Budget Resolutions and Economic Situation

– in the House of Commons at 12:00 am on 31st March 1977.

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4.17 p.m.

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

I, like you, Mr. Speaker, shall today be breaking one of my own unwritten rules. It has been my practice for more than 10 years to attend the whole of any debate in which I participate, and often many more debates. Today, however, I shall have to leave the House before the end of the debate, and I ask hon. Members to acquit me of any discourtesy. I promise that I shall not break the rule very frequently, if ever again.

The aim of the Government's economic strategy is to accomplish the transition from slump to sustained expansion in a way that will protect and benefit those sections of the community that are most at risk. The risk that I have in mind is not only that of a fall in living standards that is inevitable in a recession. It is not only the risk of frustration and the loss of morale that inevitably attends in a situation where people are seeking unsuccessfully for work or for work suitable to their talents; it is also the risk that there will be a loss of faith in the ability of democratic institutions to control and shape the economy of the country. We have been at this point previously in our history—in 1911 and in the 1930s—and I think that it would be unwise, with more than 1·3 million unemployed, not to recognise that we run that risk again today.

The fact that up to now such a remarkable degree of tolerance has been shown by the British people at this appallingly high figure is no indication that there is not growing concern. Rather, it is an indication that there is some degree of understanding of the nature of the problem and of the policies that are being applied, and have to be applied, to deal with it.

It would be a grave error to believe that this acceptance will go on for very long. I do not believe that it will. That is one of the reasons why it is a keystone of the Government's policy to achieve a return to full employment. In saying that, I am not just paying lip service to an outmoded symbol; I am recognising that the Labour Party was given political significance and power by the trade union movement, which cradled that objective. To that extent, it could be said that the greatest difference that exists between Labour Members and the Opposition is the way in which that political power was brought about. That is why we were so reluctant when we came to power, to respond to the clamour from the Opposition Benches to slash public expenditure in a way that would have increased unemployment and made the present unemployment figures look quite modest.

A return to full employment requires the pursuit of long-term and short-term policies. We must pursue the policies that are now reducing the levels of unemployment and, simultaneously, will reduce unemployment one or two years ahead.

The most formidable obstacle in the way of reducing unemployment is our unsatisfactory balance of payments. Our share of world trade has fallen over the years. We must take steps to stop it falling further and to increase it. That is the purpose of the industrial strategy. If we can make it successful, it will, together with the income from North Sea oil, transform our balance of payments position by the 1980s.

To do that, it was necessary to achieve greater agreement than had existed previously between Government, industry and the unions. That was why, in the first instance, was discussed in the National Economic Development Council, with representatives of the CBI and the TUC, the basis of an agreement on that industrial strategy to find how much common ground existed between them. To bring about a plan to overcome our balance of payments deficit—

Photo of Mr David Mitchell Mr David Mitchell , Basingstoke

Does the Secretary of State agree that the bodies that he has just described represent neither the self-employed nor the small business man? Does he agree that they have an enormous contribution to make to employment?

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

I shall come later to the contribution that can be made by small businesses. I have never denied the importance of their contribution.

The objectives concern not only hon. Members but managers of industry and trade unions. It was right that we should seek to proceed on a basis that had their consent and that reflected their judgment on what was necessary to achieve a successful strategy. That is why, arising from that agreement, it was possible for working parties to be set up in 40 manufacturing industries in which managers, lay representatives and trade union officials could analyse their own industries, about which they have an infinitely better knowledge than any Government Minister could have. That is why they were able to assess the share of the market that they could pursue and the investment and manpower implications. That is why they were also able to assess their skill requirements, and why we have today a better understanding of how the Department can help. We now have training for skills through the industrial training councils and our own training opportunities scheme.

Neither the House nor the public generally has so far understood how far the plan has proceeded. Just as we need that plan to deal with the problems of adequate labour in the manufacturing industries and to have an intelligent assessment of how that need is changing, we must also plan ahead for our investment needs. There has been no understanding of the degree of success that has attended the plan.

The accelerated projects scheme and the selective investment scheme operated by the Secretary of State for Industry have brought forward a considerable amount of investment for industry. The accelerated projects scheme alone has identified 118 projects, involving a cost of £640 million, which industry was persuaded to bring forward during a most difficult period with the assistance of about £84 million of public money. That is investment success.

The assisted projects are spread over a wide range of our manufacturing industries. There are 31 projects in mechanical engineering, 23 in chemicals, 13 in the food and drinks industry, 12 in electrical engineering, and nine in vehicles and components. With the development of those projects, there is a growth in many industries, which is being reflected in their employment figures. In January this year 7,000 more people were employed in the chemical industry than in January last year. About 16,000 more were employed in the vehicle industries, 6,000 more in metal goods and 9,000 more in textiles.

For the first time, we are seeing a growth taking place that is showing in employment figures. Before employment figures were affected, short-time working was affected. When that fell, it was followed by a huge increase in overtime. At one stage we estimated that 15 million man-hours a week were being worked in the manufacturing sector alone. The growth is now feeding through to employment. The projects in themselves are giving us an indication of the future nature of employment. It is estimated by the Department of Industry that the accelerated projects scheme alone will produce 70,000 man-years of work arising from orders placed with the construction and plant equipment industries. There will be only 13,000 permanent jobs for that industry. That is how capital intensive modern industry will become, given the right sort of investment. It is also estimated that the projects will improve import savings and direct exports, by about £500 million a year by 1980. That is the time scale involved in bringing about an improved performance in current terms.

No one who is prepared to analyse the employment potential will claim that we shall be able to solve the problem solely on the basis of our current level of and performance in world trade. We must address ourselves to the international implications of the problem and play our part in international trade. A fundamental cure must be sought at an international level.

That was strongly urged by the Prime Minister at the European Council meeting that has just taken place. As a result of that, the Council issued a statement stressing the need for intensified co-operation at Community level and more widely to deal with the problems of the recession. The European Council agreed to promote measures to tackle specific labour market problems and to encourage higher levels of investment. The Commission and the European Investment Bank have been invited to carry forward those proposals, and the Council will look for results by the end of the year.

During our year of Presidency we shall be holding a tripartite conference, under Community auspices, before the end of June. That is a bold programme, and we shall be devoting all our energies towards making it successful.

The Prime Minister and I will be going to Norway on Saturday and Sunday to attend a Social Democratic Party conference at Oslo on the employment situation. At Easter, I shall meet the Employment Ministers of Sweden and Denmark to discuss the effectiveness of specific measures to deal with the problem of employment.

The task of assessing a satisfactory range of measures to solve the unemployment problem is made no easier when one is aiming at a moving target. The employment situation never stands still. During the next five years we expect the work force to increase at the rate of at least 140,000 a year, partly as a result of the higher birth rate of the early 1960s and partly as a result of the far larger number of women now seeking jobs. The fact that the national insurance change encouraged more women to register must also have a bearing on the number of registered unemployed.

In the two years from September 1974 to September 1976 employment in this country fell by 400,000 and the number of registered unemployed went up by 800,000. That is an indication of the extent to which we have to increase jobs in this country if we are to reduce unemployment. It is a moving target because of changes in technology. Some industries are bound to decline while others expand. The threat to employment in the shipbuilding industry because of the change in demand for world shipping is one example.

These changes all come about because industry is becoming much more capital-intensive. ICI can refer us to a £25 million plant that will employ only 90 people, as opposed to similar investment, in the past that would have employed 10 times as many. Many factors that affect employment are changing. We have to make an accurate assessment of the direction of that change if we are successfully to apply measures to reduce unemployment.

In the short term, we are introducing a number of additional measures to what is already a considerable range of special schemes. We are extending for a further year the temporary employment subsidy. Unquestionably, in numerical terms this has been the most successful scheme yet introduced, covering more than 200,000 people who had received redundancy notices and whose notices have been withdrawn under the working of the scheme. The Press happened to realise this in the course of the past few weeks. The Times, not a particular friend of the Government, says today: There is no doubt that TES has been a great success.The Guardia's labour editor, Mr. Keith Harper, reports: By using TES, several companies say they have prevented ill-feeling among their workforce and have been relieved of the time-consuming task of recruiting new labour when better times returned. Many firms, facing 12 months of the depths of the depression, have been able, with the aid of TES, to reorganise in that 12 months to sustain their labour force in the market situation that has followed. But for some firms the effect of the recession goes beyond 12 months. Although they gave us undertakings in good faith to seek to maintain their work force beyond 12 months, some are still facing the possibility of redundancies when the 12 months end.

For these firms we are introducing a scheme to enable them to make a further application, which will be re-examined against their present labour requirements and their capacity to maintain the labour force with some additional assistance. The scheme will pay, on successive applications, a subsidy of £10 a week per redundancy notice withdrawn, for six months. The gross cost of the change will be £214 million.

In public expenditure terms there could be a very considerable saving. It is estimated that at present the cost to the Exchequer of having a man leave employment and go on to unemployment benefit is about £50 a week. This is not only the cost of this benefit or the supplementary benefits that may be added but also the cost of the loss of National insurance contributions and the tax that he would otherwise be paying.

Therefore, if we can keep someone in a job by extending to £20 the temporary employment subsidy it obviously makes sense to retain useful workers. It makes sense in public expenditure terms as well. Many other measures were introduced in the Budget announcement.

Photo of Sir Keith Joseph Sir Keith Joseph , Leeds North East

The Minister mentioned the gross cost. What is the net cost, bearing in mind the saving on benefits to which he referred?

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

I cannot give the precise net cost. We estimate on the basis of £50 a person, but the actual amount changes over a long period. It starts with wage-related benefits being a component for six months. Then there is six months of supplementary benefit. Then adjustments are made to supplementary benefit.

I cannot claim that, because this is a £20 a week subsidy and the cost of someone becoming unemployed is £50 a week, this is a saving of £30 a week to public expenditure. There is some displacement effect to operating any scheme but I take the view that with TES there is some net public expenditure saving, although there is obviously some net cost on the scheme that we are operating.

Photo of Mr Enoch Powell Mr Enoch Powell , South Down

If the total cost is estimated at £214 million, while the cost of individual cases will vary, there must be a corresponding estimated figure of the net cost after allowances have been made.

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

We estimate the gross and net costs. The £214 million figure that I gave was the gross cost of all the schemes. The net cost varies from scheme to scheme. In the case of TES we estimate that there is no net cost and there may be some saving, taking into account the £20 scheme and the £10 a week continuation scheme. On others there is a net cost to the public Exchequer. I could examine those schemes one at a time against various criteria, but since the Chancellor of the Exchequer is sitting rather close to me I should be rather careful before committing us to a precise cost for the scheme.

Other new schemes are being introduced, as announced in the Budget. I draw the attention of the House to a scheme that is designed especially to experiment in a completely new area—that of paying to a firm a labour subsidy on condition that it will increase its net labour force. The small firm scheme will pay firms with a labour force of 50 or less a subsidy in respect of each additional worker that they take on. This will be run as an experiment for six months in the first instance, and it will be run in special development areas. We estimate that the funding of £3 million that we are making available could provide jobs for an additional 5,500 people.

It is not the size of the scheme that is significant; what is significant is that it will be the first experiment in the United Kingdom in applying this form of subsidy. We shall attempt to measure it in comparison with what happens to small firms outside special development areas to see what we can learn.

During regional debates on unemployment I have been impressed time after time by hon. Members on both sides who have called for the introduction of special schemes to aid small firms. I am not saying that this is a complete response, but it is a form of response from the Department of Employment that will be examined with great care. I hope that it will be highly successful. We shall learn from it whether we can do things in this country which have been attempted in other countries in the labour subsidy area.

Another measure is the new scheme for aiding disabled people—the vocational induction scheme. At present 14½ per cent. of registered disabled people in this country are out of work, in spite of the fact that the Employment Services Agency employs 500 disablement resettlement officers working entirely to replace disabled people. We are currently replacing only 1,000 disabled people in jobs each week.

That is not good enough. We want to improve on that performance. We set aside sums that will be sufficient to provide £30 a week for the first six weeks to the employer of any disabled person who is recommended as suitable by a disablement resettlement officer. I think that the skill and knowledge of good disablement resettlement officers, and the will of a number of disabled people in this country, demonstrate to employers that these people are quite capable of earning a living in unsheltered employment, and that this can enable the scheme to be highly successful.

Photo of Hon. Robert Boscawen Hon. Robert Boscawen , Wells

Will the Secretary of State consider the possibility of giving assistance to disabled people to find work outside their own employment districts? Can he do something to help those who cannot get assistance to move to a new area?

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

I am never happier than when we can apply the employment transfer scheme to the assistance of disabled people. When a person cannot obtain employment in his own area and is prepared to move to another area to fill a vacancy that is registered we shall readily assist him under that scheme. That is not to say that we cannot work these schemes in conjuction with one another. There might be a place for both of them. Again, this is in an experimental phase.

I have also invited the Manpower Services Commission carefully to consider whether we can devise a scheme for assisting the longer-term able unemployed. The first shot was to be at defining longer-term unemployment with the idea that we should examine only those who have been out of work for more than 12 months, but even on that basis I found that one in five of the registered unemployed in January 1977 had been unemployed for more than 12 months, so there is a growing problem of the longer-term unemployed to which we must direct considerable attention.

The Budget has also provided £100 million for new construction projects, and this injection of funds will enable the Government to launch sooner than would otherwise have been possible a long-term attack on inner city problems. It will make a welcome contribution towards providing employment in an industry which has suffered so severely from the current recession.

Photo of Mr Peter Walker Mr Peter Walker , Worcester

Does the right hon. Gentleman agree that £50 million a year in each of the next two years is a minute amount compared, for example, with the fact that the house improvement scheme in regions of high unemployment is now running at one-third what it was in 1973?

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

In itself the amount is minute, but taken in conjunction with the wide range of other measures concerning urban aid and local authority projects it will be welcome in so far as it will produce additional work for the construction industry. However, when we are introducing these new schemes, particularly schemes such as that giving aid to the smaller firms and the induction scheme, we are virtually exploring virgin territory.

Photo of Mr David Mitchell Mr David Mitchell , Basingstoke

Does the right hon. Gentleman recall that the Chancellor said that in the expenditure of this money there will be close consultation with the local authorities? Will he give an assurance that the expenditure will not be through the direct labour organisations of local authorities, but will be through the private building and construction sector?

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

I certainly cannot give such an assurance. The Chancellor's undertaking was quite clear. It was that consultation will take place with local authorities. No doubt the local authorities will give their advice on how the money would be best spent to attain their objectives, and they will no doubt take into account the employment situation in the construction industry in their areas.

Let me now turn to the problem of introducing employment measures. As I have said, we are exploring virgin territory. Perhaps I could describe it as conducting human laboratory experiments in finding which ideas will work and which will provide a solution for specific employment problems. No country has been successful in finding one measure which in itself will end the scourge of unemployment.

Conscious as I am, and as are all the Ministers in my Department, of our responsibility for the success or failure of our actions, I believe that there are very few assertions that one can make with any confidence. The only thing that I would say without fear of contradiction is that not since Ernie Bevin was in my place in a war-time Ministry of Labour has there been so much effort, ingenuity, It is fair to say that we are waging another war—a war against unemployment—and it would be wrong for me to sit down without paying tribute to all those who have co-operated in what has been achieved so far in reducing the unemployment figure by 250,000 by these measures. That reduction has been achieved through co-operation from trade unions and employers—particularly those employers who have been prepared to introduce work experience schemes—from the Manpower Services Commission and its agencies and from officials in my Department.

One of the drawbacks of experimenting in so many areas is that there is a danger of people becoming confused. We face the criticism that we are running too many different schemes. I can say only that it is our experience that it is necessary to run a whole number of measures, because in that way we achieve the cumulative effect that I have described.

At present we are spending about £400 million gross a year on these measures. We believe that these measures will keep expenditure—I have now checked the figure—is above a quarter of that sum. We believe that these measures will keep the unemployment figure down, at the level we are now projecting, by at least 200,000 below what it otherwise would be.

During the last few months the impact of the measures has been increasing. They will reach a peak at about Easter, although during the last two months the crude unemployment figure has dropped by 60,000. I accept the criticism about the difficulty and complexity of continuing all the measures, particularly those to assist young people. That is why we are arranging the common terminal date of 31st August for the funding of these schemes. By that time we shall have the report of the Manpower Services Commission on its examination of the feasibility of ensuring that all young people aged 16, 17 and 18 either have work or are in training or education.

The prospect for young people is one that has to be based upon a knowledge of the effectiveness of the school leaving measures and of the growth in unemployment amongst young people above that age—those who have not stayed in their first jobs and have added to the numbers of youth unemployed. It has to be based, too, upon the knowledge that the situation would be little better than it was in 1976 without these measures. In 1976 there were 67,000 school leavers at Easter and 550,000 school leavers in the summer. This year we are expecting 70,000 to leave at Easter and 590,000 in the summer in England, Wales and Scotland.

I have tried to set before the House some of the problems of aiming at what I described as a moving target. But none of the four Ministers in the Department underestimates the size of the problem. There is certainly no complacency in St. James's Square. We are addressing ourselves to a problem that is not confined to our shores. There are 5·8 million people unemployed in the Common Market. Within the constraints of our own economy, we in the Government are working to our utmost while we tackle the possibilities of international action.

We have developed industrial and employment measures of a wider scope and on a greater scale than has ever existed before. I suppose that the only thing we can guarantee is the determination, the will and the strength of purpose to make these measures effective or find others that will become more effective.

We want to work in collaboration with work people and employers in pursuing policies which will lead us back as quickly as possible to full employment. The goal is one which will demand considerable effort and ingenuity to achieve. I am confident that we can now count on the collaboration of both sides of industry, and I hope, too, that we can rely on the help of both sides of the House.

4.51 p.m.

Photo of Sir Keith Joseph Sir Keith Joseph , Leeds North East

the Secretary of State for Employment is widely known as a kindly, intensely well-intentioned and nice man, but if his speech indicates the level of understanding in the Government of the employment problems of this country, it is clear that the Labour Party offers absolutely no prospect of reaching high, let alone full, employment at any time.

The right hon. Gentleman has explained the size and difficulty of the job as he sees it. I shall argue that he has not even described the scale of the task that this or any British Government face in securing a combination of prosperity and high employment. It seems to the Opposition that the right hon. Gentleman and the Government, applying a series of rather apologetic patches and cosmetics to the situation, have no vision of how to secure either prosperity or higher employment. Their understanding of the economy seems to be static. They do not seem to realise that this country is packed full with people passionately eager, in their own and their families' interests, to improve their condition.

If the Government create the right framework, a framework that combines constraint at the national economic level and competition, so as to harness the interests of the business man to the interests of the consumer, with incentives, all sorts of developments will happen spontaneously without our waiting for the right hon. Gentleman and his well-intentioned colleagues and staff to produce new employment protection schemes.

Photo of Dr Oonagh McDonald Dr Oonagh McDonald , Thurrock

The right hon. Gentleman is quoted as saying that he wanted to see more mil- lionaires and more bankruptcies. Will he kindly explain how that fits in with the Tory Party's policies to reduce the level of unemployment?

Photo of Sir Keith Joseph Sir Keith Joseph , Leeds North East

What I shall try to say today enlarges on that very theme. To take up the Chancellor of the Exchequer's comments in his Budget speech, our only chance for prosperity and higher employment is for us to be competitive. The way we become competitive is to encourage success and not to reinforce failure—which I was trying to put in a rather vivid way in that quotation from 10 or 15 years ago which the hon. Lady has dug out. I am not ashamed of it. It puts the truth relatively vividly.

The Chancellor of the Exchequer has been kind enough to send me a note to say that he has to go to a commitment in a few minutes. I should like to say before he goes that there were some good things for the country in his Budget. I thought that the fact that the right hon. Gentleman has not reflated is good for the country. I thought that the fact, to which my right hon. and learned Friend the Shadow Chancellor pointed in his excellent speech yesterday, that the Chancellor has started to trim personal tax levels is also good for the country, even if it goes only a small part of the way to undo the damage he has done in his nine previous Budgets.

In our view, the Government still have their spending, borrowing and taxation far too high. That is bad for the country. It is also bad for the country that the Chancellor has not set for the next year after this a further downward monetary guideline. He is apparently contemplating an increase in the rate of growth of money supply in the year after the immediate next financial year—a trend which he has been ready enough to attack when practised by my right hon. Friends in the previous Conservative Government. That is thoroughly bad for the country.

We find something to welcome in the Chancellor's Budget, but much not to welcome. It cannot be expected, however, that the long economic decline of this country, recently intensely accelerated, can be put right by one Budget. The Chancellor has had 10 goes, and we are not even back to where we started.

Yesterday, my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) spelt out some of the sober, depressing statistics which show that the Chancellor and his right hon. Friends have done much more harm than good in their three years of office. Despite the experiences which they have had, and still have to undergo, there are many first-class businesses of all sizes, from the giant down to the small business and the one-man business. But the country is trapped in a cat's cradle of disincentives and over-government. This cat's cradle cannot be dispersed overnight. When we have responsibility for these matters, our job will be to remove the obstacles to enterprise and effort.

It is not that there has been any shortage of good intentions. This Government have had—we would quarrel with them—apparently Utopian intentions. The country is now living with the unintended bad consequences of all those good intentions. The Secretary of State for Employment never seemed to acknowledge in his speech that some of the unemployment he is deploring today is the result of legislation introduced by his Government. Other parts of the unemployment result from trade union attitudes and trade union wage claims which have priced wage earners and managers out of jobs and helped to destroy firms.

I can remember a number of such examples. I think, for instance, of the experience at Skelmersdale where unemployment seemed to be wantonly increased because, despite the continued efforts of management, the wage earners appeared—it is always difficult to be sure that one has the whole truth—to prefer to take redundancy payments rather than provide sufficient productivity to enable the firm to make a profit. There must be many other examples of cases where unemployment is due to the counterproductive behaviour of trade unions and the counter-productive legislation of this Government.

But, above all, what has contributed to the unemployment and to the difficulty of reviving confidence has been decades of Socialist criticism of business, of profits, of management and of ownership, decades of propaganda—indeed generations of propaganda—based on fallacies, and based overwhelmingly on the fallacy that the interests of the wage earner, the manager and the owner are in conflict one with the other.

I suspect that some Ministers are beginning to realise that some of those so-called truths which they and their party have peddled for so long do not correspond with reality. Largely because of Socialist propaganda, the country is now enveloped in an anti-enterprise climate, an anti-enterprise culture. The basic fact about our economy is not de-industrialisation; it is de-enterprisation. Until enterprise is encouraged again, the right hon. Gentleman will never see a rise in sustainable jobs, because it is enterprise that creates and maintains jobs. Against this background, it is veritably marvellous that so much enterprise still exists in firms of all sizes in this country.

