ECONOMIC AFFAIRS

HC Deb 26 July 1966 vol 732 cc1449-580

Mr. Speaker

Order. Before the debate opens, I would remind the House, that, so far, 77 right hon. and hon. Gentlemen have indicated their desire to take part in this debate. I hope that right hon. and hon. Gentlemen will co-operate. The longer the speeches, the fewer can speak in a debate in which so many want to take part.

3.44 p.m.

Mr. Edward Heath (Bexley)

I beg to move,

That this House has no confidence in the competence of Her Majesty's Government to manage the economic affairs of the nation.

There can be no mistaking the gravity of the economic situation which we are debating this afternoon. The measures which the Prime Minister announced last Wednesday were sufficient indication of that. When one thinks that, after all the measures which have been taken, the very large standby which was renewed six weeks ago, the increase in Bank Rate and special deposits on 14th July, the package of more than £500 million deflation on 20th July, and then realises that sterling is less than half a cent. stronger today than it was last Wednesday—it is now only just above 2.79, and far below the parity of 2.80—one has a real indication of the continuing gravity of the situation.

We know, too, the problems which face the country in the future. There is still some hangover of the trade returns on the seamen's strike, though it may prove to be touch smaller than was at first thought. There is the usual seasonal pressure on the £ in the autumn because of the level of imports at that time. There is also the big forward position which is being built up again. These are the immediate problems which the Government face, having taken the action that they did last Wednesday.

I want to say a word about the task of the Opposition. As the Official Opposition, our duty lies to the nation and not to the Government. Our task is to expose the facts, whether or not they are palatable to the Government. We will support measures which we believe will help the situation, though we have no responsibility for it. As the Minister of Labour and the First Secretary said after the General Election: There are no alibis for the Labour Government now. Nor are we responsible for the hardships which will be brought to the British people as a result of the measures which the Prime Minister announced. We shall also offer to the House our own proposals, as we have done constantly in the past and which the Government have repeatedly failed to accept.

What this series of crises has shown clearly is that it is not only a question of policies. If it had been that, under any other Government the emergency measures which have been taken over the past 21 months would have been more than enough to deal with any situation. It is not the measures; it is the weaknesses and failings of the men behind the measures which are the cause of the crisis at the present time.

Let us look for a moment at The New Britain: The world wants it and would welcome it. The British people want it. deserve it, and urgently need it … A New Britain … affording a new opportunity to equal, and if possible surpass, the roaring progress of other Western Powers … The country needs fresh and virile leadership. My next sentence is: Labour is ready. It ought to be, "Labour is late." Poised to swing its plans into instant operation. Impatient to apply the New Thinking that will end the chaos and sterility. It goes on: Here is Labour's Manifesto for the 1964 election, restive with positive remedies. "Let's go with Labour", they said. Where have they gone? They have gone to the longest period of 6 and 7 per cent. Bank Rate ever, to stagnant production, to nearly £1,200 million of additional taxation, to a wage freeze, to a credit squeeze and policies publicly announced for creating nearly half a million unemployed.

This is the twenty-third dose of restriction or borrowing in 21 months. This is not what the people wanted, nor is it what the people deserve. This is what the Labour Government have brought forward. I believe that historians will say that Wednesday 20th July was a watershed in British politics, because on that day the Prime Minister exploded every myth, and shattered every illusion, which had been nurtured by the Left for years and foisted on the people.

The right hon. Gentleman knows, and hon. Gentlemen behind him know, that after that announcement nothing can ever be the same again. Never again will the Labour Party and hon. Gentlemen opposite be able to say that a Labour Government will never impose a wage freeze. Never again will they be able to say that a Labour Government will never impose deflation. Never again will they be able to say that a Labour Government will never put forward policies to create unemployment, and never again will they be able to hold up these targets in the National Plan. They have done all those things, and they have done them with a vengeance.

This has obliterated their right, which they claimed from time to time in the past, to criticise their opponents for measures far less drastic than the Chancellor and the Prime Minister have announced over these 21 months. But in the process of foisting these illusions and myths on the people they have undermined the will and the determination to do things the hard way, because they have always proposed the easy remedy. They won two elections on easy remedies, but they will not win a third.

Let us look at the handling of this recent situation. The Prime Minister dealt with it in his television broadcast, when he said: Up to three weeks ago, everything suggested that the progress that we were making meant that we would be paying our way by the end of this year, or at any rate not too late next year … And then suddenly we seem to have been driven off course, one thing, of course, that has hit us has been the seamen's strike. In his statement in the House the right hon. Gentleman said that he had been blown off course by the seamen's strike. That seems to be a proper metaphor to use.

What a picture it conjures up of Her Majesty's Government sailing in the splendid ship of State at what is the right rate of knots for the Government, and carousing in the cabin. Suddenly, in a calm sea, and on their prosperous voyage, they find that the whole thing is under the control of that "small, tightly-knit group of politically motivated men". and to their surprise they are sailing in the opposite direction.

What nonsense that was, and the Prime Minister knew it. Everything was not fine until the seamen's strike. Sterling had been deteriorating steadily since February. The right hon. Gentleman should look at the graph, which shows it clearly. Everybody knows it. The Prime Minister may say that a day or two before the seamen's strike figures were better, but we do not know, because they were not published.

The whole picture of sterling from February onwards was deteriorating. The reserves were boosted by the Chancellor's announcement on 1st March of the sale of American securities, but they dropped after that every month, and everybody knew it. It was well known before the election that the Chancellor would not balance the payments this year. The Institute pointed it out and gave the figures, and we pointed it out to the right hon. Gentleman time and again during the election campaign.

The Chancellor introduced his mini-Budget on 1st March. Let us look at some of the comments on that. If the Prime Minister really wants to believe that everything was fine, perhaps I might point out that on 2nd March The Times said: So far as the economy was concerned it was all exhortation and no bite. The Daily Mail, perhaps a little more succinctly, said: All bull and no bite. That was the reaction yesterday to the Chancellor's speech … So much for the story that everything was fine,

I warned the country throughout the election—[HON. MEMBERS: "Oh."] Let me read to the House what I said at Glasgow on 23rd March. I said: The threat we are facing today is the greatest that any nation can face short of war itself. Unless we take action to avert it, we are faced with the threat of national bankruptcy. Britain must awake again to the danger that threatens, and in some ways it is more insidious than that of 30 years ago. It is a danger from inside and not outside that threatens us. The Prime Minister's comment was that we were preaching doom without due cause. Does he still think that after the measures which he had to announce last Wednesday?

It is no use the Prime Minister talking, as he did at Question Time the other day, about the cost of our programme. He never found time to read our manifesto. That was apparent all the way through. If he had read it, he would have seen the undertaking in the foreword over my signature: I know that we shall inherit from the Labour Government a weak economic position. and I intend to give first priority"— before any programmes— to the management of our economy, to the strengthening of Britain's competitive position in world markets and to the repayment of the heavy burden of debt which they have incurred. That was clearly set out. That was the campaign which we fought and the right hon. Gentleman has only to read the reports to find that commentators reported on this. The right hon. Gentleman fought this election, and the 1964 one, on the basis that all was going to be splendid, while all the time there was real anxiety everywhere.

The Chancellor knows why that was so. It was because of the large inflationary wage increases, against stagnant production; and everybody in this country and abroad knows that that is the recipe for disaster. This was the cause of the trouble, but it was never mentioned by the Prime Minister. He blamed the change in the terms of trade, the difficulties of dollar liquidity, and the seamen's strike. He never mentioned the real cause over all these months. Whatever influence these three factors had on the situation, they had all been known about for some time. We had all known about the difficulties of dollar liquidity, and about the changing terms of trade. The Prime Minister knew about the seamen's strike and told the House about the dangers to trade during the strike, but nothing was done about it.

In the May Budget, after the election, the Chancellor was inhibited by his pledge that there would be no severe increases in taxation. Thus, to avoid the impact on individuals he created the Selective Employment Tax, hastily cooked up, and served half-baked. The Chancellor was prepared to gamble on getting through to the autumn, and then he thought that he would be able to get away with it with some deflation, but he has lost the gamble.

Over the last 16 days, on Sunday, 10th July, the Prime Minister, through No. 10 Downing Street, told the country that everything was fine. Perhaps the Prime Minister wants to deny that. If he does, many people would be interested in hearing it. It was that statement which caused the further trouble with sterling.

After that, the position became worse, and then the Prime Minister took over. We had the increase in the Bank Rate, and we had special deposits, and then he announced measures of a kind unknown at a date unspecified. Could there have been a weaker position than that for any Prime Minister to be in? The impact on the £ was that the 1 per cent. increase in Bank Rate and the 1 per cent. of special deposits did not strengthen it. It became weaker the next day because of the Prime Minister's statement that he would take whatever measures were required, and off he went to Moscow, leaving, we are now told, three civil servants to work out the necessary arrangements.

Last Wednesday, instead of a statement in due time before we rose in August for the Recess, we got the panic measures, and now we know what they are—the wage freeze for six months, the deflation of £500 million, and unemployment, after the redeployment and of the Chancellor's management, running up to 470,000. This is quite clear.

The indictment on the incompetence of these Ministers is that the situation has been developing for months. The Prime Minister refused to reveal the facts at the election. I put a specific question to the Prime Minister and he answered it just before polling day. I asked: Can Mr. Wilson deny that if he is returned to power there will be an increase in unemployment in this country this winter? His answer was: We sec no reason why it should rise at all apart from seasonal increases. The second question was: How does Mr. Wilson propose to pay for his programme, which is based on a growth rate of 4 per cent., now that it is absolutely apparent that this growth rate is not going to be achieved? The answer was: It is only apparent to Mr. Heath; it is not apparent to us. We shall pay for it out of the provision in the National Plan involving a growth rate of 4 per cent. The third question was: What does Mr. Wilson propose to do if returned to power about the National Nan, which is now totally unrealistic? The answer was: We see no reason for amending the Plan target at all. The National Plan still stands, and we intend to fulfil it. That was the basis on which the right hon. Gentleman fought the election. When the situation developed and he got back into power, he failed to take action in time, because the Chancellor of the Exchequer gambled in the Budget.

Then, when the crisis broke, the Prime Minister was completely unprepared and his response was dilatory and complacent. Finally, he rushed in with the panic measures, far more severe, as I said on Wednesday, 20th July, than they need have been if they had been taken in time. [HON. MEMBERS: "Why?"] Because the drain in confidence in the Prime Minister increased greatly during that period. What is more, during that time, from the time when the Prime Minister said that there was no need for action until 10 days later, when he took the final package, tens of millions of pounds drained out of our reserves.

Sir John Eden (Bournemouth, West)

That was the give-away.

Mr. Heath

That was the give-away, as my hon. Friend says. That has to be made up.

What about the package which the Prime Minister produced? Let us look at it for a few moments. One could easily deal with it with perhaps a number of quotations: Production which we need to expand will be held back by the 7 per cent. Bank Rate … The higher petrol and distribution costs and higher loan charges—has not the Chancellor calculated the effects of these upon our competitive position? But, of course, like every one of his"— that is, the Chancellor's— immediate predecessors. he had to satisfy the international banking community by masochistic and irrelevant cuts in our standard of living, harmful restrictions on our production and needless increases in our costs and price structure, because he believes that international speculators are impressed only by actions which in the long term harm the economy. By now the Prime Minister will be recognising every one of the statements he made in 1951, when he criticised similar measures.

The Prime Minister (Mr. Harold Wilson)

1961.

Mr. Heath

The right hon. Gentleman knows the year well enough, because this was the time when he was making these criticisms. He also said this: … we are in danger of earning for ourselves the gibe which the Czar Nicholas addressed to the dying Ottoman Empire, 'The sick man of Europe '."-[OFFICIAL REPORT. 26th July, 1961; Vol. 645, cc. 440–43.] That is what the Prime Minister is creating by these measures. So I could go on using words of the Prime Minister's.

But I do not want to do that. I want to deal with these measures on their merits. The main ones are devoted to consumption, which we understand. This is necessary in this situation. Of course, the regulator affects the cost of living. Hire purchase will affect individuals, but in this situation the Government have no alternative.

I remind the President of the Board of Trade that there have now been four changes in hire purchase in 13 months. How can our industry organise itself on a proper basis when hire purchase, affecting so much of its production, is changed four times in 13 months?

It is now quite apparent that the figures in regard to Government cuts were just taken out of the air—£55 million for central and local government and £95 million for the nationalised industries. Since then the figures have been broken down and the Chief Secretary to the Treasury has announced individual figures. Nobody knows what is involved in those individual figures. Nobody can say what actually is to be done to make those changes. Therefore, nobody can judge as to their impact. I believe that those for the nationalised industries and a considerable number of the Government ones will affect investment. They will cut back investment radically. There is no indication, but, as far as we can judge, this will be the effect.

The overseas cuts are in a great state of confusion. Nobody knows whether these are the cuts originally planned by the Government and in part announced, or whether they are in addition. We understand that the Prime Minister still tells us that the figure is £2,000 million at constant prices. How can this be so if there are to be these additional cuts in overseas expenditure? This matter must be clarified by the Chancellor of the Exchequer.

