§ 11.7 a.m.
§ The Chancellor of the Exchequer (Mr. Harold Macmillan)
With your permission, Mr. Speaker, and that of the House, I will make the statement about the economic situation, to which reference was made yesterday.
The Government have come to the conclusion that further measures are required to deal with the overload which has put such a strain on our balance of payments. I propose to give a brief explanation of the measures we have taken and propose to take. When the debate takes place, there will be an opportunity to develop at greater length the reasons why we think them necessary.
Before, however, dealing with the wider field, I should like to refer to the current expenditure of the central Government. The expenditure which we propose for 1956–57 is made known in the Defence White Paper and in the Civil Vote on Account, both of which are being published today. I should like to say a word about the new figures.
The defence total will be £1,499 million net, as against the original Estimates of £1,494 million for 1955–56. As the White Paper will show, we have carried out a comprehensive and forward-looking review of our defence effort. In this we have had regard both to the needs of the new strategic situation and to the dangers of overloading the economy with the cost of defence, whether in terms of manpower, materials, or money. The total Estimates for Defence would have been much lower, but for the increases in Service pay and 2666 emoluments which are to cost £67 million in all. The addition, of course, will cost £67 million in all.
The Civil Estimates, at £2,481 million, show an increase of £112 million over the original Estimates for 1955–56: of the increase, the Social Services account for £99 million.
It will be seen that the total Estimates, Defence and Civil, are £117 million more than those presented at this time last year. This represents a rise of about 3 per cent. in money. This, at a period of higher costs, is actually a fall in real terms—that is, in demand on labour and materials. If the Government had not exercised the most rigorous check, the increases in Service and Civil Service pay, in wages generally and in the costs of all the supplies needed for the Government services would of themselves have carried the total of the Estimates to far higher figures.
But we have made vigorous and sustained efforts, initiated by my right hon. Friend the Lord Privy Seal and continued by me since I took up my present office, with the help of all my colleagues, to reduce this total. The fact is that rises in education, the Health Service and Service pay more than account for the net total increase. Over the rest of the field, notwithstanding developments such as those of atomic energy and roads, we have brought the total estimates below this year's figure.
We shall continue our efforts to reduce the total of public expenditure and shall not hesitate to ask the country to accept a reduction of existing services, if we judge it as any time proper and expedient to do so. We shall also pursue a continuous search for further administrative economies. We have already carried this so far that, short of changes in policy, such economies cannot yield large sums: but, as an earnest of our intentions. I would remind the House that in his recent speech at Bradford the Prime Minister said that our target was a reduction in the staffs of Government Departments by a further 10,000 to 15,000. This work is being put in hand.
So much for the Estimates. Now I come to the wider problem. There is general agreement that the combined demands of investment and consumption are growing too fast for our economic health. This has held back our exports, swollen 2667 our imports, forced us into balance of payments deficit, helped to reduce our reserves by a quarter, and driven up our domestic price level. After much study during the past few weeks of developments under all these heads, it is clear to me that something more must be done, in addition to the measures taken by the Government in the course of last year. The more quickly we are able to act, the more effective will be the results. We must make an even more determined attack on the roots of the trouble and enforce still further reductions in investment and consumption.
I will state, first, the measures which are being taken in the monetary field. As the House knows, the Bank of England yesterday increased the Bank Rate from 4½ per cent. to 5½ per cent. I regard this as a timely move which will reinforce the further disinflationary measures on which the Government have decided. Next, the reduction in bank advances has accomplished a good deal, but I must look to the banks to continue their efforts to reduce the total of their advances. Similarly, I look to the Capital Issues Committee to maintain a vigorously critical attitude towards all applications. The Committee should recommend consent only when it is satisfied that the purpose has a definite urgency under current requirements; and, where such urgency is not proved, it need not be moved by the argument that the applicant has committed himself to the development in advance of Treasury consent.
Credit restrictions are designed to slow down investment and consumption in the private sector of the economy. I would also appeal to businessmen who are able to finance investment out of their own resources to apply the same tests as to the timing and rate of their investment as if they had to borrow. Meanwhile, I have given careful thought to the question whether it is right in present conditions, to continue the investment and initial allowances. I have reached the conclusion that I should suspend the investment allowance and in its place restore the former initial allowances.
