Economic Situation

Part of Bill Presented – in the House of Commons at 12:00 am on 21st December 1976.

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Photo of Mr John Nott Mr John Nott , St Ives 12:00 am, 21st December 1976

I am sorry to cut out the hon. Member opposite who wishes to speak, but this has been a long debate. It has been lengthy and interesting, and I must comment on what has been said already. It has been an interesting debate, not least for the very thoughtful and at times moving maiden speech of my hon. Friend the Member for Cambridge (Mr. Rhodes James) who spoke with great feeling about the ever-widening gulf between the developed and under-developed nations. It is appropriate that when we are immersed in, if not obsessed with, our own financial problems in this country, both he and the right hon. Member for Newham, North-East (Mr. Prentice) should draw our attention to the much greater problems of the less developed world.

I think the House will greatly miss my hon. Friend's predecessor, Mr. David Lane, who was one of the most modest, charming and intelligent Members of the House of Commons. My hon. Friend said that David Lane represented Cambridge with distinction. I am equally sure that his successor will do so with equal merit. I hope that he notes that the Conservative Front Bench also increasingly represents Cambridge with distinction, placing that other place in its rather sooty and less important station. I can see that my right hon. Friend the Leader of the Opposition does not agree with me.

This debate, as expected, has shown up some of the tensions which exist on matters of ideology and policy within the Labour Party. Not for the first time I find myself winding up a debate which at times seemed like a private disagreement conducted in public on the other side of the House and in which the Conservative Party did not have much of a rôle to play.

But the nation is interested in these matters particularly at a time when prices and unemployment are rising again. The official Opposition, whether the hon. Gentleman likes it or not, represents a constituency of growing size, spanning all manner and stations of men, as Workington and Walsall demonstrated.

It is hardly surprising that the Chancellor has failed to satisfy his critics, whether they be in the Press or in his own party. This financial crisis—characterised by the collapse of sterling—has been thrust upon him at the most damaging moment by Government ineptitude. About 18 months ago, the Chancellor said that the cuts were "unwise and unnecessary". That was at a time when 800,000 were unemployed. Now, when unemployment is about 1½ million, and rising fast, the Chancellor, at the instigation of our creditors overseas, having placed himself in their hands to the extent of nearly $19,000 million—that is the amount we have borrowed in overseas currency since the Government came to power—has now been forced to inflict further reductions in expenditure and extra tax amounting to about £4½ billion in the current year.

This is at a time when output is stagnant, unemployment is rising and confidence has collapsed. We have had a classic financial crisis pure and simple. Whatever Labour Members may say— and this point was clearly made by the hon. Member for Nottingham, West (Mr. English)—the forecasts of the Treasury on future national income and expenditure are largely irrelevant to the problem we are now facing. This is where I part company just a little with my right hon. Friend the Member for Chipping Barnet (Mr. Maudling) who made an extremely agreeable contribution. I hope that that does not sound patronising. It is not meant to sound patronising.

I read my right hon. Friend's maiden speech from the Front Bench in the last economic debate. He said that our problem was not overspending but under-earning. I, too, would wish to look at the positive side of the account. But the problem is—I am sure we do not differ on this—that our resources are finite. We are overspending, or we were about to overspend, by about £13·2 billion this year. I arrive at that figure by taking the £4½ billion by which the Chancellor has reduced the borrowing requirement this year, plus the £8·7 billion now regarded as being the Budget deficit. Until we go some way to removing that deficit, the economy will be vulnerable, and therefore there cannot be the resources available to put into higher profits and from higher profits into higher investment and lower taxes. The whole economy is vulnerable.

Like my right hon. Friend, I wish to look at the positive side and to consider what we can do to create an incentive. But at the moment we have a major financial problem and not a resources problem on our hands.

The confusion between money, on the one side, and resources, on the other, has come out clearly in the debate. On the one hand, the Government have to create the maximum impact on foreign opinion, and that has been made infinitely more difficult for the Government by a rather strange article in The Times by the Prime Minister's son-in-law which built up expectations overseas and in the City which no democratic Government could conceivably satisfy in any one year. On the other hand, the Government have had to minimise the impact, to pretend that they are not doing what they have been doing—for the benefit of their political creditors in the left wing of the Labour Party and the TUC.

The Government are no less in thrall to their political creditors than to their financial creditors. So they have had to speak with one voice to two audiences which want to hear mutually contradictory things, which has hardly added to the coherence, decisiveness and relevance of this package.

