The Economy

– in the House of Commons at 3:30 pm on 8th November 1982.

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Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey 3:30 pm, 8th November 1982

With permission, Mr. Speaker, I should like to make a statement.

As the House knows, it is customary at this time of year to publish outline public expenditure plans and proposed national insurance changes for the year ahead, together with the economic forecast required under the Industry Act 1975. This year, as foreshadowed in the Government's reply to the report of the Treasury and Civil Service Select Committee on budgetary reform, we are bringing these together and publishing them in an autumn statement which I shall today be laying before the House. I am grateful to my right hon. Friend the Member for Taunton (Mr. du Cann) and the Select Committee for the initiative which has led to that development.

During the past year, monetary conditions have exerted downward pressure on price rises and substantial progress has been made against inflation. In January the rate of inflation was 12 per cent.; it is now around 7 per cent.; and we envisage a 5 per cent. rate early in 1983. Interest rates have fallen even more sharply, with bank base rates down a full seven points from their peak of 16 per cent. last year to 9 per cent. today. The CBI has calculated that each percentage point fall benefits British industry by around £250 million in a full year. We shall continue to maintain downward pressure on the monetary aggregates to achieve further success in the battle against inflation. Interest rates will continue to reflect the indicators of monetary conditions which I described in my Budget speech.

As the statement explains, the growth in output this year—in this country and throughout the Western world—has been lower than anticipated. For next year the Industry Act forecast now suggests a 1½ per cent. increase in our GDP. That is close to what is expected for most other industrialised countries. Unemployment remains the nation's most distressing problem. As in other countries, further rises are expected to continue into next year, although they should moderate as output picks up in response to lower inflation and lower interest rates.

Public borrowing remains under firm control, which of course is one reason for the fall in interest rates. We expect the PSBR this year to be within the figure of £9½ billion expected at the time of the Budget. Final decisions about the level of next year's borrowing requirement will not of course be taken until my 1983 Budget. The current forecast suggests that the scope for possible tax reductions in 1983–84 could be of the same order as was indicated at the time of the last Budget. That is on the basis of conventional assumptions as to the revalorisation of direct taxes and excise duties. It also assumes the same 1983–84 PSBR, as a percentage of GDP, as was assumed at the time of the last Budget, and takes account of the decisions which I am announcing today.

The public expenditure planning total for 1983–84 will be £120·06 billion. That is lower than the provisional figure for 1983–84 published on Budget day this year. It is the first time since 1977 that a Government have been able to stop expenditure plans for a particular year rising with each annual review. Compared with the plans for the current year, the new total is a slight fall in cost terms—that is, in constant prices. The ratio of public expenditure to GDP will come down from 45 per cent. to 44 per cent.

Details of the changes in individual programmes are summarised in the statement. Social security programmes have been adjusted to take account of the rapid reduction in inflation. This month's benefit uprating is 11 per cent. Even allowing for the 2 per cent extra to compensate for last year's shortfall, that is well over the current rate of inflation. We accordingly intend to make an adjustment to next year's uprating. Meanwhile, those in receipt of benefits will continue to receive payment at a rate above that needed to compensate for price rises in the last year. As is customary, the exact size of next year's uprating will not be decided before Budget time.

The House will be glad to hear that the resources that we had planned to make available for a number of important programmes have been increased. We plan additional gross expenditure of £260 million on two new special employment measures—the community programme and the job splitting subsidy—which were announced earlier this year. For housing, the provision of an extra £49 million and a continuing high level of receipts from council house sales will allow gross capital spending to be at least 10 per cent. higher than the expected level this year.

More money will be made available for the urban capital programmes to support the new urban development grant programme and the urban development corporations in London docklands and Merseyside. These two changes represent a significant new boost to the construction industry.

In addition, £96 million more has been allocated to law and order programmes, mainly on police and prisons. In the Health Service we are providing an extra £80 million in England, which should continue the growth in the level of services that has already taken place under this Government. Comparable increases will be made for the rest of the United Kingdom.

