The Manufacturing Base

HL Deb 26 April 1989 vol 506 cc1312-45

5.35 p.m.

Lord Ezra rose to call attention to the size of Britain's manufacturing base in the light of the balance of payments situation; and to move for Papers.

The noble Lord said: My Lords, the object of the Motion that I propose to your Lordships' House is consideration of the size of the United Kingdom's manufacturing base in relation to the balance of payments. We have heard today that the current account deficit on the balance of payments was reduced from nearly £1.7 billion in February to approximately £1.2 billion in March. This has been the occasion for much rejoicing in certain quarters, particularly in the City.

I think it is rather a sad state of affairs that a deficit of £ 1.2 billion in one month should be a cause for rejoicing. After all, it still indicates that by the end of this year we shall be in deficit to the tune of £15 billion or thereabouts should that sort of level be maintained, bearing in mind what happened in the previous two months. The rejoicing, of course, comes from relief that the situation was not worse, and we are all delighted that it was not. But what our aim clearly must be is to discover what means are at the disposal of the nation progressively to close that enormous gap. Before I try to indicate what I believe should be done for that purpose, I should like to go back a little in time.

On 10th November 1983 I put down an Unstarred Question in this House, the purpose of which was to ask Her Majesty's Government what they were doing to stimulate non-oil visible exports. I am delighted to see that on the list of speakers in today's debate there are two noble Lords who participated in that debate; namely, the noble Lords, Lord Hatch of Lusby and Lord Bruce of Donington. The reason for asking that Question at that time was that an historic point had been reached in the economic history of Britain. Leaving aside the war years, for the first time we had run into deficit on our manufacturing trade account.

In 1982 we had shown a surplus of £2 billion; in 1983 we showed a deficit of the same amount, approximately £2 billion. I thought that was a serious development and that attention should be drawn to it. At that time we were showing a quite substantial surplus overall, and it was largely due to the oil. The question then asked was: what happens when the oil revenues diminish? If we are now moving into a deficiency on our manufacturing trade account, what will be the consequence of that trend?

During the course of that debate, I proposed that a Select Committee should be set up to look into that important issue. I am glad to say that that was agreed. In due course a Select Committee was formed under the illustrious chairmanship of the noble Lord, Lord Aldington, who will be speaking later in this debate, and the issue was looked into very much more carefully. The point that was raised in my initial contribution to the subject was elaborated much further by the Select Committee. The important point that I want to emphasise is that, having looked at the problems that we were likely to encounter as a country when the benefits of the oil revenues for whatever reason started to diminish and if our manufacturing trade account did not show some improvement, we put those points to the Treasury and asked what it thought the solution would be.

As noble Lords who took part in the debate on the Select Committee's report will recall, the Treasury's answer was that there would be an automatic adjustment or automaticity. This apparently would arise for the reason that when the oil revenues diminished, sterling, which was then regarded as a petrocurrency, would equally diminish. That would give a stimulus to manufacturing exports. According to the Treasury's thesis, that is what was meant to happen. I may say that nobody on our committee, which was representative of all parties in this House, accepted that thesis. We felt that it was quite fallacious and that that situation was not likely to happen in the event.

In that report, we included certain forecasts of what the deficit and the balance of payments might be, should the existing trends continue. For 1989, we mentioned a deficit on current account of £10 billion. The only mistake that we made in the event was that it was unfortunately on the light side. We would have been more correct had we made it £15 billion, which it is likely to be. Therefore the question is this. Why has the theory propounded by the Treasury in 1985 not worked out in practice? I should like to hazard the suggestion that it is because it was far too simplistic. One cannot get things to work on the basis of simple theories. It was quite obvious then, as it is even more obvious now, that unless we have a very strong manufacturing industrial base we shall not be able to balance our trade and our payments with the rest of the world. In order to achieve that, we have to build up that base.

I well remember in the arguments that we have had over the issue in this House over the years that we were repeatedly told from the Government Benches that even if manufacturing was diminishing, services would take its place. The Government seemed quite resigned to the fact in those days that we would diminish as a manufacturing country but that we would fill the gap with our services—and in any case there was this automatic adjustment that would occur.

Let us consider what has happened to our manufacturing capacity in Great Britain. We had the crisis from which the whole world suffered as a result of the oil price increase in 1979. We had the massive recession in 1980 to 1982 when there was an enormous reduction in our industrial and manufacturing capacity. Subsequent to that there has been a recovery, and in many sectors there has been a remarkable improvement in productivity, to which I have no doubt the noble Lord will refer when he speaks, which is perfectly fair since there has been improvement. The problem that we have as a country is that our recovery and the present size of our manufacturing industry do not compare in relative terms with those of our competitors. It was only in 1988 that we achieved a recovery in terms of manufacturing capacity to the level of 1974, whereas the Germans, the French, the Americans, the Japanese and others had long surpassed that level.

The test of such recovery is that when demand has increased, as it has in the last year or year and a half, we have been unable to meet it. We have had to draw in manufactured goods from other countries not very far afield. A large part of them have come from Germany—a country which is in Western Europe, which is in the same situation as ourselves and which has also gone through the same tribulations. It has not had the benefit of the oil in the North Sea, yet it has managed to build up this surplus of industrial capacity to meet our needs. This suggests therefore that there is something wrong with our policies.

Before we consider what policies we should be adopting to put this right, let us consider what size our manufacturing industry should be. It is better to know at what one is aiming if one is trying to devise a policy to achieve something rather than simply talking in vague terms. The value of our manufacturing output in 1988 was £95 billion or thereabouts. The deficit on our manufacturing trade account in 1988 was £14 billion or thereabouts. It follows from the combination of those two simple figures that, if we were able to increase our manufacturing capacity on a competitive basis to the tune of about 15 per cent. we would be able to close the gap either by meeting more of the home demand, or exporting more. I suggest that it seems a very desirable objective. The question is whether present policies will lead to it. We must view that with a question mark.

The CBI published in the newpapers this morning its latest quarterly survey. It shows that the Government's policy of using high interest rates as a panacea for solving the country's economic problems is beginning to bite on industrial and manufacturing capacity. Furthermore, the consequential impact of high interest rates on the value of sterling is beginning to reflect on export prospects. Therefore this weapon of high interest rates that the Government have decided is a way to solve all problems of inflation, of stimulating manufacturing, and of improving exports is clearly not working. If one relies on such a weapon, another simplistic approach, it cannot solve all problems at one go. In practice, high interest rates at present have not reduced inflation. They have increased it because they have put up a number of essential charges. They have not added to the competitiveness of British industry because they have added to its costs. They have not added to the ability of British industry to compete abroad because they have made the goods of British industry more expensive. If we agree with my main thesis that we need to increase the competitive capacity of manufacturing industry by15 per cent. to close the trade gap, this weapon does not appear to be the way to do it.

What is the way to close the gap? I am not among those—I do not think that there are many in this House—who believe that government can solve all problems. For a start, government cannot manufacture anything, and nor do we want them to do so. However, the important role of government is to set the framework. The framework that they set is of immense importance in relation to the reactions of those who have to operate within the economy.

I should like to suggest ways in which the objective of increasing manufacturing capacity may be achieved. First, I must refer to the question that a number of noble Lords have asked of government ever since the domestic credit crisis arose. Why use the bludgeon of high interest rates to solve the problem when there are other ways of doing so? I am among the millions in this country who receive continued proposals from financial institutions on ways in which I can have an extra holiday or buy a number of domestic appliances and so on by going to them for credit. There has been no diminution on the sale of credit even though the credit expansion that we have encountered in this country over the past year or year-and-a-half has been at the root of our problem.

One is bound to ask the question: why do the Government not think of tackling the situation in another way? Why at the very least does not the Chancellor, or the Governor of the Bank, talk to the chairmen of the main financial institutions and tell them to stop advertising and promoting credit? That would be a start.

Secondly, why can we not have the system so well and successfully tried in the past of getting the banks to hold larger deposits, so that their capability of creating more credit was thereby restricted? If domestic credit is the problem, I feel that it should be directly looked at. If that were tackled, there would then be the possibility of reducing interest rates, which in turn would work through to the benefit of industry. The CBI is continually asking for that. In turn this would diminish the value of the currency, and at an appropriate stage I believe we should then try to fix the currency in relation to the currencies of our main competitors in Western Europe by joining the exchange rate mechanism of the European monetary system.

Clearly we must do something like that in our approach to 1992. We must seek to reduce the burdens on industry. The Director General of the CBI spoke only the other day about all the burdens which are now being imposed on industry: increasing electricity charges, which we debated in this House yesterday; increased water charges; the impact of the poll tax on industry. There are a mass of extra charges being imposed on industry at the very time when we should be seeking to expand it. So these should be looked at.

Another major impediment to industry is created by our faltering infrastructure, particularly transport. Your Lordships probably will all have received and read what the CBI said about the extra costs of congestion. Firms such as Marks and Spencer, Sainsburys—all the big firms—have indicated what their extra costs are as a result of congestion and because goods cannot be moved around. That should be an absolute priority. The Government keep saying how much more is being spent, but the real issue is: how much more do we need to spend on it? What is the need? How are we to get the railways, the roads and the airways working in a less congested way so that industry can expand?

There are then the two big issues which our Continental friends seem to have tacked much more vigorously than we have: namely, training and research. In our approach to training for industry, although big strides have been made recently, we are still falling behind the Germans and the French. In research, the stimulus for adequate research and preparing for the goods of tomorrow and creating the innovation that is so badly needed is lacking.

