HL Deb 22 July 1976 vol 373 cc958-80

3.45 p.m.

The LORD PRIVY-SEAL (Lord Shepherd)

My Lords, if the debate is to continue, it may be as well if I repeat a Statement which is now being made in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:

"With permission, Mr. Speaker, I shall make a Statement about measures which the Government have decided to take to secure our social and economic objectives.

"Our overriding priority is to restore the prosperity of the British economy through the regeneration of our industry and to provide the essential conditions to bring down, and to keep down, the intolerable level of unemployment. To do this we must ensure that manufacturing industry has sufficient resources available to take advantage of the exceptional opportunities open to us in the export field; we have got to get our rate of inflation down to the level of our competitors' and hold it there; and we have got to do both in a way which will protect the poorest and weakest of our people and retain the social consensus on which the success of all our policies depends.

"In my Budget speech last April I said that I expected our gross domestic product, which fell during 1975, to grow by about 4 per cent., and manufacturing output to grow by about 8 per cent., in the year to mid-1977. The increase in demand would come largely from exports and stockbuilding: little from consumption.

"In fact the recovery has proceeded faster than I then expected, led by a vigorous growth in exports. On present policies I would now expect GDP to increase over the 18 months from the first half of 1976 at an annual rate of 5 per cent. and exports of goods and services by 11 per cent. This could imply a very rapid rate of increase in manufacturing production, perhaps as much as 9 per cent. We must as usual expect a lag before these developments affect the present unacceptable figures of unemployment; but on current prospects I would expect unemployment to start falling before the end of the year. I shall have more to say about this later. Money supply (M3) has grown well within the guidelines I set at the time of the Budget.

The balance of payments on current account, however, remains in substantial deficit. The 12 per cent. depreciation of sterling since March will inevitably worsen the balance of payments in the short term, and make it more necessary than ever for us to maintain the confidence of those from whom we may have to borrow to finance our external deficit. On the other hand the increase in our exports and in import substitution deriving from our increased competitiveness will later bring a massive improvement.

In fact we now have a unique opportunity for export-led growth, something we have sought in vain ever since the Second World War.

There are two possible threats to our success. In the previous cycle an excessive rate of growth in manufacturing production led quickly to supply constraints and bottlenecks in many sectors of industry. We also suffered from an excessive growth of the money supply. We saw a price explosion and an unacceptable deficit on our balance of payments. We will not let this happen again. In tackling these problems the Government benefit greatly from the co-operation which has been established with both sides of industry; this has made possible an agreement on prices and incomes between the Government, the trade unions and industrial management, which in one year has halved the rate of price increases. It has also produced a dramatic improvement in industrial relations which has greatly reduced the amount of disruption in the flow of industrial supplies. The days lost through strikes so far this year have been less than half last year's figure which was itself only a third of the figure for 1974. The same consensus has successfully launched the industrial strategy which is an essential element in this country's economic regeneration.

"My right honourable friend the Prime Minister and I have said many times that the Government stand ready to take whatever action may be necessary to make room for the growth in exports and productive investment on which this country's future depends. It remains my considered judgment that there is no call for major action in the current financial year. Firm action to break into the tendency for public expenditure to exceed planned levels has already been taken. In particular, our new techniques of control, notably cash limits, will ensure that expenditure in 1976/77 is strictly contained within the limits which the Government have published. But there is no economic or financial case for further reduction in public expenditure or the PSBR this year, which I now estimate will be about £11½ billion, about £½ billion less than the Budget estimate.

"It has been right for us, like other countries, to run a large fiscal deficit in the depths of the recession so as to keep unemployment lower than it would otherwise have been. It would, however, be wrong to do this through the period of recovery which is now beginning. Unless the deficit falls steadily over the next three years as expension proceeds, the financing of the public sector will pre-empt private savings which productive industry is likely to require on a substantial scale to finance stockbuilding and investment; or it will lead to an excessive growth of the money supply which would refuel inflation.

"Given the economic prospect as we now see it, we intend that the PSBR for 1977–78 shall be reduced to £9 billion or less.

"Next year the recovery of the economy is likely by itself to reduce the PSBR only by something like £1 billion to about £10½ billion. This alone will not be enough. Fiscal action is needed in addition to achieve the objective which the Government set.