Photo of Mr John Mendelson Mr John Mendelson , Penistone

I should be happier if Socialist propaganda were as powerful as the right hon. Gentleman pretends. How does he square the conclusion with which he has suddenly startled the House with the position in the United States, where a tax on enterprise and entrepreneurs has never taken place and where everyone has praised the entrepreneur, yet the percentage of unemployment there is higher than ours? it is more than 8 million. Is it not silly and childish to suggest that entrepreneurs base their decisions on what other people say about them and not on hard market conditions and realities?

Photo of Sir Keith Joseph Sir Keith Joseph , Leeds North East

Socialism has been powerful in a negative way. It has destroyed. It cannot construct. The Americans regard themselves as hurtling down the British path, 15 to 20 years behind us. Of course business men respond to hard realities as well as to the climate, but the Socialists' attitudes have led to crippling legislation such as profit control and dividend control and to the tide of egalitarianism that helps to make up the climate, culture and economy in which business men are trying to fight with their competitors all over the world.

We can welcome some things in this Budget. We do not under-estimate the sheer difficulty of any Chancellor in trying to formulate a sensible Budget with the limited knowledge that a Government have. We notice, for instance, that the Budget speech made no reference this year to savings. There were two aspects of that omission. It is normal courtesy for the Chancellor to pay tribute to the work of those concerned with savings, and there is also generally some reference to the likely trend in savings. All the pundits were surprised and caught out by the rapid rise in savings a couple of years ago and their precipitate decline during the last quarter of last year. The Chancellor's strategy could be completely wrecked—he cannot be blamed for this—by an unpredictable surge or fall in savings, so perhaps he was wise not to make any prediction.

There are other equally important factors that the Chancellor cannot predict. What is the trend in productivity, the position on labour-hoarding and the real availability of skills? What vacancies exist? I should like to commend the improvements to the monthly Press notice issued by the Department of Employment which is concerned with unemployment and vacancies. But it is a weakness for the country's economic management that vacancies are still reported on the basis of only those that are actually registered with employment exchanges. As the Chancellor and the House know, there is a footnote on the front page of the report that explains briefly that these are only part of the total vacancies because only a relatively small fraction of vacancies are reported to the employment exchanges.

Would it not be far more enlightening to the country and helpful for the management of the economy if the Department of Employment managed, by sample surveys, to put on that front page, with equal prominence as the registered unemployed, the actual vacancies that it believes exist rather than a small proportion of the vacancies—namely, those that are registered? The result—partly necessarily and partly through the gratuitous ignorance of the Chancellor of the Exchequer—is that the Budget can be blown far off course by trends that cannot now be predicted—quite apart from the larger trends that come from mismanagement of the economy and the exchange rate and from world events. Peter Jay put it well in The Times earlier this week when he referred to the Chancellor as being: little more than a cork on the waves of industrial productivity and the industrial costs that they make. The Government are presiding—with a surprising element of complacency, judging from the Chancellor's attitude—over a stagnant economy with absolutely minuscule growth prospects that mean little or no improvement for anybody or anything. The Secretary of State for Employment has shown that the Government have no vision to offer the country about how to escape from stagnation and the present level of unemployment. The Government have no vision and no understanding. No one charges them with lacking in good will and good intentions. Hard work and effort—yes, but there is not an ounce of evidence that the Government have the necessary understanding and vision.

The Chancellor identified what is necessary in his Budget Statement. He referred to productivity. Two whole paragraphs in columns 264 and 265 of Hansard refer to price competitiveness and non-price competitiveness. The Chancellor knows in general that this is necessary to improve our prosperity, balance of payments and job opportunities. He was right to emphasise productivity—greater output of goods and services at the same prices. Yet the Secretary of State for Employment in his speech today did not begin to understand the scale of the potential spare labour that is there to be absorbed into sustainable production of goods and services for consumers at home and abroad. The Secretary of State for Employment did not refer today to the effect of low productivity on labour, about which the Chancellor spoke yesterday.

There is a large amount of overmanning. Nobody knows how much it is but there are sectors, mainly in the public service and nationalised industries but also in private industry and commerce, that are overmanned. The largest examples of overmanning tend to be in the nationalised industries and public services, but the private sector also contains some elements of gross overmanning.

Overmanning is an option that is open to people in a free society. If people choose to overman and to accept the consequences, that is their choice. I am glad to have the approval, since he is a purist, of my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen). He has taught me that overmanning is not an offence but a cost that has implications for the standard of living, earnings, social services and defences of a country.

Most people in this country have hopes and aspirations—for earnings, pensions, social services, defence, transport and all sorts of other ingredients of national life—for themselves and for the nation. They cannot be achieved while overmanning continues on its present scale. I hope that my hon. Friend the Member for Wolverhampton, South-West will not quarrel with that. Overmanning undermines the hopes and aspirations of the people.

It always seems strange to me that trade union leaders who generally, though not always, protect overmanning are so clamorous for new investment when we all know that more investment is justified only when the overmanning comes down sharply so that the cost of equipment may be justified within the price that the consumer will pay and the investment will yield profit to the business.

New investment is not the prime need of this country, but the better use of existing investment is. We could achieve a great leap forward in productivity, competitiveness, earning power and market penetration at home and abroad if existing investment were better used. There will not be a surge in investment and productivity unless there are better profits, better prospects for profits and better incentives at all levels of income. The Government do not seem to recognise these truths.

The scale of the need for new jobs is far larger even than the Secretary of State recognised in his gloomy speech. There is a need for new jobs to absorb those who are seeking work now, and there will be a need in the years ahead if and when productivity rises to absorb those who overman.

The right hon. Gentleman never even approached an analysis of how new jobs come into existence. The Government cannot create them because they have no money. The Secretary of State talked about protecting and creating jobs, but he had to acknowledge that the money used by the Government has to come from somewhere else. In reply to an intervention, he spoke of the displacement effect. He claims that there is no net cost involved in the temporary employment subsidy, but with all the other subsidies the net cost comes out of taxes, which would otherwise be lower, or borrowing, which would otherwise be less. Higher than otherwise borrowing and taxation removes, by way of higher interest rates or taxes, money from consumers that would otherwise have been spent elsewhere.

For every job visibly saved by the Government's measures, there is a portion of a job—sometimes quite a large portion—that is invisibly lost somewhere else in the economy. The Secretary of State deceives himself if he believes that the Government can create and sustain jobs. If a Government concentrate on protecting jobs, jobs will dwindle because, one after another, firms and industries will come to depend on subsidies and the strength of the economy will gradually be sapped and its capacity to meet the market and to create jobs in meeting the market will dwindle.

If the Government continue to focus on producers, that way lies poverty. The only way for jobs to be created is to look after consumers at home and abroad.

Photo of Mr Albert Booth Mr Albert Booth , Barrow-in-Furness

If the right hon. Gentleman's argument is sound when he says that money spent in protecting jobs has to come from sources that would otherwise create employment, would he apply the same logic to unemployment benefit?

Photo of Sir Keith Joseph Sir Keith Joseph , Leeds North East

Unemployment benefit is certainly a cost on the taxpayer or on borrowing, but it is wrong to assume that every unemployed person remains unemployed permanently. There is a relatively short average duration of unemployment—though it is longer than it has been—and it is wrong to assume that unemployment is permanent. People are moving in and out of employment all the time.

The way to secure jobs is to have a philosophy that puts consumers ahead of producers. Look after the consumers at home and abroad, and the jobs will look after themselves.

We have to recognise that the task of job creation in the economy will get increasingly difficult as more and more developing countries learn how to compete with us in producing our staple needs and services. We shall not always be able effectively to produce goods in competition with them. They can hire the best managers and buy the best machinery and put both to work with relatively docile labour to outproduce and outsell us at home and abroad. We cannot hope to compete unless we innovate as well as achieve higher productivity.

It is against this background that the industrial strategy seems a rather feeble weapon. I am sure that we all pay tribute to the 1,000 people in 39 working parties beavering away looking into the present situation in their industries. No doubt they are intent on doing something that they see as useful, but there is no impulse to convert their perceptions into improved performance.

The Secretary of State said that the industrial strategy leans on accelerated investment and assisted projects, but most of this investment and these projects would have occurred anyway, and in the cases where they might not have occurred there is no guarantee that they will be successful.

There remains the question of who pays for them. They are paid for by healthy firms and their employees, and an invisible unemployment effect is dispersed through the economy to offset at least part of the employment that appears to be created by the industrial strategy schemes. We have to avoid exaggerating the importance of the industrial strategy or employment subsidies.

I return to the basic fact that the Secretary of State has no vision to offer the country or the unemployed. Yet, as my right hon. and learned Friend the Shadow Chancellor said yesterday, and as a succession of my hon. Friends have explained, there is a strategy to escape from stagnation, from the current unemployment level and, over the years, from gross overmanning—a strategy which would not increase inflation. It involves a recognition of the function of the risk-takers, the decision-makers, the job and prosperity-creators. They come in all sizes—one-man, small, medium, large and giant businesses—and they produce services as well as goods.

We deceive ourselves if we ignore the fact that initiative and enterprise will not be shown unless we recognise the indispensability of these prime movers and entrepreneurs and the management, design, marketing and research skills with which they surround themselves. The motivation of these people is something that the Government and the Labour Party have totally neglected.

These people have to take risks, and they often have to go away from home for long periods. It is only sensible that they should have some chance of making a success for themselves and their families. The Chancellor and the Government—against the wishes of the Tribune Group—have gingerly moved part of the way in the right direction, but they will never be free to allow the rewards of success to come through to those who make the success.

The country must recognise that unless there is personal wealth there will not be national wealth. The motivation of these prime movers is not always and never only money, but money is nearly always an element in the basic satisfaction. These people on whom everythng depends are worse paid, higher taxed, more squeezed by inflation and less esteemed here than in any other industrialised country.

It was Keynes who spoke about the "animal spirits" of business men. How do the Government imagine that these spirits can be catered for within the cocoon of controls, disincentives and obstacles with which they surround us?

The Government will find it hard to do enough to make risk and effort worth while, because the Labour Party has for generations taught envy, egalitarianism and the unimportance of business men and managers. The result has been the increasing shabbiness, poverty and unemployment of the people of this country. The Labour Party has taught the wrong lessons for generations and must now unteach them. The correct lessons are not repugnant to most people.

Yesterday's editorial on page 2 of the Sun—which is a very valuable page for the country—[HON. MEMBERS: "What about page 3?"] I said page 2. The editorial said: The Chancellor should have had the courage to give a genuine incentive to the pacesetters whose skill and initiative are essential to Britain's economic growth. It will not be enough only to provide incentives. There will also have to be a big switch away from unnecessary Government spending, partly to allow a decline in the rate of growth of the money supply in 1978–79 and onwards, but mainly to permit a cut in the marginal rate of taxation.

We do not intend a consumer boom. We intend that consumers should spend more and that Government should spend less of the consumers' money. If there is such a switch and if there are incentives, we can escape from stagnation and secure the provision of jobs to reduce unemployment. Over the years over-manning will be absorbed if, as a result of incentives, productivity rises. There will be more small businesses formed, fewer small businesses dying and more self-employed. The medium, large and giant businesses will be more willing to take risks to expand.

The Government cannot do those things. They are imprisoned by party mythology, misunderstandings and schizophrenia about capitalism. They were born as a party to milk capitalism. They have helped to debilitate it and they do not know how to handle it now. The Chancellor has produced a mouse Budget with some genuine merits, but it will make only a mouse of a difference.

The Government's real duty to the people, especially the unemployed, is to encourage the job creator and to cut their own wasteful spending and taxing. Unless they drop their destructive anti-capitalist element permanently, and not just because they cannot get that sort of legislation through Parliament at present, the Labour Government will never revive prosperity. They are out of their depth. I hope that tonight the electorate will give them the signal that it thinks so too.

5.22 p.m.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

The right hon. Member for Leeds, North-East (Sir K. Joseph) has given us an old song. The right hon. Gentleman is an old singer. If the Government do not have the vision to solve the problems with which we are faced and if the right hon. Gentleman represents the vision that would be offered by a Conservative Government, God help the country if ever the Conservatives came to power. The right hon. Gentleman has talked unmitigated rubbish. I have never before heard such ideological nonsense from an Opposition spokesman.

The right hon. Gentleman failed to answer the point made by my hon. Friend the Member for Penistone (Mr. Mendelson), who pointed out that America happens to be the greatest capitalist country in the world, has a totally free enterprise system, yet has a high level of unemployment. That has nothing to do with propaganda for Socialism or Socialist policies.

I should be delighted if Britain had a genuinely Socialist Government pursuing Socialist policies. If that were so, unemployment would be somewhat different from what it is now.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Mr. Nigel Lawson (Blaby) indicated dissent.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

Conservative Members should recall what happened in the United States prior to the rise of Roosevelt. When Roosevelt came into power all that he wanted to do was to bring in some sort of Keynesian policies. He did not want to change the system. He merely believed that there should be some Government intervention. What was the attitude of big business and the Conservatives of America? They said that Government intervention would be appalling. All that Roosevelt wanted to do was to save the capitalist system in America. He did so by interventionist policies.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Mr. Lawson indicated dissent.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

If the hon. Gentleman does not believe that, he does not believe what Conservative Ministers and Members have been arguing in the past. Perhaps he has never read Mr. Macmillan's "The Middle Way". It is a very interesting book. I commend it to every Conservative Member. It does not contain the ideological nonsense that we have heard this afternoon. It is an acceptance, incidentally, of Keynesian policies. It is an acceptance that we have to have Government intervention to deal with unemployment problems.

Photo of Mr Nigel Lawson Mr Nigel Lawson , Blaby

Is the hon. Gentleman aware that there is now a consensus among academic studies of that period that what went wrong in the United States was not free enterprise but a completely inappropriate contractionary monetary policy?

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

As I am not very enamoured of what most academics say I am not prepared to accept that necessarily anything that they say is correct. Academics can be wrong. In fact, academics are wrong. Academics all come up with different theories and different ideas. We have to look at the practical realities of life.

The right hon. Member for Leeds, North-East said, for example, that Governments cannot create jobs. Apparently everybody else can create them but not Governments. What happened with the TVA scheme in the United States? What has been happening since the end of the Second World War in this country, under Conservative Governments as well as Labour Governments? Of course jobs have been created by Governments. It is nonsense for the right hon. Gentleman to say otherwise.

Conservative Members should not allow themselves to get into this ideological morass. Not that I mind. If they go about the country preaching ideological nonsense, the British people will have sufficient sense to realise, when the General Election comes, that the Opposition have no vision and no policy. We might not be doing too well, but if they came into power there would be disaster. It is about time that Conservative Members woke up to the fact that their present leadership is very poor.

Photo of Mr Bryan Gould Mr Bryan Gould , Southampton, Test

Given that the problems of industrial decline have been with us for well over a century, I was wondering how far back the right hon. Member for Leeds, North-East (Sir K. Joseph) and his hon. Friends would be prepared to go to find the supposedly golden age in which the economy was prospering along the lines that they advocate.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

My hon. Friend has raised a very good point. Was 1930 the golden age? Was that the golden age for Conservative Members? At that time there was mass unemployment. Was the golden age at the turn of the century? Again, unemployment was at a high level.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

Around that time there were high levels of unemployment. Or was the golden age earlier still? The years that I have mentioned were times during the history of the capitalist system when the policies now being advo- cated by Opposition spokesmen were being advocated and put into practice.

No doubt they were the golden ages when Britain was great. It was so great that the British working people were living in poverty. They were not getting the right sort of education, and their homes were hovels. They were living in a society in which the children went without shoes and worked in the mines. No doubt that is the sort of golden age that is in the minds of some Conservative Members. I exclude some Members of the Opposition. Some of them are most rational and intelligent beings. They do not accept that nonsense. Unfortunately, that is not true of the present leadership.

It is said that we need to get rid of overmanning. That is very important. It is true that investment in itself does not create employment. If it did, we would not have had problems, for example, on Merseyside. A new grain terminal was built that employed a handful of workers, as against many hundreds. The unions were deeply concerned about the loss of jobs, but a handful of workers could do twice the amount of work that was handled by the previous labour force. That is true of all technological advance.

How do we deal with technological advance? Do we leave it to market forces? Do we just let it rip? Do we sack people and put them on to the streets? The answer, of course, to dealing with technological advance is to plan our productive resources. That is the step forward. That is what must be done. Surely the answer is the very opposite of what the right hon. Gentleman has been arguing this afternoon.

However, I do not want to spend all my time replying to the points made by the right hon. Gentleman. I should like to raise some serious practical points with my right hon. Friend the Secretary of State. I want to deal with the problems of the construction industry, inner cities and unemployment.

I am sure that by now hon. Members have become totally bored by listening to me and to my hon. Friends who represent Liverpool constituencies when we have said that in our city we have about 80,000 unemployed. A high percentage of those are construction workers—and they are not, incidentally, just unskilled workers. I accept that many who register as unemployed construction workers probably entered the job as unskilled or semi-skilled during the construction boom that occurred in the early 1970s. However, a great many skilled construction workers are unemployed.

On Merseyside, 25,000 workers have been unemployed for over one year. That means that they are now living purely on supplementary benefits and that they are really beginning to understand and to feel what unemployment is all about. The effects of the first six months of unemployment—and the first year, because of Labour Government policy in the past—are to some extent cushioned; but that does not last. With long-term unemployment, workers suffer terribly.

It is not only that. In Liverpool 8, a district that is represented by my hon. Friend the Member for Liverpool, Scotland Exchange (Mr. Parry), we have areas—I shall not call them ghettos because I do not think that we have ghettos in Liverpool—in which there is a high percentage of coloured workers. They suffer a double problem. They are unemployed and they happen to be black. There are problems in our inner cities with which we must deal.

I take the point raised by the right hon. Member for Worcester (Mr. Walker). I welcome the sum of £100 million spread over two years to deal with problems of the inner cities as a step in the right direction, but it is actually chicken feed. It is only a very small beginning of what is necessary, and we need to step that up.

I say to my right hon. Friend the Secretary of State, as I said to the Chancellor at a meeting yesterday, that later in the year I want to see more money made available to deal with problems in the inner cities. Why do we have such problems?

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

I do not know what rent control has to do with the fact that when the developers came in they tore the guts out of Liverpool and left it derelict, taking out all the small businesses in one fell swoop.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

The hon. Gentleman really must come up with some sensible answers to the problems.

How are we to revitalise the city centres?

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

The first thing that we need to do is to ensure that in the designated areas the Department of Industry creates buildings for what I would call nursery factories on an extensive scale, with subsidised rents in order to bring back small businesses to the city centres. In city centres small businesses are important and can create a great deal of employment, involving many thousands of workers.

Photo of Mr Nigel Forman Mr Nigel Forman , Sutton Carshalton

I should like to try to help the hon. Gentleman in his difficulty. Surely the main reason why the inner city areas are to benefit only from what he described as chicken feed over the next two years is that industrial production in Britain, as he well knows, is only just above the level at which it stood when the present Government took over, and unless one first creates the wealth one does not have it to redistribute for these desirable purposes.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

I wish that hon. Members would not keep churning out the same gramophone record the whole time. Let us deal with the reality of the problem. The reality is that with Government assistance we can create nursery factory units in city centres and ensure that small businesses are attracted to such factories, thereby creating employment. That means assistance with rents, and so on. It also means, incidentally, the extension of the scheme in areas of high unemployment, because we shall not get, overnight, full employment in those areas, much as I should like to see that happen. However, there are areas of the country, around Gloucester, Worcester, and so on, that do not have the same levels of unemployment, although there are still certain skilled workers who could well be absorbed in those areas.

I should like to see an extension of the scheme for assistance to workers, not merely in helping them to travel and, perhaps, helping them to buy a new house if they move from a private house. What about those living in council houses? That is a very important matter.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

It is something that up to now no Government have positively dealt with. It needs to be dealt with in a really practical way.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

I cannot keep giving way. The hon. Gentleman must make his own speech in his own time. I cannot give way every couple of seconds.

I ask my right hon. Friend the Secretary of State to convey the point that I have just mentioned to those in his Department, and to the Department of Industry and the relevant Cabinet Committee.

There is something else that should be done. Today there was an announcement in the House that airborne early warning Nimrod aircraft will be produced in this country. I want a situation in which British ships are built in British yards and in which British ship repairing is carried out in British yards. That is something positive that could be done. Ship repairing facilities could be developed on Merseyside to a much greater extent than they are at present. We have allowed them to decline. We can do something about that.

A positive move must be made in areas that have derelict port facilities that are no longer usable as ports. Liverpool is one such area, but London is another. I suggest that we ought to have some special type of machinery, special development associations or something of that kind, to designate an area of special need and to move in to ensure that something positive is done about it. We cannot leave this to the old regional policies. That is not enough, particularly in the present climate of economic crisis. I want to see special organisations created to move into such areas and deal with derelict docks, and to create work in the inner cities, to create new housing and accommodation and to deal positively with derelict areas.

As I said at another meeting yesterday, we on the Government side of the House have a genius for advancing money—in this case, we have given money back to the people—and still being unpopular. I do not know how we do it.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

Apparently it is not, but an ordinary common sense lad would not do it. It needs a graduate or a double first to achieve this result.

It is about time that we looked at things differently. Why do we have to put 5½p on petrol? It may not mean anything to some people who are wealthy—I am sure that it does not—but for an ordinary working man who relies on his car to take his mates to work and to take his family out at weekends, another £10 on the road fund licence and 5½p on petrol is a great burden.

The Liberals, of course, want a shift to indirect taxation, but now that it is done they intend to vote against, because they want the best of all worlds. If we do not increase this tax we shall have to increase VAT, which is also indirect taxation. I am opposed to an extension of indirect taxation, because it is regressive.

Photo of Mr Eric Heffer Mr Eric Heffer , Liverpool, Walton

The hon. Gentleman had better try to convince me, but not just now.

If there are more and more taxes on the things that people buy—on the telephone, and so on—the poor income groups pay relatively more. One does not have to be a genius to understand that. One problem is that this Budget has unfortunately meant that the higher-paid will benefit more than the lower-paid. I do not say that the lower income groups will not benefit at all—of course they will—but they could have benefited much more.

This proposal is a movement away from the basic concepts upon which the Labour Party has developed its taxation ideas over the years. I want the Government to do much more, later in the year, for the construction industry and the inner cities. Even at this stage I want them to distribute taxation differently. I trust that by the time of the next Budget the Government will be pursuing much more the type of alternative economic policies for which I and my colleagues have been asking for the last two years.

Several hon. Members:

Several hon. Members rose

Photo of Mr Myer Galpern Mr Myer Galpern , Glasgow Shettleston

Order. I should remind hon. Members that the winding-up speeches will begin at 9 o'clock. It may seem early to intimate it, but 15 right hon. and hon. Members, who are all present, are anxious to take part. If we are to accommodate them all—as we can in three and a quarter hours—speeches will have to be reasonably brief.

5.43 p.m.

Photo of Mr Jo Grimond Mr Jo Grimond , Orkney and Shetland

I must begin by announcing that I am opposed to the petrol tax. It may appear to some people to be a tax on consumption, but it is in fact a tax on production. It will hit the rural areas very hard. There, cars are used for all the ordinary purposes of life, particularly for getting to work. The tax will raise the costs of agriculture, the retail trade and local industries. It has come at a time when freight charges are already going up by 10 or 20 per cent.