In conclusion, I should like to suggest that if we agree that one of our main economic objectives should be to increase the size of our competitive manufacturing capacity, we must devise policies to that end. I do not believe that the policies at present being applied will lead to that objective, which would be a sad state of affairs. I believe that we in this country have all the capabilities and skills and all the resources needed to achieve that desirable result. What we now need is the right framework and strategies to be able to go ahead on that basis. My Lords, I beg to move for Papers.

5.55 p.m.

Lord Aldington

My Lords, we all wish to thank the noble Lord, Lord Ezra, for introducing this Motion in a characteristically well argued, lucid and very persuasive way. My noble friends on the Front Bench would be very wise to listen to the noble Lord, Lord Ezra, who has great experience in industry in running one of our great national enterprises. In running that enterprise he learnt about British manufacturers, who in those days supplied practically everything he needed in the way of plant. Eveything he says is worth listening to. His experience is unrivalled, and we on the Select Committee found his charming way of putting it very telling indeed. I thank him, and I hope that my noble friend will consider very carefully what he said. I hope that my noble friend will also listen a little to what I have to say, which is very much along the same lines. I have a point of view to put and I know my noble friend will forgive me if he does not agree with all of it.

The size of our manufacturing base is, in my opinion, the principal key to the balance of payments. The size of the base dictates the output of manufacturing, and if we do not make in Britain at least the quantity of manufactured goods that the British people want to buy there must be a deficit on the balance of trade in manufactures and there must consequentially be a deficit on the current account in the balance of payments.

Exports and imports are very important in that they affect the goods made here or bought here, but they do not affect the proposition that I have put. We know that last year the deficit on the manufactured balance of trade was £14.4 billion and in the current account it was £14.7 billion. Those two figures are very close together, and that closeness has been repeated in the figures we have seen today for the first quarter of 1989: a deficit on the manufactured account of £4.27 billion and a deficit on the current account of balance of payments of £4.48 billion. The old idea that invisible services could make up the gap surely has gone. What the invisible surplus can and does do magnificently is to make up for the deficit in other parts of the balance of payments account. It just does that, or is slightly short.

Your Lordships were warned in 1985 by your Select Committee of the importance of the manufacturing trade deficit to our economy. You were warned that the manufacturing deficit would grow, which indeed it did—from £3 billion, when we finished our inquiry, to just under £15 billion last year. As the noble Lord has said, there have been improvements since we reported. The most important improvements are in the efficiency of management and in the productivity of our manufacturing industry generally. But those improvements have not led in the last three-and-a-half years to a sufficient increase in output—there has been some—that would increase our share of world trade and our share in our own home market, which governs the penetration of imports. I hope the Government will tell us why their undoubted success in stimulating efficiency and productivity has not reaped the results that they must have expected.

Demand may have been abnormally high in 1988. We are told of the inflation, but in my opinion it is not that additional demand or that inflation which have caused the growing deficit. The reason for that deficit is the failure of manufacturing output in Britain to keep up with demand for manufactured goods in Britain. The market is there for British-made goods, but the British goods are not there and so the gap is filled by imports.

I gave one simple set of figures in November when we debated the economic situation generally. Between 1973 and the first quarter of 1988 demand for manufactured goods in Britain increased by 25 per cent. But our output of manufactured goods did not increase at all. It was the same at the end of that period as at the beginning, although it was down during the middle. It was not until the second quarter of 1988 that manufacturing output in Britain grew above the level of output in 1973, when, according to my figures, it was at its peak. Since the first quarter of 1988 demand for manufactured goods has grown even faster than output, which has grown by 6 per cent. Hence the rising deficit in the balance of trade. The gap has widened.

Current policy aimed at curing inflation seeks to reduce the rate of increase in demand by several percentage points. But if that reduction is achieved —and I hope that it will be—it will not eliminate the deficit. The elimination can come about only by a substantial increase in output. The noble Lord says that it must be an increase of about 15 per cent. but I calculate it to be between 15 and 20 per cent. It must be above the normal increases to deal with the annual increase in the demand for manufactured goods which we expect to take place in our society. That is a large target to set and a large increase to achieve.

Today I took comfort in the CBI report which I read in the Financial Times. It stated that consumer demand is responding to the Chancellor's policies. Like all noble Lords in the House, I wish to see inflation squeezed out. However, I take no comfort from the other part of that report, which stated that the supply side of the economy is also slowing. If the Government would help industry to be more competitive so that it can take up a larger share of the home market there would be no need for that to happen.

I must draw to the attention of my noble friend Lord Strathclyde the share in the home market. When on 10th April he replied to the noble Lord, Lord Ezra, who asked what the Government intended to do about the matter, he said: it is not so much for governments but for industries to galvanise themselves to improve their export situation".— [Official Report, 10/4/89; col 4.] They need not merely to improve their export situation but also to improve their capability of taking up a proper share of the home market. Imports must be reduced and, until they are, the great deficit will continue.

What can the Government do? I believe that the expression they use for the task is "the right climate" and I agree with that. They must try to find and create the right climate for the extension of British manufacturing industry by between 15 and 20 per cent. over the next few years in a fully competitive world. When one looks at what they are doing one must avoid being facetious in wondering whether they are trying to create a climate which will obstruct that.

They encourage productivity and take the credit for that, quite rightly. But since 1986 they have so arranged the exchange rate that its increases have cancelled out the splendid productivity gains of the past two years. I find that to be extraordinary. In 1986, when we were beginning to do quite well, the exchange rate was approximately 10 per cent. more favourable than now. They exhort investment and add to the cost of the investment by sharp increases in the interest rate. I cannot believe that they intend to cause the damage which such things can cause, not so much to people who are already there and know how to weather the storms but to people upon whom we rely for investing and starting new products and expanding the lines of existing products.

There is one other point to which the Government must address themselves. They are worried, as are many of us, about inflationary pay settlements which have taken place in the economy but not in manufacturing industry. Over the past two years unit labour costs in manufacturing industry have risen by between 1 per cent. and 1.5 per cent. per year. Yet, in trying to squeeze those inflationary pay settlements out of other sectors of the economy, the Government use measures which harm manufacturing industry far more than any other sector. During the past two years the increase in unit labour costs in the rest of the economy has been four or five times that within manufacturing industry. I am aware of the importance of pay settlements, but one can trust competitive manufacturing industry, which must compete in the import as well as the export market, to restrain its pay settlements. Manufacturing industry has done its best but it is competing for labour in a market which has, or appears to have, no such restraints upon it.

The noble Lord, Lord Ezra, referred to the CBI's analysis of the burdens upon manufacturing industry. I should like to remind my noble friend of what happened in 1988. As compared with 1987, increases in manufacturing industrial costs were as follows: local authority rates—plus 10 per cent; electricity prices—plus 9 per cent.; water charges—plus 10 per cent.; unit labour costs—within the control of manufacturing industry—plus 1 per cent.; unit labour costs where the goods were bought from other manufacturers—plus 4.5 per cent.

The Government are trying to tackle the rates. They are trying to tackle electricity and water charges by privatisation and I hope that in doing so they will be successful in reducing the costs to industry. But what about tackling some of the matters in their own field? We have been led to believe that the Government have reduced the rate of corporation tax. There has been no reduction when compared with the previous rate for many people with high capital allowances. But the important point is that in Britain corporation taxes as a percentage of GDP are much higher than in competitor countries. In the United States they are 2 per cent.; in Western Germany they are 2.2 per cent.; in France they are 2.2 per cent.; and in the United Kingdom they are 3.9 per cent. If the Government are trying to help manufacturing industry to be more competitive why can they not turn their attention to that matter? Taxation impinges upon savings or profits which must be reinvested for training, research and development and so forth.

Since 1986 the effective sterling exchange rate has risen by approximately 9 per cent. During 1986 and 1987, when it was at its lowest, inflation was also at its lowest and not at its highest as we are led to believe. Interest rates were then kept down. Why is there the belief that the exchange rate must be kept up in order to keep inflation down? If it is because there are some artificial restraints on inflation then the sooner we get away from that the better. One cannot cure inflation artificially; it must be squeezed out properly.

There are many other things which the Government can do apart from the exchange rate. I was amazed when this morning I heard on the "Today" programme that the Government had turned down everything recommended by a Select Committee in the other place in connection with information technology. I regret that very much. I beseech my noble friends to listen a little to what is said by other people who are trying to help. Our Select Committee had the extraordinary experience of being rubbished. I was sad to learn—although perhaps also a little comforted—that Select Committees in another place suffer the same fate. I hope only that, as a result, the committee's report turns into a best seller as ours did.

In conclusion, I turn to my noble friend and say that he and the Government believe in market forces. The big market force in Britain is that demand for manufactured goods has risen just as much as demand for services. It is a myth to say that the British purchaser has turned to services in a big way. Why have the Government let the output side of the economy get out of balance? Market forces have gone wrong. What can the Government do to put them right? I do not believe that they can continue to stand off. Many of us, their close friends, believe that to have a stand-off attitude in this matter is near to madness. We are reminded of the old adage that those whom the gods wish to destroy, they first make mad. I do not wish to destroy them: I beseech the Government to give up this particular madness in regard to manufacturing industry.

6.10 p.m.

Baroness Blackstone

My Lords, the economic future of Britain is being undermined by the present performance of our manufacturing industry. As a trading nation, we must expand its capacity and increase the output of goods which we sell abroad. As the noble Lord, Lord Ezra, said, today's trade figures are a matter for regret and not for rejoicing. His debate today is especially timely for that reason. I should like to congratulate him for introducing it.

In particular, we must produce goods which will sell in Europe. Our economic future now lies largely in Europe; it is in Europe that the competitive failure of our manufacturing industry is most persistent and severe. It is on Europe that I should like to focus most of my remarks.

