looking to the future and asking: whose men will be sacked—Hugh Scanlon's or Alan Fisher's? We have to face up to this. Are we to go further along the road of maintaining employment in the public sector and reducing it in the vital manufacturing sector? Even when we make economies in manpower or in spending in local government, almost inevitably that is done, on the capital account, by making cuts in employment in the private sector. If, on the basis of no redundancies, it is said that we have to cut out a number of highways, the highways which will be cut out will be those to be built by private contractors.
I say to the Prime Minister, for whom I have always had the highest regard, that in this area of local government—parochial and petty no doubt—he must stand up, or get the Chancellor to do so, and tell local government that if there are to be further cuts in expenditure it may imply a certain amount of redundancy among those employed in local government. My right hon. Friend should not place the whole burden of unpopularity on the shoulders of the elected representatives in the area.
Mr. Samuel Brittan said that those who, like me, think that the Chancellor put up the minimum lending rate to finance his public sector borrowing requirement are crackers and that it was really done to prevent the pound from collapsing when the new figures on money supply are published a little later. I do not believe that. The Chancellor is in a desperate situation about financing his public sector borrowing requirement. We have a remarkable situation. No one will agree with me about this except my friends from the Tribune Group, who are not present.
What we have had over the past two or three months has been a situation in which the poor old Chancellor has been forced by the pension and investment funds of the country to go to the banks and borrow through Treasury bills, increasing liquid reserve assets and thereby producing these horrific money supply figures—apart from the financing of lags and leads—which are to be announced shortly. This is intolerable. It is the exercise of financial power without any responsibility by those managers—apart from a responsibility to posterity.
Would the hon. Gentleman think it fair to the policyholders—and it is their savings we are talking about—that they should have had those savings invested in, say, Government stock six months ago only to see the value of that stock fall in the intervening period? What would have been right about that?
I made the point that I am not too worried about posterity. I accept the hon. Gentleman's point. I would accept it all the more readily if the managers of these funds had shown any ability to lend their money in the equity market at anything above 6·6 per cent. which I believe was the last yield figure in this sector. It is appalling that they should hold the Government to ransom in this way, refusing to lend the money to the Government until they felt that the yield on gilt edged stocks would decline. I am happy that they made a mistake a couple of weeks ago when they rushed in to buy the new loan the Government put out. I am glad that the Government broker saved the Chancellor £40 million. I hope that he gets a cut.
We have to face up to the fact that my hon. Friends below the Gangway will use this sort of ammunition increasingly in support of the proposals to nationalise these enormous funds—pensions and insurance companies in particular—if we cannot see the exercise of a little more responsibility as well as financial power, so that those who are able to do so are prepared to assist the Government rather than hold them to ransom.
This has been called a crisis debate and an emergency debate, but I think that the word "crisis" is probably being wrongly used. I part company from the hon. Member for Stoke-on-Trent, Central (Mr. Cant) when he says that perhaps this crisis is in some way different in kind. I suppose that every crisis is different in kind, but I do not accept the view of the right hon. Member for Sidcup (Mr. Heath) that we are at the end of the road.
Anyone who has been in public life over the past 10 or 20 years and who has had any contact with the economy must have felt that we were near the end of the road on numerous occasions. Certainly I felt that in 1974. I thought then that we could not continue with the rate of inflation that then prevailed. I thought that people must begin to realise that and that the tide would have to turn.
A crisis is that stage in an illness when matters either get better or get worse. There is an element of uncertainty about which course the disease will take. However, there is no element of uncertainty about the course which the British economic sickness will take. It will get worse. Nothing has been said in this debate that leaves me with any confidence that the course of our decline will in any way be altered.
I know that that sounds like gloom, doom and despondency, something of which I was accused at my party conference. I was accused of causing a decline in the Liberal vote between the two elections of 1974. The fact remains that there is no reason to suppose that the British economy will improve.
In a pamphlet that I produced in 1974, I started with a quotation from the café wits in Vienna before the First World War—namely:
The situation is hopeless but not serious.
That seems to be something of the mood of Britain today. I note that my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) carried that historical parallel further in an article in the Observer of three weeks ago. When dealing with Britain's situation he wrote:
It is perhaps that of Vienna in about 1910. Austria is no longer a great power. Demands for internal self-government have gone too far for federal solutions. Her economy and industries are decaying. She is overburdened with a grimy mass of unproductive civil servants. She is threatened from without by the barbarism of Russia. She is pleasant, she supports art and music. She has a pathetic, well-intentioned hopeless Government.
Surely that is an exact description of Britain today. I should not wish to change one word of it.
I want to take a broad view of our problem, as I believe it is essential to do so if we are to arrive at a correct analysis. Outside the Chamber people are expecting hon. Members of all parties to speak for the national interest. My hon. Friend the Leader of the Liberal Party called for that in a noted speech over the weekend. I am sure that that is what all of us would wish to do today, but it is impossible that it will be done. That is because this place is no longer constituted in a fashion to do so.
If I were a Conservative Member, I should now make a speech to show that this is a crisis of short-term causes, all of which I could happily blame on the present Government, especially the present Chancellor. Indeed, that was the speech that we had from the Conservative Front Bench. If I were a Labour Member, I should try to show that things are nothing like as bad as they really are and that the Government's measures are in fact working. Indeed, the Chancellor went out of his way to do that today. However, neither of those points of view would be in accordance with reality. What in reality is in the national interest?
No, I shall develop my argument. No doubt the hon. Gentleman will wish to intervene when I have done so.
I do not believe that this is a short-term crisis. It is part of the long-term decline, and it will continue whichever party is in power. We are the most incompetent industrial country in the world. Our industry is inefficient.