I appreciatè what the Financial Secretary said yesterday, when he admitted the plight of these rural areas, but he added that the Government had failed to find any way of dealing with the problem. The way to deal with it is not to put up the tax. The tax will also be an invitation to the oil-producing countries to raise prices still further.

It is useless to say that people should travel by public transport, because in many places it does not exist. Even where it does, as in London, it is so badly run as to drive people away. One waits for hours at bus stops and then sees convoys of buses of the same number pass in lugubrious funeral procession.

As for saving fuel, the first example should come from the public authorities. They could learn from America and reduce the heat in some public buildings. I wonder how many cars will be taken out of the Government pool. I sometimes think that if Ministers and senior civil servants ever used public transport, they would be less enthusiastic about encouraging everyone else to do so and less ready to raise the cost of petrol.

Any reduction in direct taxation is welcome, but the reduction in the Budget does no more than make up some part of what has been done by inflation and it will make very little difference to the economy. However, this feature of the Budget raises three questions of vital importance to the management of that economy, which today is largely a political, and not an economic, matter.

The first question is, what are we to do when we are beset by organisations and bureaucracies of all kinds, each demanding more and all resisting cuts of any sort? This is all taking place against a background of stagnant production. It is not Conservatism or Liberalism or Socialism to point out that one cannot make people richer simply by giving them more money, unless there are more goods to buy with it. Yet, as I say, production is not rising and it is doubtful whether it will rise or become more efficient in future. Certainly we cannot purchase more goods by going abroad, because we are up to our ears in debt. At the same time, inflation steadily burns away the possibility of investment. Money as a store of value is becoming less and less acceptable. It is even becoming unacceptable as a means of conducting international trade.

Over the last two or three years, it is probable that the public sector borrowing requirement plus taxes have taken 100 per cent. of the taxable capacity of the country. That means to say that nothing has been left for investment. We are already taxed, I think, up to 80 per cent. of our presumed taxable capacity—a figure greater than in any other Western country. Therefore, the best that can be said of the willingness, if it exists, of the trade unions to take only 4 or 5 per cent. extra is that it is a smaller wound than they might have inflicted. But let no one pretend that it is a benefit. Until production rises and indeed becomes more efficient, there should clearly be no extra payments at all unless someone is prepared to give something up.

Like all hon. Members, I receive every week well-argued pleas from this organisation, or that union or college, for more money. I always reply: "You have made a powerful case. Who will take less?" To that there is no answer. Of course it is true even of reductions in taxation that if the little extra money which people have in their pockets is spent, it may increase prices or someone will have to take less.

The next trouble is that taxation is primarily designed to take money out of the pockets of the people at large so as to make room for Government and public authority expenditure. It is this enormous rate of Government expenditure which makes high rates of taxation necessary. It is unfair to levy heavy direct taxation on the poor and it is ineffective to levy it on the very rich. Therefore, if demand is to be reduced, taxation must increasingly fall on the middle ranges. But these are the very people upon whom a great deal of the economy now depends and whom one has to encourage if one is to get more production.

The third handicap under which the country struggles is the size of the public sector. It has many drawbacks, but the one to which I want to draw attention is the fact that there is now no known way, which can be accepted as tolerable or fair, of fixing its salaries and pensions. When the public sector was relatively small it could be related to the private sector, but it is now bigger than the private sector. The public sector, on the whole, has achieved high salaries, almost total security of tenure, high pensions tied to the cost of living, and innumerable perks. That has not been of any advantage to the country. It has simply become another very powerful interest operating on its own. That is serious, because whatever one might like to do it is essential to cut down on non-productive expenditure and devote resources to production.

The public sector has to a large extent opted out of inflation, leaving industry and agriculture and other productive operations to carry the burden. There is a great deal in what Professor Beckerman has said, that if salaries of high public officials were, in monetary terms, fixed for ever at present rates a good deal more attention might be paid to inflation in some places than it is now.

I am quite sure that the economy will be far more affected by the pay settlement than it is by the Budget. I agree with the right hon. Member for Leeds, North-East (Sir K. Joseph) that we are indeed faced with a serious and continuing situation. Budgetary methods in particular have now failed for a great number of years. We need to attack inflation and unemployment with new weapons. How, then, do we do this? We have to see them against a background in which our methods of running industry, whether in the public or the private sector, give little satisfaction to many people who work in it and even less self-respect.

No one can fail to have a great deal of sympathy with the long-term unemployed. But it is also true that many people in industry feel quite divorced from any involvement or any enjoyment in their work. If the population as a whole were deeply aware of the public interest, and if that interest was linked to their own interests, we could indeed run the country much more simply and with greater emphasis on monetary policy.

But the huge size of the public sector makes it just as difficult for the monetarists as it does for those who want an incomes policy. Of course, if the innumerable bureaucracies would accept tighter monetary control and a reduction in numbers that might have to go with it, that would be a simple and effective way of running the economy. But if they would accept that they would accept a strict incomes policy.

The real difficulty is that the public sector and the attitudes that go with it make it difficult to run the economy whether by monetarism or by other methods. We have to get our ablest people into productive industry and not necessarily into the professions and administration. We have to get more out of them when they work there. Financial incentives are not everything. Although I welcome those that are given in the Budget, they are clearly not enough.

The solution surely lies in the direction of interesting workers in their own industries and their own welfare. This can and should be done by partnership in workers' co-operatives. These must be run by the people directly employed in the firms concerned. Nor must it be argued that all industry should be run in this way. The British must get used to encouraging different forms of economic organisations. We must also break the disastrous tradition of bureaucratic Socialism descended from the Webbs. To my mind that has been disastrous for the country and for the Labour Party.

There have been important developments with regard to co-operatives. One is the likely success of Meriden. It is interesting that Sir Arnold Weinstock is now putting money into it. He is not a man who is devoted to State Socialism, nor is he oblivious to his shareholders' interests. There are also extremely interesting experiments going on in the Mondragon group of co-operatives in Spain. These co-operatives were started not by Communists but by a Catholic priest, Father Arizmendi. They have become the largest manufacturers of machine tools, cookers and washing machines in Spain. The basis of the co-operatives is that profits are allocated to the workers not on the ground of ownership but on the ground of their contribution to those industries. They are organised in a form of a federation, and a workers' bank not only supplies the money but helps with expertise and management. There are numerous co-operatives of a similar type in France. They are springing up all over the place.

The advantage of workers' participation is well known, but it is possibly worth repeating. It helps initiative. That has been so in the Mondragon group. Workers are much more ready to accept new methods when they feel that it is their decision, which is not forced upon them. It encourages better industrial relations. Workers will put aside money for investment in their own firms. It relates the distribution of wages, and so on, to the profits earned. In the Mondragon group of co-operatives wages are called advances on dividends. It interests workers in the success and the good management of their enterprises. It does what Adam Smith hoped the private enterprise or mortgage system would do—it reconciles the individual's ambition with the public interest.

I should like to see the nationalised industries broken up into smaller groups and returned to their workers. I should like to see some private industry—not all of it—encouraged to go the same way and involve its workers in management. I should like to see savings banks turned into local banks and run as co-operatives for investment in local industry. Millions of pounds are taken out of the regions in this country and put into Government securities. Over the years this has proved good neither for the country nor for the investors.

The National Enterprise Board should certainly look at this type of development. It should also be encouraged in the Budget. The changes in company taxation, mentioned by the Chief Secretary, are helpful. He outlined what has been done for smaller companies. This, too, is welcome. But more can be done.

Because the Bullock Report is a bad and mistaken report, in that it puts the emphasis on blanket measures to cover all types of industry and simply accepts that the trade unions must appoint representatives, it should not blind us to the need for this type of development if we are going to restrain inflation and bring down unemployment. We must look at new methods of running our industry. We cannot go on year after year pretending that a little fine tuning will put right the long-term problems that the country faces.

5.59 p.m.

Photo of Mr Doug Hoyle Mr Doug Hoyle , Nelson and Colne

My hon. Friend the Member for Liverpool, Walton (Mr. Heffer) criticised the speech of the right hon. Member for Leeds, North-East (Sir K. Joseph). I welcomed it because one usually only reads about speeches like that; they are usually made to very select audiences all of whom are Conservatives. It was most welcome to hear it made in the House, because one does not believe all that one reads in the newspapers, even if it is The Sun, which the right hon. Gentleman quotes from. I would call the right hon. Gentleman's speech a golden crock at the end of the rainbow. Like the rainbow, it was an illusion, a state that one will never reach.

I believe that in the meantime unemployment would soar. I notice that the right hon. Gentleman did not say anything about that. I believe there would be bankruptcies, which from time to time he has stated, are inevitable, and that there would be a decline in confidence to almost zero level.

My hon. Friend was right to say that what the right hon. Gentleman was talking about had not even happened in this century. We have to go back to the middle of the last century to meet the open, red-blooded capitalism that the right hon. Gentleman was describing. I cannot believe that in the latter part of the twentieth century any party could be putting forward such policies, but I thank the right hon. Gentleman for opening the door of the Thatcher cave a little so that we may look at a few of the goodies inside. I hope that people note the treats he has in store for them.

I am rather disappointed with the Budget. In many ways it is timid, when we should be preparing for an expansionist policy based on the planned economy that many of us have put forward for a long time as an alternative strategy. However, I welcome the fact that the temporary employment subsidy is to continue, because it has helped to provide more than 184,000 jobs. In the North-West alone 47,551 jobs depend upon it. That gives the lie to the right hon. Gentleman's statement that a Government cannot create jobs. The Government are successfully keeping people in jobs in industries that are suffering very much from the slump in the world economy.

Photo of Mr Robert Parry Mr Robert Parry , Liverpool Scotland Exchange

Is my hon. Friend aware that the TES is keeping about 9,000 people in employment on Merseyside?

Photo of Mr Doug Hoyle Mr Doug Hoyle , Nelson and Colne

I realise that. We are receiving the same kind of benefits in North-East Lancashire for the textile industry. Merseyside is already suffering from a high rate of unemployment. If the TES were removed tomorrow North-East Lancashire would become another graveyard. Therefore, I welcome the fact that it is to be extended for another 12 months and that the firms receiving it will be given further assistance for six months. It is a valuable measure.

However, because there is to be hardly any growth, unemployment will rise, unless more positive steps are taken. That is why I should like to see positive intervention through the National Enterprise Board. That is what we fought the election on. When my hon. Friend the Member for Liverpool, Walton was at the Department of Industry he regarded it as one of the keystones of our economic policy that the Board should be interventionist, that it should be going into not only declining industries but successful industries to bolster them and provide the confidence needed if we are to bring about the expansion that we all desire.

My other criticism is that, although we now have some of the lowest wage and salary rates in Europe, we always seem to concentrate on wages as the only cause of inflation. That is not true. There are many other causes of inflation, such as high interest rates. I am pleased that interest rates are falling, but if the pound continues to float down—I hope that it has stabilised itself—that will continue to be another cause of inflation, because we shall have to pay more for imports. We face further inflationary price increases because, unfortunately, we are now members of the Common Market. That is one of the misfortunes we face in the coming 12 months.

Another cause of inflation is the activities of the multi-national corporations and their transfer pricing. I do not believe that it was an accident that the Chrysler Corporation made a massive profit worldwide yet managed to lose over £40 million in this country. A sum of more than £40 million had been underwritten by the Government, and we have had to pay. Those of us who were a little critical of the Chrysler deal when it went through have been proved right. This is an example of the kind of transfer pricing in which the multi-national corporations indulge.

I was not surprised when the right hon. Member for Orkney and Shetland (Mr. Grimond) said that he was against the 5½p increase in the duty on petrol. Yesterday his hon. Friend the Member for Cornwall, North (Mr. Pardoe) talked about crystal balls. If people look in crystal balls, they often find the results they want to see. I did not need a crystal ball to think that the right hon. Gentleman would say what he did today. A certain by-election taking place in Stechford has helped the Liberals to clear their minds of something that might be disagreeable, particularly in the centre of the motor industry.

I can well understand why the Liberals do not support the increase. I do not support it, but my reason has nothing to do with by-elections. It has everything to do wtih the fact that the working person with a family car will suffer. Because public transport costs are also going up, he will find it difficult not only to travel to work but to take his family on holiday or to get away from the large cities and urban areas at weekends. It is the wrong policy.

This leads me to the newspaper reports that we are reconsidering the future of the Mini, at a time when savings on petrol will be invaluable. If we scrap the proposed Mini we shall drag in even more imports of the foreign cars that are very good on petrol economy, an area on which we are not strong. We must think again about the decision to put the new Mini on ice, though when it was being contemplated my criticism of it was that it would be very late on the market.

Photo of Kenneth Clarke Kenneth Clarke Shadow Spokesperson (Trade and Industry)

I was interested to hear the hon. Gentleman joining his hon. Friend the Member for Liverpool, Walton (Mr. Heffer) in strongly attacking the 5½p increase in the duty on petrol. There is considerable speculation about who will vote with the Conservative Party on Monday in opposing the increase. Do we take it that, in addition to Liberal Members, the hon. Gentleman and his hon. Friend will be joining us in the Lobby on Monday in opposing it?

Photo of Mr Doug Hoyle Mr Doug Hoyle , Nelson and Colne

I am not one who runs away when there is the sound of gunfire. Although I am critical of many aspects of the Budget, I must look at it as a whole, and, therefore, I shall reluctantly vote for it on Monday, because I am determined to keep this Government in power.

Photo of Kenneth Clarke Kenneth Clarke Shadow Spokesperson (Trade and Industry)

As far as I am aware, no one else is dividing against the Budget as a whole. That is not the intention of the official Opposition. There will be but one vote, and its only subject will be the 5½p increase in the price of petrol. The hon. Gentleman is against that. Will he be voting against it?

Photo of Mr Doug Hoyle Mr Doug Hoyle , Nelson and Colne

The hon. Gentleman is jumping the gun. He is looking in the crystal ball. Monday is a long time away. Certain people have taken up certain positions because of other factors, some of which will be over by Monday. Many people will be reconsidering the situation on Monday, and we shall have to wait, and see what happens then. I shall not be rushed into making prophecies of what will happen.

I do not accept the suggestion that, when we talk about the manufacturing base of industry, investment means a reduction in the labour force. I look again at what the Lucas shop stewards and work force have done in preparing an alternative corporate plan. They have looked at a corporate plan to manufacture things that are desirable and are needed by the community, such as heart machines. They have also looked at an alternative form of railroad transport, in order to bring about a saving on petrol. These are the kinds of things which, given the initiative, a work force in their place of work and in their own time, has put forward as an alternative corporate plan. If work forces in manufacturing sections were given this opportunity to prepare alternative corporate plans many more schemes would come forward. They would make goods that we need in this economy, and that is the right way forward.

I am sorry that the Chancellor has been so cautious. I think that we need to be more expansionary in our objectives, but now that we have set out on the road we shall see it through successfully. We must prevent unemployment from rising again, by having a new national plan and a planned economy. In that economy, the National Enterprise Board must have a central rôle.

6.11 p.m.

Photo of Mr Peter Walker Mr Peter Walker , Worcester

A number of hon. Members on both sides have expressed concern about the obvious issues of unemployment and inflation. I share with the hon. Member for Liverpool, Walton (Mr. Heffer) a continuing concern about the remarkable apathy of the Government towards unemployment in the construction industry. The reality of unemployment is that it has been grossly under-estimated in this House. Unemployment is, in itself, a massive cost to public expenditure.

In the 1920s and 1930s unemployment was highly deflationary, but today it is highly inflationary. At present we have 1¼ million people unemployed. The Economist estimates that this costs about £4 billion a year in public expenditure. Imagine that—spending 4 billion to produce nothing. It is very difficult to have anything more inflationary in economic terms. This continuing complacency on the part of the Government is very worrying.

I enjoyed the speech of the right hon. Member for Orkney and Shetland (Mr. Grimond) very much. It showed the kind of thoughtfulness that we have come to expect of him. He has taken a great deal of interest in the position that he described in Spain and I am looking forward to hearing his reporting more about it at a meeting later on.

It is surprising how the Labour Party has been rather shy of the co-operative principle—a principle that has had remarkable success in this country. John Lewis is a partnership that has had pretty good success both in economic terms and in terms of staff relations.

What concerns me most is the fear that the reception of this Budget is totally wrongly placed. The Labour Party was slightly disappointed but nevertheless its members think that the Budget is not too bad. The Conservative Party regards it as a mouse step in the right direction and perhaps an improvement. To the Liberal Party the Budget is totally acceptable. In reality, eventually this will prove to be the most disastrous of all the Chancellor's Budgets, because there is one massive factor that no one has bothered to calculate. What will happen when the Government try to negotiate phase 3 of their incomes policy?

The right hon. Member for Orkney and Shetland said that a pay settlement was more important than the Budget, and I agree with him. The magnitude of the problem facing this Government is of such dimensions that it virtually dwarfs every other economic consideration. That fatal two years in 1974 and 1975 when the Government, in the first part, encouraged the country to pay itself 54 per cent. more for doing 4 per cent. less, have left this Government and a future Conservative Government with problems of immense dimension.

The public sector wage bill is now £26 billion a year. Therefore, to pay for that we have to find £40 a week from every family of four in the country. If, on arriving at the phase 3 negotiations, the atmosphere is such that the Government succeed in getting a settlement of 10 per cent., it will add £2,600 million to public expenditure. That will create a need for a massive increase in the public sector borrowing requirement or, alternatively, an increase in taxation.

What are the prospects? The Chancellor this year, unlike last year, gave no figure, because of the disastrous way in which last year's contract failed. Last year he told the trade unions that he would give them tax reductions and allow pay increases of up to 6½ per cent. He implied in his forecasts that if the trade unions agreed to that he would get the rate of inflation down to 7½ per cent. The simple calculation in the minds of many trade unionists was that there would be a 6½ per cent. increase in earnings and a 7½ per cent. increase in prices. They felt that this was a sacrifice but that it was, after all, not too bad. But that was not what the Chancellor delivered. The trade unions delivered their side of the bargain and kept pay increases down to 6½per cent., but the Chancellor, instead of his promised 7½ per cent., delivered something of the order of 17½ per cent., inflation. Throughout his period in office this Chancellor has been absurdly optimistic and incredibly inaccurate in his forecasts.

As a result of this latest miscalculaion trade unionists throughout the country have suffered the biggest drop in their standard of living since the war. The British Leyland toolmakers, not supported by their union, brought British Leyland to a standstill. Fortunately, that dispute was settled, but on what basis? It was on the basis of a massive expectation of what will come to the toolmakers in the next phase of the Government's income policy.

Even as I speak, at Port Talbot there is a strike of steelworkers, who are demanding a £10 a week increase. When that is settled I suspect that it will be on exactly the same basis of great expecLeyland is dispute—a basis of great expectations. Trade unionists are desperately depressed by their dropping standard of living.

However, management has reason to be even more depressed, and it is. In the view of management, going for a free-for-all even for just a few disastrous months would enable it to put into effect what it has been saying to its workers in the past—"We would like to give you more but the Government's pay policy prevents us from doing so." From the Management's point of view there would be great advantages in making a break from the incomes policy.

We have skilled workers, trade unions and management, all combined in believing that phase 3 must be very much more flexible or generous. They think that the word "flexible" allows them to have a bigger increase. I warn the Government that they are all in that mood. Yet nothing would be more disastrous for the country than for the Government to fail to obtain a sensible phase 3.

What would be the rate of increase obtained from free collective bargaining? The current rate of inflation is between 15 per cent. and 17 per cent. and the standard of living has dropped in the past year. What would any of us, as trade union leaders, want to get in negotiating pay increases? No trade union leader would negotiate less than the rate needed to maintain the standard of living. In a free collective bargaining situation I would pitch a claim at 25 per cent. to 30 per cent., because after tax that would be the increase needed to in-increase the standard of living.

What would that do to the public sector borrowing requirement and the strategy of this Budget. This Budget is bogus, because the figure put in as the public sector borrowing requirement must have contained an estimate for an increase in the public sector wage bill. Unless the Government succeed in obtaining an agreement with the unions they cannot keep to their strategy.

There is to be a change soon in the leadership of both the Amalgamated Union of Engineering Workers and the Transport and General Workers' Union. Will the new leaders, in their first year in office, be prepared to preside over a period in which the standard of living of their members is reduced substantially? Mr. Joe Gormley, for the National Union of Mineworkers, has already said that he is in favour of a quick return to free collective bargaining, and Mr. Clive Jenkins has constantly repeated that he is also in favour of such a return.

The Budget is a minor change of taxation here and there, with something on petrol tax, and so on. The real test lies in the incomes policy, which the Government have already operated disastrously. The first phase was operated generously, at £6 a week, with the promise that that would be the year of sacrifice. It was toughened up in the second phase, to the great depression of all concerned. Having, in the first two years, built up this massive public sector wages bill, the Government are in a desperate situation.

I am not too unhappy about a Labour Government being trapped in such a desperate situation but I am desperately unhappy about the country being trapped in it. I believe that in the autumn the country will be faced with a ghastly dilemma.

There is no way out by quickly going back to free collective bargaining. If the trade unions will not settle for something that will lower further the standard of living of their members, the present Government, or the alternative Conservative Government, will have to come to a ghastly decision about what they are to do about it. They will not be able to stand back and say that they will keep the money supply at a certain level and leave the massive wages question to the trade union leaders and the industrialists, because the theory that if money is short industrialists do not give big wage increases does not stand up to examination. In 1974 and 1975, the two years in which British industry had the worst cash flow problems in its history, it gave the biggest wage increases in its history.

So the situation is far more gloomy than the debate has so far given expression to. I hope that we will all support the Government's desire to get a sensible incomes policy for phase 3, but the tragedy is that their policies over the last three years make the achievement of that situation very difficult.

6.22 p.m.

Photo of Mr Robert Parry Mr Robert Parry , Liverpool Scotland Exchange

The measures introduced in the Budget are, like the curate's egg, good in parts. The Budget has received a mixed reception from the Conservative and Liberal Parties, from the TUC and the CBI, from the motoring organisations, and from other people.

I share the reservations of some of the trade union leaders about whether tax concessions should be dependent on phase 3 of the social contract. Over the past two years, during phases 1 and 2 of the social contract, we have seen a constant erosion of the standard of living of the ordinary people. We are seeing an increase in inflation, an increase in unemployment, and an increase in prices. Over the last two years, the old myth that higher wages can cause inflation, high prices and unemployment has been killed for ever. I therefore support the trade union leaders who are asking now for an end to the social contract and for an early return to free collective bargaining.

My constituents who are in trade unions and have had their wages restrained over the past two years will, in the very near future, receive a further cut in their standard of living, because many council tenants in Liverpool will soon be getting notice from the city council that their rents and rates are to be increased by about 60p a week. There are to be increases in gas and electricity charges, and further increases in public transport fares.