The cuts in our aid programme mean that we shall drop below the 1 per cent. of G.N.P. which was our undertaking at U.N.C.T.A.D. to the developing countries. None of this will have any effect until 1967–68. The Chancellor of the Exchequer may be able to tell us more about the Rhine Army today. I sincerely hope that changes will not be made without going through all the usual procedures, and in agreement with our allies. Why is the Chancellor of the Exchequer trying to insist upon 100 per cent. coverage by the Germans, when we ourselves receive, as he told us in his Budget statement, or in the Budget debate, £40 million in dollars from the Americans for their troops stationed here?

Surely the answer to this is to have a N.A.T.O. pool in which these figures are worked out so that each country makes a foreign exchange contribution. Why does the Chancellor of the Exchequer shake his head? I think that I can tell him the answer to the question I have posed. The reason is that he is afraid he would lose if the thing were done fairly by N.A.T.O. as a whole. Let the Chancellor explain why he will not have a pool to deal with the whole question of foreign exchange.

There is a further point of treaty problems over his travel allowance. Has authority been granted under Article (4) for the travel allowance to be cut in this way? Has that now been cleared, or are we doing this unilaterally?

The Chancellor of the Exchequer (Mr. James Callaghan) indicated assent.

Mr. Heath

I understand that it has now been cleared with the I.M.F. That is a considerable sacrifice by the I.M.F., because all the Article 8 countries undertook that they would not cut overseas travel allowances or payments of this kind, because it was their responsibility as developed countries to ensure that this aspect of convertibility was maintained.

The Prime Minister made great play of the fact that development areas were being exempted. I want to emphasise here that I personally gave the assurance to Scotland and the North-East that in a time of reduction of capital expenditure, their programmes would not be cut. I did that in the White Paper. The Secretary of State for Scotland and myself, when Secretary of State for Industry, Trade and Regional Development and President of the Board of Trade, gave that assurance.

It is right that that should be honoured. The development areas will be affected by the general cut-back in demand. We all know that the problem is that so many of the firms there are subsidiaries. It is the subsidiaries which suffer first in regional development and not the parent company. This is why the measures which the Prime Minister announced will affect the development areas —not in respect of the cut in capital development from the Government, but in these other ways because of the decrease in demand. Development areas have also been damaged by the Selective Employment Tax.

I turn to the income freeze. What does this mean? It means that the outflow in gold and dollars from our reserves during the 10-day crisis in which the Prime Minister did next to nothing is being met by sacrifices on the part of trade unions, workers, and others. Nobody yet knows how the incomes freeze will work, so hastily has it been imposed by the Government, without thought. If it can be secured, it is desirable. What the Prime Minister and the First Secretary of State must do is to convince the trade union movement and others of the seriousness of the situation and of the determination behind their own policies. We believe, too, that it ought to be a voluntary policy and not a compulsory one.

In 1961, it was clearly laid down that agreements already reached would not be covered by the pause. The Prime Minister has taken the other view. I have no doubt at all that this will create a sense of injustice among those who have gone all through the negotiations, sometimes in a state of great difficulty with the Prime Minister and his colleagues and others, but who are now told that this is not to be included. There will be a sense of frustration and injustice about it. The danger is that this will endanger the rest of the pay pause and agreement with it. I would prefer that this had been taken into account beforehand, but it has not. Therefore, if the Prime Minister now changes it, he will be accused of weakening.

As to the Prices and Incomes Bill, we read in the Press today that the White Paper and the Amendments are not yet ready—they will be presented at the end of the week—and that the Government now wish to get the Bill through both Houses of Parliament before Parliament rises for the Summer Recess. The Government did nothing for nine months about the Bill, yet they now come to both Houses and say that they want to get it through in nine working days. This is typical of the general mismanagement of the Government's business. It is a disgraceful way to treat the Parliament.

What is the Government's position on the wage freeze? On Thursday, the Prime Minister stated his position, but it began to erode soon afterwards when he said that it was only for a short time and that the sun would shine afterwards. The First Secretary was opposed to the whole thing and offered his resignation. The Prime Minister sent a remarkable message from Moscow to the effect that anybody who offered his resignation would jolly well find it accepted—tough, purposive, gritty. But the first one who offered his resignation found that he had hours of personal attention from the Prime Minister, who refused to accept it. There cannot be any confidence in the Government's policy so long as the Prime Minister and the Deputy Prime Minister are believed to be at loggerheads even on fundamental aspects of policy.

This has been for long the trouble with the Government. We were in some doubt whether the Chancellor or the First Secretary was in charge of economic policy. Now there is doubt whether the Prime Minister and the First Secretary are in agreement. What chance did the First Secretary stand against the right hon. Member for Nuneaton (Mr. Cousins), who had the courage of his convictions? The First Secretary has publicly disowned any belief in the policy which he is supposed to have persuaded others to accept.

But the most extraordinary thing is the statement attributed to the Chancellor at the Press conference after The Hague meeting. The report in the Financial Times was from its Common Market correspondence. This is a reputable paper, read throughout Europe, and very much wider than that. In it, he said that the new and directly deflationary measures combined with planned foreign exchange savings, particularly in the military field, would be sufficient to do the job on their own. The prices and incomes part of the package should, therefore, be viewed"— and then, in inverted commas— as a bonus on top of it all."— I rather doubt whether the trade unionists regard this as a bonus— While the Government meant it to succeed, the Chancellor said, ' we would not be all at sea again if it failed '. The Chancellor is reported as saying, according to that reputable correspondent, that the wage freeze is not necessary, and that the deflationary policy will do the job on its own. How does he, or the Prime Minister, or the First Secretary, expect to get the co-operation of the whole country in these measures when he says, "We have just thrown them in as a bonus, and we can succeed without them"? That completely undermines the whole basis of the Government's attempts to institute the wage freeze. It undermines their whole policy. It will have a catastrophic effect on the economy and upon all those being asked to cooperate in something which is thoroughly distasteful to them. This is yet another example of the divisions inside the Government. No longer is it a question of one economic Minister or two economic Ministers; we have three different economic Ministers in charge of our affairs.

We read that the Chancellor of the Exchequer has let it be known—which means, I suppose, that he has not yet told the Prime Minister—that he does not wish to go on being Chancellor of the Exchequer. We can well understand that. But he is no longer Chancellor of the Exchequer; the job has been taken over. So we have these open differences between the three major Ministers who deal with economic affairs. How can we expect sterling to gain any more than it has done already, and expect it ever to be strong while these public divisions exist in the Government?

I want to mention briefly the main omissions from the present package. There is nothing to give people incentives; there is nothing to encourage savings; there is nothing to encourage efficiency; there is no promise of economies in Whitehall; there is nothing to encourage investment against great deflationary pressures; there is nothing to encourage exports, except, perhaps, hotels. Here we see a typical example of the Government's contradictory policies. They penalise all the hotels through the Selective Employment Tax, and now propose to set up a bureaucracy to try to make an administrative judgment on how hotels may help to encourage tourism, and to give them a loan.

What a way to try to encourage tourists and hard currency to come into this country! In all these measures and restrictions there is nothing to inspire anyone to greater output or harder work. The long-term disadvantage of all this will be its impact on investment, coinciding, as it probably will in the autumn, with a downs urn in investment anyhow. There will be hardship for families, and particularly for young married couples trying to furnish their homes. The long-term effect of these measures will be to damage investment.

Finally, I want to look to the future. I said that I thought that Wednesday of last week would be a watershed. For the people it could either be disillusionment once again, finding themselves back with a whole series of restrictive measures, worse than have ever been taken before, or a great opportunity to abandon the emotional shibboleths of economic policy, to face our real problems realistically, and to judge policies on their merits.

For the Government there are two alternatives. The first is to go deeper into the siege economy. I know that some hon. Members below the Gangway opposite will argue that this is the right course to take. The other alternative is to take action—and nobody will deny the difficulty of taking it—to move out of the siege economy and on to the open plain of opportunity. I believe that that is the road which we ought to take. [Interruption.] The hon. Member for Penistone (Mr. Mendelson) is so blinded by the siege economy and living in the dark that he cannot see anything else. The real problem facing the country is that of creating dynamism in the economy, with just on 80 per cent. private enterprise and just over 20 per cent. nationalisation. This problem must be tackled realistically.

The First Secretary says that the alternative is either his incomes policy or mass unemployment. He threw at us the figure of 2 million unemployed on Monday of last week. That choice is absolutely false. It is untrue to say that any Member on this side of the House wants to see mass unemployment, and hon. Members opposite are in no position to criticise unemployment. We ought to have several economic objectives. We must manage a full employment economy and not an over-full employment economy, and we must achieve cost stability and price stability. Far more is involved in that than an incomes policy. We must improve the balance of payments, and maintain the strength of sterling and, as a result, raise the incomes of the most lowly paid.

The obstacles to achieving these are considerable. The first one is overmanning; the second is restrictive practices; and the third is too little competition generally, including too little competition in tariff reductions. The next trouble is low incentives to people in industry at whatever level, and then the mass of distorted Government spending. Then there is inefficient organisation, the subsidisation of the nationalised industries, and regional imbalance.

All these are real obstacles which are facing us, and each must be dealt with by different policies. [HON. MEMBERS: "Tell us yours."] If hon. Members opposite bide their time for a few minutes they will hear my views on these policies. The first thing that we need is not a general emotive cry about unemployment but sound economic measures and the use of skilled economic weapons, which are very wide-ranging indeed. We need a considerable variety of policies to deal with the situation, and a determination to carry them through. It cannot be done by gimmicks and by short cuts. It can only be done by bringing home the real economic facts to the people and the relevance of their policies—[Interruption.]

Mr. Speaker

Order. We cannot argue by noise. Each side will have the opportunity of saying what it thinks.

Mr. Heath

This is what the Prime Minister and his colleagues have completely failed to do—

Mr. J. J. Mendelson (Penistone) rose—

Mr. Heath

They have not brought home the real facts of the economic situation, nor have they brought home the relevance of their policies—

Mr. Mendelson rose—

Mr. Speaker

Order. Hon. Gentlemen must keep their seats if the right hon. Member does not give way.

Mr. Heath rose—

Mr. Ivor Richard (Barons Court) rose—

Mr. James Dickens (Lewisham, West) rose—

Mr. Heath

Over 70 Members wish to speak and I do not intend to give way—[Interruption.]—because the right hon. Gentleman will be winding up and it will not be possible to speak afterwards.

First and foremost, confidence cannot be restored only by the short-term measures which the Government have announced. This is fundamental. They must be combined with a long-term programme, a programme which must concentrate not on the blunt weapons which the right hon. Gentleman has been using, but on the more refined weapons, both in timing and in structure, for dealing with the economy—[Interruption.] I am endeavouring to make a serious contribution, because I do not believe that economic discussion ought to be in the rut of purely restrictionist measures such as the Government have just introduced.

The first thing is to concentrate on more refinement of economic management and the information necessary to back it up. The second is to recognise that over-full employment is menacing to the economy and to everybody else—

Mr. Dickens rose—

Mr. Mendelson rose—

Mr. Speaker

Order. If hon. Gentlemen cannot contain themselves, I must ask them to leave the Chamber.

Mr. Mendelson

On a point of order. With great respect, it is perfectly normal and traditional to try to intervene after you, Mr. Speaker, have pointed out that one should not intervene while seated, and ask the right hon. Gentleman to give way. He ought to give way.

Mr. Speaker

It is in order for the hon. Gentleman to seek to intervene. It is also in order for the right hon. Gentleman who has the Floor not to allow him to intervene.

Mr. Heath

The hon. Member for Penistone will not break up this speech, however hard he tries.

The hon. Gentleman's Leader and Prime Minister has just announced to the country that he wants to have 470,000 unemployed, so the hon. Gentleman is in no position to criticise that. Let us recognise, then, the problem of over-full employment and the need, while men are changing their jobs, that there should be this unemployment and that there is a number of things which go with it.

Next, there should be far greater and more imaginative retraining facilities, both for management and for men—

The Prime Minister

I have not interrupted all the other items of the right hon. Gentleman's misstatements because, as he says, this is a debate, but he has just thrown at my hon. Friend the Member for Penistone (Mr. Mendelson) a complete travesty of what I said on Wednesday of last week. Will he now quote—[HON. MEMBERS: "No."] He said that we want to have 470,000 unemployed. Will he now quote the exact words which I used?

Mr. Heath

Of course. If the figure of unemployment were, after all the re-absorption, after all the redeployment and after the measures for regional distribution, to rise to a figure between 11 and 2 per cent."— 2 per cent. being 470,000— I do not believe that the House as a whole would consider that unacceptable."—[OFFICIAL REPORT, 20th July, 1966; Vol. 732. c. 646–647.]

Several Hon. Members rose—

Mr. Heath

I want to bring my speech to an end by emphasising the long-term policies which ought to be pursued and which are not being pursued by the Government.

Thirdly, they should aim at a high wage and low-cost economy, with a wide extension of productivity agreements, the abolition of restrictive practices and overmanning.

Of course, the right hon. Member for Nuneaton is right in his thesis that what one wants is higher wages and higher productivity, but his case would be unanswerable if he could say, "Look at the great union of which I am a leader. See how they are doing this. Look how, every time they have had a wage increase, they have produced a magnificent increase in productivity." When he can say that, he will carry the country with him, but until he does, the bottom falls out of his thesis.

Another feature of this long-term policy is the reorganisation of industrial relations. The Royal Commission set up by the Prime Minister still delays giving answers. The Trades Union Congress has not yet submitted its evidence—

The Prime Minister

It has.