If the hon. Gentleman knows of a more incompetent industrial nation, no doubt he will mention it. I cannot think of one that is more incompetent. If we consider the figures we might well pass such a judgment. The hon. Gentleman said very much the same thing in his speech.
Our industry is inefficient in a way that could not possibly have been caused by anything that has happened in the past two years, let along the past 20 years. Let us consider the fall in the pound. That is not something that can be blamed on any one party or on any one Government. It is something that has happened over years. I have spoken to international bankers and I find that they take the same view. They expect the pound to be at about parity with the dollar in the early 1980s. The same conclusion springs from the fall in our share of world trade that we have suffered ever since the war. They are both symptoms of a failing economy with which no Government have come to terms since the war.
Although it is now fashionable to discount the views of the greatest economist of our age, I remind the House of the views that were stated by Keynes when he considered the post-war outlook for the British economy. It was a deeply gloomy outlook. Keynes was someone who revolted against over-regulation, but he came to take so gloomy a view about our post-war economic prospects that he warned that Britain could well be forced to employ all the weapons of Dr. Schacht to square the circle. If we consider the present state of our economy and the situation that Keynes was considering in 1943–44, I do not think we have moved on very far.
Keynes saw Britain's post-war balance of payments deficit as of a size and kind that no one else had appreciated. We had never balanced our trade account with the rest of the world. Since the Industrial Revolution we had not had to do it. We had relied on overseas investment. In two world wars we had not only sold most of those investments but had borrowed considerably. We had run up enormous debts to pay for those wars. Presumably it has been the policy of all succeeding Governments since the war to repay those debts, but some of them are still unpaid. They have been added to massively over the years. That has happened not only recently but over a long period.
What are the remedies that we are offered 30 years on? The Government offer us industrial regeneration and we certainly need it. But the Labour Party correctly defined and analysed that problem in the period leading up to the 1964 General Election. I well remember the right hon. Member for Huyton (Sir H. Wilson). who was then Leader of the Opposition, talking about the need for industrial regeneration in speech after speech. We are still as far from achieving it as we ever were.
The Government's strategy cannot work. First, the Government believe in export-led growth. Do not we all? But there is no hope of getting out of our problems by that course. Even if the boom in other countries takes off—it is very slow about it this time round—our industry is not competitive enough to take advantage of it.
That is not because of prices. Of course we are competitive in terms of price. Given the way that the pound has gone, we should be able to sell anything if it depended on price alone. Unfortunately, we cannot do that, for it is quality and dates of delivery that make for one's ability to sell in export markets. We are uncompetitive because there has been chronic under-investment over the years. No one can make up for poor quality by prices lowered by a sinking pound.
The falling pound might do the trick for some economies, but it will not do it for ours. Our added value is so low that the increase in the price of materials that we must import to make our exports outweighs most of the advantages of the increased export sales.
Let us consider this doomwatch formula. A calculation made recently by a Dutch economist—I have not been able to find anyone to fault it—is that for every 1 per cent. by which our GNP grows, our imports grow by 1·7 per cent. For every 1 per cent. by which the GNP of our major trading partners grows our exports to them grow by 0·7 per cent. There is no way out of that problem through an export-led boom. It will not happen. It cannot happen.
Is it possible that we can get the growth we need through investment? I do not believe so. There is a great deal of spare capacity about and even though a lot of the machinery is old, it is still being under-used. There may be some defensive labour-saving investment but there will be no job-creating investment of the size that we need.
Cutting interest rates would certainly make it easier for industry to invest, but how far should we have to cut interest rates from their present levels in order to make investment in British industry really worth while? Would we have to cut them to 10 per cent. or 5 per cent? Even at 5 per cent. they would then only equal the average return on industrial capital. That leaves us with a consumer boom. That is always possible but obviously it would be quite fruitless. I maintain that the Government strategy will not work.
What about the Opposition? The remedies that they have espoused in their new pamphlet are not at all new. And they did not work when they were last tried. It is no good talking about the 'fifties, which were a sort of golden age of Conservative economic policy, because the terms of trade were so different then. We are now faced with an entirely different international situation. If we cut public expenditure to allow industry to invest there is no indication at all that industry would then take up the money which was made available.
There are two fallacies in this Conservative approach. Would industry invest if this was done and do we know how to cut public expenditure by the amount required? In respect of the first question, did industry invest last time? I well remember the right hon. Member for Sidcup having to go down to the City to curse and cuss at the industrialists of this country for not investing in spite of the fact that he had done everything to make that possible. The right hon. Gentleman introduced all sorts of new investment incentives—he cut taxation and did everything he could to make investment possible—but investment went into the property boom instead. When did we last have an investment boom of the size that we now need to square the circle? It has not happened in my memory and I do not believe that it will happen in my lifetime, and certainly not within the next 20 or 30 years.
Having sacked all those public employees by cutting public expenditure, which for other reasons might well be a good thing to do, what would a Conservative Government do if industry then failed to invest? Perhaps the Leader of the Opposition will address some of her remarks tonight to the questions how and what. The hon. Member for Henley (Mr. Heseltine) when interviewed on the radio on Saturday morning by George Ffitch was asked what a Conservative Government would not do that Governments were now doing. That really is the crucial question when we try to see what to cut in public expenditure. The hon. Gentleman listed various Government Acts which should not be passed—shipbuilding and aircraft nationalisation and such things.
I agree that they should not be passed but those Acts have not yet been passed. They represent expenditure in the pipeline. Surely the Opposition are not saying that Government expenditure is too high only in view of the amount which has not yet been spent. They are talking about Government expenditure last year. If they are saying anything at all, it is that Government expenditure last year was too high and that something has to come out of that, not out of what is being planned in the future.