"I believe that it would be wrong in present conditions to load on to taxation anything approaching the whole burden of adjustment. In particular, a major increase in the burden of personal taxation would have unacceptable consequences for take-home pay. It could wreck our counter-inflation policy in the coming year.

"I must therefore look to public expenditure for a major contribution and I am announcing now, in advance of the usual White Paper, public expenditure reductions of £1 billion at 1976 Survey prices for 1977–78, which will be the crucial year for recovery.

"Since the February White Paper (Cmnd. 6393) was published the Government have approved a number of proposals which add to expenditure programmes in 1977–78. The main items are the various measures the Government have taken to relieve unemployment, the uprating of social security benefits from next November and the net cost to the Exchequer of the introduction of child benefits. These were announced as claims against the contingency reserve provided in the White Paper and have not therefore added to total planned expenditure.

"In deciding where the reductions of £1 billion should fall, the Government have avoided mechanical cuts across the board. We have deliberately decided to maintain the main social security benefits like pensions so as to provide the maximum support to those in need here at home. We have also decided to maintain, untouched, our aid programme to the Third World. I shall later be referring to further measures which the Government intend to take to assist employment among young people.

"The main purpose of our measures is to allow manufacturing industry to take the maximum advantage of the opportunities now presented to it. Because of the priority which the Government are giving to the industrial strategy, we have been concerned to avoid damaging the trade, industry and employment programmes.

"We intend to move towards putting emphasis on selective, as against general, assistance to industry. We plan therefore to increase significantly the resources available for selective assistance to industry through the NEB and the Scottish and Welsh Development Agencies, as well as from the Government direct, so as to support the work on the industrial strategy now under way in NEDC. Our experience shows that this is the most cost-effective way of helping to achieve the reversal of our post-war industrial decline. As part of this policy of selective support for industry, the Government will also watch vigilantly the need for any extension of their existing selective import restraints to provide temporary protection to viable industries faced with unfair foreign competition. We have already taken action and we are anxious to discuss with both sides of industry the need for further action of this kind in particular cases.

"In some areas we have already increased provision for public expenditure, especially for the Department of Employment's programme, including funds provided to the Manpower Services Commission for training. In addition, we are prepared to make provision, within the revised programme, for a possible Government contribution in 1977–78 to the collective funding of any scheme of apprentice training which may emerge from the public discussion of our recent Consultative Document on that subject. We shall be announcing before the Recess further measures to help with the serious problem of unemployment among young people.

"This shift of emphasis towards selective assistance to industry will require savings in expenditure of three kinds. First, Regional Employment Premium is at present £3 for men and £1.50 for women: in future it will be at a single rate of £2 for both. Secondly, we will introduce legislation to reduce the employer's rebate from the Redundancy Fund from 50 per cent. to 40 per cent. Thirdly, savings will be obtained on regional development grants by imposing a delay of some three months in payment of approved claims. We also propose to concentrate these grants in future on manufacturing investment by withdrawing eligibility from the construction and private milling industries, the location of which for the most part is not determined by any incentive.

"Apart from further selective action still to be decided, the net effect of all these measures will be to reduce the trade, industry and employment programmes in 1977–78 by £105 million.

"Net savings of £157 million will be made on the capital investment programmes of the nationalised industries other than BNOC. These savings are spread between the industries and should not affect the main industrial objectives of any of them.

"We believe the time has now come to review the treatment of the nationalised industry programmes generally in our public expenditure figures so as to bring our practice more closely into line with that of other countries. The Expenditure Committee"—in the House of Commons—"will of course be consulted on this review. No general change will be made until it is completed. Meanwhile we are treating BNOC as a special case.

"There will be net savings of £87 million on roads and related expenditure.

"Net savings of £25 million will be obtained on existing agricultural and forestry programmes, largely by deferring the payment of capital grants, and ending the lime subsidy.

"Our existing plans envisaged that food subsidies would be largely phased out by 1978–79. This process will be accelerated, to save £80 million in 1977–78. The effect of this acceleration on the RPI will be only about 0.1 per cent.

"The Government have decided to save £5 million on overseas services other than aid in 1977–78.

"The planned defence budget for 1977–78 will be cut by £100 million. This will be achieved by rephasing the works programme and some deferrals.