Mr. Heath

It must have done so in the last day or so, because, on my last check, it still had not done so. Fifteen months have now passed before it has submitted its evidence. That is delay and the Prime Minister is doing nothing about it.

Agreements should be enforceable on both sides. With productivity agreements, this becomes more important. This requires to be implemented speedily, with industrial courts and outlawing wildcat strikes. What about restrictive practices being referred to Mr. Aubrey Jones's Board. Let that Board investigate instances of those restrictive practices and bring them to the light of day and let legal action be taken against them if action cannot be taken voluntarily, because this is one of the great obstacles to growth.

Let us have incentives through direct taxation. In a splendid passage at the end of his announcement on Wednesday, the Prime Minister talked about: The unsung achievements of keen executives … of inventive scientists and creative designers. "—[OFFICIAL REPORT, 20th July, 1966; Vol. 732, c. 638.]

The Prime Minister

Hear, hear.

Mr. Heath

But if they are so keen, and earn more than £5,000 a year, he clamps 10 per cent. on their Surtax straight away. That is the treatment of the Prime Minister and his colleagues when real initiative is shown in British industry.

The efficiency of the nationalised industries should be improved. The Government have abandoned this principle by what has been done—on the railways, for instance, in their handling of Dr. Beeching's axe, and elsewhere. Instead of reducing the subsidies, they are being increased. What about encouragement to private industry, instead of the constant discouragement which they have had since this Government came into being? We now have worse investment allowances, the Selective Employment Tax and the damaging uncertainty of the Corporation Tax.

Then there is the recasting of the social services. This will be another great shibboleth for the hon. Members below the Gangway—

Mr. Mendelson

If the right hon. Gentleman will allow me—

Mr. Heath

No, I will not. The hon. Member will put this in the same category as the "sacred cow" of unemployment. He will not discuss the social services on their merits, which we have done in the House and which we did throughout the election.

Then, regional policy—

Mr. Norman Buchan (Renfrew, West)

On a point of order. Is it in order for the right hon. Gentleman to refer specifically to one hon. Member of the House and then fail to give way?

Mr. Deputy Speaker (Sir Eric Fletcher)

The right hon. Gentleman is not out of order.

Mr. Heath

Another bogus point of order.

The regional policy lost momentum under the First Secretary.

Finally, there is the European policy. The Common Market has now reached agreement over the agricultural policy. Will the Prime Minister now say that he will accept that in order to reach agreement about entry into the European Economic Community? The European policy has lost all momentum under the present Administration, who are divided, and the Prime Minister uncommitted. In any case, we ought to move towards the levy system in agriculture and give the British farmer a better opportunity in the home markets to reduce our imports.

These are 12 major items of policy, none of which the present Government is following. They are the policies which can restore this country's economy, and restore confidence in this country abroad. But they need to be carried out by people who believe in them and people who, unlike the right hon. Gentleman and his colleagues, are competent to pursue them. The Prime Minister said at the end of his famous telecast, talking to the country as a whole, "We, the country, are under attack". He was quite wrong. It is the Prime Minister who is under attack.

The loss of confidence in this country abroad is a loss of confidence in him, a loss of confidence in his colleagues, the First Secretary and the Chancellor, a loss of confidence because of their incompetence. That is why we are censuring them today.

Hon. Members

Hear, hear.

4.30 p.m.

The Chancellor of the Exchequer (Mr. James Callaghan)

The somewhat forced cheers which greeted the end of the speech of the right hon. Gentleman the Leader of the Opposition bore all the semblance of what I remember happened when we were ordered to give three cheers for a visiting dignitary to one of Her Majesty's ships. The order was given "off caps" and we all cheered from the heart. The cheers sounded very much like those which greeted the conclusion of the right hon. Gentleman's speech.

I will pick up some of the points raised by the right hon. Gentleman and I will gladly give way to him if he thinks that there are some which I have missed on the way through. The first point I wish to emphasise, for it should be emphasised in this debate, is that the series of severe measures proposed and introduced by the Government during the past week will carry this country's overseas accounts back into balance and should produce a surplus in 1967 as a whole.

As a result of these measures, the country can look forward to putting an end to the series of deficits which, year by year, we have incurred since 1963. As the House knows, these deficits reached a peak in 1964. Thereafter, as a result of deliberate Government action, the deficit in 1965 was £400 million smaller than in the previous year. It was the intention of the Government to reduce the deficit to nil by the end of the current year, but it had become clear that we were not making sufficient progress towards that goal. Hence, the necessity for the new measures which have now been introduced.

In addition, there are special short-term factors which have had an adverse influence on our progress. We are having to pay much higher prices for imported commodities, and this has the effect of swelling our import bill. Import prices have risen sharply in recent months: in the three months from March to May they were 2 per cent. above the previous three months. That 2 per cent. increase, for that one quarter, compares with an increase of less than 1 per cent. per annum throughout the whole of 1960–65. The price of copper has caught the headlines, but, for a number of reasons, including the Vietnam war, prices of other basic materials have also climbed. The effect of the rise in import prices in the first five months of this year would be to add to the country's import bill at an annual rate of over £100 million a year. Further, as the House knows, both our trading position and confidence in sterling was adversely affected by the seamen's strike. The size of the reserves loss in June had an adverse impact on the markets.

As for the longer-term reasons why we are not progressing towards the goal we had set ourselves on the balance of payments, there has been the continuing pressure of demand at home. This has increased for a number of reasons. First, and mainly, demand has remained high because of the renewed strength in consumer spending; and this has been the result of large increases in money incomes. A further factor has been that the growth in the productive capacity of the nation has slowed down significantly because of the substantial fall in actual working hours that has accompanied the move to a 40-hour week. Actual hours worked in manufacturing appear to have fallen by about 2 per cent. between the first quarter of 1965 and the first quarter of 1966. This offset, indeed disguised, the increase in productivity per man-hour that has been taking place. For example, over the same period, output per operative hour in manufacturing rose by 3½ per cent.

The figures of consumer spending in the first quarter have lately become available and they suggest that pre-Budget buying was quite as high as I and others had anticipated. Indeed, expenditure in total was up by 21 per cent. in real terms over the fourth quarter of last year. I had anticipated that as a result of the hire-purchase controls which were tightened up by the Government as recently as February of this year, shortly before the General Election, and of the reaffirmation of the credit restraint policy combined with pre-Budget buying, there would have been a fall-off in demand in the second quarter of this year. Indeed, the Budget estimates were based on this.

The Government were publicly warned in the spring by independent observers, though not by all—the view was not universally expressed, though, nevertheless, a warning was given to the Government—of the real dangers of taking further measures at that time to deflate the economy. I said that the view was not universally shared. The Leader of the Opposition, for example, expressed some doubts. not about the total deflationary effect of the Budget, but about its timing. However, despite his view—and he was right—even he did not have the prescience to foresee the rise in import prices or the seamen's strike. Indeed, he would have been a remarkable man had he done so. Suffice it to say that many people believed, and wrongly, at that time, that it would have been dangerous to have depressed the economy into a downward decline.

Preliminary indications are that although there has been something of a slowing down in demand and activity in the second quarter, this has not been as pronounced as earlier seemed likely. In the first half of this year unemployment was running at an average level of 1.2 per cent. The prime cause of the continuing buoyancy of consumer spending and the continuing high pressure on resources has been the rise in money incomes. They have gone on increasing at a rate much in excess of the increase in national productivity. As a result of all the factors I have mentioned, our trade balance showed insufficient signs of improvement—and it became clear that there was no prospect of achieving the aim of balance by the end of 1966.

As we could not afford to continue indefinitely the process of incurring new debts, additional measures became necessary to enable us to pay our way. I emphasise and re-emphasise this, because there sometimes seems a willingness to overlook the obvious—that we are not paying our way—and to search for some other reason outside of these islands and outside of ourselves. There is no doubt that we in these islands are particularly exposed to international gusts of confidence and changes in interest rates throughout the world, because sterling is today so largely used by the world as a trading currency, and that is as important as its status as a reserve currency. But basically, in the long run, it is within the nation's power to control this situation by maintaining a strong balance of payments position.

The measures announced by the Prime Minister last Wednesday have that purpose, and they fall into two parts. There are the proposals designed to lessen the pressure of demand at home and the measures for the reduction of our expenditure overseas. I will deal with the second issue first. Expenditure overseas by both the Government and private persons has increased substantially in the last few years. First, there is the tourist allowance and emigrants' remittances. Since 1959 our tourist expenditure overseas has been rising by about £20 million a year, and this increase seemed likely to continue. We have therefore taken direct action to reduce the tourist allowance for the 12 months starting from 1st November, 1966. The reduction in the tourist allowance to £50, together with the tightening of the provisions for emigrants' remittances and gifts, will save up to £50 million a year.

The right hon. Gentleman complained about it. Clearly, as he says, his duty is to the nation and not to the Government, but the nation might have been a little clearer about his attitude if he had said whether he agreed with it. Would he have reduced the tourist allowance or not? After all, when he tells us that he is going to give us guidance on these measures, he might at least have expressed a clear view on this expenditure. But he failed to do so, as he did on a number of other matters. A substantial sum can be saved by this reduction, and I am sure that it will be accepted by the nation as justified in the present circumstances.

As regards Government expenditure overseas, the total for military purposes, aid, representation, subscriptions to international organisations and all the other forms of Government expenditure amounted in 1965 to over £500 million. That is a very heavy claim on our total resources, whether measured against our national product or by our external expenditure. The largest item is the cost of stationing troops abroad, and the second major item comprises loans and aid and our contributions to international organisations. As the House knows, the Government have decided that this total must be cut, and the decisions that have been taken will save £100 million in overseas payments in the financial year 196768 as compared with the current year.

Many of these reductions do not relate to matters wholly within our control. There must be consultations with those concerned at home and overseas, and therefore I should prefer to decline the invitation to give an exact breakdown of how these sums are made up. That could be counter-productive in the circumstances. But a significant part of the savings will flow from rephasing and speeding up the policies announced in detail at the time of the Defence Review. As a result of the changing situation in the Far East, given the end of confrontation, we expect to accelerate by more than 12 months the decisions that have been taken, and this will produce significant savings in overseas expenditure.

On the question of our troops in Germany, I met Dr. Dahlgrün, the German Minister of Finance, and the communiqué which was issued after our meeting gave a clear indication of the course of our discussions. The foreign exchange costs of British forces in Germany are now about £94 million a year. This includes the exchange cost of not only our troops but their dependants, who outnumber the troops, and the German civilians who are employed to service our forces there.

I made clear to Dr. Dahlgrün that in our present situation, and given the additional burdens that were being imposed upon the British people, these costs would have to be covered in full by one means or another. If, therefore, it were the considered view of the German Federal Government that they were unable to cover these costs by the various means open to them, we shall propose through the prescribed procedures a reduction in the size of the British Forces in Germany. We now await the next move by the German Government, which I expect in a matter of weeks.

The right hon. Gentleman asked why we did not propose that there should be a N.A.T.O. burden-sharing exercise. 1 thought that that was not a very helpful question if the right hon. Gentleman was as anxious to save overseas Government expenditure as we are, because this is an argument that is often advanced by other members of N.A.T.O. He has picked up their argument and is using it against the Government. There is one overwhelming reason why it would be desperately unfair to the British people that we should adopt and accept such an exercise. It is that we as a member of N.A.T.O. have carried greater burdens throughout the rest of the world than any other member of that organisation.

My view and that of the Government is that if we are going to work out the relative foreign exchange costs of troops maintained overseas in helping to keep the peace of the world, our total costs should be taken into account, and not merely those in Germany. When those total costs are taken into account, it will be found, as I have said in the House before, that the proportion of G.N.P. we pay across the exchanges for military purposes is greater than that of any other nation. That is the answer to the right hon. Gentleman, and that is why I hope that he will not encourage those who would be very ready to take up this argument in trying to restrict it to N.A.T.O. That clearly could not be advantageous, nor would it represent the burdens which we are carrying in other parts of the world.

I now turn to our domestic measures. In the five months before the seamen's strike, exports were 9 per cent. up compared with the same period last year. Nevertheless, we need to ensure that exports go on rising steadily, and, therefore, part of our measures are designed to reduce the pressure of demand at home and so release more goods for export. Generally speaking, it is not true that our goods are overpriced in foreign markets. But there are major difficulties over delivery dates, and so long as capacity in sections of our industry is fully stretched there is an inevitable tendency for export orders to be held up. Delivery dates are still too long for plant and machinery which is wanted either for export itself or to produce goods needed for export, and skilled labour is in many places at a premium.

One of the consequences of easing the pressure of demand at home will be that our exports will get a freer run. At the present time, we are dealing with a situation in which taking the country as a whole there is a labour shortage, especially of skilled men. Reducing the pressure of demand should ensure that labour shortages will no longer frustrate the export drive or produce such lengthy delivery dates.

The House knows the measures taken to achieve this by curtailing both private and public spending at home. On private consumption, there are the hire purchase restrictions, tighter building controls, the increase in Purchase Tax as part of the regulator which covers also oil and alcohol, and there are also the measures in the public sector to which I shall come later. This range of disinflationary measures, combined with our overseas savings, will produce the substantial improvement in our balance of payments that we need. I shall repeat that, because I want to come back to the headline in the Financial Times, which was a rather circumscribed version of what I was saying—others have also suffered that fate. The range of disinflationary measures which we have taken, coupled with the overseas savings, would in themselves produce the substantial improvement in our balance of payments which is necessary to get rid of the deficit.