Fifteen years ago, at the time of our accession to the European Community, just over a third of our trade was with the countries which currently make up the European Community. Today more than half our trade is with the EC, an expansion that is as welcome as it is inevitable. However, any welcome must be tempered by the sobering fact that over the past 10 years the balance between exports and imports has swung so heavily towards imports.

In 1980 our trade with Europe in manufactured goods was roughly in balance. Today our manufactured trade with our European partners is in deficit by over £14 billion. Perhaps I may elaborate on that appalling figure. Although it is true that in 1980 we had deficits with the three largest Community countries, they were very small by today's standards. In 1980 our manufactured deficit with West Germany was £550 million; in 1988 it was a staggering £8 billion. In 1980 our deficit with France was £400 million and with Italy just £200 million. Today our deficit with France has more than doubled to £1 billion; with Italy it has grown quite disastrously—eight times over—to £1.7 billion. Worst of all, a £400 million surplus with the Netherlands has been transformed into a £2.7 billion deficit. Indeed, the only Community countries with which Britain regularly achieves a manufactured trade surplus are Greece and the Republic of Ireland.

It is with the Community that we are to form an integrated single market by the end of 1992, a single market in which the bracing wind of competition will blow yet more strongly. I am afraid to say that for the ill prepared, it will be a bitterly cold wind. The completion of the internal market should not be a threat; it should be an exciting opportunity. However, opportunities have to be taken. And in this case opportunities have to be prepared for. The tragedy is that we are not taking our opportunities. We are not preparing our manufacturing industry for the challenges which lie ahead. We are not preparing by investing in the new technologies which will determine competitive strength in the 1990s.

The level of investment in manufacturing industry is even lower now than it was in 1979. That really is a disgrace. When it is so evident that their current policies have failed to increase the volume of investment, what changes are the Government going to make to encourage a higher level? Perhaps the noble Lord speaking for the Government could enlighten us; perhaps he could also say what the Government intend to do about investment in infrastructure to help industry.

We are not preparing by training a skilled labour force. Our investment in training amounts to less than one-tenth of West Germany's expenditure. And a recent report by the National Institute for Economic and Social Research has demonstrated that our training in the very important area of advanced engineering is markedly inferior to French schemes. As many Members of your Lordships' House pointed out in a debate only a week or so ago on higher education, we are not preparing by investing in the universities and polytechnics to produce the highly skilled people we need as well as the new ideas.

We are not preparing by investing in research and development. Again, perhaps the Minister could throw some light on the terribly slow progress made by the LINK scheme. In 1986 the Prime Minister announced that scheme saying that she attached great importance to the work that it would do. She went on to say that the Government would spend £210 million over the next five years on research programmes which would bring together industry and publicly-funded scientists on a collaborative basis.

As at 4th April 1989, the Government had authorised only £60 million worth of funding for that scheme. So, after two and a half years, just over one-quarter of the money has been allocated and much of it has not yet been spent. Scientists in universities and research institutes are extremely disappointed as, no doubt, are people in industry. Our scientists want to help. They want to work in industry on research and development.

What has happened looks like the dragging of feet rather than the attachment to the scheme of great importance, to use the Prime Minister's words. The sad fact is that no importance is attached to it. This country's expenditure on commercially viable research and development as a proportion of national income is the lowest among the advanced industrial countries of Europe.

Most important, we are not preparing by creating an environment in which industry rejects short-term cost cutting in favour of long-term competition in research and in product and process development. Instead of creating a framework in which long run development and competition can thrive, I am afraid that the Government have been the principal agents of short-termism. Deregulating finance both at home and abroad has created uncertainty on the foreign exchanges and has enhanced short-term financial pressures through the stock market. By declaring that the only criterion for reference to the Monopolies and Mergers Commission should be competition in the narrowest sense, the Government have encouraged conglomerate mergers arid predatory takeovers including the takeover of British high-tech companies by European companies. Is that really what we want to see?

By privatising electricity and water, as has already been mentioned, with consequent increased costs for manufacturing, the Government have put their really ridiculous dogma about privatising all and everything first and the improved performance of British industry and its competitiveness second. By abandoning all tools of economic policy save interest rates, the Government have squeezed British industry in a vice between the highest interest rates in any major industrial country and a high exchange rate. How can our industries be expected to compete when in one year the pound has risen by 7 per cent. against the deutschemark and our interest rates are more than double German interest rates?

Perhaps one of the pettiest changes of all concerns the announcement this year by the Secretary of State for Trade and Industry of so-called improvements in export promotion. In a classic example of bureaucracy-speak we were told that, the DTI intends to widen the scope of services where charges are applied". That means in plain English that exporters will have to pay more for vital advice and information on overseas markets. According to the Daily Telegraph they will have to pay between £200 and £300 for each inquiry. My own experience, going back to the Central Policy Review Staffs report and work on overseas representation was that this kind of advice is vital for companies if they want to make progress in exporting. Perhaps the Minister can explain why industry, which may be trying to develop overseas markets and which we want to support and encourage, should be discouraged in this manner by the introduction of a petty system of charging. Surely that will not help to increase our competitiveness.

All these measures to which I have referred are the acts of a Government failing to prepare for the challenges of 1992. It is vital that the Government now abandon their dogmatic refusual to take any responsibility for Britain's industrial future and adopt an active supply-side strategy to assist in building our industrial strength.

The Government are, quite rightly, happy to welcome the Japanese investment now being made in Britain to exploit the opportunities of the European market. When will the Government commit themselves to the sort of industrial policies which created that Japanese industrial strength? There must be a strategy of concerted investment in education, training, research and development, and in the techniques and processes of the 1990s. There must be a long-term strategy for the recovery of industrial competitiveness. That means recapturing markets at home and abroad and creating new markets for British goods. As the noble Lord, Lord Ezra, said, that cannot be done by the Government alone; but, as current failures show only too clearly, it cannot be done without the Government creating what the noble Lord, Lord Aldington, called the right climate. The failure to prepare our industry for the 1990s is, in itself, serious enough.

However, there is another factor which should be taken into account. If British industry cannot compete in the single European market, if persistent deficits weigh down our economy and condemn us to slow growth and to economic backwardness, then disillusionment with Europe will be one of the results. Instead of the new Europe holding out an exciting challenge in the future, the new Europe will be seen simply as a delusion and as a failure. That would be a great tragedy, not only for this country but for the whole of Europe. It must not happen. Instead, we must start now, without wasting any more time, to build the manufacturing strength which will allow us to compete on something like equal terms so that competition within Europe becomes a constructive stimulus and not a destructive threat.

6.23 p.m.

My Lords, the debate this afternoon creates a definite atmosphere of déjà vu. There have been many times over the past few decades when we saw Britain go round this circle of expanded consumerism leading to the sucking in of imports, balance of payments problems, pressure on the pound, a run against the pound, interest rates rising, and recession setting in. We have seen that circle again and again. In fact, it is not so much a circle as a downward spiral, down which our country has travelled, finishing up at each turn lower down and behind our competitors.

We have no option but to face our need to compete. About 20 per cent. of everything we consume in this country is imported and we cannot avoid the necessity to pay for it, either by increasing productivity and total production or by the falling value of our currency—and the latter is the way that we have tended to adopt several times over.

The Government have recently been proud to announce increasing production over the past seven to eight years and have many times boasted of several per cent. a year increases. However, they take 1981 as the base year. Unfortunately, the Government must face the fact that they came into power in 1979 and for the first two or three years there was a dramatic crash in British industry. Looking at the Government's performance over the whole period there has been a return to just above the 1979 level of production; but what a dramatic deterioration in the balance.

In 1979 our manufactured exports represented 108 per cent. of the value of our manufactured imports. Current production is just above that level but it now represents only 77 per cent. of manufactured imports. We face a catastrophic problem. In an open market, expansion without a corresponding increase in efficiency leads to the most dreadful problems. While I accept what my noble friend Lord Ezra said about the need for a considerable increase in production, that must be accompanied by a dramatic increase in productivity.

With our expanding market why is it that private capital has not expanded the investment in British industry? The answer is that capital is free to travel, and if it is free to travel I am sorry to have to say that sheer patriotism will not carry too much weight. If the Government fail, as they have failed, to set the concomitant conditions for industry, of course investment will go to Germany, France and Italy—the golden triangle has tremendous magnetism. The tunnel, when opened, will carry goods both ways, not just from Britain to Europe.

We have repeatedly read in the financial press of the dramatic deterioration in the United States balance of payments. The prognisis is trouble for the United States because no advanced country has been able to sustain a 3 per cent. deficit in its GDP for more than two or three years. The United States is now carrying a 3 per cent. deficit. Britain is carrying a deficit of nearly 4 per cent. Our position is therefore markedly worse than that of the United States and we must pay some immediate attention to that. There is a terrible threat to the pound. I very much fear that we are far from being able to take advantage of 1992-93. We shall find an even worse climate unless we pull up our socks very quickly.

I should like to speak about the chemical industry, in which I have worked for all of my working life. I declare an interest because I am still active in a chemical business. My personal experience has been in selling mainly to the countries of Eastern Europe where there is very fierce and open competition with sources from all parts of the world. The chemical industry has been one of the star performers of British industry, and we are very proud of it. We have steadily increased our exports. But when one is at the sharp end doing the selling one can sense the competition before it shows up in the statistics.

In recent years, time and again I have seen markets that we have had for many years and assumed would always be ours and in our pockets, suddenly facing competition. For example, a buyer may say, "We have had an offer of 12.5 per cent. below yours". I have returned and said to the British suppliers, "We have competition". All too often the response has been, "Ah, you are just saying that. That market has been ours for years". A month of two later the company is wondering why on earth the orders have not materialised. Then comes horror of horrors, because South Korea, Bulgaria, Hungary and other places that no one had ever dreamed of as competitors are in serious competition with British industry and with the chemical industry which is one of our stars.