"Approvals for new housebuilding by local authorities are running at a substantially higher level than allowed for in the estimates in the last Public Expenditure White Paper. It is therefore necessary to reintroduce control over this programme and to limit the rate of approvals so that overspending is avoided. Reductions will not be imposed in areas where housing needs are greatest. In addition, net savings of £146 million will be achieved, principally by reductions in local authority mortgage lending. My right honourable friend has consulted the building societies, who have expressed their willingness to help fill this gap in mortgage lending and I understand that a press statement will be made later today by my right honourable friend and the Chairman of the Building Societies Association.

"Net savings of £81 million will be obtained on existing programmes for other environmental services.

"For 1976–77 we have agreed to postpone the 5p increase in the charge for school meals that was due this September but if the charge were kept at 15p in 1977–78, that would add £43 million to net expenditure on school meals in that year. We propose to limit this addition to £15 million by raising the charge by 10p in the autumn of 1977. We shall save £45 million on the rest of the education programme, mainly by curtailing capital expenditure on the universities and other educational building and reducing the budgets for science and the arts. The total net saving on this programme will therefore be £30 million.

"We have given high priority to the poorer members of our society and particularly to old age pensioners. We shall continue to honour our commitments to uprate the main social security benefits regularly and we shall maintain general social security expenditure in 1977–78. Furthermore, we propose to increase the rate of the new mobility allowance in November 1977. But we shall be introducing legislation to restrict the unemployment benefit entitlement of those with substantial occupational pensions; and non-contributory invalidity benefit for housewives will now be introduced in November 1977. Taking into account the increase in mobility allowance, these measures will save about £21 million net in 1977–78.

"Reductions of £70 million will be made in 1977–78 in the health and personal social services programme as a whole, but there will be no cuts in services for patients in the NHS. This will consist of £20 million on capital expenditure on the NHS and on local authority personal social services; £20 million by way of extra receipts from increases in dental and ophthalmic charges and £10 million from savings on overheads and measures to curb the drugs bill; and it is proposed to save a further £20 million in 1977–78 (£40 million in a full year) by legislation to recoup mainly from insurance companies the full cost to the NHS of treating road accident cases. The Government will hold immediate consultations with the insurance companies and other interests concerned.

"A reduction of £10 million will be made mainly in expenditure on Government accommodation.

"A reduction of £35 million will he made in Northern Ireland. Some £3 million of this is the result of the new equalised rate of regional employment premium. The remainder of the cuts will be spread widely over the different Northern Ireland programmes.

"In those cases where the reductions I have announced fall on the spending of authorities other than central Government, the necessary consultations about the form of the savings will be initiated at once. Where Parliamentary authority is required, the necessary Bills or Orders will be introduced in due course.

"These savings do not include any reduction in local authority current expenditure below the provision in the public expenditure White Paper published in February (Cmnd. 6393). But it is essential that stringent economy should be exercised to avoid exceeding this provision. We shall be discussing this matter, and also the implications of the reduction in capital expenditure of the local authorities, with the Consultative Council on Local Government Finance and with the Convention of Scottish Local Authorities.

"I will circulate in the Official Report a table showing the effect of these measures on the main public expenditure programmes. Together with the saving of £60 million on debt interest which results in 1977–78 from the measures I am announcing this afternoon, the total public expenditure saving will be £1,012 million. This will reduce the PSBR in 1977–78 by about £800 million.

"I turn next to taxation. I shall of course have to make my usual Budget judgment in nine months' time, next spring, when the course of the economy in the following year can be predicted more surely. However, in addition to the public expenditure measures which I have just announced, further action in the tax field is needed to reduce the PSBR to £9 billion. A massive increase in income tax or indirect taxation would be disastrous for our counter-inflation policy, particularly since the effects would be felt immediately in the middle of the next pay round. The Government have therefore decided instead to make an addition of two percentage points to the employers' national insurance contribution. This will accrue to the Exchequer. The Government will be introducing legislation early in the new Session, so that the addition can take effect from 6th April 1977. It will yield about £910 million in 1977–78 and about £1,030 million in a full year. Less than half of this will come from manufacturing industry. This sum will further reduce the PSBR in 1977–78 by about £700 million.

