HC Deb 27 July 1965 vol 717 cc228-41
The Chancellor of the Exchequer (Mr. James Callaghan)

The measures taken in the Budget to correct the balance of payments deficit are beginning to take effect. This year's balance of payments deficit is likely to be well below half last year's figure. To ensure that we reach our aim of eliminating the deficit in the course of next year and of maintaining the strength of sterling, the Government have decided to adopt the following measures.

First, expenditure at home. The Government intend to slow down the rate of expenditure on capital projects and to defer as far as possible purchases of equipment and stores by Government Departments, local authorities and nationalised industries.

Housing, schools and hospitals will be contained within their existing programmes. For other non-industrial capital projects for which contracts have not yet been signed, the starting dates will be postponed for six months. Exemptions will be made for projects in development districts and areas of high unemployment. Similarly, purchases of goods will be deferred to the maximum possible extent.

All Government Departments have been instructed to carry out this policy and to arrange for other bodies for which they are responsible to do likewise. The nationalised industries will be called on to follow a similar course of action. Local authorities will be asked to follow suit.

Loan sanction and grants will only be given to local authority projects which are urgently required. In particular, sanction will not be given except in special circumstances to loans for expenditure on land purchases in advance of requirements, on civic buildings, offices and a variety of miscellaneous projects which, though desirable in themselves, are not essential at this time. The expenditure in these categories is now running at £150 million a year.

Lending by local authorities on mortgage for house purchase has trebled in England and Wales in the last five years, and in 1964–65 reached £180 million. With the co-operation of the local authorities this will be restricted to the average of the three years ended 31st March, 1965, namely, £130 million.

Since the beginning of the financial year drawings by local authorities on the Public Works Loans Board have been exceptionally heavy. In present circumstances a more regular phasing of issues is necessary, and I have asked the Public Works Loans Commissioners to arrange this forthwith.

The Government, in addition to reviewing their own establishments, are asking the local authorities to review their present establishments; and in the light of this to confine net increases in their staffs to very urgent services, where essential professional workers, for example, teachers, are required.

The House will recall that last spring I undertook to review the swollen programmes of public expenditure left behind by our predecessors. This review is now complete. As I forecast before the election, the examination revealed that it would not be possible to carry out all the programmes we inherited within the limits of our resources until the necessary rate of growth of production has been achieved. We have, accordingly, reshaped the total programme and I can inform the House that from now on expenditure will be kept to the level that we as a nation can afford. I am giving instructions to Departments that the 1966–67 Estimates shall be drawn up within a limit which has been determined for each Department within the agreed total.

As regards defence, good progress is being made with the review designed to reduce the forward defence programme by some £400 million by 1969–70 and to achieve a large cut in that part which falls on the balance of payments. Next year's programme is being reduced by about £100 million. As to other overseas expenditure, all Departments and public authorities are to observe the most stringent economy in overseas expenditure and do all they can to increase overseas receipts.

So much for cuts in existing expenditure. We shall also have to defer some of the desirable social reforms we had hoped to do in the immediate future. While priority must go to wage-related unemployment and sickness benefits, the Government have decided that it will not be possible to introduce an income guarantee scheme or remove the remaining National Health Service charges in the next Session. We have also decided to postpone the introduction of the scheme of specially favourable interest rates for owner-occupiers.

In regard to private investment, the Government will introduce legislation instituting a licensing procedure to govern the starting dates of privately sponsored construction projects of the value of £100,000 or more with the exception only of housing projects and industrial building. The control will be made retrospective to all such projects for which no contracts have been entered into before the time of this announcement. Provision will be made for exempting projects in development districts and areas with high unemployment.

It is further proposed to introduce control over office development in the Birmingham conurbation. An Order giving effect to this will be laid before Parliament as soon as possible after the Control of Office and Industrial Development Bill receives the Royal Assent. As my right hon. Friend the President of the Board of Trade has already announced, closer control over industrial building will also be introduced when this Bill becomes law. It will become necessary in the London and South Eastern, Midlands and Eastern Regions to obtain an industrial development certificate for industrial development exceeding 1,000 sq. ft.