I noted with interest that between 1981 and 1989 we succeeded in increasing British chemical exports by 53 per cent., and that is not bad at all. We all know each other in the chemical business. It occurred to me that some of my friends who are in the business of selling into Britain seemed to be making a somewhat easier living than I. I am still slightly shocked to find that in the same period between 1981 and 1989 when our exports had increased by 53 per cent., imports into the United Kingdom had increased by exactly 100 per cent. Even in this star industry our competitive edge is slipping and we had better watch it. In 1981 we had a net favourable balance in the chemical trade of £2 billion. In 1988 it was still £2 billion but the trade had almost trebled and the value of the pound was less. That is more evidence that the edge is slipping and that we had better watch it.

The most profitable part of our international chemical trade is pharmaceuticals. There have been many triumphs of British technology in pharmaceuticals, but here the Government have shot themselves in the foot several times despite pleas from the industry. Their enthusiasm for slashing the cost of the National Health Service has resulted in spoiling the ship for a ha'porth of tar. The restriction of the list for National Health Service prescriptions was a severe blow to the British pharmaceutical industry.

For example, imagine being concerned in selling a new pharmaceutical on which tens of millions of pounds has been spent in development. One goes to a foreign client and explains that the little extra they shall have to pay is well justified because of the low side effects, the greater ease of ministration and other reasons why technically this product is better. What does one reply when the customer asks, "If it is so good why have your own Government cut it from their list?" It is impossible to reply. One can hardly say, "Because they are a load of idiots", even if one thinks it.

Lord Strathclyde

My Lords, what on earth do Swiss or American drug companies do? They do not have a National Health Service on which to try out their products.

Lord Whaddon

My Lords, a healthy and vigorous home base is absolutely essential to any industry on which to base its exports. You hit your home base and you are asking for trouble. The companies have made representations to the Government time and time again. It is strange, because they are such friends of the Conservative Party and they make such large subscriptions to it. It is very odd that they get so little attention.

Noble Lords

Oh!

Lord Whaddon

My Lords, I refer also to the cuts in the Medical Research Council budget and the slashing of the long-term developments which provide the seedcorn for the future. There is also the government resistance to the constant pleas from the pharmaceutical industry to extend the validity of patents. These days the cost of developing new pharmaceuticals is enormous. The period needed for their development increases and that means that the effective earning period of the patents is reduced. Yet the Government will not listen to the pleas of the industry. Therefore time and again in the pharmaceutical industry the Government have not been on the side of British exporters.

What are the cures for these problems? The macro-measures necessary have already been mentioned. There is need for a dramatic increase in spending on education. I read recently that in British industry one in three of shopfloor workers have a technical qualification whereas in Germany four out of five have such a qualification. Of course capital will tend to go to Germany where there is more skill. The workers are not any better there; it is simply that they are trained better. There should be more spending on education and on the infrastructure.

I put in a special plea for the Government to show more imagination in long-term research. Private industry pours money into research but it is always concerned with short-term profits and what is likely to bring it profits in the next three to five years. Private industry is not really interested in the further horizons of 10, 20 or 30 years. Yet it is imperative for the Government to have these longer horizons in view. It has appalled me that the Government have thrown away support for the HOTOL project, for example, and shown such little enthusiasm for the European Space Agency. Apart from pharmaceuticals, the other star performer in British exports has been the aero engine and aero space industry. If we do not put adequate research into HOTOL, the aerospace industry and the European Space Agency, we shall lose the edge in these spheres as well. HOTOL, the European Space Agency and the Medical Research Council are the bodies demanding greater government sympathy.

A failure to cope with our problems means that Britain has been eating the seedcorn which should be building our future. Seventy-eight billion pounds of oil revenues has been frittered away and wasted. If the Government do not pull up their socks, history will pass a very sour verdict on them.

6.38 p.m.

Viscount Caldecote

My Lords, we certainly should be very grateful to the noble Lord, Lord Ezra, for introducing this debate on a very important and topical issue. It is a serious situation and I shall make some rather critical comments. So perhaps 1 may say right at the beginning that whatever I say in no way reduces my admiration for the achievements of Her Majesty's Government over the past 10 years. In particular, at home they have rekindled the spirit of enterprise, controlled trade union power and helped industry to improve productivity. Until recently we could have added to that list the successful control of inflation, but clearly a few problems have occurred recently in that area.

That is serious because we all agree that inflation must be kept certainly below 5 per cent. and, if possible, not above 3 per cent. Even at that low level it means that prices double every 25 years. It is a very serious issue indeed. There is another on which I wish to concentrate my remarks; that is the current account deficit on manufactured products to which other noble Lords have already referred; namely, the non-oil visible trade deficit. That is very relevant to inflation. I am referring to the figures for the non-oil visible trade. In the first quarter of 1989 the deficit was over £6 billion, whichs an annual rate of over £20 billion on non-oil visible trade. It is true that there are some very small signs of improvement. For instance, the increase in exports in the first quarter of this year is slightly greater than the increase in imports compared to the last quarter of last year. But the reverse trend is true if one compares the figures of a year ago. The terms of trade have also shown a very slight improvement. In spite of those tiny improvements, deficits of the magnitude to which I have referred on the balance of trade in manufactured goods are totally unsustainable in the long term and they are just as unacceptable as an 8 per cent. inflation rate or any other percentage of inflation above 3 or 4 per cent. Those deficits on visible non-oil trade are major obstacles to lasting prosperity.

They are caused by the relative uncompetitiveness of too many British products and companies and by the contraction of our manufacturing base, which affects too many products. British industry today is incapable of meeting home demand and exploiting the many export opportunities. This results from inadequate resources, both people and money, being devoted to developing new and improved competitive products. The noble Lord, Lord Whaddon, has already referred to the pharmaceutical and chemical industries. He has pointed out how successful they have been because they have spent large sums of money on research and development. Other examples are Rolls-Royce and British Aerospace. They have been very successful. Why is Toyota able to make a huge investment in this country? It has the same workforce as other companies have available to them. It is able to do so because it has spent vast sums on new product development in the world's competitive markets.

The lesson is quite clear. We need more companies like our most successful companies which spend adequately on research, and especially on the development of new products for competitive markets. Because we have not spent enough in that way, home demand far exceeds available supply. That creates inflationary pressures of increased prices, and imports are sucked in. Unfortunately, for advice on such problems as these, the Government seem to rely almost exclusively on those who are unversed in manufacturing and have negligible experience of the design and development of new products. One needs only to look around at the otherwise admirable members of the Government both in the Cabinet and outside. There are few with any experience of this difficult and complex process of market research, design, development and manufacture.

Those of us who have been involved in that for most of their lives know how difficult it is to understand the problems and to take the right decisions of balancing risk with enterprise to keep on the right side of that fine line away from disaster. The Government see the imbalance between money supply and product availability as purely a money problem, to be corrected by adjustments to monetary and fiscal policy. That leads to higher interest rates, just as high, as the Chancellor has often said, as are required to damp down an overheated economy and maintain a strong pound in interests of controlling inflation.

In the short term I have no quarrel whatever with those policies. Both are needed. But in the longer term those actions alone will prove and are proving disastrous. Certainly tight monetary policy will reduce home demand and imports, but the strong pound also makes it more difficult to export, so exports will fall too. Simple arithmetic makes it clear that the deficit on our overseas non-oil visible trade will also fall. However, that is no comfort. High interest rates also discourage investment of all kinds—in capital plant, but perhaps most important of all, investment in new product design and development, which is a much more risky and difficult task. The manufacturing base is further eroded via the smaller home demand, the export difficulty and the lack of investment, while the monetary medicine does its job.

When the time comes—in a few months or in a year or so—and that medicine has worked, inflation is reduced and the economy is cooler, there will be another attempt at expansion. That will create worse problems because by that time the manufacturing base will have shrunk further. The whole dreary money-led cycle will be repeated. I am afraid that it will continue in that way just as long as the Government look at only one factor and at only one side of the inflation equation—the money supply, important though it is.

I shall try to illustrate the point that I am trying to make with an example from those delightful hill farms in the vicinity of the home of my noble friend on the Front Bench who is to reply. Let us suppose that a sheep farm has too many sheep per acre. They become diseased due to lack of nourishment from the available grass. There are two ways out. One can, by some external edict, require that the price of sheep goes up so that the demand for them will fall and the farm will carry fewer sheep. They will be healthy sheep because there is enough grass for them. The alternative is to be a better farmer, put some fertiliser on the ground and increase the supply of grass. One can then carry more healthy sheep, and the economy of the farm is healthy too. So it is with our economy. We need to look at both sides of the inflation equation. So long as we ignore that other vital factor of product supply, and the availability of goods for the money circulating to buy is left to market forces, the problems will continue.

The other day I read with great interest some words of the Chancellor in a lecture that he gave in September last year to the Institute of Economic Affairs. He was referring to the current account deficit. He said: That deficit is entirely the result of private individuals and businesses making choices about their own financial affairs". How true that is; but how true it is also that too many decisions are being made that are wrong. Perhaps they are in the short-term interests of those individuals and organisations, but they are wrong in the long-term for the wealth creation interests of the national economy. It is not good enough for the Government to wash their hands of these problems. It is not good enough to rely solely on the dogma of non-interference with market forces. Those are not sensible, logical or consistent policies. The whole framework of the monopolies and mergers legislation, of the consumer protection legislation and of the Financial Services Act is an example of the way in which the Government interfere in the national interest with free market forces.

