HC Deb 22 February 1965 vol 707 cc35-41
The Chancellor of the Exchequer (Mr. James Callaghan)

I must apologise, Mr. Speaker, for making two statements in one day, but with your permission, and that of the House, I wish to make a statement now about Supply expenditure in 1965–66.

The House will recall that in my Budget statement of 11th November last I said, with reference to public expenditure, that the Government's first objective was to get the deployment of economic resources right. The presentation of the Vote on Account affords me an opportunity to report on progress.

The Vote on Account, covering the Civil Estimates and the Defence (Central) Estimate, is being published this afternoon; the Defence Estimates and the Defence White Paper will be published tomorrow. The total estimated Supply expenditure in 1965–66 is £7,134 million, an increase of £585 million, or 8.9 per cent. over the Budget Estimates for the current year. Of this, £247 million, or 3.8 per cent., is attributable to increases in prices. The figure of 8.9 per cent. compares with increases in the Budget Estimates in the three previous years of 6.7 per cent., 9.4 per cent. and 8.2 per cent., respectively.

The Defence Budget Estimates, at £2,120 million, will show an increase of £121 million. In real terms, this represents an increase of 2.3 per cent. over 1964–65 as against a comparable increase of 5.5 per cent. in the previous year. We attach a high priority to checking the rise in the Defence budget; the Estimates will show that we have made a start. Moreover, defence expenditure bears heavily upon the balance of payments, and this aspect is the subject of a special review. The needs of our Forces must be met at a cost which the country can afford and the Defence White Paper will explain the measures we are taking to achieve this.

The Estimates show an increase over last year although they have been severely pruned. In large part, they are the outcome of a long series of decisions going back over a period of years during the time when right hon. Gentlemen opposite were in office. My colleagues and I are determined to cut out unnecessary spending, but because most policy decisions imply a long-term programme of spending Government expenditure cannot be reshaped at short notice. As we made clear in the Statement on the Economic Situation which was issued on 26th October last, it is the Government's view that the expenditure programmes which we inherited do not provide adequately for the nation's economic or social needs and we intend to reshape them.

Moreover, the examination shows that the commitments involved in these Estimates were not related by the previous Administration to any plan for making the most of the nation's economic capacities and thus of the capacity to finance them. It is the Government's task to plan the purposive use of our economic resources as a whole, in order to secure, first, that total expenditure both public and private matches the resources that can be made available, and, second, that within the total there is a proper balance between the requirements of the public and private sectors. This means that the public sector may need to absorb a larger share of our gross national product than it does today. But the growth of public expenditure must be effectively controlled so that social and economic priorities can be duly secured in the National Economic Development Plan which the Government are preparing.

We have accordingly been considering the problem of planning the longer-term course not only of Central Government expenditure, but of the total expenditure of the whole public sector. A final decision on the details of this will be reached when the plan has been drawn up. Meanwhile, the Government have decided that the growth of public sector expenditure between 1964–65 and 1969–70, excluding the investment of the nationalised industries, will be related to the prospective increase in national production, which in our present judgment means limiting the average increase in public sector expenditure, taking one year with another, to 4¼ per cent. a year at constant prices. This will mean a corresponding containment of the rise in private sector expenditure. Only as a nation succeeds in raising the annual rate of production can public and private expenditure be increased.

These decisions will provide a sound base for our policies for modernising and expanding the national resources. They will also permit the progressive development of our economic and social policies, because expenditure will be realistically related to our capacity to embark upon new plans.

Mr. Heath

I am sure that the whole House feels that the right hon. Gentleman need not apologise for making a second statement on a matter of such importance as this. Where we differ from him is in his saying at the beginning that this was an opportunity to report on progress. The statement in fact describes little more than what he himself has described already in his Budget speeches and in the White Paper which came out very soon after the Government took office and to which he referred again today. I have a number of questions to put to the right hon. Gentleman.

According to his statement, a decision about public expenditure must wait until a plan has been produced—and we know the difficulties about producing plans, particularly those to which this Government have set their hand. This means delay, although the right hon. Gentleman himself has just said that the question of obtaining exports needs action to reinforce it, to use his own words. The statement lacks any description of what action he is taking now to reinforce the need for exports which he has so emphasised.

Secondly, the right hon. Gentleman points out, the need for public expenditure to take the larger sector and for private expenditure to take the smaller. How is this to be achieved—by increased taxation, or are there to be measures for increased savings?

Thirdly, will the right hon. Gentleman recall that, whereas he wants further measures against private sector expenditure, this means productive expenditure as well as consumption expenditure and that both are already subject to the 7 per cent. Bank Rate and the credit squeeze? I will be grateful if he will deal with these points.

Mr. Callaghan

I am grateful to the right hon. Gentleman. Perhaps I should congratulate him on the assumption of his new responsibilities.

As regards the question whether decisions must wait until the plan is produced, the broad programme is, as I think the right hon. Gentleman will recall, that Departments have to start now, at this season, preparing next year's Estimates. The purpose of this decision is to inform them that they will be required to plan on an overall basis on the lines that I have indicated. That is why I thought it necessary to give the House the information now.

In due course, as the detailed plan moves to completion in the summer—not the outline which I hope my right hon. Friend the Secretary of State for Economic Affairs will be able to produce fairly soon—it will, I hope, be possible to marry the proposals contained here with the proposals he hopes to put forward in relation to the planning of our national resources as a whole, and adjustments can he made if necessary.