I think, therefore, that the people have suffered enough over the past two years. The only measure capable of giving the workers a chance at least of keeping their standard of living up is a return to free collective bargaining.

I promised that I would be brief, Mr. Deputy Speaker, if I were fortunate in catching your eye, so I shall deal, briefly only, with one point, which was raised by my hon. Friend the Member for Liverpool, Walton (Mr. Heffer), about the renewal of the inner areas of our large cities and help to our ailing construction industry. My hon. Friend and I know the problems of Merseyside. We were both employed in the construction industry. We are both aware of the frustrations of many of our trade union colleagues now unemployed on Merseyside. The £100 million allocated by my right hon. Friend the Chancellor of the Exchequer to assist us in these areas is too low. At least £500 million needs to be poured into the decayed inner areas of our older cities and to assist the construction industry.

My constituency covers Liverpool dockland and all the Liverpool inner areas. Council dwellings account for 90 per cent. of the housing stock. Of that 90 per cent., 80 per cent. are pre-war tenement dwellings or post-war high-rise blocks of flats. Many of our schools date back to the early years of this century or the later years of the nineteenth century. We have a tremendous chortage of nursery school facilities and school clinics. We have great need for a health centre in the Vauxhall area of my constituency. Therefore, the amount of money allocated by my right hon. Friend is quite inadequate.

There has been another development in the unemployment situation, the recent statement made by Tate and Lyle, which has a plant in Liverpool dockland, right in the middle of the inner area. Its proposals are that there should be a loss of 1,500 jobs throughout England and Scotland, and that 1,000 of these jobs should be lost to Merseyside. It is true that the company intends to provide 500 new jobs, but that will still mean a total net loss of 500 jobs on Merseyside. We simply cannot afford any further job loss on Merseyside. We have enough problems already with Plessey, Cammell Laird, Lucas, and other firms, without another 500 jobs going down the river. I hope that when Merseyside Members meet my right hon. Friend the Minister of Agriculture, Fisheries and Food next Monday, he will give replies to some of these objections.

My hon. Friend the Member for Nelson and Colne (Mr. Hoyle) mentioned our entry into the Common Market as being responsible in part for an increase in food prices and inflation. I agree with him. From the point of view of Tate and Lyle, it appears that entry could mean the closure of the sugar cane refineries in Scotland and Liverpool. We feel that this loss of jobs, with the reduced level of production in the Liverpool refinery will mean that, in the medium term, the refinery could not be viable. The workers quite rightly feel that this could be the thin end of the wedge, in that the refinery side of the business in Liverpool might be closed, and that eventually we may see sugar cane refined only in the South-East of England—in London.

6.30 p.m.

Photo of Mr John Eden Mr John Eden , Bournemouth West

The Chancellor hopes to get inflation down to 13 per cent. this year and to single figures by the second quarter of 1978. I hope that he is right. But I wonder whether he realises how cynical everyone has become about his forecasts.

When the Prime Minister visited my constituency in May last year, he said: If you can grin and bear it for 12 months or more, then by the end of 1977 the inflation rate will be where that of our major competitors is now, at 6, 7 or 8 per cent. Over the past 12 months we have not had much to grin about. We have certainly had to bear a lot. So far as I know, we have the highest starting rate for income tax anywhere in the world. We are far up the league for the top limits of tax on earned income. Unemployment is unacceptably high and inflation is rising.

Those are just some of the unsavoury consequences of Socialism. I see examples of them in human terms in my constituency, especially among the elderly who have saved and who have found that the value of their savings has been completely eroded. I find examples among small traders, many of whom have been put out of business or are struggling to survive. I have seen examples among young couples whose hopes for a home have been dashed by high interest rates. I have seen them among school leavers who have failed to get either a job to their liking or any job at all. They have all been affected adversely by the actions of this Government.

It is worth reminding the Chancellor that he is not on his own. It is not he alone who introduces the Budget, as one might have been forgiven for thinking if one listened to his post-Budget performance on television. He is part of a Government who have been responsible for a programme of legislation over three and a half years that has done grave damage to the country.

Much more than one Budget is required to put that right. The extent of the damage that has been done is well demonstrated by the high cost of achieving even the limited adjustment which the Chancellor has now proposed. Yet here is the Chancellor proclaiming to anyone who will listen what a success he has been. Let him pause for a moment and discern the realities of the industrial scene before him.

There are three problem areas that need to be tackled with more imagination and understanding than the Chancellor has shown so far. The problem areas have an impact on each other. They are in conflict with each other, or, at any rate, their solutions could give rise to contradictory policies if there were an attempt to solve all three at the same time. It is necessary, therefore, for the Government to determine their priority.

The first of the problem areas concerns pay. Certainly there must be restraint, but I must confess to apprehension at having to go through yet another of the front-line brinkmanship exercises and wait on tenterhooks for the trade union leaders to hand over the scrap of paper that the Chancellor believes to be so essential. I am also apprehensive about building up too high an expectation about phase 3. I am apprehensive about limiting the talks about pay to yet another one-off exercise. We need to operate on a strategy of perhaps a three-year basis. That would mean that intelligent people, which trade union leaders are, could see mapped out before them the economic prospects that the Government seek to introduce in the expectation that they would be able to act with the degree of responsibility, moderation and restraint which they profess is in their best interests.

The Chancellor will have to take account of the natural aspirations of the individual. There have been many destroyed expectations at all levels of income. That has been true for management, as the Chancellor has now recognised. The higher cost of motoring which be has proposed—if he can introduce it—will more than offset the encouragement that any marginal reduction in taxation might have given. There are enormous pressures involving skilled men in every sector of industry. They are placing the operation of plants at risk. We have seen the volcano erupt at British Leyland. We are now witnessing it again at Port Talbot, and it could become more widespread. That must be tackled urgently.

I conclude from an anxious look at this scene that there will be increases in wage and salary costs which businesses will have to meet later this year or next year. That could give rise to further unemployment. Particularly would that be so if the Chancellor were to hold to his present limit on prices.

The second area of concern is productivity. We are told that that is at the heart of the Government's industrial strategy. A call for increased productivity is often linked to the request for more investment. All hon. Members know that we need better plant utilisation and that by that means we could diminish excessive manning. Excessive maiming exists. Although it is not universal, it is widespread. If that is tackled, it will also give rise to further increases in unemployment.

The third problem area is job creation. Undoubtedly, where peaks of depression exist in a locality or area, special remedial measures must be taken. As a long-term solution, however, job schemes are not likely to do much good. It would be better for the Chancellor to encourage business expansion and to foster business profitability. That would create lasting forms of employment. Employment opportunity will come only from the private sector. New jobs will come from small businesses as well as large businesses.

If the Chancellor wants any guidance about his priorities, he should concentrate his efforts on the encouragement of business enterprise. Yet there is no incentive to start or expand a business. The climate in which businesses have had to be conducted during the tenure of office of this Government has been one of almost complete hostility. I am happy to say that it is now beginning to change. The Chancellor has certainly made a start in that direction, but there is the full weight of Government legislation on the statute book which is basically anti-business and anti-enterprise.

The Chancellor is calling for an economic miracle. That is headline talk. In itself it is totally meaningless. What we need is a fundamental change of direction. Hon. Members may have seen an interesting article in today's Financial Times under the heading "The Jobs Column". There is a quotation there from one of five leading figures in the executive manpower sector who is reported as saying: But all in all, I think this country will have to get back to fundamentals, and Denis Healey's obviously not yet doing that. He's trying to Scotchtape together the social contract and so on; he's not really tackling the fundamental problems of skilled work, differentials and productivity. There is another fundamental problem that we have to tackle. We must move away from high-cost government towards profitable free enterprise, away from increasing public service employment and back to private service and manufacturing employment. The heavy on-cost of government at national and local level and in the nationalised industries that the private sector wealth producer now has to bear makes the job of wealth production near impossible. But it is to the production of wealth that the Chancellor should be bending his efforts. He should be exerting his influence and concentrating his energy in that direction.

The Chancellor and his colleagues should also try harder to end the chaotic trade union situation which has led to such widespread disruption this year and which consumes so much management time in having to negotiate in a multiplicity of different union negotiations in a single plant. He should make it really worth while for people to work and to save. When he begins to do that, there really will be ground for hope.

6.43 p.m.

Photo of Dr Oonagh McDonald Dr Oonagh McDonald , Thurrock

I wish to talk mainly about the proposals for direct taxation that the Chancellor made in his Budget. I find it curious that the Chancellor is now giving away tax cuts of £1¼ billion when as recently as last September we were going through the agonising process of finding out how to cut public expenditure by £1½ billion. The results of those cuts will be felt in the coming months as people lose their jobs and receive a lower social wage in poorer housing, education, roads and all the other things that public expenditure provides.

It seems that the Budget is taking place in the wrong context. It should be coupled with those discussions about public expenditure cuts and people should be trying to look seriously at the question of how much they want in their pay packets and how much they want to receive in a social wage. The question should be put fairly and squarely to the people. That, however, is not the context in which the Budget has been prepared. Instead, the Chancellor has decided to cut income tax. In so doing, he has simply bowed in the direction of reducing tax on the low paid. That is where the burden of taxation now lies.

If we look at the example of a father in full-time work, we see that the current tax thresholds are only a little above current supplementary benefit rates, without taking into account such things as rent and rate payments. If we take rent payments and so on into account, the tax threshold is well below the supplementary benefit rate.

A married couple without children start to pay tax at £20·87 a week, but they would receive £20·65 if they were on supplementary benefit. A married couple with one child aged four start to pay tax at £26·63 a week but would receive roughly £24 on supplementary benefit. The same couple with two children aged four and eight would start to pay tax at about £31 a week, but they would receive supplementary benefit of about £28 a week. That is where the real burden of income tax lies. That is where the Chancellor should have made his cuts. In fact, the cuts he has made benefit largely the higher paid. The really substantial benefits come for those earning about £110 a week and more, whether they are single people, childless couples or married couples with children.

The Chancellor has not give much help to the poorer members of our community. Perhaps the reason is that he has been mesmerised by his own figures. He has said that the average earnings for a man are now nearly £80 a week and that the earnings of four-fifths of employed men are within £30 a week on either side of that figure, so that a married man on £80 a week is just under £2 a week better off when all the income tax proposals are implemented.

The Chancellor has been mesmerised by average figures, which give a very misleading picture. Probably 60 per cent. of male wage earners earn below the average figure. That explains why, when one talks to people on the doorstep—and they have read in the papers or seen on television that the average male industrial wage is nearly £80 a week—they fold their arms and say angrily "I'd like you to tell me who earns £80 a week, because it's not me and it's not any of my friends." That is correct. Most of them are not earning anything like that much a week.

It is time that the Treasury and other Government Departments gave up quoting average figures for wages and presented the figure in terms of the median figure or the mode. Then, perhaps, the Chancellor would not be mesmerised in this way. That in itself would help to focus attention on those who need help most. Perhaps it would help the Chancellor to think that there are other groups who are too often neglected by the Treasury and the Inland Revenue when they think about how to cut taxes and how best to help people. Those groups include households in which the woman is the main breadwinner. One household in nine in the pre-retirement age group is a household in which the woman is either at work or looking for a job to support other members of the household. The average wage for a woman worker is £50·36 a week. My earlier point applies here too. Many women do not earn that average wage. Many households include widows and other lone mothers, a group not greatly helped by this Budget.

When I look around in society, I find yet another group not helped by the Budget—namely, widows on pensions and other one-parent families on supplementary benefit. I find that the supplementary benefit rate and the pension has been adjusted so that the child benefit due in April will be given with one hand and taken away with the other, although I understand that there are technical reasons for that. The Chancellor should understand the resentment felt by those who have to face this kind of taking with one hand and giving with the other. The resentment is bound to be intensified if they read in papers such as the Financial Times and The Guardian how many more highly-paid people benefit under the new tax proposals.

What has gone wrong is that we have a Treasury which is thoroughly out of date. Its picture of society needs to be brought up to date. The Treasury's picture of society is roughly that the married man is the sole breadwinner in his household and that his household includes himself, a dependent wife and children. That is true in many cases, but our society has changed a good deal. There are now more married couples without dependent children than with dependent children. In many households with children, the mother goes out to work or is perhaps temporarily unemployed and is looking for another job. It is now highly probable that the majority of married women are out at work. The figure in 1974 was 49 per cent., but the rate has increased in the past couple of years and I expect that the majority of women are already out at work.

The whole structure and attitudes of society have changed. Young couples with children now look upon their income as the family income. If the wife gets more child benefit to spend on food and clothing for the children—and especially on shoes, which are an extremely expensive item—that increase is regarded as part of the family income. It does not matter whether the wife theoretically gets it or whether the husband gets it.

This change in attitude is something to which the Treasury and the Inland Revenue in particular should wake up to. They should see what society is really like in the latter part of the twentieth century and see that it has changed from the immediate post-war period. Sometimes I think that the Inland Revenue is living in medieval times when married women could neither read nor write.

The Chancellor for the first time should have recognised the changed status of married women by permitting them to complete, sign and return their own tax forms. That would be a novel step for the Inland Revenue to take, and it is some thing that the Chancellor should think about doing.

There are other special proposals that I should like to see. For example, the Chancellor should have introduced a child benefit of £3·35 per child. That would have been an enormous and important addition to the income of low-paid families. If he did that and allowed it to be paid in full to one-parent families, it would have been a significant boost in income for that group too. It could have been done by replacing the marked man's allowance with a unisex personal allowance of, say, £890 a year and adding to that a band of tax at 20p in the pound for the first £500 of taxable income.

Those two measures combined would have ensured that no married man would lose out by the increase in child benefit and the abolition of the married man's allowance. No married man would have lost out but many families would have stood to gain, and many widows and other one-parent families would have been better off too.

Let me now consider the costs of these proposals. They would be partly funded by abolishing the married man's allowance. They could have been partly funded also by raising VAT by 2 per cent. They could have been partly funded by spending roughly one-quarter of £1 billion which my right hon. Friend proposes to give away in other directions, and I believe that this would be a more sensible form of benefit for those who need it most.

There is, of course, another way in which the Chancellor could have funded these proposals. It is time that he and the Treasury took an overall look at our taxation as it operates now and as it operated in the past. They would find that in the past 10 years Government expenditure has been increasingly borne by wage and salary earners. The trend has been away from taxation of company incomes and towards taxation of wages and salaries. This trend has continued at an increasing rate until it has reached the present position in which 51 per cent. of total revenue from all sources, direct and indirect, is produced by wage and salary earners and 8 per cent. by companies.

The figure for companies has shown a sharp fall. On direct taxation only, tax from companies in the past 10 years has dropped from almost one-quarter of total revenue in 1966 to one-eighth in 1976. That is the sort of thing that the Chancellor and his Treasury officials ought to be looking at.

We all know, and even the Treasury and Conservative Members recognise it, that many companies pay no tax. They are not picking up the bill for education or for the roads they use. They are not picking up the bill for the unemployment they cause. These costs are borne by wage and salary earners. In spite of the generous tax concessions for companies, investment has not improved. In 1976, after allowing for stock appreciation, company profits rose, and they rose sharply in the latter part of the year.

It is time that the Treasury emerged from its cloud-cuckoo land and looked carefully and clearly at the kind of society in which we now live. In that society the status of women has changed. The number of one-parent families has increased, and more women are going out to work. Those are the factors the Treasury should be taking into account.

The Treasury should also look realistically at the burden of taxation borne by companies and consider whether it is fair that a large multinational company with interests throughout the world pays nothing in corporation tax and pays nothing, directly or indirectly, for the services which it uses in the community. It is time that the Treasury and the Chancellor alike woke up to the world of 1977 and adjusted their taxation accordingly.

6.58 p.m.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

It is not for me to defend the Chancellor from the attractively-presented attacks by the hon. Member for Thurrock (Dr. McDonald). Having listened to the hon. Lady, however, with some care, I find that I support the Chancellor and I disagree with her. She made a most eloquent plea on behalf of single women and women generally, but she missed the most important point of the Chancellor's case. It is that those who are weak in society are attacked most of all by inflation. We do not defend them by thinking up ways of increasing public expenditure or of marginal redistribution of the tax burden. We defend them most of all by trying to reduce inflation.

We should bear in mind primarily the social effects of inflation. On a personal note, I felt a little irritated as I listened to the hon. Lady's attractively-presented but spurious argument when I reflected that my hatred of inflation comes from the fact that I was brought up in a one-parent family. I saw my mother crushed by what were then very low rates of inflation. Neither she nor any of those in a difficult position would have been helped by the creation of further inflation through increased public expenditure or increased tax load and, ultimately, an increased public sector borrowing requirement.

I believe that the much-attacked Treasury is right at least in one of its central objectives, which the Chancellor stated as follows: The principal measures I shall be announcing will contribute to two key aims—getting our inflation down to the level of our main competitors and improving the performance of our manufacturing industry. I shall say a word or two now about the industrial strategy. While I agree with the Chancellor's objective of attempting to contain inflation, I believe that the industrial strategy is wholly misconceived. It is misconceived because it is biased towards only one section of the economy, biased towards manufacturing industry but against commerce. Most of all, it is biased and dangerous because it is based not upon known and certain laws but, contrary to the rule of law, upon arbitrary and political expediency. It is based upon the haphazard desire of politicians to benefit those who may ultimately benefit them. It is ultimately the one part of the Government's whole strategy which is more likely to bring our democratic process into fundamental disrepute than is almost anything else.

There is clear evidence already that those who benefit under the industrial strategy are those who may, for instance, set up a workers' co-operative or who may take direct action to get what they want from their employers or the Government. This selective arbitrary industrial strategy is more likely to do lasting damage to the fabric of our society than is almost anything else, except inflation. It is also expensive, because it costs about £3 billion a year, and, as my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) is so often saying, that money could be fructifying in the pockets of private employers and they could be providing long-term profitable private employment for people who are at present unemployed.

Contrary to what the hon. Member for Thurrock was saying, the Budget should be judged principally in relation to its alleged attack upon inflation. When we think about inflation, we perhaps think most of all about the very successful attacks that were made against the last Tory Administration during what I might call the Barber years. A very convincing monetarist case was put against that Administration for the vast and increasing deficits which were accumulated in 1971, 1972 and 1973.

One would have thought that, with a Labour Administration priding itself upon the high intellectual calibre of its Front Bench and on the consistency and logic of its advocacy of various causes, and in view of the scorn with which Labour has view of the scorn with which Labour Members spoke of those who now sit on the Opposition Front Bench, the same degree of consistency would have emerged from the Treasury when the present Treasury was advocating an economic policy. Yet we see that we do not have a monetarist Chancellor. We do not have a Keynesian Chancellor. We have merely an opportunist Chancellor. Last year, when the Chancellor was negotiating with the IMF, we had a monetarist Chancellor. He talked in specifically monetarist terms when he was negotiating with the IMF.

I draw attention now to the lead-in to the main part of the Budget Statement. I must apologise to the House, because it is asserted that I went to sleep during the course of this. I am sure that is not true, but, even if it were, I should have been wise to go to sleep, because there really is the most inconsistent rubbish in the first part of the Budget Statement.

We start with the description of the domestic economy, and there the Chancellor is talking in his most Keynesian terms, blaming the trade unions for the creation not of unemployment but of inflation. He says: I have said many times that we need to get our inflation rate down to the level of our main competitors. Last year's experience with the exchange rate shows what is bound to happen until we achieve that. Our inflation rate was falling rapidly in the first half of 1976, thanks to the £6 pay policy, but our rate was still much higher than those of our main competitors. He goes on to blame our old friend commodity prices, and in the next paragraph we read: The response of the trade union movement, first of the £6 pay limit and then to its successor, gives us a very good chance of resuming the fall in inflation in the second half of this year. Why does not the monetarist Chancellor tell the trade unions in an honest way that inflation is being checked by a very tight monetary policy? Why does he go on—

Photo of Mr John Ryman Mr John Ryman , Blyth

Could the hon. Gentleman read the rest of that passage? As he has left it, it is thoroughly misleading.

Photo of Mr Nicholas Budgen Mr Nicholas Budgen , Wolverhampton South West

Certainly. I am sorry to trouble the House again, but I shall repeat the paragraph. I hope that it is the right paragraph for the hon. Gentleman. The response of the trade union movement, first to the £6 pay limit and then to its successor, gives us a very good chance of resuming the fall in inflation in the second half of this year when the effects of last year's depreciation have finished feeding through into prices. Indeed, there is a real prospect of getting inflation into single figures by the second quarter of next year, provided that we can avoid substantial depreciation."—[Official Report, 29th March 1977; Vol. 929, c. 256–9.] If the hon. Gentleman is saying that depreciation of the currency happens as a consequence of causes over which we have no control, I say that that is wholly wrong. The reason why the currency fell by about one-third during last year was that there was a sudden increase in the supply of money, so that foreign holders of sterling decided to withdraw their sterling from this country and as a consequence the exchange rate fell. I think it slightly ironic—I shall deal with this later in my speech—that the Bank of England is now holding down the exchange rate, having so vehemently complained about the exchange rate being driven down by wicked foreign speculators.

What one would look for from a Front Bench composed of such intellectual giants would be an element of consistency so that they gave honest leadership to the TUC and were able to tell the TUC that the advantage of entering into any sort of statutory or semi-statutory control of wages might be some amelioration of the rate of unemployment. They do not do that. Therefore, what is the attitude of the TUC likely to be? The TUC is told that, if it imposes a rigid and arbitrary control over its own members, the rate of inflation will fall. It has not done so. The TUC has been conned time and again, because the highly intelligent, distinguished Labour Front Bench do not have the courage to explain whether they are either monetarists or Keynesians.

Surely, by any sort of monetarist argument the Chancellor takes an immense risk in running such a vast public sector borrowing requirement of £8½ billion. He takes a risk, particularly if his estimated increase in manufacturing investment turns out at 17½ per cent., as suggested in the Financial Statement, because once again we shall find that during the summer and autumn there will be competition for scarce funds, and the Chancellor will then have the unpleasant choice of either allowing interest rates to rise or having to print further money.

That is where the real risk lies, because this is probably this Chancellor's last Budget. A new Chancellor will, of course, want to stamp his mark on our financial affairs. The present Chancellor having tried to give the impression that he is an iron Chancellor dealing with the profligate financial affairs of an outgoing Tory Administration, the new Chancellor will no doubt wish to be popular, particularly bearing in mind the age of the present Prime Minister. That is the real danger. The next Budget will be a popular Budget. This one is leaving the present Administration with what they describe as plenty of headroom, since it has the advantage of an extraordinarily lax definition of the money supply within the IMF constraints.

The definition of money supply in relation to domestic credit expansion leaves the present Administration with a great deal of room for manoeuvre. It is significant that at column 261 of Hansard the Chancellor spoke in vague terms of his target of an expansion of M3 of between 9 per cent. and 13 per cent. It is clear—it was perhaps made most clear by the helpful article by Mr. John Whitmore in The Times yesterday—that there is now a tight control of money supply. The money supply is now growing at about only 5 per cent.