I would repeat the question: what is it that Governments will not do that they now do? It is a problem for all of us. I have asked it at many meetings of my own party in the last year and I have never got an answer. People talk about rolling back the frontiers of government, but they are never able to answer the question. We could cut out a few subsidies here and there. We could do a bit with housing subsidies. If we look at the list of public expenditure items in the central pages of the Government's annual White Paper we see that in order to make the impact that we need to make on public expenditure we cannot cut at the fringes: rather we have to cut right at the centre of things in the major areas of public expenditure. These are education, defence, national insurance and social benefits.
That is where the cuts would have to come if they were really to make the difference. They could not be made unless we were prepared to return whole services now provided by Government to the market. I have not heard that argument by the Conservative Party officially, though it has been argued by one or two individual members of the Conservative Party.
What about the commitment to indexing pensions? That is something which nobody in this House will want to dismiss but unless one cancelled that commitment I do not see how such cuts as the Conservative Party are now calling for could be made.
I do not believe that we shall solve our problems by any of the measures that we have heard of either from the Government or Opposition. The Government are certainly blameworthy for short-term faults. The 8½4 per cent. fiasco is symptomatic of the Chancellor of the Exchequer. One of the first rules of politics is that even if one believes anyone's propaganda, one should not believe one's own. The Chancellor unfortunately not only misled the country but misled himself and the Treasury. I think he actually thought that he had got inflation down to 8½4 per cent.—poor fool. And that meant that he based all his policies on the wrong figures; that is not entirely unknown of British Governments, and he was not the first to do it.
There is a further point for the Opposition to consider. Supposing they come up with the right strategy, how long would that strategy have to be pursued to halt the decline? Ten years, or would it be less? I do not believe that it could be less. It would have to be 10 years. How can we ensure that any strategy is Pursued long enough for it to work?
It is certain, for instance, that any correct strategy would have harsh effects in the early years and be very unpopular. A very wise, if somewhat cynical, elder Tory statesman—indeed he is still very active today and within a stone's throw of the right hon. Lady's confidence—once told me that no Government should ever try to do anything in this country which could not reap electoral reward before the next election. Ten years is beyond the next election and the unpopular effects of the strategy will come before the next election—the first election that a new Conservative Government would have to fight. Therefore, the Conservative Party would not be able to pursue that strategy and would have to go back on it in exactly the same way that they had to go back on it after 1970. That is straight politics and there is no escape from it.
I believe that we are faced with a situation in which what is economically
necessary is politically impossible. Since the Chancellor quoted from the Investor's Chronicle I will now quote from an even more illustrous one—the Economist, which said on 9th October:
The real need for Britain is to find the political institutions and national will to reverse 100 years of continuous decline.
But there will never be a party, Labour or Tory, with the self-confidence and moderation in government to make any of these reforms until the electoral process to what purports to be the mother of parliaments has itself been made representative.
I hope that the right hon. Lady will address herself to that.
It is no use her coming to the Dispatch Box tonight and making a repeat of the kind of speech which she made at the Conservative Conference or the kind of speech which the right hon. Member for Sidcup was making in the Selsdon Park days. Whether or not that is the right strategy, the right hon. Lady should realise that the political system of this country will not allow her to pursue that strategy long enough to have a hope of its working.
I was waiting for the punch line from the hon. Member for Cornwall, North (Mr. Pardoe). I was wondering what it was going to be. Of course, it turned out to be that the answer to our economic problems is proportional representation. I thought that a strange thing to say. I must add that if I were as gloomy as he is about the economy, I would resign from Parliament immediately.
I think that most hon. Members on this side of the House can accept the reasons given by my right hon. Friend the Chancellor of the Exchequer for agreeing to the raising of the minimum lending rate. The rapid depreciation in sterling combined with the difficulties that the Government have experienced in financing the public sector deficit has made it inevitable that he should have to take action on these lines. He could not stand by and watch the inflationary effects of depreciation of sterling and uncontrolled expansion of the money supply totally undermine the social contract and most of the Government's economic policies.
But if I can understand and sympathise with his predicament, and if I can accept the raising of the minimum lending rate as a temporary but necessary crisis measure, I think that as a long-term policy it must be incompatible with the Government's economic and industrial strategy. In the long term, the raising of interest rates to this kind of level must bring to a halt the encouraging signs of investment intentions that we have seen in recent surveys which suggest that we are going to get considerably increased investment in the coming year. It must lead directly to an increase in unemployment, which is already far too high, and, as Member of Parliament for a constituency in the North-East of England, I must point out that if interest rates are as high as this for a long time, they will make it extremely difficult for such regions to expand and to prosper in the way they should.
In addition, of course, such high interest rates will have highly undesirable consequences for young people, particularly young married people. Apart from anything else, the situation will also eventually undermine the social contract. Raising interest rates may be a necessary short-term measure, but it can never be more than that. What the Government have to do is to restore confidence in sterling in a very short time in a way that does not undermine their basic economic and industrial strategy—a strategy that has the support of the trade union movement, of most British industrialists, and of the major Governments of the Western economic system.
I do not pretend to have any ready-made solution to all this. I do not agree with the right hon. Member for Sidcup (Mr. Heath) that we have reached the end of the road—if we have, it is a road which the Conservatives helped to make, certainly the right hon. Gentleman himself did. We are also told that further cuts in public expenditure will solve all our problems—this despite the fact that public expenditure is already declining in real terms and is likely to decline very considerably in real terms over the coming two years.
Of course there may be some areas in which we can make further economies of one sort or another, but drastic cuts of the kind proposed by many members of the Conservative Party and many commentators outside and in The Times would damage essential services very seriously. They would lead to far greater unemployment, and they would not be tolerated by the British people. That is a political and social fact.
There are those in the Labour Party who believe that they have a more acceptable alternative. I hope that they will forgive me if I remind them of Mr. Wynne Godley's recent letter to The Times in which, although he was advocating protection on a long-term basis, he said that we could not have it unless it was accompanied by the most severe financial, fiscal and monetary measures. So that is not an easy palliative or alternative to the Government's policies.
