ECONOMIC SITUATION

HC Deb 21 December 1976 vol 923 cc482-605

Motion made, and Question proposed, That this House do now adjourn.—[Mr.Tinn.]

Mr. Speaker

Before I call the Chancellor of the Exchequer to open the debate, may I say that the House will realise that it is impossible, with all the good will in the world, to get everyone who wishes to catch my eye into the debate. I can only say that I shall try to do my best, and I hope that I shall have a better response from some people who make very long speeches. I hope that they will realise that this is unfair to their colleagues on this occasion.

4.18 p.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

It may be convenient for the House if I open this debate by reaffirming the principles of the Government's economic policy. on which our application to the IMF was based. They are, to restore balance to the economy in the short term through securing a massive shift of resources into the balance of payments. This is already well under way. Some 2½ per cent. more of our GDP is now flowing into net exports than was the case in 1973.

Since the growth in our output must depend on increases in net exports and investment, the Government are holding down both private and public spending. And it relies on the voluntary co-operation of the trade union movement to prevent wage costs from rising higher than the economy can afford. These elements in our strategy have won growing respect both at home and abroad.

The other main objective of our policy is to improve the performance of our manufacturing industry through co-operation with employers and trade unions in the industrial strategy. Although this strategy can produce its full results only in the medium term, the priority we have given to the manufacturing industry is already reflected in the fact that both employment and investment have been rising in the manufacturing industry since the middle of this year.

The basic policy I have described has received whole-hearted support from our friends abroad and from the International Monetary Fund.

I made it clear in Blackpool that the Government were applying to the IMF on the basis of this existing strategy though, as I emphasised in later speeches at the Mansion House and in this Chamber, painful adjustments might be necessary to keep the economy on course and to ensure that we reached our objectives in time. But though a deterioration in the prospects for Britain and the rest of the world has made such adjustments essential, I have said again and again that there is not and never has been any economic case for massive deflation on the scale some of our critics have demanded.

Those critics may well be disappointed that there has been no violent reversal in the Government's policy and no massive deflation, but they cannot say that they were not warned. Indeed, what I suspect they really mean when they complain, as one journalist did, that there was nothing in my measures to uplift the spirit is that the Government have come through one of the most testing crises since the war with their unity and their co-operation with the trade union movement bruised but unbroken. Indeed, when some journalists talk of uplifting the spirit they remind me of Mr. and Mrs. Ramsbottom on their first visit to Blackpool: There was no wrecks and nobody drowned. In fact nothing to laugh at at all. I hope no one will give them anything to laugh at tonight.

The adjustments made to our policy last week were made primarily on financial grounds. They were designed to ensure that we could finance both our external and internal deficits over the period before the economy has achieved balance—in the case of the external deficit this should be achieved in 1978—without an excessive increase in the money supply, without having to maintain interest rates at a level which would choke off our industrial revival, and without pre-empting so large a proportion of the nation's savings for the public sector that the private sector was unable to obtain the necessary finance.

I have described on earlier occasions the malignant interaction last autumn between the fall in the exchange rate, the increase in the money supply, and the level of domestic interest rates. No one who had the responsibility for watching this interaction, sometimes from minute to minute, in the Treasury could doubt the need for measures to break this vicious circle. If we had failed to recover control of our currency and to offer the prospect of a continuing fall in our interest rates, the consequences would have been catastrophic for both jobs and prices. This was fully recognised by the Economic Committee of the TUC in its statement last Thursday, which said: It has to be accepted that there was no real alternative to seeking financial support from abroad if the £ was to be protected against continuing downward pressure, the consequence of which would have been even more difficulties for the balance of payments and even more unemployment. On the other hand, it was essential that the measures we adopted to deal with our financing problems should be designed to avoid increasing the level of unemployment already likely next year because of the reduction in the expected growth of output. The anxieties of the trade union movement on this account have been frequently expressed. The CBI has been no less anxious than the TUC to avoid a damaging deflation. That is why I gave both the TUC and the CBI the opportunity of putting their anxieties to the IMF team at the beginning of their visit.

In a word, the problem has been to reduce the PSBR sufficiently to restore confidence in the financial markets at home and abroad without adopting measures which would undermine either of the two pillars of the Government's policy—the social contract or the industrial strategy. It is not surprising that many of our observers have not been wholly satisfied with the result. But as I have said elsewhere, it would have been impossible to give full satisfaction to some sections of our constituency without outraging some other section whose support is equally essential to our success.

It was for this reason that I decided, with full agreement from the IMF, to spread the necessary adjustment over two years rather than one, and to put the main burden of the consequent reduction in demand on the second year, since in the first year our economy is already likely to be running well below its full capacity. The central problem in the first year—1977-78—will be the financing of our deficits, to which the sale of BP shares will make an important contribution without in any way reducing demand, output or employment.

As the second year goes on, we shall need to ensure that shortages of capacity and financial pressures do not develop so as to threaten our recovery and the return to a balance of payments surplus. That is why I have recognised the need to make further adjustments in 1978-79 if the rate of growth over those two years is likely to exceed 3½ per cent., so as to ensure that the additional growth goes into the balance of payments and investment rather than domestic consumption.

As a result of the measures I announced last week. I believe that the PSBR in both years will be on the targets I announced of £8.7 billion in the first year and £8.6 billion in the second. The IMF agrees that the projected ratio of our PSBR to GDP in 1978–79 is reasonable by international comparisons, especially considering that the PSBR in the United Kingdom has a wider coverage than the concepts used in most industrialised countries. More important, the IMF agrees that the reductions in the PSBR which will result from the measures I announced last week will tend to reduce interest rates and encourage a more buoyant climate for industrial decisions.

Industry will, I believe, be able to see the indicators moving in the right direction—declining interest rates, greater stability in the exchange markets, firm control of public expenditure and the monetary aggregates, but without wasteful and mindless deflation. The greater confidence this should give can be expected to lead to the bringing forward of new investment, since there is now an assurance that the recovery we expect will be sustained.

There has been a good deal of discussion in the last few days about the limits which I have set to domestic credit expansion which—as the IMF has always maintained—is a more suitable measure for monetary growth at the present time than money supply, since it allows more rather than less expansion as the balance of payments deficit turns into a surplus. Domestic monetary policy will have a critical part to play in my overall economic strategy in the coming months. We must not allow the expansion of domestic credit and the money supply to damage either our counter-inflation policy or the stability we seek in the exchange markets, and I have set the targets for DCE accordingly.

The reduction in the PSBR over the next few years will make a major contribution to the fall in the rate of domestic credit expansion. We shall also need to continue to fund the major part of the PSBR outside the banking system. We have had considerable success in this for the last two and a half years. In particular, in the last three months total gilt sales have been nearly £4 billion net of redemptions, and most of the sales will have been outside the banking system. This has produced a dramatic fall in the rate of increase of the money supply and is convincing evidence that Government finance can be obtained through the gilt-edged market on a very large scale.

For at least the immediate future, it will be necessary to continue to constrain the total of private sector bank lending, using the Supplementary Special Deposits scheme which I recently reactivated. But I am satisfied that because of the reductions in the PSBR, and because of the directional guidance given to banks to give priority to the essential needs of industry for investment and expansion, there will be sufficient room within the DCE targets for those needs. I have also agreed with the IMF that the targets should be reviewed in six months to ensure that this is the case.

One of my aims in drawing up the measures was to create a climate in which it would be possible for industry and others to look forward to a fall in interest rates. MLR had already fallen by ¼ per cent. from its peak of 15 per cent. in advance of the measures, and the market expressed its confidence in the prospect by a further fall, to 14½ per cent. last Friday. The prospect is probably for limited further falls in the first instance but with the reductions gathering pace as the balance of payments turns round and the fall in the rate of inflation resumes later next year.

Mr. Ian Gow (Eastbourne)

If the Chancellor should find that the level of interest rates does not fall as he expects, will he undertake that he will reduce further substantially in April the public sector borrowing requirement in order to achieve that fall in interest rates that he recognises to be essential?

Mr. Healey

I cannot give such an assurance. I make it clear that not only the Government but the IMF and our major friends abroad all agree that the level of the PSBR now is appropriate for the circumstances in which we find ourselves. Interest rates can be governed by a large number of factors, but the IMF, like the Government, believes that they are now set on a steady decline, although that decline will be slow at first, gathering pace in the latter half of next year.

I am glad to say that the judgment which the markets have made on my measures has been a great deal more favourable, now they have had time to digest them, than the instant reaction in some politically-partisan elements of the British Press. The House will know that the sterling exchange rate has steadied at $1.68, broadly the same level at which it stood after several weeks of continuous climb in anticipation of my measures. The stock markets have seen one of the most remarkable rallies in recent times, and there have been very substantial sales of gilts in the last two days. The long tap was exhausted this morning.

The fact is that those abroad who know the real problems which the world economy now faces, and who are in a position to make an informed judgment of the contribution which is now required by the United Kingdom, never had any doubts about the adequacy of the measures. For example, the House will have seen the statement issued by Mr. Simon, the Secretary of the United States Treasury, on 15th December in which he described our programme as a responsible and sustained approach which represents a sound and realistic strategy for the United Kingdom rather than a one year transitory effort. He went on to say that the United States would strongly support our programme in the International Monetary Fund.

Similar comments were made by representatives of the German and Japanese Administrations. Moreover, as I have told the House, Mr. Witteveen himself, the Managing Director of the International Monetary Fund, has given full endorsement both to our general strategy and to the measures I have taken, and has undertaken to recommend to the Executive Board that our application should be supported.

Some commentators have tried to suggest that the normal phasing of the drawings on the $3,900 million standby in some way indicates that IMF support for the Government's measures is less than whole-hearted. This is, of course, completely untrue. Ever since 1968, the Fund has insisted that all standbys should be phased—including those to ourselves and France in 1969 and to Italy in 1974. On the other hand, Britain has obtained on this occasion an exceptionally high proportion of the total standby in the first drawing, and the total standby is well over twice as large as the next largest in the Fund's history. This is hardly the humiliation or grudging acquiescence to which some critics have referred.

The phasing naturally takes place over the two years of the programme to which it relates. The Fund will, of course, as is invariably the case, maintain its interest in our economic performance during this period, and may from time to time wish to consult Her Majesty's Government. In addition to the regular annual consultation which the Fund holds with all countries, and which for the United Kingdom is normally held in May, we have arranged to consult the Fund towards the end of 1977 to review the targets for 1978 in the light of the economy's actual performance and prospects. But I do not expect our standby arrangements this time to require a visit by the Fund staff to the United Kingdom every quarter as happened during the 1969 standby.

As the right hon. Member for Chipping Barnet (Mr. Maudling) was arguing the other day, I find it strange that though the IMF is content with the reduction in the Government's borrowing requirement and with the ceilings for domestic credit expansion, Her Majesty's Opposition are arguing that it was the Government's duty deliberately to create unemployment and bankruptcies on a massive scale, out of some perverse impulse to inflict the greatest possible suffering on the British people. That sort of masochism may sell newspapers but it is a bad guide for economic policy.

Some critics have argued that though the size of the cuts in aggregate was about right, the effect of the particular cuts in public expenditure which the Government have chosen falls too heavily on the private sector rather than on the public services, particularly through the cuts which affect the construction industry. They suggest that the Government should have concentrated their cuts wholly on employment in the public sector—particularly in the Civil Service and the local authorities.

With all respect to those who argue this point, I suspect that it is in large part a variation on a very familiar theme. Everyone is in favour of cutting public expenditure in general but not the particular expenditure which affects him or her. But the fact is that any cut in public expenditure, if it reduces demand at all, reduces demand for the marketable goods and services produced by the private sector. I suspect it was recognition of this which led the CBI to argue so powerfully against unnecessary deflation at this time.

Mr. Eric S. Heller (Liverpool, Walton)

The construction industry has already been cut back almost to the bone, and to be cut back further still means a longer length of unemployment for construction workers. When there is, whenever it comes, an upturn, no one will be left in the industry. Indeed there will be no construction industry at all the way we are going on.

Mr. Healey

I know how deeply my hon. Friend is concerned with the construction industry in the light both of the problems he faces in the great city of Liverpool and of his own experience as a trade unionist. I will deal with this problem in a moment.

Mr. Michael English (Nottingham, West)

My right hon. Friend will recall that my sub-committee, irrespective of party, has criticised cuts by successive Governments—not only the present Government and not only the present set of cuts—on the ground that they have concentrated too highly and differentially on capital expenditure. Would not he agree that there must be something wrong in a system of government that allows us to have a surplus of teachers teaching in schools 140 years old?

Mr. Healey

I am coming to that precise point. But I do not agree with my hon. Friend's point in the terms in which he put it, for the reason to which I am now coming. With all respect to those arguing the sort of point that he has made, I must point out that, broadly speaking, public expenditure consists of transfer payments and spending on resources, including manpower. Cuts in transfer payments, such as pensions or unemployment pay, besides hurting the beneficiaries, also hurt those in the private sector whose products the beneficiaries might have bought. Cuts in subsidies or increases in prices or charges for public goods and services, besides affecting demand for the goods concerned, also reduce the money available to pay for other goods and services provided by the private sector.

Cuts in public purchases of goods and services, besides hurting the public organisations concerned, also hurt those in the private sector who supply those goods or services. Finally, cuts in public service manpower, besides adding to the unemployment register, also reduce the demand of those concerned for private goods and services.

There is, in other words, no way in which demand can be cut through cuts in public expenditure without hurting the private sector as well as the public sector. If, at this time, we had sought, as advocated by hon. Members opposite, to achieve the necessary reduction in the public sector borrowing requirement mainly through cuts in the public sector manpower, we would have had to make very much greater cuts in public spending overall, would have brought less benefit to the balance of payments, and would have added unnecessarily to the figures of unemployment, which are already tragically high.

To take an extreme example, to cut the PSBR next year by £1 billion exclusively by reducing public service manpower would have meant cutting expenditure by about £2 billion at 1976 survey prices, and throwing an additional half-amillion men and women on to the dole queues by the end of 1977. On the other hand, the £1 billion cuts in public expenditure which I announced last Wednesday will reduce the PSBR by the full £1 billion and increase unemployment by only 30,000 by the end of next year, a figure which is offset by the jobs created by the increased expenditure on employment and industry.

As it is, the Government are ensuring that the Civil Service and the local authorities' manpower do make some contribution to the savings needed. As a result, there must be much greater restraint on Civil Service manpower than we originally intended until the £95 million additional savings announced last July begin to take effect. This additional restraint will result in saving £30 million and £10 million in the next two years. There will also be, as I think I did not tell the House last Wednesday, a valuable saving of £50 million in the current financial year from this source. We have already achieved a very substantial change in attitudes towards the growth of local authority manpower, through the Joint Manpower Watch for England and Wales and similar arrangements in Scotland. Over the five years to 1975, covering the whole period the Opposition were last in power, the average annual rate of growth was about 4 per cent. During the year ending last June the growth was only 1 per cent., and more than half of this occurred in the first three months ending September 1975.

Mr. R. B. Cant (Stoke-on-Trent, Central)

I am sure that we must accept this delightful, sophisticated argument—[HON. MEMBERS: "No."] We must accept it because it is a delightful, sophisticated argument.

As a member of a local authority for many years, I think that it is morally unacceptable that the cuts in local authority expenditure that we are talking about are not falling on the salaried manpower of local authorities, with their inflation-proofed pensions and all the rest of it. They fall in every respect, and on all occasions, on the wage earners, the chaps who do the jobs, and that is wrong. We should come to the point in our negotiations when we say that we can no longer accept a non-redundancy formula for salaried staff in the Civil Service or the municipal services.

Mr. Healey

I fully share my hon. Friend's views. As a member of a local authority, he will know that the Government have no control whatever over local authority current expenditure. It is up to him, again as a member of a local authority, to see that the stringency to which local authorities are now subjected is reflected by cuts in the areas to which he referred. But that is entirely in the hands of the local authorities. It is a matter in which the Government have no constitutional power to intervene, as every hon. Member knows. It is entirely for local councillors who share my hon. Friend's views to ensure that the cuts in their control are made in the areas in which my hon. Friend wishes them to fall.

Mr. Cant

That reply is typical of the schizophrenia that exists. My right hon. Friend the Secretary of State for the Environment has said very clearly that there must be no redundancies in local government, and that even the reduced rate support grant covers that.

Mr. Healey

What my right hon. Friend said was that there was no need for redundancies if the cuts came about by wastage, but the distribution of the wastage lies entirely in the hands of the local authorities. It is open to the authorities, with regard to current expenditure, to ignore the advice given by my right hon. Friend. If he had given the advice that my hon. Friend suggests, they might have been wise to ignore it, but I think that I have quoted that advice more accurately than it was quoted a moment ago.

Mr. Michael Morris (Northampton, South)

Is the right hon. Gentleman saying that this Government will no longer give guidance on local authority rents and the rate contribution to the rent fund?

Mr. Healey

I have just quoted the guidance given to local authorities by my right hon. Friend the Secretary of State for the Environment. It is for the local authorities to decide whether to accept that guidance. I might add, as a Conservative Member has intervened on that point, that the biggest burden carried by local authorities in the field of which my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) complained is that imposed by the local authority reorganisation carried out by the right hon. Member for Worcester (Mr. Walker).

It is a bit thick to be lectured by Conservatives about increases in public service manpower, which, as Lord Blake pointed out in a pamphlet recommended to the Conservative Party by the Leader of the Opposition, were bigger and faster under them than under any previous Government. The rate support grant settlements imply a reduction of about 1 per cent. next year—the first reduction in modern times.

It is, of course, true that about 30 per cent. of the cuts in each of the next two years will affect new construction, although of this, 15 per cent.—and I know that my hon. Friend will approve of this—will fall on architects' and surveyors' fees and activities other than physical construction. But it is important to keep a sense of proportion. The cuts in the next two years will represent about 2 per cent. of total construction output in 1977 and 3 per cent. in 1978.

The £300 million saving on housing in 1978–79 will not entail any major reduction in construction work compared with 1977–78, or indeed any reduction in total expenditure on housing. Much of the housing saving will be made on non-construction programmes such as municipalisation and the purchase of housing land. I know that many of my hon. Friends will regret these cuts, but at least they do not directly affect the work of the construction industry.

Mr. Frank Mann (Salford, East)

Did not the axe fall on council housing in July? Although it will not operate until next year and the year after, how can my right hon. Friend ensure that the one-third of the construction industry that will be put out of work will go into export industry when we already have 1.3 million unemployed? If my right hon. Friend means what he said a few moments ago, that in order to reduce purchasing power he is prepared deliberately to cause unemployment—that is really what he is saying—he will find that that is unacceptable to almost the whole of the working-class movement.

Mr. Henley

Any cut in purchasing power has its effect on employment, because it reduces demand for goods and therefore means that unless people accept lower wages to produce the goods at a lower price, so that the same number of goods can be produced by the same number of people, unemployment is bound to follow. But I hope that my hon. Friend will accept that at present the Government, through a very large public sector borrowing requirement, are financing employment by spending £1 for every 80p they receive in taxes and revenue, and the aim of the present exercise is not to end deficit financing but to bring it down to a level compatible with our financial and economic health.

Several Hon. Members

rose—

Mr. Healey

With respect, I must continue. I have given way a great deal, and I fear that a speech that should have taken only half an hour to make has taken much longer. I shall give way later, but if I give way at the end of every sentence, we shall be unable to accommodate the 60 hon. Members who have indicated to Mr. Speaker a desire to speak, not to mention another 60 hon. Members who have not yet indicated that desire.

I appreciate the deep feeling of many of my hon. Friends on these reductions and wish that it had been possible to make the cuts in construction smaller. But that would have meant reductions in the only major programme now spared from any contribution to the total saving. I refer, of course, to social security benefits, which represent about a fifth of all public expenditure and which, unlike wages, are increased automatically each year at least in line with prices. Hon. Members who most regret the cuts in construction must ask themselves whether they would have preferred to find savings in this area.

I know, too, that there is deep feeling on the further acceleration in the phasing out of food subsidies. I believe that the new approach taken by my right hon. Friend the Secretary of State for Prices and Consumer Protection towards bread prices may in many shops more than offset next month's ½p reduction in the bread subsidy, although the precise effect will depend on the bargain struck between particular retailers and producers.

My right hon. Friend the Secretary of State for Education has already made it clear that her savings will be found, to a significant degree, from cuts in administration, particularly of school meals. This is reasonable enough. The recent increase in the staff administering these meals is proportionately far greater than that in the number of children receiving school meals, and the number of adults eating free meals has gone up by over 40 per cent. in the last eight years. I do not believe that it is unfair to look for savings here.

Defence and overseas aid have also had to make a contribution. But Britain will still be spending a higher percentage of her national wealth on defence than any of her main European NATO allies. And the proportion of our national wealth we spend on aid will still be higher than that of the three richest countries in the world—America, Germany and Japan. Moreover, at a time when most programmes are falling in real value, our aid programme will be kept roughly level over the next two years taken together—less next year, a little more the following year than we are spending at present.

Since the Opposition Front Bench is said to have decided not to oppose the measures that we are discussing, I will spend less time on them than on some previous occasions. I hope that the right hon. and learned Gentleman the Member for Surrey, East (Sir G. Howe) will at least take this opportunity of telling us specifically where his party now stands. Do they still support their old line, set forth with appalling clarity in last week's Spectator by Mr. Patrick Cosgrave, who I understand shares with Mr. Robert Moss a special relationship with the right hon. Lady as a speechwriter? Mr. Cosgrave wrote: The Shadow Cabinet realises that a reduction of £5,000 million in its first year in office would be the barest minimum that tactics and philosophy alike would demand, and if one considers just a few candidates for the axe—say £250 million in regional subsidies, £400 million in nationalised industry development, £800 million in housing subsidies, £278 million on school meals and £260 million on health—the radical, even the dramatic nature of what is being suggested is clear". Indeed, it is the sort of thing we are used to hearing from the right hon. and learned Gentleman. Does he still hold that view? Or does he take the more cautious, unquantified view of the hon. Member for Oswestry (Mr. Biffen) who contented himself with saying last week: I believe and predict that there will have to be renewed action to reduce those planned deficit;"? Or has the right hon. and learned Gentleman at last seen the light on the road to Damascus like his right hon. Friend the Member for Worcester'? Does he now share the view put forward by the Tory Reform Group that many of the proposals to reduce public expenditure by, for example, slashing still further housing and food subsidies would prove unacceptable"? Or does he agree with the comment by The Times in its leader today that If the Tory Reform Group is to play a useful, or even a continuing, part in public discussion it will have to develop a more coherent approach to the problem of inflation.

[HON. MEMBERS: "Hear, hear."] Whatever the last position of the Opposition Front Bench on these matters, I hope that at least they have come to recognise that their Leader was wrong in believing, as she has repeated with such earnestness so often on television, that public expenditure cuts do not hurt. They do hurt, and they hurt the private sector as well as the public sector.

We on this side of the House have never denied it. That is why we never cut public expenditure without the most agonising consideration. We have never taken the view that there is some predetermined level of public expenditure at which democracy collapses and gives way to totalitarian dictatorship. But after the most extended discussions the Cabinet has come to the conclusion that these cuts are necessary, and necessary for one reason only—to give the economy the best chance of achieving the highest sustainable level of output and employment as fast as possible.

If the Government had failed to take the measures which the economic prospect now requires, and in inevitable consequence there had been a further plunge in the sterling exchange rate and a further increase in interest rates, inflation would have gone through the roof, unemployment would have reached pre-war levels and the social contract and the industrial strategy would have collapsed with all the rest of our hopes. Last week's measures will enable us to gain control of our currency and to move more rapidly towards paying our way in the world with rising levels of employment and falling prices. They provide a solid fiscal and financial foundation for our recovery.

But they form only part of what must be seen as a two or three-year programme for recovery. They provide the conditions for our industrial revival but they do not create the certainty. That must depend on the response of both sides of industry to the opportunities now before them.

Mr. John Mendelson (Penistone)

My right hon. Friend will appreciate that many of us regard the question of levels of unemployment as the crux of the matter. Will he deal with the autumn of 1977? We gather that his measures will create unemployment but will be matched by Government expenditure to create more jobs. In other words, where shall we be in the autumn of next year?