The strategy of the present Administration is to achieve a massive surplus on the balance of payments as quickly as possible. The Government will do that by continuing to hold down the exchange rate. They will wait until North Sea oil starts coming in in substantial quantity. They will then find that, within the interpretation of the money supply by reference to domestic credit expansion, they will have an enormous amount of room for manoeuvre. We shall then see that the new Chancellor in a pre-election situation will, even within the constraints laid down by the IMF, start increasing the money supply good and hard. He will know perfectly well that the chickens will not come home to roost for another 18 months, and he will receive plenty of support from his Back Benchers.

Labour Members will say that they lost Stechford because taxes were not cut enough in this Budget. They will say that there was silly talk about the public sector borrowing requirement and that the Chancellor was in a monetarist mood and told them that he could not cut taxes further. But he will cut taxes before the next General Election. There will be another pre-election squirt of the money supply, and the Government will attempt to ride to fame on that.

7.12 p.m.

Photo of Sir Anthony Meyer Sir Anthony Meyer , Flint West

I shall not follow my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) in his erudition or his forecast, althought I have a nasty feeling that he is right.

One of the features of this Budget has been the total absence of support for it from the Government side of the House.

Photo of Sir Keith Joseph Sir Keith Joseph , Leeds North East

They are all at Stechford.

Photo of Sir Anthony Meyer Sir Anthony Meyer , Flint West

I hope for their sakes that they will be more successful there than they are here—although that will not very successful.

There have been no speeches from the Government side to support the Budget. There have been attacks and criticisms from Labour Members below the Gangway who, we hope, will make their votes accord with their voices.

The hon. Member for Thurrock (Dr. McDonald) made a speech that impressed us with its grasp and erudition. If the Labour Party want a Chancellor from the extreme Left they could do worse than pick the hon. Lady. If she becomes Chancellor she should mediate on the fundamental truth that the present Chancellor does not seem to have understood.

There is a problem with the low-wage earner who has to pay transport costs and possibly tax at a level that means that his income and supplementary benefit are virtually identical. It sometimes means that there is even an advantage in his drawing supplementary benefit. On top of that, the gap between this miserably low level and the national average after tax deductions is horrifyingly small. I suggest to the hon. Member for Thurrock that if she imagines that the answer can be found in any jiggling about with the tax system, by altering allowances and the initial low band of taxation, she is kidding herself.

The only possible answer is so to increase the national wealth that we can begin a process of effective distribution. The Labour Party, by concentrating solely on fair distribution and excluding altogether the need to increase total wealth, has defeated its own objects.

Photo of Mr John Ryman Mr John Ryman , Blyth

I appreciate the point that the hon. Member for Flint, West (Sir A. Meyer) has made about the need to increase the national wealth, but does he not agree that there are enormous anomalies in the present tax system, affecting the poorer sections of the community, such as were described in the speech of my hon. Friend the Member for Thurrock (Dr. McDonald)? The hon. Gentleman seems to be saying that these are matters of no importance and that there is no need to reform any of the existing anomalies that fall most heavily on the poorer section of the community.

Photo of Sir Anthony Meyer Sir Anthony Meyer , Flint West

Some of the things that the hon. Member for Blyth (Mr. Ryman) has described as anomalies are not anomalies at all, but the inevitable consequences of trying to fiddle around with a situation that requires a much more drastic cure. There is little room for manoeuvre. Does the hon. Gentleman suppose that if he had room for manoeuvre a Labour Chancellor would not have eliminated these anomalies for good and all? It is all very well for the hon. Member for Thurrock to say that a first priority is to cut taxes to the lowest possible level. To do so would be so enormously expensive that, with the room for manoeuvre that the Chancellor has now, it is not open to him to make much contribution on this point. The only way is to liberate those forces of energy that will increase the national wealth.

I find certain elements of good in the Budget. One thing that I particularly welcome, because there are a large number of retired people in my constituency, is the tiny concession on the investment incomes of those aged over 65. Of course, that will be welcome—dismally small though it is—but it will not ease or remove the gnawing anxiety of those retired people who believed that they had just enough savings to see them through. Inflation has eaten into their savings at such a pace that some of them are now praying not to live too long while others are trying, and failing, to bring themselves round to the idea of applying for supplementary benefits.

Unlike any Labour Member, I commend the Chancellor's courage in giving bigger tax reliefs to those earning high salaries than to those on average salaries. It is always an unpopular thing to do, and it is guaranteed to lose votes, but it is a way, timid though it is, to encourage wealth creators in our society.

The trouble with this Budget is that, like the famous pudding of which Sir Winston Churchill spoke, it has no theme. The announced theme was a big transfer of the burden from direct to indirect taxes. That has failed to materialise, partly because of the need imposed by the vital necessity—according to the Government—of obtaining a successful phase 3. If that is to be done the retail price index must be drawn in such a way that the unions will be able to suggest moderation to their members in the pursuit of wage claims.

The Government have found themselves unable to make a transfer from direct to indirect taxation, in the hope of achieving a phase 3 that, as my right hon. Friend the Member for Worcester (Mr. Walker) said in a truly remarkable speech, looks unlikely to be attained. If it is not attained the Government will find themselves badly damaged, largely because of the enormous build-up that they have given to the importance of obtaining phase 3. They have built it up so successfully that other people, including those in the Liberal Party, imagine that not only is it vitally important to get a stage 3, but that it will be possible to get an agreement that will mean something. I hope that they are right, but the Government have built up something that they are unilkely to achieve, and if they crash it will be all the worse because of the build up that they have given to it.

I turn now to the two forms of indirect taxation that have been increased by the Chancellor. The first is the duty on cigarettes. Under this Government, the price of cigarettes has doubled in three years because of increases in the duty. The Chancellor claims that in doing this he has made a positive contribution to the health of the nation.

However, it is interesting to note that the doubling of the price of cigarettes has taken place in five stages, with the Chancellor virtuously taking credit for making a contribution to the improvement of the nation's health on each occasion. In fact, each increase has been calculated to get people to say "Oh, hell. I shall have to pay the increase, because I am determined to smoke". It has been calculated to make people grumble but to allow them to continue smoking, and to give the Chancellor the same tax revenue as before.

If the Chancellor really meant to make a contribution towards improving the nation's health he would have increased the duty on tobacco in one jump rather than by a series of price increases that people could assimilate. I do not think that the present price should be increased, but it would have been better to go straight to the present price a couple of years ago.

The other indirect tax increases are the duty on petrol and the £10 on the vehicle excise licence. It has already been pointed out what a catastrophic effect these proposals will have on the economies of rural areas. Members of the Labour Party have regarded the motorist as a middle-class Tory for so long that they find it hard properly to assimilate the changes that have been taking place.

A car is no longer a toy of the rich; it is often a poor man's essential means of transport. This is true not only in those areas where public transport is very infrequent, but in those areas, all over the country, where is is cheaper for two, three or four people to go to work in one car than it is for them to travel on any form of public transport.

Areas such as my constituency, where unemployment is well above the national average—one adult male in five is out of work in Rhyl—are also areas of relatively low wage levels, with the result that people face high transport costs because they have to travel a long way to get to work and do not receive very much when they get there. This takes us back to the situation described by the hon. Member for Thurrock.

An increase in the price of petrol is one of the worst possible ways of increasing indirect taxation. It has been calculated that it will add £1 a week to the average travel-to-work costs of someone who goes to work by car. If he has a couple of chaps to share the cost, it will be reduced, but it will still go a long way towards offsetting the concessions made by the Chancellor on direct taxation. I am undisguisedly delighted by the thought that this duty increase is likely to be defeated in the vote on Monday and that the Government will have to think of something else.

If we consider what they can turn to, we find VAT staring us in the face. It is a good tax and it is unfortunate that it has achieved such a bad name because it has been badly administered. I blame partly my own Government for introducing it with a threshold that was far too low and partly the present Government for bringing in multiple rates which have added enormously to the burden of small shop keepers. I blame both Governments for allowing the deprivations of the VAT inspectors who, in many cases, are giving VAT a thoroughly bad name.

I see that the Minister of State, Treasury is looking a little unhappy. I concede that authenticated instances of unpleasant behaviour by VAT inspectors are few and far between, but they are widely reported and believed and it is important for the Treasury to ensure that such cases do not arise.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

The structure of VAT was introduced by the Conservative Government for which the hon. Gentleman, no doubt, voted and the whole basis of the structure is that the VAT inspector goes to a trader's premises and inspects his books. That is quite different from the income tax system under which discussion generaly takes place between an inspector and an accountant.

The hon. Gentleman's Government deliberately chose not to follow that procedure, but to use a different system and he cannot really complain about it now.

Photo of Sir Anthony Meyer Sir Anthony Meyer , Flint West

The hon. Gentleman should not be so anxiously partisan. I was not trying to make a party point. If there is abuse and this is a bad system, why have the Government, who were violent in their denunciation of VAT when in opposition, not proposed any changes in the system? I hope that the hon. Gentleman will at least ensure that an instruction is given to inspectors to be careful about how they carry out their duties.

In the long term, VAT could do far more than anything else—provided trade unions were educated and shown its real impact on the cost of living—to take the burden off direct taxes. There could be a massive reduction in direct taxation if a single rate VAT were introduced. I should prefer that it were spread over a wider range of articles, though I realise that I am treading on dangerous ground here. However, the zero rating system is causing more trouble than it is doing good.

The Budget does a little to undo some of the damage that the Chancellor did as he trampled through the economy like a rogue elephant. We shall wait to see it improved further as the Finance Bill goes through the House.

7.28 p.m.

Photo of Mr John Ryman Mr John Ryman , Blyth

I should like to deal with a number of points in my short speech. I had not originally intended to speak, but I have been prompted to do so by the speeches of some hon. Members in all parts of the House.

I agree with those who have stressed the importance of the pay settlement between the Government and the unions this year and also with those who expressed misgivings about the perpetually mistaken optimism of the Chancellor of the Exchequer.

I cannot remember a single estimate of the Chancellor that has been fulfilled, in relation either to the prospects of the rate of decline of inflation or to the level of pay settlements. I cannot remember a single occasion since he became Chancellor when, in the face of the most damning evidence to the contrary, he has not appeared over-optimistic out of all proportion to the facts of the situation as they faced him. Consequently, I have little confidence in his powers of prophecy for the performance of the economy in the near future.

I was particularly concerned about what the Chancellor said about the effects of the Budget on unemployment. The Government have a grave responsibility, particularly in the North-East, for the tragic increase in unemployment, and certain specific measures taken by the Government last year directly caused further increases in unemployment and aggravated an already bad situation. For example, the sudden and peremptory abolition of the regional employment premium in the Chancellor's statement before Christmas caused untold hardship and misery in my constituency. That was not merely because the premium was abolished but because its abolition was introduced at a few weeks' notice, thereby forcing many employers to create redundancies straight away and to cut back industrial training schemes.

I recognise the Chancellor's point of view that the regional employment premium was not the best instrument for areas that required assistance in dealing with unemployment. There is a case for producing assistance in a different way—for example, the temporary employment subsidy. However, I can see no merit in the Chancellor's action in introducing the abolition of REP shortly before Christmas, to take effect at the beginning of January. The announcement of abolition was made with employers and management being given no notice. They found all their financial planning in the previous quarter to be worthless because they were not to be in receipt in the new quarter of the money that had been promised them by the Government in the previous quarter.

In my constituency there are a number of examples of employers who were extremely worried by the suddenness of the change in the Chancellor's policy. As a result, a large number of additional redundancies occurred and industrial training had to be restricted by a number of companies.

I am completely dissatisfied with the Chancellor's optimism expressed in his Budget Statement about the proposals he is now introducing to deal with unemployment. I have no confidence in his optimism. It is a tragedy that a Labour Government, who are now in their fourth year of office, have been helpless in the face of mounting unemployment throughout the country.

Although estimates differ, one Cabinet Minister a short while ago predicted that by the end of this year there would be 2 million unemployed. If a Conservative Administration had ever ventured to make such a phophecy, there would, quite rightly, have been an outcry. I find it appalling that a Labour Government should apparently be absolutely helpless in dealing with this tragic problem, which we are all agreed should be one of the first priorities of any Government.

I shall now deal with specific proposals. I deeply deplore the increase in the excise licence fee from £40 to £50 for all motor vehicles. It seems quite illogical that all cars and all car owners should be expected to pay the same fee for the excise licence. Why should the owner of a Mini—I declare a personal interest as I am the owner of a Mini—pay the same excise licence fee as the owner of a Rolls Royce, Bentley, XJ6 or XJ12? It is quite absurd.

The original intention of the excise licence fee was to produce a fund for the roads. Successive Governments of all political complexions have raided the fund from time to time for purposes other than those connected with roads. We now see an appalling increase that many owners of modest cars—they are not all Tories by any means—simply cannot afford, coupled with the proposal to increase the cost of petrol, the increased capital cost of car purchase and the increased cost of car maintenance.

I made the same point two years ago in a speech in the Budget debate. The Minister, the present Financial Secretary to the Treasury, promised that the Government would consider the proposal seriously. Indeed, at the end of the debate the Chancellor said that he would look at the proposal seriously and that he thought there was a strong case for having a differential excise licence fee so that owners of cheap cars should pay a smaller fee than the owners of expensive cars.

I think that that is a jolly good idea. I am amazed that the Government have done nothing in that direction. Indeed, they have gone the other way and introduced a flat, overall increase. The other side of the coin is that those who run expensive cars are not the personal owners. The cars are usually owned by companies and they are driven by directors or senior employees. Here is a disparity and an unfairness that the Government should want to avoid.

I deplore the increased tax on petrol. I shall not support the Government in that proposal because it seems iniquitous that once again the motorist, who has been fleeced by successive Governments of all political complexions, should have to bear an intolerable additional burden. There are large parts of my constituency that are badly served by public transport. We have no railway. Dr. Beeching saw to that many years ago. There is a rural bus service in various parts. The bus company does its best to provide a good service, but it is wholly inadequate for the needs of the population.

Many people, although they cannot afford to do so, have to have either a motor cycle, a motor scooter or the share of a car when going to work. The new tax on petrol is wholly unnecessary. It will involve enormous hardship for motorists and other sections of the population, and I shall not support it.

Perhaps my hon. Friend the Minister of State will be kind enough in his reply to enlighten us why the Government have not done anything about abolishing the tax distinction between earned and unearned income. I have never been able to understand why unearned income should be taxed at a higher rate. Unearned income today was earned income yesterday. A person does not have unearned income unless it has been earned. If a person works sufficiently hard to make a modest saving and in subsequent years derives an income from the capital, why should he or she be taxed at a higher rate than what is now described as direct taxation on earned income?

Photo of Sir Anthony Meyer Sir Anthony Meyer , Flint West

Perhaps the hon. Gentleman will repeat that a little louder. I am not sure whether the Minister is hearing.

Photo of Mr John Ryman Mr John Ryman , Blyth

I hope that my hon. Friend is hearing me.

If it is said that a person who derives benefit from unearned income has inherited the money, that can be overcome by increasing death duties or dealing with legacies, for example, by other fiscal policies. I see no merit in perpetuating this iniquitous system whereby income is subject to high rates of taxation because it is allegedly unearned. The system hits particularly hard the widows for whom the Chancellor has done virtually nothing in the Budget. They are penalised by a most unfair earnings rule. It also hits hard elderly people who are living on modest savings.

About three weeks before the Budget I wrote to the Chancellor. I made a special plea on behalf of widows. Do you know, Mr. Deputy Speaker, the Chancellor did not even have the courtesy to acknowledge my letter? In my letter I set out in detail the case for widows. [Interruption.] This is a serious matter. It is not a matter of levity. I referred to the serious plight of widows—not only war widows and industrial widows but many other categories of widow. For the purposes of tax law there are seven different types of widow. They are all in a desperately serious plight. They simply cannot make ends meet in the face of inflation and particularly the high cost of food.

I wrote to the Chancellor about three weeks ago asking for special consideration to be given to widows. I said in my letter that I appreciated that he could not give any commitment or anything of that kind, but I asked him to confirm that he would sympathetically consider the plight of widows. I was appalled. Perhaps the Minister of State will be good enough to ask the Chancellor why he did not even acknowledge my letter, let alone why he did not give me a sensible answer, or any answer at all.

There is one good thing that I see in the Budget—at last. I welcome the Budget in the sense that it undertakes to deal in some ways with continued tax avoidance and evasion, although the terms of that seem to be extremely vague. Again, I disclose an interest. For five years I advised the Inland Revenue in a legal capacity in many cases of this type. That was an appointment that I gave up when I had the privilege of coming into this House, because it was an appointment under the Crown.

I am appalled by the enormous amount of tax evasion that still goes on, particularly with cash businesses, whether it is a greengrocery business, a horse dealer's business, farmers, launderettes, scrap metal dealers or the like. An extraordinary amount of dishonest tax evasion goes on, and the Inland Revenue is apparently powerless to do anything about it. It must cost the Exchequer millions of pounds a year.

I shall be most interested to hear what the Government will do about dealing with tax avoidance and evasion of that type. I am thinking not of sophisticated accountants or sophisticated tax evasion machinery conceived in the City of London or anything of that kind but of the plain dishonesty, of which there is an abundance of evidence, that goes on in cash businesses.

A lot has been said in favour of an extension of value added tax and about the unpopularity which that tax is attracting by reason of the behaviour of some inspectors from Customs and Excise in enforcing VAT. I have had no personal case of that kind brought to my attention in my constituency, but I have had many cases brought to my attention by traders and individuals in my constituency of the enormous amount of extra work that they have to do in bookkeeping and documentation in order to act as unpaid tax collectors for the Government.

Why on earth should they do that? Why should a busy chemist's shop, a butcher's shop or a shop of that kind have to go to enormous expense to fill up all the ridiculous forms and keep additional books in order to collect tax for the Government? If the Government want them to do that, they should make allowances for traders to be reimbursed for the additional expense that they often have to incur intolerably concerning paperwork. Customs and Excise officers are efficient. They insist on books being kept, and rightly, and on the proper records being kept. But the maintenance of this tax is placing on intolerable burden on traders and individuals of all kinds.

The matter is made a thousand times worse by multi-rate VAT, which the Government, in their anxiety to remain within the EEC, have been forced to adopt, and will be forced to adopt more frequently in the future as more and more multi-rate VAT is introduced. I should be very interested indeed to hear from the Minister in due course whether it would be possible to alleviate the hardship and extra work borne by traders in the administration of VAT.

I end where I began, with a plea to the Government to alter their economic strategy and their fiscal policies, if they have any, in order to face the most fundamental problem of our time—that is, the increasing unemployment in the country, about which the Chancellor appears to be absolutely hopeless to do anything. Concerning the taxation of petrol, I confirm what I said earlier—that I shall certainly not support the Government in the introduction of such an additional tax.

7.45 p.m.

Photo of Mr Geoffrey Dodsworth Mr Geoffrey Dodsworth , South West Hertfordshire

I shall not attempt to follow the logic of the arguments advanced by the hon. Member for Blyth (Mr. Ryman), other than to observe, as one of my hon. Friends has said, that it is remarkable that the speeches from the Labour Benches do not appear to find the Budget very attractive. Now we have gone a stage further, and I understand that not to vote for it becomes an addition to not finding it attractive.

I want to point to one aspect of the Budget. At column 260 of Hansard for Tuesday the Chancellor refers to the price control question and mentions in particular the desire to have a new power to freeze a particular price for up to a year when an independent investigation shows that to be justified. I believe that prices are a fundamental part of such a Budget strategy. It seems a curious oversight that only a very small amount of attention, as far as I can see, has been paid to this necessary sector of our economic activities.

We had a trailer from the Department of Prices and Consumer Protection in February this year in which it indicated that there was likely to be a new Government policy on prices. It referred to the particular areas of price about which I am concerned this evening—prices in the nationalised industries and particularly expenditure through nationalised industries. In a speech made in Cardiff by the Under-Secretary there was a reference to the Government' new policy on prices. He said In place of the cumbersome rigidities of the cost controls operated under the present Price Code we propose a new instrument for specific investigations into prices by the independent and reconstructed Price Commission. Nationalised industries will be within the ambit of this policy. Under the legislation which we shall shortly be bringing forward, the Commission will be able to investigate the prices of those nationalised industries referred to it by the Government. I hope to demonstrate during my remarks that Parliament itself has been completely losing power over expenditure. But it is worse than that; it is also losing control over income matters and, in particular, the prices that are being charged through nationalised industries. We as a Parliament have a responsibility in that matter—a responsibility in which we have been failing.

If one examines the content of the Financial Statement and looks at its components, one finds it interesting to observe that the figures shown on page 34, under the heading "Forecast Effects of Changes in Taxation", show reductions in tax of £1,830 million and an increase in Customs and Excise duties of £786 million. On that page no mention is made of the national insurance surcharge, which is to increase by £1,159 million. Therefore, we can say that all those net costs are being paid for by the national insurance surcharge in any event. What we have today is nothing but a charade.

All this pales into insignificance alongside the steamroller programme of the nationalised industries, which is operating at an ever-increasing level. On page 19 of this very interesting and no doubt statistically accurate document—I make the qualification that I am being selective—the trading surplus of the nationalised industries amounts to £4·3 billion. That is indeed a figure of some magnitude when we are considering a total Budget of about £43 billion.

It seems to me that we are tinkering when we talk about tax reliefs. At the same time, we are not addressing ourselves to the real problems of control of expenditure in an area in which the Government ought to be competent and able to control that expenditure. We know that in addition to the actual expenditure it has a recoupment capability within its trading surplus. It is to that matter that I should like to turn in a little more detail.

We have a mechanism that provides that if nationalised industries wish to raise their prices they must apply to the Price Commission for permission. We have had an instance recently of the Secretary of State for Energy putting up gas prices and that matter being referred to the Price Commission.

When dealing with nationalised industry prices, the Price Commission is in some difficulty. In its report in August 1976 it said: It is essential that we should realise that the control of nationalised industry prices is effectively vested in the hands of Ministers responsible for nationalised industries and not in the Price Commission. Provided that the responsible Minister feels that the price increases can be justified, then they must be accepted. He may, however, restrict the increase in certain conditions. Through the Budget strategy, we see a large balloon of a whole area of operation that can effect the consumer and the individual taxpayer—an area of operations that is getting further and further outside Parliamentary control. Particularly when we are controlling expenditure through the operation of Statutory Instruments and the limitation of borrowing powers, these elusive mechanisms are being operated so as to prevent the fullest debate. Although 2,000 Statutory Instruments go through the House in a year, we should address ourselves particularly to a proper method of controlling the expenditure and prices of the nationalised industries.

This problem was well illustrated in the recent question of gas prices, which arose from the Budget strategy. Under that strategy, £100 million had to be raised, particularly from the energy industries, to reduce the public sector borrowing requirement. The Secretary of State decided that it should be found by increasing gas prices, and it was convenient to increase them by 10 per cent. from 1st April.