I propose that as a general rule no investment allowance shall be given in respect of capital expenditure becoming due and payable after today, but that 2668 such expenditure should qualify for the rate of initial allowance in force in 1953. There will be two classes of exception. In the first place, where a definite contract has already been placed for the purchase or construction of capital assets the investment allowance will still be given in respect of the relevant expenditure when it becomes payable. Secondly, capital expenditure on the construction of ships and on scientific research assets will continue to qualify for investment allowance. The necessary resolutions and legislation will be brought forward in the Budget and in the Finance Bill.
Again, we have reviewed the Orders regulating the terms of hire purchase. We propose to tighten up the present arrangements in three ways. First, the minimum down payments for consumer goods will be increased from the present 15 per cent. and 33⅓ per cent. to 20 per cent. and 50 per cent. respectively. Maximum periods of repayment will remain unchanged. Secondly, power will be taken to control hiring of certain of these goods—as opposed to hire purchase. Thirdly, the control will be extended to a comprehensive range of capital goods subject to a 50 per cent. down payment and maximum repayment period of two years. We expect these change to restrict credit over a wide field. I regret the need for these changes, which will disappoint many people. But at a time when we are restricting borrowing for investment and production, we must also restrict borrowing for purchase. We must all join in the battle against inflation.
The Government must also play its part in this campaign through the public authorities and departments over which it has control. I have, therefore, made a full review of these plants with the Ministers concerned. Useful works already started must be completed with all expedition. But we shall take measures to impose delay on some works not yet started so as to reduce, as quickly and by as much as possible, our demands on productive industry, especially building and heavy engineering.
I will deal, first, with the nationalised industries. As a result of previous requests, they had already reduced their programmes of capital expenditure in 1956 before submitting them to their appropriate Ministers. They have readily co-operated further and by reassessing priorities and by rephasing they have now 2669 further reduced their programmes, as submitted, by just under £50 million. In the result, the total capital requirements of the fuel and power industries should be some £20million less than in 1955, although investment in coal production will, in fact, be higher.
On the other hand, the British Transport Commission, although it has agreed to substantial reductions in its 1956 programmes, must spend more than in 1955, in order to make a start with its major plan for re-equipping and speeding up the railways.
The contributions to this of the various authorities are:
Next, capital expenditure financed direct by the central Government will be reduced by over £20million in all below what had been planned for 1956. Towards this the Post Office, by rearranging its programmes, will find £5¼ million; and the restriction of storage facilities and stockpiling for Home Defence will save £10million on the original plan. The New Town Corporations are also being asked to defer the starting of new capital projects wherever possible. We do not propose any change in the programme of hospital building already announced.
- Central Electricity Authority and the two Scottish Electricity Boards, £13¾million.
- The Gas Council and Area Boards, £5million.
- National Coal Board (on items other than coal production), £5million.
- British Transport Commission, £22 million.
- Airways Corporations and Airports, £2¼million.
- B.B.C. and I.T.A., £1½million.
The same principles must be applied to the capital programmes of local authorities. As regards housing, the Government's proposals have been embodied in the Bill which has just passed through the House.
As regards education, the changes which the Ministers concerned are making in the school building programmes affect only timing. The programme stands. But the 1955–56 programmes of the local authorities are seriously in arrears. It is, therefore, prudent, since they are in arrears, to make room in the 1956–57 programmes for starting the carry-over from the current year. For this purpose a control of starts will be necessary. The 2670 Minister of Education will, therefore, postpone until 1957–58 a proportion of the 1956–57 programme of starts. The Secretary of State will take the corresponding action in Scotland. My right hon. Friends will shortly issue circulars to local authorities, explaining these arrangements in detail.
The grant of loan sanctions for other capital schemes of local authorities will have to be severely restrained, except where there are exceptional circumstances. The sanctioning Ministers will be sending out circulars to explain the new arrangements for the services with which they are concerned.
Finally, I must refer again to the question of the current expenditure of the central Government. This is part of total demand on our resources and we cannot allow any expenditure for which there is not full justification.