My plea is not for detailed interference by government in industry. That would be quite wrong. We have tried it before and it does not work. My plea is simply for acceptance by the Government, unequivocally expressed in word and deed, of the central importance of a strong and growing manufacturing industry and a strong manufacturing base. That strength and that growth must be measured by value and volume of output, not by the numbers of people employed in manufacturing industry. Those numbers will steadily reduce as productivity increases through the use of advanced technology.

Today the Prime Minister is showing dramatically her acceptance of the importance of protecting the environment. The lady is indeed for turning, and rightly so, when she is convinced of the need. No less important, perhaps more important, is the need to convince the Prime Minister, my noble friend the Secretary of State and all his colleagues, including my noble friend on the Front Bench who is to reply, of the vital, central role of manufacturing industry. Until that acceptance is achieved it is no use repeating suggestions about what actually needs to be done by the Government in support of industry—that, of course, is where the real responsibility lies—because that advice will continue to fall on deaf ears.

The sad fact is, as I have already suggested, that far too few of the Cabinet understand in depth the real issues at stake. There is all too little understanding there; all too little first-hand experience of the complex processes which I have mentioned. However, our champion for manufacturing industry should be my noble friend the Secretary of State for Trade and Industry and, indeed, the other Ministers with him. Alas, my noble friend the Secretary of State does not seem to accept the importance of manufacturing industry. He seems to believe that £1 million made in the financial futures market is as valuable to the nation as £1 million made from the manufacture and the selling of washing machines, machine tools or diesel engines. I am sure that he is as sincere in his views as I hope he believes I am in mine—as indeed are my friends. But the fact of the matter is that my noble friend and far too many of his colleagues and advisers are frankly wrong.

Unfortunately, this is not a short-term issue and therefore it is that much more intractable because the political time-scale tends to be short. In spite of current problems we in our generation will not suffer much from the mistakes which are being made; but our children and grandchildren will. Also unfortunate is the fact that the problems are made much more difficult to solve by the almost total lack of influential people in the Government to offer constructive and informed criticism of current policies and to champion the cause of manufacturing industry. And of course there is no credible alternative government either. Therefore all we can do is to take advantage of debates, such as this one which the noble Lord, Lord Ezra, initiated, and every other occasion we have in the country wherever we go, and to whomsoever we speak, to express the concern which I have expressed today—as indeed have other noble Lords—and to use our advocacy to achieve a change of outlook on the importance of manufacturing industry.

It is never too late to change. But the longer we wait, the greater will be the damage that will be done and the more painful will be the hard road back to a strong, growing manufacturing base.

6.52 p.m.

Lord Hatch of Lusby

My Lords, the Government are constantly telling us about their great, dramatic economic success—success, with a trade deficit of over £14 billion a year and, as the noble Viscount has just pointed out, now running at around £20 billion—and it looks as though the Chancellor of the Exchequer will again be wrong in his estimates; last year he was 300 per cent. wrong—with 2 million people at least still unemployed, with inflation now running at 8 per cent. and with interest rates, on which the borrowing for investment depends, set at 13 per cent? If that is success, what do the Government conceive to be failure?

It was a privilege for me to serve on the Select Committee which has been referred to by the noble Lord, Lord Ezra, and which was chaired in a most distinguished manner by the noble Lord, Lord Aldington. I learnt a great deal from that experience. I took, perhaps, a separate line from most of the other members of the committee, and I intend to do so tonight. I am glad to say that the committee was unanimous. The internal policies concerning manufacturing industry have been well outlined by the noble Lords, Lord Ezra and Lord Aldington, and I entirely agree with them.

However, there is another dimension here. I listened with interest to the figures given by the noble Baroness, Lady Blackstone. I too have those figures; but I also have some others. I must say quite frankly that I draw different conclusions from the same set of figures. Indeed, I should like to put another proposition forward based on an examination of the breakdown of the figures of our balance of payments deficit.

The noble Baroness pointed out that in 1980 we almost had a balance of trade with Europe. However, she did not point out that that year was art extraordinary one. During that year—which marked the beginning of this Government—the Government had virtually crushed enterprise and destroyed industrial activity. In 1980 there was in fact a balance of trade deficit of only £50 million with the European Community; but the previous year that figure had been over £3.5 billion. I shall not dwell on that contrast, but I should like to point out to the House that in 1970, before we entered the European Community, the balance of trade deficit with the European Community was only £29 million. This year that deficit is £14,853 million. That is with the European Community alone. In other words, the total trade deficit in this country in 1988 was due to our trading relations with the European Community.

What I should like to draw from that fact is the contrast between our trading position with the European Community and our trading position with the developing world. I hardly need to repeat in this House what I have said so often before: there is a closed market. However, there is a potential market which consists of half the population of the world. If we are to improve our factories—indeed, now they will have to be rebuilt—and if we are to get our machines working again, I believe that our best opportunity is to look to that potential where people want our goods; and where the workers in this country could be providing such goods. In my view we are on a false trail if we do as the noble Baroness suggested and continue to concentrate on trade with Europe. That does not mean to say that we should not trade with Europe, but I am talking here about concentration. I believe that we are neglecting, and have neglected for many years now, that half of the world's market. Many of the people in that part of the world are starving and are looking for such goods. We must play our part in the reorganisation of the global economy, not just from the point of view of charity—and certainly from the point of view of social peace on our planet—but also in the interests of the manufacturing industry in this country.

If one looks back over those figures, it was in 1977 that this country changed from having a deficit in its trading relations with the developing world to having a surplus. Moreover, ever since that year the surplus has been constant, though it has gone up and down somewhat. In fact, last year it was only £1,075 million; yet the previous year it stood at £2,753 million.

The contrast between our trading relationships with the developing world and with the European Community are so stark that they simply cannot be ignored. The noble Lord who is to reply to the debate very courteously sent me some figures, in answer to a question, which quite naturally, he had not been able to answer during Question Time. I give Latin America as one example. Between 1979 and 1988, in figures corrected to constant prices, our exports to Latin America fell by 29 per cent. Our imports rose—but by 5 per cent. only. That is merely one example of the stagnation of trade with the developing world. One could add what is happening in trade between this country and Africa. If one looks at the third world as a whole, we have constantly had a surplus in trade whereas the deficit with the European Community has risen to astronomical heights and is still rising.

Here I suggest, is an open market. I do not say that it is the whole answer; it is however important, certainly for the next quarter or half a century. But we have to play our part in reorganising the international economic system. There are two main factors retarding our trade and, indeed, trade between the whole of the developed world and the developing world. The first is debt; the second is commodity prices. I cannot go into the details of both tonight. I shall concentrate on debt.

The Government have a part to play. As has been pointed out, the climate that the Government create for industry has its own innate importance in our industrial future. That applies even more to our trade with third world countries than it does to the disastrous trade that is now going on with our major competitors in Europe.

The economic problem at the heart of the debt crisis is the enormous flow of resources paid by the debtors, that is, the developing countries, to their richer creditors, that is, our country and the developed world. The World Bank estimates that in 1988 interest and principal repayments by the debtors exceeded new lending by no less than 43 billion dollars. That is the extent to which the third world is financing the developed world every year. Such an enormous flow can be generated only by the debtors importing less, that is, taking fewer of our goods, and exporting goods that they themselves could consume. No wonder there is starvation and death thoughout the third world! That constraint is the main reason why living standards throughout the third world—Latin America, Africa and many parts of Asia—are today one tenth below what they were 10 years ago.

I know that there have been plans. There was the James Baker plan which urged the banks to lend more money to cut the transferred resources. However, the banks did not do it. There was no mechanism. Why should they do it? Now there is the Nicholas Brady plan, which is slightly different. It suggests that new lending should be produced to cut the old debt and subsidise a part of the interest payments. That depends again on the banks. Will the banks play at this game? It is very doubtful. The IMF and the World Bank are now geared to play a part in the debt reduction. If they do, it means that they will have to reduce their resources for rescue programmes and lending cuts resource loads, so the debt problem is constantly growing. One sees the evidence of this in the riots in democractic Venezuela and the food riots in Zambia last year.

I concede that the Government have made some contributions. They have cancelled a few debts. But, as the Prime Minister said in that notorious programme, it has been just a teeny, teeny bit, well outweighed by the reduction in overseas aid from this country over the past 10 years from 0.53 per cent. of our gross national product to 0.28 last year. This is seedcorn for our potential customers. It can be added to by the use of our diplomatic missions, as the noble Baroness, Lady Blackstone, pointed out, and by a more generous or less mean attitude by the Department of Trade and Industry towards assisting in exports through the Government's own overseas trade board.

Government guidance and encouragement are essential. We know that the task is for industry itself, but much depends on how the Government encourage that industry. The Government have found it possible to encourage exports to South Africa. Why do they not do that for third world countries that are gasping for our goods?

On this attitude to the future depends the health of the global community. On it too depend British employment and British economic progress and the prospect for the deprived peoples in our own community of a new form of prosperity offering hope to the unemployed and the deprived regions. Above all there is the chance to start our machines going again, to open up our factories and to provide the opportunity for our workers to produce the goods that half the world still cries out for.

7.8 p.m.

Earl Russell

My Lords, the noble Viscount, Lord Caldecote, has delivered a very important speech. The rhetoric of the Government for a long time has appeared to favour business. We heard only two weeks ago the noble Lord, Lord Joseph, instructing us on the importance of favouring business. In fact, what it seems to me the Government tend to favour is commerce at the expense of industry. Industry is a rather more empirical business than the Government tend to allow.

I am a little disturbed by the doctrine which has emanated from Washington in the last few weeks and is now becoming popular here to the effect that one really need not worry too much about a balance of payments deficit because one can finance it. It sounds like Mrs. Noah in the Coventry mystery play assuring Noah that there was no need to fuss so much about a shower of rain and in any case she would not move unless she could bring her gossips with her.