That was a retrospective action, since any meter reading after 1st April will relate partly to gas consumed since 1st January. This is an alternative tax on the consumer, and he should have some protection. One would have thought that that protection would come from the Price Commission, but it does not. The commission recommended against such an increase but the Minister did not accept the recommendation.

That is not entirely satisfactory. The Counter-Inflation Act allows for such a ministerial consent to an increase but provides that the reasons should be published. When I last inquired, yesterday, I discovered that the reasons have not yet been given. If the Minister consents and is satisfied after consultation with the commission that exceptional circumstances justify his intervention, he can approve the increase—as the Secretary of State has done in this case. But his written consent has not yet been published.

This is a small point, but it shows how the control mechanisms are failing, because there are too many of them and because Parliament has delegated so much authority that it does not have a firm grip on its own affairs.

We need not just a freeze on prices, an investigation of special cases and an investigation of nationalised industries in general, but a radical overhaul of the price mechanism in those industries to ensure that justice is done and that an alternative form of indirect taxation is not being levied. We should also ensure that we control all levels of expenditure and examine the methods by which this is being achieved, so as to satisfy ourselves that the control over borrowing limits and guarantees is working as effectively as it should. I do not believe that that is happening at the moment.

Any investigation should be much wider. Then we should begin to tackle this contribution of £4 billion to the Income and Expenditure Statement—a sum that dwarfs all the other changes recommended by the Chancellor.

7.55 p.m.

Photo of Mr Richard Luce Mr Richard Luce , Shoreham

I agree with almost everything that my hon. Friend the Member for Hertfordshire. South-West (Mr. Dodsworth) has said, particularly about the need for the legislature to exercise greater control over the Executive, not only in expenditure but in many other areas. The emptiness of the Chamber today is a reflection of the ebbing away of the power of the legislature in relation to the Executive. I therefore warmly welcome my hon. Friend's views. One way in which we could exercise greater scrutiny, in expenditure and in other areas, of the Executive is by means of powerful Select Committees which could examine much more effectively than they do now the activities of different Departments.

There has naturally been much anxiety in this debate about the low standard of living of many people and the need to create wealth. I want to deal with one subject only—the need for innovation and the implementation of new ideas in industry. I suppose that I should declare an interest as a vice-president of the Institute of Patentees and Inventors. It is not a monetary interest, but I should declare it nevertheless.

Our industrial success depends largely on our ability to innovate and to implement new ideas. It is said, although it is difficult to back up the statement with practical evidence, that we have been and still are good at inventing but bad at implementing. There are many examples of new ideas produced here but implemented elsewhere, particularly in the United States.

Tomorrow's standard of living and tomorrow's exports and economic survival depend upon innovation, which affects our ability to be competitive and to produce new machinery which is more efficient, new products, better design and goods of the right quality and at the right price. Thus, innovation is closely linked to the creation of wealth.

The creation of new industries in turn is essential to the provision of employment in the long term, as my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) rightly said in his excellent speech. It follows that the greater the profitability of any innovation, the more jobs will be created. The record since the war shows that as profits have increased employment has increased, and that as profits have fallen employment has shrunk. There is a clear link there.

If we do not innovate, we become more and more dependent upon imports of machinery and products which are more efficient. Russia, which does not have the right climate and enivornment for innovating, depends almost entirely on Western technology. That dependence will continue as long as Russia is unable to innovate. As a result, it has accumulated enormous outstanding debts with the Western world.

Therefore, I want to examine the Budget in relation to whether in the long term it will create the right climate for innovation. We need to look at the Government's taxation strategy if we are to examine this problem. I have come firmly to the conclusion that what we desperately need in this country is a selective fiscal amnesty for innovators and entrepreneurs. The key to this is to create a situation where we can increase the ability of new businesses—and, indeed, existing businesses if they wish to expand—to raise capital, and to encourage existing businesses in particular to retain their profits.

Moreover, it is essential to reward the risk-taking of entrepreneurs. Small businesses have a critical rÔle in innovation. The Bolton Report on small businesses in the early part of the 1970s not only highlighted the importance of small businesses in terms of their contribution to the gross national product and the fact that they employed about 6 million people. It also highlighted the fact that small businesses implement many new ideas. They have, therefore, an important role to play.

Labour Members talk desperately about the need to create more employment. There are about 1¼ million small businesses in this country. If we were to create a climate in which those businesses could expand and each of them could employ only one extra person, we would end the present level of unemployment. If we could only create the right climate for innovation as well as for encouragement to small businesses, we should see unemployment decline in due course at great speed.

In my view, there are a number of areas for action with regard to taxation. I would say, first that we need a climate of taxation stability. Since the war there have been 60 company taxation changes. There is a desperate need to create a situation of stability. This comes back to the need for Select Committees to examine new taxes and to scrutinise the Government.

The interesting thing is that every aspect of taxation affects innovators. If we take income tax, for example, we find that unless income tax is reduced we do not encourage people to innovate. I do not need to repeat the fact that our rates of income tax are extremely high. Although one welcomes the Government's gesture in the Budget, it is only tinkering with the problem and is only a small step down a long path.

I recently read a report produced by the Anglo-German Foundation which illustrated the profound differences in personal taxation between this country and Germany. It found that if two individuals, one in Germany and one in this country, accumulated income over 10 years of £236,000 gross, the average income tax in Germany amounted to 33 per cent. while in this country it was 67 per cent. That illustrates the dramatic difference between the two countries. The same applies to the tax surcharge on investment income. That plays a leading part in inhibiting innovation in this country.

The close company provisions also, in my view, inhibit innovation in this country, because we have a situation in which these companies are obliged to pay a large percentage of after-tax trading profits as dividends. What we need to do is ease the rules and encourage the accumulation of capital in that kind of business. Equally, in the treatment of capital losses we need, for a defined period, to encourage a situation where small businesses and individuals are allowed to deduct capital loss from shareholders' personal income before they are subject to income tax. This would help people to accumulate capital and to innovate.

Corporation tax also illustrates how innovation is affected by every area of taxation. I welcome, of course, the small move to encourage small businesses by increasing the lower-tier rate of 42 per cent. from £30,000 to £40,000 before one pays the higher rate, but that is only tinkering with the problem. It needs to be at a much higher level. With regard to capital taxation, we find that capital transfer tax prevents people from passing on their businesses within their own families, and this again inhibits innovation. Capital gains tax, unlike what happens in a country like Germany, is penalising, and it usually penalises paper gains. The Government would do well, if they want to create the right climate for innovation, to remove the threat of the introduction of a wealth tax.

A final area which has been mentioned many times is VAT. That affects a small business in the way it operates because there is not a single rate but two main rates. The turnover or threshold figure is still far too low and the procedures are still too complicated. That is another example where we could ease the situation for small businesses. If we examine the Budget in the light of its requirement to create wealth with which to innovate in this country, and to provide not only a higher standard of living but more jobs, we see that although some of its aims are welcome it hardly begins to tackle this major fundamental problem in our country.

I had the privilege the other day of being chairman of a working party which set up a conference entitled Economic Revival and Industrial Innovation. I was very impressed by the quality of the lectures. The important fact was highlighted that, if we are to innovate successfully, people must understand that innovators need finance, and very often a great deal of finance. In the 1950s Pilkington's introduced the float glass process but it needed £7 million before it could make the idea a commercial success.

Equally, when we consider the development of the gramophone record from 78 rpm to 33⅓ rpm, we find that a large amount of resources was required to undertake that development. In electronics, the change from thermionics to devices for transistors needed vast sums of money to develop and carry out the right research before implementation. The National Research Development Corporation has, over 23 years, had 28,000 submissions on new ideas for implementation, but only 37 have been substantial earners. That indicates the enormous risk that people take when they innovate and the need to give them sympathetic financial treatment.

The real problem for the innovator is the raising of finance. There are three sources. He can raise it from shareholders, but at the moment they get a poor return. He can borrow, but the costs are so high. Thirdly, he can derive it from retained profits. That is an area of fundamental importance where we need to create a change of climate in our country today.

During the conference that I have mentioned, an interesting lecture was given by Dr. F. E. Jones, President of the Engineering Industrial Association. He graphically highlighted, by means of charts, something that brings home the real problem. He talked about the added value to our wealth per employee in manufacturing industry. That added value is distributed, first, in employees' pay, secondly, payments to shareholders, thirdly, in the money that the Government take in taxation and, lastly, in money available for depreciation, innovation and expansion.

We find a fascinating figure when we compare United Kingdom manufacturing industry in 1975 with Japanese manufacturing industry in the same year. The amount available for retention for innovation and expansion is far higher in Japan—18·5 per cent., compared with 9 per cent. here. Only in exceptionally successful companies such as Pilkington's do we have figures anywhere near the Japanese level for the amount and percentage available for depreciation, innovation and expansion. This highlights our fundamental problem in innovation.

If we are to succeed economically and to encourage innovation, our requirement now is a massive blood transfusion for private manufacturing industry. We must have taxation policies designed to encourage the supply of capital to private industry. If we replenish and nurture the seed corn of industry, we shall in turn replenish and nurture the British nation. We must innovate in order to succeed.

8.12 p.m.

Photo of Mrs Margaret Bain Mrs Margaret Bain , Dunbartonshire East

It will come as no surprise to you, Mr. Deputy Speaker, or to hon. Members who are still present to be told that I intend not to follow many of the arguments pursued today but to take a particularly Scottish view of the Budget and its implications for Scotland.

We in the Scottish National Party have argued in the past that Scotland should have a separate Budget because of the differences in our economy from that of the United Kingdom as a whole. We should have liked an expansionist Budget. There are many aspects of this Budget that we do not like.

It was most encouraging to hear some Labour Members below the Gangway earlier. Some of them might have the courage of their convictions and join us on Monday in voting against some aspects of the Budget. The official Opposition should not count on there being only one Division, because the SNP dislikes many aspects. We intend to continue our rôle as the most effective Opposition party in the House.

Unlike the hon. Members for Nelson and Colne (Mr. Hoyle) and for Liverpool, Walton (Mr. Heffer), we have no hesitation about bringing down the Government, because we are very keen to have a General Election, particularly in Scotland. That is not because we think that the official Opposition might make a better Government. We know only too well that their record in Opposition has been appalling, and such details as we know of their so-called alternative strategy give us little hope that they would be effective in dealing with the problems north of the border.

I think here particularly of the Conservatives' desire to cut back expenditure even further than the present Government have done. We wish to see a real alternative in Scotland, and we believe that it can come in an election, when the people of Scotland give a mandate to treat for independence and we can deal with our economic problems in our own way.

I turn specifically to the Budget. There is a desperate need for jobs in Scotland, as in many other areas of the United Kingdom. The Government's record in Scotland has been particularly disastrous, bearing in mind that for part of their period in office some areas were cushioned against the overall effects of Government policy by the fact that short-term jobs were available to many people in North-East Scotland, jobs connected with the oil industry in pipe-laying and general infrastructure work. Those jobs have gone.

We are now seeing the real effects of Government policies. Our unemployment is getting worse all the time. We want investment in long-term employment prospects. Emigration has been the curse of Scotland. Our young, best, talented people have invariably gone abroad to use the entrepreneurial skills which previous speakers have mentioned. Our young people are again being driven from our country to seek opportunities elsewhere. Entrepreneurs must be encouraged here.

We find it upsetting that the VAT registration liability level was not raised from £5,000 to £15,000 of annual turnover. That would have done a great deal to help young people in Scotland who wish to set up businesses and expand there. We had also hoped to see an increase in the budget of the Scottish Development Agency, which we hope will attract industry to West-Central Scotland in particular and which has responsibility for environmental improvement.

That brings me to the question of inner city relief, to which the Chancellor referred. He said that we could expect a further statement fairly soon on what is to happen in Scotland. The £100 million being made available is small in relation to the overall problems of our inner cities, especially of Glasgow and Clydeside, where 97·5 per cent. of the worst areas of multiple deprivation are to be found. Multiple deprivation means that people do not have running water in their houses, that their houses are crowded, with no bathrooms and only outside toilets, and that there are rats running around the closes in Glasgow. The sum of £100 million is peanuts compared with what is needed for areas such as Glasgow and West-Central Scotland—and, no doubt, other cities such as Birmingham which suffer from similar difficulties.

In Glasgow we have had talk of the East End project. People in West-Central Scotland have so much confidence in what the Government are doing that they call it Turkish Delight—something that is full of promise but will not materialise.

We want a guarantee from the Government by Monday that a fairly substantial portion of the money will be spent in those areas of deprivation, a guarantee that we shall get rid of this sore in a civilised society. I had with me at the last General Election foreign journalists who said that they had never seen such conditions as those in Glasgow since they first saw the effects of napalm. I find it horrifying that anyone should come from abroad and say that about my country.

We should also like a guarantee that that spending will not adversely affect the new owns policy. The new towns are complementary to urban renewal in the inner cities. Here I endorse the views of the Town and Country Planning Association, which says: The New Towns programme is vital for dealing with inner city problems. To halt the new towns programme is to deny thousands of people the opportunity to move to better surroundings and to delay the improvement of environmental conditions in the older urban areas. We in Scotland are particularly concerned because the Stonehouse new town project was recently cancelled, at substantial expense to the Government. With it there was the loss of attracting jobs to an area which desperately needs them in the provision of housing, with all the contribution that that would have made. The programme is complementary and should help the population in such areas if they have no alternative accommodation and job opportunities. Therefore, I trust that the £100 million will not be tawen away from the development of new towns.

We should like a guarantee that there will be no attempt to use for this purpose money from the European Regional Fund. There is a great suspicion in many areas that regional funds coming for the social programme in the United Kingdom are being used not in addition to Government expenditure but as an alternative to what the Government should be spending anyway. We want to be sure that the money is not just a replacement.

I return to the jobs issue. Many right hon. and hon. Members think that the whisky industry concerns only the North of Scotland. That is not so. Many jobs in the central belt of Scotland are tied up with the industry. In my constituency there are about six companies totally dependent on it for their survival. They are involved in such work as making bottle tops and labels, packaging, bottling, distribution and warehousing. All these jobs are terribly important, and hon. Members should not think when they are talking about whisky that they are talking only about the North-East with its beautiful distilleries. Anyone who goes on one of the Scottish Tourist Board's whisky tours knows that the central belt of Scotland is included in the industry as well.

We would like to see a reduction in excise duty and tax on whisky, and we want the Government to look at the whole question of how excise duty is raised. The six-month period is causing great cash flow problems to the industry, and that gives rise to great concern. The Scottish National Party was very glad that there was no increase in duty on whisky in the Budget, but the 31p increase in tax three months ago took the industry to its limit and a further increase would have been totally unacceptable.

The most controversial part of the Budget was, of course, the petrol tax. Most people seem to talk about this in the rural context, but it is not only rural constituencies that are affected. In areas such as East Dunbartonshire, which are commuter constituencies and in which public transport services leave a great deal to be desired, the vast majority of people use their cars to travel to work. This is absolutely essential and it will remain so until the Government do some-think wonderful to alter the ridiculous situation in which British Rail has fifth-hand rolling stock between my constituency and Glasgow. This breaks down frequently, so people prefer private cars because they then have a guarantee that they will get to work and back home again.

To many constituencies which are dependent upon retail and distribution industries, the petrol tax is unacceptable. This morning I noticed the disabled drivers lobbying us here at the House to see whether they could get exemption from the increase in petrol prices.

There was little real reference to education in the Budget, and that is not all that surprising. However, the provision to make money available to increase the number of mathematics and science teachers was very important and received a general welcome. We all appreciate that we must combat teacher unemployment and improve educational performance in areas that are crucial for manufacturing industry and technology. That is all very well, but it appears that this provision applies only to England and Wales. An extra 1,500 teachers a year will be provided in England and Wales.

I wonder whether the Chancellor can imagine the furore in Scotland today when people discovered that that provision was not to apply to Scotland. We have shortages of mathematics and science teachers, we have manufacturing industry and we want our technology to expand. Why are we being deprived? Only this week I visited the Notre Dame Teacher Training College in my constituency. It is the largest Roman Catholic teacher training college in Scotland. The point raised time and time again by lecturers there was that it was essential to ensure that there should be more mathematics and science teachers in order to get the kind of youngsters who could take up apprenticeships in the jobs that we all hope to see in Scotland—presumably when we get out of our present economic difficulties.

I read what the President of the Head Teachers' Association said last night when he found out about this Budget provision not applying to Scotland. As far as I know, he is not a member of the Scottish National Party. He said: It is typical of British administrators to forget that Scotland exists. Are we always to be trailing along as an afterthought? It is just as well that I am speaking on 31st March. Had it been tomorrow, I would have thought that this was an April Fool's trick being played on Scotland by the Treasury. Before we decide not to vote against the total Budget on Monday night, we must have a guarantee that something will be done about this situation to ensure that Scotland has mathematics and science teachers recruited on the same basis as south of the border.

All this has taken place against the background of the worst consultative document on Scottish education that we have seen, and morale is at an all-time low in educational circles. We are fed up with the situation.

Finally, the Government have made no statement at this stage about social benefits. I know that politicians are always regarded by the public as being rather cynical, and I must express my own cynicism now. I think that the Government have deliberately said nothing about benefits because they think that the Lib-Lab alliance will not last all that long and that there will be a General Election later in the year. They think that it would be rather nice to raise pensions and child benefits at that stage. I wonder whether the Government are keeping these benefits back as a carrot.

One aspect that concerns me is the failure of the Government to say anything about the social implications of the Budget for one-parent families. Also, there is tremendous confusion about child benefits. I am heartily sick of seeing this scheme go backwards and forwards. At my surgeries in my constituency, people are always asking me what is happening to the scheme and what it means.

One-parent families are not being given the priority that they deserve. The Director of the National Council of One-Parent Families said last night: It is very sad for us to have to tell lone parents that they will only be £1·74 a week better off after receiving the new tax reliefs and claiming child benefit, but childless married couples will be 94p a week better off from extra tax relief alone. The heads of one-parent families have enough deprivation to suffer. The Government are institutionalising that deprivation and doing very little to ensure that these people escape from the poverty trap.

Like the hon. Member for Thurrock (Dr. McDonald), I am disappointed that there is no tax exemption for widows, including war widows. We managed to harry the Government last year into giving a 50 per cent. exemption for war widows, and now there is all-party support for exemption of widows' pensions from taxation. In an answer from the Financial Secretary last week, he indicated that it would have cost £140 million to exempt widows' pensions from tax in 1976–77. If the Government can afford to hand out £2¼ billion in tax relief, they can surely consider allying with that the £140 million that would give social justice to these people.

Widows are becoming increasingly frustrated as they have all the responsibilities of heads of households yet they see married women without such responsibilities taking home more at the end of the week than they do. I hope that the Government will look again at this and show that they have principles in recognising the responsibilities of widows. I believe that politicians and Governments should be judged on moral and humanitarian grounds, and I do not see this Government getting a gold star in this respect.

The Scottish National Party warns the Government that it is looking very seriously at the overall implications of the Budget. Unless we can have guarantees on the various points that we have raised in this debate, we will seriously consider voting against the Government on the whole Budget and not only on specific items.

8.28 p.m.

Photo of Mr Nigel Forman Mr Nigel Forman , Sutton Carshalton

I shall not follow the argument of the hon. Member for Dunbartonshire, East (Mrs. Bain) on the Scottish aspects of the Budget. I want to leave enough time for the massed ranks of the Labour Party to squeeze into the debate on one of the major planks of Government strategy.

A few days ago, The Times described the Budget as a "nice little Budget". I would say that we have a nice little audience here tonight and that we might well consider co-opting a few people from the Public Gallery on to the Government Benches so as to give the House more of an impression of a full Chamber.

This Budget is the Chancellor's tenth economic package in three years. It has to be judged in the light of what the Government have done or have failed to do since March 1974, as well as in the light of the Chancellor's own criteria, set out in his Budget Statement. Clearly, he has had to err on the side of caution, because we still have an inflation rate of about 15 per cent. In addition, the Chancellor must act within the undertakings that he gave to the International Monetary Fund, which obliged him to keep the public sector borrowing requirement within the limit set in the Letter of Intent. We also have his need to negotiate some sort of phase 3 of the incomes policy. I suspect that any kind of deal at the end of the day will do, as long as the Government can call it "phase 3", and breath a sigh of relief.

But—perhaps most notable from the parliamentary point of view—we have yet another conditional Budget. It continues the tendency of events since the Government got into their difficulties. The Chancellor's two key aims are to reduce inflation to the level of that of our international competitors and to improve the performance of our manufacturing industry. But it is significant that there are two other aims which should have been in his Budget, which he did not mention but which the British people have a right to expect the Government to try to acheive.

The first aim is to reduce the burden of direct taxation. On this, too, The Times was right to point out that, on average, the Budget concessions will raise the purchasing power of incomes by the same amount as inflation has reduced them over the last 80 days.

The second aim that one would have liked to see in the Budget is a lower level of unemployment and a greater degree of genuine job security for those now lucky enough to be in work under Labour. The Chancellor and the Secretary of State for Employment claim to have created or maintained nearly 200,000 jobs which would not otherwise be in existence, but I fear that that is little more than the smile on the face of the clown, which, if peeled away, reveals the grim and miserable expression underneath. As has been said, there can be no possible chance of secure jobs unless we in this House, as politicians, give the utmost priority to wealth creation before wealth redistribution.

Taking these four yardsticks of the Budget, I want to look at each briefly in turn. As regards the international competitiveness of the country, it is noteworthy that the Chancellor forecasts single-figure inflation by the middle of 1978. But one presumes that that forecast is based on the premise of a pretty tight phase 3 of the incomes policy, which I do not believe will be possible. Worse still, even if this target is achieved, I think that it is all too likely that our inflation rate will still be out of line with that of our international competitors even in the summer of next year.

What a dismal record that will be to show for over four years of Labour Government, assuming that this band of brothers is able to hang together for that long. It will have meant four wasted years to get back to where they started—four years of hard labour, and a far cry from the slogan "Back to work with Labour", which now sounds so hollow.

One needs to stress the point that the Chancellor and his Budget are now secondary as influences upon the performance of manufacturing industry. We cannot pin our faith on the so-called industrial strategy, on which my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) rightly poured so much scorn. We cannot depend on the worthy gentlemen who, as he said, beaver away in the 39 sector working parties within the NEDO framework. All that is useful, and we should let it continue, but let us not dupe ourselves into thinking that we are creating wealth thereby. We are creating "Neddy" reports and bumf. We need a sustained boost to the prospects and conditions of those concerned in the process of wealth creation, whether of goods or services.

One must include the service sector in this definition, as did the original article in The Sunday Times on this subject some time ago. The Budget has done, and is likely to do, precious little for the performance of British manufacturing industry.

Among the few measures that we can really welcome are those giving relief to small businesses. But even such measures are no substitute for the more suitable broad economic policies that would create the climate favourable to innovation and enterprise to which my hon. Friend the Member for Shoreham (Mr. Luce) referred earlier.