So far, nearly all the decisions of the Government, whether in the monetary or in the physical sphere, bear principally on investment. We regret the need for this; but even investment, on which our future prosperity depends so much, cannot be allowed to outrun our resources of men and materials or to make excessive demands on the balance of payments.
Nevertheless, it would not be right to-put the whole burden on the future, especially when we are paying out large sums to encourage consumption. In present circumstances, with full employment and high wages, it is difficult to justify the continuance of these general consumer subsidies on their present scale. At the same time, a period of reasonable stability in prices remains a primary aim of Government policy; and the progressive reduction of these subsidies must take place consistently with that aim.
The bread subsidy, which amounts to about 2¼d. on the 7½d. loaf, costs about £40 million a year. Ordinary milk—I am not speaking of school or welfare milk —is subsidised to the extent of £37 million a year. As a first step, the Government have decided to reduce the subsidy on bread by 1d. on the 7½d. loaf. This will operate as from 26th February, and will represent an immediate reduction in the subsidy at the rate of some £18 million a year. The retail price of milk will be put up by ½d. a pint as from 1st July. The saving will be at the rate 2671 of some £20 million a year. These proposals, of course, do not affect the cost of welfare or school milk to mothers and children.
The immediate increase in the price of bread amounts to an increase of 0.6 of a point in the cost-of-living index. The milk increase in July will amount to 0.4 of a point. But these movements, although important, are not the true test of our measures. The real effect must be judged in the light of the general success or failure of the national campaign against inflation.
I have now completed my account of the results of the review which the Government have made of the whole range of public expenditure, capital and current. The reductions we have been able to make in the capital expenditure of the Government and of the nationalised industries will reduce the pressure of demand in 1956 by about £70 million. The savings on the food subsidies will amount to £38 million. To these must be added—though I cannot put a figure on them at this stage—the reductions in outlay which will result from the rephasing of local authorities' capital expenditure.
Finally, we must expect that the continuing, and—in the case of hire purchase —the still tighter restriction of credit, coupled with the increase in Bank Rate, will achieve a more definite slowing-down of demand from private industry and the consumer.
As the House knows, I have made this statement today to give hon. Members the opportunity to think over its contents before the debate on Monday and Tuesday.
Mr. George Cherwynd (Stockton-on-Tees)
Why not last week?
§ Mr. Macmillan
I trust that hon. Members, in considering it, will bear in mind one important point. We are attempting to grapple with inflation, an obstinate and gravely serious problem which has beset us ever since the war and has not been fully mastered at any time by any Government. Yet it must be mastered, if our personal lives are not to be darkened by continual anxiety and uncertainty, and our country's position in the world steadily undermined.
Though our measures are in this sense restrictive, our purpose is positive and 2672 constructive. We want to call a halt to the prospect of a continuing rise in costs, so that the constant upward pressure on prices will be relieved. We want to safeguard the internal purchasing power of the £, so that the shopping money will go as far at the end of the year as it does at the beginning.
We want fixed incomes to mean what the figures say, and not be reduced by a dwindling of the value of the money they represent. We want to fill the gap between our exports and our imports by successful trading, not by draining our gold and dollar reserves. We want to go further than that, and build up the strength and effectiveness of the whole sterling area by increasing our reserves. We want, in fact, to safeguard the striking gains in our standard of life that have been achieved since the end of the war.
Never before has the standard of living been so high or general well-being so widespread. Never before has every individual home had so great a stake in the continued prosperity and solvency of Britain. I believe, therefore, that although these measures will, naturally, result in some sacrifice or some disappointment, they will be accepted as wise and timely.
Mr. H. Wilson
The Chancellor will no doubt expect the gratitude of his hon. Friends for having postponed this grave announcement until his by-election candidates scraped home safely on a document called "Prosperity Plus."