However, I believe that if the Government's economic and industrial strategy is to survive, there must be a radical change in the way we manage our financial affairs, and particularly the role of sterling. There is ample evidence that much of the fall in the value of sterling over recent weeks has been due to holders of large reserves of sterling getting out of sterling. It is about time the sterling balances were funded. It is wrong that a country with as small an industrial base as we have should be playing this rôle of major world banker.
Perhaps I shall be told that our position is too weak. Yet when our balance of payments was strong we were informed that funding was unnecessary. The Conservative Government missed a great opportunity by not funding in the early 1970s, when we had a strong balance of payments and were negotiating our way into the Common Market.
In our present position, it is often forgotten that, despite our weakness, we have very considerable bargaining advantages from the fact that we have a world currency and that we are still a very large domestic market. These are advantages that we have to exploit to the full. Whatever the right hon. Member for Sidcup has said, the truth is that the rest of the world cannot afford to see Britain go under. A funding by the major European countries and the United States is not only in our interests but in the interests of the rest of the world as a whole, because it would create financial stability in the world.
We also need a massive long-term loan which will serve to underwrite the economy until the British balance of payments gets the full benefits of North Sea oil. It might mean some international supervision of our economy, but that is a price I am prepared to pay if we could get large-scale international support which would give our policies the time they need. As the hon. Member for Cornwall, North said, the problem is time.
Meanwhile, I think that the Government have to consider measures which are needed to help the balance of payments directly, because it is also our balance of payments deficit which is weakening the position of sterling. The depreciation of sterling has made our goods extremely competitive, and our exporters have a great opportunity—one that they have not had before. However, there is evidence that some of our main exporters still find it very difficult to quote for long-term contracts because of the uncertainties of inflation. This is an area where the Government might consider giving more help.
There might be a case for some form of import controls. I have never been against them in principle. I think that it is a question not of theology but of the balance of advantage and disadvantage. We may have to have some form of import controls in the coming year if the balance of payments deteriorates further—perhaps temporary controls, perhaps an import deposit scheme.
What I have been arguing for is a combination of enlightened support from the major economic Powers and some adjustment in our own financial and balance of payments policies which will preserve our economic and industrial strategy and give it the time to work. I shall be supporting the Chancellor in his measures. But I hope that the Government are now considering a package of the kind I have been discussing—otherwise we shall be once again "blown off course" when, if we can act with grit and determination, our long-term prospects are better than they have been for many years.
I for one do not share the readiness of the hon. Member for Chester-le-Street (Mr. Radice) to accept international tutelage. If we lack determination, if we lack insight, if we lack wisdom and courage, then those qualities will certainly not be supplied by the interested benevolence of other nations. We have to find them for ourselves if we are to use them at all.
There has been much talk, in the recent conference weeks particularly, of national unity—these deploring that we do not have it, those believing that we are about to get it, and those calling for it to be created. I do not know about national unity; but on the subject which we are discussing this evening there certainly has recently been a remarkable move towards a consensus, at any rate as to the cause and nature of the inflationary evil from which we persistently and increasingly suffer in its symptoms and its consequences.
The two Front Benches, so far as one can judge, and most other quarters of the House seem now to be agreed upon the identification as at any rate the major cause of inflation of the consequences of an excessive public service borrowing requirement having to be met by methods which increase the money supply. Whatever distaste their past disclaimers may have inspired in Ministers and those who sit on the Opposition Front Bench, it is all too clear, from words in the one case and in the other from the practical policies which the Government pursue, that radically they accept this broad analysis of the causation of inflation and of our present predicament. It would be impossible otherwise to understand the necessity for the Prime Minister himself to make such speeches as he makes to his own party, notably at the Blackpool conference. So we have the advantage in this debate, which we have not always had, of a broad consensus as to diagnosis.
The Chancellor of the Exchequer was, I thought, remarkably frank in describing the immediate causes of the steps which have recently been taken—the massive new borrowing and the increase of the minimum lending rate. He described how quite suddenly it had been found impossible to meet the emerging requirement of the Government for loans from the public here or abroad, and that therefore steps had to be taken to meet that alarming deficiency. What was lacking in the speech of the right hon. Gentleman, and what I believe has to be supplied, is the relationship between that sudden predicament of the last few weeks and the fundamental and increasingly accepted analysis.
It is tedious and rarely justified to venture upon a self-quote; but sometimes such a thing can be a kind of datum or bench-mark, and I will venture upon two sentences from the debate of March this year:
I say that it is an unacceptable danger—not to a class but to the nation—for us not to aim at eliminating the net borrowing deficit over the next two years, and without being able to quantify that precisely—of course I cannot—I say that it means a reduction of about £4 billion on what is proposed in the coining financial year. I said that six or nine months ago, at a point of time when it would have been much easier to achieve that result."—[Official Report, 10th March 1976; Vol. 907, c. 498.]
Already another seven months have passed since I said the words which I have just quoted.
We do not do these things unobserved, we do not conduct our affairs in secret. The consequences of the exorbitant public service borrowing requirement, and the chance that at any moment—as indeed happened in these last few weeks—we might fail to meet it by the selling of Government securities to the public had not escaped the attention of others. In so far as we were failing to fund this requirement, then, as the money supply figures mentioned this afternoon show, the process of overcoming inflation had actually been reversed: the pressure of money supply was again rising, and, of course, the prospects also were that this would only be the beginning. Those therefore who for their own purposes and in the course of their own business try to estimate what will be the course of our affairs concluded that, sooner or later, renewed inflation, generated by the inability to fund this excess borrowing requirement, was bound to be our experience in the coming months. Whether the fall in the rate of sterling somewhat anticipated the actual rate of inflation or not, it was a direct consequence of the manner in which our financial budget is constructed. Similarly, the necessity for trying to tempt out funds became stronger when potential lenders saw themselves threatened with the consequences —which have already been referred to earlier this afternoon, I thought in rather gloating terms—of buying gilt-edged securities at the wrong time.