Finally, provision for defence in 1983–84 has been increased by £622 million because of extra costs following the Falkland Islands action. That increase is over and above our commitment to meet the NATO 3 per cent. per annum real growth target. It will fund purchases of equipment to replace losses this year and will ensure the future security of the Falkland Islands.

To find room for these increases within an unchanged total, we have been able to secure economies elsewhere. We have also transferred to programmes part of the provisional contingency reserve set aside in the 1982 White Paper, but we have left a substantial contingency reserve of £1·5 billion, which we shall review again nearer the Budget.

Full details of public spending plans for next year and for 1984–85 and 1985–86 will be set out in the public expenditure White Paper which we expect to publish early in the new year.

My right hon. Friend the Secretary of State for Social Services is this afternoon announcing details of changes in national insurance contribution rates and limits for next year, and will be publishing the report of the Government Actuary on the national insurance fund. If we were fully to balance the fund for next year, increases in employers' and employees' contributions of nearly 0·4 per cent. each would be required. But we are anxious both to minimise additional burdens on industry and to diminish the effects of contribution increases for employees, so we have decided that the increases should be limited to 0·25 per cent. each for employers and employees. The upper earnings limit will go up only to £235, rather than £245 which would be the maximum permitted by statute.

Taken together, these measures mean that contributors will pay a little over £200 million less next year than would have been required fully to balance the fund. The cost to the PSBR has been taken into account in the forecast.

I turn now to the national insurance surcharge which was introduced and then increased to 3½ per cent., by the previous Government. It has long been criticised, and rightly so, by commerce and industry. As I said in my last Budget statement, it raises production costs, it is not rebatable on exports, and it either puts up prices or cuts into profits.

I was able in March to announce an effective reduction of 1 per cent. in the rate for private sector employers, from 3½ per cent. to 2½ per cent., for the year 1982–83. I am pleased to inform the House that we can now take another substantial step in the right direction, by reducing the rate for 1983–84 by a further 1 per cent., so bringing it down to 1½ per cent. The cost of this to the PSBR has been reflected in the forecast.

The public sector will not gain from the change, but the benefit to private employers in 1983–84 will be around £700 million. Overall, this will more than offset the increase in their costs due to the new NIC rates and levels. A table showing the overall effect for employers and employees of the NIC and NIS changes for next year has been put in the Vote Office today.

That is not all. I intend that for private sector employers ½ per cent. of the NIS reduction from April 1983 should be brought forward and made effective for 1982–83 also—that is to say, for the current year. Hon. Members will know that to change the NIS rate at this time of year presents considerable administrative problems, but we have found a way of overcoming them. The equivalent of a ½ per cent. reduction for the whole year will be given by reductions in employers' payments of national insurance surcharge and national insurance contributions for January, February and March next year. Details and guidance will be sent in due course to employers.

That further benefit will be worth £350 million in the current year. Legislation will be needed for the new arrangements both this year and next. A Bill will be introduced at an early date. I am sure that it will commend itself warmly to the House as providing a substantial reduction in the costs faced by private sector commerce and industry.

The House will want to study the autumn statement carefully. The format is new and, I hope, helpful and the scope rather wider than before. It demonstrates that we are determined, within the framework of our monetary and fiscal policies, to continue to do what we can to relieve the burden of taxation so as to move towards renewed growth and more employment. I hope to be able to say rather more if I am fortunate enough to catch your eye, Mr. Speaker, later in the course of our current debate.

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

The Chancellor has made a long statement. It is as full of information and documentation as it is remarkably empty of any promise or hope for the British people or for the rescue of our savagely damaged economy after three and a half years of the Chancellor's regime at the Treasury.

It is a depressing statement. It marks the fact that we have often brought to the attention of the House—the failure of the strategy and judgment of this year's Budget. It also marks the failure of the past three and a half years of Government economic policy. The Government's Budget was based on the premise that there would be an upturn and a bottoming out of the economy. The Opposition said that that would not happen. The Chancellor has now had to confess that the rate of growth in Britain in the past year has been 0·5 per cent. We all know that we are in the middle of a massive recession. The Chancellor has done virtually nothing, apart from a couple of cosmetic touches to the national insurance surcharge, to face that challenge.