I have decided to reinforce the hire-purchase measures. As from tomorrow, the maximum repayment period of hire-purchase contracts will be reduced from three years to 30 months. This will apply to all goods which are now subject to H.P. controls other than furniture, bedding, cookers and water heaters, for which the period will not be altered. The Government will consult immediately with the gas and electricity industries to secure a reduction in promotional expenditure.

I propose to introduce some further changes in exchange control. The first concerns direct investment outside the sterling area. Hitherto, official exchange has been allowed in certain cases regarded as specially favourable for the balance of payments. For the time being no further approvals will be given for the use of official exchange in such cases. All approved projects will have to be financed with investment currency or by borrowing abroad.

Another change concerns investment currency. I announced in the Budget that certain receipts of foreign currencies by residents of the United Kingdom which had hitherto been allowed to be sold as investment currency would in future be exchanged at the official rate. The same change will now be made in respect of certain other receipts, including the proceeds of life policies and the assets of immigrants redesignated as residents of the United Kingdom.

Finally, I am asking the Bank of England to exercise more uniform control over borrowing in this country by companies registered here but controlled by non-residents of the sterling area.

It is the Government's policy to limit to the greatest possible extent facilities for financing imports of manufactured goods for home consumption and imports of all kinds for stockbuilding. With the Government's approval, the Governor of the Bank of England has now written a further letter to the banks. It asks them to scrutinise with even greater care than they do already all requests for credit when there is prima facie evidence that to provide the finance would facilitate payment for imports.

As regards prepayment for imports, at present payment for imports into this country may be made at any time between the date of contract and the date of arrival of the goods. In future, payments will not normally be allowed before the goods have been shipped. This should produce a useful once-for-all saving and help to check excessive purchases.

If the exchange control measures I mentioned earlier are continued for a full year, these, together with this once-for-all saving, should produce a total saving in official exchange of at least £45 million over the next year.

My right hon. Friend the President of the Board of Trade is introducing from Monday next a further improvement in the Export Credit Guarantee Department bank guarantee facility, by reducing the qualifying contract value from £50,000 to £25,000.

Arrangements are also being made to reduce the cost of shorter-term credit. This will affect a much larger volume of exports, and help many more companies. For shorter-term credits of at least 30 days and less than two years, guaranteed unconditionally by the E.C.G.D., the banks have agreed in principle to make finance available at Bank Rate. This compares with rates of around 1 per cent. above Bank Rate at present. The scheme will involve a large extension of the E.C.G.D.'s unconditional bank guarantee facility.

Details will be announced as soon as possible.

Also in this field of exports, urgent action will also be taken to increase efficiency in the docks and to improve access to them.

Together with the other measures the Government have taken previously, these further steps will reinforce our position and enable us to continue with the tasks of balancing our payments and reconstructing the economy.

Sir Harmar Nicholls

On a point of order, Mr. Speaker. May I have your guidance? In view of the unfortunate decision not to provide the Opposition with a copy of this statement—for reasons which may or may not be well based—and in view of its importance, and bearing in mind that it cannot be debated now because the Order Paper is fixed, is there any way of having a short Adjournment so that a considered probe can be made in the interests of understanding the statement?

Mr. Speaker

Not within my control.

Mr. Barber

Having listened to the statement made by the right hon. Gentleman, I must say that I can see no reason why he should not have delivered a copy of the statement to the Opposition, in accordance with the normal courtesies of the House. Both sides will agree that we have listened to a very grave statement indeed, which will have the most serious repercussions throughout the whole of the country. We shall have the opportunity on Monday of debating the whole economic situation, including this statement, but as the statement was handed to my right hon. Friend only when it was actually being made by the Chancellor, I will now only make one or two brief observations.

First of all, I would say to the Chancellor that we on these benches—

Mr. Speaker

Order. I hope that the right hon. Gentleman will contrive to put the observations in an interrogatory form.

Mr. Barber

I apologise, Mr. Speaker.

I hope that the Chancellor will appreciate that we will not shirk from giving our full support to measures that are genuinely in the interests of the nation. The statement raises a number of questions, and the first is: will the right hon. Gentleman tell the House what is the total financial effect of all the measures he has announced? Secondly, is it not the case that the primary purpose of these further measures is to reassure foreign opinion? Does he realise that the lack of confidence that exists abroad is the direct consequence—[HON. MEMBERS: "Oh."] Oh, yes—of the inept and incompetent handling of our economic affairs?