But we do not and cannot rely solely on this range of meaures. It is not enough just to reach a bare balance in our foreign payments. We must have a surplus wipe the slate clean of past foreign debt. We must use the period of disinflation upon which we are now entering to put our competitive position on a sound footing for the long run. We must stop the process under which our whole cost structure is inflated, year by year, by a push on money incomes that goes on almost independently of the pressure on the economy.

We are therefore taking immediate action on this front, just as much as on the side of demand, in order to stop "costpush". Hence, the prices and incomes standstill is an essential, indeed crucial, element in the totality of our measures to get the economy right. My right hon. Friend the First Secretary will deal with this in greater detail when he comes to speak tomorrow night, if he is allowed to by hon. Gentlemen opposite who have made a habit of interrupting him whenever he has wound up in the past. But he is well able to look after himself.

I believe that there is widespread recognition throughout the country of the need for a temporary standstill in incomes. Incomes of all sorts have been going up too fast in recent years, pushing up prices with them. Now we must have a breathing space. We can find all sorts of long-term remedies which will take effect over the course of some years —the right hon. Gentleman produced some this afternoon, most of which are already in operation, and the work is going on—but we need at this moment a breathing space in order to restore the competitive position of our economy. Hence the case for a prices and wages standstill to enable us to achieve this end.

Will this be accepted? We have tried to create the social conditions in which it can be accepted as fair. I do not wish to rub salt into old wounds, but at least we did not reduce Surtax at a moment when we denied the nurses an increase in pay. We have attempted to ensure, through the Capital Gains Tax, that where uncovenanted benefits are secured there should be a measure of return to the Exchequer of the gain which has resulted from them. We have attempted, through the operation of the Prices and Incomes Board, to ensure that there is greater fairness in the distribution of incomes. These things are not perfect, and are unlikely to be for some time, but the conditions are there to make it possible for people in this country—and that means hon. Members opposite and their friends as well as Members on this side of the House—to accept restraint on all incomes in order that we may both achieve social justice and ensure the competitive nature of our economy which we want to ensure during this deflationary period.

Details were given yesterday by the Chief Secretary to the Treasury of the intended savings in central and local government activity. As regards roads, we are securing a reduction in the planned rate of increase in our expenditure, but there will be a continued development of our plans for the road programme as a whole, including projects of high priority on economic grounds such as the movement of goods. Capital expenditure by local authorities designed to improve local amenities will be postponed also. Much though we should all like to see such spending go ahead, I do not think that anyone would argue that in existing circumstances we should let it continue. There will also be a saving on building projects carried out by the Ministry of Public Building and Works on behalf of Government Departments, as well as expenditure by local authorities. Details of reductions in investment by the nationalised industries were given by the Chief Secretary yesterday, and an appraisal has shown that these reductions are practical without damaging essential investment. The full details are being worked out in conjunction with the chairmen of the nationalised industries.

As the Prime Minister announced, the total effect of all the new measures will be to reduce demand in real terms by over £500 million in 1967, in addition to the effect of the Selective Employment Tax, and this calculation allows for offsets of savings, for timing factors and for diversion of expenditure from foreign to home sources.

As regards the increase in the price level which will result from these measures, it is estimated that they will raise the Index of Retail Prices by rather less than 1 per cent.

Inevitably, on the introduction of a series of measures of this kind, criticisms and suggestions are made from both sides of the Chamber advocating the substitution of other measures for the ones which have been selected. One proposal is that we should introduce import quotas. These are permitted only as a temporary remedy, and we have already used the import charge in substitution for them on the ground that it is a better temporary instrument. If Britain were to introduce quotas in these circumstances, they would be badly received by our trading partners and could provoke retaliation. The E.F.T.A. countries would undoubtedly take it amiss in view of the fact that, at the beginning of 1967, tariffs between the E.F.T.A. countries and ourselves—we are part of E.F.T.A.—tariffs between E.F.T.A. countries are to disappear finally. From then on, British industry will be able to look, in effect, to a domestic market of 100 million people enjoying an average income per head which is among the highest in the world.

Moreover—it is important to remember this—there is no soft option here. Quotas would not remove the need for disinflationary action. Such action would still be necessary to offset the effect of quotas in reducing the flow of supplies available to the economy. The Government, therefore, ruled out quotas as an appropriate instrument for dealing with our situation.

Another proposal is that we should further tighten controls over the export of capital. It has been a complaint against me from the other side of the House that we have tightened control over capital too much. I do not accept that. Neither would I accept that it would be right to carry this process further at the present time. As regards the non-sterling area, control over capital exports is complete. Companies are pressed into borrowing locally as far as they can raise what capital they need. They are urged to review all the possibilities they can find of securing resources outside this country, and it is very rare indeed for a company investing in the non-sterling area to receive the facilities of the exchange market at the normal rate of 2.79.

As regards the sterling area, the Voluntary Programme was willingly accepted by the overwhelming proportion of British industry which I approached at the time of the Budget. There had been a very substantial drain of capital out of the country before the Budget. This has gone on in the second quarter. The Budget was introduced in May, and during the month of April there was still a drain, but since then the Bank of England has examined all the proposals for expenditure overseas of the 200 companies which have been asked to cooperate. The Bank has allowed those which it thinks proper, that is, those which are remunerative in our short-term as well as our long-term interest, and is disallowing others.

I do not myself believe that it would be advantageous in the long run or, indeed, in the short run to tighten this control any further. It has been willingly received. It is certainly being observed at the present time by those who come under it. In any case, it would be shortsighted to frustrate completely, even in present circumstances, the export of capital. A balance must be drawn. I have tried to strike that balance by reforming the tax system and by the voluntary measures of control, as well as exchange control, which have been introduced. We ought to be careful where we draw the line so as to get the maximum advantage for ourselves, and that is where the line is drawn at present.

Another problem—it is not a problem; it is a human heartache—is the level of unemployment. I do not know whether this is to become a party shuttlecock or not, but the fact is that nearly everyone in this country is deeply committed to maintaining a high level of employment. Unemployment in the first half of this year, at 1.2 per cent., was at the lowest level for ten years. By way of comparison—I give it only by way of comparison, because people have their minds clear about the period of which I am talking—in the third quarter of 1964, when the last Government went out of office and we came in, a time when, taking the country as a whole, there was what was generally regarded as full employment, although not in some regions, the percentage was 1.6. The average for the years 1959–64, which I admit, takes in the bad year 1962–63, was just over 1.8 per cent.

The best estimate which can be made was the one made by the Prime Minister in the announcement he gave last week. If the level of unemployment which resulted were—and could be—spread evenly around the country, it would be almost unnoticed, and it would in fact represent little more than the movement of men between jobs. It is when this unemployment is concentrated in particular areas that it becomes intolerable. This is what happened in 1961–62–63, when there were startling contrasts between region and region which affronted the conscience of ordinary citizens everywhere in the country.

Since then, policies have been followed which have had the effect of strengthening the economy of some of the weaker regions and restructuring some of their industries. The selective policies of the present Government have resulted in deliberate regional advantages being given to areas where unemployment is higher than average—by way of new factories, preferential credit terms, additional access to the Public Works Loan Board, and in other ways. The purpose of Government measures has been to strengthen the economy of the regions, and it is the Government's aim that the disinflationary effect of our policies should be more evenly spread over the country than it has been in the past.

Moreover, the Government's social policies mean that the wage-related benefits for the unemployed, the supplementary benefits for the unemployed, as well as for the widows and the sick, will be coming into force this autumn. These will provide at least half take-home pay for the man on average earnings—and a good deal more than that if he has dependants—for up to six months. Then there is the Redundancy Payments Scheme, covering most workers, which has recently come into operation throughout the country. The right hon. Gentleman also asked us to get on with retraining—and we have. In the current year there are 6,000 places in training centres, compared with 2,750 in 1961. By the end of 1967 the total number of centres that will be in existence will be able to turn out 15,000 trained men a year, from some 8,000 places. On 1st April last, labour training schemes for new firms in development districts were improved; and since 1st July instructors from the Ministry of Labour have been available to train semiskilled operatives on their own premises. In addition, of course, the new industrial training boards for retraining now cover some 10 million workers—

Mr. Sandys (Streatham) rose—

Mr. Callaghan

I will gladly give way in a moment, but I want to make the point that in relation to the areas that are at the top of our minds—Scotland, Wales, the North-East, the North-West—there has since 1962 been a substantial transformation in the scene that has resulted in these economies being much stronger than they were at that time.

Mr. Sandys

I thank the right hon. Gentleman for giving way. This is a very interesting lecture, but when does he propose to answer the charge of gross incompetence contained in the Motion?

Mr. Callaghan

My whole speech is an answer to that. [HON. MEMBERS: Oh."] The best answer to abuse is to give the facts. It is the facts that will stand and will speak. It is these long-term policies I am now describing which the right hon. Gentleman's nominal leader, the right hon. Member for Bexley, was attempting to depict. It is those that I am saying are now in operation and are being worked out. It may be that the right hon. Gentleman does not think as much of the long-term proposals as his right hon. Friend, but the fact remains that these long-term measures go on quietly. They are no remedy for the short-term position, but they are essential to acquiring the healthy growth of the economy we all want to get back to as soon as possible—

Mr. Cranley Onslow (Working) rose—

Mr. Callaghan

No. I have just answered the right hon. Member for Streatham (Mr. Sandys), and I will not give way again now. I will pursue my argument for a little while.

I turn to the next question that is of importance in this context, and the right hon. Gentleman must see its relevance. I do not quite follow his point. We are discussing a situation in which disinflation is overtaking the country. It therefore seems to be absolutely vital in regard to such human problems as unemployment, which are of very great concern to everyone in the House and everyone in the country, that we should ensure that the burden of unemployment does not fall, as it has done in the past, on regions and persons unable to accept it or tolerate it because of its concentration. This is surely very relevant to the period on which we are about to embark.

I come back to the same point again. We have chosen, and it is right—indeed, it is necessary so to choose—the getting into balance and then into surplus with our balance of payments as being the first preoccupation of the country at the present time. But it is not the only one. The maintenance of a high level of employment must also be an aim of national policy, as must healthy expansion, and it is the underlying measures of the Government that I have been describing, particularly in connection with the regions, that will ensure that we can, in due course, resume the policy that is necessary.

I should like now to take up one or two or more of the points made by the right hon. Gentleman the Leader of the Opposition. It is not true that during the election we failed to warn the country of the situation—[HON. MEMBERS: "Oh."]—the right hon. Gentleman has "election" right at the top of his mind. He kept on referring to it, and he no doubt bitterly regrets having lost the last one, but if he wants to swop quotations I would refer him to our manifesto, which stated: There is no easy way ahead—and only the dishonest would pretend that there is. We do not believe that the British people want to be lulled with the message that ' all is well ' and that they have ' never had it so good '. Nor do we think that they expected or wanted their Government to present a give-away Budget on the eve of a general election. We have not done so. And we shall take whatever further steps are necessary even if they are unpopular, to achieve the rate of progress that we need. We are facing the facts—as they should have been faced in the 13 years of Tory rule". The right hon. Gentleman made great play with the strength of sterling. I do not think that he went unduly far, but I thought that he went quite as far as was necessary, on this occasion, because this is not a simple matter of scoring party points. If it were, I could tell the right hon. Gentleman where the rate for sterling was in the months immediately preceding the 1964 Election—yes, and why it was there—but I do not think that we should push this problem at each other across the Floor of the House, nor try to prove that because the rate for sterling is down or up this implies that the policies of one Government are necessarily better than those of another. If it did, I can only say that our policies today are undoubtedly better than those of the Tories in the summer of 1964.

Maybe that is not saying much, but when the right hon. Gentleman says that we had in this last week exploded every myth and destroyed every illusion of the Left, it seems an astonishing statement from someone who left behind the biggest deficit we have ever had. It is—and the right hon. Gentleman the Member for Barnet (Mr. Maudling) knows this—the continuing weakening of the economy that resulted from our failure to balance our payments over so many years that has resulted in the rundown of our reserves and in the attempt now to climb out of that situation—and it is an attempt that should have, and needs, the support of the whole nation.

The right hon. Gentleman has been speaking on this subject with two voices. He says that he warned the country of the situation. He did, in some speeches, but he and his right hon. Friends were also proposing at the same time other measures that would have had a substantial inflationary effect. It was in the Conservative manifesto that we were told that there were to be half a million houses by 1968. 1 hope that that statement will not be denied, because I have the manifesto here.

It was in his broadcast that the right hon. Gentleman told the nation that he would go on with another aircraft carrier, and that his spending on defence would certainly be greater than the £2,000 million which was the target the Labour Government had laid down. I have the text of that broadcast here, too. It was the right hon. Gentleman himself, together with his hon. Friends, who proposed in their manifesto, an increase in social services expenditure of over £800 million. Oh, yes—he warned the nation all right, but the warnings were muted on occasions when he wanted to tell the nation of all the other things he proposed to do.

The right hon. Gentleman accuses me of having risked the situation by leaving it to the autumn—[HON. MEMBERS: "Gamble."] Yes, he used the word "gamble". The country will have to decide whether this was a reasonable risk to take in the light of the circumstances. I have no doubt that the Opposition will say "No", but it is what the country says that matters. There was strong pressure at the time from industrialists and others who felt that the economy was on the point of turning down. There was no doubt that the Selective Employment Tax would have a substantial effect in the autumn. I thought it was right, and I still think it was right, to take the risk of not depressing the economy at a time when there was so much uncertainty, in the light of the destruction which had gone on before when no risk was taken at all. I certainly do not accept the view that because we leave these measures over they therefore have to be bigger. That is certainly not so.

