Economic Situation

Part of the debate – in the House of Commons at 12:00 am on 11th October 1976.

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Photo of Mr Douglas Jay Mr Douglas Jay , Wandsworth Battersea North 12:00 am, 11th October 1976

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.