Orders of the Day — Budget Resolutions and Economic Situation

Part of the debate – in the House of Commons at 5:18 pm on 25th March 1985.

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Photo of Mr Edward Heath Mr Edward Heath , Bexley Sidcup 5:18 pm, 25th March 1985

And when we found the necessity for it, and the whole Cabinet supported it, we had the courage to change our policy to deal with that emergency. If the Chancellor has the courage to change his policy to deal with the present emergency of nearly 4 million unemployed, and rising unemployment, I shall have the greatest admiration for him.

We have been told by the Secretary of State that demand is enough. I think he said that there was plenty of demand. But what is "enough"? How in these circumstances does one define "enough"? If unemployment is at the scale that it has reached now and is rising, how can one say that demand is enough to keep those people in employment? If we do not, we are admitting the need for unemployment. That is the basic argument. That is why I want to draw the attention of the House to these basic points which we have got to face, both philosophically and politically.

What is enough? It is quite apparent today that the demand is not enough. The Front Bench insinuation is that the demand is there, but that it has been taken up by imports. There is no indication of how one prevents that happening. The importation of manufactured products has become a far worse problem. However, even if one were able to prevent all the consumer imports, one would still not deal with mass unemployment. There would still be a massive figure, which can be easily calculated. Demand is not enough. There are 24 million unemployed in the OECD countries and that affects all of us, although the United States to a lesser degree.

Now we are told that borrowing for a programme such as many have urged causes inflation. That is a sentence which, in vacuum, is meaningless. Borrowing is going on already. The Chancellor has to decide the level of borrowing. Chancellors have overshot by between £2 billion and £3 billion on their expectations year by year. That has not brought the world or the country to an end. Nor has it produced a solution.

But Goverment borrowing must be seen in relation to the savings of the people. Whether borrowing causes inflation must also depend on unemployment. The fact is that there is massive unemployment. Inflation also depends on the use to which borrowing is put. If it is used for capital investment, as is being urged, it is justifiable. If it is for pure consumption, it is obviously unjutifiable. Those must be the criteria by which we judge whether borrowing for a programme will cause inflation.

We have also heard the argument that borrowing will push up interest rates. The Treasury in Washington and the Federal Reserve Board take exactly the opposite view. They have said publicly that high interest rates are not caused by their own borrowing. Paul Volcker has stated that publicly. The United States has high interest rates, but the United States does not connect that to the borrowing.

The United States has carried through the greatest reflation in history, yet it does not have high inflation. Yet we hear that, if we are to carry through a modest amount of reflation, that will bring about a massive inflation. That is not a justifiable argument.

I am sometimes puzzled because we are always urged to follow the United States in its policies and attitudes. We are told that the American dream must be pursued. I do not know what the American dream is, but I know what the present American situation is. It is borrowing three times as much as we do, taking our currencies and GDP into account. It is taking 70 per cent. of its private savings in order to carry out that policy. The rest—30 per cent.—is coming from overseas. United States savings as a percentage of disposable income are between 5 and 6 per cent. In Britain, they are between 11 and 12 per cent. Therefore, we have more than twice as much disposable income in savings than the Americans if we want to use it properly. The Japanese have 18 per cent. of their disposable income in savings and that enables them to have a much larger borrowing requirement and for the Government to carry out investment.

On the one hand, the United States is showing what it can do by a massive budget deficit, which is largely carried through defence programmes and which goes on into other private industry programmes. On the other hand, the United States is now an international debtor. By the end of the year, it will be the largest international debtor in the world—larger than Brazil. That does not alter the fact that we have twice the personal savings of the United States and just over half that of Japan which can be used for Government purposes.

My right hon. Friend the Secretary of State identified the public sector borrowing requirement as one of the causes of the fall in sterling. I cannot accept that for one moment. When one talks to operators on the exchanges, particularly in Wall street, they have no idea what the British Government's borrowing requirement is or will turn out as. What they do know is that they are worried about the oil crisis and its effect on our economy. They are worried about the future of the oil industry, as that turns down on our economy. That is what is worrying them as long-term investors in Britain, not the Government's PSBR.

Our interest rates are almost entirely governed by American interest rates. The PSBR did not cause the pound to drop. The pound dropped because the dollar rose with increased confidence in it and because of the doubts that I have expressed. Now the pound has risen. That is not because the borrowing requirement has been shown to be any different. It is not even because of the increase of 4·5 per cent. in interest rates. They had no immediate effect. The pound went on dropping. No, it was caused by doubts about whether the United States could keep up its growth and by the banking crisis in Ohio.

That in itself should be a warning to us about the position of the United States. With farmers in a more and more difficult position, the impact on the farm banks will grow. We may well find them in the same difficulties as the savings banks in Ohio. We hear so much about the strength of the American economy, but one has only to think of the furore which arose here, rightly, with the collapse of one bank in the City of London. To have 71 banks collapse at one time shows the danger in the American economy.

My next major point concerns the free market. That affects much of what my right hon. Friends the Chancellor and the Secretary of State have said. It is commonly said that we must remove all distortions, with no explanation as to why action has to be taken. That is not justifiable. Distortions are of two kinds. There are natural ones which we try to counter-balance through our policy and our financial legislation. They provide the justification for regional development programmes, which the Government are rapidly dismantling. Therefore, we find that the north cannot compete with the south. That is why it is falling more and more into derelict acreages. I do not want to go into detail, but I shall argue that at any time with anybody.

Other distortions in our financial legislation were because we wished to influence circumstances at a certain time. We must ask ourselves whether those circumstances have changed sufficiently to alter the situation. There is no automatic principle that distortions of any kind must be removed. That is where we are liable to be misled. To abandon them without showing that they are no longer necessary would be an abdication of government.

I believe more strongly than ever that a Government programme of investment in the infrastructure is desperately needed and should be carried through. My right hon. Friend the Secretary of State's announcement on education is welcome, as is the Chancellor's Budget announcement on the youth training scheme. We must face the fact that Britain still does not have a comprehensive technical education scheme which compares with those of our competitors. This scheme will not be put into effect for another year, so another year will go by and the young will still be unemployed and untrained.

Let me add a word of warning here. Many of us would find it extremely difficult to accept a situation in which social benefits were removed from people between the ages of 16 and 18 if they did not accept a Government proposal for a training scheme. [HON. MEMBERS: "Why?"] Because I strongly believe in the freedom of the individual, including young people. I shall go on believing in that and I do not believe in taking it away from young people.

When one puts together the abolition of the wages councils and the removal of the safeguards on unfair dismissal, one can see that unscrupulous employers will be given the opportunity to employ young people on a low wage and dismiss them within two years in order to take on new young people. We have seen that happen before and we opposed it. We produced legislation to prevent it happening. That is why I am sad to see these proposals come forward.

We must also have a regional development policy to create a balance between the north and the south. We have tried to do that in the past, with considerable success—[Interruption.] Does anybody doubt that success?