Two measures, therefore, were taken which did not go to the heart of the matter but which were palliative of the symptoms. The first measure was directed at the symptom of the falling sterling exchange rate. Now, the balance of payments always balances, provided that the exchange rate is allowed to be the equilibrator; but the Government are not willing to accept that—I think mistakenly—and therefore have found themselves making immense borrowings in order simply to prop up the exchange rate of the pound sterling. For that purpose they both used the reserves and ploughed back the borrowings. It is exactly like attempting to cure a fever by smashing the clinical thermometer or putting it into a refrigerator. It is merely attempting to hide the symptoms without paying regard to the causes. This is not merely futile: it is positively damaging.
There is a lot of mythology about the exchange rate and the consequences of a fall in the sterling exchange rate; and I am afraid that the Press, and the manner in which it handles this, contributes to public misunderstanding. The notions of bankruptcy, catastrophe and so on, the whole vocabulary of national ruin, are exhausted every time there is a movement of a few cents in the exchange rate.
Yet a movement of the exchange rate which reflects, belatedly or in advance, internal inflation, has, and can have, no effect whatsoever upon our standard of living or our ability to procure what we want from other countries in exchange for our products. That can be affected only by an alteration in the real terms of trade; in other words, in the comparison between the prices of what we import and the prices of what we export. In fact, the terms of trade in recent years, though they took a dent in 1973, have, broadly speaking, been by no means catastrophic for this country.
It is also true that a fall in the exchange rate, temporarily at any rate, renders some items relatively more expensive on the domestic market, and others therefore necessarily less expensive—it alters slightly the pattern of internal prices. But this does not and cannot contribute, upon the analysis which, fundamentally, the Government themselves have accepted, to cause or to exacerbate inflation.
A fall in the exchange rate is, therefore, a pure symptom, harmless in itself and, indeed, very useful, because, unless we allow the exchange rate to act as the equilibrator, if we attach ourselves mystically to some exchange figure for the pound sterling in terms of dollars or otherwise, there will be no end to the extent to which we shall load upon ourselves useless debt for the mere purpose of concealing this indicator of reality, this external index of the internal depreciation in the value of our money. It is for that reason that I say, and have long said, that it is perverse for Governments to attempt to rig the exchange rate. The exchange rate is an indicator which tells useful truths if it is allowed to do so. Any attempt to rig or to fudge it does no one any good.
That brings me to the other measure which has been taken—that of the increase in the minimum lending rate. There is both an internal and an external aspect to this measure. The external aspect is yet another form of fudging the exchange rate, because an increase in the minimum lending rate is a kind of surrogate for a fall in the exchange rate. If the aim is not to let the exchange rate fall, it is possible to prevent the realisation of that movement by artificially increasing the internal rate of interest. However, I have already dealt with the disutility of fudging the exchange rate.
At the same time, driving up the internal interest rate temporarily brings out funds which are not in themselves inflationary to meet the Government's borrowing requirements, it being the case that people are ready to invest—very temporarily—in Government securities if they believe that the next move in the interest rate will be downwards, and it is easier to believe that when the interest rate has been pushed up very high than when it has not.
I will not describe this process as a trick, since everyone understands it, and those who are intended to be tricked watch very carefully to ensure that they escape from the trap before it closes on them. But morally innocent though the procedure may be, it is foolish and counter-productive, because the interest rate has an even more vital function in the regulation of the economy than the exchange rate.
The business of an interest rate is to spell out, in all the possible varieties of circumstances and under all the possible varieties of conditions, the choices which people are making between present and future and between less risk and more risk. If we are interested in getting investment and in getting the right investment, as I think we all are—in getting a more satisfactory productive pattern in the British economy—we must not fudge the interest rate, we must not grotesquely falsify it, for it is indeed a grotesque falsification to pretend that 15 per cent. represents the current balance of supply and demand for investable savings if it were not for Government intervention. When we intervene for short-term purposes, we destroy the markers by which those who are taking all manner of investment and commercial decisions should be guided. Other hon. Members se:; this—and I make no criticism—in terms of the direct harm which an artificial rise in the interest rate does to employment and to investment.
So in order, once again, to conceal the consequences of what really ails us and to patch over what the Government themselves know is the risk which they have deliberately courted and to which they have fallen victims, we have inflicted additional injury upon ourselves. That is what we have done with the 15 per cent. interest rate.
I come back, therefore, to the undisputed fundamental that we cannot carry on with a British economy staggering under this huge public service borrowing requirement, which at any moment can force a Chancellor of the Exchequer into the position in which the right hon. Gentleman found himself, no matter whether other economies can do so, where confidence and the attitude of the public to Government are different. We have, therefore, to bring total intake and total output of money by the Government much more nearly into balance, and we have to do it with greater urgency than ever. That is the message which should be conveyed by the events of the past few weeks.
Since I made the remarks six months ago which I ventured to quote to the House, I fancied that I had caught an echo of them from the right hon. Member for Leeds, North-East (Sir K. Joseph), and I noted with great disappointment that he was not to be leading for Her Majesty's Opposition in today's debate. But when the insistent question, "How do you do this?", which I have not been afraid to face, was put to the right hon. and learned Member for Surrey, East (Sir G. Howe), he took refuge almost in trivialities. Of course, he referred to the reduction and elimination of subsidies. I have always done the same and give it my support, but remember that it is an ambition which the Conservative Party and incoming Conservative Governments have cherished during the past 20 years but rarely realised. However when that phase of his speech was finished, when the reference to food, housing and transport was over—I wonder when these transport subsidies were mostly accumulated, but let that pass—the right hon. and learned Gentleman had nothing to talk about but nationalisation.
