Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 6:22 pm on 21st March 1985.

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Photo of Mr Ian Gilmour Mr Ian Gilmour , Chesham and Amersham 6:22 pm, 21st March 1985

The hon. Member for Kingston upon Hull, East (Mr. Prescott) has been very combative and I shall endeavour to reintroduce an element of consensus to our proceedings.

The hon. Member for Kingston upon Hull, East said that he was not against special schemes. I am strongly in favour of them and I should like to congratulate my right hon. Friend the Secretary of State on the wise things that he said about them this afternoon, especially YTS. My right hon. Friend has the advantage of being able to elaborate on the most welcome and praiseworthy parts of the Budget, and he did so wisely and encouragingly. In last year's debate on this day, I chided my right hon. Friend for describing the Budget as a Budget for jobs. This year, correspondingly, I congratulate him on studiously avoiding that phrase.

With unemployment in mind, some of my right hon. and hon. Friends and both Opposition parties have criticised the Budget for not expanding the economy and for not increasing borrowing. That criticism understates what is happening. The Government's financial deficit is a much more significant figure than the PSBR, which is distorted by sales of assets and other matters. Table 6.5 of the Red Book shows that that financial deficit is estimated to be £13·9 billion for 1984–85 and that it is forecast to be £9·8 billion for next year. The difference of £4·1 billion is miles larger than any imaginable cost of the miners' strike and therefore represents an unmistakable tightening of the fiscal stance.

Some of my hon. Friends might say that the forecast of the deficit or of the PSBR always turns out wrong anyway, so what is £2 billion or £3 billion between friends? I am inclined to agree, but wish that the £2 billion or £3 billion had been in the expansionary rather than the contractionary direction. I am also inclined to agree with what Professor Desai said in The Guardian recently — that the chief purpose of setting a precise figure for the PSBR seems to be to see by how much that figure has been overrun one year later. It is wrong that the Government should set such store by the PSBR when the Chancellor's predecessor, my right hon. and learned Friend the Foreign Secretary, described it as a fickle and delusive statistic. Nevertheless, the Government set great store by it, so presumably the considerable tightening of the fiscal stance is intended and is meant to be significant. In that event, the tightening seems to be an extraordinary confession of failure that, after six years of this policy, the supply side of the economy is so weak that a cut has to be made to avoid inflation.

The tightening is also a mistake. The Budget is billed as a Budget for jobs—as was last year's—but we are not likely to get a great budget for jobs by cutting demand. My right hon. and learned Friend the Chief Secretary to the Treasury said yesterday that there is no evidence of a lack of demand. What an extraordinary claim. What matters for real output and real jobs is real demand, and there is plenty of evidence that there is a lack of that. One might ask what my right hon. and learned Friend would regard as evidence of lack of demand. Does he not regard the fact that taxes have increased from 40 per cent. to 45 per cent. of gross national product from 1979 to 1983 or that there are 3 million or 4 million unemployed as evidence of lack of demand? How many millions do there have to be before the number shows lack of demand?

At the same time, there are only 150,000 vacancies. If we multiply that by three, as we are told we should by my right hon. Friend's Department, we still get to only 450,000—a small fraction of the number out of work. Earlier this year, the Confederation of British Industry asked firms whether they were working at full capacity and 54 per cent. said that they were not. It seems to me that the evidence of lack of demand is overwhelming. If we really want a budget for jobs, we must increase demand and improve supply.

I strongly welcome the employment measures in the Budget, but I do not believe that they go far enough. Some key ingredients are missing in the strategy for jobs. There seems to be no viable strategy for tackling unemployment in the medium term, for example. The necessary and sufficient condition for getting unemployment down is that real output should rise substantially faster than it has in the past few years. On previous figures, it seems that a reduction of only 1 per cent. in the level of unemployment —some 250,000 jobs—would require sustained growth of output of at least 3·5 per cent. per year. Indeed, it would probably have to be 4 per cent. or more, year in, year out. On the Chancellor's own figures, the chances of that happening are negligible.

The projections for growth at table 2.4 in the Red Book are 3·5 per cent. for 1985–86—that is very good—but 2 per cent. for the following three years. Those rates of growth cannot possibly reduce unemployment; they cannot even hold it at the same level. They are bound to generate increased unemployment.

I am not suggesting that the requisite rates of growth can be achieved by tax and expenditure policies alone, however cleverly they may be designed. Fiscal expansion is of course necessary, but by itself it would soon run the economy up against the three major constraints that it has suffered from for a long time: inadequate productive capacity, our inability to pay for imports on the scale required by much faster growth, and the renewed onset of inflation at unacceptable rates.

I am no crude expansionist. The possibility of achieving sustained growth turns on the relaxation of these constraints. I know that my right hon. Friend has these in mind. Only then will fiscal expansion be feasible and a faster growth rate sustainable.

The essence of a growth strategy — which is necessary if we are to get unemployment down—must therefore consist of interrelated measures to improve the competitiveness of British industry combined with an international initiative to encourage our trading partners to pursue compatible policies.

The recent fall in the sterling rate of exchange coupled with expansion of output in the United States should have been getting us off to an excellent start. British exports have been doing well and rising at a very satisfactory rate since the summer. In the past three months the volume of non-oil exports was 10 per cent. up on the previous year and the value of non-oil exports was up by no less than 19 per cent. It is a great pity that these favourable factors have not been exploited to achieve a higher rate of growth, but as things are we should have quite a good year this year, although the underlying constraints on a sustained high rate of growth are still there.

Charts 3 and 4 of the Red Book, which show our declining share of world exports and the ever-growing import penetration ratio of manufactures into this country, are deeply alarming, as I am sure my right hon. Friend would agree.

It is therefore vital that the breathing space which we are now afforded be used to strengthen the competitive position of industry when the constraints are most likely to present themselves again in an acute form—that is, in 1986 and subsequent years. The Government should give much higher priority to giving direct assistance to industry by fiscal and other means.

Unless we are prepared to accept a further devaluation, or several further devaluations, the most promising course of action is to achieve now a national agreement to limit incomes and prices. That would simultaneously improve the competitiveness of British industry and insulate the recovery from inflation. The choice, of course, is not between having an incomes policy and and not having one; it is between having a bad incomes policy and having a good one. At present we have an incomes policy based on three elements: high unemployment, discrimination against the Government's own employees, and a great deal of tireless ministerial exhortation.

Monetarism was meant to make all this unnecessary, but unfortunately it has not quite worked out like that. Indeed, as Professor Phelps Brown put it a shade ironically a year or so ago: Monetarists urge trade unionists to make monetarism work. Not surprisingly, they are not wildly enthusiastic about doing that.

If, instead of an unsatisfactory incomes policy based upon exhortation and discrimination against a background of rising unemployment, we had an incomes policy based on negotiated consent as part of a deal which included substantial growth in employment, we should be likely to be much better off.

Incomes policies have acquired a bad reputation in this country because they have always been introduced in the past at times of national crisis as part of restrictive packages. They have also invariably borne the seeds of their own destruction by simultaneously interfering with differentials. It would be an entirely different matter to introduce an incomes policy at the beginning of a real recovery and as an indispensable part of the strategy to achieve it.