Lastly, does he not agree that the announcements he has just made to the House make a mockery of the Labour Party's election manifesto, and show the Labour Party's promises for what they were—a hollow fraud on the electorate?

Mr. Callaghan

I would certainly want to give the Opposition every proper facility in regard to this statement, as is always done, but there is, as the right hon. Gentleman will notice, a sentence in it which talks about licensing controls which are retrospective from the time of this announcement and that, I think, is an important reason for not previously giving the Opposition a copy. In any case, as my right hon. Friend the Prime Minister has said—and I do not want to make a major point of it—apparently when a similar statement was made in 1961 a copy was not supplied.

It is difficult to quantify the total financial effect, because in some cases we are talking about reduction of pressure of demand and, in others, about reduction in Government expenditure. I have said that on defence there will be an immediate reduction of £100 million, and the hire-purchase measures should, on the other hand, reduce demand by about £65 million. There will be other consequences arising from the deferment of capital projects for six months which I cannot at this stage quantify, although figures will become available in due course.

As to whether this action is necessary to reassure foreign opinion which is disturbed by the consequences of the handling of the situation by the Government, it really is a little too much for hon. Members opposite to try to slide out in this way. I need only refer them to the O.E.C.D. Report which speaks of the persistent and deep-seated weaknesses in the economy which have grown up over a number of years. It is with these that we are grappling. It is these that we are attempting to overcome in the reconstruction of the economy.

It is, of course, necessary to reassure foreign opinion that the events of the last 13 years are not now continuing. What foreign opinion wants to be clear about is that this country is reconstructing its industries; that it is in a position to earn is keep; and that it is in a position to pay its way. Every measure we take to achieve that is a real reassurance of foreign opinion.

As to the election manifesto, a number of things were said, I would remind the right hon. Gentleman, of the way in which he and his colleagues contradicted me in November, 1963. I said to the country: The Tories are embarked upon a spending spree. It is like taking on hire-purchase commitments when we do not know how much they will be and whether we shall be able to afford them. This was hotly denied by all Conservative spokesmen at that time.

There were other matters, too. The plain truth is that the Government of the day concealed the truth because they were throwing away the money of the people at that time.

Mr. Grimond

This is, of course, a grave and will probably be an unpopular statement—probably it was not worth making unless it was grave and unpopular. Will the Chancellor assure us that the Government are not speaking with two voices? Will they tell the people that they have to accept unpopular things? Is he satisfied that he has taken enough out of consumption goods, for there has been a feeling that a soft home market, whatever is done for exports, may end in more consumption at home?

Will the right hon. Gentleman bear in mind the question of investment allowances? Is he satisfied that private investment will go on at the required level? Did I hear him say that overseas defence expenditure will not be cut this year, but next year, by £100 million? If so, is he satisfied that that will be enough?

Mr. Callaghan

I shall try to remember all those questions. The right hon. Member may remind me if I forget some of them.

First, as to whether this will be unpopular, I have no doubt, but believe and trust, that the people will accept what is necessary so that we should balance our external payments and live within our means. To say anything less, or to believe anything less than that, would be unworthy of the people of Britain.

As to whether enough has been taken out of home consumption, I think that one of the effects of these measures will be to ensure the speeding up of a number of projects which, at the moment, are lagging because of the great strain to which the economy is subjected. It may well be that we shall get more out of the economy even in the short run as a result of greater concentration of effort of this sort.

Thirdly, on the question of overseas military expenditure, with the rest of my colleagues I have worked on this ever since we came into office. We have made substantial changes, for instance the cancellation of TSR2 was a very early decision.

The Prime Minister (Mr. Harold Wilson)

Hon. Members opposite voted against it.

Mr. Callaghan

I do not know who voted which way; but we made that change. I think that everyone realises that in this field we can make changes of this sort only over a very long period. I assure the right hon. Member that to cut £100 million on military expenditure next year is a very considerable achievement. I assure the House that I shall go on doing my best to make certain that we get this cut of £400 million in the period we have set ourselves. I believe that it can be done, but we need the support of all in the House and of the whole country if we are to do it.