Mr. Healey

The measures l have described lay down the conditions for our industrial recovery. That must depend on the response of both sides of industry to the opportunities that lie before them. It must depend, above all, on the long-awaited improvement in our commercial performance both at home and abroad and on the increase in investment which is essential if we are to maintain and extend the growth in our output and employment in the coming years.

My right hon. Friend the Secretary of State for Industry this evening will be talking about the next phase of our industrial strategy and the contribution which will be made by last week's measures in the field both of investment and employment. I think, however, that the House will expect me—and I know that my hon. Friend the Member for Penistone (Mr. Mendelson) will—to say something now about the likely effect of last week's measures on employment, not only next year but in the longer term, and on the prospects for unemployment today compared with what they would have been if the Government had taken no action at all.

On the last point, 1 can only repeat what I said earlier—that if we had not taken decisive action last week to ensure the financing of our internal and external deficits by means which would not refuel inflation or destroy confidence in sterling, the result would have been a collapse of the exchange rate, roaring inflation and an increase in interest rates to levels which would have put paid to all hopes of industrial recovery. In that situation, unemployment would have risen to heights perhaps unprecedented even in the 1930s.

As it is, the prospect for unemployment, though not catastrophic, remains very disturbing. As today's Press notice from the Department of Employment points out, because of industrial action by the civil servants who collect the figures it is not possible to be certain of the movement of unemployment since it levelled off in October. But it looks as if total unemployment in the United Kingdom has fallen slightly since October because of a substantial fall in the number of school leavers without a job. There were 50,000 school leavers without a job on 9th December compared with over 200,000 last August. But excluding school leavers the number of unemployed may have increased perhaps 10,000 a month over these past two months, with all the provisos set out in that Press notice.

It is likely that the number of unemployed will continue to increase in the coming year, if only because the number of men and women available for work looks like increasing by some 750,000 over the next five years—at the rate of over 12,000 a month, so we shall have to run hard to stay in the same place.

On the other hand, there are deep uncertainties. The House will be aware that the National Institute for Economic and Social Research the other day predicted lower growth than the Government expect with no increase in unemployment, on the grounds that there will be much more work-sharing and no increase in productivity—the worst possible reason, if we look at our real economic needs.

The biggest uncertainty surrounds the precise effect of last Wednesday's measures. On all the conventional arithmetic, it is possible to calculate that by themselves the cuts in public expenditure and increase in excise duties would increase unemployment by about 40,000–10,000 in respect of the increase in excise duties—by the end of next year and over 100,000 by the end of the following year, while increased expenditure on employment and industry would generate up to 50,000 extra jobs by the end of next year, more than offsetting the result of the cuts that year. The planned further increase in expenditure on employment and industry in 1978–79 would work in the same direction.

This is to apply mechanical rules of thumb to a situation which is essentially dynamic. First, as I have already said, we could not have maintained even the present prospect for employment if we had failed to take these measures. Secondly, the International Monetary Fund takes the view that the effect of falling interest rates and a more stable pound on confidence both at home and abroad could in itself generate sufficient additional activity in the private sector to offset the direct effects of the cut in PSBR—a view often expressed by Opposition Members. In that case we could expect to see unemployment level off towards the end of next year and start falling steadily in 1978. I see that the Economist, not hitherto noted for its confidence in Government policy, is now predicting an even more rapid improvement in our general prospects.

The fact is that no one can predict with any hope of accuracy the path of unemployment over the next few years. As the hon. Member for Oswestry said the other day: It simply does not lie within the capability of Government to give employment targets. What I can say is that the key to an improvement in our unemployment prospects must lie in the performance of our manufacturing industry, in increasing the volume of our exports, and in countering the penetration of our domestic market by foreign imports. As the economic forecast for 1977 which we published last week points out, if we could increase the growth in our exports of goods and services from8½ per cent. expected to 10½ per cent. next year, and reduce the growth in our imports of goods and services from 1½ per cent. to ½ per cent., our GDP could grow at 3 per cent instead of 2 per cent. and manufacturing production could increase by 7 per cent. as against 5½ per cent. in the main forecast. This would make an immense difference to the employment prospects. Moreover, we should be in balance on current account in the second half of next year.

It is here and here alone—in exports and import substitution—that the key to beating unemployment lies. The Government have created the conditions for this improvement in our trade performance. Exports have never been more profitable. We have never been so competitive in price. It is the duty of all who want to see Britain return to high employment to ensure that we now make use of those opportunities. The Government have done their bit to help by continuing the cost escalation scheme another year and by planning to improve the tax treatment of those who work at the sharp end of exporting.

Mr. Norman Atkinson (Tottenham)

I accept that the weakness of employing targets is that bad shots often miss the target, but on my right hon. Friend's general arithmetic it is essential that we should get these matters right. My right hon. Friend mentioned the figure of 140,000 jobs that will be lost. Does that figure include the effect of the 2 per cent. increase in the National Insurance Surcharge, and does it also have any relation to the figure of 110,000 mentioned by my right hon. Friend the Secretary of State for Employment earlier this year? What is the cumulative effect of the policy that is now being pursued in terms of the targets to which my right hon. Friend referred? How do these things fit together? It is on that basis that we must examine the working of the policy which he has now enunciated.

Mr. Healey

I understand my hon. Friend's question well. The figures I gave referred to the results of the measures that I announced last week. They do not cover the results of the measures in July or the stimulus to spending and employment created by the large Government borrowing requirement. My hon. Friend must accept—and we have discussed this matter repeatedly with the trade unions and the CBI in the NEDC—that we cannot afford to base growth on anything except net exports and investment at this time until we get into balance, which I hope will be in 1978.

The second point is that the rate at which we bring down unemployment will depend on the rate at which we can increase net exports, including import substitution and increased investment. That does not depend on the Government. The Government can only create the conditions, as I tried to make clear to the House. It depends on the workers in individual firms, in the sales office and in the board room.

It is the purpose of our industrial strategy to bring about this improvement in our general performance. As I pointed out to the House last week, both sides of British industry must accept that their failure to respond to the export opportunities in the middle of last year—as shown by the fall in our export volume despite the competitiveness of our exports—is the reason why unemployment is still rising. Until we get this right, on the shop floor, in the board room and in the sales office, the fall in unemployment which my hon. Friends and Opposition Members also I am sure—wish to see will not and cannot take place.

Mr. David Crouch (Canterbury)

The Chancellor has been speaking for three quarters of an hour, mainly about his deflationary promises to the country. He is now coming, at the end of his speech, to talk about the strategy for industry and the need for everyone who works in industry, whether on the shop floor or in the sales office, to take advantage of opportunities. Can he give us some glimmer of hope about what the opportunities are to be in his Spring Budget which will produce this new surge?

Mr. Healey

A large number of firms have taken good advantage of the opportunities. Exports have never been so profitable and competitive. Many firms are taking advantage of this and have increased their export volume. Unfortunately not all firms have done so. Later tonight my right hon. Friend will be saying a little about the problems which this presents. I do not think that Conservative Members will deny the facts that I have put to them. They are not denied by the CBI. The opportunities for exporting have never been as great as they are now.

Mr. Keith Stainton (Sudbury and Woodbridge)

Where are they?

Mr. Healey

All over the world. We have increased by 25 per cent. our exports of manufacturing goods to Germany in the past 12 months. This is an impressive and important achievement. But we have not increased our exports sufficiently. Our exports of industrial goods to the Community generally have begun to grow substantially in the past year.

Mr. Stainton

What is going wrong?

Mr.Healey

This is a matter which we shall be discussing over the months and years to come. My right hon. Friend will be dealing with it in more detail tonight. What I can say, and this reflects some of the anxieties of Conservative Members, is that there are broader international dimensions to the problem of unemployment which will require international action. Almost all of the industrialised countries are now suffering from higher unemployment than ever before in a period of world recovery—and also from higher inflation than ever before in a period of world recovery. They must consider this problem together and see how they can help one another to deal with both the cyclical and the structural elements in the problem.

I conclude with some words about the rôle of the next Spring Budget in providing the necessary incentives which are needed at all levels of industry and in all parts of the economy if we are to reverse the post-war decline in Britain's relative performance. I believe, as I have said before, that it has become essential to reduce the burden of direct taxation, particularly on the lower and higher income levels where at present the marginal rates of income tax are a growing disincentive to the effort, innovation and enterprise on which an improvement in our industrial performance must depend.

My scope for acting on the income tax will have to depend on two factors, as I made clear last week. The first condition is finding ways of financing the cost without increasing the public sector borrowing requirement above the £8.7 billion in 1977–78. The second crucial condition is getting the right pay policy when the present round ends next July. The TUC has already committed itself against a free-for-all or wage explosion. It declared at its last Congress its desire to continue the attack against inflation while permitting more flexibility in wage bargaining. I hope that the whole House will support these objectives. I agree with Mr. Len Murray that we cannot confine discussion of next year's pay policy to a simple trade-off between income tax relief and limits on increases in earnings. As with earlier discussions with the TUC, these talks will have to cover a much wider range of economic, social and industrial policies.

Above all, we shall have to consider the best means of guaranteeing maximum employment and minimum price increases in the coming years.

I hope that we shall be able to begin these discussions early in the New Year, not only with the TUC but with the CBI, which has an equally legitimate concern with all aspects of the problem. If we can reach agreement, as I believe we shall and must, before I complete my Budget, the resulting boost to confidence both at home and abroad will bring immense benefits to everyone, above all in more employment. An essential condition will have been met for letting another key component of our recovery programme fall into place—a cut in income tax—which I believe the whole House and country will welcome.

Next year will be a difficult year none the less, particularly for jobs and prices. But the measures I have been describing will make it less difficult than it would otherwise have been and it will lay the foundations for a steady improvement in all aspects of our economic performance. It is for these reasons that the Government decided on these measures and it is on these grounds that I commend them to the House.

5.16p.m.

Sir Geoffrey Howe (Surrey, East)

The Chancelor closed with a customary peroration suggesting that all would now be well in the world. In the course of his speech he challenged the Opposition to begin dealing with some questions which he was posing. I want the House to be entirely clear about the questions which we are discussing. We are discussing the adequacy of what the Chancellor described as the package that had to get it right, the one which has concerned the nation for a great deal of time. We are concerned, therefore, with why we should accept the right hon. Gentleman's view about the rightness of this measure compared with the different views the Chancellor formed last July and last February.

We are not wholly impressed by the Chancellor's repetition of the tributes he rehearsed earlier to his judgment from foreign statesmen and foreign financiers. With respect, we have heard that part of the chorus before about his judgments, but the Chancellor has changed since then. We are concerned, and I say this seriously, by the fact that the Chancellor's judgment in this respect appears to have been called in question by his right hon. Friend the Member for Newham, North-East (Mr. Prentice). I wish to say nothing to pre-empt what that right hon. Gentleman will say if he catches your eye, Mr. Deputy Speaker. It is for him to speak for himself. But when this judgment, which is so critical to the nation, can cause concern in that respect, we are surely entitled to press the Chancellor hard to see how far he has got it right.

My first question is to ask the Chancelor why he has dwelt so much upon the agony of making these cuts. Why has he steered so close, perhaps, to getting it wrong, if the consequence of getting it wrong in the wrong direction is as great as he told the House a moment or two ago? He told the House quite frankly that if there were no cuts we would have unemployment at beyond pre-war levels, the collapse of the exchange rate, roaring inflation, and so on. The House agrees with the right hon. Gentleman. It is for that reason that we are desperately anxious that he should have got it right.

My anxiety about the way in which the Chancellor has presented his Budget to the House is heightened by the fact that he does not yet seem to have addressed the House and therefore the nation, and certainly his hon. Friends, with the candour that is required as a result of the fundamental change of strategy and objective which he has been passing through in these past 12 months and which his last statement in particular displays. We were glad to hear him accepting the view expressed by my hon. Friend the Member for Oswestry (Mr. Biffen)—and apparently he does accept it—that it is no longer for the Government to give employment targets with any confidence. That was a fundamental change from the position he was adopting earlier this year.

In his Budget speech in April this year he said—and he repeated it again in August—that the Government were setting out to pursue the target of getting unemployment down to 3 per cent. by the end of 1979. We all share the objective of reducing unemployment as soon as is possible and sensible. But there is a difference. At that time it was for the Chancellor the over-riding target and dominant objective. When he dealt with it in August this year and explained that he was setting out to reduce the public sector borowing requirement by £1 billion, he said that the reductions he wanted to achieve were necessary to secure the anticipated growth of manufacturing industry. He was still setting employment as his main objective. At that time, the problem of the public sector borrowing requirement was consequential.

This has a significance to the situation in which we find ourselves today. As a result of what is contained in the Letter of Intent it is perfectly clear that the right hon. Gentleman has made a major shift in policy and is setting the achievement of monetary objectives as his overriding purpose, with unemployment taking its course alongside that. I particularly draw attention to this because it is important that the House should understand it, even if the Chancellor has not himself chosen to explain it.

In paragraph 7 of the Letter of Intent, the Chancellor says something which the House will echo without hesitation. He says: The Government is deeply conscious that the present state of the economy has brought a waste of human and material resources. Of course, we all agree with that and we want to conquer unemployment. We recognise now, as we did not several years ago, that the conquest of inflation is a necessary precondition to conquering unemployment. The Letter of Intent continues: For this purpose, an essential element of the Government's strategy will be a continuing and substantial reduction over the next few years in the share of resources required for the public sector. It is also essential to reduce the public sector borrowing requirement …in order to create monetary conditions which will encourage investment and support sustained growth and the control of inflation. And so the letter goes on, giving emphasis to this point again and again. The Chancellor makes plain further on that he intends to take further fiscal action, totalling £500 million affecting 1978–79, in order to bring the PSBR for that year down to his target level.

In paragraph 16 of the Letter of Intent he says, as he told the House this afternoon, that he will make an additional fiscal adjustment to achieve the overriding PSBR objective if growth exceeds a certain level. So we have here an overriding commitment to the achievement of these monetary objectives expressed in domestic credit expansion terms, an overriding commitment to getting the PSBR down to these levels.

It is most important, for the Chancellor's policy to succeed without producing an unacceptably high increase in the rate of unemployment, to spell that out with total candour. The comments of the TUC on Friday still related to achieving the target on unemployment levels. It is most important that there should be no misunderstanding about the right hon. Gentleman's determination to achieve the money supply objectives as part of the agreement arrived at with the International Monetary Fund. It is clear that the Chancellor can no longer say that he is making these changes because of what he calls the "malignant interaction" between factors on the exchange markets.

The Bank of England Quarterly Bulletin sets out the explanation clearly. It says: This year has been a year of crisis, exemplified most dramatically by the fall in the exchange rate. Between early March and early December the value of sterling in terms of other currencies fell by about 20%. This depreciation, spread over nine months, has been considerably greater than either the devaluation of sterling in 1949 or that in 1967 … Among the underlying reasons for sterling's decline … there has been widespread unease at the size of the public sector borrowing requirement and, since mid-year, the faster pace of monetary growth. That is the message we have been trying to get through to the Government for the last two years. We regret very much that it has taken so long for it to get through. I think almost everyone in the House, and certainly not only on the Opposition Benches, must feel a sense of humiliation and shame that it is only at the hands of the IMF that this lesson has finally been learned.

I see the Leader of the House in his place. I fancy that what I have said may strike an echo in his mind as well. He will recollect that on 5th December 1967, at the time of the sending of the Letter of Intent on that occasion, he initiated a Standing Order No.9 debate, and he closed his speech by saying, In the view of many of us this document is an ignominious letter which should never have been signed by a member of a British Cabinet, and should never have been dispatched by a British Labour Government. Therefore, many of us will work for policies and for a Government which can save us from these humiliations.—[Official Report, 5th December 1967; Vol. 755, c. 1152.] Whichever way we look at it, this is humiliation. It is an objective to which the Chancellor did not intend to march when he went into the Treasury.

Even as little as 15 months ago the Chancellor was telling us how terrible it would be if we were to finish in the hands of the IMF. It was also not an objective of the right hon. Member for Newham, North-East or of the Leader of the House.

It need not have come to this. None of them wanted it. The responsibility lies with the Chancellor for having failed to understand the lessons soon enough, and for having failed to carry his Cabinet colleagues with him in time. That is why we have now come to this humiliating position. It is that which the Chancellor, with his forced change of strategy and objective, should clearly spell out if it is to achieve its effect.

Mr. Cant

Before the right hon. and learned Gentleman leaves this period of shame, may I ask, in defence of the Chancellor, to what extent the right hon. and learned Gentleman agrees with the conclusion of Professor Griffiths in the article in The Banker dealing with monetary policy that the reputation of the Bank of England has never been lower in the management of the monetary affairs of this country since the 1920s and the 1930s?

Sir G. Howe

I am not prepared to discuss the reputation of the Bank of England over such a long period of time. We may all make comments about certain aspects of our monetary management, but the man who is claiming to be in charge of these matters, to be watching them minute by minute—he went to London Airport and was forced to return, and he went to Blackpool and came back—must bear the responsibility. One cannot blame the Bank of England. It is the Chancellor who now comes before the House to defend his policy, and it is with him that the responsibility must lie.

Now that we recognise that we have started on a separate course, let me deal with one or two elements to which the Chancellor gave less prominence today than in the past. First, there is the industrial strategy, and, second, the social contract. Both these elements feature less and less in the Chancellor's speeches because they come more and more to appear like the dignified rather than the effective parts of the Government's policy, if I may borrow a phrase from Bagehot.

The more we look at this the more difficult it is for us to discover what the industrial strategy is. It surfaced last at the Neddy meeting on 4th August this year. Neddy was presented there with two scenarios. The first was assumption of an average GDP growth over the next four years of 3½ per cent. and, second, the assumption of a 4½ per cent. growth over the next four years. Neddy, confronted with these two views of the industrial strategy, resolved with an admirable determination that the first view was unacceptable and that therefore everyone should proceed to plan upon the basis of the second view.

As my hon. Friend the Member for Eastleigh (Mr. Price) pointed out, that was triumph of hope over experience. Now it is crystal clear that both of them are wholly unattainable, and the Chancellor, in trying to defend his industrial strategy this afternoon, was reduced to saying that if we did this, or that, that if imports fell and exports rose, that if everything else went marvellously well, and that if we could do better, then perhaps we would do better. The industrial strategy has almost disappeared. It flits across the stage in the form of sectoral plans to which the Chancellor referred last Thursday in dealing with the sums of money being made available to particular parts of industry.

I am always concerned about the emphasis that is placed upon manufacturing industry to the exclusion of services that are still contributing to the growing volume of invisible earnings, and about the way in which the sectoral plans concentrate on industries that are running into difficulties or appear to command a large number of potential votes.

Under the sectoral plans of which the Chancellor spoke last year for the ferrous foundry, the machine tools and the clothing industries, a total of £80 million was made available in August 1975. The final date for application is just about to pass by, and so far only £18 million out of the £80 million has been taken up. Less than £500,000 of the £20 million made available to the clothing industry has been applied for. [HON. MEMBERS: "What about private enterprise?"] I shall come in a moment to what private enterprise can and should do. I am talking about the State attempting to intervene in certain sectors of private enterprise instead of restoring the engines of private enterprise. The Minister of State, Department of Industry, describing the success of the clothing industry plan, said in the understatement of the year that it had not proved entirely successful. That is not surprising. He was the Minister who, during Question Time last week, said that it was clear that Government could no longer create employment by taking action to achieve that end. That is what we think of the vanishing framework of the Government's industrial strategy.

What the Government are learning painfully, and should be learning more quickly, is that £1 left in the pocket of the investor, the industrialist, the entrepreneur as a result of lower taxes, does far more good than £1 placed in somebody else's pocket by Government from taxes that are far too high.

Some important changes are being made in the Government's attitude—

Mr. Geoffrey Robinson (Coventry, North-West)

Does the right hon. and learned Gentleman agree that over the past two years manufacturing companies have paid virtually no mainstream corporation tax?

Sir G. Howe

Yes, indeed, because of the extent to which profitability has sunk to its lowest all-time level in the past 12 months. I draw the hon. Gentleman's attention to the fact that many small and medium-sized businesses are groaning under the weight of taxes and levies imposed upon them by the Chancellor to enable money to be made available to other parts of the economy. They suffer from high taxes. The hon. Gentleman referred to the low level of company corporation tax. That is the language so often used by Labour Members. On Friday the TUC said that it could not understand why British industry was not doing better because it had the most advantageous tax circumstances. That is a fallacy believed by many hon. Members. It is not only companies and institutions that are depressed by taxes. It is people.

Mr. Robinson

rose—

Sir G. Howe

No. I shall not give way again. It is because Socialists tend to think always of shifting money from one institution to another that they overlook the point I made about people.

Mr. Robinson

Will the hon. and learned Gentleman give way?

Sir G. Howe

I am sorry, not for the moment.

I want to say a word about the social contract. The one element of the social contract that is essential is truth from the Government and understanding by the people and those engaged in bargaining in industry of the consequences of Government policy. If the social contract means simply that the Chancellor spells out more clearly and honestly than he previously has done the implications of his monetary policy so that people who are engaged in bargaining in industry know how to adjust to it, that is fine.

It is the other elements of the social contract—which we are glad to see dwindling away—that cause so much concern. It is the incidence of high taxation, high personal taxation and egalitarian taxation—which the Chancellor is beginning to see does harm—and the continued existence until recently of indiscriminate subsidies. We admire the Chancellor's repentance in that respect.

It is interesting that the Chancellor introduced the massive food subsidies in April 1974 as an essential condition for the achievement of a voluntary pay agreement at a time when inflation was running at 12 per cent. per annum and is now announcing their abolition when inflation is running at 14 per cent. per annum and likely to go higher. That is a good example of the Alice in Wonderland sense of logic that runs through his economic policies.

In his 1974 Budget the Chancellor announced that gas prices would be frozen. In his statement last week he announced that gas prices were to be deliberately increased. He must be in a state of despair when he is challenged this afternoon to pay tribute to the successful initiative of the Secretary of State for Prices and Consumer Protection in relation to bread prices, an initiative that has apparently provoked drivers, bakers, retailers and consumers into equal anguish at his folly.

The Chancellor has moved some way in the right direction in recognising the need for substantial reductions in public spending. We criticise him because he has done none of the many other things that could and should be done to revive the depressed spirits and the latent talents of the people. At the beginning of his speech he made a jest in referring to what commentators had said about his having done nothing to uplift the spirit. That is no matter for jesting.

Even if the Chancellor has learnt enough to begin to control public spending in the right way, only if he takes those measures in a way that will raise the morale of people and encourage them will he begin to have a chance of success.

I wish to comment on two aspects, the first of which is what the packages contain for the construction industry, about which hon. Members on both sides of the House rightly express concern. In addition to the cut of £400 million last July, another £1.000 million worth of new building is to be cut. It is unarguable that that is likely to raise unemployment in the construction industry from about 200,000 to about 300,000 workers. I readily acknowledge that part of that may be unavoidable in the context of a proper programme for the reduction of public spending. But it is a legitimate complaint from Labour Members to ask why all that is necessary. Why does this huge load have to be thrust on the back of one industry?

The Chancellor has produced several excuses. He said that whatever is done to cut public spending is bound to fall on the marketable sector, so it does not matter which way it is done. Why should it be thrust upon one industry, not import intensive but labour intensive, when demand could be reduced, if that is a legitimate objective, in other ways?

Mr. English

I wish to be fair. May I address to the right hon. and learned Gentleman the question that I addressed to the Chancellor of the Exchequer? My Committee has consistently criticised concentration on capital expenditure. If the right hon. Gentleman will think back to the previous Conservative Government he will recollect that they imposed a cut of 10 per cent. on goods and services that fell mainly on capital expenditure and the construction industry. I agree with the right hon. and learned Gentleman's last remarks, but does he agree that his Conservative Government were wrong. too?