This statement was not concerned with the stimulation of exports. I remind the right hon. Member for Bexley (Mr. Heath) that the export rebate is worth to one industry alone more than £10 million. A review is now taking place of other measures which, we have been told, cannot be put into force, but which we want to examine so as to satisfy ourselves about them, before we accept a policy of defeatism towards the further stimulation of exports.

The right hon. Gentleman asked how the private sector would be contained. He was quite right. His right hon. Friend the Member for Barnet (Mr. Maudling) told us a year ago that unless we could get a higher rate of savings it must mean a higher rate of taxation, on the basis of the expenditure proposals put forward by right hon. Gentlemen opposite when they were in power. Apart from stimulation of the economic resources, which is the whole purpose of the plan on which we are embarking, these are the only ways in which to meet the necessary social expenditure.

I do not think that the right hon. Gentleman would expect me to make a statement about the Bank Rate and the credit squeeze this afternoon.

Mr. Grimond

Is the right hon. Gentleman aware that this continual rise in the Estimates is extremely disturbing and can be carried through only if there is a compensating rise in productivity? Is he also aware that what was found lacking in his statement was any mention of measures to increase productivity? Will he at least give an assurance that there is no intention to cut private sector investment which is fundamental to an increase in productivity?

Mr. Callaghan

The right hon. Gentleman is asking for rather much. I am making a statement on the Vote on Account about public expenditure, not covering the whole of economic policy. It is not for me today to discuss these most important matters to which the right hon. Gentleman calls attention. However, as he has asked the specific question, it is our desire and intention to see that private investment is maintained at a high level, provided that it is productive investment. This is the important point and it is the distinction which must always be drawn between various types of private and public expenditure.

Mr. Heffer

Will my right hon. Friend take into consideration that, while many of us on this side of the House welcome the pruning of defence expenditure which has been done we are, nevertheless, bitterly disappointed that the cuts have not been greater, for, if they had been, much more money would have been available for the necessary social services, housing, and so on, which our people need?

Mr. Callaghan

I suggest that my hon. Friend reads the Defence White Paper tomorrow. Perhaps I should not anticipate that, except to say that he will find that a full review is being made of the nation's defence commitments in every direction in order to see what is the proper relationship between those commitments and our capacity to carry the defence burden. I must say to my hon. Friend that this review is fundamental, but it must take time. We cannot hope to get short-term solutions to such a longterm problem as defence expenditure.

Sir H. Butcher

Can the right hon. Gentleman give an assurance that rationing is not to be reintroduced?

Mr. Callaghan

If that is the best contribution which the National Liberal Party can make, no wonder it is in decline.

Mr. Zilliacus

I appreciate what my hon. Friend says about the difficulty of reducing defence expenditure in the short term, but will he give an assurance that the Government stick to the Prime Minister's declaration of 16th December, that it is not merely a question of getting value for money, but that there is an imperative necessity actually to cut defence expenditure and to make corresponding changes of international policy? Does he further recognise that we do not have a long time in which to make a drastic reduction in defence expenditure?

Mr. Callaghan

I appreciate the need for an urgent review, because I have no doubt from my examination that if the policies being followed up to the moment were to be continued, for aircraft and in other respects, the defence burden on the country would become quite insupportable in a few years' time. We have already made a start on pruning in order to get the necessary redeployment of skilled men and resources to enable the export industries to go ahead. This is what we need to do and this is what we are determined to do.

Mr. Ridsdale

Is the right hon. Gentleman aware of the danger of using up necessary short-term investments with a high rate of long-term Government spending? Would he, therefore, see that the same incentives are given to business and personal savings as is the case in the rest of the world except behind the Iron Curtain?

Mr. Callaghan

I cannot accept the proposition as the hon. Gentleman formulates it. It depends on the value of the investment and it does not matter whether it is private or public. For example, a great deal of public money put into research in the computer industry would still be a very good investment, although it was public expenditure and not private. In so far as benefits are transfer payments from one section of the population to another, they involve no additional call upon our resources. We have to be clear about this. Public expenditure is not necessarily bad, nor private expenditure good. With both, it depends to what they are applied.

Mr. Arthur Lewis

Can the Chancellor say whether his figures take account of any repayment of the £4 million which is owed to the Treasury by Ferranti's? What is happening to that money?

Mr. Callaghan

Negotiations with Ferranti's are going on and I doubt whether the very prudent officials in the Treasury would take account of a debt which has not yet been paid.

Mr. Heath

Would the right hon. Gentleman clarify one point in his statement? He spoke of the public sector, excluding the nationalised industries, being limited to a 4¼ per cent. increase. Does that apply to the calendar year 1965–66, which does not appear to be compatible with the first part of his statement, in which it is said that the Estimates are to be reduced to this level for the coming calendar year? Was that an indication for the public sector for the next calendar year, while the plan is being formulated? Why are the nationalised industries excluded from the public sector?

Mr. Callaghan

The reason for excluding them is that we thought that there should be an investment budget as a whole, because investment in the nationalised industries is and should be productive of a return. The right hon. Gentleman is quite right about the dates—this applies for the next year and not for the coming year.

Several Hon. Members

rose—

Mr. Speaker

We must now pass from this subject.