"The addition, like the existing contributions, will be an allowable cost for purposes of the Price Code and corporation tax. My right honourable friend the Secretary of State for Prices and Consumer Protection will be announcing today the Government's decisions on the Price Code to come into effect on 1st August. These will include a rate of 50 per cent. for investment relief instead of 35 per cent. proposed in the Consultative Document and an adjustment factor of 1.4 for depreciation instead of the earlier proposal of 1.3. These further changes should contribute to industrial expansion and in themselves make little difference to prices.

"The total estimated effect of the public expenditure and tax measures I have announced is to increase the price level by about 1 per cent. by March 1978, nearly two years from now.

"On current forecasts, these measures will suffice to achieve the Government's objective of getting PSBR down to £9 billion in 1977–78. £9 billion would be about 6 per cent. of GDP at current market prices, compared with about 9 per cent. which we now forecast for this year, and nearly 10 per cent. last year. It thus represents a reduction of one-third in the PSBR in the first full year of recovery. The General Government Financial Deficit, which excludes on-lending to public corporations and the private sector, is the concept used by some other countries and is often quoted in international comparisons. The measures I have announced will reduce the General Government Deficit from just under 6 per cent. of GDP this year to 3 per cent. of GDP next year—a reduction of nearly a half.

"The Government's plans for the reduction of the PSBR will, of course, make it easier to finance the borrowing requirement without excessive growth of the money supply. It will mean less pressure on interest rates, to the benefit of industry, and of Government and local authority borrowing. In the current year, 1976–77, money supply has so far been growing at an annual rate of about 10 per cent. Because borrowing needs and gilt sales inevitably vary from quarter to quarter we must expect rates higher than this for some periods, especially towards the end of the financial year. It is a mistake to attach too much significance to such fluctuations. For the financial year as a whole money supply growth should amount to about 12 per cent. Such an outcome would be fully consistent with our objectives for reducing inflation. I repeat the assurances I have given that I do not intend to allow the growth of the money supply to fuel inflation, either this year or next. If inflation and output move as now forecast, I would expect the growth in money supply to be lower next year than this.

"There remains a risk that, even after the reduction in the PSBR, the necessary restraint in the growth of the money supply might result in industry being denied essential finance. I intend to ensure that that does not happen. It is essential that any increase in bank lending should be directed to priority borrowing in particular for exports, import saving, and investment and working capital for productive industry. This means that both lending and commitments for the future to customers in all non-priority categories must now be strictly limited and we shall monitor carefully what happens in these categories. The Governor is issuing a notice to the banks emphasising the necessity of applying restraint in this extended form, in reinforcement of existing requirements.

"As a result of the measures which I have announced this afternoon, I now expect GDP to increase over the 18 months from the first half of 1976 at an annual rate of about 4½ per cent. and manufacturing production at a rate of about 8½ per cent. These are still better figures than I was expecting at the time of the Budget. Unemployment in early 1978 will still be lower than then expected, even though the measures may by then have reduced the fall in unemployment by about 60,000. With the help of a much better balance in the public sector's finances, we can look forward to the economic recovery over the next 18 months at a pace which is both vigorous and sustainable and which will not refuel inflation.

"The measures I have announced this afternoon have one overriding purpose—to make certain that this recovery can be sustained until full employment is achieved. This means that sufficient resources must be made available for manufacturing industry to take full advantage of the export opportunities which now present themselves. The modernisation and expansion of our manufacturing industry must remain our first priority. My right honourable friend the Prime Minister again emphasised the Government's commitment to it when he chaired the important meeting of NEDC earlier this month. I believe that these measures will enable both sides of industry to work closely together with the Government to achieve our common aim with full confidence that the remaining obstacles to our success are now removed."

My Lords, that completes the Statement.