I have several questions to ask the Chancellor. The first relates to what he said about the adjustment to next year's uprating of old-age pensions. Is he aware that the cost of not adjusting that uprating will be only £250 million during the present fiscal year? Is he further aware that the cost for a full year would be only £500 million? Is he aware that the cost of living affecting retirement pensioners and most people on low incomes is much higher than the proposed increase because their pattern of expenditure is different from that of the rest of the country?

It is monstrous for the Chancellor to claw back from people, the great majority of whom are having a more difficult time than they can recall, this year's so-called overpayment. Can he justify making yet another major statement and failing to make good the 5 per cent. that was taken away from the unemployed? The Chancellor said that he is worried about the number of unemployed. It is a scandal that so many people should be made unemployed, but, having made them unemployed, he takes away a substantial part of their benefit. What type of generosity is that?

I shall now deal with the changes in the national insurance surcharge. I had hoped that, at the very least, the Chancellor, if he cannot bring himself to do anything else to assist British industry, would have removed the national insurance surcharge in next year's Budget. He said that, apart from a relatively small, once-and-for-all three months' cash injection in the first quarter of next year, the net result would be that, minus the increased employers' national insurance payments, the cash flow of firms throughout Britain will be no more than £175 million higher than it is now. I should be grateful if he would confirm that. I believe it to be the case.

I turn now to a rather surprising omission from the Chancellor's long statement. He said nothing about the rate support grant for the coming year. Last year we were told what the percentage rate support grant would be. We were also told of the anticipated increase in council house rents. What are the present estimates for both those important items? They are important because unless something is done about rate support grant ordinary people and industry will face more increases in rates next year.

I shall conclude with three questions. The first relates to unemployment. The Chancellor has already made it plain in the document that accompanies his statement that the unemployment assumption is to increase from the 2·9 million of this year to no less than 3·2 million next year. As the Chancellor believes that he has reduced inflation to single figures, can he tell us when the economy will take on the predicted orderly, natural and spontaneous growth upon which the whole of the Government's policies are predicated?

Secondly, will the Chancellor confirm that personal living standards are now running at 3½ per cent. below what they were when he took office in 1979? What is his assumption or forecast for living standards for next year?

Thirdly, having examined the industrial forecasts that accompany the Chancellor's statement and having noted that the balance of trade is expected to deteriorate—although it is not quantified—I should like to know whether Britain, for the first time in recorded history, is importing more manufactured goods than it is exporting to the rest of the world?

This statement comes after three and a half years of Conservative Government, and covers the prospects for the last year of a five-year Parliament. It builds upon a record of failure, offers no prospect to the country, and shows that the Government have not even begun to understand what is needed to tackle the problem that they face.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The right hon. Gentleman began with a caricature of the economic improvements that have taken place in recent years. Am I to take it that he brushes to one side the prospect of inflation down to 5 per cent.—a formidable and important achievement? Am I to take it that he brushes aside a fall in interest rates of 7 per cent., which would not have been achieved without firm control of public spending and borrowing for which we received little support from him?

The right hon. Gentleman drew attention to the unemployment assumptions that are set out in the autumn statement and the Government Actuary's report. They show an average increase next year of 300,000—from 2·9 million to 3·2 million. As I said in my statement, that rate of increase is likely to decrease as the year goes on.

The right hon. Gentleman asked about council house rents. The autumn statement shows that the Secretary of State for the Environment will be consulting the local authority associations on a rent increase of 85p per dwelling per week. If that figure is confirmed, it will mean no increase in real terms in 1983-84, and it will enable us to provide for a real increase in housing capital investment that year. I hope that the House will welcome that.

The right hon. Gentleman also asked about the rate support grant. The announcement of the provisional figure has already been made by my right hon. Friend the Secretary of State for the Environment. Consultation is taking place on that, and I have nothing further to add.