Sir G. Howe

There are several differences. At the time of the cuts made in December 1973 the construction industry was over-heated and over-extended. It was in a different condition then from the condition it is in now, when more than 200,000 construction workers are out of work. I agree, as the Chancellor once did from the Dispatch Box, with the recommendation contained in the Expenditure Committee Sub-Committee's report that we should not use capital expenditure as a short-run means of containing Government expenditure if we can avoid it.

The Chancellor said in answer to his hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) that it was not possible to achieve these cuts in other ways—for example, by securing corresponding reductions in the salariat of local government—because the Government had no power to achieve that. The right hon. Gentleman was rightly criticised for pursuing a morally indefensible policy. It is difficult to see the moral justification for a policy that bears down upon the private sector, upon people who are employed on weekly or hourly wages, but not upon those in central or local government who conduct the business of supervision.

The Chancellor may know the story of last week, which is accurate, about a major employer. A major employer was protesting last week to one of his colleagues in Government that as a result of the cuts he would have to lay off 2,000 men as soon as that could be achieved. He asked the fair question—namely, " How many people will be laid off in the Department who are employed in supervising this construction programme that will result in lay offs in the construction industry?" With difficulty he extracted the answer "Twenty-three". That is the reality of the injustice about which people are entitled to complain.

I am not making this point because I want to see civil servants in local and central Government joining the unemployed merely for the sake of it. However, there is a legitimate complaint and it is indefensible to proceed as at present. The Chancellor says—in this respect I quite agree—"I should love to be able to do something but we have no power to do anything about the local government sector". But that does not apply to central Government. If the Chancellor controls anything, he controls the size of the central Government public sector payroll and the numbers on that payroll.

The right hon. Gentleman says that he will achieve a reduction in that area of public spending of £40 million over two years. That is a saving of £40 million in Civil Service employment at £5,000 per annum per person. It is a saving of about 8,000 people. In the area that the Chancellor chooses to control he is to make a reduction of 8,000, although the Civil Service is recruiting and could lose 150,000 people every year by non-replacement. Where is the legitimacy of that response? He may have no power in local government but what about central Government?

Let us consider another aspect of the right hon. Gentleman's policies. He has defended the additional cuts that he is making by pointing to the success of his right hon. Friend the Secretary of State for Education and Science. How is she to achieve her savings? It seems that she will do so by securing savings in the number of local education authority employees who apparently have free school meals. It seems that there will be savings in the number of people who are employed in school meals administration. The right hon. Gentleman says that he has no power over local government, but in some mysterious way he can save on free school meals that are consumed by school staff and reduce the number employed in the school meal administration service. However, no savings can be made in the numbers who are employed in the administration or supervision of the construction industry.

Why should all the savings be concentrated on capital spending and not on current spending? If it is legitimate to reduce food subsidies, as the Chancellor has finally decided to do, and if it is legitimate to phase out subsidies for nationalised industries, why is it illegitimate to begin reducing housing subsidies?

Would it not be better to save money by cutting housing subsidies when we bear in mind that there are about 1 milliom local authority tenants with incomes over £80 a week? Why should they receive subsidies at the expense of people employed in the building industry? I am not making a party point, and I recognise that Labour Members would prefer to reduce tax relief on mortgage interest, but it is a legitimate subject of debate. I am saying that it is more sensible to make a generalised reduction than to destroy an industry and the jobs of tens of thousands of people who are employed in it.

Mr. John Lee (Birmingham, Handsworth)

I follow the argument of the right hon. and learned Gentleman, and I think that some of my hon. Friends below the Gangway share some of his criticisms, although possibly we make them from a different angle, but he said, in a throw-away line which I do not think should go without comment, that the capital expenditure of the construction industry should bear some element of the cuts. How much does he think it should bear?

Sir G. Howe

I have indicated already—I shall be entirely open with the House —that we do not have this year's public expenditure White Paper. However, we know that the capital spending programme of central Government is about £10,000 million. If we are to set out to achieve the substantial reduction that is necessary, then it is necessary for the industry to bear a part of the reduction, but in the Chancellor's package it is having to bear more than half of the burden in the capital sector, which happened in the last package. That shows a wrong sense of judgment.

Another hammer blow on the construction industry is the statutory commitment to extend the rights and privileges of local authority direct labour organisations. That will add insult to injury in the most absurd way.

Another area in which I look for encouragement from the Chancellor in his next spring Budget is the whole tax structure. I am not quite certain which month of the year that will be or whether the right hon. Gentleman will introduce it. We welcome his recognition of the destructive effect of high taxes on incomes earned by high-income earners as well as by low-income earners. He has been bold enough to commit his personal opinion on that in the Letter of Intent to the IMF, and he has been saying it now for all of two and a half months. That is a long time for him to be consistent on one subject. It represents a most important reversal of attitude. I should like to know how far it represents the attitude of his party.

In the 1974 Budget Statement that the right hon. Gentleman introduced he was positively mellifluous in his tribute to the success and desirability of raising direct taxation almost beyond the limits. Indirect taxation was something that he did not like but direct taxes could be adjusted and manipulated. Pips could squeak and there could be howls of anguish, but it was a marvellous thing for him to be doing. He revelled in putting up taxes, and in the spring of 1974, 1975, and even in 1976, he was effectively increasing direct taxes. To make matters even more confused, and despite the warnings given by my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin), he raised the level of short-term benefits untaxed more than he raised them long term, thereby deliberately intensifying, despite our warnings, the effects of the reverse yield gap between worker and non-worker about which he is now complaining.

We welcome his conversion. I hope that all Labour Members recognise that if jobs are to be created and if prosperity is to return it will not come from an expansion of public sector spending. There is nothing left to spend. The Chancellor is going back on that so as to bring down interest rates in order to revive the vitality of the wealth-creating sector.

Mr. Atkinson

Production depends upon investment in the public sector. The energy industries are almost wholly publicly owned.

Sir G. Howe

I take the hon. Gentleman's point but I want the hon. Gentleman and his hon. Friends fully to understand what I am saying. It is not only the private sector I have in mind. I recognise that there are wealth-creating activities in the public sector as well. I am talking about the wealth-creating sector.

How is prosperity to return unless the Chancellor makes this major shift, quite apart from reducing public spending? How can it be done apart from moving away from the principle of raising the burden of direct taxation on people so as to give them encouragement and incentive, which does something to uplift the spirit, the very phrase that the Chancellor was ready to deride?

That is the change of emphasis that we now want to see from the Chancellor. Our judgment on the package can be put in this way—thank heavens that belatedly the Chancellor has realised the importance of controlling money aggregates, the money supply and getting public spending under control. Thank heavens that in his third Budget this year he has made a substantial step of the right kind and size. How regrettable it is that he should have distributed the burden in such a ham-handed way as to be damaging where damage is unnecessary, as to be discouraging where discouragement is unnecessary. How little it does to achieve the prospect of restoring the economic prosperity of this country. How little it does to restore the jobs, the prosperity and the social services to which we all look in future, which can come only from the wealth-creating sector in place of the near barren greyness of social contracts that achieve nothing, of industrial strategies that go nowhere, in place even of incomes policy so defined.

Mr. Sydney Bidwell (Ealing Southall)

rose—

Sir G. Howe

We are looking for an earnings policy that will respond to the by now universal longing throughout the country for success, for reward, for a new start and for enterprise and energy to be rewarded. Only a fresh lead of some kind from the Government with a new commitment to the legitimacy of profit, incentive and excellence can begin to meet the nation's mood, and in that respect we look to the Chancellor entirely in vain.

5.50 p.m.

Mr. Reg Prentice (Newham, North-East)

Thank you, Mr. Speaker, for calling me so soon after my elevation to the Back Benches.

I hope that the House will permit me to begin on a personal note and to say that I face my situation today with mixed feelings. There is a feeling of sadness at parting company with colleagues in the Government whose friendship I have enjoyed and whose help I have valued. There is sadness, too, at parting company with a loyal and dedicated group of officials in the Ministry for Overseas Development who work in one of the more neglected but most worthwhile and important areas of national policy. These feelings are mixed with feelings of relief at having greater freedom than I have enjoyed in the recent past to express a number of opinions and doubts about the direction that our policy has taken.

I shall stick to the subject of the debate, but the reasons which led me to resign are numerous. I have had doubts about a number of Government policies and the way in which decisions have been reached for a considerable period. I could summarise them in one sentence by saying that too often we have made key decisions as a reaction to pressure rather than on the merits of the decisions.

Our style of Government-and-adversary politics in the House has become increasingly irrelevant to the problems of our country and is seen to be irrelevant by many of our people who are increasingly doubtful about which party, if any, deserves to command their support. For me, that growing disenchantment became more intense during the summer and after our resumption in October, when it seemed that this side of the House was obsessed with pushing through far too many controversial and irrelevant measures which did not command the support of the majority of the British people. In addition, I found myself unable to go along with my colleagues in support of the devolution Bill last week. If anyone is anxious about my state of health on the night of the vote on that Bill, they may be reassured that there was no reason for my nearest and dearest to have any anxiety.

I delayed my resignation from last week to this week for only one reason. It seemed just possible—not probable—that there might be some danger in a Cabinet Minister resigning so soon after the Chancellor of the Exchequer's statement. It might have been misconstrued as meaning that I did not agree with the need for cuts in public expenditure and it could have been of some damage to the pound in a critical period. That was my decision and mine alone, and I am glad that I am now able to declare where I stand on these issues.

I support the economic package in overall terms and in its quantity, but I wish to criticise its content. I say to my hon. Friends who are against cuts of this nature that they have a very difficult job if they wish to argue that we do not need the IMF loan, that in order to get it we do not need substantial cuts in the public sector borrowing requirement or that this could have been done without substantial cuts in public expenditure.

It is essential to see the two stages of the coming financial year and the succeeding financial year as a prelude to a much more radical reduction of the public sector borrowing requirement in following years. On current figures, the PSBR will total about £150 for every citizen next year, compared with about £20 in 1960. We are talking not about a deflationary package but about an inflationary situation which will be rather less inflationary than it would have been without these measures. The measures have to be seen as a prelude to a further adjustment for the British people. It will be painful in many ways, but it is an overdue adjustment.

There are some areas in which I think the cuts should not have fallen and I shall state my alternatives. We were wrong to make a further cut in defence. Soon after we came into office, the Government carried out, over a period of many months, an exhaustive defence review which involved cancelling or phasing out a number of overseas commitments and the pruning of the Services so that they were able—but only just—to discharge our remaining commitments. These include commitments to the defence of this country, to share in the defence of Western Europe and the naval approaches to this Island, a solemn undertaking in relation to Ulster and a few remaining obligations in other parts of the world, for example Hong Kong, from which no one would seriously argue that we should withdraw.

It is not good enough to have said in July and again now that defence has to make a contribution to public expenditure cuts. Defence can reasonably be expected to make a contribution only if the effects of the cuts on the ability of the Services to continue our commitments are carefully examined in detail. I am not convinced on this point and I believe that we were wrong to make the cut.

I should like to link that with my responsibilities for overseas aid. I shall resist the temptation to address the House at great length as I should like, but I believe that the cut in this aid was excessive, not only judged against the moral duty which those of us in the richer one-third of the world have in the fight against poverty in developing countries but judged also against our self-interest and in terms of the North-South dialogue. This is not a dialogue between supplicants and donors. It is increasingly becoming a negotiation in which there is a joint interest for all parties to reach agreement. We and other countries should not turn aside from this as though overseas aid is a marginal, charitable activity. It is an essential part of the structure of the world economy.

I link overseas aid with defence because both are concerned with our rôle in the world. However else we tackle our severe economic problems, do not let us retreat into a parochial attitude of self-pity. As a leading European nation, a middle-sized world Power and a considerable trading nation, we have a positive rôle to play, both in the defence of our basic freedoms and in the fight against abject poverty in the developing countries. I hope that we shall not be so obsessed with our own backyard that we turn our back upon these wider responsibilities.

With regard to the domestic cuts, I agree with the right hon. and learned Member for Surrey, East (Sir G. Howe) and with many of my hon. Friends from all sections on the Government side who criticised the cuts as they affect the construction programmes. The Chancellor of the Exchequer quite rightly said to the House that the Cabinet had a choice between making cuts of that nature and cuts in social benefits. Of course we had to make that choice and no one is entitled to duck that choice. But I believe that we made the wrong choice.

With regard to the construction programmes, it seems to me that we inherited, as a result of Lord Barber's cuts, a situation in which capital investment in the Health Service, the education service and other public services was already too low, but we have made it lower in successive public expenditure exercises.

If we have made one strategic mistake in our public expenditure policies, it was to rush ahead, particularly in our early months as a Government, in increasing transfer payments in the form of pensions, food subsidies, housing subsidies and the rest, at the expense of the essential fabric of our public services. When we are talking of those public services it is not simply a matter of making do with old buildings and old equipment a bit longer. The whole morale of the health service and the whole morale of the education service—there are many ex-teachers on these Benches who can testify to this—depend upon those who work in outdated, shabby conditions. At least there should be some light for them at the end of the tunnel in terms of improvement in the fabric of the service in which they are working.

We are talking here about how long people who are to live out the rest of their lives in geriatric wards or in mental hospitals must continue in conditions which should have been outdated years ago. We are talking about how long children in the deprived areas of our big conurbations, who need nursery education, will have to go without it.

I put it to the House that this is not only a matter of the construction industry. It is a matter of the public services, where I believe that we have made the wrong choice. But it is also a matter of the construction industry, and it is no use my colleagues on the Front Bench talking about industrial regeneration, for they ignore the problems of one of the most vital industries in this country.

The construction industry has been an easy target for cuts by successive Governments. It is an industry which I got to know quite intimately during the brief period when I was Minister of Public Building and Works. It is an industry which we can easily criticise in terms of its training record, its investment record, its research record, its safety record and many other things. But it has an alibi, of course, in the sense that the public, whether in national or local government or in nationalised industries, provide at least half of its custom, and its management cannot rely upon continuity. It is continually being messed about by rapid changes in Government policy. This has happened under both Conservative and Labour Governments.

Incidentally, if we are talking about industrial regeneration, the House should not ignore the item on the list of cuts referring to the nationalised industries. The exact effects of those have not been worked out and remain to be worked out. It will mean that the nationalised industries, representing between them some of the most vital industries in this country, will somehow or other be called upon to make decisions which they would not make on their commercial and industrial merits. This is not consistent with talking about industrial regeneration.

But if we are to look at the alternative, let us do so frankly. This means that we have to grasp the nettle of seeking at least a reduced upgrading during the next two months in terms of all national insurance benefits, including pensions and also public service pensions. I think that the right hon. and learned Member for Surrey, East and others from the Conservative Benches, if they are to attack this package, ought realistically to face up to the alternatives to a greater extent than we heard this afternoon.

Many of us have argued for years that the pensioners, the widows, the chronic sick and the unemployed should enjoy a higher proportion of the national product than they have enjoyed in the past. Certainly I have made many speeches on this subject, as have most Members in the House. If we were talking against a background of an expanding economy and had been in the position occupied by many other Western industrial countries in recent years, then certainly I for one would have said that those in work should make a proportionately high sacrifice for those no longer able to earn a living for themselves.

But we are not in that situation. The situation that we are in has been described by my right hon. Friend the Chancellor of the Exchequer, who has had a good deal to say about the overlap of the incomes of those at work and those out of work who are getting insurance benefits. The Chancellor said that about 20 per cent. of those at the moment getting unemployment benefit are getting a bigger income than they would earn at work. There is some dispute whether that is the right figure but there is no doubt that it is a substantial figure.

But I am not talking of that figure. That overlap will grow next year and the year after under present policies, because those at work are affected by income policy criteria, they are affected by inflation and they are affected by taxation. For those three reasons their incomes have tended to fall and are likely to continue to fall. Those in receipt of national insurance benefits and public service pensions have a statutory protection against inflation. Their increases are not subject to the criteria of incomes policy. Some benefits are also free of taxation. In other words, this overlap will grow, and we shall aggravate the situation in which the climate of our society is not one which encourages people to give of their best in everyday work.

Mr. Tom Litterick (Birmingham, Selly Oak)

I am listening intently to my right hon. Friend, but there is a point of factual accuracy that we must nail down, because it is of such monumental importance outside. The number of people who will actually be getting more money out of work than they would at work is very small. It is less than 50,000 at maximum. He therefore does a great disservice to the community in emphasising this point as if it were monumental and of growing social significance. It is not true—

Mr. Prentice

rose—

Mr. Litterick

Never mind the social security claimant hunters. My right hon. Friend is supposed to be a Socialist.

Mr. Prentice

I claim to be a Socialist, and I remember it being said that Socialism is the language of priòrities. I am not sure that inflation-proofed pensions for the wealthier element among the retired population are a priority for me as against improving some of our worst mental hospitals, geriatric wards and the rest. Concerning the 20 per cent. figure and whether it is right, I admitted earlier that there was a difference of view as to the correct figure.

But the main point I was making was that on present policies the overlap to which I referred will grow next year and the year after—except that my right hon. Friend the Chancellor of the Exchequer has said that this matter will be studied. That is something, and of course it needs to be studied. I will be brutally frank with him and say that I hope that studying will not mean finding out what the TUC will put up with and just doing that. The Government certainly have to consult the TUC, along with others, but the Government have to make the decision on priorities. No one else can do it.

If there had been a decision in the package to limit next year's upgrading in accordance with the current guidelines on incomes policy, the Chancellor would have achieved two things. First, he would have saved a great deal of money. Secondly, he would have prevented a situation in which the overlap will increase.

One other nettle that we should have grasped is that of the National Health Service prescription. It was fixed at 20p per item in 1971. In real terms it should be about 40p now and perhaps more during the period under discussion. I do not see any real hardship in asking the majority of my constituents to pay 40p or 50p per item for a prescription—something comparable with what they pay for a packet of cigarettes. The Health Service needs in my constituency—the replacing of some of our hospitals for instance—are more urgent to me than any small hardship that would be created by a change of the kind that I suggest.

My criticism of the package is not merely of the choice made but of the motives that lie behind the choices. There are two aspects. Looking through the measures the most obvious point is that none of them requires legislation and hardly any require statutory instruments. They were designed to avoid a situation in which we had to rely upon Labour Members of Parliament to carry through the legislation of a Labour Government.

My Left-wing hon. Friends criticise this package. They must honestly admit that they got away with more than they expected. In their position, a Government who mean to govern properly must from time to time lay on the line measures that they consider to be right. They must say to their supporters that they must back them here or they will look for support among the other parties and, failing that, that the country must be invited to elect a party which will face up to the challenges which confront our country. What we cannot justify is a shirking of the issues, and many of the issues have been shirked.

The second reason for distributing the cuts in this way is the excessive nervousness of my right hon. Friends about the reaction of the trade unions. The argument goes something like this—and there is merit in it: we need a further year—probably more than one year—of incomes restraint and therefore we need an updated social contract. Therefore, we must calculate these measures to give us the maximum chance of getting that social contract.

Of course we need a further period of restraint. We need to get the good will and understanding of the people that work in this country whether they are trade unionists or not. We should not underestimate the reserve of good will and patriotism among the people at work in this country. If necessary, we should say to the leaders of the trade unions that we expect them to appeal over the heads of the militants in the district committees—[Interruption.]—to the general rank and file at work. If the leaders of the unions will not do it, we should do it. [Interruption.] When we introduced the £6 limit in the summer of last year most people were amazed that we had waited so long because they were waiting for it. They were prepared to accept it if it was fair and relevant to the situation. They will accept considerably more as long as the message is fair and the leadership is determined.

In a sense, this debate is about leadership because, although we have rightly concentrated on our situation now at the end of 1976 and the measures that we are taking to get the necessary loan from the IMF, the background to our debate has been that for over 30 years the performance of Britain has compared badly with that of other Western industrial nations. That has happened under Governments of both parties, and Governments of both parties must share the blame.

There is a need for a new quality of leadership. When I say "leadership" I do not mean leadership in terms only of political leadership, and certainly not in the sense that some people suggest, that they wish that there were some charismatic figure, some peace-time Churchill, available to lead us out of our problems.

The hon. Member for Cambridge (Mr. James) wrote a book about Churchill called "A Study in Failure" which dealt with Churchill's relative failures as a peace-time Prime Minister. But in the peace-time politics of that time, and even more in the peace-time politics of the 1970s, it is not one charismatic leader that is required. It is not even the lead from Government alone that is required. It is a lead from politicians and people in positions of responsibility throughout our society—from managers in industry, leaders of unions and head teachers in schools, for example. They are the people who have responsibilities. But too many of them are suffering from a malaise by which they duck making decisions or dodge decisions whenever they can.

Somehow, we must shake ourselves out of that. It is up to us in the House, irrespective of party, to forget some of our traditional war games and to try collectively to find the answer to these problems and to help give a lead which will enable the British people to realise their potential and to work themselves out of this very difficult situation.

6.18 p.m.

Mr. Reginald Maudling (Chipping Barnet)

We have just heard an impressive speech delivered with great clarity, sincerity and courage. I am happy to have the chance to succeed the right hon. Member for Newham, North-East (Mr. Prentice) in speaking today although I am less happy in preceding him to the Back Benches. The speech of the right hon. Member was in the language of a personal statement and I shall therefore not comment on it in detail. We strongly agree that the Government were wrong further to cut defence in these circumstances. I also agree with the right hon. Gentleman that underlying all our differences about social expenditure, public expenditure and social welfare is the inability of the country's economy to expand. If we had had in recent years the expansion that other countries have had, none of these difficulties would be with us in the tragic form that it is at present. We listened with respect to the right hon. Gentleman. He has had many crosses to bear and we wish him well in the future.

The Chancellor of the Exchequer made clear that his main argument for the reduction of the public service borrowing requirement was to ensure a greater expansion of employment and output. I find the logic of that argument a little difficult to follow but it is now the formal, orthodox, financial view. No doubt the Chancellor of the Exchequer had to accept this cut in the borrowing requirement as part of the price for the IMF loan. Let us never forget that the price required by international finance for a loan to any Government escalates in inverse proportion to the confidence that the world has in that Government. The price is a reflection of the deep lack of confidence of the world in the present Government.

There is a case for saying that at the moment to recommend massive deflation for this economy is like prescribing ice packs for someone suffering from hypothermia. There is a strong case for cutting public expenditure but not for deflation. There is an inherent wastefulness in the public sector. Too much money is badly or wastefully used and too much goes to activities which hold back the private sector. These are the real and strong arguments for cutting public expenditure, not the argument of deflation for deflation's sake.

I should have been much happier had the Chancellor accompanied his cuts in public expenditure with substantial cuts in direct taxation, which I believe has priority. I agree very much with what my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said—that something more in the way of inspiration is required. The fundamental problem—it must be said again and again—is not over-spending but under-earning. We must increase the earning achievement of this country.

To this, to giving the inspiration, the encouragement and the incentive for this, the Chancellor made no contribution whatsoever. That is the fundamental criticism I make of the measures that he has brought forward. The simple fact is that chastisement without inspiration is not the way to lead the British people; yet that is precisely the mixture we have had from the Chancellor at present.

Many hon. Members wish to speak in the debate, so I shall not indulge in my criticism of the monetarist theories of the economy—another occasion will arise for that—save to say once again that I do not believe the monetary theories, or the argument that if the Government do not create money, there will not be any inflation. As a principle of logic, it may be impeccable. As a guide to action, it is in practice of very little value, because we are suffering from cost-push inflation based on social factors, new modern social factors, and one cannot deal with an inflation of that character purely by restricting the credit base—the DCE as it is now called.

Mr. Atkinson

Say it again for the sake of the right hon. and learned Member for Surrey, East (Sir G. Howe).

Mr. Maudling

I shall say it again and again for everyone's sake, because it is worth saying. If it were true that one could and should restrain inflation solely by cutting down demand in the economy, one would be condemning the economy to permanent "stagflation"—the famous word of Iain Macleod. The same is true in some ways of the borrowing requirement. It is surely wrong to condemn all public borrowing. Borrowing is part of the way that the capitalist system, whether public or private capital, has developed. The question is the ratio of total public borrowing to capital investment, on the one hand, and the savings of the nation, on the other hand.