Following are the Tables referred to:

Table A below indicates the effect on the main public expenditure programmes of the measures announced today and other changes since publication of Cmnd. 6393, including the allocation of expenditure to programmes from the contingency reserve. Fuller details of the revised programmes, including any further policy or estimating changes made subsequently, will

TABLE A
1977–78: PUBLIC EXPENDITURE PROGRAMMES
£m at 1976 Survey prices
Cmnd 6393 revalued Changes before Chancellor's statement Total (1)+(2) Changes announced on 22.7.76 Total (3)+(4)
(1) (2) (3) (4) (5)
1. Defence 5,644 — 5,644 -100 5,544
2. Overseas aid and other overseas services 1,126 +149* 1,275 -5 1,270
3. Agriculture, fisheries, food and forestry 967 -116* 851 -105 746
4. Trade, industry and employment 2,469 +132 2,601 -105 2,496
5. Nationalised industries capital expenditure** 3,310 — 3,310 -157 3,153
6. Roads and transport 2,500 -13 2,487 -87 2,400
7. Housing 4,435 — 4,435 -146 4,289
8. Other environmental services 2,481 -14 2,467 -81 2,386
9. Law, order and protective services 1,822 +11 1,833 — 1,833
10. Education and libraries, science and arts 7,386 -24 7,362 -30 7,332
11. Health and personal social services 6,611 -3 6,608 -70 6,538
12. Social Security 11,359 +200 11,559 -21 11,538
13. Other public services 867 -32 835 — 835
14. Common services 813 -6 807 -10 797
15. Northern Ireland 1,599 -2 1,597 -35 1,562
Total programmed expenditure 53,389 +282 53,671 -952 52,719
Civil Service staff costs -62
Total programmes 53,327 53,671 52,719
Contingency reserve 1,050 706 706
54,377 54,377 53,425
*See Note (2)(b) below. **Excluding BNOC.

NOTES TO TABLE A:

Column (1) of the above table gives the main programme totals in the February 1976 White Paper (Cmnd. 6393), revalued to 1976 Survey prices.

Column (2) indicates the changes due to—

  1. (a) announced policy changes up to 21st July 1976 (details of these changes are given in Table B)
  2. (b) some estimating changes on certain programmes, already identified during the course of the public expenditure Survey, including a revised estimate of EEC contributions in Programme 2, which is partly offset by a revised estimate of the cost of agricultural support in Programme 3;
  3. (c) reductions in civil service staff costs (paragraph 32 of Cmnd. 6393).

Column (3) gives the sum of columns (1) and (2).

Column (4) indicates the net effect of the measures announced by the Chancellor of the Exchequer on 22nd July 1976.

Column (5) gives the sum of columns (3) and (4).

be included in the public expenditure White Paper to be published later in the year.

TABLE B
ANNOUNCED CHANGES UP TO 21 JULY 1976
Subject Programmes affected £ million at 1976 Survey Prices Nature of Announcement
Employment measures 4, 15 56 By Chancellor of the Exchequer (OR 12 February, cols. 634–638)
Agricultural price review 3 12 By Minister of Agriculture, Fisheries and Food (OR 8 March, col. 28)
Extension of the Coal Industry Act 1973 4 16 By Under-Secretary of State for Energy (OR 25 March, cols. 717–722)
Assistance to the film industry 4 4 By Prime Minister (OR 29 March, Written Answers cols. 333–334)
Temporary employment subsidy, community industry and industrial schemes 4, 15 43 In Budget Statement on 6 April
Social security benefits 10, 12, 15 125 By Secretary of State for Social Services (OR 7 April, cols. 425–440)
Accommodation for Scottish and Welsh Assemblies 13 3 By Lord President of the Council (OR 14 April, col. 1382)
Pay policy: Employment measures 4 10 By Chancellor of the Exchequer (OR 5 May, col. 1304)
Child benefit scheme 12, 15 84* By Secretary of State for Social Services (OR 25 May, col. 284)
Additional capital for the Radio-chemical Centre Ltd. (TRC) 4 3 Secretary of State for Energy (OR 2 July, Written Answers, cols. 318–319)
Total 356
*Net Exchequer cost.
Lord DAVIES of LEEK

My Lords, before the noble Lord sits down will he explain fully the esoteric phrase "PSBR", which occurred about 11 times in the Statement?

Lord SHEPHERD

My Lords, it means public sector borrowing requirement. However, I think that we should leave this matter, as our convention is that first there should be statements and questions from the Opposition Front Bench.

Lord DAVIES of LEEK

Yes, my Lords, but I asked the question just for the Record.

4.17 p.m.