As the Chancellor said, on Monday and Tuesday we shall be debating this very grave epitaph to his predecessor and Tory freedom. But there are one or two questions which I should like to put to him right away. As the House will understand, this is broadly the continuance of existing policies—the intensification of hire purchase and his predecessor's class policies in that direction—swingeing cuts in the expenditure of public industries, and local authorities, including education, because of Government failure to control the private sector of industry. Quite apart from that, as one understands it——
There is no question about any of this. Apart from that, with the increase in the Bank Rate and this continuing reliance on monetary weapons alone——
§ Mr. Pickthorn
On a point of order, Mr. Speaker—[HON. MEMBERS: "Sit down."] I quite understand, if I may respectfully say so, the convenience to the right hon. Gentleman opposite of having previous notice. What I wish to ask is, what is the Motion before the House which justifies the amount of argument and innuendo we have already had? Will other hon. Members be allowed to participate?
Further to that point of order. Has it not been repeatedly ruled— and was it not invariably the practice of right hon. Gentlemen opposite when in opposition—that questions after a statement of this great length should be preceded by an expository sentence?
§ Mr. Speaker
The right hon. Gentleman said, quite truly, that we shall be debating this matter on Monday and Tuesday of next week. He then went on to say that there were certain questions which he wished to put to the Chancellor. No doubt a certain amount of prefatory matter is allowable, but it would be for the convenience of the House—may I remind all hon. Members that I feel a certain responsibility to the private Members whose day this is—if, in view of the debate we are having on Monday and Tuesday, we got this stage of the proceedings over as quickly as possible.
Since the Chancellor appears to be continuing with a reliance on monetary policies which, if they are persisted in, will inevitably lead to mass unemployment, will he answer this? He seems to have rejected physical controls. Would he not agree that he would have a better hope of stopping frivolous building expenditure, and giving the green light to essential investment, were he to reintroduce building licences instead of using this blunt instrument of investment allowances?
The second question I want to put is; will he tell us what will be the increase in council house rents as a result of this statement? Will it be as some people have estimated, a 6s. increase, and if that is so, will he stop the Housing Subsidies Bill, now on its way to another place, and introduce another Bill?
My final question is: since his aim is declared to be an attempt to stop rising prices, how does he think that he will 2674 achieve this by putting up the price of bread and milk, and what effect does he think that that will have on the wage and prices spiral?
§ Mr. H. Macmillan
The right hon. Gentleman has said that we are to debate this on Monday and Tuesday and I think it would be a waste of time to have a peroration now which we shall have to have again. Nor do I intend—I hope the right hon. Gentleman will forgive me—to answer purely theoretical questions which I think could be better dealt with in debate. However, they give me an opportunity to say something which I want to say, and perhaps I ought to have said. We shall have a debate upon what are the best methods to try to deal with a disease which I think we all feel ought to be dealt with. The right hon. Gentleman suggests one method and we say another.
I shall be very happy to discuss the question of building controls in the debate. I would say now that we have no intention of re-introducing the old building licences system, which had practically broken down when it came to an end. These are very serious matters and we can debate the merits for and against doing it in that way. Having regard to the fact that such a high proportion of the total building—I think over 90 per cent.—is either for housing or factories, it is doubtful whether that is worth doing. However, it gives me an opportunity of saying, on the other form of control—where it would be much more serious were there any misunderstanding —that we have no intention of reintroducing import controls.
I think that the rise in the price of bread or milk by 1d. or 2d. in either case—0.6 of a point in one case and 0.4 in another—introduces another theoretical argument over which, I agree, there is a difference. If it is right to keep down prices by subsidies, then we ought to subsidise everything, and it is just that policy which has proved to be a failure. It is because we know that—[Interruption.]—I remember Sir Stafford Cripps having to stand at this Box and say, "We have subsidised up to £485 million." Then he had to stop.
§ Mr. C. Davies
May I ask the Chancellor of the Exchequer this question? The Government must have known about the weak economic position of the country 2675 for some considerable time and, consequently, must have known that it was getting worse day by day. Assuming that the Chancellor thinks that the steps he proposes to take will have some effect, may I ask why he delayed his announcement until today?
§ Mr. Macmillan
I can give an answer to that question and it is absolutely simple. One of the steps on which we rely is the raising of the Bank Rate, that is very important. But I should have been very much averse, and so would the authorities, to the raising of the Bank Rate by itself until we were in a position to fortify it by a statement of the Government decisions which we have now taken, because I believe that all over the world an announcement of a rise in the Bank Rate—had it been made a few weeks ago when I first took office—would have been regarded as a sign of weakness and fear; whereas I believe that, combined with these measures, it will be regarded as a sign of strength.