As to the adjustment in pensions, the pension increase provided for in this year's Budget not merely provided fully to make up for the 2 per cent. shortfall in the preceding year but also, as it turns out, for more generous provision for price increases than those that have taken place this year. If we are to maintain real value in that sense, it is bound to mean adjustments from year to year, just as we have experienced in successive years. There is nothing extraordinary about that, and I assure the right hon. Gentleman that the pledges are being maintained.

With regard to living standards, the right hon. Gentleman should by now understand that one of the causes of our economic difficulties was the substantial increase in real personal disposable income that took place between 1977 and 1980 as a result of the wage explosion that concluded the disasterous period of office of the Labour Government. To some extent, that increase has been reversed, but there is still further need, as the right hon. Gentleman pointed out, for improvements in our competitiveness if we are to expand our rate of growth and increase our share of the domestic market. In fact, in the current year, real demand in the economy has increased by 3 per cent. We shall get a larger share of that for British manufacturers and exporters by continuing to improve our costs. I hope that I shall have the unqualified support of the right hon. Gentleman for the need for continued moderation in pay settlements if that is to be achieved.

The last feature is the need to reduce the overall cost burden falling on employers. By wringing his hands in horror at the reduction in the rate of national insurance surcharge, the right hon. Gentleman astonished and amazed the House. As a result of the changes in national insurance contribution and national insurance surcharge, the total reduction in the cash burden on employers in the next year will be £686 million, about £450 million of which will be a reduction wholly to the benefit of the private sector.

I hope that the House will be struck by the contrast between this Government's record, who, by taking national insurance contribution and national insurance surcharge together, have effected a reduction in the combined burden of 1½ per cent., and the record of the Labour Government, who, in spite of the right hon. Gentleman's hypocrisy today, increased the joint burden of those taxes by 5 per cent.

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

The Chancellor replied in his own way to my question about what had happened to living standards and confirmed that they had fallen. I asked about the prospect for the coming year based on his own estimate. I should like an answer to that question.

The question of competitiveness relates very much to the national insurance surcharge. The case for getting rid of the national insurance surcharge is to increase the competitiveness of British industry. Will the right hon. and learned Gentleman confirm that the loss to Britain's international competitiveness since he took office is still 36 per cent., and what improvement will there be as a result of today's statement?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The right hon. Gentleman is right to point out that there is still a significant loss of competitiveness now compared with some years ago. He must understand that a large component of that loss was due to the wage explosion that took place under the Labour Government.

As I have already said, real personal disposable incomes for people in work continued to rise almost regardless of economic trends for a number of years, perhaps until a year ago. If we are to secure a further sustainable advance in personal living standards and, at the same time, to achieve a reduction in the number of people out of work—which is surely what all hon. Members would like—it is of crucial importance to continue improving our competitiveness by achieving further moderation in the rate of pay settlements. I should like the right hon. Gentleman specifically to endorse that. I am grateful to him for his welcome for the reductions that we have been able to make in the national insurance surcharge burden that the Labour Government left on British industry.

Several Hon. Members:


Photo of Mr George Thomas Mr George Thomas , Cardiff West

Order. As the content of this statement can and will be discussed today, tomorrow and the day after, I shall allow 20 minutes for questions, which will be very generous. We shall then move on to the next business.

Photo of Mr Roy Jenkins Mr Roy Jenkins , Glasgow Hillhead

Does the Chancellor reject the London Business School's forecast that inflation, after falling in the second quarter, will thereafter begin to rise again? What is his own forecast for the fourth quarter of 1983? Would it not have been far more helpful to British industry to have abolished the national insurance surcharge now—a jobs tax clearly perverse in present circumstances—rather than to wait and hope to give personal income tax concessions in the Budget which, because of their unprecedentedly high import content, will have nothing like a similar benefit to the activity in the economy?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I do not accept the London Business School's expectations for inflation at the end of next year. The right hon. Gentleman will find that my statement says that at the end of 1983 the inflation rate may still be around 5 per cent. I am sure that he will endorse the proposition that if we are to continue to achieve further progress in reducing the rate of inflation at the same time as enhancing employment prospects, it is important to take the main remedy to reduce costs to British industry, which is to achieve further moderation in pay settlements.