The existing situation results from the factors I have outlined: increased prices of commodities, the seamen's strike and other matters of that sort. [An HON. MEMBER: "No."] The hon. Member says "No", but I cannot see how he can possibly argue the contrary, or how an extra £100 million for imports of raw materials can possibly not have an effect on the balance of payments in 1967.

Mr. Onslow

Does the Chancellor understand that the question which he has to answer is whether he foresaw this crisis or not? If he foresaw it, by his own words he is condemned as dishonestly concealing it. If he did not foresee it, he is condemned in the eyes of the House as being utterly incompetent.

Mr. Callaghan

I thought I was wrong to give way, and clearly I was, because that was not a point of interrogation, nor was the hon. Member seeking information. He was expressing an opinion which he should have reserved until later in the debate. I would answer the question in this way. It was not possible to foresee all these matters which have flowed during the last few months. No one could have foreseen the seamen's strike or the uplift in import prices of commodities. What could have been foreseen, and was foreseen, was that the economy was very much in balance at the end of the first quarter of 1966 and therefore a decision had to be taken between the two issues of deflating immediately in May or leaving it until the autumn.

Mr. Stratton Mills (Belfast, North) rose—

Mr. Callaghan

No, I shall not give way at the moment.

It has not been possible to leave it until the autumn. I regret this and wish it had been. I am sure that every industrialist in the country shares my view, but I think there comes a moment, and the Government have taken their decision at that moment, when it is necessary to restrain home demand to ensure that our payments are brought into balance again. This was the right and proper thing to do, and we have done it.

As to differences which are supposed to exist between us on economic policy, the right hon. Member spoke of them so familiarly that I wondered whether he and the right hon. Member for Barnet had been having recent conversations, because we all know of the differences of this sort between them in Government —I speak of nothing afterwards—on economic policy of this sort. I do not accept that the right hon. Member was saying anything new at all in the measures he put forward. The proposals he made were a series of cliches and generalities. They were cloudy and imprecise when he was speaking of something positive. When he was speaking of something negative I quite agree that he was absolutely clear and dogmatic.

I know that the right hon. Member has to try hard. Everyone recognises the difficulty of the economic situation when a nation is not paying its way and everyone knows the difficult choices which confront the nation. As to the question of confidence, I say only this. I do not expect the right hon. Member to have much confidence, but his view is not shared by others. I was at the meeting of Finance Ministers yesterday. I dare-say the right hon. Member has seen the communiqué. The Ministers attending the Group of Ten expressed full support for and sympathy with the action taken and expressed their confidence in the determination of the British Government to carry the measures through and thereby achieve their aim. I somehow think that that view is a little less partial than that of right hon. Ministers opposite.

Whatever measures we take, there is no doubt at all in my mind that this Government retain the confidence of the people of this country. If there is one thing which is absolutely clear it is that the Opposition, and especially their leader, have no confidence whatever in the minds of the country.

5.15 p.m.

Mr. J. Grimond (Orkney and Shetland)

The Chancellor of the Exchequer appears to attribute the recent crisis to bad luck. I believe that so long as we attribute our crises to bad luck so long shall we go on having them. It is fatal to give the people of this country the impression that their economic troubles are either due to bad luck or to the ill-will of foreign bankers.

Let us look at the two matters which the Chancellor cited as being responsible for the drastic measures of the last two weeks. One was the seamen's strike. I do not believe anyone thought the seamen's strike was anything more than a possibly precipitating element in an already dangerous situation. Indeed, I should have thought that the Government would have foreseen the possibility of a seamen's strike. Many people knew that there was acute danger of such a strike and it was widely put about that it was part of the Government's plan with their incomes policy that such a claim as the seamen put in should be resisted. But now we are told that it came as a complete shock to the Chancellor of the Exchequer.

The other factor which he claimed threw him off course after his Budget was a rise in import prices. I shall be grateful to the Chancellor if he will give me a moment's attention while I ask him this question. If it is true that the economy is plunged into a crisis by a move of this sort in import prices, what chance has the National Plan of having any relevance for the future? How shall we remain in the field as an international banker financing a large amount of world trade if we are constantly completely thrown into disarray with changes of this kind outside our control?

Surely the point of this debate is that the crises of this country since the war have been continuous. They have come round again with monotonous regularity, are coming round rather quicker than they did and we are taking longer to get out of them and not recovering to the position we held before. If the country is to he told by the Chancellor of the Exchequer that all we need is better luck, I regard the future as desperate.

Mr. R. T. Paget (Northampton)

Is not the particular price rise which is causing the trouble one which was caused a; a result of Rhodesian sanctions?

Mr. Grimond

I am not sure that I followed that point. It was not the Chancellor's argument that it was within our control but that it was outwith our control.

The measures taken last week, coming on top of the measures in the Budget, are in my view in grave danger of pushing this country into a recession next winter at the time when world trade in general may be turning down. I believe the situation today is much more difficult than it was even four or five years ago. It is admittedly more difficult to stop or postpone capital projects today because they are much bigger in scale and companies have learned from the losses they suffer by chopping and changing. But once we have got into a recession nowadays it may be equally difficult to start up again.

I heard nothing in the Chancellor's speech which would give me more confidence that the assessment he has now made of the amount to be taken out of the economy is any more right than the assessment he made only a month or two ago.

I think it quite extraordinary, if it is true, that he should go into the Continent of Europe and say that this incomes freeze is not necessary. I sometimes think the Government have forgotten about the telephone and have an idea that things said on the Continent will not be repeated at home. He is reported as saying that it would be a "bonus on top of it all". If I had a wage claim agreement repudiated and read that the Chancellor considers this only "a bonus on top of it all", I should be in a pretty ill-tempered frame of mind. I cannot believe that the Chancellor can really expect to get his incomes freeze if those sort of remarks are made about it.

Mr. Callaghan

I realise that the right hon. Gentleman wrote his speech before he heard what I had to say today, but surely he will deal with the point I made. Does he not accept it as being perfectly valid?

Mr. Grimond

I shall deal with that point, but the right hon. Gentleman has also stated that the incomes freeze is a bonus. I am entitled to deal with that point. I am entitled to ask what is the position of the various pay claims that workers understood they were to get. What is the position of the railwaymen's claim which has, I understand, the backing of the Prime Minister?

The other point made by the Chancellor is that he expects the country to be out of the "red ", I understand, by the end of next year. He said that the fact that we must have a breathing space is irrelevant. The term "breathing space" has a familiar ring. I suppose that it is Labour language for "pause", and we have tried a pause before. The Chancellor says that the difference is that this time the pause is associated with social justice. It remains to be seen whether that makes a great deal of difference to the way it is received. But there is a certain amount to be said for example. For the purpose of example, is it good that at least two Ministers have been given flats free of rent and repairs, rates or tax, at a time when the Chancellor is asking for a pause?

What is going to happen when the pause is over? Are the postponed wage-claims to be met? What are we to have at the end of the six months? Is it thought that a breathing-space will cure the economy any more than the breathing space of the right hon. and learned Member for Wirral (Mr. Selwyn Lloyd) put the economy on the right lines? What was extremely noticeable in the Chancellor's speech was the absence still of any positive suggestions for the future, other than the shake-out of labour and the speeding up of cuts in overseas obligations which were going to happen some time anyway.

Let us look at the shake-out of labour. I was going to ask whether it was true that there would be only 35,000 places for retraining next year. But I understand that even that figure would be an exaggeration. There are to be very much fewer. I understand that the right hon. Gentleman took pride in saying that we were to have 20,000 places, or whatever the figure was, for retraining—and this at a time when we may have 500,000 unemployed. If these measures satisfy the Government in the redeployment of labour I am aghast. They certainly will not help the economy to re-deploy labour.

It is no good spending time attacking the record of the Government because, clearly, their record stands on its own and nothing could be more damaging to their reputation than the infliction on the economy of exactly the same sort of ragbag of measures that we had from the Conservative Governments during the last two or three crises. There is no new strategy in the Government's thinking; no new method has been set before the nation; no fundamental decisions have been taken.

Two of the most fundamental decisions that we have to take are, first, to make far more drastic cuts in our military obligations east of Suez. This means rethinking our role and not merely trying to fulfil the same commitments with fewer troops. Secondly, we have to make a determined effort to get some of the weight of sustaining an international currency off our shoulders and at the same time steps must be taken to get more liquidity in the world. If ever there was an epitaph on the present policy it was spoken by the Prime Minister in the debate on the Address in November 1964. He said: … we have learnt the hard way that deflation and contraction, so far from making us more efficient and competitive, have the opposite effect—costs rise; essential investment is discouraged; restrictive attitudes on both sides of industry are encouraged; a policy which relates incomes to expanding production is made infinitely harder to achieve."—[OFFICIAL REPORT, 3rd November, 1964; Vol. 701, c. 79.] That is the Prime Minister's view of what is now his own policy.

If I am told that the Government's policy differs from the Conservative Government's policy because development areas are not to be badly affected then I accept that small crumb of mercy. But who will build factories in development areas in the present economic atmosphere? The Selective Employment Tax will also do far more damage in these areas than many of the positive measures of the Government.

The Chancellor should also remember, in talking about bad luck, that the ill-thought-out nature of his fiscal proposals, both the Selective Employment Tax and the Corporation Tax, have diverted a considerable proportion of extremely scarce skilled labour into the totally unproductive purposes either of advising companies as to what the tax is thought to mean or providing new staff for the Inland Revenue.

Of course we must hope that these new measures will succeed in the purpose they are supposed to achieve. But if they do succeed they will lead to deflation and unemployment. It should be made clear that if they do not lead to deflation and unemployment the policy will have failed. What I suspect has happened up to now is that the Government's popularity has been largely based upon the failure of their policy. If the policy succeeds, I do not think their popularity will last.

Once again we are buying time. That phrase was used in 1964, when the Government came to office. Since then we have failed to use the time bought. We have failed to find new methods of keeping the economy in balance. We have failed to take fundamental decisions. One of the causes of this failure is that the Government have never explained what they expect to provide the driving force of the economy. If it is Socialism, let them tell us so, but I do not believe that they will. I do not believe that all the "Neddies" and commissions, committees, pronouncement and estimates and plans will make anyone work harder.

I do not believe that anyone will increase productivity to please "neddy Taxation has steadily risen and there is always, running through Government statements, the feeling that success is rather to be despised and that profits are only worth while if they are very small and "socially justifiable" whatever that means. If we are to run a free enterprise economy we have to realise that the mainspring is not only profits but the belief that people who work hard and do good work should get higher rewards.

What is there to go for in modern Britain? All sorts of things, but none of them provided by the Government. The failure lies in the basic outlook of the Government, who cannot make up their minds whether they believe in a free enterprise economy or whether they have anything else to offer. I cannot believe that one can have a free enterprise economy and a wage freeze. One cannot start, as the Government tried, by holding down rewards and then expecting productivity to rise. I accept that one can have an incomes policy in a sense that one hopes to relate rewards to productivity and to penalise those who are not successful and who do not deserve it, but to get that one has also to reward efficiency.

I therefore make some practical suggestions as to how the Government can increase productivity, which is surely what we all want. Let the Government first of all ask all works councils to meet and put forward schemes for increasing productivity within the months—the period of the pay pause. Let these councils report their findings to their local "Neddies". [An HON. MEMBER: "The right hon. gentleman does not believe in them. I do not believe that people will work for "Neddies", but they may have other uses. Let the Government make it clear that, where such schemes show that increased productivity will be achieved, the Government, so far from holding back the wages of those involved, will encourage agreements such as that which was introduced at Fawley and which allow rises in wages in return for increased production and the end of restrictive practices.

Then let us take measures to increase competition. We should give the Registrar of the Restrictive Practices Court the right to bring before the court cases in which either management or labour, or both, have conspired, so to speak, to forbid the introduction of new machinery, or to hold up measures clearly in the public interest. Furthermore, let us give the court some sanctions to employ against restrictive practices on either side of industry.

Then let us look at the taxation system. If we believe in a free enterprise system, we cannot go on increasing the rate of direct taxation particularly at levels where it becomes an important factor in whether a man is prepared to move his job and to take on a new job for the sake of extra employment, but probably finds that the extra taxation is so much that he prefers to remain where he is. I do not know how far we could remove taxation from overtime, but, combined with some tough measures to increase competition, that might be possible, too.

Then we have to consider holding down the size of the Civil Service. If the Government are anxious through their Selective Employment Tax to put people into productive employment, surely they should look at their own offices. Many Civil Service Departments and some of the nationalised industries could perfectly well be given a direction to get rid of 5 per cent. or 10 per cent. of their staff, which might result in much more than all the Selective Employment Tax will result in, with all its wasted labour.

To increase exports the Government could do something directly by raising the status of trade attaches at embassies, to see that they were much better trained for their jobs, and that their line of promotion was in industry and not through the Foreign Service. It is quite a different job from being an ambassador. These attaches should be seconded from industry as first-rate salesmen who should go on behaving as salesmen when in the embassies and not be afraid to go out knocking on doors and pushing British goods in the world markets.