Lord CARR of HADLEY

My Lords, we are grateful to the noble Lord the Leader of the House for repeating this very long and complicated Statement. First, may I say that we on this side of the House welcome the decision to reduce the level of public spending for next year as an important, although belated, step in the right direction which we have been strongly urging for a very long time? However, is the noble Lord aware that the £1 billion cutback in spending which he has announced today on behalf of the Government has to be compared with the £20 billion increase which this Government have permitted over the last two years and that, had this huge increase not been permitted, both prices and unemployment would be much lower today and the international value of the pound much higher, to the benefit of every person in this country?

After such a long Statement I am sure that the noble Lord the Leader of the House will understand that one cannot now go into the details and that a further opportunity will be needed to discuss them. Perhaps the debate next week on the Second Reading of the Finance Bill may provide such an opportunity. May I, therefore, limit my specific points to the noble Lord to three very brief ones?

First, on defence, is the noble Lord aware that the further reduction he has announced today, coming on top of the two major cuts in defence expenditure which his Government have already carried out, does, in our opinion, amount to playing fast and loose with the security of this country and our capacity to contribute to the collective security upon which world peace itself depends?

Secondly, is the noble Lord aware that the very serious increase in industrial and business costs which will be represented by the tax increases which he has foreshadowed—something like £1 billion a year—is on the same level as the savings in public spending? Therefore, will the noble Lord give a very firm undertaking that, despite this and any other events, industry will be allowed, through the price policy and other taxation policies, to make the increased levels of profit without which there is no hope of a return to prolonged full employment in this country?

Thirdly and lastly, may we ask the noble Lord why no contributions to these necessary economies have come from the Government's current legislative programme? Is he not aware that the five measures guillotined this week will contribute an extra £800 million to public expenditure, and is he also not aware that the people of this country would far rather see cuts in that area than some of the cuts which he has announced?

4.21 p.m.

Baroness SEEAR

My Lords, we on these Benches also would like very sincerely to thank the noble Lord the Leader of the House for repeating his long and no doubt somewhat exhausting, if not exhaustive, Statement of the Government's new economic policy. We wish to welcome it. It is almost too late and nearly, if not quite, too little but at least it is welcome that it should have taken place now. We should like also to say that in the broad lines adopted by the Government they will have our support; that is to say in attempting to safeguard the position of those persons most in need and in maintaining the payment to pensioners, because it would have been disastrous if it had been necessary to make a further cut. We would also, however, like to doubt whether in all respects the proposals now being made are really going to be adequate for the major purpose of enabling manufacturing industry to proceed to expand profitably and with continuing profitability, so that the improvements which we are looking for will be continuous.

It is disappointing that the Government have found it necessary to put a 2 per cent. additional charge on the employers' social security contribution, which is of course a tax on industry and this underlines the very great importance of maintaining an incomes policy through 1977 and 1978. If there should be a rapid increase in earnings during that period then this additional tax on industry will become a very substantial amount since it is related to the actual amounts paid out to persons employed. The corollary of this whole policy is that there should be agreement on what happens after August of next year when the policy which has been entered into with the TUC and the CBI is due for renewal. Without that, the good intentions in this document could well ultimately be frustrated.

With the noble Lord, Lord Carr, we would like to know more about how the £100 million cut in defence expenditure is going to operate. It may well be that there is room for savings which will not affect our commitment and our standing with our allies, but when faced with the need to make reductions it is all too easy to make those reductions in the defence area, and although we would willingly have them made in that area if it can be done without any reduction in our influence in NATO and in the EEC, we should like to receive assurances on that point. We believe also that the reductions made by the Government in food subsidies is a move in the right direction—or, rather, the willingness to speed up the cuts, and that is something which we from these Benches have urged on the Government for a very long time.

The decision to cut housing expenditure subsidies is to be welcomed, but as we have said on previous occasions a far more fundamental investigation into the financing of housing, which is an enormous absorber of public expenditure, is long overdue. Finally, we would urge the Government to maintain their stand against import controls. As the noble Lord read the document I wondered whether there was a sign of weakening in this direction. In this direction, no attempt at import controls beyond the present situation would meet with support from these Benches.

4.26 p.m.