Mr. John Hynd

Are copies of this statement now available for hon. Members? Will the Chancellor explain how the cut in local authority mortgages will achieve any saving whatever, because, if people are unable to get money from local authorities, they presumably will get it from somewhere else, or will be unable to purchase houses? Would my right hon. Friend care to explain how this is an effective way of saving?

Mr. Callaghan

I think it true to say that there has been an explosion in the field of local authority borrowing for which they pay only interest, while the greater part of the capital has to be found by the Exchequer. The fact that that has gone up so substantially to £180 million is at least evidence that we could not maintain such a rate of expansion. Of course, this will mean—I do not deny it and it would be foolish to deny it—that it will be more difficult to get money from this source to purchase housing; but we have to choose between that and other consequences which would be much more unpleasant

Mr. Selwyn Lloyd

We will, of course, support proper measures to defend sterling—[HON. MEMBERS: "Oh."]—unlike what happened in 1961, when I recall some of the speeches made by hon. and right hon. Members opposite. In view of what the Chancellor has said in one of his answers about speeding up, is this stop or is it go?

Mr. Callaghan

I saw in the Press that what we were suffering from was too much go-stop and not too much stop-go. The theoreticians can work out what the difference is. What I think will be the effect is to ensure that at the end of the production pipeline we shall be getting a faster rate of production than we were getting before because of the very great strains which were placed on the economy. It is within the experience of every industrialist that the fulfilment of orders—including many important export orders—has been held up because of failure to get sufficient labour or through shortages of components. This will have the effect of making the economy much more balanced than it has been over the last two years.

Mr. Sydney Silverman

While we fully appreciate the prime necessity for the Government to pursue a policy to make certain that the country can stand on its own feet in the world, and pay its own way, before we can do the things we want to do, may I ask my right hon. Friend to answer two specific questions? First, can he estimate whether his proposals will have an effect, and if so what effect, on the level of employment in this country?

Second, since the proposals that he is making are meant to deal with an immediate emergency, does he not consider that to postpone the proposed cut of £400 million in defence expenditure for four years will not help him to achieve the objects that he has in mind?

Mr. Callaghan

There is no doubt that the election programme on which we stood, and about which many of us made many speeches, said that we put the economic recovery of the country first; and until we get the economic recovery of the country we cannot fulfil the social programmes and aspirations we have in mind. I and others made speeches on television and in the country, but, of course, we were not helped by hon. Members opposite telling the electorate that everything was all right.

The effect on employment is a matter about which the whole Government, including, of course, myself, are very deeply concerned. We have not been in the Labour movement for many years to create a substantial measure of unemployment. Let there be no doubt about that. [HON. MEMBERS: "Or on this side."] I do not except hon. Members opposite from that desire, but there is strong feeling about this matter. Our intention is, as we have endeavoured to do and, to a certain extent, have succeeded so far, to secure a redeployment of labour. There are now important export industries which cannot get the labour they require to fulfil orders. Everyone knows that there is a shortage of exports today. It is the basic weakness from which we are suffering. Therefore, the Government's policy is directed to positive redeployment of labour towards those fields.

As regards postponement of defence cuts, I promise the House that it is not my or the Government's intention to postpone any defence cuts which are reasonable and feasible. This is a very tough field in which we are operating, but I give the House the assurance that we shall make the maximum cuts at the earliest possible moment.

Mr. Brooke

What does the Chancellor judge has worsened between April and July to make these serious restrictions and postponements necessary now? If they are necessary now, as they may be, why did he not foresee that at the time of his Budget?

Mr. Callaghan

There are two reasons. First, demand has continued to rise despite what I did in the Budget, although hon. Members opposite voted against it on the Second Reading of the Finance Bill. It would have been even worse if they had carried some of their Amendments to the Bill. The other major point is that exports have not been rising to the degree on which I was relying. The relationship between imports and exports is not satisfactory yet and that is a relationship that must be satisfactory. This is the other major reason why I felt it necessary to introduce these steps at this time.