I accept that the national insurance surcharge represents an addition to those costs. It is for that reason that I have reduced it by a full percentage point in the current year and intend to do so in the next year. I intend to do that in a way that maintains effective control over the size of public sector borrowing, which is a crucial component in the reduction in interest rates, which in turn is an even more significant element in industrial costs.

Photo of Mr Maurice Macmillan Mr Maurice Macmillan , Farnham

Could my right hon. and learned Friend tell the House how the total employers' share of the contributions to national insurance compares with the share paid by our competitor employers overseas?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

There are wide variations. Taking a very general average figure, it is my impression that employers overseas pay a rather larger sum in contributions of this kind than is paid in Britain in order to sustain social security programmes.

Photo of Mr Jack Ashley Mr Jack Ashley , Stoke-on-Trent South

As the Chancellor of the Exchequer's derisory statement makes it clear that he cannot or will not tackle the scandal of mass unemployment, will he at least provide funds for the payment of long-term supplementary benefit for people who are unemployed in the long term? Would not that be at least a crumb of comfort until we have a Government who are less sanguine about mass unemployment and who are prepared to do something about it?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I understand the right hon. Gentleman's anxiety about unemployment, and I know that it is genuine and strongly felt. We have to make our choice as to the ways in which we contribute to reducing the burden imposed by unemployment. It is for that reason that I have announced today that £260 million will be devoted to the two employment programmes that I have identified.

Photo of Mr Terence Higgins Mr Terence Higgins , Worthing

Will my right hon. and learned Friend note that on the Conservative Benches we do not take for granted the substantial reduction in the rate of inflation and in interest rates? The reduction in the rate of inflation will be very much welcomed, not least by pensioners. I suggest to him that it is essential now to give priority to cutting industrial costs. In that context, will he stress to the Labour Party and the TUC that excessive wage claims, particularly in the public sector—for example, in the water, gas and electricity industries—will further endanger the level of employment if they are persisted with? Therefore, we must take the strongest possible stand against claims for pay increases which are far above the level of inflation.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I am grateful to my right hon. Friend for his support and welcome for what I have said, and underline the importance of his point. It is crucial to continue to secure a reduction in public sector costs as part of the process of reducing inflation, and a key contribution can be made to that if we achieve moderation in pay settlements within the public sector, in particular in the industries to which my right hon. Friend has referred.

I hope that the Labour Party will find it in its heart to underline and endorse the importance of that message. All too often it is given to complaining about high increases in prices in the public sector utilities, but it is important, if it makes that case, to join us also in arguing the case for a reduction in pay settlements.

Photo of Mr Richard Wainwright Mr Richard Wainwright , Colne Valley

Does the Chancellor of the Exchequer recall that as an integral part of his Budget statement in March he included a long passage about energy and fuel prices, including the announcement of a gas price freeze, which expires next month? Has he anything to tell the House today on that theme?

Secondly, when the Chancellor referred to modest increases in the housing programme and the community programme, he was wholly specific about the figures, but when he came to the other side of the account he merely said that he was securing economies elsewhere. Will he be equally specific in describing those economies?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The hon. Gentleman will see the answer to his last point if he studies, as I know he will, the autumn statement produced in response to his representations, among others, as a member of the Select Committee on the Treasury and Civil Service.

With regard to energy prices, the British Gas Corporation has today confirmed that the freeze on the contract price of gas sold to industry will continue until October 1983. That is a matter for the corporation to decide, but it is a decision that it has been able to reach within the agreed external financing limits.