I believe that the German borrowing requirement is probably greater in relation to the gross national product than ours; but the Germans can do that, because they have a Government in which the world has confidence and an economy which is expanding. If our public sector is taking too much, the real reason is not that we are over-spending there—although we are in many detailed ways—but that our total production has grown far less than it should have done.

After listening to the right hon. Member for Newham, North-East and knowing the pressure on the time of the House, I shall omit what I wanted to say further about international borrowing. I want to return to the theme about under-producing and the fact that the Chancellor's overwhelming failure has been his inability to make any contribution to the solution of this problem.

In this country we could produce so much more, and so much more efficiently, if only we could match our competitors. Many of the reports that we have seen in the last few weeks have said the same thing time and again. This is the answer to all our problems and priorities within the public sector and between the public sector and the private sector. The answer lies in producing as efficiently and as effectively as the Germans, the Japanese and the Americans. If we could do that—we have not done it over many years—all our problems would be so much easier to solve. This must lay within our own grasp.

There are two reasons for underproduction. One is inadequate capacity. The other is inadequate use of existing capacity. We suffer from both of those defects. In recent years there has been a shortfall in both the quantity and the quality of our industrial investment as compared with that of our competitors. By "quality" I mean quality measured in terms of profitability, which is the right measure of evaluating the quality of any investment.

The reasons for this shortfall of investment are complex, but, above all, surely the basic problem has been the lack of incentive for people to make that precise investment. In particular, there is a gross imbalance in our labour force between skilled and unskilled labour. We have a very grave shortage of skilled labour in many critical areas at a time when many people are unemployed or underemployed.

That is a problem that we must try to get right. We have known about it for years. In my Budget of 1963 I allocated a sum of, I think, £10 million for retraining in industry—one of the rare times when a Chancellor has volunteered expenditure—because it seemed to me essential to get our training going on a large scale. But not very much has happened.

We have an inbuilt resistance in Britain, both on the side of management and certainly on the side of the unions, to the transfer of skills and the creation of the new skills for modern demands. Unless we get this right pretty quickly, we shall continue to suffer from a grave lack of capacity to produce what we need.

However, more urgent and possibly more important is the inadequate use of our existing capacity. The simple fact is that British industry, man for man and machine for machine, produces far less than is produced in similar circumstances in other industrial countries. The second factor is that there is no inherent reason whatever why that should be so. If we are not producing as well as other people when we should be doing so, the reason surely must be lack of will, lack of purpose and lack of incentive. That must surely lay at the heart of our problems.

We have a low industrial morale in both management and the work force. What are the reasons? There are many. Many of them lie deep in our history and in recent developments in our whole national position. One of them, I am certain, is taxation. Whatever people may say about it, it is perfectly true that men do not work for money alone, but if men work hard and take on additional responsibility, if they find themselves heavily taxed, overtaxed as compared with people in other countries, they think that their effort is undervalued, they are discouraged and their morale is reduced. The great argument for reducing taxation is to restore the morale of the efficient worker and the efficient manager.

Another reason for low morale in industry in recent years has been the constant propaganda of the Socialist parties and of the Left wing against industrial management and against working in profitable industry, the constant reiteration of the idea that there is something clever about not giving of one's best and something wrong in trying to participate in an industry or enterprise that is successful and profitable. Hence the low morale in our industry, and hence, too, the reason why many of our best young peope go not into productive industry but into administration or the services.

Those are some of the reasons why morale in industry is low. Until we make a combined effort to stop the denigration of success and profit, until we check that denigration, we shall not restore the spirit of British industry and the production of British industry to the levels that we can achieve.

I hope that we can concentrate more and more in our discussions on what seems to me the fundamental issue—how to produce more, how to produce better, how to realise, through the spirit of a united British effort, the real value and inherent quality and power of Britain's industries.

6.28 p.m.

Mr. Sydney Irving (Dartford)

Like the right hon. Member for Chipping Barnet (Mr. Maudling), I should like to congratulate my right hon. Friend the Member for Newham, North-East (Mr. Prentice) on his speech this evening, I have known my right hon. Friend for over 30 years. The one thing that he has never lacked is courage. Whether or not one agrees with everything that he said tonight, most of us would concede that it was a very impressive speech. Some of us have sympathy with the difficulties that he has experienced in Newham. We hope that he will be able to overcome them successfully in order to remain a Member of this House.

Much of the Press reaction to the Chancellor's economic statement has been extravagant in language and critical in tone. Of course, this was entirely predictable, particularly from those people who wanted the Chancellor to swing the axe savagely without any concern for the upheaval and the social tensions that would follow. Some of the more responsible newspapers, however, made it clear that they were against greater deflation and were, perhaps, concerned that even the Chancellor's present measures might lead to a further increase in unemployment.

At least one chided the Opposition for refusing to acknowledge that the total cost of the cuts in the public sector borrowing requirement would be as much next year as they themselves had been advocating, and perhaps implied that they were more concerned with criticism than with the effect of the measures that had been taken.

Very few alternatives have been advanced. It seems that on this occasion the Cabinet has given more careful consideration to all the alternatives than ever before, and a number of members of the Cabinet who are not always in agreement with their colleagues have been generous enough to concede that all the alternatives and minority opinions have been given most detailed and careful consideration.

The one alternative which was canvassed more than any other was that of import controls. In my view, the consequences of import controls, or to put it more dramatically, of a siege economy, would be devastating. Retaliation would be swift and serious and would deprive us of some of our most important raw materials. This would have an immediate effect on employment and production.

Mr. Ian Mikardo (Bethnal Green and Bow)

Who has suggested a siege economy?

Mr. Irving

If my hon. Friend reads the Tribune and Geoffrey Wainwright's article he will see that it seems as if he does not talk about anything but import controls. But when one reads the remainder of the article one finds that it is not just a matter of import controls. The author suggests the closure of the Stock Exchange and the commodity markets, the direction of pension funds into Government securities, and the nationalisation of banks. I am certain that he was not concerned with import controls just to take on a marginal commitment.

Mr. Mikardo

Rubbish. Which constituency—

Mr. Deputy Speaker (Sir Myer Galpern)

Order. I will not allow sedentary interventions.

Mr. Irving

Many hon. Members wish to speak, so I shall try not to be drawn by sedentary remarks. Import controls would mean scarcity which would raise prices, and give a huge boost to inflation. With prices soaring, the possibility of a further period of wage restraint would be out of the question, to say nothing of the effect on industrial relations.

Several firms in my constituency are doing extremely well in the export business, but the paper industry, although improving, is one which has been affected by imports. However, I know that it would do no good if, in return for protection of the paper industry, my engineering workers were put out of business by retaliation against engineering products. Voluntary restraint could be increased and made even more effective in several fields, including the paper industry. I hope that the Department of Trade will renew its efforts through the EEC and other agencies to secure such agreements in fields in which our industries are most hard pressed.

The Manifesto Group, of which I am a member, said earlier this year that the twin and overriding aims of the Government and the country must be to curb inflation and to secure industrial regeneration. Without these there could be no sustained growth, or any attack on unemployment. We still believe that these should be the overriding aims of the country.

We drew attention to the urgent need to do something in the long term to deal with the weakness of sterling. Clearly, the IMF loan contributes to this process, but it is only a start. Important as it may be, support from our friends for a longer-term loan is essential in order to eradicate the weakness caused by the sterling balances and our rôle as a reserve currency. Elections in Germany and America, and even in Japan perhaps, have delayed a co-ordinated effort to help us, but it must be a major objective of ours to secure this support.

In terms of the resources of the countries concerned—our friends—even without formal arrangements the purchase of sterling in relatively limited amounts in a co-ordinated way on critical occasions could correct and stem falls in sterling and stabilise the currency at a realistic valuation. In the end, of course, we must stand on our own feet. The only way this can be done is by a dramatic improvement in our exports.

In some fields this improvement has already taken place to a degree which is not yet fully realised. I believe that the underlying position in exports is stronger than most people think. It has been masked by the anxieties about sterling and a surge in imports which was largely due to restocking. It has also been hindered by the failure of the American economy to expand. Two of these factors, the weakness of sterling and the lack of expansion in the American economy, will change, and this will provide a tremendous boost to opportunities for our exporters.

The reduction in the public sector borrowing requirement will make Government borrowing easier and will help to bring interest rates down, thus making investment more possible. While I believe that interest rates will fall, I am bound to say that there has been one factor about the last 18 months to two years which is significant. While the CBI and a number of industrialists have been oppressed by the difficulties, many of which I am sure are real, others, including a number of companies in my constituency, despite the difficulties, have had the confidence and the courage to go ahead. Many firms are exporting as fast as they can produce the goods and are doing so profitably. I congratulate these companies on the great efforts that they have made.

Many of us, including the Prime Minister, believe in a mixed economy with a private sector which must be profitable. We are encouraged by the Government's expressed intention to improve incentives in the spring Budget. But in our present circumstances all the necessary changes cannot be implemented in a short space of time. Therefore, I hope that companies will accept the assurance of the Prime Minister and others and will have faith in the future and make the maximum effort now—an effort which the country needs desperately if it is to win the battle for survival in which we are all involved. The tax burden on lower paid workers is far too heavy and I hope that the Chancellor will give them some relief in the April Budget.

The other essential feature if we are to progress is the negotiation of the third phase of the incomes policy This will be a critical year and the third phase is essential. It is important that negotiations start as early as possible, because the task will be difficult and complicated and the new agreement needs to be transitional in order to allow greater flexibility to give release from many pressures which have built up in the wage structure in the past 12 months. The TUC has shown a remarkable capacity for responsible action, but it will be under considerable strain this year. I believe that there is good will and understanding which can secure a satisfactory settlement.

The additional amount to be made available to the National Enterprise Board is welcome, but if present practices are continued it may be of little effect. A small company making machine tools in my constituency has made a tremendous effort after a difficult spell. It is exhibiting in Canada, America, Birmingham and elsewhere, and it is now securing orders at an extraordinary rate. Despite this, after a negotiating period of 12 months the NEB was able only to offer a loan at a 19 per cent. rate of interest—2 per cent. higher than that available from the bank. The company felt, rightly, that it could not subsidise the National Enterprise Board in this way.

Several commentators at the weekend asked how long this Government could last. I am sure that the Government are more durable than their opponents give credit for. One commentator was right in saying that the Government will survive as long as they keep their nerve and maintain their support in the House of Commons. I believe that all hon. Members on these Benches are aware of their responsibilities in this respect. Many of us dislike parts of the package. For some, like me, the cuts in defence are most distasteful, and as a member of a local authority I find that the curbs on local government are most oppressive.

As a Co-operative Member, I am aware that the slackening of trade in 1977 and 1978 will make it much harder to contain costs in distribution as overheads increase as a percentage of sales. The cut-back on bread subsidies will leave less for spending on other commodities, and this will bear harder on lower income groups.

Nevertheless, in the end I believe that there is no alternative strategy which is likely to succeed. I think that the Government package should be given a chance, and I hope that the House will give it its full support.

6.40 p.m.

Mr. Robert Rhodes James (Cambridge)

It is customary for hon. Members addressing the House for the first time to seek its indulgence. I believe that I have more reason than most hon. Members to seek that indulgence because many hon. Members present, including the right hon. Member for Dartford (Mr. Irving), have sought my advice on procedural matters in the past when I was an Officer of this House, and many were unwise enough to take it. Their emotions must be comparable with those of Horatio on the battlements of Elsinore: What, has this thing appear'd again tonight? It is also usual for hon. Members to refer at length to their constituencies. I have noted that if the constituency is a major industrial city, its importance is such that if by some cataclysm it were destroyed, the hopes, wealth and future of this nation would be irretrievably destroyed. If it is a county constituency, it is the most beautiful constituency in the kingdom. If it is a seaside constituency, it is the only place for sensible people to have their holidays. I often found it difficult, as an Officer of the House, to equate these romanticised versions with the grim realities.

This scepticism stemmed from many years ago when I discovered an hon. Member in the research section of the Library looking up his constituency. This was a rather rare visit for him, because his attitude to his constituency was similar to that of the late Colonel Brabazon who, when posted to a regiment of which he disapproved, remarked: "I can never remember their name, but they wear green facings and you get at 'em from Waterloo."

The city and the university of Cambridge require no introduction or description, as their achievements and distinctions are already familiar to the House. It is a considerable tribute to the tolerance of the electors of Cambridge that they have forgiven me my youthful indiscretion of being educated elsewhere. Until three months ago, I might have been tempted to describe the University of Cambridge as being second to one. It is amazing how educative politics are. I have seriously reconsidered my position on this issue and I have developed a sympathetic pity for my hon. Friend the Member for Oxford (Mr. Luard). Although he sits on the Labour Benches he has always been, and I hope he will always be, my hon. Friend.

I am particularly honoured to have the opportunity to represent Cambridge because I follow an hon. Member who was deeply esteemed in my constituency and in this House, David Lane. He has taken on one of the most difficult and certainly one of the most thankless posts in the public service. In Cambridge we are proud of him and grateful to him, and we wish him all success in his difficult task. I am sure that many hon. Members from both sides of the House will fully share this view.

There will be other occasions on which I shall have the opportunity of drawing to the attention of the House certain matters of particular relevance to my constituents. There is a certain aspect of the Chancellor's proposals last week which has a considerable relevance to a city in which private enterprise, small business men and the self-employed are crucial to its character and prosperity. I find it difficult to detect anything in the right hon. Gentleman's proposals which has any direct relevance to the problems of these crucial sectors of the national economy. Not only do these people feel that they are the victims of benign neglect, but they feel that Whitehall does not understand their problems or their potential contribution to the resolution of the problems which face us all.

They have raised with me certain questions which I want to raise with the Minister, constructively and seriously. Cambridge is fortunate in that it does not suffer yet from the severe unemployment that afflicts other parts of the nation. But we are feeling the icy chill of the collapse of the pound, of appallingly high interest rates, a rampaging inflation, of high taxation and the abrupt decline in national confidence.

My constituents do not understand why the Government continue to pour public money into the temporary employment scheme, which can only be a short-term measure, whereas, in contrast, a programme of low-interest loans to small firms would not only solve the serious cash-flow problems of such businesses, but create long-term employment. Meanwhile, many smaller businesses in my constituency are being forced to the edge of bankruptcy, not least the construction industry which was referred to by the hon. Member for Liverpool, Walton (Mr. Heffer) and others. Certainly these companies cannot consider further employment in the present situation. Even the invaluable Cambridge police cadet programme, which provided employment and the prospect of a good career, has had to be abandoned. My constituents are genuinely baffled by these strategies and results.

I should like to put to the Minister certain positive and constructive proposals to which I hope he will listen and which I hope he will take seriously. First, I suggest that we should now seriously reexamine the practical possibilities of a proposal which is not new and which has often been mentioned by my hon. Friends, notably my hon. Friend the Member for Basingstoke (Mr. Mitchell), namely, the establishment of a small business commission which could have a major part in the negotiations in which at present the CBI, the TUC and the Government are the sole participants. Obviously, this must be a voluntary organisation, but its establishment requires positive Government support and encouragement which I hope will be forthcoming.

Secondly, I recommend the reintroduction of and much greater publicity for the former ECGD small exporters' policy and the introduction of practical measures to provide vital pre-delivery finance for exporters. If the Government are serious about increased exports from the private sector—and I am convinced that they are—they must recognise that there must be greater positive encouragement and assistance.

This also requires a much more generous Government attitude towards the threshold for grants and subsidies. Many small businesses do not qualify for these and I suggest that it is in the national interest that they should. I should also like to stress to the Minister the urgent need for the simplification of VAT and a reduction in form-filling, which particularly affect and afflict small businesses. The VAT threshold for the self-employed should be increased from £5,000 to at least £9,000 a year.

Few of these suggestions involve an increase in Government expenditure. What they involve and require is a redeployment of existing expenditure to help the private sector. They could lead in the long run to a reduction of public expenditure by the increase of wealth in the private sector. The private sector is asking for encouragement and incentive.

All that my constituents ask for is to be given a fair chance and some positive encouragement. The right hon. Gentleman and all right hon. and hon. Members must realise that the combination of high taxation, increased employers' insurance contribution, inflation, penal interest rates and restrictive legislation is causing havoc in the private sector, and that these items constitute a recipe for national disaster. We are, after all, talking about 6 million jobs. What the people are asking for from the Government—whether this Government or any other—is confidence and incentive, not just financial incentive, although that is important, but the kind of incentive that involves living in a country where success, hard work, achievement and contributions are admired and rewarded.

I put this point to the House in deep seriousness. I look back over a period of considerably more than a decade in which we have been deluged with plans, commissions, forecasts, strategies, Budgets, and legislation in which we have been exhorted again and again in fine speeches to work harder, save more, invest more; but we have so seldom been given any real incentive to do so. We come to the point of wondering whether any politician is genuinely interested in the future of private enterprise, the individual and the self-employed. There used to be a time when such people were regarded with admiration in our society and were given every possible encouragement. I should like us to get back to that situation.

The resentment of the small business man, the individualist and the self-employed is not at all confined to any Government or any party. Over the years, all too many promises have been given and all too few have been fulfilled. When it comes to the crunch, the big battalions always carry the day, to the tragic detriment of what is our greatest national asset—the desire of individuals to chart their own course, to earn a good livelihood through their own endeavours and to hand on to their children solid achievements which may give them a better start than their parents had.

I sometimes wonder whether hon. Members and Government officials ever think about the baleful effects of death duties and the capital transfer tax on this absolutely honourable and very human ambition. I also sometimes wonder whether our economic geniuses ever trouble to consider what is the inevitable fate of any society that treats capital as income.

If I emphasise these points it is not simply because they are of constituency interest. It is because I passionately believe that such individuals created the wealth of this nation, that they have saved it twice in this century, and that, given a fair chance, they could save it again.

The right hon. Member for Newham, North-East (Mr. Prentice) referred to the fact that I am a historian. As a historian, I am frequently oppressed by the fact that the people who really made this nation, who really are this nation, are the sort of people who never appear in history books and yet they provide the contribution, courage, sacrifice and hard work which made this nation and which can save it in future.

I should like to refer briefly to another aspect of the Chancellor's proposals which was also touched on by the right hon. Member—the proposed reduction in overseas aid. I emphasise that I consider that we tend to speak too much about overseas aid in purely financial terms. I always thought that the Pearson target of 1 per cent. of gross national product was not only unattainable but a dangerous concept. We have seen in this country and elsewhere the folly of claiming that great and profound social problems can be met and resolved by the mere spending of money.

Similarly, it is our bitter experience that, after the expenditure of truly vast sums by the developed countries over the last 30 years to the developing countries, the general condition of the latter is little better and in most cases considerably worse than 20 years ago. The reasons are many. One of them lies in the Western attitude to aid. Giving money to developing countries may make the donor feel good and salve some consciences, but it is too easy, and it is also very inefficient. Money is vital, but I emphasise from my experience, particularly in the United Nations, that it is only one part of a deeply complex issue.

What is the situation we confront? We inhabit a planet in which more than two-thirds of the population live in conditions of deep and tragic poverty while a minority live in relative affluence. It is a planet in which 10,000 die every day from malnutrition or its effects. It is a planet in which more than 200 million children suffer from serious dietary insufficiency. It is a planet of whose scientific and technological resources over 98 per cent. are in the developed countries. It is a planet of appalling differences in incomes, in health, in education, in life expectancy, and in hope.

One could go on with statistics, and, indeed, to anyone of imagination and compassion those statistics are numbing and appalling. Those who have had experience of trying to do something practical with the reality can only tell the House that the reality is infinitely more terrible than even the imagination can conjure up.

More than a century ago, Disraeli, referring to this country, wrote of the two nations—the rich and the poor—and warned of the perils to our society if the situation were allowed to continue. Today we have two worlds. To adapt Lincoln's famous phrase, a planet divided against itself cannot endure.

Apart from the ever-present and fearful shadow of nuclear disaster, I regard this ever-widening gulf between the affluent few and the impoverished many as the most profound threat to all our futures. One can put the matter at its lowest and bluntest—that beggars make bad customers—or be reminded of Keynes's bitter dictum that there is no guarantee that starving people will die quietly.

One can talk of the matter purely in cold-blooded and nationalistic terms—that it is in our national interest to attempt to reduce this terrible chasm between the minority and the majority. Perhaps that is the way to look at the situation. Certainly I see no way in which we can achieve reasonable political stability on this planet so long as there are these glaring economic inequities between the few and the many—and in the establishment of that political stability no nation has a greater interest and concern than we have. I put it at that level.

I could go on perhaps to talk about the enormous value to this nation of exports to the Third World and about the enormous potential of that market. That argument is valid and realistic to many people, but it avoids something rather more profound to which the Chancellor referred.

Few people in this country or in the West as a whole have any realisation of the awesome scale of the problems we confront. Let us take the example of food. The world will have to double its production of food over the next 25 years if we are to maintain the present rather abysmal standards that we have. That fact is in itself an awesome challenge. Furthermore, that food can only be produced in the developing countries, and in the main in areas which do not now produce food.

But the growing of food is the easiest part. We are talking about large areas of the world which do not have the fundamental logistics that we in the West take for granted—reasonable communications, roads, transport, housing, health facilities, education, marketing arrangements, capital and basic technology. None of these things exists in such areas. One has to start absolutely from scratch.

Thus, the food question is only one part, although a vital part, of an infinitely larger and more complex issue. I remember vividly when I was serving at the United Nations trying to deal with the situation in the Sudano-Sahelian area of West Africa—an area almost the size of North America, with no communications, no roads, no airstrips. To my knowledge, 100,000 people perished. We were unable, although we had the food and the equipment, to do anything about it, because we were dealing with an area which was, to all intents and purposes, empty and a desert.

I do not know anyone who has been and is involved in the development effort who is not deeply frightened by its scale and who is not convinced that we are approaching an appalling human catastrophe, of which the Sudano-Sahelian disaster was only a foretaste. The scale is indeed so awesome that it makes many people feel utterly helpless and sit back as though waiting for the advent of the Black Death.

I understand but do not share such attitudes, and I do not think that this House should share them. For the key to meeting this problem is political will. When that can be created, as it was in the case of the elimination of smallpox over the last decade—itself an astonishing and remarkable example of human endeavour—there is almost literally nothing we cannot do if Governments are determined to do it. The recent establishment of the World Food Council and the International Fund for Agricultural Development illustrates what can be done when the political will is there.

The record of this nation over the last 20 years in development matters demonstrates a remarkable contrast between individual and governmental concern. We have voluntary organisations in Britain which have done more to create respect and gratitude for this nation than any Government have. As I know from personal experience, the enthusiasm, professionalism and dedication of the British non-governmental volunteer organisations have made a most profound impression throughout the world and have won us a large number of new friends.

In marked contrast, successive British Governments have been depressingly bereft of ideas, initiatives, or indeed any serious indication of comprehension of the extent and importance of the problem. I am glad to make an exception in the case of the commodity initiative last year. It was the creation of Sir Donald Maitland and was taken up, to their credit, by the present Government, particularly the right hon. Member for Huyton (Sir H. Wilson) when he was Prime Minister. That began a process of debate, dialogue and negotiation which was of enormous benefit. We have obviously not yet reached a solution to this enormously complex question, but it was a very good example of a proposal which was taken up and carried forward and which could have enormous benefits for this country, the Commonwealth and all the nations involved. The Lomé Agreement was another excellent example. But when we look through the records we find that such examples of initiatives and ideas from the Government have been depressingly few.

I very much agree with what the right hon. Member for Newham, North-East said. For a long time in the post-war period we have been seeking a rôle in international affairs. I am not arguing that it is to be found in development matters. I believe that with a stronger economy and stronger defence we shall be in a better position to have influence in the affairs of the world. But the House and the nation under estimate the respect and regard with which this country is treated abroad, and the hunger which many people have for the ideas, idealism and experience which we can provide and which I have found in individuals working in the United Nations and voluntary organisations. I know of their extraordinary contribution and the respect and trust they have gained not only for themselves but for this nation.

I repeat that giving away money is not in itself the answer. It has tended to create a kind of national backlash here and in the United States against the whole concept of overseas aid.

