§ The Chancellor of the Exchequer (Mr. James Callaghan)
With your permission, Mr. Speaker, and that of the House, I should like to make a statement on public expenditure.
The expenditure programmes which we inherited had insufficient regard to the nation's social or economic needs or to our capacity to pay for them. Accordingly, I said a year ago that we intended to reshape public sector expenditure, and that its growth, other than that of the investment of the nationalised industries, would be limited in the period 413 1964–65 to 1969–70 to an average of 4¼ per cent. a year at constant prices.
This work has been going on during the year. The Estimates for 1966–67 are now ready and the Vote on Account is being published this afternoon. These Estimates represent just over 60 per cent. of the total public sector expenditure to which the Government's 4¼ per cent. decision referred, and I am able to tell the House that they will show an increase of no more than 1.8 per cent. at constant prices, compared with 5 per cent. last year. I have also presented a White Paper describing the methods that we have employed to plan and control public expenditure, and which we propose to develop.
The total Estimates, including those for the Defence Department which were published today, amount to £7,728 million. This includes £70 million attributable to changes in classification, representing expenditure which would otherwise not have been on Votes, but would have appeared either as a reduction of revenue or as advances from the Consolidated Fund. On a comparable basis, the increase over the Budget Estimates for 1965–66 is £524 million, that is, 7.3 per cent. Of this £387 million is the consequence of increases in pay and prices.
As I have said, the comparable increase at constant prices is 1.8 per cent. It is too soon to make a firm estimate of the increase in total public expenditure in 1966–67 as compared with 1965–66; but, given the very moderate increase in Estimates at constant prices, there is every reason to believe that the increase in total public expenditure at constant prices will be less than 4¼ per cent.
I believe that the House will recognise that this is a satisfactory achievement in the task of bringing the growth and pattern of public expenditure into line with our capacity to support it.
§ Mr. Heath
While the Chancellor of the Exchequer is congratulating himself on his statement, will he recognise that, against the background of the Government's heavy indebtedness, which he has incurred overseas, and stagnant production, it would have been extremely damaging if he had made any other sort of statement this afternoon?
414 What are the other items in the public sector expenditure which will bring up the percentage from 1.8 to 4¼ which he expects, and what percentage increases will these be? They must obviously be very much greater than 4¼ per cent. What will be the increase in the nationalised industries' expenditure? Is he aware that by comparing a 1.8 per cent. increase in real terms with a 7.3 per cent. increase in financial terms, one gets the true measure of the Government's failure to control inflation?
Finally, as the right hon. Gentleman is proposing to spend 4¼ per cent. in real terms against stagnant industrial production—no increase at all over the last year and still stagnant—how does he propose to prevent inflation in future?
§ Mr. Callaghan
I fully understand the disappointment of the Leader of the Opposition. It is, of course, true that at no time during recent years in which records have been kept has an increase in constant price terms been as low as this. I welcome the congratulations which the right hon. Gentleman extended to us on achieving that.
There were so many misstatements in his supplementary questions that I do not know where to start. The balance of 40 per cent. which he mentioned is made up of local authority expenditure, which is part of public sector expenditure, but, naturally, not included in the Estimates; it is also made up by Consolidated Fund expenditure and by a number of other items of that sort. The right hon. Gentleman is quite wrong if he assumes that the increases there must be much greater than 4¼ per cent. When the figures come out, he will probably find that they are rather less than 4¼ per cent.
The right hon. Gentleman mentioned inflation. I must say that it is unwelcome that there should be such a large increase in respect of pay and prices; but £56 million of it is for the Armed Forces, and I do not remember the Leader of the Opposition suggesting we should not pay that. Other large sums are for increases in Civil Service pay which do not come every year, but tend to bunch into alternate years. I do not suppose that the Leader of the Opposition is saying that civil servants should not receive those accumulated increases which, 415 alas, derive from the fact that there has been an increase in the pay and incomes of other people in preceding years. In other words, what the Civil Service gets in this year is related to what others got in earlier years; but I do not want to make too much of that.
The right hon. Gentleman referred to overseas indebtedness. It is true that we have borrowed substantial sums to pay for the debts which were incurred by the Conservative Government. [Laughter.] I do not think that that is much cause for laughter by hon. Members opposite. They ran away leaving an overseas deficit of upwards of £800 million, and that cannot be financed out of nothing. We have to conjure up the money in order to finance it, but I am delighted to tell the House—and I am sure that the Leader of the Opposition will be equally gracious when he hears it—that we have begun to repay the debts which he incurred.