Lord SHEPHERD

My Lords, I am grateful for the way in which the noble Lord, Lord Carr of Hadley, and the noble Baroness, Lady Seear, have received the Statement. The noble Baroness was quite right in saying that it was rather a long Statement, but I will leave it at that. I entirely agree with the noble Baroness that the crucial issue is the third round of a pay agreement between the Government, the trade union movement and industry. That is very much the core. It will be more difficult than the two previous ones, but I believe—to use the word that is in the Statement—that the maintenance, the growth, which will need to be cherished, of the social consensus is of paramount importance in the months that lie ahead. Therefore, when we were considering the way in which we could find opportunities for providing the necessary investment for industry we had to keep very much in our minds how any proposals would affect the social consensus. Some of these proposals will be hard to be borne by those in the trade union movement. If I may say so, I rather expected to hear something from the noble Lord, Lord Carr, to that effect, other than the question of costs and the consequences to industry.

In these proposals the 2 per cent. surcharge will represent some 1 per cent. on RPI by 1978. Our view of the present buoyancy in industry, and the great opportunities that are to be found in the export field, is that this proposal can be borne without too much difficulty in the long term although in the short term there may be difficulties in cash flow. But if you were to seek this £9 billion target it could not come solely from public expenditure cuts. It had to come from another field, and the Government's judgment and decision was that this course bore less harshly upon the retail price index. If we were to take VAT and raise it by 2½ per cent, you would increase the RPI by 1¼ per cent., and if we were to increase (shall we say?) income tax by 3p in the pound this would be some £1.68 or £1.78 off the pay packet of a single person on average income. We had to look—and we have looked—at the best ways in which we can do least damage, not only to the social consensus but also to industry.

The noble Lord, Lord Carr, is quite right that we shall have plenty of opportunity to discuss the Government's proposals in regard to shipbuilding and the aircraft industry, and of course that is where much of the projected public sector borrowing will be required, as he said. But I should like the noble Lord, Lord Carr, to come to this House and say what future there would be for the 70,000 to 80,000 men working in the shipbuilding industry if that industry was not taken into national ownership.

In regard to defence, I agree with the noble Baroness, Lady Seear, that this is a matter on which one needs to act with care; and that I think we have done. There will be certain deferrals of equipment but not in any major degree. The bulk of it will be found by postponing for some 12 months some of the housing and building projects within the Defence Department, but when one sees the details of these proposals, I think the fears of the noble Lord, Lord Carr of Hadley, and the noble Baroness will be allayed. I agree with the noble Lord, Lord Carr of Hadley, that the Second Reading of the Finance Bill will give us an opportunity of discussing this matter after reflection. It is a very important Statement, and it is worthy of careful consideration. If I may say so, there should be no snap judgments.

4.31 p.m.

Lord SHINWELL

My Lords, may I ask my noble friend how soon we can expect a detailed statement of the proposed reduction in defence expenditure, so that we can ascertain whether the decision to reduce defence expenditure by £100 million was simply a concession to a section of the Labour Party in another place, or whether it was based on a careful study of what our defence requirements are? How soon can we expect a detailed statement? May I ask my noble friend, further, whether he is aware that already in the last year there has been a reduction of around £250 million in defence expenditure? This additional £100 million would seem to indicate that defence is no longer a No. 1 priority but is at the very bottom of the list. This is regarded as a serious matter, particularly by those, apart from this country, who view with disfavour a reduction in defence expenditure, which will place our security in possible jeopardy.

Lord SHEPHERD

My Lords, I am most grateful to my noble friend Lord Shinwell for his helpful remarks. I will see that he is provided with the information. I hope that what he wants to find will be in the material that I will place in the Library. If not, I will see that it is provided to him, and that it is circulated. I would only say to my noble friend that at least in one respect I think he will be satisfied that there are no cuts; that this is mainly a deferral. But I hope my noble friend will understand that in an exercise of this sort we must strike a balance, taking all Departments as a whole. My noble friend may feel very strongly about defence, and I rather share his view, but there are others who see the poverty, and I nearly called it the shame, of some of our city centres who feel that perhaps we should have sought to relieve housing a little more than we have been able to do. I suggest to my noble friend that it is entirely a matter of judgment. I hope when he sees the material that he will feel we have exercised a true judgment.