I suppose I say it as a compliment to the Prime Minister when I suggest that, seen in the narrow light of the self-interest of the Labour Party, the package has been a succesful manoeuvre. The right hon. Member for Huyton (Sir H. Wilson) must be proud of his successor. The Prime Minister has got his money, or at least one-quarter of it, subject to monitoring by the IMF in future years. Only the right hon. Member for Newham, North-East has resigned so far, although the Secretary of State for Energy is making more and more outrageous speeches, so perhaps he feels that the climate is right for him to come before the public again. The Parliamentary Labour Party has been denied any opportunity to upset the measures by a vote. All this represents a high degree of political skill, but I cannot say that it is of much benefit to the country.

One of my less discriminating hon. Friends—and I use his indelicate phrase—urged me to go for the Chancellor's jugular. The Chancellor is not always popular among my hon. Friends. But, being a sensitive fellow I do not feel like joining the hyenas on his side of the House, so I will tackle issues rather than the right hon. Gentleman himself. But there is some comparison with a fishing expedition. When one catches a gigantic conger eel, however many times one bashes it on the head, it still thrashes about in the bottom of the boat. The Chancellor—and in a way I admire him for it—seems unable to accept what all of us know is inevitable defeat.

What is astonishing about the right hon. Gentleman's last three Budgets—I will take only three out of his nine—produced in April, July and December, is the extent of the punishment to the economy that he has meted out. In terms of reduced spending and increased taxation, it goes far beyond anything contemplated by the Opposition at the beginning of this year.

In a debate on public expenditure last March, I spelled out what we saw as the necessity at the time. I said: Even with pay restraints and incomes policies, there is not the slightest justification for imagining that private consumption can be held to the level in the resources table. The average rise in consumer spending between 1969 and 1974 was 2·7 per cent. and that is the lowest figure I can get for it. This shows that with Case I in the table, involving 4 per cent. growth over the next three years—2·4 per cent. over the five-year period—we should need to save about £6,650 million of Government expenditure by 1979, at 1975 survey prices, in order to achieve the objectives of the Government."—[Official Report, 10th March 1976; Vol. 907, c. 543.] Since that debate, consumer expenditure is now not going to rise at the level indicated in the March White Paper but is projected to fall by 2 per cent. The lowest figure I could get at that time was a rise of 2·7 per cent. Gross national product is to go up not by 4 per cent., the level projected in case I of the White Paper, but by 2 per cent.

Based on that White Paper, my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) and I foresaw the need to reduce public spending by about £2½ billion in the first year, rising to £7 billion by the end of the quinquennium. We considered that then to be the minimum necessary to restore solvency to our national accounts.

Despite derision from the Chancellor and his hon. Friends about the Conservative Party supposedly seeking unemployment, we were contemplating a considerably smaller decrease in the current year than the Chancellor has now been forced to bring about. My judgment is that if this reduction of about £2½ billion to £3 billion had been implemented at that time instead of the Chancellor having to take three bites at the cherry under force majeure, we would not have had the run on sterling in the autumn which has undermined the Government's forecasts, the increase in taxation amounting to £1·3 billion, mostly falling on middle management and skilled workers—the very people the Chancellor says he wants to help—interest rates of up to 15 per cent., and the humiliation of having our economy placed in the hands of the IMF.

This year the Government have been out in their figures by about £4½ billion. Their growth forecast is 100 per cent. down—from 4 per cent. down to 2 per cent.—in five months. There has been a rise in the inflation forecast of 50 per cent. in six months from 10 per cent. to 15 per cent. We would all be wise to look at the next public expenditure White Paper carefully so that we do not make ourselves look as incompetent and as foolish as the Government have made themselves look in the past few months.

This brings me to the twin pillars of the Government's policy, the social contract and their industrial strategy. As I understand it, the social contract is responsible on the positive side—this was the Prime Minister's claim for it only today—for halving the rate of inflation. I find that extremely confusing. The social contract formed the basis of the Government's promises to the country in October 1974 when the Chancellor said that inflation was running at 8·4 per cent. On the same three-month basis, it is now running at 20 per cent., which seems to me to indicate clearly that the rate of inflation has nearly trebled, not halved. That is the only positive contribution which we understand that the social contract is making.

I come next to the new industrial strategy, which is even more puzzling. We have had it with us for a considerable time now. Output is now stagnant. Since April 1975 levels of production have been below those of the three-day week. In spite of the massive fall in sterling, export volumes fell last month. Today they are hardly higher than they were during the three-day week. Profits have been deplorably low for the past 10 years. All parties have some responsibility for that. At current replacement costs, after stock appreciation, profits now show a 2 per cent. rate of return, one-third of 1973 levels. Investment is about 14½ per cent. down on 1973. In the last two quarters of this year it is 4 per cent. down on 1975. So one can go on. Where is the new industrial strategy in all this?