Photo of Dr Jeremy Bray Dr Jeremy Bray , Motherwell and Wishaw

In view of the omission from the statement of any reference to the exchange rate, is it a coincidence that the rate of reduction of interest rates has been such that the effective exchange rate has not changed? Is not the Chancellor of the Exchequer keeping British industry uncompetitive in order to protect the Government's claim that they have reduced inflation?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The hon. Gentleman understands that the factors that influence the exchange rate are many and diverse. The assumption made in the autumn statement—it was, of course, presented as an assumption—was that there will be no significant variation in the exchange rate. The hon. Gentleman will appreciate that interest rates in Britain during the past 12 months have fallen by about 7 per cent. compared with an average fall of only 4 per cent. in other countries. He will also have noted the conclusion of the debate conducted by the CBI on the exchange rate in Eastbourne last week.

Photo of Mr William Clark Mr William Clark , Croydon South

Is my right hon. and learned Friend aware that all thinking people will not only congratulate the Government on their economic strategy in reducing inflation, interest rates and the national insurance surcharge but will welcome it? Could he assure the House that he will keep a close watch on public expenditure? Although we welcome the fact that the proportion of GDP has gone down from 45 to 44 per cent., if the Government were to adopt the official Opposition's policy and to increase public expenditure that would put the whole of the economy into jeopardy.

Having given this assistance to industry, will my right hon. and learned Friend, between now and the next Budget, give urgent consideration to reducing the standard rate of income tax?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I understand my hon. Friend's concern with personal taxation as well as with the tax burden on the industrial and commercial sector, and obviously have that in mind now, as at all times.

I am grateful to my hon. Friend for his support concerning the importance of controlling public expenditure. It is well worth emphasising that all the countries which find themselves facing increasing difficulties, as their public sector borrowing becomes increasingly difficult to control, and as their interest rates and inflation rates likewise become increasingly difficult to control, are those which have not committed themselves to the reduction of the public sector deficit in the way that we have done. It is important for us to maintain and sustain that achievement as a crucial part of the foundation for the restoration of sustainable growth.

I take this opportunity to pay tribute to my right hon. and learned Friend the Chief Secretary for his remarkable achievement on public expenditure, in co-operation and consultation with the rest of our colleagues.

Photo of Mr Harry Ewing Mr Harry Ewing , Stirling Falkirk and Grangemouth

The documents concerning the autumn statement published today contain a passage about old-age pensions. The Chancellor of the Exchequer states there that he is working on the basis of a 5 per cent. inflation rate for next year, less the 2 per cent. overpayment that he claims will be made to pensioners in the next few days. That leads one to the conclusion that the uprating of pensions for 1983–84 will be about 2½p to 3p in the pound. If that is the case, on what basis has the Cabinet taken a decision to make the old-age pensioners pay for the Prime Minister's bungling incompetence in leading us into the Falklands crisis?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

None of the hon. Gentleman's statements is correct. We do not yet know the final result concerning the rate of inflation. The inflation figure for November this year, which is one of the components, is not yet known. By definition, the inflation forecast for next year is not yet known. Those are two components essential to any decision that has to be taken in this respect, which will not be announced until Budget time. Therefore, it is wrong to suggest that the pensioners or any other group are bearing the cost of the necessary expenditure in achieving our national objectives, with the support of the nation, in the south Atlantic.

Photo of Mr Anthony Nelson Mr Anthony Nelson , Chichester

Does my right hon. and learned Friend agree that, while many of us hope that there will be some scope for real improvement in pensions next year, the implications for public expenditure and the burden of taxation would be altogether unacceptable if pensions, benefits and allowances of all kinds were to be uprated only on the basis of forecasts and were unable subsequently to be readjusted when those forecasts proved too modest?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I entirely agree with my hon. Friend. He underlines the point that I made in my statement.