I am told that every other major exporting country has far more power from its Government behind its export drive than we do. I am told that the Dollar Export Council has an annual budget of only £30,000 a year. Every other country is spending out of all proportion to our expenditure and if even a tiny proportion of the export earnings went back through the Government into export promotion, that would be direct help to righting our balance of trade. Let us not be afraid to act commercially.

Let us see how much import saving we can make by encouraging the expansion of agriculture. There is still scope for more food to be grown in this country, thereby saving imports.

I turn finally to the east of Suez business. It is impossible to avoid the conclusion that one of the country's major long-term recurring disadvantages is the attempt to maintain a role in the Far East which is quite outside our capability. I notice that this subject was not mentioned by the Leader of the Opposition, but I find it difficult to believe, whatever is done at home, that we will get the country into long-term balance when it is trying to play a role in the world which no other country of its size attempts and which has very little value in today's world.

When these measures were first before the House, my complaint was that they were negative and restrictive. I still think that they are negative and restrictive. I still see no sign of any measures beyond next January which can give anyone any confidence that the country will pull itself out of its difficulties and set off on the course of expansion.

I do not believe that in this country we can run a low-wage economy. We can run a much sharper economy than we have with much more competition, but for a country in our position a low-wage economy can only mean a low-efficiency economy. It is not high wages but lack of efficiency and productivity which have dogged the British through crisis after crisis ever since the war.

5.34 p.m.

Mr. Frank Allaun (Salford, East)

The Leader of the Opposition and his party would have spent more on arms, not less. This would have increased still further the deficit in the balance of payments which is at the root of our troubles. Therefore, any attack from that side of the House is worthless and invalidated.

My criticism of the Government is from exactly the opposite angle. Because the Government are failing to make drastic cuts in arms expenditure, they are making drastic cuts in employment and living standards instead. They are refusing to squeeze the profligate arms spending abroad, which accounts almost entirely for our international deficit. Hence the unemployment, wage freezing and belt-tightening which are to come. In saying that, I am expressing the views of the 47 Labour M.P.s who last night signed a statement on this matter, and I can assure the House that double that number would have signed if there had been time to secure their signatures.

One does not need to be a professor of economics to understand the troubles facing the country. They are staring us in the face—the run on the £ is due to our balance of payments and that, in turn, is almost exactly equal to our overseas military expenditure. Paul Bareau, the distinguished financial commentator who is certainly not a tremendous Left-wing supporter, wrote from Washington on 18th July: Our commercial transactions,"— and he underlined "commercial"— visible and invisible, with the rest of the world show a large surplus and it is Government overseas expenditure (nearly £500 million a year) which puts us in the red. The simple truth is we just cannot afford to spend precious foreign exchange on bases and troops abroad. The Government are acting as crazily as a man living on a pension of £4 a week and spending one quarter of it on revolvers, rifles and ammunition. Moreover, when told to be sensible, he cuts down on food. That is precisely what the Government are doing.

I do not often agree with the hon. Member for Bosworth (Mr. Wyatt), but he puts his finger right on the trouble spot when he points out that in 1938 Britain was spending £16 million a year on overseas military bases and forces, that in 1954 that figure had soared to £250 million, and today has reached the lunatic total of £560 million a year, I warn the House that if this continues, there will be further runs on the £, even if we overcome the immediate difficulty.

Exactly a year ago, the Parliamentary Labour Party carried a resolution asking the Government to carry out drastic arms reductions "much earlier than at present intended". That resolution was carried after the announcement by the Government of a targetted ceiling of £2,000 million a year—at 1964 prices—by 1970. The prices of things are going up and the prices of armaments are going up much more sharply. That means probably £2,500 million a year, in other words, an increase rather than a reduction in military expenditure.

I regret to say that even now the Government are not lowering that ceiling. Indeed, I reveal no secret—because it was in all the newspapers this morning—when I say that last night the Prime Minister said that the £2,000 million a year programme still stood. Hence the other, domestic cuts. It is to that that I object and I am sure that there are millions of people throughout the country who share my sense of ridicule about this folly.

Unemployment, according to the Chancellor, is going up to 470,000. Mr. William Davis, the shrewd financial editor of The Guardian, estimates the figure of 750,000. Mr. Richard Pryke, who resigned from the Civil Service, put the figure at 1 million. No one really knows. In addition, wages are frozen for six months, whereas dividends will merely be stored up for future release. Purchase tax increases will affect working people much more than rich people, as will the hire-purchase deposit measures. In most working class families there is a dependence upon hire-purchase for furnishing their homes.

In contrast, the arms reductions announced are trifling or even non-existent. We are told that there is to be a saving of £100 million in Government overseas expenditure. Of this, £20 million will be in cuts in aid to Commonwealth countries. There is reason to believe that even the £80 million reduction is covered by changes envisaged in last February's Defence Review.

This figure also includes hypothetical savings on B.A.O.R. if we take those away there are virtually no military economies at all. This is despite the ending of the fighting between Malaysia and Indonesia. Even worse—it is officially stated that there will be no reduction in our expenditure over the next 10 years of £1,080 million in dollars on American planes. That is economic nonsense, as was said by the 47 Labour M.P.s in last night's statement.

It all adds up to this—even now the Government will not accept that Britain cannot attempt to retain its role as a great world military power. Even if we quadrupled our expenditure on arms and made the country completely bankrupt, we still could not compete as a first-class military power with either America or Russia and I weep no tears for that.

Sir Arthur Vere Harvey (Macclesfield)

I follow the hon. Gentleman's point about the large expenditure of British funds in the United States of America, which will have to be paid for some six or seven years hence. Would he agree that if we had the labour at home at least some of this equipment should be ordered through British factories?

Mr. Allaun

I objected very strongly to the TSR2, unlike hon. Gentlemen opposite. I was glad that that was abandoned, but it is double folly to buy American planes instead

Opposite me there are serried ranks of retired admirals, generals, colonels,—the lot! They are not all here at the moment. I must say that they are sincere and upright men, but when they talk of "making Britain great again" they mean making Britain militarily great again, and they cannot do it.

They are dreaming of the days of the last century when it was possible to send a gun-boat to subdue a small country. This is no longer possible, because there are much larger sharks swimming around. Their criticism today is quite worthless, because they still support that point of view. What worries me is how the Labour Government succumbed to the Conservative's grandiose military dreams. Ordinary working people will be asked to pay the bill every time that they pay extra on their Purchase Tax, every time that the middle income man pays 4d. a gallon extra on his petrol.

Some people may think that this is due to Kiplingesque delusions of grandeur on the part of the Prime Minister, and this may be partially so. An even more serious factor is the insistence of our American masters. On 22nd July, Mr. McNamara, the United States Defence Secretary, was interviewed in Washington by Renee MacColl of the Daily Express. This is what he wrote: Mr. McNamara was very emphatic when raised the question of a continued British presence east of Suez. He stressed, ' That presence remains absolutely essential. You British have been doing an extremely important job there—and it is necessary that you should go right on doing it.' Now we know. If the British Government say that they cannot bring the lads in uniform home because of our foreign commitments, may I remind them of their commitments at home, to our own people, which I would put first?

Recently, I went on a visit to West Germany and before I went, thinking of a present for my wife, I asked her what I should bring home from Germany. She told me, "The British Army of the Rhine." [An HON. MEMBER:" All of them?"] I must admit that it would be rather inconvenient to have 60,000 men in uniform tramping up our garden path. It would certainly be a great advantage to the country, however, to have them over here.

When I was pleading with the Prime Minister recently to bring our troops home from the Far East and Germany he replied that it was true that it would save expenditure in foreign exchange, but it would mean that the Government would still have to build expensive barracks in Britain. This is not so. Every town and factory in the country is crying out for labour. Why not bring home the 220,000 men overseas, release them from the Army and enable them to go into productive industry? This would kill two birds with one stone. It would save our expenditure and increase our production.

Captain Walter Elliot (Carshalton)

The hon. Gentleman says that he would bring the Rhine Army home. This would mean that Germany would be the dominant political partner in Europe with the United States. Is the hon. Gentleman prepared to accept that?

Mr. Allaun

With great reluctance I have to accept that this is already the position. We have German commanders in charge of most British troops at the moment. Therefore, I do not think that that argument holds water.

If we put half of our 440,000 Service men into industry we would save costs and increase production. Drastic situations demand drastic remedies.

Mr. Patrick Wolrige-Gordon (Aberdeenshire, East)

If the hon. Gentleman's philosophy succeeds, after the men have come home and their bases been demolished, can he say that we will never again have a balance of payments crisis?

Mr. Allaun

This would cut our present deficit on the balance of payments. Most people in the country would heave a sigh of relief at this.

The new situation adds tremendous force to the resolution tabled by the Transport and General Workers' Union for the annual Labour Party conference in the autumn, which, along with many of the other affiliated organisations, is urging substantial cuts in arms expenditure. How drastic is drastic? It is a great deal more so than was believed to be necessary even a few weeks ago. A cut of £700 million a year, or one-third of our total arms programme, is required to put our country into a solvent position.

5.50 p.m.

Mr. Gwynfor Evans (Carmarthen)

It adds lustre to the honour which I have of representing Carmarthen in the House that I follow so very distinguished, respected and loved a person as the late Lady Megan Lloyd George. [HON. MEMBERS: "Hear, hear."] It is still very difficult to think of one who abounded with such vitality and gaiety as the "late" Lady Megan. Her passing was a very heavy loss to this House, as it was to Wales, the country which she loved so well. I enjoyed her friendship for 20 years, and, although I twice had the temerity to contest Carmarthen against her, it did not affect the warmth of our friendship, such was the generosity of her spirit. I rather think that she might be happy to see me here today in her place, speaking not only for Carmarthen but, if hon. Members will pardon the conceit, for Wales.

I want to speak for Wales on this Motion, although the Welsh nation does not seem to be included in its wording. The Motion refers to one nation. But there are four nations in these islands. Perhaps the framers of the Motion had in mind the English nation, which, for this House, is the nation. It is often called the British nation, and indeed in England and overseas "British" and "English "are very often used synonymously. I think that this stems from the fact that there is a British State, and "nation" and "State" are often confused.

However, because there is a British State, it does not follow at all that there is a British nation. The British State is multi-national. It serves four nations, although one would not gather that from the policies of Governments. This is not being pedantic. It is because the Governments at Westminster equate Britain with England that the impact of their policies on Wales is not considered. What is good for the English goose is assumed to be good for the Welsh swan. Wales is ignored when policies are decided.

The power of the State has grown so greatly, particularly in this century, that it is only necessary for a multi-national State to ignore the existence of a small nation like Wales for that nation to be destroyed. We had evidence in this Chamber on Thursday that the English order has no place in it for a living Welsh nation. The rules of this English Parliament prevent even the taking of the oath in the Welsh language.

Since Wales was incorporated in England, in 1536, it has been the policy of successive Governments, pursued fitfully, it is true, to assimilate the Welsh people and so destroy the Welsh nation. The attitude to language is an example of this. In the middle of the last century virtually the whole of Wales was Welsh speaking. John Frost, the Chartist leader, would have to address his people in Newport and the Monmouthshire valleys in the Welsh language. Men who rode with Rebecca in the West were Welsh speaking to a man. The great insurrection at Merthyr Tydfil where between 30 and 40 were killed by the military happened in a town of almost entirely monoglot Welsh-speaking people.

In this situation it was decided in this Chamber, on the proposal of one who was a Member of this House, to, as he said, send the English schoolmaster among them". He said that this would be cheaper than sending the military to civilise them—that is, to make them English-speaking monoglots. Therefore, we had an entirely English education system imposed on the Welsh people, and the children in the schools of Wales were punished if they spoke a word of Welsh during their school hours.

The Welsh language still has no official status in its own territory, and there is no intention on the part of the Government to give it anything like equality of status with the English language. English institutions and techniques have been imposed on us and the Welsh people have no self-defence. There is still no Welsh cinema or independent broadcasting corporation. There is still no Welsh national theatre or opera house. There is no Welsh national orchestra, despite the unusual talents of the Welsh people. The language which was the language of law and government in Wales, of kings and princes, scholars and artists has been made a pariah language in this country.

The result is that the Welsh nation which should today be living with the dignity and fullness which the Scandinavian nations enjoy, and which would be living in that way if it had its own Government, is being reduced to ruin. Many members of your Press and politicians gibe at us because three-quarters of our people have been deprived of their national language. It is the English order which has robbed them of their heritage. Now, through its spokesmen, it tells them that they are not true Welshmen. In doing this it has gravely impoverished and diminished their lives. I do not think that "barbarism" would be too strong a word to use for this.

This is usually justified on economic grounds. It is usually said that under the English order the Welsh people, whatever else they may not enjoy, do enjoy economic prosperity. For many, the death of a nation and the awful waste of great moral and spiritual resources matters nothing as long as the people are well fed, well-dressed and well housed. We are told that they are treated quite as fell as any slaves in history.

The Leader of the Opposition celebrated St. David's Day with the affluent London Welsh—and there are more Welsh born people in London today than there are in all the five counties of Mid-Wales. He said that Wales was the success story of the Tory Government. Now we have seen spokesmen for the Government soaring to even greater heights. During the recent by-election the Prime Minister told the people of Carmarthenshire, in a letter which expressed very great concern for Wales—after reading it the people of Wales felt that they should excuse his mistakes in Vietnam and Rhodesia; they were due, they thought, to his preoccupation with Wales —" The Welsh nation is prosperous". He gave us the reason for this prosperity in Wales. He said that it was due to the Labour Government's emphasis on regional development. The people of Carmarthen, praise be, did not believe him.