§ Mr. Bellenger
May I ask the right hon. Gentleman whether he proposes to maintain the figure of £50,000 below which it is not necessary to get the authority of the Capital Issues Committee? Is not there some evidence that certain companies, particularly those engaged in hire-purchase finance, are getting round this figure by the flotation of several £50,000 companies?
§ Mr. Macmillan
I am grateful to the right hon. Gentleman for referring to that loophole. We have it under review. I should hesitate to make a general rule to reduce the £50,000; it would be very inconvenient to administer. I think that by one way or another, by monetary control, credit control, bank control and the capital issues control, we ought to be able to achieve our purpose.
§ Sir R. Boothby
I welcome the domestic proposals of the Chancellor, but may I ask two questions arising out of the fact that the most dangerous aspect of our situation, as I am sure my right hon. Friend will agree, is the excess of imports over exports. Has he any plan in mind for decreasing the former and increasing the latter? I am not talking about direct physical controls. Is he considering the problem and, if so, will he produce a plan?
2676 The second question is: does my right hon. Friend really think that in the present situation we can go on giving to commodity exchanges and cereal importers unlimited quantities of dollars which we have not earned and which, shortly, we shall not possess?
§ Mr. Macmillan
The hon. Gentleman has made two points, very helpfully. The first asked me to say again—and I want to make it perfectly clear if there was any misunderstanding—that we do not intend to have any form of import control. We believe, on the other hand, that the general application of the measures we are taking and the general working of those measures will have the effect of reducing imports because of the difficulty of financing them or due to reducing the demand for them.
On the wider problems of increasing exports and the whole trade position, I would hope to be able to say more at a later stage. There are the great problems of European development and the development of trade overseas, and in all that field we have the possibility of making advances. I think that the whole of this body of measures will give us the breathing space and the control which is necessary for our success.
§ Mr. Jay
Is the Chancellor aware that the cut in bread and milk subsidies is a piece of unbelievable folly which will push up the cost of living, wage levels and the cost of our exports? Will the right hon. Gentleman say whether, simultaneously with this, he intends to increase the rates of old-age pensions and National Assistance?
§ Mr. Macmillan
The right hon. Gentleman asked whether I agreed that my proposals are those of unbelievable folly. I can only say that I answer that question in the negative.
§ Mr. Macmillan
No. As the right hon. Gentleman knows well, the National Assistance rates, which are fixed on the recommendations of the Board, were increased only a week or two ago. They have increased to a figure which would 2677 take account of a far greater increase in the cost of living than is proposed by these proposals.
§ Mr. Doughty
Will my right hon. Friend assure the House that the measures taken will reduce the rise in the cost of living, which is such an anxiety to those with fixed incomes?
§ Mr. Macmillan
The object of these measures is to reduce excess demand. I know that the Opposition has one way in which it wants to do it and we have another way on which we rely. If we can succeed in reducing the excess demand, by whatever method, then we shall succeed in getting the reasonable stability in prices that we want.
§ Mr. Crossman
Will the right hon. Gentleman say whether the £70 million which we may have to pay for the British Army of the Rhine is included in his calculated advanced cost next year?
§ Mr. Macmillan
In the Defence White Paper figures—I am sorry that I have to use the total figures—we are allowing for the receipt of £50 million from the German Government.
§ Mr. Maclay
Is my right hon. Friend aware that it is a matter of great satisfaction that he has not resorted to those forms of control which, in the years after the war, produced gross extortion in our economy?
§ Mr. Strachey
Will the Chancellor add to his answer about German policy, and say why he thinks he can bring the £50 million from the German Government into these calculations, because his other calculations are likely to be as unfounded as that appears to be?
§ Mr. Macmillan
The right hon. Gentleman has held very high office, and is a member of the Privy Council. I am sure he would think it very odd if I were to embark upon a negotiation by starting to write off the figure before I began.
§ Several hon. Membersrose——
§ Mr. Speaker
The House is now getting into questions of detail which are far better reserved for the debate. I have again to remind the House of the interests of private Members, whose day this is.