The extension of the temporary employment subsidy and the job creation schemes are not part of a strategy. No strategy is involved with them. They are desperate measures to hold people in essentially unproductive jobs to stop unemployment rising to 1·8 million next year. What have industrialists to look forward to? I agree that this country has great prospects. There is no reason why it should not be one of the richest in the world, certainly in Europe, during the 1980s. But at this critical time the Government are introducing legislation to deal with Bullock. Is it suggested that that this critical juncture the Government think it necessary to impose by legislation a completely new structure for the control of boards by trade unions?

Next there is the problem of bureaucracy. Yesterday my hon. Friend the Member for Hitchin (Mr. Stewart) described in a remarkable speech all the bureaucracy and rules and regulations in industry. The Minister of State, Department of Industry described what he said, which is echoed by every business man in the country, as trivial and pathetic.

Then there is the wealth tax. The Government have looked at it and decided that they want to put it aside. But now we have a joint committee on which the hon. Members for Tottenham (Mr. Atkinson) and Bethnal Green and Bow (Mr. Mikardo) will serve. How can industrialists have any confidence when that is going on?

We have heard from hon. Members on both sides of the House of the problems of the construction industry. That has been the main theme running through this debate. Yet in the Queen's Speech the Government announced a proposal to extend local authorities' direct labour departments. One thing after another is in total contradiction to the new industrial strategy for which we have been waiting for so long.

I come to the question of tax and incentives. The whole thrust of the Chancellor's speech last week was that if we were patient his next Budget would contain measures to create incentives, to deal with the poverty trap, restore differentials and widen the margin between those in work and those out of work. In his remarkable and notable speech, which will be widely read, the right hon. Member for Newham, North-East remarked on that. How will the Chancellor reduce tax at the lower end?

To reduce taxation by raising the threshold to family income supplement levels—and that is not very high—would cost £5,000 million. How it is possible for the Chancellor to deal with income tax at that lower end at costs like that, especially now that he has the targets for the public sector borrowing requirement imposed upon him by the IMF and the DCE targets? He can do it only by a switch from direct to indirect taxation. But is it suggested that he will nearly treble the existing rate of value added tax? This £5,000 million is purely to raise the tax threshold to FIS levels. Will he go along to the TUC for stage 3 and advocate this switch? I hardly think that he will. If he does, I do not think that he will get a very polite answer in return.

The problem of the poverty trap, which grows worse and worse, can be solved by the substitution of child credits, but it can be done only as part of a system where the benefits are taxed. We had some leaks coming from the Government that the Chancellor of the Exchequer and others were proposing the taxation of benefits, and it looked as though for the first time the Government intended to tackle the problem of the cross-over of social security and tax benefits at the lower level. Certainly it is impossible to do it by child benefits unless benefits are taxed. Nothing has been said about that.

The most telling section of the speech of the right hon. Member for Newham, North-East came when he pleaded with the Government to re-examine their stance on social benefits. He said that when the Government came to office they rushed ahead with increased transfer payments at the expense of the social fabric of the nation. This is the central area where a genuine re-examination of the Government's priorities is required. I hope that I can say that if the Chancellor came forward with courageous legislation on benefits to overcome this problem, my own party would not seek to disagree with it. It is a major necessity for the country.

That deals with the lower income groups. I come now to the middle income groups. We have heard a great deal about the problems of differentials and about the problems of skilled workers and those in middle management. However, as the Chancellor was about to deliver his speech on Wednesday, the Government came out with an increase in the employee's stamp for those on middle management earnings. It represents an increase in tax of £100 million on middle management at a time when the National Insurance Fund is £900 million in surplus. Of all the events of the last week or so, that is the most cynical measure of this Government. They increase the middle management and skilled employee's stamps, when the National Insurance Fund is £900 million in surplus, for no additional benefits. It has been done purely to help finance the Government's borrowing requirement.

The Prime Minister's problem is not that he is boxed in by the economy but that he is boxed in by his colleagues. This morning, I received from Conservative Central Office the transcript of a radio broadcast which was made the other day. I am afraid that it is very difficult to read, but it goes something like this: Voice over: I would like to tell you the story of the Honourable —it is difficult to read but it looks like "Anthony"—