This is the sort of patronising rubbish which we have had throughout the years, and you will not be able to get away with it much longer because the Welsh are beginning to take their country as seriously as the English take their country and as seriously as the Danes and Swedes take their countries. They know the position. They see no evidence of this prosperity. What they see is mines closing, railways closing, steel workers being made redundant and a decline in agriculture.

In my County of Carmarthen, which is better placed than many in Wales, the economic situation gives the lie to the glib talk of prosperity. It is a county of very treat natural wealth. There is in Carmarthenshire the only anthracite coalfield in Britain. There are steel and tinplate works, ports, and great agricultural potential: it has produced more milk than any country in Britain. We have there great scenic beauty and a talented people. There is everything there, but the population of Carmarthenshire is falling year by year. It is the biggest county in Wales, yet its total population is today smaller than that of a medium-sized town like Swansea.

What do the Government do about it? They introduce an employment tax to drive men from the service industries. In Carmarthenshire, where will they go? What other work is there for them? The Government introduce centralised bureaucratic control of the steel industry. The aridity of a socialism which is little but bureaucratic centralism makes one despair.

At a time when Wales desperately needs expansion, which it has not had in the past, it is having to face further contraction and deflation. Although there is no pressure whatever on Welsh manpower, unemployment in Wales is between three and four times as high as it is in these prosperous regions of England. [HON. MEMBERS: "Oh, no."] It is between three and four times as high as in the south-eastern region, and that is despite the heavy migration that we have had to face in Wales. Despite that, the Government intend to have still heavier unemployment, and that in a country which in the inter-war years saw nearly half a million people having to leave it because there was no work for them in their own land.

The Government do this because of English economic difficulties. They call it a crisis—that is a big word—but what do they know of crisis? In Wales, we are faced with a crisis far graver than that for which you mobilised all your resources in 1914 and 1939. There has never been a threat to the existence of the English nation, only to the existence of the English State. But what we are fighting for in Wales is the life of a nation, a nation which is threatened with extinction.

Your economic difficulty seems to us to be self-inflicted, as I have heard other hon. Members say this afternoon. It seems to us to arise because you place England's prestige above all else. Sterling, the pound, the hydrogen bomb, Aden and Singapore—your costly efforts to keep these relics of an imperial past place a devastating burden upon the Welsh economy. The proportion of the gross national product, said the Chancellor of the Exchequer this afternoon, which is spent on overseas military expenditure is higher in this country than in any other country. That is an utterly shameful situation.

If you were prepared humbly to accept the reality of your present position in the world, there would be no talk of financial or economic crisis today and no panic Tory measures. This is an English crisis, but, as usual, the Welsh people have to pay more than their share of the price.

I would not have a single Welshman unemployed to save England's prestige. Even before we had this dose of inflation—and we in Wales cannot escape its effects; that is quite impossible—the economic situation in Wales was critical. The Government told us six weeks ago that before 1970 we would have to find about 30,000 new jobs in Wales. That was an unrealistically conservative estimate.

We expect the deplacement of 40,000 Welsh miners and the redundancy of 10,000 Welsh steel workers, and your agricultural policy, which will make agriculture an occupation which only the wealthy can enter, will drive thousands more from the land. The fact is that we would not be far out in saying that by 1970 we need in Wales, not 30,000, but more like 100,000 new jobs if we are to avoid the kind of migration and mass unemployment that we had in the 1920s and 1930s.

A problem of this magnitude cannot be tackled effectively unless you declare something like a state of emergency in Wales, but the massive complacency of the Government and their preoccupation with other matters lead us to be treated as a slight local difficulty undeserving of any special effort. The Welsh nation is prosperous, says the Prime Minister; and, therefore, if we are prosperous, why do anything about it? The Government say that they will give us advance factories—yes, sufficient to employ about one-tenth of the number necessary, even if they are filled, and who will fill them in present conditions when they are built?

What you are doing in Wales is making a desert and calling it prosperity. I can think of only one European nation which is governed as badly as Wales is governed, and that is the people of Brittany, where the French Government is deliberately trying to destroy the nation.

If you thought seriously about Wales, you would have had ready two years ago a plan for Welsh development, something like the late President Roosevelt's Tennessee Valley Authority. We have among us many admirers of that example of planning. But no plan was ready, and still no plan is ready for Wales. The Government's regional set-up is an ineffectual irrelevance. They could have created balanced development and stemmed depopulation—and in Wales we have depopulation not in just a few areas, but in nine of our 13 counties. In other words, nine of our 13 counties are seeing falling population, as against only two out of the 39 in England. Not one of Norway's 18 counties is seeing depopulation, not one in a country which is far more difficult to govern than Wales. We are told that this kind of process is inevitable and is the price of living in the modern world. Nothing in this life is inevitable, not even a Labour win in Carmarthen.

If we are men, we have a will of our own, and we have a spirit and we can decide what our economy is to be. We could shape our economy if we had the freedom to do so. We are Welshmen in Wales, but we do not have the freedom to shape our economy. If we had that freedom we could subordinate the economy to social ends and, in particular, to create the conditions of full nationhood in our country.

A Government who were serious about Wales would first have created an efficient transport system. That is the key to all development. One cannot hope to have any industrial development without an efficient transport system. A Government serious about Wales would never have permitted the closure of Welsh railways. They would have modernised them instead. We have no evidence that Welsh railways in Wales as a whole are losing money. All the evidence is to the contrary and that they are making a profit year by year in Wales as a whole. There was no need of Beeching in Wales. It was in England that you had to have him, and even after having Beeching you lost last year £132 million on your railways, half the total Irish Budget. Will you close all the English railways? Not on your life. They are necessary to the English society and to the economy of England. Have we no economy and no society in Wales that our amenities are dealt with in this way?

A Government serious about Wales would have built major roads in our country, but apart from a derisory few miles in Glamorganshire and Monmouthshire we have no motorways in Wales and very few duel carriageways. We are told that there is no industry in Wales to justify building them. Have you ever heard of the Autostrada del Soli, built right along the backbone of Italy as an axle for that country? Have you heard of the 3,000 miles of motorways which Italy will have by 1970? We are told that we cannot afford these things. How can others afford them?

How can the Six Counties of Northern Ireland afford them, for instance? By 1970, they will have 100 miles of motorways. The equivalent in Wales would be 200 miles in our 13 counties. The Six Counties of Northern Ireland are planning to build 200 miles of motorway. The equivalent in Wales would he 400 miles. Between 1965 and 1970, those Six Counties will spend no less than £87 million on roads alone. The equivalent in Wales would be £150 million spent on roads alone during that period. To make up the leeway in our country, we need an expenditure of £200 million. Actually, less than one quarter of that sum is to be spent. They are even cutting down on expenditure on roads in our country.

Our feeling is that the Government never will invest in our country on this scale. They prefer to spend their money on bombs and bases. They never will take the necessary steps to build up a healthy balanced economy in Wales. What, therefore, should they do? They should get out of Wales, and leave the government of that country to the Welsh people themselves. It would be good for England, and it would be good for the people of Wales. It would be good for England to have a prosperous nation alongside her, instead of the ruin that the Government are now creating. It would be the right and magnanimous thing to do; and the English can be magnanimous, as many small young countries know from experience and as I know from my short experience in this House. I know that there is no shortage of magnanimity here. Why not apply some of it to the people of Wales in our present situation?

The Government recognise the existence of the Welsh nation. They have given us a series of concessions. It may be said that things are different in Wales as a result. We have a Secretary of State and a Minister of State, and, fortunately, we have had very fine Welshmen to fill those offices. It is no disrespect to or reflection upon them to say, however, that these offices make virtually no difference to our situation. After all, Scotland has had a Secretary of State for 80 years, and look at the awful situation in that poor country now.

Let Wales have the institutions of nationhood. Let Wales live like a nation and act like a nation. Today, she can do nothing for herself. She cannot even build a road for herself. She has no power of action, no power of decision or choice, and no freedom. Let the people of Wales be free to act for themselves and live their own lives rooted in the traditions of millennia, and rooted in their Christian values.

I do not think that anyone would be disappointed in the fruits of Welsh national freedom. The most exciting thing about Wales is her possibilities. They are limitless. If the Welsh people only had freedom, they would be found to do more than justify their existence. After all, we have been there a long time, and there is a growing movement throughout the country now, mainly among the younger generation, which is determined that this "ancient nation proud in arms", as Milton called her, will be there for a long time to come and that the language, so greatly enriched by the Romans when they lived among us—there are over 1,000 Latin words in the Welsh language from those distant days—will again be spoken through the length and breadth of our land.

Many people thought that the sun of Wales had set for ever, but I do not think so now. Looking round the country in which I live, I can see something different from the light of the setting sun. It looks more like the rising of a new dawn. "Westward look, the land is bright". I appeal for help at the seat of the only Government which we have to create quickly the conditions which will ensure for the people of Wales a fine national future.

6.13 p.m.

Mr. Jack Ashley (Stoke-on-Trent, South)

As one who has been appalled at the length of some of the speeches in this Chamber, I propose to make my contribution very brief. Some of the things which I intend to say will not be popular on either side of the House, but I feel that it is time that they were said.

One comment which will be popular is that the speech which we have just heard from the hon. Member for Carmarthen (Mr. Gwynfor Evans) is one of the finest maiden speeches that we have heard in this Parliament. I can assure the hon. Gentleman that we offer him our warm congratulations not only on his eloquence, but on his persuasiveness. Those of us who stood outside the House a few days ago to watch his arrival and listen to the singing of the Welshmen —and the people with flags depicting dinosaurs and cabbages, or perhaps they were red dragons and leeks—expected an extraordinarily good speech from him, and I can assure the hon. Gentleman that we were not disappointed.

I never appreciated the dilemma of the Opposition until I listened to the opening of today's debate. Here we have a group of hon. Members lecturing the Government on how to implement a policy which they themselves failed disastrously to carry out when they were in office. It is one of the great political ironies of the day that the same people who led the nation practically to economic disaster should tell the Government this afternoon how to conduct their economic affairs. No matter how they wriggle and twist, they cannot evade the fact that the basic cause and root trouble of our economic ills is the result of their stewardship over a decade.

In all honesty, I am not at all worried by the remarks which we have heard today, nor by the vituperation which we can expect later in the debate. I am more concerned with the criticism which has been expressed from this side of the House., It is my belief that the economic battle will be fought in the factories, in the mines and in the docks, and, as a former labourer and crane driver, I recognise that there are certain critics of the Government on this side who will be listened to with respect.

Those critics have no hesitation in condemning the Government. We have heard eloquent criticisms recently from right hon. and hon. Members willing and able to condemn the Government, and they must not be surprised if we do not turn the other cheek and if the case for the Government is presented against them.

The voices which may carry weight in the factories and the mines are those of men like my right hon. Friend the Member for Nuneaton (Mr. Cousins). There can be no doubt that, when he speaks on economic matters, his voice carries a great deal of weight on the shop floor. His advocacy of a wages scramble must be sweet music in the ears of many trade unionists. As a former shop steward, I recognise that when the Government, the official trade unions or anyone else with a responsible opinion are asking for restraint, the man who comes 'along and says "We should have a wages free-for-all", is bound to win support. In that way, my right hon. Friend is bound to win support.

But although my right hon. Friend is playing this music loud and clear, it must be said that his ideas are far from clear. I believe that they are among the most confused and muddled ideas of any critic of the Government. He confuses long-term solutions with short-term necessities. He appears to be unable or unwilling to see the relationship between wage inflation and the balance of payments. In addition to the wages scramble, part of the panacea offered by my right hon. Friend is productivity. No one in the House, even the destructive critics opposite, will deny that. Of course, we all agree with productivity.

My right hon. Friend has been the Minister of Technology and has been primarily responsible for giving a lead in productivity over the past 18 months. He has had a powerful voice in the Cabinet on matters of productivity during that time. He has been the acting General Secretary of the Transport and General Workers' Union, affecting productivity over the last 18 months. My right hon. Friend—and I told him that I would be making this speech this afternoon—knows full well that increasing productivity is a long, slow, painful complicated business. It is a vital, but a long-term job. If it is not, he ought to tell us.

If my right hon. Friend has a magic wand to wave, let him prepare to wave it now, and let him also tell us why he has not waved it when he has had the opportunity to do so during the last 18 months. By all means let us have his ideas, his energy and his enthusiasm for increasing productivity, but let him recognise the basic fact that increased productivity is not a substitute for, but a complement to, a prices and incomes policy.

I have said that I was a shop steward. I realise as well as anyone who has worked in the trade union movement that the voice of my right hon. Friend carries great weight in his powerful claim that his members should seek the increased wages they desire. We all have a "little cousins" inside us, waiting to get out, but we do not allow it to get out because we have a responsibility to millions of men and women to avoid the sort of mass unemployment which we saw under the Administrations of the right hon. Gentlemen opposite.

Mr. John Biffen (Oswestry)

The hon. Gentleman referred to the "mass unemployment under Administrations of right hon. Gentlemen opposite". Let us be quite clear what he means. Does he mean during the post-war administration of the Tory Government?