The reason why that argument is not sound in the long term, whatever soundness it may have in the short term, is that the financing of a deficit must be done by jacking up interest rates. The remark of Sir Josiah Child, which has become no less true in the 300 years since it was made, that doubling the rate of interest, in effect, halves the amount of capital available for investment, is a point of considerable importance. The level of industrial investment in this country is not something of which we have been able to be very proud over the years. If we jack up interest rates, it costs more to invest money and it becomes a hindrance to industrial growth. So I think that if we go on financing a deficit with high interest rates, we shall impede the growth of our manufacturing sector even further and be even less able to pay off the deficit than we were before.

When I think about what industry needs from a government, I suspect that it is very like what universities want from a government: stable conditions and a secure infrastructure, suitable conditions in order to do the job and beyond that to be left alone to get on with it. It seems to me that we are not really getting any of these. When one thinks about the conditions that produced the Industrial Revolution, as people on the Government Benches frequently exhort us to do, it is not just a matter of a particular spirit but of particular economic conditions, some of which we can reproduce and some of which we cannot. We cannot reproduce the dominance we had in the energy market at that time; we cannot reproduce the captive overseas markets that we had at that time. But it is worth remembering that up until the beginning of the Napoleonic wars the Industrial Revolution progressed with interest rates at 3 per cent. How much more investment could we make with interest rates at 3 per cent.!

It is also worth remembering that it progressed with what at the time was, I think, the best internal transport system in Europe. That is absolutely vital to industrial costs, and the CBI survey on transport in London makes highly perturbing reading. It says that every British household has to spend at last £5 per week more than it need do on goods and services to meet the costs to business of congestion on road and rail. This is equivalent to 2p on the basic rate of income tax. That is a figure worth thinking about. It also says that, assuming distribution accounts for 10 per cent. of GDP, a competitive disadvantage of, say, 15 per cent. would represent an annual waste of the order of £6 billion, not far short of the nation's annual expenditure on civil research and development. That also is worth thinking about. There is such a thing as the conditions to do the job—that is the Government's business,

In addition, we should think about the persistent government policy of trying to get industry to pay for those things which the Government want to take off the public spending budget. For example, when we were discussing Morley College in the course of the debates on the education Bill, it was suggested from the Government Front Bench that money could be found from industry. My noble friend Lady Seear remarked in surprise that she thought that the point of profits was to lower prices or raise dividends. It was a breath of fresh air.

We hear, for example, about the possibility of industrial employers having to recruit graduates by paying off their student loans for them. We hear of universities exhorted to go out and get money from industry. That is fine for universities; there is no problem from our point of view. But I wonder whether it is quite such a good thing from industry's point of view—and so does the CBI. What it has to say about the policy is this: Industry cannot be expected to fund undergraduate Higher Education more extensively than it does already, indirectly through taxation and directly by special industrial support and sponsorship … there is no prospect of industry collectively intervening to shoulder a large part of the cost burden of Higher Education currently met from central and local government funds. This must continue to be the responsibility of government, paid for through taxation to which all contribute". If industry has to pay for these things, that means inevitably an increase in industrial costs; and an increase in industrial costs must feed through either in the form of lower profits or of raised prices. Neither of those seems to me to be in the interests of our manufacturing industry. This policy of cutting back public spending and asking industry to pay should be regarded as a form of indirect taxation. Those who do it cannot pride themselves on reducing the burden of taxation. We ought to leave industry alone, let it pay for its own business and give it the conditions in which to get on with the job

7.16 p.m.

Lord Hooson

My Lords, I doubt that the Government have an economic policy at all; that is, they have a financial policy because, as has been stated in the debate, they tend to have tunnel vision and to concentrate their minds on the money problem and the money problem alone. It is quite obvious that in this country there is a clash of interests in the demand between the City and manufacturing industry. The former is short-term—the City wants quick profits, speculative profits. Industry on the other hand wants long-term investment.

The noble Viscount, Lord Caldecote, in what I thought was a very fine contribution to the debate, posed a question rhetorically: why is it that Toyota can invest in this country in the way it is doing? Why can we not do so? I think the noble Viscount provided part of the answer, but I suggest also that for many years in Japan Toyota ploughed back all its profits into research, development, expansion and so on. It was not pressed for immediate dividends and profits.

If anybody tries to do that in this country m manufacturing industry, he is immediately hammered by the City. I know that because I have to declare an interest. I am a non-executive director in a company that is probably one of the success stories of this country in recent times. It manufactures and sells abroad a great deal. Because the margin of manufacture is so much less than in retailing, we are constantly receiving advice to concentrate on retailing and give up manufacturing. We manufacture almost entirely in this country. That might be good immediate advice to a company which is only concerned with immediate profits, but it is very bad advice for the country It so happens that there is this clash. It seems to me that the Government have concentrated for 10 years on the City, on what the City demands, on what the money interests demand, and not on what industry demands. I think we see the situation today where the chickens are about to come home to roost.

The most disturbing fact about our economy is that the size of our manufacturing industry, if we measure it in terms of productivity and not physical size, is about the same as it was a decade ago. In physical size I suggest that it is probably very much smaller. In relation to our population of 56 million people and our history of success in the early development of industrial skills and technology, it is depressingly small.

It is all the more disturbing in that during this decade, as my noble friend Lord Ezra has already said, we have had the full benefit of the bonanza of North Sea oil, which provided a substantial proportion of government revenue. It provided 12.9 per cent. of government revenue in 1984; it provided us with a considerable proportion of our export revenue—;21.1 per cent. in 1984. It also provided not a negligible proportion of our gross national product—;6 per cent. in 1984. For the past three years that proportion has gone down to 2 per cent. There lies the root of our present problem. Our current balance of payments problems are clearly bad enough, but where would we be without North Sea oil? That is the 64,000 dollar question, for in the longer term we shall be without it.

It is perfectly fair to contrast our economic performance, aided by North Sea oil, with that of comparable Western economies such as West Germany and France, which have had no such outside windfall assistance. We do not come out well from such a study.

I recommend to everyone, and to all Government Ministers, an analysis which was made of nine countries by the Harvard Business School. It was published at the end of 1987, and is entitled Ideology and National Competitiveness. The three European countries that were selected among the nine were West Germany, France and the UK. Needless to say, we were at the bottom of the league in Europe by a long way. However, it is interesting to find that Britain came eighth of the nine countries examined. An analysis of our future prospects was made. The publication was written not by Left-wing extremists but by one of the powerhouses of Western capitalism. The prognosis of that body for this country is pretty poor.

The one really optimistic sign for our manufacturing industry, which has already been referred to, is that our productivity shows signs of increasing per man unit. However, our national productivity is not increasing because of our failure to invest adequately in manufacturing industry. The rise in productivity could, however, provide an important springboard for future expansion provided there is adequate investment in enlarging and supporting our manufacturing base.

However, even now doubts have been raised about the accuracy of the figures in the Treasury's Economic Progress Report No. 201. It is said that the report does not take account of the increasing habit in industry of contracting out or leasing in ancillary activity. As Miss Sarah Hogg pointed out in Monday's Independent, the report "artificially raises recorded productivity".

The oil revenue has certainly not been used to restore Great Britain's manufacturing base. It has largely gone overseas. What real benefit does our country get from it? It is said to be reflected in the invisible earnings. But what safeguard is there that money which has been generated in this country and has gone abroad will ever be repatriated? Why should it be? If there were a change of government, I believe there would be an engineered flow of capital from this country. The basis has already been laid for that.

The benefit to this country of this investment overseas and this exodus of capital is far more dubious and uncertain than if the money had been used to develop and concentrate, as West Germany has done, for example, on fulcrum industries. We do not have the nurturing by our banking system and investment houses of selective fulcrum industries that occurs in West Germany. We have not had, as France has had, the steady, slow burning expansion of an economy. We have not concentrated on industries which have potential for future growth and are crucial for future national adaptation. Everything has been left to the forces of the market, but those forces are inadequate.

This Government have certainly failed to face up to the medium and long-term consequences of what appears to be, under them, the intractable problem of the decline of our manufacturing base. Yet, how can we possibly maintain in the future a population of 56 million people at a reasonable standard of living without a much larger manufacturing base?

As I have already mentioned, most companies who have manufacturing bases in this country are often advised by the financial houses to reduce them. I give the example of the retail profits in the sale of cars. They are much greater than the profits that are derived from car manufacturing. We can see the decline of the car industry in this country compared with the car industry of our competitors in France and Germany, let alone Japan. What good does it do our country in the long run to be so dominated by the City of London, which is always looking for short-term results and which is constantly pressing for the bottom line to be improved, when it is in the interests of our country that there should be far more investment in long-term developments in our industry?

The Government's reversion to the encouragement of a rugged, extreme form of individualism as the principal means of overcoming our economic problems is inadequate to meet the international challenge of our time. We will never build an adequate export trade to balance the cost of imports if we sacrifice our home market largely to imported goods. How can we capture the export trade if we cannot successfully compete with imports at home? That is impossible.

The Government's whole approach to this problem has been too short term. It has been too concerned about the short term and too little concerned about the long-term investment needs of manufacturing industry. The Government's approach is too credulous about the benefits of free trade in a world where our main competitors see and cater for the limitations of free trade.

There is a crying need for domestic co-ordination of our economic policy, as occurs among our competitors. We lack what the Harvard Business School publication describes as "a broad communitarian base" on which to build a new and positive consensus. That publication points out that not only in France and Germany, but also in the countries of the Pacific Rim, there is a communitarian interest. There long-term interests are built into economic policy. When Japan, for example, decides to invest in this country, it has already calculated where the investment should be made. It has already made its sacrifices at home and decided not to remove all profits by way of dividends. It has decided to plough the profits back into the investment. Germany has followed a similar policy through a different mechanism. In Germany there is the influence of the German investment banks.