The third yardstick against which the Budget should be judged is the burden of direct taxation. I cannot go anywhere in my constituency without people gratuitously saying to me, and to politicians in general, that taxation is too high, has been too high, and must be brought down. It must be brought down for the individual taxpayer. The Healey Mark 4 Budget does nothing to reverse the cumulative damage created by the Healey Marks 1, 2 and 3 Budgets. It is no comfort for the Chancellor to say that things will now hurt less because he has stopped banging our heads against the wall and has decided to lay off a little. The Chancellor must not expect us to feel all that grateful.

After the Budget, we are still the highest directly taxed people in Western Europe, with the steepest progression of taxation in that category. He may have done enough to sweeten the negotiation of stage 3, but I suspect that he has not done enough to prevent people pricing themselves and others out of jobs and hastening bankruptcies at a rate greater than would have occurred otherwise. The Chancellor has certainly not done enough to restore the vital differential between those in work and those out of work. That is one of the differentials that matter. He has not done enough to provide talented people of all kinds with the incentive to go on working, and to go on working in this country.

The hon. Member for Dunbartonshire, East referred to people in Scotland who are already voting with their feet and who have decided, because the prospects are not there, that they must look elsewhere. That is what happened in Scotland hundreds of years ago, and we are seeing it again under this Government. Under Socialism, too many people are forced to vote with their feet. One sees the process of internal as well as external emigration. Internal emigration means that someone no longer does his utmost in his job or tries to do his best, because he knows the rewards are not there for his effort.

The essential criterion should be lower unemployment and less underemployment. In the long term, the structural labour market problems matter most. The Budget has brought together little more than a set of palliatives and proposals to mitigate the effects of previous Government policies which stored up the problems.

I approve the special measures to help the disabled, and to help them obtain work. I approve the measures to train teachers in shortage subjects. If we cannot get more high quality teachers of maths and science, our technology and industry will suffer in future years.

The other employment measures—the temporary employment subsidy through 1977–1978, the special subsidy to manufacturing firms in special development areas and the experimental scheme to help the long-term unemployed—are no substitute for more ambitious training and retraining programmes, the revival of the economy on a sustained basis and other policies that would bring more flexibility and mobility to the labour market.

This is vitally important. Hon. Members know the importance of housing policy and other aspects of employment policy whereby the Government have diminished mobility when they should have increased it with measures to reduce rent control and measures on housing to facilitate the movement of people, and above all measures which would have been the opposite of Acts like the Employment Protection Act, which have ossified and stultified the labour market.

At the end of the Budget the Chancellor said: We cannot afford at this of all moments, when the rewards of our sacrifices are well within our grasp, to throw away what we have gained in those two years.—[Official Report, 29th March 1977; Vol. 929, c. 285.] The Chancellor was referring to the past two years. What we have gained in the past two years seems pretty dubious to me and to other hon. Members, and if we asked those in the Public Gallery what they thought, they would echo that sentiment.

Prices are now rising at a faster annual rate than they were in 1974, and at roughly three times the rate in Western Germany. Unemployment is twice as high as when the Government took office and the underlying trends, despite the latest figures, still seem to be upward. The taxation system now catches within its grasp at the higher rates almost double the number of people that it did in 1974, and the present Budget will have only a marginal and temporary effect on that. The index of industrial production is scarcely higher than it was a few years ago and the index of real incomes is definitely lower.

If that is the measure of what we have all gained, and what the unfortunate British public has been blessed with under Labour, the people of Stechford tonight and of the country as a whole in the near future will be right to throw it all away and trade it in for a commonsense Conservative Government who will get back to governing the country on a commonsense basis with commonsense policies.

8.43 p.m.

Photo of Kenneth Clarke Kenneth Clarke Shadow Spokesperson (Trade and Industry)

I am delighted to follow the excellent and very erudite analysis of the Budget by my hon. Friend the Member for Carshalton (Mr. Forman), without the intervention of any speaker from the Labour Benches. That is because those Benches are bare, and have been completely deserted throughout the majority of the third day of the Budget debate.

It is interesting to see the reaction of the Parliamentary Labour Party to the Budget. It is supposed to have shown some resignation and acceptance of the package in a meeting upstairs, but we have had few speakers from the Parliamentary Labour Party, and all of those have been very hostile to their Government's package. The only defence of the Budget package and the Government's economic record has come from the rather lack-lustre performance of the Secretary of State for Employment, who opened the debate.

One wonders where the Members of the Parliamentary Labour Party are. One suspects that they have gone to Stechford, every one of them, to remedy the consequences of the Budget. We understand that there was considerable disappointment in Transport House when the package was announced, because the Stechford by-election was fixed for two days after the Budget and this was not the kind of Budget that Transport House wanted. I am not surprised that Transport House has sent most of its members to Birmingham, because if there is a verdict against the Government tonight the final straw for the electors in England's motor city will have been the Budget's attack on the motorist and the motor industry.

This Budget has not turned out to be an electioneering Budget in any sense, but their expectation shed some light on Labour movement attitudes towards the Government's position. If Transport House and Labour Members both below and above the Gangway imagined that this would be an electioneering Budget they failed to realise how seriously boxed in and restrained the Government have become; they failed to realise, too, how much the Government's failure of the last three years has left no real room for manoeuvre, except within the strict and cautious guidelines set down by the IMF after November's rescue operation.

It is not the reaction of the Labour Party in or out of this House that interests me, however; it is the reaction of the business and industrial community to the Budget, and the effect of the Budget on the life of that sector. I think that the reaction of the industrial community will be to latch upon such comfort as the Chancellor was able to give. In one of his least optimistic predictions the right hon. Gentleman summed up his Budget by saying that the worst was past.

The industrial community will only echo that comment and hope that it is true. It will turn to such consolation as there is and welcome, no doubt, the modest reliefs in personal taxation, which almost compensate for the likely level of inflation over the next 12 months. Basically, however, it will simply hope that the worst is past. I believe that it will feel that this Budget and the Government's industrial strategy, their anti-unemployment measures, their social contract, or whatever other slogan they use to describe their policy, will have little to do with industrial revival over the next two or three years.

I am sure that any business man or industrialist will be glad to hear the apparent acceptance on all sides of the House of the view that the future of the country depends on the revival of industry. It depends on increasing production to levels that may be sustained because we have made our economy competitive. By being more competitive, industry can achieve higher output based on higher productivity, and ultimately by reviving our industry we may pay ourselves the high incomes and achieve the high living standards that we would all wish.

At the moment that seems a long way off. The best that can be said is that the Chancellor may be right when he says that we are through the worst. It is important to bring home to industrialists not only that we all emphasise the importance of industrial revival but that we realise how grave the present position is and how far we have to go before we can hope to see anything of the kind.

The position of British industry after three years of Labour Government is very grave indeed. Take, for example, the levels of investment that have prevailed and still prevail in industry. We are glad to see that at the end of last year they were rising, but for last year as a whole they fell. Capital investment by manufacturing industry fell in 1976 by 7 per cent.

Everyone now expects and hopes for some improvement over the next year, but the Government's estimate in the Financial Statement and Budget Report, that there will be a 17½ per cent. increase in investment, may prove to be another of those optimistic forecasts. Even if that increase is achieved it will only take investment in this country back to the levels of 1970.

Let us now look at the cash flow problems of British industry. For many businesses they are very severe. The rate of bankruptcies is unlikely to abate much in the foreseeable future. On 29th March the Financial Times analysed the latest figures, indicating the serious financial position of industry and commerce. The financial deficits of industrial and commercial companies for the full year 1976 are now estimated to be £775 million.

Any upturn compared with the situation in 1976—and that is the pattern in the economy that the Government are looking for—will require companies to go in for stock building and a higher level of capital spending, and they will face that situation needing to raise finance at a time of heavy financial deficits.

The serious factor is the levels of production that British industry is achieving. Everyone realises that production is well below the country's productive capacity. All estimates put it at well over 10 per cent. below capacity. Production is almost stagnant. Under this Government, industrial production has barely exceeded—at times it has dropped below—the levels of production at the time of the three-day working week, the worst few weeks of the last Conservative Government.

It is estimated that industrial output increased last year by about only 2 per cent. The worst lack of use of our productive capacity reveals itself in the horrific figures of unemployment over which this Government so complacently preside. How quickly is that likely to be dispelled? According to the forecasts and the Budget Statement, it appears that the estimated increase in GDP next year is 1½ per cent., and in the case of manufacturing output the Government are expecting an increase of 2½ per cent. At least, those modest forecasts are some sign of reality at last in the kind of forecasts the Treasury is putting out.

Last year's White Paper on Public Expenditure set out forecasts based on a growth rate of 8½ per cent. for each year up to 1979, and they were not long ago abandoned. But, given these new modest estimates, what do they really mean for the dole queues over which the Secretary of State for Employment so complacently presides? These modest forecasts are worrying for the level of unemployment in this country. The levels now forecast in the Red Book for the increase in manufacturing ouput over the next year are not enough to lower our present levels of unemployment, and barely adequate to keep unemployment down to its present level.

Any increases in productivity achieved on these levels of production—we all agree that we need increased productivity—will lead in the short term to an increase in unemployment. If the one unknown factor in the whole judgment goes wrong and there is failure to get a further acceptable phase of pay restraint, and if a pay explosion occurs in a year of tight monetary policy, which the Government are forecasting, the levels of unemployment produced will be absolutely catastrophic.

Given that the one factor we are in the dark about is how the pay negotiations will go, all those thinking about where we might get to if that went wrong should consider what my right hon. Friend the Member for Worcester (Mr. Walker) said. He carefully analysed the serious difficulties facing the negotiation of a phase 3 pay policy by any Government, but, in addition, he indicated firmly how the difficulties were created by the mismanagement by this Government of the first two phases of the pay policy.

The Government have had two levels of flat-rate oriented pay policy, dictated largely by one union, the T & GWU, at the end of which they have achieved nothing. They have achieved restraint from the working population—and then, as my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) explained in his speech yesterday, that restraint on the part of the working population has been dissipated and wasted by the profligate overspending of this Government. Thus, after two years of pay restraint inflation is still rising, living standards are still falling and the Government have not achieved what they promised they could achieve by pay restraint.

In negotiating now, the Government are facing considerable anger about the form and consequences of their pay policies. I agree with my right hon. Friend that it is not only the toolmakers of British Leyland who feel that their differentials have been eroded and destroyed, or the striking electricians at Port Talbot, now. It is not possible to go into an engineering factory in the kingdom and find skilled men who are not furious about the form of pay policy that has been imposed on them.

Unskilled workers are angry, too, because of the slight difference they see between their level of pay for less skilled work and the level of benefit that can be achieved outside work. We do not yet know what the effect of the Budget and the Government's economic judgments will be on the tiny level of incentive for some of the low-paid in work who are paying tax, as compared with the level available to those on benefit.

The mood of the shop floor in industry, let alone the mood of trade union leaders, is most unhelpful to a further discussion of pay policy. The main fault for that lies in the way in which the Government have handled the first two phases and the way in which they have wasted the opportunities that those two phases might otherwise have given. What is the Government's answer to all this?

This side of the House will not obstruct the negotiation of further interim pay restraint. What is the overall reaction of the Government? The whole picture that I have given of British industry is that there is great spare capacity, stagnant levels of production and a low level of investment and that firms are short of money. Even if the Budget judgment succeeds, and pay restraint is achieved there is a limited and gloomy prospect for the next year. The Government's reaction to unemployment is complacent, as some of my hon. and right hon. Friends have said. The Secretary of State for Employment has produced a patchwork of measures for short-term relief of unemployment. He believes that it is the duty of his Department to work hard to try to cure the symptoms of the disease even if they have not much relevance to the actual cause.

The Government's answer is to quote the industrial strategy, and in these debates all Ministers have felt it their duty to make occasional references to this strategy and to emphasise how the Budget fits within it. We expected, before a last-minute change of cast was agreed at this morning's Cabinet, that the Secretary of State for Industry would open the debate and attempt to give a fuller and clearer explanation of the industrial strategy. Instead, the Secretary of State for Employment was provided with a few useless paragraphs reiterating the Press releases on this subject. It would have been helpful if the Secretary of State for Industry had tried to give some clarity to this concept of the industrial strategy, which becomes cloudy in most ministerial statements.

We can certainly recognise that the strategy is a slogan, but trying to discover the reality is like trying to get hold of a slippery eel. The Government's strategy is vague and the short-term tactics in the Budget are clearly damaging for key sectors of industry.

The first and most obvious sector is the motor vehicle industry, which will feel grave consequences from the Budget. My hon. and learned Friend the Member for Solihull (Mr. Grieve) spelt out the consequences for the West Midlands. I have no doubt that the Minister will find that my judgment is the same as that formed by a significant proportion of those who work in the motor car industry in Stechford. The industry is a particularly bad one to single out for adverse treatment because the root of its difficulties in the past has laid partly in the fact that it was the victim of stop-go policies and of a too selective use of controls. When hire purchase was used as a regulator, the motor car industry was adversely affected.

Now, in order to cover income tax concessions, the Government have decided to raise petrol tax and vehicle excise duty. Many speakers have emphasised the effect of this on the motorist. I listened to the hon. Member for Nelson and Colne (Mr. Hoyle) and the hon. Member for Liverpool, Walton (Mr. Heffer) when they indicated their fierce opposition to the increased level of tax on petrol. We await with interest to see whether they will vote with us on Monday, as we also wait to see whether any of the Government's other allies will vote with us on a principle that all of them are agreed is a grave error of judgment—that is, the raising of the price of petrol by 5½p.

The effect on motorists, particularly in rural areas, will be grave, but the effect on the car industry will hardly be helpful either. There is a curious contrast between the amount of public money that the Government are putting into the car industry in an attempt to sustain major firms and the increase in the vehicle excise duty, which can have only the effect of discouraging car ownership.

In previous years, the Government have been deterred from raising petrol prices because they have said that it would increase the imports of economy sized cars, in the production of which our foreign competitors are particularly strong. I do not see what has happened to the British motor industry in the past year to alter that judgment. What are we to make of that argument now? Will it turn out, as we were warned in the past, that such changes will be good news in Tokyo but not such good news in Stechford? It is wrong to single out the motor industry in this way.

The construction industry has been mentioned by, among others, the hon. Member for Walton, who is well acquainted with the serious difficulties facing the industry. The £100 million inner city programme has been effectively derided by Labour Members from Liverpool and by my right hon. Friend the Member for Worcester, who takes a special interest in this subject. It will not do much for the inner cities, and it is misleading for the Chancellor to hold out the programme as a significant contribution towards helping the industry's problems. It will be no consolation to the industry when set against the Government's decision, at the start of their cuts in public expenditure, to concentrate on cutting capital programmes in order to avoid cutting their revenue expenditure. That has borne particularly heavily on the construction industry and has put it in a grave crisis, which the Budget has done nothing to help.

My hon. Friend the Member for Basingstoke (Mr. Mitchell) drew attention to an especially worrying aspect of this mini-package. It covers only five major cities, and the local authorities will obviously be involved. It seems likely that a proportion of the £100 million will be used to support the direct labour departments of the five biggest cities. That will be no contribution to the private construction industry, which has been so badly damaged by the Government.

We welcome the easing of the corporation tax burden on small firms, but it is hardly likely to lead to the dramatic revival of the small business sector which is an essential feature of any revival for the country. All we are seeing from the Government in what they have done for small businesses and the self-employed is a slight mellowing of the unremitting hostility that they have shown to this section of industry in the past three years. It does not make up for the neglect of the small business sector by the Government or the lack of any real policy to stimulate it.

My hon. Friend the Member for Shoreham (Mr. Luce) dealt more directly with the problems and indicated how small business men would be aided by a programme that included one rate of VAT—raised to 10 per cent., if necessary, in order to cover the revenue that we would not take from the motorist—a simplification of the collection of VAT, an increase in the level at which it starts to be collected, and the tackling of complications in this tax, which is a useful source of revenue but has caused problems for small business men. That would be a far more constructive approach to the problems of small business men.

However, those sectors are not in the Government's industrial strategy. The Minister will say that I have chosen unfavourable examples and will make one or two references to the strategy as a whole. The work of the strategy is contained in the NEDC and the sector working parties set up by the Government. My hon. Friend the Member for Carshalton showed a healthy scepticism about the work of the NEDC, but no one derides the good intentions and hard work going into consultation at NEDC level.

I have met many people in industry and business who have put considerable effort into that exercise and who hope that something useful will come out of it. Contacts between the Government, civil servants, business and trade unions must be of value, and I hope that one of the most valuable results of such contacts will be that they will bring home to the Government, at first hand, the need for planning agreements and contact trialists some hope that the Government might begin to appreciate the impact of what they have done or intend to do.

Although those contacts are valuable, no decisions can be taken by the NEDC or by the sectoral working parties. Ministers seem reluctant to acknowledge that these discussions will not be turned into decisions because decisions are not taken in industry at sectoral level. It is at individual company level that anything is changed in British industry. Speeches of Ministers at the Department of Industry on the industrial strategy try to draw in individual companies by stressing the need planning agreements and contact with sectoral working parties.

I hope that we shall hear about planning agreements from the Minister when he replies. In the corresponding debate last year, the Secretary of State for Industry emphasised the value of planning agreements. However, he said that he thought the forecast of 100 planning agreements being entered into over the coming year was perhaps a little far-reaching and that in fairness he should tell his hon. Friends to expect somewhat fewer than that.

Since then, precisely one planning agreement has been entered into. Which firm came out of the free enterprise world freely to enter into a fresh, new agreement of its own with the Government? It was Chrysler United Kingdom. The company has been trying to explain why it did slightly worse financially during the first year of Government assistance than it forecast when it received the assistance.

The contents of that planning agreement were leaked fairly heavily to the Press. That experience will only underline to many companies the dangers that they fear of breaches of confidentiality through planning agreements. If they enter into them as the Government wish, they fear that they will be used for the purpose that the Ministers who formulated them always wanted. They fear that agreements will bring them far too close to the arms of a Government that will be Socialist again when they have the opportunity.

Another part of the industrial strategy dealing with individual companies is the National Enterprise Board, which continues its activities. It is trying to pick winners, and we are assured that it will help in the revival of British industry. Some of us are accused of being too doctrinaire about the future of the NEB, but we have always conceded that the Government need a holding company of some sort to hold the many companies that have now come into public ownership. Our objection to the NEB has clearly been based on what the NEB is doing, has been doing and intends to do with public funds. Its principal duty continues to be the extension of public ownership.

I am not quite sure about the nature of the Liberals' reaction to the activities of the NEB. I expect them to join us in welcoming the announcement that the Government intend to sell their shares in BP and thereby recover £500 million. However, while that is being announced the NEB is maintaining its activities. It is saddled with some of the wounded eagles of industry such as British Leyland and Alfred Herbert. It is acquiring a wide-ranging portfolio of other companies in a rather far-reaching range of activities. In investing public money, it is said to be picking winners. It is extending the range of public ownership in an arbitrary fashion, in a way that is almost completely unanswerable to the House.

What is the Liberals' reaction? If they are trying to restrain the Government from extending public ownership, certainly they have put forward no answer this evening. Why, in their opinion, is Lord Ryder using taxpayers' money to buy Thwaites & Reed? The week before the Budget, this newly-restrained Government dragged into public ownership an ailing clock company. What was the purpose of that? How did that fit into the industrial strategy?

Photo of Kenneth Clarke Kenneth Clarke Shadow Spokesperson (Trade and Industry)

In the heady days of Socialism after the war, people were inspired by talk of the people's coal, but it is the people's grandfather clock that is coming into production in 1977.

Public ownership is being extended into small firms quite arbitrarily. What is the purpose of this within the industrial strategy? Why is public money being used in that way by a Government who claim that they are suddenly beginning to achieve some restraint in their level of public spending?

Quite apart from the NEB, it is their investment in private industry in terms of their industrial strategy of which the Government are most proud. They are using public funds through the Industry Acts on a considerable scale in an attempt to stimulate the investment that is otherwise not taking place in British industry. Of course, we all welcome in principle the recognition of the need for some investment in British industry, but we question both the method by which the Government are putting it in and precisely the way that the Government approach the whole problem of investment in industry. Although investment is clearly needed, it is no good saying that every industry should have investment for its own sake or that the problems of every industry can be cured simply by producing investment.

One sometimes thinks that the main purpose of industrial strategy is to produce good figures of investment for Ministers to reel out in their public statements. Before becoming a Minister, the Under-Secretary of State for Industry, the hon. Member for Keighley (Mr. Cryer), used to make very wide-ranging and entertaining speeches, but his public hand-outs now make him sound like a walking cash register as he gives out statements about how much each industrial sector has now got through each industrial scheme under the Industry Act.

However, the problems of some indusries cannot be cured by investment. As my right hon. Friend the Member for Bournemouth, West (Sir J. Eden) emphasised, one of the things that we need is to make better and more productive use of what we already have invested in industry and to tackle problems of overmanning. If the Government do not accept that from my right hon. Friend, they should look at Alfred Herbert, now firmly in public ownership, where the management is not accepting public money that could be on offer for investment because in its opinion the first problems of Alfred Herbert are better management and better use of the resources that it has. The firm will not go into an investment programme until it has got over other fundamental problems.

When we have industries or companies that do want more investment, the whole object is increased productivity and not just investment for its own sake. The only point of investment is reorganisation or modernisation—an industry with more output than can be produced for the same cost. It is certainly not to support the declining industries. I should have thought that there was a need to emphasise to the Labour movement and the Labour Party that that is certainly not the point of Industry Act funds, because the pressure pours in on their Government from Labour Members who are constantly looking for the use of industrial strategy and Industry Act funds to protect ailing industries.

There are other things wrong with the Industry Act priorities at present. As my hon. Friend the Member for Wolverhampton, South-West (Mr. Budgen) said, these are far too much oriented towards manufacturing industry. This bias in favour of manufacturing industry is certainly firmly held by the present Government, but it is not in the long-term interests of this country if it is pursued at the expense of the service and distributive industries—commerce generally—on which the future of this country will probably largely depend.

However, let us deal basically—as I hope the Minister will—with the use of Industry Act funds on the scale of last year—a scale very much emphasised by my hon. Friend the Member for Wolverhampton, South-West, with his keen eye for public spending of all kinds. A great deal of the selective financial assistance under the Industry Act has to be given by way of interest relief grants. As their name implies, one of the principal reasons for the size of these grants is to give relief against interest rates that have been driven up by the present Government's own management of the economy.

Interest rates soared to catastrophic levels in the autumn because of the Government's financing of their own overspending and their own deficit outside the banking sector. Therefore, large interest relief grants are given by the Department of Industry to would-be investors against the rates of interest that have been created by the Treasury and the rest of the present Government.

Then, quite apart from the form that the grants take, a great deal of the money is going to contribute to investment in projects that would have gone ahead in any event, supported by the markets without any recourse to public funds. There is no doubt at all that the Government are not in any way ensuring that a great deal of the money is not simply going to give public support to projects that would have been financed anyway.