I hope that the Chancellor's cuts, which I regret, may at least give us the opportunity to begin again a serious dialogue and debate about the whole issue of where we are going and what we are trying to do in development matters. I am not suggesting another dreary and interminable Royal Commission, but I am suggesting a debate in which all the political parties, the voluntary organisations and industry are involved. Here is a clear case for national interests right across the board being consulted and considered.

I hope above all that this may be an area that we keep out of party politics, one in which we can provide continuity, whatever the vicissitudes affecting the House and the country. I hope that we may play a full, honourable and practical part in meeting this human challenge. Before specific cuts are made in the programme there should be consultations with the Opposition parties, the voluntary organisations and industry, so that we may together do all that we can to minimise any ill-effects that the cuts may have. I think particularly of the most seriously affected countries, and, most of all, those in the Commonwealth.

I remember vividly Mr. Speaker Morrison once remarking that the most ominous words in the English language were "In conclusion, Mr. Speaker." I shall say finally just this, that in thanking the House for its kindness in listening to me I should like to convey to you, Mr. Deputy Speaker, and the House my sense of pride and happiness at being once again a servant of the House.

7.4 p.m.

Mr. Ron Thomas (Bristol, North-West)

I congratulate the hon. Member for Cambridge (Mr. Rhodes James) on his maiden speech. I am sure that we shall hear a good deal from him in the months ahead. I understand that he was a Clerk in the House for about 10 years and then entered the academic world. Therefore, he could well be able to advise us on hybridity rules and one or two other matters. He may also have read what the Cambridge School has to say about the economic situation, and may well tell us something about that.

I offer the hon. Gentleman a word of warning. When he mentioned Keynes I saw many of his right hon. and hon. Friends wince, because most of them have not read much economics after nineteenth-century economics. They are still on the quantity theory of money and believe in nineteenth-century economics, such as that of Ricardo. I do not think that they have yet reached Keynes. There are very few Keynesians or those who appreciate the writings of Keynes on the Conservative Benches.

I wish to speak to the motion in the names of 45 of my hon. Friends. It is: That this House is appalled at Mr. Chancellor's Statement on 15th December, because the package it contains in no way reflects Labour's priorities and policies; notes that the proposed cutbacks in the construction industry will undoubtedly create further unemployment and are desperate news for the homeless, is particularly disgusted at the shabby cut in overseas aid; notes that the package bears no resemblance to any clear and coherent economic policy; and concludes that all the available evidence shows the desperate and urgent need for a socialist strategy. One thing that divides the 45 signatories and many others on the Labour Benches from our Front Bench and Opposition Members is that we believe that an objective examination of the British economy over the past two or three decades since the last war shows clearly that the so-called free market mechanism has failed miserably. What divides us is the belief, expressed once again today by my right hon. Friend the Chancellor of the Exchequer, that if my right hon. Friend creates the environment by public expenditure cuts and alterations in taxation, if he tinkers about with demand and so on, the private sector of the economy can regenerate British industry, increase exports and bring about more capital investment, economic growth and so on. If anything has been shown to be completely false, it is that supposition.

The NEDC reports—"Conditions Favourable to Faster Growth" and so on—produced throughout the period of the 1964–70 Labour Government are well worth reading. They said the kind of things my right hon. Friend is regurgitating now, that if only we take certain steps, the private sector can regenerate the economy. There is a belief that we can do it with no real planning, with no real intervention. Such things are said in complete ignorance of the rapid changes that have taken place in the structure of British industry.

Dr. Jeremy Bray (Motherwell and Wishaw)

My hon. Friend is on a very good point. Is it not even more distressing to find that the same industries—ferrous foundries, machine tools and electric motors—are still being talked about?

Mr. Thomas

My hon. Friend is absolutely right. We also had a NEDC report on imports of manufactured goods back in 1965 or 1966. Arguments of the same kind were being used then. There was a belief that if a certain environment were created, the private sector would take off. Those reports predicted the levels of economic growth, exports, capital investment and so on. The fact is that a few large companies now control the level of capital investment and with it levels of employment, prices, exports and economic growth.

We do not, of course, see these public expenditure cuts in isolation. We see them as part of an economic strategy which we reject. But we also see the cumulative effect of these cuts. For the Labour Party and the Labour movement, one of the most tragic aspects of the cuts is that the right hon. and learned Member for Surrey, East (Sir G. Howe), as Front Bench spokesman for the Tories, was able to say last Wednesday to our Chancellor of the Exchequer "You have done in three instalments what we would have done in one." That, for me, is the biggest indictment of these policies.

But the Chancellor of the Exchequer has moved from argument to argument. He has spoken of the need to shift resources out of the public sector and said that these would find their way into export creation and capital investment creation. He said that again today. He also said that from next year the cuts were to try to bring down the public sector borrowing requirement, but that the year after he feared that there would be pressures on the economy because of increasing exports and capital investment and that we had to cut our public expenditure in order to turn resources in those directions.

When shall we ever learn that there is no mechanism in our capitalist system which can direct resources and cuts in the public sector into exports and capital investment? There is no mechanism to do it. Equally, when will the Chancellor of the Exchequer realise that British manufacturing industry in many cases is operating well below 50 per cent. capacity? When will he realise that there are hundreds of thousands of workers who have been sacked or made redundant from manufacturing industries and who are now in dole queues?

In essence, we could increase our exports and our capital investment and we could go for a rapid increase in import substitution still without having a great deal of effect on the level of unemployment in the British economy. I think that the Chancellor of the Exchequer still believes that we face some kind of unique and transitory situation of unemployment. If he would only look at the unemployment figures over the last two decades he would see that each time that we have come out slightly from a depression we have left behind a higher level of unemployment.

The malaise has bitten deeper each time that we have gone down into a depression. We are not dealing with a unique and transitory situation. We are dealing with a deep-seated malaise in our economy which cannot be cured simply by saying that we shall create a certain environment and let private enterprise do the job. Private enterprise has failed time and time again. Once again we hear the right hon. and learned Member for Surrey, East call to the Chancellor of the Exchequer to stimulate and revitalise these nineteenth century innovating entrepreneurs who are supposed to be waiting for a slight reduction in our tax rates to rush in with capital investment. What did they do between 1970 and 1974 when the Tory Government gave them all that they asked for, including wage restriction, the Industrial Relations Act, tax handouts—the lot? We did not get the capital investment. We got overseas investment and we got the proliferation of secondary and God knows what banking and financial institutions. Money went overseas and into land and property speculation.

We have tried that time and time again. Therefore, we believe that the time has come to say to the Government, even at this late hour, that there is no possibility of dealing with the deep-seated malaise in our economy without a fundamentally different economic strategy.

The Chancellor of the Exchequer then talks about the public sector borrowing requirement. It is admitted already that part of that PSBR is for capital investment in publicly-owned industries. It seems to be praiseworthy if ICI borrows money for capital investment. If the British Steel Corporation, the National Coal Board and, soon, British Aerospace borrow money for capital investment, it is all wrong.

The Chancellor has admitted time and time again that our public sector borrowing requirement figures are distorted vis-à-vis other countries because we include a part of the public sector capital investment programme. Seen in terms of gross domestic capital formation, nearly half of it is in the public sector. We ought to be grateful that the public sector invests in that way. We should be in a fearful economic mess without that capital investment in the public sector.

Another big chunk is because of the indefensible system which pays almost 1.5 million working people to be in dole queues. We have heard time and time again how much that costs. Is it £3 billion, £4 billion, or some such figure?

A sizeable chunk goes in the continued handouts that we give to the private sector, not least in terms of stock relief. Is that now running at £2 billion or £3 billion?

It seems to me that we have already dealt with the public sector borrowing requirement. We know that other countries in Europe are in the same kind of position. But if they follow the militant monetarists, whose policies are advocated by the Opposition, and equally they adopt cuts of this kind in public expenditure, we could find ourselves in Europe heading for a depression which would make the 1920s and 1930s look like an economic miracle. They all seem to be taking the militant monetarist attitude which is now adopted by our Government.

The Chancellor has said of the public sector borrowing requirement that there has been no difficulty in borrowing this money—and he told us today that £500 million went almost overnight—because outside the banking sector there is plenty of money still slopping round. So to be cutting back at this stage really can be pushing this economy of ours into a far worse depression than we have ever known.

Government supporters have demanded continuously a different strategy, a Socialist strategy. The Chancellor responds to that at one stage by talking about a seige economy, but at once he tells us that we are in a seige economy situation. But I believe that, as time goes on, more and more people see how right are some of the major parts of the policy that we have demanded.

The Chancellor talked about import controls and suggested that we were demanding import controls right across the board. Let us look at the actual figures in terms of imports. Taking last year, out of an import bill of about £24,000 million, almost half—£l2,000 million—represented imports of finished and semi-finished manufactured goods. If we deduct oil from the import bill, the cost of imports of finished and semifinished manufactured goods was 60 per cent. of the total. Ten years ago, it was 30 per cent. In the first three-quarters of this year imports of finished and semifinished goods are up to almost £11,000 million against £8,300 million over the same period last year. Even to cut that by 20 per cent. would make a sizeable contribution to our balance of trade. That would not be a siege economy.

At the moment, it looks as though our imports of finished and semifinished manufactured goods this year will cost between £15,000 million and £16,000 million. If they were cut by a quarter, that would save £4,000 million—almost twice the amount that we are crawling to the the IMF to borrow.

Between 1970 and 1975, according to official statistics, which are well undervalued, United Kingdom private investment overseas amounted to almost £7,500 million. In the first two quarters of this year there was a further £900 million. It looks as though, by the end of the year £2,000 million will have gone this year alone in capital investment overseas—again almost as much as we want to borrow from the IMF.

Then let us take military expenditure overseas. From 1970 to 1975 it amounted to more than £2,600 million. So far this year it has amounted to between £800 million and £900 million in hard-earned foreign currency. In the last three or four years on our military commitments overseas we have spent in foreign currencies the equivalent of the loan for which we have had to crawl to the IMF.

It is argued that if money is invested overseas the profits will come rolling back. That does not work. According to the official statistics for 1970–75, total dividends remitted from overseas direct investments, including profits from oil and subsidiaries, amounted to just over £2,000 million. But almost £4,000 million was left unremitted. According to 1947 legislation firms are supposed to remit two-thirds of their profits. They did not. They hardly remitted one-third of their profits back to the United Kingdom. If they had remitted the full amount, it would have made a contribution of £2,000 million towards our balance of payments between 1960 and 1975.

Capital investment depends essentially upon effective demand and capacity. Effective demand does not exist in the British economy because wage restraint is cutting into the real disposable incomes of millions of workers. I say to my right hon. Friend the Member for Newham, North-East (Mr. Prentice), who spoke about the overlap situation, that there is an overlap between social security payments and wages because too many employers pay appalling wages and because of cut backs due to pay policy.

Effective demand is absent from the economy. There is plenty of capacity and therefore the only way forward is by expanding the economy. Otherwise there is no hope of bringing employment below the million mark. Some Labour Members have put forward an alternative strategy, advocating cuts in defence and imports of manufactured goods, investment overseas and military expenditure. We advocate the need to marshal overseas assets, value at over £90 thousand million, for the defence of sterling, the introduction of planning agreements—there is not one as yet—and the extension of public ownership.

The worst line with which the Tories have so far been able to get away and which they have been able to make people believe is that our economic and industrial problems are due to Socialist policy. Apart from measures affecting aircraft and shipbuilding, I have to think hard to recall a Socialist measure that has been put through this House during the last couple of years.

It is because we are pursuing the Tory policies adopted by the Opposition when they were in office that we are now in difficulties. Those policies failed the Tories and they will fail again. I say to the Chancellor "For God's sake, even at this late stage, look at our conference decisions, what the TUC is advocating, what the national executive of our party is demanding, and what the Tribune Group is advising" and I urge him to change his policies.

7.24 p.m.

Mr. Edward du Cann (Taunton)

I hope that I shall do no harm to the hon. Member for Bristol, North-West (Mr. Thomas) in the eyes of his hon. Friends and colleagues on the extreme left wing of the Labour Party if I say that I agree with him in respect of three matters. First, there is a case for import controls to some extent, although I would personally advocate import deposits. Second, I agree that it is intolerable that we should now be considering this programme of cuts, although my reasons for believing that are different from those of the hon. Gentleman.

Third, I am glad to make common cause with him, as another hon. Member representing a West Country constituency, in paying tribute to the outstanding maiden speech of my hon. Friend the Member for Cambridge (Mr. Rhodes James). We all enjoyed that speech. We enjoyed its wit as much as its great sense, and many of us were struck by the way in which the hon. Gentleman spoke about overseas aid and made common cause with the right hon. Member for Newham, North-East (Mr. Prentice), who I thought made one of the most remarkable speeches I have ever heard in this House. Not only was what the right hon. Member for Newham, North-East said remarkable for its courage, but what struck all hon. Members, politics apart, was his obvious integrity.

Mr. Martin Flannery (Sheffield, Hillsborough)

On the matter of the maiden speech of the hon. Member for Cambridge (Mr. Rhodes James), which dealt with poverty and misery throughout the world, the Chancellor of the Exchequer, according to these projected cuts, has cut no less than £50 million off overseas aid. Will the right hon. Member for Taunton (Mr. du Cann) explain to this side of the House how, in one breath, he can say that he wants to help all these people overseas and then connive at the miserable cut that our Government—sadly for all of us—are about to make?

Mr. du Cann

I do not connive at any action of this Government. I said that I make common cause with the hon. Member for Bristol, North-West to the extent that I am opposed to a number of the cuts. Every hon. Member in this House knows that I have tried, in practical terms, to do something about improving standards of living in developing countries. I like to think that I have made a practical contribution.

I have one short point left to make which goes to the root of all our economic problems. Over a very short period there have been eight previous Budgets introduced by this Chancellor. There has always been personal good will towards him. I remember saying, during a speech that I made following an earlier Budget, that his success is our success and that, indeed, his success is the nation's success.

But what is the position on this anniversary, on this ninth Budget occasion? The value of the pound sterling has declined from $2.30 to $1.67. In terms of production we are on the equivalent of a three-day week, our share of world trade continues to decline and our balance of payments deficit continues to increase. Our standard of living—to which the hon. Member for Bristol, North-West referred—rises less rapidly than that of other nations—if at all. Unemployment will certainly rise further. That is the catalogue of the Chancellor's achievements, and what a shocking record it is.

The statistical evidence is clear and overwhelming. Now we have received almost the final humiliation. The last available overseas borrowing from the IMF is being doled out in instalments because it does not trust us with a single payment. Our compliance with the terms of the loan is to be subject to periodic audit because the IMF does not trust the Chancellor's statement of intention.

So, the position has deteriorated and continues to do so. The real anxiety that we all share is to know where it will end. It is tragic that, as my right hon. Friend the Member for Chipping Barnet (Mr. Maudling) said, this Budget makes almost no constructive and certainly no imaginative contribution towards improving the situation. Nothing has been done to increase industrial capacity.

The Chancellor quoted from the Economist this afternoon. It was that newspaper that said that this is still the best country in the world in which to run a loss-making industry and that it is the worst country in which to make profits. There is no encouragement to managers or to those working on the shop floor, as my right hon. Friend the Member for Surrey, East (Sir G. Howe) pointed out.

That would all be bad enough, but what is worse and inexcusable is that the professions, businesses and workers are still expected to carry the burden of Government expenditure. All experience clearly indicates that that expenditure is smothering the nation. It is a burden on all form of commercial activity. It is the prime cause of inflation, nor only inflation today but a built-in guarantee of continued inflation tomorrow.

The excess of expendiure over revenue leading to the request to borrow to finance it puts an immense strain on the financial capabilities of this country. The airy way in which the Chancellor announced that another tranche of gilt-edged stock had been disposed of was misleading.

There may be good reasons for borrowing. For example, it could be wise to borrow to finance capital investment. But the complaint one is bound to make which cannot be contradicted is that borrowing now represents for too high a proportion of expenditure. For every £5 spent, £1 is borrowed. Thus, the private sector is starved of capital.

I do not believe that investment is the Holy Grail, and our investment record has not been too bad in the last few years. The hon. Member for Bristol, North-West and my right hon. Friend the Member for Chipping Barnet had it about right when they said that the real problem for British industry was the under-use of capacity. None the less, investment is the seed corn for the future, and it is crucial that it should be kept at a high and profitable level.

Interest rates are forced up to insupportable levels and are a discouragement and a disincentive. If continued for too long, high interest rates will in the end bring activity in many parts of the private sector to a complete stop. There is much evidence of strain. The construction industry is one such industry in which this shows.

We must be clear that we shall not obtain any export-led boom to which the Chancellor looks forward unless the home market is kept continually healthy and strong.

I am not an opponent of public expenditure for its own sake, and never have been. I agree with the Prime Minister that many aspects of public expenditure can be beneficial.

I am a proponent of two things, The first is that in the British Parliament we should have effective systems of control. We do not have such systems. Second, I am a proponent of obtaining value for money. Alas, again Parliament in my judgment does not sufficiently insist on this.

We do not debate the issues which are of greatest importance, as the right hon. Member for Newham, North-East pointed out. We do not discuss how much of the nation's resources should be devoted to public expenditure and how much to private expenditure. We do not debate often enough the policy alternatives. We do not debate priorities. We do not adequately scrutinise Supply, and we have not developed in Parliament the right institutions to monitor public spending.

In Whitehall the Civil Service has advanced, as the complexity and total of Government spending has mounted, so much faster than we have in the Commons. The servant has done better than the master. No wonder there is such cynicism among the public about the way in which we conduct our activities in this House. Indeed, The Times put it well the other day when it said that we had a Rolls-Royce of a machine but drive it like drunken drivers.

Some of us have advanced a number of suggestions as to how the control could be improved. I have advanced a suggestion that we should revise the Exchequer and Audit Act 1866 which established the Public Accounts Committee, of which I have the honour to be Chairman. I put forward the suggestion that we should amalgamate the Expenditure Committee and the PAC.

I do not know whether these are the best suggestions we can find and I do not suggest that they are. What I complain about is the fact that the need to control public expenditure remains, and is obvious. Yet still nothing continues to be done.

For these reasons, I thought it right a day or two ago to bring this matter to the attention of the Prime Minister personally and to suggest to him that he might like to consider the establishment of a Select Committee of senior Members of this House. I refer to a number of hon. Members, including some who now occupy the Labour Benches, such as the hon. Member for Nottingham, West (Mr. English), who is a distinguished Chairman of a Sub-Committee of the Expenditure Committee. That Select Committee should be charged to report to the House promptly as to how we can devise machinery for controlling public expenditure in a better manner.

Since we are debating these cuts—cuts which none of us likes to see—perhaps I might be allowed to quote from my letter to the Prime Minister which I hope will put the matter in perspective: I fear that the present methods are leading to cuts in expenditure of a kind which will be harmful … On the question of the abolition of the regional employment premium, which will hurt us in the West Country, and the effect on the construction industry, which the Chancellor mentioned yesterday, and the cuts in defence, I hope that you will agree that for the House to attempt to get better value for money is much the wiser course than are clumsy cuts in expenditure. This House is failing in its duty and is failing the nation. The Chancellor fails also adequately to understand the need better to control expenditure and to harness the energies of the House to assist him.

There should be a natural alliance between the Chancellor and Back Benchers in all parts of the House. They should be allies in controlling expenditure. Yet what is the reality? It is that all the pressures are always continuously the other way—namely, towards increasing expenditure. I reflect how little we parliamentarians truly understand the priorities of the parliamentary game. We must never forget that we are trustees for the taxpayer and we must see to it that his or her hard-earned money is properly spent. I believe that the Chancellor has missed an opportunity in our parliamentary history—because this was it par excellence.

Long ago, as a young sailor, I learned in practice that there are no bad men but only bad commanders. I make no special party point at this time. The truth is that probably all Governments since the war have failed to give our nation wise leadership. But this time is special, as the present always is, because time may be running out.

There are some words of that great English poet John Milton, dead these 300 years, which seems to me to be especially apt: Lords and Commons of England Consider what nation it is Whereof ye are the governors". I omit a few lines which are not particularly relevant, and then pick up the theme of the speech by the right hon. Member for Newham, North-East: Not beneath the reach of any point The highest human capacity can soar to". So it is with our people today. All agree that they have the skills, inventiveness, application, tenacity and, I hope, the ambition to assure our nation's prosperity.

Of what quality is the leadership our people are offered? If I have a motive in this place it would be, in the words of Mr. Disraeli, to defend the constitution and to elevate the condition of our people. The sad thing and the indictment of the stewardship of this nation as displayed by those on the Treasury Bench is that both are now at risk.

The Chancellor spoke a great deal about confidence, although I do not think he understands the conduct which would merit it. There is, I am sure, no example which would give greater confidence at home or abroad than an obvious determination on the part of the Government and this House to budget in future as carefully and as prudently as any housewife. If the Chancellor and the majority of Members of Parliament will not insist on this, they must make way for those who will.

7.41 p.m.

Mr. John Cronin (Loughborough)

The right hon. Member for Taunton (Mr. du Cann) made an interesting speech. I think that all hon. Members would agree that there is room for more efficiency in public expenditure, for some type of control to ensure that there is more frugality and prudence, such as a housewife uses. It is certainly not used in every Government Department. I am rather surprised that the right hon. Member does not intend to vote with the Labour side of the House tonight. I should have thought that he considered the measures set out in the Chancellor's statement as prudent housekeeping. I can understand why the Conservatives generally intend to abstain. It is because it is largely their fault that we have got ourselves into this economic situation.

Mr. Patrick Cormack (Staffordshire, South-West)

The hon. Gentleman does not believe that.

Mr. Cronin

The hon. Gentleman's memory is rather shorter than memories on the Labour Benches. In 1972 and 1973 there was a grotesque increase in public expenditure which certainly was not of a productive nature. It was not particularly helpful to the economy. Money supply increased 26 per cent. in 1972 and 28 per cent. in 1973. This was the impetus which set off the inflationary run which we have had for the past few years. It is very much the fault of the Opposition that we have got ourselves into these economic difficulties.

If we look at the future policy of the Conservative Party, the outlook is not very attractive. The right hon. and learned Member for Surrey, East (Sir G. Howe) spoke rather scathingly about how industry is treated by the Government. Let us consider the Conservatives' policy for industry, which they are now promulgating. What will happen to the motor industry when Government support is completely withdrawn from Leylands and Chryslers? There will be total chaos. What will happen to North Sea oil when it is denationalised? What will happen to the aircraft and shipbuilding industries when they are suddenly denationalised, as promised by the Tories? This policy seems to be certain to lead to industrial chaos.

Most Labour Members feel that the Chancellor's statement last week was certainly a giant stride backwards for Socialism. Many of us have reservations about it and many of us will have difficulty in explaining to our Labour supporters the nature of the Chancellor's dilemma. I have an active and vigorous Labour Party in my constituency and I shall certainly have some problems in explaining to it what the Chancellor has done today. I am particularly unhappy about the cuts in food subsidies and the increase in the price of gas. They will seriously affect retirement pensioners and others who, for various reasons, have small incomes.

It is particularly unfortunate that there should be these cuts in housing construction. It is also unfortunate that there are to be cuts in education, although the Chancellor has said that because of the way in which the cuts will be applied they will not be so deleterious as they sound. Nevertheless, substantial cuts in housing and education are very much contrary to what Socialists regard as the basic principles of public expenditure.

I am particularly appalled by the cut in overseas aid. The amount involved, £50 million, is paltry compared with the other enormous sums involved. That is something which we could have avoided. The moral responsibility to give some adequate form of overseas aid is overwhelming. Even from the point of view of self interest, there is hardly any justification for these cuts. I feel relieved that there are no cuts in social security payments—

Mr. Mikardo

That is for next time.

Mr. Cronin

My hon. Friend is being pessimistic. I would certainly have great difficulty in inducing my feet to a walk into the Lobby to support any cuts in social security payments.

It seems that the Chancellor's cuts have been more or less inevitable. First, we should certainly not have got the IMF loan if he had not taken action on the lines of his statement. There can be no doubt that if we had not got the IMF loan we should have faced much higher unemployment and inflation. The Chancellor had no choice but to reduce the public sector borrowing requirement because he could not finance it. He still cannot finance it without rates of interest which are so exorbitant that they are causing severe damage to the economy and are a great disincentive to expansion in industry.