§ Mr. Lubbock
Is the right hon. Gentleman aware that we on this bench accepted some of the restrictions on public expenditure which had to be introduced last year as a consequence of the present Government's economic inheritance? Nevertheless, this process seems to have gone too far. Surely the figures given by the Chancellor of the Exchequer this afternoon show that he appears to be permitting public squalor and allowing private consumption to increase. Is he aware of the difficulties which have been created for local authorities in the past year in some of the most vital sectors, such as teacher-training colleges and local authority home loans, difficulties from which it will take a long time to recover? Is he not aware that he has imposed these restrictions on local authorities too harshly in the last year?
§ Mr. Callaghan
No, Sir. I could not accept that. The hon. Gentleman will see from the Estimates that there is an increase in real resources available to education next year, and that is a considerable achievement considering the economic position in which the country is placed. He will also see—I make it clear now if he does not—that expenditure this year in real terms is on a rising curve between now and 1970 to fulfil the targets of public expenditure. These will involve a substantial increase in expenditure on the public infrastructure, that is to 416 say, in expenditure on roads, hospitals, housing and schools.
All of these will secure a substantial increase. I have never disguised the fact—and here I differ from the hon. Gentleman—that if the country wants these increases in expenditure on hospitals and schools and roads there must be some compression of private consumption. This is why I hope that we have the support of the whole House in trying to fulfil the National Plan, which will secure that increase in our gross national product which will enable us to finance it.
§ Mr. Boston
My right hon. Friend has mentioned an increase, I think, of £387 million. Can he give further details of how this is made up?
§ Mr. Callaghan
As I said to the Leader of the Opposition, there is £56 million for the Armed Services' pay, and another large sum in respect of civil servants' pay, related to agreements concluded earlier. This increase follows from the fact that comparable occupations outside the Civil Service had substantial increases in 1962, 1963 and 1964.
§ Mr. William Clark
Is the Chancellor aware that the country is at last realising that the Socialist Government cannot continue to blame 1964 conditions for the inadequacy of their economic policy during the last 16 months? Would he now answer the question posed by the Leader of the Opposition—how will he avoid inflation with a 4¼ per cent. increase in expenditure and stagnant production?
§ Mr. Callaghan
The answer is to get the National Plan fully working, to get increased productivity in industry, to sweep away both bad managerial practices and restrictive practices on the other side. This is the only way that I know and at last it is being tackled—by this Government. It is the only way I know to raise the real wealth of the country. I am not allowed to ask questions from this Box, only to answer them, but I wonder, in view of some of the remarks being made, whether the Opposition are in favour of more public expenditure on defence or less.
§ Mr. William Yates
The Chancellor has told us that in 1964 the Conservative Government left the country in debt, or owing money abroad to the extent of 417 about £800 million. As he has been in power since, can he tell the country what the Government now owe?
§ Mr. Callaghan
Yes, I constantly tell the country of the £800 million deficit, although this is not very much related to the public expenditure that I have been talking about; but I quite understand why the red herring of the £800 million deficit was introduced. [HON. MEMBERS: "The right hon. Gentleman started it."] No, the Leader of the Opposition introduced the red herring of overseas indebtedness because he wanted to get away from the great success of the Government on public expenditure.
I constantly tell the country that £800 million was the deficit in 1964. It looks as though we shall have reduced the deficit of last year—it is now running at something under £400 million a year—to rather less than half. I am aiming, if possible, and certainly on current account, to reduce that to nil through the continuation of the policies to which the hon. Gentleman and others have referred. That is the measure of the achievement and no sneers on the other side can deprive us of it.
§ Mr. Heath
Is the Chancellor aware that he has now made absolutely plain that what he is doing is embarking on a year with an increase of 4¼ per cent. Government expenditure in real terms, with no prospects or promise of an increase in production at all? That is the situation with which he has to cope. Does he also recognise that he does not impress his own integrity upon the House or enhance his prestige when he tries to pretend that the borrowing was carried out by the previous Administration? It was carried out by his own Administration as the result of the complete lack of confidence in the present Government.
§ Mr. Callaghan
The right hon. Gentleman should try to get his facts right. The borrowing from the Central Banks was begun in the summer of 1964, before the election, and it was not repaid at the time I assumed office. [HON. MEMBERS: "How much?"] If hon. Gentlemen opposite want to know how much, I suggest that they ask the right hon. Gentleman the Member for Barnet (Mr. Maudling) to give them the figure. I do not think that he will do so, for the same reason that I would not—Central 418 Bank arrangements, until they are published, are not normally discussed. The right hon. Gentleman is not right on growth. There was substantial growth last year, not as large as in 1964 because we were trying to solve the balance of payments problem. There will be substantial growth again this year. A total growth in our gross domestic product of between 2½ per cent. and 3 per cent. is quite likely this year.
§ Several Hon. Members rose—