Lord WIGG

My Lords, no doubt my noble friend has noticed that the noble Lord, Lord Carr of Hadley, in the course of his questions made a comparison between a cut of £1 billion against the increase in Government expenditure. May I make a similar comparison in relation to defence? The cut of £100 million needs to be related to the fact that since the end of the war we have spent £57 billion, and the effectiveness of defence cuts depends not so much on the cut, but on what remains, and the purpose of what remains, because the ultimate test of a defence policy, surely, is not the amount spent, but whether you have got the right amount of fire power in the right place at the right time. The bill that we now have is colossal. My noble friend Lord Shinwell regards the cut as if it were a blow, but I can assure him that so far as I am concerned the cut is not savage enough, because a large part of our defence expenditure is largely on waste. The maximum contribution for the defence bill of this country, somewhere approximating £4,000 million a year, takes place annually at Trooping the Colour and the Royal Tournament at Olympia. This is the basic fact, and the reason for it lies primarily with the Conservative Party who introduced the 1957 White Paper.

Lord SHEPHERD

My Lords, I must say I do not share the opinion of my noble friend Lord Wigg in this matter, except to say that quality is the thing that counts, certainly for a country like ours which is a medium-sized Power. Again I say that when the details are known I believe the House will see that this is largely, if not entirely, a deferment, mainly in the field of accommodation.

Lord BOOTHBY

My Lords, is the noble Lord the Leader of the House aware that all these proposals, some of which are very welcome, will fail unless and until we can establish, with our friends abroad, a viable international monetary system, because the total collapse of the monetary system is the root cause of our predicament?

Lord SHEPHERD

My Lords, since the Second World War we have sought—have we not?—to establish a fairly stable international currency system. Until some three or four years ago it had served us very well. The strains, particularly of the last two years, of the international recession have placed that system in question, but I think today there is closer co-operation between the Finance Ministers of the major countries than perhaps ever before. It will be for countries to co-operate, to put aside (shall we say?) some of their national interests; but so far as this country is concerned we cannot really play a major role until we have placed our own house in order. That is what we must try to do. We cannot do it immediately, for it takes time. As I reminded the House in a debate some few days ago, the decline of this country has been a decline over very many years; a decline, perhaps, which we did not ourselves recognise, but it was there, and we now see the depths of it. If recognition of this gets through to the people, as I believe it is doing, we can deal with our problems and put our own currency in order. That is an essential factor before we can play the role we ought to play in establishing a stable and long-term international currency base.

Lord DAVIES of LEEK

My Lords, while thanking my noble friend the Leader of the House for the Statement, may I ask him one question. It is all very well to talk about defence strength, but we are living in cloud-cuckoo land if our agriculture and our economy are weak. May I ask my noble friend whether the National Farmers' Union and other agricultural interests were fully taken into confidence over the question of the lime subsidy? As simple as it seems, those of us who know what farming on marginal land or hill farming means, know that with the weather we have had, money spent on the lime subsidy would be money well spent for the food of the future, particularly in view of the fact that when the Common Market comes to a decision in 1978, food prices naturally will be expected to go up because we shall have to join in the full Common Agricultural Policy programme in Europe.

Lord SHEPHERD

My Lords, I am not a farmer. All I know is that the previous Administration got rid of the lime subsidy, and I have a suspicion that they may well have been right and that we were wrong to bring it back. We looked at the contribution that agriculture can make, and it appeared to us—certainly from the advice that was given to me—that the lime subsidy was one that we could well do without, taking into account all the other calls being made upon the Exchequer by agriculture.

Baroness PHILLIPS

My Lords, I take it that we shall have an opportunity to debate the cuts. On a first superficial hearing—and I may have heard some of it incorrectly—some of it sounds to me like mathematical nonsense. If we are to give an increase in child benefit of £1, which, when taxed, is reduced to 70p, and if we add an extra 10p on child meals, I work it out that the woman, at the end of the week, will be exactly 20p better off. But the 20p will have been a very costly operation, involving two Departments of Government. Surely there must be a more sensible way of dealing with this kind of thing.

Lord SHEPHERD

My Lords, mathematics was not one of my brighter subjects, but we had a look at this and we thought that it was about right. But perhaps my noble friend might like to raise this, I think most appropriately, on the Second Reading of the Finance Bill. Since she has given me notice of it, instead of relying upon matchsticks as a previous Prime Minister did, perhaps I may be able to give her a full and constructive answer.