But how are we to obtain domestic co-ordination in this country? Without it we shall not achieve true national competitiveness, because a simple reliance on rugged individualism, adversarial relations in industry and a series of narrow, short-term financial measures is not good enough.

We on these Benches acknowledge the globalisation of manufacturing, transport, communications and marketing. We recognise the increased integration of business firms all around the world. We see the need for more global management of competition as a necessary corollary and supplement to free trade. We need a managed market. The founding fathers of the Common Market realised that. They foresaw the need for a managed market to, as it were, set certain parameters to competition. They set in train the creation of a structure which might at least manage a market and safeguard the well-being of the Western European Community as a step in the direction of global management.

The latest step in this development of the EC is economic and monetary union. It is typical of this Government that the Prime Minister turned it down immediately. I should have thought that an arrangement for monetary co-operation in Europe was an absolute must. In the longer term we are the one European country which will most need all the protection and benefits of a common European market. Here we are today with the inflation rate at 8 per cent. It was 10.3 per cent. when the Prime Minister came into power. We have a forecast balance of payments deficit of about £15 billion. We have unemployment at between 2 million and 3 million. We have a higher rate of inflation than any other major industrial country. I said at the outset of my remarks that I think that the chickens are coming home to roost. All the indications are that they are.

7.30 p.m.

Lord Bruce of Donington

My Lords, we on this side of the House are most grateful to the noble Lord, Lord Ezra, for having introduced this debate this afternoon. The figures that he has supplied relating to our situation are completely accurate. The fact that they have been supplemented by my noble friend Lady Blackstone makes it quite unnecessary for me to recite the statistics again. On all forecasts there will be a deficit in trade in manufactured goods which by the end of the year may be anything between £18 billion and £20 billion according to the current rate of progress.

What I find so depressing about this is the Government's attitude towards what by all accounts and to most serious-minded people in the United Kingdom is a very serious position indeed. The Government normally take two lines. First, they pretend that there really is not a problem; that ultimately automaticity will take care of it; that by some queer amalgam the surplus on the service industries and on services will somehow miraculously make up for any deficit on the manufacturing side, however that grows.

First of all, they pretend that there is no problem. They supplement that invariably, if one quotes the export figures relating to manufactures and compares them with imports which grossly exceed them, by saying that much of that is due to the fact that we are importing a very large quantity of capital goods in order to build up our industries. Most informed economists know that that is complete nonsense. If the noble Lord wants any documentation on that he has only to read a very important feature in his party's journal, the Daily Telegraph, for Monday last which disposes of that nonsense.

Alternatively, the noble Lord or his noble friend Lord Young of Graffham replies with a recitation of statistics, suitably picked for very convenient years in order to show how wonderfully we are doing at the moment. One is given comparisons in some industries of performance in 1983 as compared with 1987. In some cases 1986 is compared with 1987. I have a list here and I have no doubt that when the noble Lord comes to reply I shall be able to tick off against that list the most flattering comparisons by selected years that the noble Lord is able to make of the performance of British industry.

So, as I say, they endeavour to prove that everything is really all right. That argument is normally supplemented by glowing accounts from the noble Lord, Lord Young of Graffham, about his colourful visits to various parts of the country in which he finds bounding enthusiasm and signs of prosperity everywhere.

That does not always suffice because the Government have an uneasy feeling, which they do not like to express, that things probably are not going too well. Having asserted there is really no problem they then state if there is a problem it is due to excessive wages and the necessity for us to become competitive. That argument is probably best answered by a very important contribution to the Financial Times yesterday by Sir John Collyear, who is a former chairman of the Technology Requirements Board. He said: It is a dangerous mistake to assume that UK lack of cost competitiveness can be solved (other than by temporary respite) by concentrating on holding down wage rates or wishing for a cheaper currency. UK labour wage rates, including 'fringes', are low by comparison with our important competitors, even at current exhange rates". If the ordinary worker's claims for the work that he does are not the principal cause of our present disarray and our present lack of a developing manufacturing base, who is responsible? There are only three other ingredients. There are those who provide the capital; there are those who provide the management; and finally there is the Government, whose nominal responsibility at any rate is to secure the co-ordination of the whole.

Bearing in mind that manufacturing investment in the United Kingdom has still, in 1989, to reach the level of 1979, let us consider where capital has gone. Quite clearly capital has not gone in any abundance to the development of productive assets in the United Kingdom, at any rate beyond the level at which it stood in 1979. If one looks at the figures one finds that in the past nine years—;1980 to 1988 inclusive—£80 billion of British capital has been invested overseas as against some £30 billion that has been invested in the United Kingdom. I am ignoring portfolio investment for the moment, but if challenged I can give the figures.

Why? Why has not some reasonable proportion been invested in this country to meet what I consider to be the modest requirements put forward by the noble Lord, Lord Ezra, and reinforced by the noble Lord, Lord Hooson? Where has the capital gone? Why has not capital, which presumably has some social responsibility in terms of the institutions that enjoy the protection of our country and many of its benefits, provided the extra 15 per cent. to 20 per cent. which would be necessary to develop properly the manufacturing industrial base of this country?

Noble Lords have referred to this point. The noble Viscount, Lord Caldecote, did so in part, as did the noble Lord, Lord Hooson. The fact is that market forces by themselves do not take care of the problem. The instructions given to investment analysts and their managers in stockbrokers every morning are these: they have three choices—hold, sell, or buy. Those are the three decisions they have to make.

It is abundantly clear that short-termism and the necessity for one institution to vie with another makes them seek the most immediate investment opportunities offering the most profitable returns. That is called short-termism. It has been added to not only by the devotion of capital to mergers and acquisitions, which add nothing to the productive assets of the United Kingdom at all, but also by the pre-emption of very large sums of money—billions of pounds—to acquire industries from the state by privatisation, where, as is well known, institutions can make a considerable profit. They must be smacking their lips at the prospect of investing large sums in industries that will have their debts paid off and their assets written down so that they can make a fat profit. Why should capital interests invest, other than out of patriotism—of which one should not accuse them—in manufacturing industry when there are lush sums to be made by easy acquisition, privatisation and other similar means?

The answer is in the figures themselves. There is a lack of investment in manufacturing industry. It is not the function of the ordinary working person in the United Kingdom to provide those funds. He provides his life and his work. Capital itself in the United Kingdom has not lived up—and, to be fair, has never been expected to live up—to any ethical standard that is required for the conduct of ordinary civilised life in the United Kingdom.

The second angle on this matter concerns management itself. In this matter, I am minded of the considerable investment made by the Japanese in the United Kingdom. Many reasons have been given and much speculation made as to why they choose to invest in the United Kingdom. In 1987, for example, they invested £1.5 billion in the United Kingdom. That was before the present Toyota proposals. The answer is of course that the British worker is regarded as one of the best workers in the world. The Japanese normally bring with them some six management staff instead of the 30 or 40 that are often extant in British firms. The fact that the Japanese can manage on a much smaller staff, but with a different social relationship within the works itself, is one of the most vital factors.

If the cap fits, it can be worn. There are many companies in the United Kingdom that conduct their relationships extremely pleasantly and co-operatively with their workers, without treating them as social inferiors. But that cannot be said for the rest because, under the current ethic and ideology, workers are merely digits. Nothing could be more revealing in that connection than the remarks of the noble Lord opposite a few weeks ago when he referred in an off-hand way to the shedding of labour. He did not refer to individuals as such, but purely to labour. The Japanese have discovered a way of getting the best out of workers. They have done it in their own country, and thank goodness, they are doing it here because it is one of our defects.

The Government ignore all those factors. They are driven along solely by an ideology that was more at home in pre-war years and in the times of Montagu Norman and Hawtrey at the Treasury than it is nowadays. The Government are responsible. They follow one single ideology of market forces which, while they have their use in our country, have no relevance as an overall solution to our country's problems.

7.45 p.m.

Lord Strathclyde

My Lords, we have listened intently to a typically thoughtful debate on a subject that we all agree to be of great importance. I should like to thank the noble Lord, Lord Ezra, for initiating this debate. However, I feel that noble Lords who have spoken have painted a most gloomy picture. I do not accept that the situation is nearly as bad as so many noble Lords have pointed out.

I should like to remind the House of the economic context in which our debate is taking place. We have seen eight years of steady economic growth at an average rate of about 3 per cent. That is the fastest rate of sustained growth in the European Community. For 20 years before that, our growth was the slowest. There are now more jobs in the economy than at any time since statistics began to be collected. Unemployment has fallen for 32 consecutive months and is now the second lowest in the Community, with only Germany lower. We have eliminated the Budget deficit and have achieved a substantial level of public sector debt repayment.

Those are genuine achievements, not just of government but of the economic activities of people—workers and managers alike. The Government fully recognise the full partnership between workers and management, whatever the noble Lord, Lord Bruce of Donington, wishes to suggest. It has been achieved by working within the framework of the best economic climate that this country has seen for many years.

The noble Lord, Lord Ezra, praised the framework, but criticised interest rates as a simplistic policy. Perhaps I may explain why interest rates are the main policy instrument. The role of monetary policy is to control inflation. Short-term interest rates are the essential instrument of monetary policy. They are the only instruments, available between Budgets in today's sophisticated markets. The economy has been suffering from a build-up of inflationary pressures. As inflation is a monetary phenomenon, monetary policy is the appropriate cure. That means that short-term interest rates must be increased, and the Government have done that. Credit controls and similar measures would be ineffective and inefficient in today's sophisticated financial markets. They would also be unfair in that they bear more harshly on less well off and less sophisticated borrowers and, to the extent to which they were effective, they would work by raising the cost of credit. That can be achieved more simply and effectively by raising interest rates.