Also, sometimes when the Government try to extend the range of money available, so non-selective have they been and so far have they failed to understand what the problem of investment concerns that, they have even offered money to some firms that do not want to take it up. The machine tool industry scheme was an absolute fiasco, until December 1976. It was offered to the industry on terms that no one could be induced to take up.

I should have thought that the Government, in analysing the schemes, might in the end have realised that simply injecting public money or offering it so generously was not proving to be a proper cure for the low level of investment in British industry.

The significant thing otherwise about the large amounts that are going in is that last year, at a time when all this public money was on offer to companies, being injected into all these sectoral industry schemes, the total level of investment in industry as a whole declined. It declined although there was no shortage of money available in the market for investment in industry. Although it was available at a price, there was a distinct shortage of manufacturers and industrialists willing to put their money into projects and to look for investment of any kind.

The Government's reaction, in their industrial strategy and their use of Industry Act funds, was rather like that of a vet trying to force-feed an animal that has lost its appetite. The owner of the animal might ask that the cause of the sickness that led to the loss of appetite should be looked for rather than that attempts should be made to cram more and more unwanted nourishment down the poor beast's throat. The Government were trying to cram public funds into investment in industry when the real problem was that many industrialists were reluctant to invest. The low upturn in investment that we now see gives the cost.

This has nothing to do with any wicked capitalist plot against the objects of the Tribune Group—I gesture yet again to the empty Labour Benches—or any deliberate refusal to invest for obstinate non-Socialist reasons. Investment will come, first, only when there are seen to be some sound market prospects and prospects of an upturn in the world economy and, second—most important for this Government to adjust to—when there is some profitability in British industry and some likelihood of a real return on investment.

That matters far more than the availability of funds under the Industry Act or any advice from sectoral working parties. The level of return on investment in this country has fallen to pathetically low levels; that, more than any other reason, is the explanation of the pathetically low level of investment which we have begun to achieve as well.

Some Government must achieve the difficult shift in our use of resources from consumption to profits, so as to stimulate investment. Not only must they enable profits to be produced; they must allow the investor to enjoy the results of those profits and allow distribution to get under way again. Where is that provided for in the Budget? Fundamentally more important than any waffle about the industrial strategy is the need to revive profitability, to encourage investors by allowing the distribution of profits that can be gained in industry.

The Government have made some changes in the investment income surcharge, for example. They have had the effect of taking it back to the money levels that applied before they themselves brought down the threshold for the surcharge. The overall effect is that this Government have raised the punitive levels of tax on income from investment. We got strong support in that from, of all quarters, the hon. Member for Blyth (Mr. Ryman), who denounced his own Ministers for the discriminatory levels of tax on investment.

When one looks not only at the distribution of profits but at the generation of profits by industry, and when the Government assert that they are now adopting an approach based on profit-earning in industry, one can only contrast that with what is being done by the Secretary of State for Prices and Consumer Protection in retaining price controls on British industry.

A new system of price controls is to come in later this year, and the Secretary of State has tried to reassure the world that the encouragement of investment is an essential part of his new policy. But the reaction of industry has confirmed that the uncertainties, unreliabilities and discriminatory nature of the price controls proposed do anything but encourage the likelihood of proper levels of profitability being achieved and give no one a secure feeling that they can achieve those levels.

The sayings of the Secretary of State for Prices and Consumer Protection do not suggest that the speeches are being made by a man who has learned any lessons, but in that area and in many others, when one considers the key question of profitability and the distribution of profits, it is not only the Secretary of State who has not learned any lessons; there are endless fields in which the actions of Government themselves are cuting across profits in industry, the distribution of profits and, therefore, the generation of investment that they claim is one of their prime aims.

The Government themselves, financing their own deficit outside the banking sector and competing for funds, are crowding out the possibility of private industry raising funds itself. Interest rates, to which I have already referred, have been driven up to ruinous levels by the Government. The whole of the Government's approach to enterprise, profits and the distribution of the rewards of those profits has the effect of crushing the industrial activity and investment which the so-called industrial strategy should promote.

It is for that reason that there remains one further great and final lack in British industry, and that is confidence. Despite the speeches about the industrial strategy and Ministers' speeches about their new deal for business and industry, industry does not have a great deal of confidence in the performance of the Government. It is confidence which above all is needed to stimulate investors and industrialists to begin to regenerate our industry.

What is really needed is that those in industry should have confidence that the Government will deliver their side of any bargain entered into during the industrial strategy. The main Government contribution of any policy must be to undertake to manage their own affairs, their own spending and the economic affairs of the nation. They must begin to contain inflation, to exhibit a genuine commitment to profitability and a genuine commitment to a strong private sector, which Ministers have only begun to support in their speeches in comparatively recent months. Too often, however, their speeches are belied by their actions.

What is needed is confidence in a Government who really believe that their duty is to give an atmosphere of incentive and fair rewards to responsible, skilled, hardworking people in industry and to entrepreneurs who take commercial risks. We need a Government who believe that their duty is to promote an atmosphere to encourage such people. I do not believe that this Budget, welcome though the cuts in personal taxation are, really gives anyone confidence in the Government's commitment to a strong private sector or confidence that they are really supporting industry in its recovery. I trust that it does not have the confidence of this House.

The Government retain the confidence of this House only because 13 frightened men do not wish to expose them to the electorate outside. It will be interesting to see what those 13 frightened men do at the end on Monday. We have staggered on for a fortnight to a situation where it appears that they agree with us on all controversial measures and can rapidly be persuaded to vote with us on these issues, but they will vote with the Government only when any question of a General Election comes round. That strange arrangement ought not to continue. The arrangement which should result is not defeat on petrol taxation. It has to do with far more important things, and that is to defeat a Government who can never carry a genuine conviction in their ability and inclination to revive industry and who ought to make way for a Government who can inspire genuine confidence in industrial issues and begin the long, steady haul to levels of decent economic activity in this country.

9.24 p.m.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

We have had an interesting debate and interesting contributions, especially from the Opposition Front Bench. The first Opposition speaker represented the Friedmanite wing of the Conservative Party and gave us a classical monetarist approach to our problem. The debate was wound up for the Opposition by the Keynesian wing of the Conservative Party. What we did not find out and shall not find out is whether the Conservative Party in general, and the Front Bench in particular, finds it desirable to have an incomes policy. The Friedmanite wing did not say anything about that at all. The hon. Member for Rushcliffe (Mr. Clarke), on the other hand, seemed to indicate that he liked incomes policies, but not this one. Perhaps the new Conservative tactic is that incomes policies are all right and that the problem arises not because of any particular problem arising from an incomes policy but because of the misdeeds of the Government. Be that as it may.

I turn to some of the points raised in the debate. Most of them were raised by my hon. Friends who, unfortunately, will have to read my reply in Hansard tomorrow. My hon. Friend the Member for Liverpool, Walton (Mr. Heffer), who has apologised for not being able to be here, raised the difficult problem of the inner cities and the £100 million to be spent to try to assist them. Other hon. Members, including my hon. Friend the Member for Liverpool, Scotland Exchange (Mr. Parry), also raised that matter. They said that £100 million was not a great deal of money, and no one would deny that. But we must look at the matter in the context of the problems of the inner cities, which cannot entirely be solved by the application of money.

I do not know why the inner cities are deteriorating. There are probably many factors. Redevelopment plans may have been to blame. Perhaps some of our housing policies are to blame. Perhaps rents for small businesses have been too high. There are probably numerous reasons why not only in this country but throughout Western industrialised society the inner cities are declining. We all wish to do everything we can to reverse the trend. I do not know whether it is possible, but at least the provision of the money is a start to try to improve the environment in certain areas and to reverse that trend.

My hon. Friend the Member for Walton also said that we should not try to shift the burden of taxation from direct to indirect taxes. He said that that was not a Socialist thing to do. Most of us on the Labour Benches have more or less accepted that indirect taxes are more regressive than direct taxes, but we are in a new situation. Direct taxes are now impinging on people at very low levels of income—people who in the past paid no tax.

It is probably better now to talk about a fair system of taxation, looking at direct taxation and indirect taxation together. We have tried in the Budget to create a fairer system by engineering a small shift away from the burden of direct taxes towards indirect taxes.

In a very interesting speech, my hon. Friend the Member for Thurrock (Dr. McDonald) raised a number of points that I should not go into now as she is not present, but there was one point of general relevance. My hon. Friend rightly complained, as other hon. Members have, that we were not able to raise thresholds high enough to benefit the people at the bottom, especially widows. The hon. Member for Dunbartonshire, East (Mrs. Bain) made the same point. The answer is that we have not been able to do it because we do not have enough money. If we had enough money to reduce taxation further, obviously one of the priorities would be to try to raise the thresholds to a level where people with low incomes pay no tax. But I ask hon. Members to recognise that if one raises the thresholds one not only benefits those at the bottom of the scale but, because of the whole structure of our tax system, give substantial benefits to those at the top end of the tax bracket.

It was felt that in this Budget it was fairer to try to spread the amount of money available through the whole of the direct tax system and produce a slightly better, more progressive curve than to give all the benefit at the top and the bottom. However, I recognise that we have not been able to do as much as we could have in increasing the thresholds.

Perhaps I may correct my hon. Friend the Member for Blyth (Mr. Ryman) on one of a number of points that he made. He said that he did not want the tax on unearned income, as it used to be called, to be at a different rate from that on earned income. The first £1,500 of investment income is not now taxed at a different rate from so-called earned income, and for people aged over 65 the limit is £2,000. Although we have not gone the whole way, at least the lower levels of investment income are not taxed at a different rate. Incidentally, I do not know what sum of capital would be needed to produce £1,500. That would depend on circumstances.

The hon. Member for Dunbartonshire, East asked about the provision of extra money to train mathematics and science teachers in Scotland. I believe that in Scotland the position with regard to money will be exactly the same as in England and Wales. The only difference is that a special scheme will have to be worked out, but the allocation of schemes will be treated exactly the same as in England and Wales. The only reason why Scotland appears to have been excluded is that we have to have a different system in Scotland for ensuring the provision of the money.

Perhaps I may turn now to one aspect of the Budget that is of interest to hon. Members—especially the Friedmanite wing of the Tory Party, which is fairly well represented in the debate tonight. I apologise to the House if this is dry and boring, but I should say something about monetary policy, because this is an important factor in trying to curb our rate of inflation. My hon. Friend the Member for Nelson and Colne (Mr. Hoyle) said that wages were not the only factor causing inflation. He is right. Wages, interest rates and exchange rates are all factors that come into the picture and can help to cause higher rates of inflation.

One of the objectives of the Budget—it has succeeded already—is to build up on the December measures and ensure that there is greater stability in the financial markets. One of the main indicators that the Government have to build on is the public sector borrowing requirement, because this is the factor that is taken into account by the financial markets in determining the rates of interest.

There is no doubt that fear about the size of the public sector borrowing requirement last year was one reason for instability in the financial markets and the consequent fall in the exchange rate and the inevitable rise in the rate of inflation. That is why a phased reduction of the PSBR this year and next year formed a critical element in the December measures. It was essential to reduce the PSBR in order to create conditions in which it was possible to control the monetary aggregates while reducing interest rates from the exceptionally high levels of last autumn.

This strategy has been very successful. We have seen interest rates going down very rapidly in the last 48 hours, and I am sure that hon. Gentlemen opposite who are very concerned about small businesses and the construction industry would be the first to admit that the best action that any Government could have taken to assist these industries was to ensure that interest rates came down. This we are achieving. I hear mutterings from the Opposition Front Bench. I do not know whether hon. Members are happy about the falling interest rates, but I assure them that industry is.

Photo of Mr David Howell Mr David Howell , Guildford

I was merely asking the Minister whether the rates were coming down any further.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

The hon. Member should not be so impatient. He has seen what has happened over the past few days and he should welcome it. Instead, he wants more and more and more.

A few hon. Members raised the problem of monetary control. We are determined to keep domestic credit expansion safely within the £7·7 billion set in December. Our aims for the monetary aggregates are now expressed primarily in terms of DCE rather than growth in the money stock, because this is more appropriate when a major objective of economic policy is to secure an improvement in our balance of payments.

One of the characterisics of the money stock is that it contracts when there is a current account deficit on the balance of payments, because the various measures acting on money stock include only bank deposits held by United Kingdom residents. A current account deficit generally leads to a reduction in the bank deposits of United Kingdom residents because they are transferred to non-residents or to the Government. A monetary objective expressed in terms of the growth of the money stock could be met not by a firm control of domestic credit but by a higher-than-expected balance of payments deficit—an unsatisfactory outcome, since it would give a false impression of the real state of the economy. The rate of DCE, on the other hand, is, broadly speaking, not reduced in this way by an external deficit.

That is why monetary aggregates are specifically expressed in DCE terms. But that does not mean that the growth of money stock is unimportant. We are now expecting a modest current account surplus on the balance of payments over 1977–78 as a whole, and it is particularly important that as the balance of payments moves further into surplus the rate of DCE does not imply an unduly rapid growth of the money stock, which could, in turn, fuel future inflation. This answers the point of the hon. Member for Wolverhampton, South-West (Mr. Budgen).

We shall therefore be keeping an extremely close watch on the development of money stock. As my right hon. Friend said, we expect the growth of sterling M3, consistent with domestic credit expansion, to be safely within the limit of £7·7 billion, in the range 9 per cent. to 13 per cent., given our present view of the outlook for the balance of payments.

Photo of Sir Keith Joseph Sir Keith Joseph , Leeds North East

These are welcome words. Why, therefore, is the Chancellor allowing for an increase in the M3 bracket for the year 1978–79? He is postulating about a 9 per cent. increase during the coming year, but is allowing for a 13 per cent. increase in the year after.

Photo of Mr Denzil Davies Mr Denzil Davies , Llanelli

There is no increase in the bracket which was the same last year. It appeared, before the end of the last financial year, that the growth of money stock may have been slightly under 9 per cent. The bracket is the same for this coming year as it was last year.

If the growth of the monetary aggregates is to be controlled in this way while allowing sufficient room for the financing of industrial expansion, the Government will again need to finance a significant part of the public sector borrowing requirement by the sales of debt to the private sector outside the banking system, although not necessarily on the record scale of 1976·77. This meets the point put by the hon. Member for Rushcliffe, the Keynesian representative of the Conservative Party, whose Friedmanite representatives shook their heads.

Well over half the 1976·77 public sector borrowing requirement was covered by gilt-edged sales alone, and probably about three-quarters was met by sales of all forms of public sector debt. A significant start has already been made with the funding for next year, with the full subscription of last week's £800 million stock, most of the payments for which will fall in the 1977–78 financial year.

The Government's success in selling gilt-edged stock in recent months shows that the conventional forms of Government securities are not as ill-suited to the task of funding as some commentators would have us believe. We think that for the future the bulk of gilt sales will continue to be in such conventional forms. However, there may be market conditions in which there would be advantage in adding to the range of securities available to investors by issuing Government bonds at a rate of interest that is not fixed at the outset but varies over its life—for example, in relation to the Treasury Bill rate.

The Government have therefore decided to take certain preparatory steps to facilitate the issue of such bonds if and when it is considered that there would be advantage in doing so. I therefore announced, in reply to a Question by my hon. Friend the Member for Thornaby (Mr. Wrigglesworth) earlier today, that the Government would be initiating certain preliminary steps. The Bank of England will be having discussions with the Stock Exchange on certain technical details which must be agreed before an issue can be made. Statutory Instruments will shortly be laid before the House extending the powers of investment of trustees and of building societies so that they cover such bonds if they are issued.

As I said earlier, we are determined that the growth of the monetary aggregates should be achieved in a way that allows for adequate provision for the finance of the essential needs of industry, both in terms of the availability of such finance and its cost. As far as availability is concerned, the present evidence is that although the DCE limit for 1976–77 will have been met with a very considerable margin this was not at the cost of industry's ability to obtain funds.

I turn now to the problems and difficulties that arise in estimating the public sector borrowing requirement, because, clearly, as everyone appreciates, this is an important figure. On the other hand, I do not think that the Government should hide behind the fact that it is sometimes difficult, in the short term, to estimate precisely what the figure is likely to be. The public sector borrowing requirement is the difference between two very large figures—total public sector expenditure including lending, on the one hand, and total public sector income on the other—each of the order of £60,000 million. The main difficulties in estimating the requirement arise because of changes in prices, interest rates, exchange rates, and so forth.

In the case of local authorities, even knowledge of the financial transactions is available only piecemeal and with very considerable delay. The first information available is of their borrowing from the Public Works Loan Board. If it were possible to assume that their borrowing from the market was fairly stable, deductions could be drawn from this about their total borrowing, or, if it could be assumed that their total borrowing was fairly stable, deductions could be drawn about their borrowing from the market. It is, unfortunately, always very dangerous to assume either of these conditions. Actual information about local authority borrowing from the market is available only for quarterly periods, and with a delay of about two months, so that figures for the January to March quarter, for example, will not be available until early June. A monthly sample inquiry has recently been started, and this should be very helpful in time, but the interpretation of the first results is bound to be difficult.

There are somewhat similar difficulties with borrowing by nationalised industries and other public corporations, although in their case rather firmer early estimates are possible of their actual borrowing as compared to local authorities.

There are difficulties in forecasting the public sector borrowing requirement, but we have to make the effort to do that as accurately as possible because so much depends not only on its level but on what the markets believe the requirement is likely to be.

I am sure that hon. Members will appreciate that important as these financial indicators are their attainment is not an end in itself but merely the means of creating the necessary stability without which we cannot hope to regenerate our manufacturing base and reduce our high levels of unemployment.

Most Opposition Members have poured scorn on the industrial strategy. The hon. Member for Rushcliffe said that he approved of a partnership between Government, management and unions, but the right hon. Member for Leeds, North-West (Sir K. Joseph) does not seem to agree with him. That is a division in the Opposition. The aim of the industrial strategy is to secure a close partnership between Government, management and unions to enable us to improve productivity and arrest the decline in our manufacturing industries.

The Opposition seem to imply that all that is required is a substantial cut both in taxation and in public expenditure and that productivity will magically improve and our industries will again be able to compete with those on the Continent and in Japan. Such simplistic solutions as the Opposition appear to be putting forward not only ignore the disastrous experience of their own period in government but show little understanding of the complexities of modern industrial society.

The purpose of the industrial strategy is to ensure a much closer involvement of Government with industry. Ever since the war, Governments of both major parties have channelled substantial resources into industry. Despite this, however, the paradox of our system is that the partnership between Government and industry is much weaker in this country than in those of many of our major competitors. The French and the Japanese, in particular, as hon. Members know, have managed to create a much closer relationship—the kind of relationship which I should have thought the right hon. Member for Leeds, North-West would frown upon. He would not want to see the Japanese system operating here, for many reasons. We cannot reach the Japanese position, but we are trying to create a closer relationship between the Government and industry, which we have not had despite Government efforts in the past.

The work being done in the sector working parties is an attempt to remedy the present unsatisfactory position, to enable the Government to realise the problems of industry and also to enable industry to appreciate that the Government, however sympathetic they may be, cannot by themselves solve all their problems. The problems of British industry—and this is the whole basis of the industrial strategy—can be solved only by co-operation both between Government, management and all employees, and between management and unions at the shop floor level. The hon. Member for Shoreham (Mr. Luce), in a very interesting speech, spoke about innovation and the difficulties that innovators face in obtaining money. He made some interesting and useful points. The financial institutions of this country also must play an increasing part in the industrial strategy. I think that it is fair to say that our banking and financial community has not in the past had such a close involvement with manufacturing industry as the banking institutions of other countries. There are signs that the situation is improving slowly, but we have a long way to go before we attain the level of co-operation between finance, industry and Government which exists among our major competitors.

We cannot pretend, as the Conservatives pretend, that these deep-seated problems can be overcome simply by reducing taxation and reducing public expenditure. Such suggestions show a complete misunderstanding of our real problems.

We should not be under any illusion that the high levels of unemployment from which we are now suffering can be reduced either by financial gimmickry or, indeed, by a substantial reflation behind a tariff wall. These problems will be solved only through painstaking and un- dramatic work at the level of industry itself, with the Government playing their full part.

All too often in the past we have tended to assume that our industrial difficulties would disappear through the application of fashionable economic doctrines, be they the doctrines of John Maynard Keynes or Mr. Milton Friedman. If, as a nation, we had been as successful in producing trained engineers as we have been in producing economists and financial analysts, I dare say that many of our industrial problems would have been solved a long time ago.

The House, of course, will recognise that even with the most efficient industry in the world we still could not secure a substantial reduction in unemployment without an upturn in world economic activity. Unless the economies of the Western countries manage to climb out of recession we will, I am afraid, be faced with a prospect, in all countries, of a much higher level of unemployment than we have experienced in the past. The need for concerted action among the major industrial countries to secure this upturn in activity is, in my view, greater now than it has been since before the last war.

The unprecedented slump of 1974–75 owed much to the fourfold increase in the price of oil. There has been some recovery since then, and the OPEC countries' current account surplus was approximately halved in 1975. However, there is still a long way to go before the effect of these surpluses will be mitigated. Indeed, the OPEC current account surplus appears to have grown somewhat again in 1976.

Given the likely outlook for world demand for OPEC oil and the limited capacity of some of the major producers to absorb imports, we have to reckon with the likelihood of continued OPEC surpluses. If the oil surplus rises—and it certainly could—it would threaten both the hopes of increased economic activity and the stability of the international payments system.

We tend to assume that all our problems are domestic, but the problems facing the world economy as a result of this surplus and the continual increase of this surplus are very serious. The Governments of the industrialised nations therefore face a very difficult problem, which can ultimately be solved only through the medium of international institutions and by means of international co-operation.

We are told that the prospects for the United Kingdom with North Sea oil coming on stream are slightly better than for many other industrialised countries. But it will be of no benefit to us or even to Scotland—even with the oil—if, as a result of these large surpluses, world economic activity continues to be at a low level and the international financial system is threatened.

To enable us to reduce our unemployment we need an expansion of world trade and a stable international exchange and payments régime. As hon. Members will know, some proposals are now under consideration in the International Monetary Fund with the intention of trying to do something about these large surpluses.

We shall, of course, play our full part in the discussions that are now going on, for it is in our interests, as it is in the interests of the whole world economy, that these surpluses should be put to productive use, thereby stimulating international trade and investment.

In conclusion, this Budget has to do three things. First, it has to make our tax system a great deal fairer by creating a small shift away from direct taxation to indirect taxes. Secondly, it has to provide a framework in order to enable us to get a third stage of incomes policy, which we in the Labour Party and some Conservatives feel is crucial for the development of our economy. Thirdly, it is intended to create the kind of financial stability that we must have if we are to regenerate our industry and improve our economic performance.

I believe that my right hon. Friend will achieve these three objectives and that the Budget will assist us in creating a better and more stable foundation for economic growth in the future.

Debate adjourned.—[Mr. Tinn.]

Debate to be resumed upon Monday next.