Mr. Timothy Raison (Aylesbury)

The hon. Member has told the House about the cuts he thinks should not have taken place and has said that the Chancellor was right to make the cuts overall. Can he tell us which additional cuts should have been made?

Mr. Cronin

The hon. Gentleman misunderstands me. I said that I was unhappy about the series of cuts, that I regretted their necessity. The only cut to which I totally object is that affecting overseas aid, which is a very small proportion of the whole package. We have reached a psychological situation were some form of cut in the PSBR had to be made to deal with overseas confidence. There is no escape from the fact that speculation against the pound would have continued unless there had been some cuts in the PSBR. It is unfortunate and disagreeable for us Socialists to have to pay attention to the good will of foreign financiers but it is also a fact of life with which we have to cope.

It has been suggested by some of my hon. Friends that an alternative method would be to impose import controls of a generalised nature. If they are of a temporary nature, they obviously cannot do much good, because everyone marks time and then imports more than ever once the controls have been suspended. If they are of a prolonged nature, they must inevitably lead to retaliation, except in certain instances of countries which cannot retaliate against us. There is certainly a case for selective import controls. I have particularly in mind the hosiery industry where there is unfair foreign competition.

The most important reason given by the Chancellor for cuts in the PSBR is to provide the resources for industrial expansion. This is something about which I have the gravest doubts, in spite of what was said by the right hon. Member for Taunton. Will industry expand if the funds are available? I am by no means certain of that. If we take, for instance, the General Electric Company—

Mrs. Audrey Wise (Coventry, South-West)

A good idea. Let us do it.

Mr. Cronin

—which is being managed very ably in the interests of the shareholders by Sir Arnold Weinstock, it has at the moment £300 million in cash ready to invest. Even 18 months ago the company had about £200 million in cash, ready to invest. Why should we believe that industry will expand provided the funds are available when a profitable and efficient firm has the cash in the bank to do so but sits on it?

Mrs. Wise

While sitting on its cash GEC is actually laying off workers in my constituency and elsewhere.

Mr. Cronin

That is an important facet of the argument. It is by no means certain, therefore, that industry will expand.

Nevertheless, industry is having serious difficulties at the moment. The rates of borrowing are quite penal, and it is now more profitable to lend money than to use it for capital investment. If a firm can get 17 or 18 per cent. on its money by lending it out, there is a considerable disincentive to use it for expansion. The Chancellor's cuts in the PSBR will bring down interest rates and we hope, therefore, that this situation will improve.

There is another disincentive in the form of high taxation on management and labour, but my right hon. Friend the Chancellor has promised to look into that in his April Budget. The incomes policy is also causing considerable difficulty in industry because it is often not possible to reward people for putting in extra effort or using extra skill. So there is a strong case for the Government looking carefully into what can be done to ensure that extra effort or skill is rewarded within the incomes policy.

I am disturbed by the direct interference with prices. That approach has obviously been in the national interest so far, but it requires a lot of discrimination and flexibility to handle the whole system of price control. I am not sure that we have reached the ultimate in efficiency there.

There is a climate of opinion in industry which militates against trying to raise productivity. The trade unions quite rightly have the job of looking after the interests of their members. The trade union has to see that its members get the maximum payment while retaining their jobs. We cannot escape the fact, however, that as well as unemployment there is a good deal of wasteful employment.

Employed people are not producing as much as they should, and the problem of low productivity will require careful attention by the Government. It is the basic problem of the economy I should have thought that some sort of productivity deal associated with the next phase of the wages policy would be an important aspect of that phase.

By the end or middle of next year industry will have had every possible advantage for expansion. If it does not take that advantage and use it profitably, we shall have to accept that capitalism as an economic way of life has failed in this country. The Government will have done everything they can. It is up to industry to take advantage of that.

The Chancellor has made himself unpopular with many people.

Mr. Mikardo

Hear, hear.

Mr. Robin Corbett (Hemel Hempstead)

He is not Father Christmas.

Mr. Cronin

I can think of no one else, however, who could take on that job at the moment with any chance of success. No one knows better than my right hon. Friend the Chancellor what has gone wrong up to now. Perhaps I should also mention his junior Ministers who so ably support him—

Mr. Brian Sedgemore (Luton, West)

Where are they?

Mr. Cronin

They are probably ably supporting him in some place other than this Chamber. The Chancellor and the Treasury face a difficult problem. It is not easy to please people with these policies, but I wish them the good luck they deserve and god-speed.

7.56 p.m.

Mr. Patrick Cormack (Staffordshire, South-West)

I trust that the Treasury team is enjoying itself wherever it is. It is a pity that it is not here.

Without meaning to be disparaging to the other hon. Members who have spoken tonight, I believe that the debate will be remembered, above all else, for one speech, and that was the magnificent, moving and historic speech of the right hon. Member for Newham, North-East (Mr. Prentice). It was a significant parliamentary occasion, and I think that everyone here who has any sense of the House and is proud of being here must have been proud to hear that speech this afternoon. It was all the better for having been followed by a distinguished maiden speech.

I wish to concentrate on what the right hon. Member for Newham, North-East said. I do not think that anyone could dispute that he is a man of absolute integrity who justifies more than most the title "right honourable". He must have endured a period of acute difficulty and mental agony before making his decision. It was not an easy thing to do—and the fact that some Labour Members can laugh at that sort of comment is indicative of the depth to which politics have sunk in certain parts of the Labour Party. The speech we heard this afternoon was a speech by a statesman. It was a refreshing contrast to the complacency of the Chancellor who spoke in a way which could not evoke the respect which was evoked by his right hon. Friend.

The British people are hungry for inspiration and desperate for leadership. They are bewildered by events and by a Government who seem to talk all the time of crises, a Government whose reaction is dictated by expediency and, above all, by the needs of party rather than country. It is a Government who all the time are asking whether hon. Members below the Gangway will wear it.

The country is suffering at the moment from a coalition Government of the worst sort, a coalition of incompatibles. On the one hand are those who believe in the mixed economy, who know where the true future wealth and prosperity of the country ought to lie. On the other hand there are those—I do not disparage their motives because that is not a sensible approach in politics—who believe sincerely in the full-blooded Socialist alternative. This coalition of incompatibles has paralysed the nation for the last two and a half years. It was refreshing and moving to hear a speech from the Labour Benches in which the national interest was put first.

That the Government should be afraid to legislate in their package, that they should feel that they cannot carry their own supporters with them in doing the necessary things, has led to the most distorted set of priorities for a long time—

Dr. Oonagh McDonald (Thurrock)

Will the hon. Member give way?

Mr. Cormack

No. Much as I should like to give way to the hon. Lady, I cannot do so because I have promised to speak for no more than five minutes and I do not want to prevent other hon. Members from speaking in the debate.

We have here a distorted package that does not put first the national interest, a package that shies away from the real decisions and that is afraid of taking the decisions that the country needs. When the right hon. Gentleman talked about the implicit shame in the defence cuts we have had to make, and when he talked so movingly about the cuts in our overseas aid budget, he carried with him hon. Members on both sides of the House.

Although most of the cheers came from the Opposition Benches, many Government supporters were with him in spirit, as I could see from looking across the Chamber. It is an indictment of the pass to which the nation has come and the incompetent stewardship under which we have suffered that we have had to slash our overseas aid.

It is an indictment of our stewardship over the past two-and-a-half years that the construction industry stands on the verge of collapse. The intervention of the hon. Member for Liverpool, Walton (Mr. Heffer)—whom I respect—illustrated the misery that would be suffered in many quarters of the land as a result of the implications of the cuts in the construction industry.

It is desperately sad that the Government did not have the guts to adopt some of the policies referred to by the right hon. Gentleman. It is patently absurd that a prescription should cost less than half the price of a packet of cigarettes. It is patently absurd that the Chancellor should have felt unable to increase the VAT rate to 10 per cent., which would be sensible. He could have used some of the money thus generated to give an incentive to the wealth creators at all levels of society, without whom the country cannot survive.

The Chancellor said that the Government have come through. I hope with half my being that the Government have come through, in as much as I hope that the package succeeds, but I fear in my heart that it will not, because the priorities are wrong even if the amount is right. When the hon. Member for Bethnal Green and Bow (Mr. Mikardo)—whose sedentary interruptions are always to the point—said that something would come next time, he put his finger on it, because there will be another package. He and I know that. The Government have not faced the harsh realities of life in the way that the British people expect them to do by introducing measures to which they would respond.

The next time the call comes it is desperately necessary for men and women of good will on both sides of the House to put aside the stupid, partisan bickering that our constituents cannot understand and together—by that I do not mean a formal coalition—seek a solution which commands the support of all and puts sectarian strife to one side and divisive legislation out of the window, so that for two years we can concentrate on putting Britain first.

The right hon. Member for Newham, North-East gave a call to the nation to which the national will respond, even if many of his colleagues in the House dismiss it. He struck a chord in many hearts today and he did the country and the House a service which he fulfilled with dignity and compassion. He put his priorities in the right order. I hope that he will be listened to in the months ahead and that he will continue to give the sort of lead he gave today. The country is too lacking in leadership to afford to neglect the services and devotion of a man like that. This debate will be remembered for a long time to come as the debate when someone had the courage to say what he truly believed in a way that was both moving and precise.

8.5 p.m.

Mr. Michael English (Nottingham, West)

The debate has been a peculiar debate in the sense that, although it has been about the economy, it has related to several of the things that may be wrong with our system of government and the way in which we make decisions about the economy.

I do not entirely agree with the right hon. Member for Taunton (Mr. du Cann), who seemed to think that we could solve all our economic problems by amalgamating a Committee of the House of Commons that deals with audit with a Committee of the House of Commons that deals with policy upon expenditure. That may be a perfectly reasonable suggestion to consider, but the right hon. Gentleman was well answered by The Times, which suggested that his committee should become a sub-committee of the Expenditure Committee.

In either case it could hardly be regarded as the true answer to all our problems. However important such procedural changes may be—I am the first person to take an interest in procedure, as my colleagues will realise—I do not necessarily regard procedural changes as a way of dealing with this subject.

My right hon. Friend the Member for Newham, North-East (Mr. Prentice) inspires in me—and I suspect in other people—almost the same feelings as St. Thomas à Becket inspired in Henry II. What is not readily realised, perhaps even by my right hon. Friend the Member for Newham, North-East, is that St. Thomas à Becket inspired the same degree of irritation among every one of his episcopal colleagues as he did in the breast of Henry II.

My right hon. Friend hit upon part of the central issues that the Cabinet discussed. At the same time he announced to the world that although he was making this speech on the economy, he had really resigned over devolution.

The right hon. Member for Chipping Barnet (Mr. Maudling) recently said—to paraphrase his words—that a decision whether some things should be done in Whitehall or Edinburgh could not be regarded as the most important matter for the country even though hon. Members get into a terrible emotional turmoil about it. What is important is whether we cut or increase public expenditure. If we are cutting the public sector borrowing requirement, how that is done is a matter of some importance to me.

With all respect to my right hon. Friend the Member for Newham, North-East, the question of the expenditure of £50 million upon overseas aid is not the most important issue. It is also of immense emotional importance, but even a Member who well understood the issue earlier in this debate did not regard it as tremendously important.

Prescription charges have an immense emotional importance too—particularly to Government supporters—but many of us objected to them and some did not vote for them because the amount of money involved was so piffling. We and many others at the time believed that the charge was introduced to placate overseas bankers.

Nevertheless the right hon. Member for Newham, North-East did raise—on the composition of the cuts—issues of vital importance. With a presidential system everyone knows who is responsible for the Executive. The Cabinet in the United States, for example, is of no particular importance compared with the Cabinet in a parliamentary system of Government.

When the Shadow Chancellor of the Exchequer, the right hon. and learned Member for Surrey, East (Sir G. Howe) says that the Chancellor did so and so and said such and such and is responsible, he should wonder to himself whether he is speaking the truth. One of the peculiarities of the British system of Government is that none of us can be certain of what the Treasury advised the Cabinet or that what the Cabinet decided was what the Treasury suggested.

My own guess, which is based upon such information as is available to me—and any man in this peculiar world we live in is entitled to make his own guess—is that the Treasury's argument on totals more or less prevailed with the Cabinet but that its suggestion as to the method of compiling the totals was thrown out of the window. I believe that a great deal of log-rolling went on happily in the Cabinet, with everyone suggesting the one thing that his Department would least hate to lose, adding them all together and arriving at a figure. That was not necessarily the best way of arriving at a figure. It was not necessarily best for the country.

This is where we come to the question of how the figure should be compiled, but before taking up that topic I must say that no more than some of my colleagues who have already spoken do I understand how the total reduction in the public sector borrowing requirement was arrived at. There is an innate contradiction in the Letter of Intent. It is said that we shall reduce the public sector borrowing requirement but it also fixes a target for domestic credit expansion. Like others, I think that a target for DCE is better than a simple money supply target, but that apart there is no close relationship between DCE and PSBR.

I do not want to weary the House with figures but this is a point of some substance. If in the Letter of Intent there is a suggestion that we should have two targets and there is no relationship between them, that is a matter of some importance that the House will wish to consider.

In 1969, the last full year in which the previous Labour Government were in office—I do not quote it for that reason but because it is one extreme in recent years—the PSBR was in surplus. If we consider the PSBR as being something positive, it was negative in that year. In fact, there was a surplus of £0.5 billion. It was a small but sufficient surplus. Domestic credit expansion at that time was almost zero. In fact, it was minus £0.1 billion.

It might be thought that that shows a relationship, but if we take the opposite case that applied in 1975, the PSBR was £10.5 billion and the domestic credit expansion was less than half that £4.8 billion. The time when domestic credit expansion reached its height was in 1973 when it was £8.6 billion and the PSBR was only £4.2 billion less than half DCE.

The relationship, clearly, is not very significant. If it is not exact, we must consider the Chancellor's proposals and the agreement with the IMF as containing two separate matters, one being domestic credit expansion and its target and the other being the public sector borrowing requirement. Once we do that we immediately have to consider whether it is desirable or necessary or relatively desirable or necessary to cut the public sector borrowing requirement.

It is desirable—this was the argument used by the Chancellor earlier this year—to cut it if it is strangling industry, if there is no surplus capacity in the machinery and if the public sector is absorbing too high a proportion of productive resources so that there is no room for expansion of industry, but I do not think that that can be said at present. As I understand it, that is the argument of some of my colleagues.

The truth of the matter is that such arguments do not matter overmuch in the current circumstances. If we are spending more money than we are earning, we go to the bank manager for a loan and we have to take account of what the manager says. The argument about whether my right hon. Friend should or should not be cutting, increasing or anything else in terms of the public sector borrowing requirement boils down to saying that we like or do not like the advice given by the IMF. Of course my right hon. Friend does not like the suggestion that he receives advice from the IMF, let us put it this way—we either like or do not like that to which the IMF is prepared to agree.

Whether or not we have to do what the IMF requires, whether what the IMF requires is logical and whether we have to do any of the things that it may suggest, must be set against the fact that we and we alone have responsibility for making the choice of how we do it. For the sake of argument, the moment that we accept a cut in the public sector borrowing requirement we proceed on the basis that it is our responsibility to choose how to do it.

In my view the Chancellor rightly said that anyone who suggests alternatives to what has been done should say how it should be done. This is where some people have not necessarily given my right hon. Friend credit and this is where I criticise the Cabinet collectively.

Under our system of government the Cabinet collectively is a secret little body with the exception of one man who, having resigned upon another issue, is prepared to say what he believes to be the alternatives. My right hon. Friend mentioned two that are worth mentioning.

Mr. Sedgemore

Did he say that in Cabinet?

Mr. English

I presume that he did, but I am not responsible for my right hon. Friend. I have reason to believe that someone said that in Cabinet. I have reason to believe that the arguments may have been put in Cabinet.

Mr. Sedgemore

But not by him.

Mr. English

I do not happen to be a great believer in pay policy or incomes policy. I am probably less of a believer in them than is the right hon. Member for Chipping Barnet. But how on earth does anyone think that we can persist in having a pay policy over a succession of years—we are now talking of having such a policy for a third year—if pensioners are linked to the rate of inflation and not to earnings?

I have the greatest of sympathy with the poor old-age pensioner, but as has been said, not every pensioner is poor. Is an ex-permanent secretary poor? In the 1971 Act the then Government linked Civil Service pensions to the rate of inflation. That was decided because they thought that it would be cheaper to link pensions to inflation than to earnings. A Labour Government linked old-age pensions to earnings or inflation, whichever was the greater, because they thought that earnings would be the greater. In both cases the same assumption was made.

No one ever seems to have thought of the possibility that we should not always judge the future by the past. There is now a situation where a consious decision is made on the part of the whole trade union movement, or 90 per cent. of it, on the part of the Government of the day and on the part of the Opposition. We have decided and accepted as a country that we shall allow earnings to rise less rapidly than inflation. However, there are two categories in the community to which that does not apply. If that policy is adopted and the rate of inflation continues at 15 per cent. or 17 per cent., whatever it may be. At that rate pensions will soon catch up earners. Has no one ever heard of the Aesop's fable of the hare and the tortoise? The tortoise is rapidly catching up on the hare and the pay policy will be in total and absolute ruin.

I mention another matter which, I am sorry to say, was not mentioned by my right hon. Friend the Member for Newham, North-East. I think that the country would have accepted a modest or sufficiently substantial increase in value added tax as an alternative. What I do not think necessary or desirable is that we should continue to cut capital investment in this country. The Government make themselves ludicrous by announcing to the world that the fault of Britain is a lack of investment but at the same time announcing that they will cut investment.

The reason for this does not lie in the policy of any one Government. It started with the Barber cuts of 10 per cent. on goods and services and has continued in the same way. To be fair to the present Chancellor, I think that he has done a little less of it in those terms than has been done in the past. But, for example, it is ludicrous that we turn out teachers by the score when they cannot get jobs as teachers. Of course, not everyone is entitled to a certain type of job. As was said by Bernard Shaw, not everyone has the right to a job as Prime Minister but everyone may have the right to a job.

However, we continue to train teachers and we are sending them into schools which in my constituency are 140 years old. That is the age of schools in the centre of the city. They are right in the middle of areas where slums have been cleared. The schools which were built at the same time, are left standing alone because, as capital expenditure on education has been cut, they are not considered to be slums.

This is a nonsense and, since the Chancellor of the Exchequer asked for alternatives, I suggest that we look at increases in VAT or decreases in other forms of expenditure, such as social security.

8.20 p.m.

Mr. Maurice Macmillan (Farnham)

I start by congratulating my hon. Friend the Member for Cambridge (Mr. Rhodes James) on a maiden speech which showed a combination of the scholarship of his university and the expertise of his constituency.

In some ways, the right hon. Member for Newham, North-East (Mr. Prentice) has dominated the debate. If he is as widely reported as I hope he will be, he will have gone a long way to restoring some confidence in the integrity and disinterestedness of politicians. I am glad to be able to agree with a great deal of what he said since, in the past, I have had to disagree with him in his capacity of shadow Employment spokesman. I have no doubt that when things get better for this country our disagreements will mount again.

I also agreed in many ways with the hon. Member for Nottingham, West (Mr. English) that it is fairly obvious what should be done in the circumstances facing the nation. Regrettably, the Chancellor and the Government have not done it.

I am arguing not about the size of the package but about the contents. It seeks merely to postpone capital projects and does nothing on current Government spending, whether it is cost effective or of a high or low priority. In the first year, 1977–78, only about one-third of the cuts come from current spending—basically food subsidies and overseas aid. By 1978–79, it drops to about one-tenth, and the rest comes from capital projects and investment in the productive sector, including the nationalised industries.

The defence cuts are disgraceful. The Government are failing in their prime duty of being certain of making a proper contribution to the Western Alliance. The cuts are economically absurd.

Defence and overseas aid—small though these cuts are—are part of the means by which we establish our position in the world, politically and economically. They are part of our world influence and provide considerable export potential now and, in the case of aid, even more in the future as we help developing countries to grow rich. They can then buy goods from us as well as manufacture and produce goods which we can buy.

The defence cuts are extremely damaging to employment, especially in the heavy and high technology industries and to skills which are becoming increasingly scarce on the shop floor and in design teams and managements. It is economic foolishtness of the highest order. We can sell and have successfully sold the products of our defence industries overseas, but we cannot do that unless our customers are reassured by our ordering the goods ourselves.

My main complaint about the content of the package is that the whole burden is carried by the sector of the economy which creates new wealth. There is no reduction in local and national administration despite evidence that there is a great deal of waste which could be cut out. It is no good hon. Members opposite saying that they can do nothing about local government. Local authorities have to carry out duties and obligations imposed on them by this House, and there is a point beyond which they cannot do those things and reduce staff as well. We should be looking at the current expediture programmes of national and local government in order to judge them better according to cost and effectiveness.

If we continue to destroy the marketable sector of the economy, there will be nothing left on which to build for the future and nothing to produce the goods and services which we need for those whom we wish to help.

This is the reality in any economy or political system. There is no difference in this respect between a capitalist or a communist system. If too high a proportion tion of the total effort in terms of manpower, goods, money, machinery and skill goes into current expenditure and development and goods and services which cannot be marketed, the country will get poorer and poorer. There must be a high proportion of goods and services which can be sold at home and abroad. We rely particularly on the sale of services.

The right hon. Member for Newham, North-East was right when he said that our social priorities were wrong. The Government did not touch transfer payments or do anything to help with incentives. It is difficult for industry to invest in new equipment when it cannot get the work it should from the machinery which it has already and can get a better return by lending money to the Government. Of course, it is not easy to persuade people to invest and make profits if they are taxed as if they have committed a penal offence for which they deserve punishment. Our social and economic priorities are wrong. We have also severely damaged the Services at home and their ability to meet overseas commitments.

The package is certainly not in the national interest. It has been put together as a cynical exercise in party management and the appeasement of a few trade union leaders. Perhaps the greatest service which the right hon. Member for Newham, North-East has done to the House has been to emphasise that the Government can and should continue, without seeking to appease any one part of their own party, in or out of the House providing that they can maintain a majority in the House, for the legislation they bring forward—no matter from where in the House that majority may come; nor whether it consists of the same hon. Members in each case.

The Government's majority is not real. If there had been a free vote within the Labour Party on many of the damaging and controversial Bills which came before us in the last Session, I have no doubt that the Government would have been defeated. But the Chancellor of the Exchequer has not pretended that he has done anything real apart from complying with the IMF, and doing his best to hold his party together. He has put party before country.

I have no confidence in the Chancellor's measures, and I do not believe that the country has very much confidence in him or in the Government in which he sits.

8.30 p.m.

Mr. Norman Atkinson (Tottenham)

The right hon. Member for Farnham (Mr. Macmillan) suggests that the Government's policy is a result of the appeasement of some trade union leaders. There seems to be little evidence that any attempts which might have been made to appease trade union leaders have succeeded, for there is great dissatisfaction among most trade union leaders about the direction in which the Government are at present going. It does not seem to me that it is a matter of appeasement.

In the course of my speech I shall refer to one or two important elements in the Chancellor's statement. I shall refer to the speech made by my right hon. Friend the Member for Newham, North-East (Mr. Prentice). I shall also talk for a few moments about the Cabinet, and about the Cabinet's views as I see them. Finally, I shall mention particularly the situation inside the Labour Party.

The alternative strategy posed by those on the left of the Labour Party is certainly based on the idea that there are more intelligent ways of operating our economy, particularly in terms of trade, than having to borrow money in order to meet the trade deficit.

What we have suggested as a central theme in the whole of our alternative ideas is that a far more intelligent way than borrowing money on the lender's terms is to be extremely selective about the things that we buy now and the things that we shall require to buy in the future. In that way, we can begin to assist the recovery of our economy, rather than impede it by conceding the terms laid down by international credit.

The basis of our selective import control policy is the idea that we must of necessity go for growth in this situation, and growth is not possible unless we are extremely selective about the things brought into the country as a result possibly of those growth policies. If we believe that now is the time for reflation, we have again of necessity to introduce an element of selectivity with regard to our resources going overseas.