Photo of Mr Jock Stallard Mr Jock Stallard , Camden St Pancras North

Is the Chancellor aware that his statement on the clawback of benefits from pensioners and those on supplementary benefit will be greeted with anger and resentment by millions of people throughout the country? He says that he has been able to make arrangements to adjust the handout on the national insurance surcharge between now and December and January, but pensioners have been asking for many years that their pensions should be uprated nearer the date when the increase is announced so that they do not have to wait nine months for the extra money. Is the Chancellor aware that pensioners will not understand why there can be an adjustment for the national insurance surcharge but not for pensions? The Government have made considerable savings at the expense of pensioners and others in the past three and a half years, and the pensioners' index has been running four or five points ahead of the retail price index for some months. Will the Chancellor reconsider his decision to claw back pensions and to make pensioners pay for other handouts?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The hon. Gentleman and the whole House must remember the point made by my hon. Friend the Member for Chichester (Mr. Nelson). Benefits to pensioners and others from the national insurance fund have to be paid for out of the fund. That principle was understandably endorsed by the Public Accounts Committee not long ago. Its effectiveness has been manifested by the need, that I have recognised today, for a 0·25 per cent. increase in employees' contributions. That represents a practical limit to the generosity of each member of the working population. Pensioners and other beneficiaries will receive an increase of 11 per cent. this month and will be better off in real terms for the whole of this year. The maintenance of the real value of benefits is bound to mean adjustments from year to year. When we came into office in May 1979 we adjusted the pension upwards by 1·9 per cent. to take account of the shortfall under the Labour Administration.

Photo of Mr Nigel Forman Mr Nigel Forman , Sutton Carshalton

While welcoming the fact that my right hon. and learned Friend has felt able further to reduce the costs to British industry by about £600 million in a full year, may I ask him to bear in mind the increasingly strong case for further cuts in direct taxation, especially for the lower paid? I am convinced that that would not necessarily lead to a significant increase in the propensity to import.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

My hon. Friend makes the same point as was made by my hon. Friend the Member for Croydon, South (Sir W. Clark). It needs to be taken into account in our consideration of these matters.

Photo of Mr George Foulkes Mr George Foulkes , Ayrshire South

Is not the Chancellor aware that we heard him clearly say that he was adding to the defence budget a sum equivalent to the amount that he is taking away from old-age pensioners? Will he answer the question of my hon. Friend the Member for Stirling, Falkirk and Grangemouth (Mr. Ewing) and tell the House why he has picked on the pensioners to pay for the Falklands war?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The hon. Gentleman may try as he likes to make a false connection and a false point, but they remain entirely false. The necessity to pay for the Falkland Islands expenditure was recognised by the House from the start to the finish of the campaign. The increase in expenditure in that area will, incidentally, lead to a significant increase in orders for the defence equipment industry, in Scotland as elsewhere. Aside from that, when I have discussed the position of pensioners, I have made it clear that the pattern of changes that we have made is maintaining the pledges that we have so far made to the House.

Photo of Mr James Lester Mr James Lester , Beeston

I congratulate my right hon. and learned Friend on his timely response with measures that will be helpful to the construction industry and to British manufacturing industry, about which there is considerable anxiety on both sides of the House. Like Oliver Twist, one is always tempted to ask for more and I should welcome an assurance from my right hon. and learned Friend at least on the principle of the restoration of the 5 per cent. abatement of unemployment benefit, if not on the practice.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

That is a matter on which I have nothing to add to what has already been said.

Photo of Mr Barry Jones Mr Barry Jones , Flint East

Does not the Chancellor's statement signal a continuation of his and the Government's war on the unemployed? Why is he so reluctant to take urgent action on behalf of the communities that are suffering from mass unemployment?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

The Government are not engaged in a war on the unemployed. Like every other Government in the Western industrial world, we are engaged in the difficult and prolonged battle against rising unemployment. As my right hon. Friend the Prime Minister pointed out last week, unemployment has been rising significantly faster in other countries than in this country over the past year or so. The House must recognise, as I am sure that the majority of hon. Members do, that the most effective way of combating unemployment is to continue the success against inflation and high interest rates and, above all, to continue to improve our competitiveness, for which further moderation in pay settlements is crucial, and in that I still invite the support of the Opposition.

Photo of Mr Chris Patten Mr Chris Patten , Bath

May I follow up the question of my hon. Friend the Member for Beeston (Mr. Lester)? Do the public expenditure plans for the coming year include provision for restoring the 5 per cent. cut in unemployment benefit?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

That is a matter which, as I have said already, remains for consideration.