Mr. Atkinson

Would not my right hon. Friend agree that there is something basically wrong with our priorities if we are now saying that we cannot next year improve on our housing record for this year? Would he give some assurance to the housing industry, particularly to those who are involved in industrial building, about the future so that they do not at this critical stage start to cut back on their capital investment and thus affect the tremendous programme, which we should all like to see next year, to give first-class homes to our people?

Mr. Callaghan

What I said in my statement was that the housing programme will be contained within the present programme. This will mean that, as a result of lessening demand in certain other fields, it will be possible to achieve that programme. I doubt whether it could have been achieved at the level which the whole construction industry was trying to maintain at present. Therefore, we can assume that there will be a continuation of the housing programme but I do not think that it is possible at this moment to expand it over this year's level, which has been increased over previous years.

Mr. Soames

Would the right hon. Gentleman reconsider the answer which he gave to the right hon. Member for Orkney and Shetland (Mr. Grimond) about the effect on the balance-of-payments problem of the cancellation of aircraft orders? He said that this had reduced it. In fact, the cancellation of the fighter and transport aircraft manufactured at home and ordering the aircraft from America has already increased the load on the balance of payments by some £230 million.

Secondly, would the right hon. Gentleman tell us how much of the reduction of £100 million which has been decided upon in the defence programme for next year is to fall on overseas expenditure? When can we expect details of these cuts to be announced in the House?

Mr. Callaghan

The right hon. Gentleman will know from his past experience that we are at this moment engaged in settling next year's Estimates between the Departments. It is this decision on next year's Estimates within which the Ministry of Defence will be working from now. It knows that it has to work within that total. So there will be no question of announcing the cuts. The Estimates will come along in the normal course of events and there will then be announced the policy which the Estimates carry out, as well as the equipment which is required.

As regards the effect on the balance of payments of ordering aircraft from overseas, the right hon. Gentleman will know that no orders for the F111 have yet been placed. As regards other aircraft, this was part of a major operation to secure a redeployment of the labour force into fields where we believed that it would be more productive for the national economy. That was the reason that it was undertaken.

Mr. Bagier

While appreciating my right hon. Friend's dilemma, and also noting in his statement the several measures which he mentioned to help the development districts, may I ask him whether he will keep a very close watch on unemployment in these areas? He will recall that in the past each measure led to a rise in unemployment in the North-East and in Scotland. Will he ensure that whatever actions he takes will not stem the gradual move towards recovery brought about by the last nine months of Labour Government?

Mr. Callaghan

We do not believe that it is either humanitarian or a proper use of our resources in skill and manpower to allow the development districts and the rather wider areas where there is high unemployment to remain in that state. We therefore believe that it is proper on all counts not to apply the full rigour of these measures in those particular areas. I believe that this marks a very great difference between what is being done now and what has been done on some other occasions.

Mr. Boyd-Carpenter

When the right hon. Gentleman says that the housing programme will be continued within its present level, does he include the private sector? If so, how does he propose to enforce that? Does this also mean that the increase in local authority building which the Minister of Housing and Local Government announced only a very short time ago is being scrapped? Can he say how many houses it is his object to take out of the programme which otherwise would have been built this year? How does he reconcile that with the Prime Minister's statement on 12th September last that it was intended by a Labour Government to apply to housing the methods of an operation of war?

Mr. Callaghan

I think that the last part is certainly true, with the new systems of house building being developed. It is a great pity that they were left unused here for so long after other countries had developed them. May I say to the right hon. Gentleman that we shall have plenty of opportunities over the new few days to debate the detailed questions which he has put to me. I am sure that answers will be given to him then. [HON. MEMBERS: "Wriggling".] We are not debating the matter now. The right hon. Gentleman asked me a number of questions. Do not get impatient. The hon. Member for Shipley (Mr. Hirst) never stands up to intervene. He merely sits there and squeals.

The number of housing starts next year will be the same as the number of starts this year. My right hon. Friend is having discussions with the building societies now to see whether a floor and a ceiling can be put on the level of private sector house building. If this can be done, we shall have a well-balanced housing programme which will match our needs, or, at any rate, the productive possibilities of the construction industry.

Several Hon. Members


Mr. Speaker

We cannot carry this matter further.