If we are determined to do something about the multinational companies, the only way in which we can come to grips with that problem, at the same time as reflating the economy, is to have some instrument whereby we can achieve this objective. The only way in which the Government of any one country can intervene in the accounts of a multinational company is through the use of import controls. There is, therefore, a need for this on all counts if we are concerned about growth and the reflation of the economy.

I turn now to the International Monetary Fund and tell the Chancellor that to me the IMF means two things. In the context of his argument, certainly it is an International Monetary Fund. But to me it is also an "Institute of Milton Friedman", because its ideas are wholly based upon the concepts put forward by Opposition Members, and it is closely associated with the ideas of Professor Milton Friedman. I think we are justified, therefore, in making the criticisms that we have made.

With regard to the current rate of inflation, it has been suggested that we shall never get it down unless there is drastic pruning of the public sector borrowing requirement and a cut-back in the money supply in this country. But there is no evidence at all to support these arguments. The right hon. Member for Chipping Barnet (Mr. Maudling) was correct in pointing this out to some of his colleagues, but he should pursue the logic of his own argument. There is at present no evidence whatsover to support the monetarists' case. The "Institute of Milton Friedman" certainly has no justification for its claims about the relationship between the rate of inflation, the money supply, borrowing requirement and domestic growth. None of those arguments is sustained by what is happening at the moment.

Dr. Bray

I want to reinforce what my hon. Friend has said by pointing out to hon. Members opposite—having read the technical literature more deeply than they—that there is no relationship between the money supply and money GDP.

Mr. Atkinson

I am grateful for that assistance. About 61 per cent. of the price index is made up of housing, alcohol, tobacco, fuel, light and clothing. Inflation has put up those items in the last year by 16 per cent. Food is weighted at 23 per cent. of the index, and that has gone up 15 per cent. Analyses have been made of the reason for that inflation. Neither the Price Commission nor any other institution which has investigated the information has any evidence that there is a direct relationship between the increase in prices and the money supply and domestic product. There is a relationship between the cost of credit—which is up by about 1 per cent.—and interest rates and the rate of inflation. Therefore, when the monetarists argue their case they must point precisely at the evidence that excessive money supply or excessive borrowing is having that effect upon the market.

Mr. Cant

I do not want to complicate my hon. Friend's argument, but, looking at another aspect, would he not say that the rate of inflation at 15 per cent. is in some way connected with the fact that our exchange rate has fallen dramatically and that the difference between Japan, Germany and the United States is that they have got money supply at about 4 per cent. to 8 per cent.?

Mr. Atkinson

I do not accept that. In order to arrive at conclusions such as that one has to start at the belief that there is excessive borrowing in the market. I am not talking about people overseas who, as a result of their lack of confidence, may have an influence on the value of the pound. I am looking for direct evidence from the monetarists for their point of view.

I turn to M3 and the important part played by the trade unions in the negotiations. Phase 1 of the pay policy ran from August 1975 to August 1976. In August 1975 take—home pay—and I talk of the mythical average of the married man with a family—was £40 for a 43½hour week. It rose by 13 per cent. to about £45 a week in August this year. Against the background of the statement, when we start phase 3 of the policy in August 1977, to keep up with the increased cost of living and to retain living standards we must accept that workers will have to secure for themselves a take-home pay increase of £6.75. It is the Chancellor's prediction that in August 1977 we shall still be faced with a 15 per cent. increase, year on year, in the price index. Therefore, trade unionists will be looking for a substantial increase in order to maintain their living standards. This year they have already taken a drop of about 1½ per cent. on average, in real terms.

When we reach August 1977, that is the situation that we shall have to face. It does not need a great deal of imagination to work out just how much is required in gross terms if trade unionists are to get an average increase of about £6.75 in take-home pay to maintain their living standards throughout the year. That is the reality of the situation. The Chancellor and the Prime Minister must now enter into negotiations knowing that that is awaiting them in August 1977, if there is to be a battle to maintain living standards.

The other thing that must be discussed with that in phase 3 is unemployment. I have confidence that trade unionists will start to put to the Government, as part of a social package, elements other than wages and some of the matters that have already been discussed, and will demand from the Government the inclusion of policies designed to solve the massive unemployment problems facing the working community.

I hope, therefore, that as an essential part of the phase 3 discussions, unemployment and the working week will feature. This matter is very relevant. It is a major problem. At present, the average working week for manual workers in industry throughout the country is 43 hours. Incidentally, it is far higher than that of clerical workers. In order to bring about the sort of employment position that we want and in order to create jobs in the numbers now being discussed, there is a necessity to reduce the working week to about 37½hours, but to do that without any loss of pay for those working the reduced week.

Opposition Members may laugh, but there is no other way. It is unacceptable to say to workers that in a situation in which their living standards are being threatened they must do something towards job creation and full employment within the economy by having a reduced working week, but then to say "Not only will you suffer a drop in living standards because of the Government's policies, but you will also have to take a cut in wages because of the reduced working week." That is not on. However, if we are serious about job creation, that is one of the few ways in which it must be done.

The Chancellor has talked about tax concessions. These must be far bigger than any discussed last year or earlier this year, otherwise they will not be on. The Government must increase take-home pay to the extent that I have outlined. Secondly, we must give tax allowances framed in such a way that they will encourage managements and trade unions to discuss the possibility of reducing the working week without loss of pay or a drop in living standards. That is where the tax effort must be made.

It is not as complicated as it sounds. We know that if we can get a shift of resources into the areas of manufacturing that lean heavily towards labour intensity, and if we can use the tax method to encourage that shift, by tax concessions in the next round of discussions we can encourage people to reduce their working week and, thereby, be job creative.

The Chancellor has two things to do. The first is to talk in terms of retaining living standards for trade unionists and to make that aspect attractive. The second is to make greater tax allowances available to those areas of manufacturing which are job creative and are using the reduced working week in order to achieve that end. This is not the time to spell out in detail how that can be done, but it can be done.

My final point is about my right hon. Friend the Member for Newham, North-East. I believe that some astounding remarks have been made about him by Conservatives during this debate. The tragedy of my right hon. Friend is the result, no doubt, of the fact that quite a long time ago he lost sight of his roots in the Labour movement and started to look in a different direction. Having lost his direction in that way, it is not too difficult to understand some of the confusion which came through in the statement which he made this afternoon.

My right hon. Friend the Member for Newham, North-East is following another colleague who used to be in this House—Dick Taverne, who once represented Lincoln. He has gone into the political wilderness for the same reasons and for identical purposes. I think that my right hon. Friend will follow a predictable course. I will have a bet with anyone that in the early months of next year he will campaign actively for a coalition Government as an alternative to the present one. That is the basis of his political logic at the moment, knowing full well that he may be fighting as an independent in his constituency, and using that independence as an influence for the creation of the wider political base at which he hinted today.

One of the most astounding things in his statement was his suggestion that we should cut benefits and retain defence. That is what he said. He is advocating guns before benefits. Now we know who it was who led the fight inside the Cabinet for a reduction in benefits. Now we know who urged the Government to start that campaign and who led the battle. We also know why some of the arguments were put in that way. My right hon. Friend had spelt out his own opinions, which presumably had not changed for some time before his resignation, and it is easy to see the pattern of the argument which was going on inside the Cabinet. It is easy to see the kind of compromise—the worst of all situations—which was developing inside the Cabinet. The Cabinet, in trying to placate him, conceded things which were of no value because at the end of the day it did not retain him anyhow.

It means that the argument has gone on between those who believe in a free market economy and a non-interventionist policy and those who believe in intervention and a planned economy. That has been the dichotomy, and the dialectics are there for all to see. The tragedy from our point of view is that those Socialists who are in favour of economic planning are in a very small minority in the Cabinet, and they have been heavily outweighed, particularly against the background portrayed by the right hon. Friend the Member for Newham, North-East.

The Socialist content of the Cabinet has been totally destroyed in this situation, because there is no element of concession towards planning at all in the Chancellor's package. There is no concession whatever towards planning as a concept and towards intervention as a means of overcoming our problems. The dependence of the Government's position is now on the free market myth, on profit and on the other balances that are present in a free market economy. That is the Government's position and that is the reality we have now to face in the Labour movement. They have turned away from the Socialist arguments of intervention and are now totally dependent on the free market method.

The grotesque policies of the cuts and of massive unemployment being used as an economic regulator are abuses of Labour Party membership. It is as much an abuse of Labour Party membership as the arguments advanced by my right hon. Friend the Member for Newham, North-East. The Chancellor is abusing his membership of the Labour Party.

What do we do this evening in the vote? It is a serious position. There will be many discussions on these arguments that must be put to the trade unions and clearly negotiated. There is the question of oil and BP, the sale of national assets, and the turning away from any expansion of the public sector. That is what it means. There is no logic in selling BP shares if, at some future date, the Government have intentions of buying a bigger stake in oil. They are saying that never in the foreseeable future are we to expand public ownership into the oil industry. That is the logic. These are massive ideological questions we have to face.

From now on, not only in oil and all these matters, a whole series of decisions will be taken in the House and I hope that I can persuade many of my hon. Friends who are not in the Tribune Group to support the resistance to turning away from the idea of a planned economy and using, in an abusive way, the free market mechanism. If we do that, we shall be depending on the support of Labour Members other than those listed on the Order Paper. Hon. Members are calling for a Division tonight for the best of motives, and I support them totally, I signed the motion. But tactically we are now compelling Labour Members to make up their minds whether they are going to enforce Government policy. If at some subsequent date we can convince them that there is a need to be critical of some of the contents of that statement and can successfully, together with the trade unions, bring about a direct change in those circumstances, we shall be asking them to do a U-turn in the process of gathering that strength in the course of a month. That may be the position.

I have come to the conclusion that it is not for me to vote tonight.

Mr. Alexander W. Lyon (York)

Would my hon. Friend agree with the analysis that the Government are stirred not by argument but by vote? That is where the power lies which matters in Cabinet. As the Chancellor of the Exchequer looks around his Cabinet and is told that he will not get measures through the House he will ask himself, "What will they do when it comes to the vote?" He knows that he can rely on the kind of loyalty which my hon. Friend is evincing. But to stop the next package of measures, he must vote against this one. He ought to come into the Lobby with us tonight.

Mr. Atkinson

I agree with the logic of Stalin's question to the Pope about how many troops he had. There is great logic in the military argument of head counting, but the position tonight is one of tactical politics in the sense of wanting to persuade people from now on, because we are now entering a much more difficult and intense period of political struggle.

Mr. Raison

rose—

Mr. Atkinson

I will not give way. I have argued the case and have given way several times in the last 10 minutes.

I am looking at the seriousness of the situation facing most of us on this side of the House. My God, I do not believe that in post-war politics the Labour Party has been faced with a more serious challenge to its unity than today. The best situation tonight, while having made the position clear, as undoubtedly we have, is not to follow the advice of my hon. Friend the Member for York (Mr. Lyon) and to go into the Lobby but to leave that for subsequent occasions, which will come with great rapidity from now on. That is the way in which we shall take the Government away from the direction in which they are now travelling.

8.55 p.m.

Mr. John Pardoe (Cornwall, North)

I presume that the arguments we have just heard as to why the hon. Member for Tottenham (Mr. Atkinson) will not vote against the Government tonight are a repeat of the arguments that have been put to him as to why certain colleagues of his in the Cabinet have not resigned from the Government. I have a feeling that what really irks him is not the resignation of the right hon. Member for Newham, North-East (Mr. Prentice) but the failure to resign of certain Left-wing members of the Cabinet. He must find that extraordinary.

Mr. Raison

Surely it is not just a question of members of the Cabinet, but also of junior Ministers who are known to be totally opposed to the Government policy but who are sitting there on the Treasury Bench happily representing the Government still.

Mr. Pardoe

I am happy to have the argument widened. The hon. Member for Tottenham referred to the right hon. Member for Newham, North-East. He spoke of him and Dick Taverne as going into the political wilderness. The hon. Gentleman must get rid of the arrogant idea that anyone who does not find the two-party madcap game in this country an attractive process is in the political wilderness.

It is from the political wilderness that most of the political sense in the country has come during the past 50 years. It was from the political wilderness that sense about unemployment during the great depression came from Lloyd George and Maynard Keynes. Although the hon. Gentleman might not agree, I suggest that it was from the political wilderness that the voice of Winston Churchill advocated a policy of standing up to the Fascist menace in Europe. It was not the party establishments that made his case. The hon. Member for Tottenham must get rid of the arrogant nonsense that the political wilderness is where anyone who does not agree with the two-party nonsense has to live. I congratulate the hon. Member for Cambridge (Mr. Rhodes James) on his maiden speech. It is perhaps ridiculous and superfluous to congratulate him, because it was no more and no less excellent than would have been expected from the author of one of the best books on modern British politics—not quite the best, because I think that the best was written by one of his hon. Friends on the Conservative Front Bench. [HON. MEMBERS: "Which one?"] Only one of the Gentlemen on the Conservative Front Bench has written a book as good as that.

I was amazed that anyone who had served this House as an Officer should want to come back as a Member. We cannot be quite as mad as I had assumed. The hon. Member for Cambridge made a splendid and articulate speech, and it was marvellous that we should have had through him a length of time spent concerning ourselves with the much vaster economic problems of the Third World when, inevitably, the greater part of the debate is being devoted to the smaller but nevertheless important problems with which we are faced in this country.

I thought that the speech by the right hon. Member for Newham North-East rose to the occasion because, after all, the decision to resign from any Cabinet is awesome. Membership of any Cabinet is not a trivial thing to be tossed easily aside. The right hon. Gentleman and I do not agree on many things, not even on many of the things he mentioned as reasons for his resignation—certainly not, for instance, on devolution—but I honour his ferocious and massive integrity.

Mr. Jeremy Thorpe (Devon, North)

Perhaps my hon. Friend will speak more loudly. I cannot hear him properly over the babble from the Labour Benches.

Mr. Pardoe

The right hon. Member for Newham, North-East is a man of massive and ferocious integrity, a commodity which is much needed in British public life. I hope that now that he is sitting on the Back Benches he will become a powerful addition to the growing body of voices expressing discontent with the present adversarial political system. Inevitably, in the context of our party political system, the debate between the two Front Benches is primarily in terms of personal attacks on and the personal responsibility of the Chancellor of the Exchequer.

The right hon. and learned Member for Surrey, East (Sir G. Howe) said on the day of the Chancellor's statement: today's taste of bitter medicine is a direct result of his own reckless and incompetent mismanagement of the economy".—[Official Report, 15th December 1976; Vol. 922, c. 1540.] I can only describe this kind of politics as political dwarfism. I dare say that there has been much incompetent management. When was there not? But to suggest that the problems of the British economy stem from the actions of one man or one Government is a load of nonsense.

There is a great danger in putting all the blame on one man or one party, because it leads the nation to believe that there is a simple solution—to get rid of that man and that party. No doubt the Chancellor has made a large number of errors—we could all point a finger at many of them—but no Chancellor acts alone. What does this say for the quality of the advice given to Chancellors of the Exchequer? What of the competence of the Treasury?

There seem to be two major fallacies at the heart of the Government's economic policy. One is concerned with remarks made by the Chancellor in a television broadcast on 26th March 1974, when he said: The way I look at it is this. Within a few years' time oil will start flowing in from around our shores and a lot of our problems will be that much easier. So the job is to get from here to there without our economy or our society breaking down. That was too simple by half. It neglected the fact that the British economy was already much weaker than the other patients when we were all attacked by the sickness of increased oil prices in the autumn of 1973. Solving our problems is not just a matter of pulling through. Oil will buy time but will not change the fundamentals of British industry or the British economy.

The second major fallacy in the Government's policies concerns the effect of the borrowing requirement. Here I agree with a great deal of the analysis of the hon. Member for Tottenham. This fallacy was summed up in a leader in The Times last Thursday. It stated: The present level of interest rates is the direct consequence of the need to fund an excessive government borrowing. That statement is just plain wrong. I should like to know whether the Government agree with it. Does the Under-Secretary of State for Industry agree with it? I would be very surprised if he did. How can it be true?

The real rate of interest at any time is certainly a factor of the supply of money to lend and the demand for money to borrow. If the real rate of interest was high, it might well indicate that demand for money to borrow was tending to outstrip the supply of money to lend. This is an easy equation. It might in time be due to excessive Government borrowing. It might be due to many other things too. But the important words are "real rate of interest", for it is only the real rate of interest that can have any relevance in the balance between supply of and demand for money to lend or to borrow. If the real rate of interest were low, that would surely indicate that the supply of money to lend was outstripping the demand for money to borrow. But the real rate of interest is low. To be precise, it is slightly less than zero. The Treasury is forecasting a 15 per cent. rise in the retail price index in 1977 and the minimum lending rate is currently slightly below that figure.

When there is still a historically high personal savings rate—and there is—when the real minimum lending rate is slightly negative—and it is—and when industry has a great deal of machinery standing idle and the index of industrial production is only 2 per cent. above what it was in 1970, there is no reason to suppose that the borrowing requirement is too high.

The public sector borrowing requirement would be no problem at all if we adopted the sensible course and financed it by the sale of indexed bonds with a 2 per cent. or 3 per cent. rate of interest. With a real rate of interest of 3 per cent., I think that everyone would rush in to buy them. I shall be less extreme and suggest 2 per cent.

Although I do not believe that there is an argument for saying that the public sector borrowing requirement is too high, the argument about it in the present situation of the economy is not at all the same as the argument about public expenditure because the case for cutting public expenditure does not depend on one's attitude to the public sector borrowing requirement.

The case for cutting public expenditure is twofold. The first is one's view about the inefficiency and poor return of much of it in either economic or social terms, and I make that distinction. The second is the need to cut taxation. In my view, every penny of these latest cuts and more should have been used to reduce income tax. Had that happened, we should have been able to finance the borrowing requirement and we should have begun to get the economy moving forward again.

The Chancellor of the Exchequer made some very strange remarks about unemployment today. He quoted approvingly a remark of the hon. Member for Oswestry (Mr. Biffen), and that somehow worried me. It is not that I do not have great respect for the hon. Member for Oswestry, but when he and the Chancellor of the Exchequer of a Labour Government agree, something strange has happened to British politics, and I do not like it very much. However, the right hon Gentleman quoted approvingly a remark by the hon. Member for Oswestry that the Government could not do anything to achieve a target for employment. Has it really come to this? I dissent completely from that consensus view.

I say, in the words of the title of the Lloyd George-Keynes pamphlet of 1929, we can conquer unemployment and indeed we must. Looking back at the White Paper of last year, we find the Government saying, If we are to reduce unemployment to 700,000 in 1979, then our gross domestic product must grow at an average rate of 5½ per cent. over the preceding years. It will not grow by anything like 5½ per cent. over the preceding years. Last year we had a growth forecast of 4 per cent. But it was obvious that that could not get us back to full employment, so the Government further deflated the economy just to make sure, pour encourager les autres, or for some other reason; I do not know.

Now we have a growth forecast of 2 per cent., so the Government go in for yet more deflation just to make doubly sure. We know, therefore, that we shall never get back to full employment, at least in the foreseeable time span. This is a policy that will lead to unemployment levels which will be nothing short of insane within three to four years.

Finally on employment I cannot but agree with Mr. Wynne Godley, who summed up the position thus: There is not the slightest indication of when, how or through what agency any recovery from this prospective deepening recession will occur. I see none, either.

That brings me to the regional employment premium, and it is the maddest aspect of a mad Budget. I thought that the Government's strategy was to concentrate all their incentives on manufacturing industry. REP is angled specifically to manufacturing industry. I thought that the Government were still committed to giving help to areas of unemployment. REP is angled specifically to areas of high unemployment. I cannot see any logic in the Government's decision to abolish REP at this time.

The Leader of the Liberal Party asked the Prime Minister about this matter last week and he was told that the abolition of the regional employment premium would not make a substantial difference. The Prime Minister was of course referring to employment levels. But it will make a substantial difference in the South-West Development area, which I represent, and in all those development areas where it is now a very important part of maintaining employment in manufacturing industry.

I have here a letter from one of the mill companies in Scotland that was written to my hon. Friend the Leader of the Liberal Party. It sets out quite clearly the argument that abolition of REP will undoubtedly lead to redundancies and, what is more, it makes the point that this is being done without warning. How can industry plan? What kind of agreement is there between the Government and industry about long-term planning when this kind of thing can be done at a moment's notice?

This afternoon the Chancellor stressed that cuts in public expenditure do not affect just people in the public sector. There is no doubt that the cuts that have just been announced, coming on top of previous cuts—starting with those announced by the Tory Government before they left office—have concentrated massively on the construction industry. When there are cuts in the construction industry and a moratorium on sewage and water schemes, who are thrown out of work? It is not the architects and planners working for water authorities and local authorities, but the people working in private architects' practices, private builders, private masons, bricklayers and carpenters who are thrown out of work.

Mr. A. J. Beith (Berwick-upon-Tweed)

In the concrete pipe industry—which is represented in my constituency—there are fears that the whole labour force will be given notice before Christmas because this moratorium has been added to a whole series of cuts.

Mr. Pardoe

This is true of all industries supplying goods and services to the whole sewerage, water, housing complex in this country.

What should be done? First, I want to echo the words of the right hon. Member for Taunton (Mr. du Cann) about the control and efficiency of public spending. We need a national efficiency audit to identify what is waste in the public sector and to make comparisons upon the return that we get from every pound spent in the public sector as opposed to money spent in the private sector. It should investigate what other countries get from their public sectors, and other aspects.

We need to introduce into local government and the Civil Service an incentive for cost cutting and higher productivity in the public sector. There is no incentive to cut costs or to improve productivity in the public sector. No one receives even a medal, let alone financial reward. Linked to this, we need far greater efficiency in local authority spending. Expenditure is now running well above the level agreed with the Liaison Committee and it will continue to do so because the Government say that there is no way in which they can introduce some form of discrimination between an authority that abides by the Liaison Committee levels and another that breaks them.

The Government go on reiterating that such discrimination would interfere with the autonomy of local government. I recognise the danger of central control, but surely it is legitimate to penalise authorities that do not keep to limits and to reward those that do.

A borough council in my constituency recently interviewed an officer from another large urban council. He was asked how his previous council tackled the problem of cost cutting and efficiency. He said that it did not tackle the problem because with grants such as his council received from the Government there was no incentive to do so. It was just as easy to employ another man or another 50 men because the Government would pay up to 80 per cent. of the cost, depending on the size and type of the local authority. We must introduce a tougher discipline in this field.

It must be said that the pay policy has worked. The rate of increase of wages has fallen from 27 per cent. in the year ending September 1975 to 17½ per cent. in the year ending September 1976. One can argue for a long time whether that is due to pay policy or the general decline in economic activity, unemployment, and all the rest of it. My view is that it has been largely dictated by the pay policy and shows that it has been successful.

We should continue the links between pay limits and taxation, but we wish to see a change to more direct links. We have advocated over the years a direct personal link so that the individual who abides by the pay policy obtains rewards and the individual who does not gets penalised. I should be happy to see the Chancellor go to a halfway stage where individual companies are rewarded or penalised for abiding by the pay policy or otherwise.

I turn to the reform of taxation. We need to make a massive switch from direct to indirect taxes. We need to index the whole tax system, especially the threshold. I start from the basis that most people in Britain pay far too much tax. We need to introduce a credit income tax—but not the scheme which the Conservative Party concocted in a Green Paper because that was far too conservative. It left out the poor, so it did not solve the poverty trap—and there is no point in introducing a credit tax system that does not solve the poverty trap.

I am glad to see that the Government are reconsidering the wealth tax. I hope that they will carefully examine the advocacy of this tax by the Financial Times. It may seem slightly strange that the Financial Times should advocate a wealth tax. It has not advocated the Government's form of wealth tax, but it has advocated mine. However, I do not mind the Government taking it over.

I shall not read out the points, but for those who want to find out what an excellent wealth tax is I recommend them to read the Financial Times of 9th December and Mr. Anthony Harris's advocacy of my proposals. Incidentally, although the picture editor of the Financial Times has done a marvellous mock-up job, I must inform the House that I was not photographed together with Mr. Len Murray.