Photo of Michael Meacher Michael Meacher , Oldham West

Will the Chancellor confirm that, even after his package, unemployment will rise to more than 3½ million next year? If he believes that large personal tax cuts will be a significant source of extra demand for domestic industry, and not just an election bribe, how will he prevent more than two-thirds of the extra demand from being dissipated on imports, which is exactly what happened last year?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

If that is the hon. Gentleman's analysis, it underlines the importance of improving the competitiveness of British industry and of further moderation in pay increases. I ask yet again whether the hon. Gentleman and the Labour Party endorse and emphasise the crucial importance of moderation in pay bargaining to deal with the problems that he raises.

Photo of Mrs Shirley Williams Mrs Shirley Williams , Crosby

The Chancellor repeated on several occasions during his statement that unemployment was due to the world recession. Is he aware that the most recent report of the International Monetary Fund says that the British Government have brought about a more restrictive shift in policy than any other Western Government and that one of the two factors responsible for our loss of competitiveness is the Government's restrictive monetary policy? Will he confirm that the reason why he can do so little is that the competitiveness of this country has been reduced by, among other things, the Government's own policies?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I certainly do not confirm that. The IMF has been commending to all its members the crucial importance of achieving continued success in reducing the burden imposed on the world economy by public sector deficits. We have achieved considerable success in that direction, which is why we have been able to reduce the level of inflation and interest rates as we have. That is the general message which has come loud and clear from the IMF. Other countries ought to listen to the same proposition.

Photo of Mr Hilary Miller Mr Hilary Miller , Bromsgrove and Redditch

Will my right hon. and learned Friend agree that, contrary to the disappointment felt by the Opposition, the real value of pensions is still being indexed, the lie has been given to the false rumour put about during the Birmingham, Northfield by-election that council house rents would increase by about £2 a week, that inflation is coming down, that interest rates are coming down and that the wide welcome for his statement on this side of the House will be reflected in manufacturing industry? The Government have recognised the important principle of the cost competitiveness of our industry.

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I am grateful to my hon. Friend, particularly for reminding me of the gap between the untruth that council house rents were likely to go up by £2 a week—I know not where that came from—and the reality of what I have told the House, which is that the increase in rents, on which consultation will take place, will be 85p a week, representing no real increase.

Photo of Mr Peter Shore Mr Peter Shore , Tower Hamlets Stepney and Poplar

The Chancellor still has to answer the question that I put to him about competitiveness, and it is of great importance. What change, resulting from the national reduction in the national insurance surcharge, does he expect in Britain's international competitiveness and what will the figure be, bearing in mind that it was minus 36 immediately before he made his statement? We are glad to hear that he is not engaged in warfare against the unemployed, but the best demonstration that he could give of that assertion is a clear and unequivocal pledge to restore the 5 per cent. that was taken away from the unemployed two years ago. It will not do for the right hon. and learned Gentleman to say that the Government have not thought about it and that it is inappropriate to give an answer. He has just made a statement about the uprating of pensions. Why cannot he do the same for the unemployed?

Photo of Mr Geoffrey Howe Mr Geoffrey Howe , East Surrey

I have said nothing about the uprating of pensions. I have told the right hon. Gentleman and the House that decisions about that will be announced at the time of my Budget.

In relation to the other matter about which the right hon. Gentleman asks, I shall go over the figures again. The changes in the national insurance contribution, the national insurance surcharge rates and the earnings limits that I have announced will save all employers £686 million in 1983–84, £450 million for the private sector, taking account of the effect of the rise in earnings between the two years. For all employers, after taking account of the reduction in contracted-out rebate announced in March this year, the total payments would have been about £12·8 billion. They will now be £12·1 billion. That represents a reduction of 5½ per cent. and therefore makes a significant contribution to the competitiveness of British industry. I reiterate that nothing can make as large a contribution to competitiveness as further success in achieving pay moderation. One day I hope to get that proposition endorsed by the Opposition.