Furthermore, the Government's priority is to maintain downward pressure on inflation. My right honourable friend the Chancellor of the Exchequer has made clear on many occasions that he will set interest rates at whatever level will achieve that. High interest rates are unwelcome, both to companies and to many individuals, including those with large mortgages (though not of course to savers). But the alternative of accelerating inflation would be far more unwelcome. Interest rates are typically a fairly small proportion of business costs. Firms can do a great deal to contain their other costs, particularly pay costs. Those are rising well above the rate of inflation and are tending to accelerate.

I hope that the noble Lord, Lord Ezra, will agree that there are many areas in which industry can contain its costs. My noble friend Lord Aldington mentioned the increase in unit labour costs in manufacturing, which was only 2 to 3 per cent.

Lord Aldington

My Lords, I said 1 per cent.

Lord Strathclyde

Yes, my Lords, 1 per cent. But it is falling in other countries. Manufacturing earnings are increasing by over 9 per cent. a year and that must be controllable by industry.

My noble friend and other noble Lords talked about high exchange rates. My right honourable friend the Chancellor of the Exchequer has made it clear that he is not prepared to engineer depreciation in the value of sterling. At best this would give a short-term boost to exports. All past experience shows that the gains would be rapidly dissipated by accelerating inflation, leaving the situation worse than before. The example of Germany shows that a strong currency need be no bar to export success.

The noble Lord, Lord Ezra, and other noble Lords have sought to argue that the country's manufacturing base is somehow inadequate, either in its overall size or in the range of goods that we produce; and that this is responsible for a significant part of the deficit which has emerged in the current account of the balance of payments.

I have several difficulties with that line of argument. Manufacturing output has grown steadily since 1981. It now stands at a record level—some 5 per cent. above the previous peak in 1974 and 8 per cent. above the level when this Government came into office in 1979. Manufacturing employment, on the other hand, is at about 5.2 million, which represents a fall of almost 30 per cent. since 1979. This means that output per head in manufacturing is half as high again as when we entered office. Profitability in manufacturing has also risen every year since 1981. By 1987 the real rate of return in manufacturing industry had reached 9' per cent., which is the highest figure for 20 years. I am confident that when the 1988 figure becomes available it will be even higher. That is not a record which suggests there is very much wrong with the manufacturing base.

My noble friend Lord Aldington and the noble Lord, Lord Hatch of Lusby, took an historic perspective. I reply that in the 1970s British industry suffered from a combination of overmanning, excessive union power and poor management, while the economy itself stagnated. That was the seed corn of economic disaster. It is only now that that situation is being overturned.

A number of speakers, and in particular the noble Lords, Lord Ezra and Lord Hooson, have compared Britain's manufacturing performance with that of our competitors. In virtually all the advanced industrial countries, the percentage of GDP accounted for by manufacturing has fallen and that of services has risen. Britain is no exception. The figure fell from 25.6per cent. in 1979 to 21.8 per cent. in 1986, which is the most recent year for which comparative figures are available. The comparable figures for the USA are 23 per cent. and 19.9 per cent.; for Italy they are 30.6 per cent. and 23.4 per cent. Only Japan is an exception to this general trend. The UK increase of 8 per cent. in manufacturing output in 1988 compared with 1978 is in line with the figures for Germany and Canada (10 per cent.), and Italy (13 per cent.). In France the increase was only 2 per cent. Only the United States and Japan of the major economies recorded significantly higher increases in manufacturing output over that period. When it comes to the growth of manufacturing productivity, the UK performance in the 1980s has been the best of the major economies.

The noble Baroness, Lady Blackstone, and the noble Lord, Lord Whaddon, spoke of the challenge to manufacturing industry of the single European market. Within the Community we are winning one-third of inward investment from the United States and from Japan. We are seen as the best location for manufacture. I was amazed by the words of the noble Baroness on the challenge of 1992. After all, it is the Department of Trade and Industry and my noble friend the Secretary of State who are at the forefront of the fight to make British industry realise what 1992 is all about. I wonder—since when has the Labour Party been a supporter of 1992 and the single free market?

The noble Baroness also asked about LINK. The DTI is involved in 10 LINK programmes and proposals for projects in these areas are being generated at a healthy rate. Delays are inevitable at the start of such multi-partner collaborations. Twelve projects are under way and over 256 more are under discussion.

Perhaps I may deal briefly with a point raised by the noble Baroness concerning export promotion and the increase in charges. These charges are an important means of signalling to the Government the services that industry finds most useful. I hardly think that £300 will deter industries from continuing their export efforts.

Several noble Lords, and in particular my noble friend Lord Aldington and the noble Lord, Lord Hooson, have spoken of "gaps" in the manufacturing base. There is no reason why we should produce goods of every description in the United Kingdom. The gains to be obtained from specialisation are a central argument for an open trading system. Any attempt by the Government to fill those "gaps" by subsidising uneconomic production would merely produce a less efficient allocation of resources. I repeat what I said on earlier occasions; it must be up to industry to decide for itself what to produce.

The current account deficit which has emerged over the past year or so followed a number of years of surplus. The deficit was not the result of a sudden collapse of manufacturing in the UK. Both manufac turing output and manufacturing exports have recorded healthy growth over this period. Noble Lords may remember as the noble Lord, Lord Ezra, pointed out, that at the beginning of the decade we saw the exact opposite of the present situation. A sharp drop in manufacturing output was accompanied by a large trade surplus. I wonder whether those noble Lords who have spoken critically would find that situation more reassuring than the one that we have today. Over the recent period our exports have held their share of world trade in manufactures. The deficit is due, so far as manufactures are concened, to the very sharp increase in imports. That has been due in part to the unexpectedly rapid increase in consumption. But consumer goods account for only a quarter of the increase in import of manfactures between 1987 and 1988. I can point out to my noble friend Lord Aldington that the major surge has been in investment.

The noble Earl, Lord Russell, asked how much more investment there would be if interest rates stood at 3 per cent. as in the Industrial Revolution. It is not investment that is a problem. In the short term, investment leads to increased imports of materials, intermediate goods and capital equipment. In time, increased investment will produce additional capacity which will enable the deficit to be reduced, but it has been necessary in the meantime to tighten monetary policy and slow down the growth of spending. There are signs that the measures taken to achieve that are having an effect. Although of course one should not make too much of one month's figures, today's trade figures are to be welcomed and show that the Government's policies are at least heading in the right direction.

Viscount Caldecote

My Lords, before the noble Lord leaves that point, can he just confirm that he believes and is saying that greater investment by industry in new product development is unnecessary?

Lord Strathclyde

No, my Lords, I am not saying that at all. I am saying that the existing level of investment is extremely high and extremely worth while and we seek to see that continue. Certainly we shall seek to see it higher so long as it leads to the production of things that people want to buy. This Government believe that ultimately industry will be able to overcome that challenge.

Lord Bruce of Donington

My Lords, perhaps I may interrupt the noble Lord for one moment. Does he or does he not accept the fact that investment in manufacturing industry today has not yet reached the same level that it was in 1979?

Lord Strathclyde

My Lords, I think that it has but I could be wrong. I do not have the figure to hand. If I am wrong, I apologise to the noble Lord. I am not sure exactly of the point he was trying to make with his question, but there it is. Time is short, so I shall continue my remarks. A number of noble Lords mentioned the report of the Select Committee of which my noble friend was chairman. It has been suggested that the emergence of a current account deficit was vindicated by the report four years ago of that Select Committee. With great respect to the committee, there are more differences than similarities between the situation envisaged in the report and that which now exists.

I do not think that I need go into any examples. However, there are a number of areas that were not even foreseen by that great committee. Transport infrastructure was raised by a number of noble Lords, among them the noble Lord, Lord Ezra, the noble Baroness, Lady Blackstone, and the noble Earl, Lord Russell. This is an area where the Government are continuing to spend more money on both roads and rail. We have the biggest renewal programme in rail since the switch from steam to diesel in the 1950s.

"Short-termism" was another problem raised in particular by the noble Lords, Lord Hooson and Lord Bruce of Donington. This is a so-called "problem". It has not prevented the rapid increase in manufacturing investment over the past two to three years. Companies with a proven track record of innovation command a healthy market rating and great respect within the City. If a company feels under short-term pressure the answer often lies in better communication with shareholders or providers of finance and in informing them of their R&D programmes and long-term objectives. The noble Lord, Lord Bruce, gave not one single specific example where short-termism had been a problem.

All noble Lords will be aware from earlier debates that this Government do not believe that the right approach is to intervene to promote manufacturing in this or that sector—nor to engineer a depreciation of sterling as a short-term boost to exports. Those policies have been tried and have failed too often in the past. The right approach is to create an economic climate of low inflation and prudent public finance in which business of all kinds can prosper. The last two weeks have seen the announcement of major inward investments in the United Kingdom by Fujitsu, Bosch and Toyota. Three world class manufacturing companies have shown in the clearest way possible their faith in Britain as a manufacturing country. I wish that some in your Lordships' House were as ready to acknowledge what British industry, with this Government's help, has achieved.

8.2 p.m.

Lord Ezra

My Lords, I should like to thank all noble Lords who have taken part in this debate. We shall certainly come back to this question again.

I believe that all of us, with the exception of the noble Lord who has just spoken, were of one mind: that although British industry has achieved a great deal—there is no denying the big improvements in productivity—the size of our manufacturing capacity is still not large enough for us to face up to the competition of other countries. That is a question to which we shall come back again. We shall try to persuade the noble Lord, Lord Strathclyde, to accept that what we are saying has a germ of truth in it. I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.