We need a commitment to growth in small enterprises and a commitment to a return to profitable private enterprise. One or two Labour Members have talked of the collapse of capitalism, when this time private enterprise can win through. Profits are now back to 6.9 per cent. of domestic income, but still well below the levels between 1964 and 1973 when the average levels were 12 per cent.

That is why industry will not invest. It is mainly a political problem. It is creating an opinion and a commitment to high profitability. We also need to see general profit-sharing, which has been shown in France and Germany to create an atmosphere in which high profits are seen to be a good thing for everybody.

The Government should not think that the fact the IMF has granted them a loan is any indication that the world's confidence in Britain has risen. Never has a major loan been so grudgingly given to a major industrial country in the whole history of the IMF. I suggest that a part of that grudging attitude towards us is not so dependent upon our economic failure as on our failure to govern ourselves. The world no longer has confidence in us as a parliamentary democracy.

9.19 p.m.

Mr. Arthur Blenkinsop (South Shields)

I should like to pick up some of the points mentioned by the hon. Member for Cornwall, North (Mr. Pardoe), particularly his comments on the impact of the Government's proposals on regional policy and the proposed abolition of the regional employment premium.

There is common agreement on the Labour Benches that the Government's industrial objective, as they have declared it, of seeking to get a greater development of export-led industrial success has been endangered, as the Government have admitted, by some of the levels of what we hope will be temporary interest rates.

We must also face the fact that the Government's proposals, made some time ago, to look at the relationship between blanket forms of regional aid, such as regional employment premium, and the needs of areas without specifying what was to take the place of REP has threatened some industrial development in areas where there is so much unused capacity in terms of unemployed workers and machinery. While many of us, examining the contribution that REP might make, have expressed our doubts about the amount of employment that it could provide, we have always insisted that if there were to be changes, either by way of a reduction of the premium or by way of abolition as the Government now propose, we must have clearly before us alternative Government moves for suporting industry.

We are assured that the Government are anxious to encourage more selective forms of industrial aid because they appreciate the criticisms and the doubts that have been expressed whether regional employment premium could help in providing employment. We have not yet had a sufficiently clear indication how alternative forms of more selective industrial aid are to work. The Chancellor has indicated that he proposes to increase the Government's contribution to the development agencies in Scotland and Wales and the Government's contribution to the National Enterprise Board.

It may be that my right hon. Friend is hoping that through these channels regional needs can be met. Many of us who represent the regions, particularly those of us who represent the Northern Region, are extremely doubtful whether that can be done. We are deeply concerned because our experience so far is that contributions via the NEB and more particularly the selective aid offered to specific industries in England have not been of much benefit to the development areas. Certainly this aid has not been much benefit to a region such as mine in the North of England where the unemployment figures are among the highest in the country and where, in parts of the region, there are totally unacceptable rates of unemployment.

So far, the specific forms of direct aid which have come through for the various industries—this is a proper form of Government intervention—have not been specifically designed to replace the aid given through the REP. We are particularly concerned about the situation in my area.

Those anxieties have been added to as a result of the Government pursuing their devolution proposals for Scotland and Wales and offering to those nations a greater focal point for pressure and with the added support being given to the Scottish Development Agency. All of these measures in some way threaten the position of the North of England.

Unless we can see clearly the Government's alternatives to replace these broad forms of aid which have formerly been available, we shall feel even greater anxiety over the development of the Government's proposals for Scotland and Wales. They cannot count on having in future the support they enjoyed on the Second Reading of the Bill if we are denied greater certainty about the way in which Government intervention is to operate.

Let me mention three or four particular areas in which Government statements are urgently needed. We want an assurance that in the present situation Government assistance towards some forms of public capital spending, such as on housing, education and training, will be given particular attention in areas such as ours which have high unemployment. In view of the levels of social benefit that we rightly regard as necessary it makes little sense to maintain or increase unemployment, to deny to men and women the positive work and contribution they can make. We need a clearer statement from the Government on this aspect.

We want to be assured that the Government will make fuller use of the Industry Act to help small public and private industries that are in grave danger. Some of these are badly affected by the high interest rates which damage their prospects of maintaining their level of work and of carrying out further development. This is true of electronics and clothing, but it applies to other industries which were brought in to help to diversify the economy of the North.

There is then the major problem concerning some of our heavy industries, and I am thinking particularly of the manufacturers of heavy power station plant. This is a specific issue of major concern to us in the North, but I appreciate that it is not peculiar to the North-East. It is nevertheless a major employer of labour and Government decisions about it are urgently awaited.

I was glad to hear today's announcement about the Tyne Metro, saying that the Government have rightly accepted the challenge of providing the heavy further expenditure that is required to see through this major transport development. The project is of the greatest importance to our manufacturing industry as well as to the mobility of workers in the North-East. The announcement will be a great fillip to industry there. Any other decision would have been a tragedy for the area.

Another area of special concern is shipbuilding and ship repairing. We are all familiar with the reasons for the delay in development here. We welcome the announcement of the possibility of major orders being placed by the Polish Government. That is an example of the practical work that can be done by public enterprise.

Major parts of the ship repair industry are already under public ownership. We need the Bill to be enacted to give us the necessary powers for public investment in a profitable and effective ship repair industry, but something can be done without waiting for the final enactment of the Aircraft and Shipbuilding Industries Bill. That is a part of the positive intervention that it is right for the Government to undertake. It is one of the tests of the Government's intent that we must have in our minds.

If the Government are to go forward with the abolition of certain forms of aid which we have had in the past—some say that those methods have been wasteful and I agree that they have not necessarily been the most effective way of generating aid—we want a clear indication how alternative forms of aid are to operate.

The people in the North and in other development areas, in return, accept their responsibility. They must. There is no doubt that the success of Government intervention in transport requires a return and a response from the ordinary people in the area. That is a responsibility we have to take upon our shoulders, and I believe that we can shoulder it.

9.31 p.m.

Mr. Nigel Lawson (Blaby)

As it is getting late and several hon. Members wish to speak, I shall not follow the remarks made by the hon. Member for South Shields (Mr. Blenkinsop), or the fascinating remarks we have heard from other hon. Members on both sides of the House—

Mr. Flannery

On a point of order, Mr. Deputy Speaker. Is it in order for an Opposition Whip to take up Back Benchers' time?

Mr. Deputy Speaker (Mr. Oscar Murton)

That is not a matter for the Chair.

Mr. Lawson

I am sorry that hon. Gentlemen below the Gangway on the Government side are so frightened of the power of argument.

Because of pressure of time, I shall not follow what has been said, but it would be wrong not to refer to the devastating speech made by the right hon. Member for Newham, North-East (Mr. Prentice). What he said carried the whole political debate on public expenditure a great deal further.

For charitable and other reasons I shall begin by commenting favourably on two parts of the Chancellor's statement. Despite all the ballyhoo we read in the newspapers day after day about the great safety net for the sterling balances and how these great negotiations would solve our problems, the Chancellor of the Exchequer said not a word about that misbegotten Prime Ministerial initiative. I am wholly at one with the Chancellor in his estimate of the importance of that matter.

Secondly, it is true that, largely as a result of the £700 million net of public expenditure cuts announced in the package last week, the Chancellor has been able to tell the Managing Director of the International Monetary Fund in his Letter of Intent that he expects total public expenditure—defined net of debt interest, and net of the nationalised industries' capital expenditure—next year to be roughly £1 billion, or 2 per cent., less than this year. This achievement—assuming that it is achieved—can readily be put into perspective: it will be the first time for at least 20 years that public expenditure, defined as the Chancellor now defines it, has shown any real fall from one year to the next.

But what is it that that last statement implies? It really is something remarkable. Indeed, perhaps it is almost terrifying. It clearly means that despite three years of what the Americans call double-digit inflation, despite an appallingly large public sector borrowing requirement —the Chancellor has admitted that even his new estimate of an £8.7 billion borrowing requirement for 1977–78 is based on "unrealistically favourable assumptions", to use his own words from the statement last week—and despite all the wailing and gnashing of teeth, we have not yet had any public expenditure cuts whatsoever.

As the Letter of Intent makes cleat, public expenditure in the current year, which ends next April, is expected to be a good 1 per cent. higher than last year. Yet surely that does not tally with our own experience or that of our constituents. Surely they have felt the public expenditure cuts in terms of a deterioration of services across a wide range.

Indeed, they have. If it were possible to measure the output, the true value of output of the Government sector, taking local government and national government together, I have little doubt that it would already be showing a decline. But the input, which is what we do measure—namely, the people, the cost, the burden on the taxpayer and ratepayer—is still rising. The answer in large measure is that the extra resources have gone, as many hon. Members have pointed out, in extravagance and waste, in empire-building and overmanning, in pampered conditions and inflated salaries.

Time was when the public services existed to serve the public. Nowadays far too often they are increasingly run for the benefit of those who work in them. The upshot is that the ratepayers and taxpayers are steadily getting less value for money.

It seems to me that two conclusions can be drawn. The first is that there must now be very considerable scope for major economies in public expenditure without any corresponding decline in the standard that the public enjoy. However, as the hon. Member for Cornwall, North (Mr. Pardoe) said—the hon. Gentleman has now left the Chamber and left the Liberal Benches deserted—it may well be necessary, if we are to realise those economies, for those who work in the public sector to be given a real incentive to achieve them.

The second conclusion that I draw is that as long as these economies are not made, the present state of affairs that I have described provides a cast iron case for further public expenditure cuts. Quite apart from all the unassailable arguments for such cuts that have been made by my right hon. and hon. Friends and myself in economic debate after economic debate over the past couple of years, above all the excessive burden that is borne by a shrinking wealth-creating sector of the economy, it must surely be clear that the further the value of a pound on the social wage declines below the value of a pound in the pocket, the better off people will be with the second rather than the first.

I realise that if anyone calls from the Opposition Benches for further expenditure cuts they can expect to be represented by Labour Members as savage deflationists whose prescription, we are told, will cause riots in the streets.

Mr. Litterick

Indeed.

Mr. Lawson

The hon. Member for Birmingham, Selly Oak (Mr. Litterick) says "Indeed". That is what we can expect. In fact, that shows how out of touch the hon. Gentleman is. I have little doubt that further expenditure cuts, balanced by cuts in income tax, would cause not riots but rejoicing in the streets. The only riots would be in the Parliamentary Labour Party and round the Cabinet table. Why should we worry about that? After all, the Tribune Group consists of proven paper tigers. Only a few moments ago, we heard the hon. Member for Tottenham (Mr. Atkinson) wrestle with his conscience—and lose. And there are few things which would do more to restore the authority of the Prime Minister and confidence in the pound than the resignation of the Secretary of State for Energy.

But beyond this, it is a major confusion to imagine that further cuts in public expenditure accompanied by and even exceeding cuts in income tax such as we, on this side of the House, continue to advocate would necessarily be deflationary. They would not.

It is true that in the old days when the size of Government non-bank borrowing was more or less an independent variable determined by the twin aims of maintaining an orderly gilt-edged market and a so-called normal rate of interest, a reduction in the Budget deficit would tend to lead to a reduction in the money supply and thus to deflation. But today, when the monetary target is the basic datum—this is agreed on both sides; and as a gradualist by temperament, I am prepared to accept, for the time being, the 11 per cent. a year rise in money supply implicit in the DCE targets which the Chancellor of the Exchequer pledged himself to in his Letter of Intent—given no change in the monetary target, a cut in the Budget deficit implies not deflation but less Government non-bank borrowing and thus a lower rate of interest.

Certainly, in either case, there is likely to be a transitional increase in unemployment as jobs lost in the public sector reappear in the private sector. Of course, this produces a genuine human problem which it would be foolish to deny, but it would be wrong to exaggerate it. As an hon. Member said last week, it is always assumed—for some reason that I do not understand—that people engaged in making "X" cannot make anything else, and that if they were not making "X" they would be unemployed. I do not know why that should be true. … One gets changes in demand all the time, and industry is a very flexible instrument."—[Official Report, 14th December 1976; Vol. 922, c. 1213.] That was a quotation, for the benefit of hon. Members below the Gangway opposite, from the hon. Member for Bethnal Green and Bow (Mr. Mikardo), except that I cheated to a small extent and used "X" where the hon. Gentleman said "arms". However, the principle is the same and is generally valid. The Government know full well that this redeployment is essential.

I am glad to see the Chief Secretary on the Treasury Bench because he knows this perfectly well. In an important speech last month he said: our public expenditure has grown faster than our rate of economic growth could sustain. I also believe that this has been an important reason for our generally poor industrial performance. For it has meant that the public sector, that is, both central and local government, has pre-empted financial and manpower resources at the expense of manufacturing industry … That position has to be reversed. It will be both painful and difficult, Too, difficult obviously for the Chancellor of the Exchequer who, once again, funked it and carefully constructed this package, as he did its predecessor in July, so as to have the maximum impact on the construction industry, as hon. Members on both sides have pointed out, and so as to minimise the impact on public sector manpower.

That was one great opportunity which last week's mini-Budget missed. But there was an even greater missed opportunity, and that was the Chancellor's failure to seize the chance of escaping from that perversion of the mixed economy which lies at the root of so many of our economic problems.

Most of us in the House, and all of us on this ide, believe in the mixed economy, one part of which is owned by the State and the other in private hands—although there is obviously room for argument over where the borderline should be. Again, we can readily accept a mixed economy in which one part is directed by the political power and objectives of the Government and the other is guided by the myriad of individual aspirations that together constitute market forces—but here again I accept that there is obviously ample room for argument over where this subtly different borderline should precisely lie.

What no one in his senses, surely, in any part of the House can believe in or desire is a mixed economy of the kind we have today, in which the market sector itself is mixed, half slave and half free. This is not the mixed economy. It is the muddled economy.

There really is no future, no sense, in requiring—to repeat the Chancellor's own words in his introduction to last week's statement—a market sector that is "vigorous, expanding and profitable" if the cutting edge of enterprise and ambition is to be blunted by grossly excessive rates of taxation on both income and capital, or if large firms are to be suffocated in the bureaucratic embrace and small firms burdened with a mountain of paperwork, or if market forces are to be ossified by a barrage of detailed pay, price and dividend controls, or if companies throughout the land are to have so-called industrial democracy—it is not really that at all—imposed on them with all the sensitivity of a Bullock in a china shop, so that the board rooms of Britain become Mr. Jack Jones's adventure playgrounds, or if the family man on average earnings is only £5 a week better off working than not working. Indeed, as the right hon. Member for Newham, North-East reminded us, in a year's time the average family man is likely to be only £2 to £2.50 a week better off working than not working.

To do him justice, the Chancellor of the Exchequer himself has belatedly recognised this. He knows that the present system of taxes and benefits is social and economic lunacy, and in particular that the precise statutory obligations concerning benefit levels, so rashly enacted by the present Government, cannot possibly be honoured. The right hon. Member for Newham, North-East did us all a great service in pointing out clearly, openly and honestly that we have to look at this again, however much it may shock the hon. Member for Tottenham.

All the evidence suggests that the Chancellor tried very hard to do something about this in his package, but he was defeated. All that remains is the one wistful sentence in his statement, which needs to be savoured in full: In this context there are also important questions, which I shall want to consider with the TUC and other interested bodies, concerning the inter-relationships between changes in earnings, social security benefits, pensions and rate of direct and indirect taxation."—[Official Report, 15th December 1976; Vol. 922, c. 1533.] Indeed, it is quite clear—as the right hon. Member for Newham, North-East in his reference to that passage implied—that to have taken the action that the Chancellor knew was needed might have jeopardised that ignis fatuus, stage 3 of the Government's incomes policy.

Once again, the nation has had to pay an unacceptable price for that pernicious political lump, the Labour-only social contract.

There really is a choice that has to be made. Either, as the Left maintain—and I give the Government Members below the Gangway credit for consistency—the driving force within the entire economy must come from direction by the State or, alternatively, as we believe, if we are to maintain the mixed economy, the dynamic in the market sector must come from the fulfilment of honest personal ambition. What cannot make sense is the current Social Democrat compromise of the muddled economy, in which the mixed economy is maintained but its essential dynamic suppressed.

It never ceases to amaze me that the Labour Party appears to believe in every conceivable form of monetary or pecuniary incentive—to invest, to set up a factory where people do not want it, to take on labour that they do not need, and so on—every kind of incentive except the incentive to work.

In the same way, the Government are prepared to allow the exchange rate to fall in order to make exporting profitable—as indeed, it is now—and thus provide the essential basis for a healthy economic recovery, and then resolutely go on to deny the absolutely crucial personal incentives to the men who actually have to do the exporting.

Almost a quarter of a century ago, also at a time of serious economic crisis, Mr. R. A. Butler, as he then was, introduced his first Budget. Wisely framing it to meet the psychological needs of the time as well as the economic needs of the nation, he explained its theme in these terms: Restrictions and austerity are not enough. We want a system which offers us both more realism and more hope. The people today are in a mood to respond to the need for austerity, and to the tapping of that great untapped reservoir of national pride. But they will respond to the need for austerity only if they are at the same time provided with the basis for hope. Last week the Chancellor fudged the austerity and denied them the hope. That, rather than the size of the public sector borrowing requirement, is the true measure of his failure to rise to the occasion.

9.52 p.m.

Mr. Douglas Crawford (Perth and East Perthshire)

I apologise for missing the opening speech by the hon. Member for Cambridge (Mr. Rhodes James). He represents a lovely city in which I spent three happy years as an undergraduate.

When he signed the 1706–7 Act of Union, James Ogilvy, the First Earl of Seafield, was heard to say, in words which have subsequently been wrongly Scotticised and heavily tinged with irony: Now there's ane end of ane old song". Last week in the debate on the Scotland and Wales Bill we had the beginning of an end of another old song—the Union of the Parliaments of Scotland and England. However, in the midst of all this there is one old song that seems never ending—the Conservatives' by now bimonthly recital of cut-backs, recession, doom and gloom.

To someone like myself, who has been in the House for only a month or so more than two years, there is already a world-weary sense of déjà vu. There is a crock of gold—or soil—at the end of the rainbow which is never reached. Maintaining the French, perhaps the previous Prime Minister, the right hon. Member for Huyton (Sir H. Wilson), was right to go when he went. He could be confusing some cynics who said "Après lui le deluge".

In all the debates, the SNP puts Scotland first. Our constituency is the constituency of Scotland—not of any one part of it, not of trade unionists only, not of business men only, not of farmers only, not of workers only, not of businesses only. My constituency is the whole of Scotland. We deprecate those who would set capital against labour, those who would set labour against capital. Our constituency is not one class of society. It is our country, and our country is suffering grievously at the hands of this Government and of this system of centralised administration and inflexible economic management.

Scotland is the country in the British Isles that has the greatest potential for growth and at the same time suffers most. Before we have the complaints from the "workers-of-the-world-unite" faction from Merseyside and South Wales, I must remind the House that when we talk of Scotland we talk of a nation, not of another region of England. On the crudest and yet the most human and most commonly understood of comparisons—that of employment—we in the SNP take no great pride and place no great faith in the fact that the ratio of unemployment in Scotland relative to Great Britain has dropped from 171 to 128 to 100 in the past three years. During those three years there has been an actual rise in unemployment in Scotland of over 90 per cent. at a time when unemployment rates in other small European countries have remained between 1 per cent. and 3 per cent.

Much is made of the seeming imbalance of public expenditure in Scotland and England. There are many mistakes in the Treasury's figures and we shall shortly be highlighting them. I shall look at one—the per capita expenditure on nationalised industries where we find a curious statistic. At £99 per head in Scotland this item is, curiously enough, almost twice as high as that for England—£54.

But the difference would appear to be almost wholly concerned with oil and gas. It would appear that the Treasury is assessing all capital expenditure on oil and gas as identifiable Scottish public expenditure. I underline the word "Scottish". It is not English public expenditure or United Kingdom public expenditure.

The Treasury really cannot have its cake and eat it. On the one hand, we are told that the oil belongs to the United Kingdom, but, on the other hand, that the public expenditure involved in its exploitation is a burden on Scotland. If it is United Kingdom oil, the burden should be a United Kingdom burden. If it is exclusively a Scottish burden, this means that it is de facto as well as de jure Scottish oil, and I am glad that the Treasury has conceded Scotland's case on this matter.

Having made what will be to the "Oxbridge" gurus of the Treasury a debating point, but what to us in the SNP is a very real point, I should like to state categorically and unequivocally that Scotland is suffering. It has been said before from the SNP Bench and it will be said again, because every time it is said, more and more people in Scotland will take heed. Scotland is suffering because she is part of a monolithic unitary economic State. That monolithic State has brainwashed some people in Scotland into a thing called the "Scotland is British Campaign". What a commentary on these people's self-confidence!

Here we have a few business men and a few tame trade unionists so lacking in logic that they remind me of what Punch said in the late 1950s: Under Mr. de Valera, Ireland changed its name to Eire. Britain still retains its name. It's called England just the same. Scotland is Scottish, not British. England is English, not British. The only thing that is British is Britain, and the concept of Britain as a unitary economic State is of no use to Scotland. Scotland is a country which, with a healthy balance of payments, with tourism and financial services providing valuable invisible earnings, could soon bring down interest rates and increase public expenditure in those areas of awful deprivation in the West of Scotland and create a healthy and stable environment for business investment.

If the tame business men and tame trade unionists in the "Scotland is British Campaign" are happy to play bridge on the decks of the "Titanic", then so be it. But those business men, trade unionists and others in the SNP most certainly are not prepared to do so. Let us in Scotland do our own thing. The sooner we can establish a strong Scottish pound in a self-governing Scotland, the better. Scotland, for all her needs and because of the patent failure of successive Governments, Conservatives as well as Labour, is not getting the economic treatment which she will easily be able to administer to herself with self-government.

I should like to turn briefly to two industries that are vital for employment in Scotland—construction and whisky. The House will be now well aware of the fact that out of the 121 areas of the United Kingdom that suffer the worst urban deprivation 117 are in the West of Scotland. My hon. Friends the Members for Dunbartonshire, East (Mrs. Bain) and Clackmannan and East Stirlingshire (Mr. Reid) have driven this message home and yet the Government have done nothing about it. The cutbacks in expenditure on construction will have devastating effects.

Mr. Robert Hughes (Aberdeen, North)

Who is responsible?

Mrs. Winifred Ewing (Moray and Nairn)

The hon. Gentleman should get up.

Mr. Robert Hughes

rose—

Mr. Crawford

I shall not give way. It is too late.

Mr. Robert Hughes

rose—

Mr. Speaker

Order. The hon. Member for Perth and East Perthshire (Mr. Crawford) is clearly not giving way.

Mr. Crawford

The cut-backs in expenditure on construction will have devastating effects not only on employment in the industry in Scotland but on those areas of deprivation and squalor in the West of Scotland. I know that English cities suffer also, but the West of Scotland is a searing indictment and a dreadful monument to generations of Labour-controlled local authorities. The present Government and last week's public expenditure cut-backs will make matters far, far worse.

The subject of whisky is another matter. It is perhaps little coincidence, given the words of Robert Burns that freedom and whisky gang thegither", that my hon. Friends the Members for Banff (Mr. Watt), Moray and Nairn (Mrs. Ewing), Argyll (Mr. MacCormick), Galloway (Mr. Thompson) and Clackmannan and East Stirlingshire, as well as myself, represent constituencies with large whisky interests.

Mr. Robert Hughes

It shows, too.

Mr. Crawford

The 1975 United Kingdom increase in duty on whisky resulted in a decrease in both consumption and production, consumption overseas as well as at home. The Chancellor cannot go on milking—no pun intended—this industry for ever. The industry has suffered excessively since, in the words of a Scotch Whisky Association booklet, After the Union of Parliaments in 1707 English Revenue staff crossed the border and to begin their lengthy attempts to bring whisky production under control. Even in his Christmas and Hogmanay present the Chancellor has been less than fair to Scotland. He said last week that the price of whisky would not go up until the new year. I have had it put to me that he has not permitted—

It being Ten o'clock, the motion for the Adjournment of the House lapsed without Question put.