Nationalisation may be very wicked; but it does not make any difference to the expenditure estimates for 1977–78, and it is those estimates that we are discussing. The fact is—and the Chancellor of the Exchequer and the Prime Minister well know it—that in order tolerably to reduce the risk which they took, and which did not come off, with serious results, in the past three months, they need to reduce the estimates for the coming financial year by £4 billion or thereabouts. I use the figure again, because I believe that we should all indicate the magnitudes in which we are thinking. I have no doubt that the major contribution to that reduction can be found only in the capital programmes of the nationalised industries and of the great Government services.
In saying that, I come to the last point which I wish to make, and I make it more to Government supporters than to right hon. and hon. Members on the Benches round me. There is a misconception abroad about the relationship between public expenditure and unemployment. The unemployment from which we are suffering is the predicted unemployment which was bound to accompany a fall in the rate of inflation. It is a rise in unemployment which we knew we would have to go through if, as we knew we had to do, we reduced the rate of inflation from nearly 30 per cent. towards single figures. That is the prime nature of the unemployment with which we are now afflicted.
But it is not true to suppose that a lump of public expenditure which does not appear in the public accounts therefore vanishes into thin air. It is a mistake to suppose that this demand and the resources which it represents become non-existent if it is not part of the net borrowing requirement in the Government accounts. Every penny of Government expenditure is a transference from somewhere else in the economy achieved by one of three methods—taxation, genuine debt or inflation; for inflation is just as much a transfer of command over resources to the Government from the rest of the economy as is taxation or borrowing.
When one says that by alterations to the pattern of Government receipts and expenditures we have to achieve a massive reduction in the net borrowing requirement, one is not extinguishing a great mass of effort for the coming months and years. One is altering the pattern of application of that effort away from one which has constantly plunged us and still plunges us into embarrassments such as those we are considering today towards a pattern with which we shall not be at constant risk of refuelling—to use the Chancellor's own word—inflation and therefore having to go once again through the purgatory through which the people of this country are now living.
Perhaps I am being ingenuous or starry-eyed; but, unlike the hon. Member for Cornwall, North (Mr. Pardoe), I do not believe that the people of this country are incapable of understanding the things we are talking about and I do not believe that they lack sound instincts and understanding in these matters if they are not misled as to the relationship between cause and effect.
The hon. Member for Cornwall, North may be right. His cynicism may be justified, but it has not ever been so and it is not my belief that it will for ever be so. I do not believe that the great majority of hon. Members or Ministers want to deceive the people who sent us here. But to get their support for the things which the Chancellor and the Prime Minister know have to be done it is necessary that we do not distract them with misrepresentations of the meaning of things like exchange rate or threaten them with bogys about unemployment and public expenditure, when the unemployment with which we are threatened arises from the dangers which can only be banished when we bring our finances back into tolerable balance.
The hon. Member for Cornwall, North may be right or I may be right; but I do not think that any of us can have much doubt that it is our duty to try, even if we fail again.
We have just heard a characteristically lucid and powerful speech from the right hon. Member for Down, South (Mr. Powell). I am not sure that I agreed with any of his arguments, but I agreed with one of his conclusions: what he said about the rate of interest was profoundly true.
The right hon. Gentleman was wrong, however, to deprecate the language of crisis. We do face a crisis, and the speeches from both Front Benches today were below the level of events. It was foolish of the hon. Member for Cornwall, North (Mr. Pardoe) to flagellate himself into a state of hysteria about the nature of the crisis. It can and must be overcome, but it will not be overcome unless we admit that it is a crisis.
We have to start by recognising that this is not a crisis of the last three or even the last 30 years. It is a century old. This country started to lose its industrial supremacy 100 years ago. There were debates in this House at the end of the last century in which hon. Members described how our rivals in Germany and the United States were beginning to overtake us because their industries were more efficient and productive.
The facts of life were masked for a long time. We had the huge captive market of the Empire and the huge foreign investments made by our ancestors. We were lucky enough to ally ourselves with the strongest Power on earth in two world wars, and therefore ended on the winning side.
However, in the last 25 years reality has been steadily catching up with us and for the past 15 years or so the crisis has been in its acute stage. We shall not begin to put our house in order as a nation unless we recognise that fact.
If we are not just to get out of the immediate problems of the balance of payments and the public sector borrowing requirement but to do so in a way which deals with the underlying sickness of the British economy which has been with us for a century, the first essential is to recognise that the Government's strategy has not worked. I hate to have to say that. I take no pride or joy in saying it. I have supported the Chancellor of the Exchequer for the past year. I believe that he was on the right lines and still believe he was right to try the strategy he tried. But we have to face facts. His strategy has not succeeded and has not overcome the crisis that we face.
In essence the Chancellor has tried to do four things: first, to moderate the rate of inflation, partly by a rather mild incomes policy and partly by a rather mild monetary policy; secondly, he has tried to borrow abroad to finance our balance of payments deficit until the benefits of the devaluation of sterling come through and until North Sea oil starts to flow; thirdly, he has tried to borrow at home to finance the public sector borrowing requirement, which he has been unwilling to reduce more rapidly because he is afraid of the conseqeuences for employment; fourthly, he has held out the promise of growth in the longer term, to be achieved by selective State intervention and by a partnership between Government and both sides of industry to promote investment.
These have been the central elements in the Government's strategy. We have to recognise, I believe, that it is no longer possible to combine all four at once. We now see that a public sector borrowing requirement of the present size simply cannot be financed without rates of interest that destroy the Chancellor's own industrial strategy and make it impossible to achieve the growth and investment central to our salvation in the longer term.
Secondly, it has become clear that we cannot finance the balance of payments deficit by borrowing abroad—here I part company with the right hon. Member for Down, South—without seeing an unacceptable fall in the exchange rate. I agree that, in pure theory, the exchange rate is nothing more than a neutral equilibrator, if that is the phrase, but in an economy like ours with huge foreign balances and apt to face acute problems of confidence, a fall in the exchange rate can be self-generating and can lead to real and unnecessary cuts in standards of living. That has become clear over recent months.
The alternative to an unacceptable fall in the exchange rate, if the balance of payments deficit remains at its present size, is to maintain confidence by means of monetary squeezes, which jeopardise investment and growth.
Thirdly, it is becoming clear, if the reactions of my constituents are anything to go by, that public support for the Government's incomes policy, which must be a critical part of their fight against inflation, will not be forthcoming unless the country is given some reason to believe that the Government have a coherent strategy for the medium term. The events of the past month have greatly shaken public confidence in that respect. Unless the Government reappraise their strategy and think again, they will not achieve what my right hon. Friend the Member for Battersea, North (Mr. Jay) rightly said was an absolutely essential ingredient in any sensible policy over the next 12 months—namely, an effective stage 3 of the incomes policy.
We must face the fact that, for these reasons, the Government's strategy has to be reappraised. The question is what kind of alternative is needed. The aims are clear.
First, it is necessary to maintain a rigorous anti-inflationary monetary policy. If we go back to the rates of inflation which obtained a year ago, we might as well reconcile ourselves to industrial suicide. Secondly, I believe that we must transfer resources to the balance of payments more rapidly than we have been doing. Thirdly, we must somehow do all this without jeopardising business confidence in growth in the long term and without jeopardising the confidence of ordinary working people in the possibility of the Government's strategy succeeding.
It will be difficult to achieve those three aims. I believe that success will be impossible unless the Government present a coherent package of measures to the nation and the House. The worst of all worlds is to be forced, little by little, into successive measures of austerity which never finally deal with the problem. That is part of the difficulty that we have faced during the past two years. It must be a comprehensive strategy which will involve every section of the nation in sacrifices, both material and ideological, if we are to have any hope of getting out of the mess.
What are the ingredients of the package which I think the Government should bring forward in the coming weeks and months? First, we must get back to lower interest rates. Whatever else is right, it cannot be right to maintain interest rates at this penal level. That must be the first aim of Government policy. I accept that the Chancellor of the Exchequer had no alternative but to do what he did last week. But the first aim must be to get interest rates back to a more reasonable level.
Does my hon. Friend think that it is practicable to have interest rates lower than the rate of inflation so that we have negative real interest rates for any length of time?
No, I do not; but I think that they should and could be lower than the present rate and that the rate of inflation could be lower also.
Secondly, I believe that we have to grasp what for everybody in the Labour Party is an extremely unpleasant and distasteful nettle—namely, that there is no way of reducing interest rates without reducing the public sector borrowing requirement, either by higher taxation or by further cuts in public expenditure, or both. That is an extremely unpleasant remark for me to have to make, and I take no pleasure in making it, but we must face that fact. Unless we do, we shall have no hope of getting business confidence revived and the longer-term problems of the economy faced.
Thirdly—this is something that the Tory Party will find distasteful—if sacrifices are to be made—and there is no question but that real incomes will fall further next year whatever policy the Government adopt—we must demonstrate to the people of this country that those sacrifices will be fairly shared and that there will be greater equality in the distribution of income and of wealth in our society than we have yet achieved. I do not accept the Conservative argument about high taxation. I believe that high income earners can be expected to make a higher contribution in a state of national austerity. It is not possible for me to ask my constituents—the coal miners of Ashfield—to accept austerity and sacrifices when they can see gross inequalities and injustices in society.
We must have higher, not lower, taxation on high incomes.
Fourthly, the Government must face the fact that some form of controls on imports is almost certainly inescapable. I do not find it easy to say that. I know all the arguments against controls. Indeed, I have used them. I know the case against import controls by heart. I shall not bore the House by reciting it.
In this emergency situation more drastic action must be taken to put the balance of payments right. I cannot see how it can be done by a further depreciation of the exchange rate. The only alternative is some form of import control. An import deposit scheme would not have the distortionary effects which are one of the main arguments against import controls. I think that such a system will have to be introduced in the next 12 months and that the Government will have to accept that fact.
Fifthly, I agree with my hon. Friend the Member for Chester-le-Street (Mr. Radice) that there must be a determined effort to deal with the problem of the sterling balances. The Chancellor of the Exchequer was unresponsive when he was asked a question about that matter by one of my hon. Friends. I know that it is easy to talk about the sterling balances. We always talk about them in crisis situations. When things are going well, nothing is done about them; but this nostrum is trotted out again and again in times of emergency. But I do not accept that enough has been done to solve this problem. It will not be easy, but the Government must give an earnest of their seriousness regarding this matter greater than they have yet done.
Sixthly, and finally—this is perhaps the most controversial and difficult of all the proposals that I have been trying to put forward—I believe that there must be a kind of political concordat in this country to take industrial policy out of politics. That involves sacrifices from the Conservative Party, because at the moment they are engaged in drawing up a very Simpliste laissez-faire programme rather like the one they adopted before the 1970 election. They did not carry it out while they were in power, of course, because the facts of life were too strong for them, but they are now going back down the same sterile path which they trod between 1966 and 1970.
We on this side of the House must accept that the mixed economy is here to stay. That means also that the Conservatives must accept that selective State intervention in the form of the National Enterprise Board is here to stay, too, as part of the mixed economy. Unless there is this acceptance on both sides of the House, there is no prospect of our economy recovering from its problems.
I cannot pretend that we face an easy task in getting out of this crisis, but the kind of package that I have tried to sketch out promises at least the possibility of success. I am sorry that I did not see such a possibility in either of the Front Bench speeches this afternoon.
The hon. Member for Cornwall, North (Mr. Pardoe) said that very few hon. Members could in this House speak in the national interest. I am speaking in the national interest, but my nation is not the nation of the vast majority of hon. Members. My nation is Scotland, and it is in the interest of Scotland that I speak.
It was with a sense of deep depression that I came to London after the Summer Recess. This sense of depression stemmed from leaving Scotland in general and coming to this Parliament in particular, a Parliament which has so patently failed to do anything for the economic, financial, business, commercial and employment problems of Scotland. My depression was countered by a sense of gladness that Scotland will not for much longer have to suffer its business being mismanaged by this House of Commons.
It is difficult to raise passions in this House. I except the ritual knockabout between the Chancellor and his Opposition Shadow, which we have seen again today and I suppose that, in general, this is a good thing. But for my party this is the time for some passion. The home rule Bill of 1969 got guffaws in this House and there is no doubt that the Scottish National Party's position will be received with the usual guffaws today, but in time people will realise just how serious we are and how successful we are becoming.
As far as Scotland is concerned, we have reached—if I may coin a phrase—the end of the road with this Government, this Parliament and the concept of the United Kingdom as a unitary economic State. Westminster has had its day as far as Scotland is concerned. The sooner we have a General Election in Scotland, the better. It cannot come soon enough. I do not know what the Opposition's position is on this matter. They made a lot of sound and fury in Brighton last week, but I am not sure quite how much this signified.
We in Scotland are concerned not just with the mismanagement of this Government but with the whole Westminster system. Successive Governments have dragged Scotland further and further into the mire. In 1973, the then Chancellor of the Exchequer engaged in a "print money policy" which increased the money supply and led to a rank proliferation of tertiary banks, and the result was the unacceptable face of capitalism. The present Chancellor has compounded the problem, and the illness from which the United Kingdom as a unitary economic state is suffering cannot be solved by medicine; the United Kingdom as a unitary economic State is in need of surgery. Economic physiotherapy will no longer do any good.
The Government's policies of panic are being pursued in the most disastrous way for Scotland because they are discouraging productive investment in my country. A short-term expediency of this kind is inimical to the medium and longer-term needs of the Scottish economy. This is another dose of benze-drine before facing up to the hangover shambles of a party which has gone on much too long.
I recognise, and I share, the despair of all people in these islands over what has happened to them. I will not exacerbate their sufferings by picking over the long sequence of economic mismanagement of successive Governments, and most notably of this Government, the list of which we saw articulated recently by the Blackpool brontosaur. From Scotland's point of view, watching the Callaghan Cliffhangers in operation—if operation is not too positive a word to describe their antics—has been like watching a marriage partner ruin the family finances and ruin its good name by a life style of spendthrift and wilful dissipation. Those of us who wish to see self-government in Scotland have been hearing a lot lately about the economic integrity of the United Kingdom. Some integrity, some economy.
It is more in anger than in sorrow that I remind those who are opposed to Scottish self-government that Scotland, more than any part of the United Kingdom, needs massive sustained investment to ameliorate unemployment, reduce the outflow of able people, and eradicate the appalling degree of social deprivation in the west of Scotland.
The unionists in all parties—Labour, Conservative and Liberal—no longer have an economic leg to stand on. Some businessmen say that devolution would cause economic upheaval in Scotland. But no economic upheaval could be as chaotic as that brought about by a 15 per cent. minimum lending rate, soaring mortgage rates, and the falling pound.
The Conservative Prime Minister of 1963–64 said in the late 1960s after he had lost office, at a St. Andrew's Society dinner in New York:
The Scots know on which side their bread is buttered.
Not only do we know that; we know that to stay within this Union means that we shall have not only no butter but no bread either.
The hon. Member for Oswestry (Mr. Biffen) wrote in a pamphlet published last week:
With the discovery of North Sea oil it is now no longer possible to use the crude and dubious argument that the Scots are the financial dependants of the United Kingdom.
The value of Scottish oil production is now running at £2·5 million a day, or 320,000 barrels a day. How then can there be any further restrictions on the Scottish economy?
The Foreign Secretary is quoted in today's Financial Times as giving the following not quite so sotto voce answer in the United States to the question why London was refusing to grant independence to Scotland. He said:
They have got a lot of oil.
Of course, we shall recycle our oil reserves to help our friends and neighbours in the South. England is, after all, Scotland's largest single market, and it is in our interests that England's economy should be buoyant. But the recycling will he done on our terms and our oil will not, by itself, be a panacea for England's ills. It is time that England realised that it cannot go on living for ever on tick.
It means according to the terms enunciated by the people of Scotland in their Parliament, democratically elected.
Scotland is also rich in another valuable resource, the most valuable of all, food. This makes recently articulated threats of possible food rationing all the more ironic. We in Scotland are self-sufficient in all major foodstuffs which is reflected in the following figures: beef, 105 per cent; mutton and lamb, 300 per cent.; poultry meat, 150 per cent.; liquid milk, 100 per cent.; cheese, 100 per cent.; and fish, 500 per cent. There is no question whatever that a self-governing Scotland could soon fix its own interest rates and minimum lending rates at levels much lower than 15 per cent.
The right hon. and learned Member for Surrey, East (Sir G. Howe) referred to other European nations' interest levels. But he missed out the smaller countries which have much lower levels. In Austria it is 5 per cent., Holland 7 per cent., Norway 5 per cent., and Sweden 8 per cent. With the resources and the labour, the economy of a self-governing Scotland will soon become one of the most prosperous in Europe with a strong and healthy £ Scots.