Mr. Ashley

The post-war record of Conservative Governments is not a proud one, and unemployment under their administration was far worse than it has been under this Government. What the hon. Gentleman hopes may well be the unemployment situation later on is a different matter.

I am talking essentially about the policy of the Conservative Administration while they have been in office for the last 40 years or so, except when we have been there. If hon. Gentlemen opposite seriously deny that they are the party of unemployment, let those who follow me in this debate make out a case which will convince the nation.

To return to the policy of my right hon. Friend the Member for Nuneaton, I think that it has to be said that the policy he is pursuing is that of an industrial quack. He is peddling a cure for our economic ills, but the medicine that he is proposing is only one part medicine, and two parts hogwash. If the nation swallows his cure we shall all find ourselves confronted with devaluation. Instead of deflation, we shall have desperation.

My right hon. Friend has attacked the Government in an extravagant manner. He appears in this House as a trade union giant, as a man who represents the trade union movement. I suggest that this is not so, because we should not confuse volume with value, nor should we confuse stridency with sagacity. My right hon. Friend represents the T. & G. W. U. and a few small trade union supporters. Although he controls 1 million votes at the Trades Union Conference, I do not believe that more than 5 per cent. of his members support him when he denigrates the Labour Government while they are struggling to deal with the economic crisis.

I conclude by expressing the hope and belief that the vast majority of trade union members in this country will follow those trade union leaders who are supporting the Government in their efforts to create a fairer and better society than their predecessors were ever able to aspire to.

6.25 p.m.

Mr. Nigel Birch (Flint, West)

Most of the speech of the hon. Member for Stoke-on-Trent, South (Mr. Ashley) was taken up with a duel between himself and the right hon. Member for Nuneaton (Mr. Cousins). I have no wish to act as a second to either of them but if the hon. Gentleman is the best orthodox Government supporter that they can find to speak, they are in a pretty bad way.

I should like to add my congratulations to the hon. Member for Carmarthen (Mr. Gwynfor Evans) on his maiden speech. We met some years ago, but he may have forgotten. He showed a very fine turn of Parliamentary wit. One thing with which I agree is the total uselessness of the Secretary of State for Wales when it comes down to business.

I do not want to go into the origins of the crisis. Basically, the crisis came about, as all foreign exchange crises have come about, by overstraining the economy and as a result having more unfilled vacancies than unemployed people, and all the things that flow from that.

At the end of my speech I shall say a few words about what we ought to do. This is very popular with the party opposite. I start by saying a word or two about the Chancellor of the Exchequer, because he did not answer the gravamen of the charge, which is that sterling has been desperately weak ever since November 1964. It very nearly went through the floor last July. It turned bad again in February and has been weak the whole time. Everyone to whom I spoke knew that this crisis was coming.

The Chancellor of the Exchequer says that this is a bit of bad luck. He ought to remember the words of Gibbon: The winds and waves are always on the side of the ablest navigators. The Government cannot blame this crisis on the seamen's strike. The strike started months ago, and the terms of trade changed some months ago. Contingency plans should have been prepared, ready to be brought in, but we know that this plan was cooked up over the weekend before last.

I want to consider for a minute or two why there has been this delay. In my opinion hon. Gentlemen opposite have been prisoners of their own words, and of their own promises. They have denounced and abused so much Peter Thorneycroft and my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) that they have almost come to believe that some of the things they have been saying about them are true.

Hon. Gentlemen opposite made pretty lavish promises at both elections. At the last election they were buoyed up by the National Plan which they had in their pockets and which they read out. The title deeds for the Labour Government were set out by the Prime Minister in his speech at Swansea on 25th January, 1964, when he gave his great vision of the new Britain—science harnessed to industry, steady and rapid expansion, no more "stop-go", and so on. He did not say very much about how it was to be done, but he did make one specific reference to how it would be done, and that was a wages policy. He said he had a right to get a wages policy because he could go to the two sides of industry with clean hands, but he was in no way responsible for the faith-breaking interference with collective bargaining shown by my right hon. and learned Friend the Member for Wirral—faith-breaking interference with collective bargaining. If the Prime Minister lives to be a hundred he will still have words enough to eat.

The second reason, apart from being inhibited by their own words and their own promises, was the extraordinarily long time it took the First Secretary to realise that his wages policy was not working; in fact, I do not know whether he realises it yet. The plain fact is that if the number of unemployed is far fewer than the number of unfilled vacancies the law of supply and demand takes over. It is worth having a wages policy, and at the margin it will work, but to think that it is possible to get away with it simply by saying that there is a wages policy when the over-demand for labour is so great is simply to say that the law of supply and demand must be suspended in your favour—and it will not be.

The extraordinary thing about the First Secretary is the way in which he goes on talking about Sweden—as if Sweden had been completely successful in these matters. He said, "I started twenty years later than Sweden, but I am catching up". He is too modest. He is doing much better than Sweden. Last year hourly wages there rose by 11.2 per cent. and the wages drift—and this is an interesting thing to note in respect of a country which has a supposedly sophisticated wages system—was 3.5 per cent. No wages policy ever works for any country —whether or not it claims to have such a policy—when there is an over-full demand for labour.

I want to return to the business of splitting the responsibility of the Treasury and dividing it between the Treasury and the Department of Economic Affairs. To his credit, before he took office the Chancellor said publicly that he thought that this was a mistake. That was the opinion of everybody who has ever studied the matter. In my first speech after the Labour Government took office I predicted that the Departments would quarrel. I said that I thought that the Treasury would win, but after a struggle which might be long, and I said that I thought the carnage resulting from that struggle might be terrible.

We have had the battle all right, but it is not over yet. By an act of supreme folly the Prime Minister did not accept the resignation of the First Secretary. It would have been far better for the country, for his own party, and for the future of the First Secretary had he done so. The battle continues. The right hon. Gentleman has not yet lost his Waterloo. As the great Duke said: Waterloo was a devilish fine-run thing. I would not say with absolute certainty that the Chancellor has won, but he looks to be winning at the moment. The carnage resulting from this delay, and also partly from the other delays and the splitting of the Treasury, has been terrible.

The National Plan has been vaporised. We shall now have to look forward to a long period of stop—the longest in our history. Above all, we must consider the position of our reserves. I wish that the Chancellor had said more about them. This is the weakness and the danger of our position. When the figures of our gold and convertible currency reserves were issued at the beginning of this month they showed reserves amounting to £1,170 million—but that was after bringing in our second line reserves; by that I mean the liquefied portion of Government holdings in dollar securities. We know that at the time £900 million of that was borrowed partly from the International Monetary Fund and partly from the Swiss, presumably on short-term. We also knew that further sums had been borrowed from the Federal Reserve Bank in New York and that the forward commitments of the Bank of England in buying sterling were very great. Since then there has been a very heavy drain on sterling, and I do not doubt that the Bank of England has had to buy a great deal of spot sterling, and borrow money to do it, and has also had to enter into very heavy commitments in forward sterling. This could mean that the whole of our published reserves represent borrowed money.

The point to get over, especially to those who talk a great deal about devaluation, is that if we devalue we must pay all that money back in gold at the new rate—that is to say, our debt expressed in sterling will be increased in proportion to the amount that we devalue.

But it does not stop there. We shall also have to repay at the new rate the remaining portion of the American and Canadian loans negotiated by hon. Members opposite after the war. Those loans illustrate what I mean. When originally negotiated they amounted approximately to £1,400 million. For twenty years we have been trying to pay them back. We have been paying off interest and principle for the whole of that period. As a result of the devaluation in 1949, however, we now owe not £1,400 million or less but £1,630 million. In spite of our twenty years' effort the debt has increased, and this could easily happen again in respect of any short-term debts.

When Sir Stafford Cripps devalued he said that he had to do so because it was essential to keep the minimum operable balance. We have not got a minimum operable balance now. That is the real danger. That is why this balance of any contingency plan is so dangerous and why the Prime Minister's visit to Moscow was a desperate mistake. It should never have taken place. I advise anyone who did not foresee the result of the visit to consult a doctor at once. There he was, causing the maximum pain, wiring back here to say that any Minister who did not agree would be sacked. Hard luck on them, because he himself did not know what his proposals were. First, the aeroplane was ordered and then postponed. All the time money was pouring out. Was his journey really necessary? I would say "No". But whether or not it was, it must have been the most expensive journey ever taken. It must have cost the reserves £100 million.

That having happened, at long last something had to be done. Whether it has been done at five minutes to twelve or five minutes past twelve, I do not know, but if we take all these measures together we see that they represent the greatest deflation that there has ever been in our history. Inevitably more measures had to be taken because they were dribbled out gradually. My right hon. Friend the Leader of the Opposition pointed out that on 23 different occasions the Government have issued new deflationary proposals. They have had 23 bites at the cherry, which is quite a lot.

It is worth comparing what the present Government have done with what Mr. Thorneycroft did in 1957. I was then at the Treasury. There was a run on the £, and my right hon. Friend put up Bank Rate to 7 per cent., made certain cuts in central and local government capital expenditure and put a ceiling on Bank advances—and that was all. There was no increase in taxation, no hire-purchase restrictions, no S.E.T., no increase in the tax on beer or tobacco, and the other awful horrors that we have had. It worked, because he had timed it right. He meant what he said, and everybody knew it—and he got away with it.

Instead of that, we have had to submit to all this business. Will it work? There will be a considerable internal deflation. It is difficult to predict whether it will work, simply because nobody knows what the buffoonery of the S.E.T. will bring about, but I expect that in time there will be a considerable deflation—quite possibly much too much. Will it save the £? I pray that it will. The danger which I see is that the wage freeze will break down before deflation starts to work. The only advice which one can give to the Government is that. when they involve themselves in wage claims, they should stand firm.

The second trouble is the freeze on prices. We have been given a great deal of information about how this curious package was arrived at. The Economist. in its leading article last week, said that the Government had been advised that they ought to freeze wages but not prices. The reason for that advice is the lesson which has been drawn from what has happened over the last 20 months, when wages have bounded ahead—that side of the policy has not worked—but prices have been restrained. The effect of this of course, is to add to inflation and to suck in imports still more.

The last danger, which is both a short-and a long-term one, is that the National Plan assumed a growth rate of 3.8 per cent. On that growth rate it based future plans for expenditure at 4¼ per cent. a year, which was a dangerous thing to do anyway. But of course the assumption of a 3.8 per cent. growth rate was wholly and completely unrealistic. That has gone with the wind, but the expenditure has not. If we go on spending as we are doing now, the effect will be that expenditure as a percentage of national income will rise very sharply—that is inflationary in itself—and something will have to go. What will go, of course, is productive investment.

I now turn to what I think ought to be done. People very often ask what we think ought to be done and there is always the temptation to give much the same answer as the yokel gave when he was asked by a motorist the way to London. He said," If you want to get to London, you don't rightly want to start from here." We do not want to start from here, but we are here. I will try to say what has to be done.

First, on expenditure. It is absolutely essential to get expenditure under control. What sort of approach to getting expenditure under control is likely to be most profitable? I believe that it is the one put forward by my right hon. Friend the Leader of the Opposition at the last election. It is the idea that people should pay a little for what they get. In the social services, we should use our scarce resources where they are most needed. Let me give two examples.

One is the prescription charges. Probably the bill for prescriptions is £50 million a year higher than it would have been if the charges had not been taken off. Of course, pensioners, the chronic sick and those who cannot pay anyway must be helped and must get their prescriptions free. But does anyone seriously maintain that the average family in this country, with a car and a television set, cannot afford the occasional prescription charge? Of course they can. What could be madder than these priorities? The whole hospital service has been ground down. Hospitals desperately need new operating theatres. They cannot get them, yet £50 million in medicine is being poured down people's throats.

The other example is that of school milk and meals, and the grant in aid of £85 million and a lot more expenditure by local authorities, which is planned, under the National Plan, to increase to £100 million at 1964 prices in 1970. Again, of course, people who cannot pay for their children's meals must be helped as they are now, but does it make sense to say that the vast majority of people cannot pay for their children's meals? Is it right to pay out all this money while cutting down on the building of technical schools? The priorities are mad.

Another illustration, not in the social services, of getting people to pay something for what they get, is that of motorways. We know that the road programme is to be cut down, but we desperately need more roads. Why can we not have tolls on motorways? There are tolls on the Forth Bridge and there will be tolls on the Severn Bridge, and if people do not want to pay the toll they can go along the old way. We will get money by this approach to the problem.

It is essential to get expenditure down in one way or another. I do not believe that anyone really thinks that we get the best out of the people of this country with direct taxation as high as it now is. It works through the whole level. While dealing with expenditure, we must have a shift away from taxes on earnings towards taxes on spendings. We have had S.E.T., and if it had not been quite so dottily arranged I should have approved it. I should have approved a straight payroll tax universally applied at a low rate. The present lax is absolutely absurd.

Does anyone believe that we shall get an efficient economy, without some competition? We do not get it in this overstrained economy. What is the Government's contribution? To end all competition in steel. This is the maddest possible business—[Interruption.] The right hon. Gentleman ought to read the speech which the right hon. Member for Vauxhall (Mr. Strauss) made last night, in which he pointed out exactly what had happened about competition in the steel industry. He ought to know something about the matter, but I hardly think that the Chief Secretary does.

There must be some competition. Does anyone believe that we shall get the economy right with the trade unions in their present hopeless state? We were delighted to hear from the Prime Minister that the T.U.C. has supplied its evidence to the Royal Commission after fifteen months. That shows great drive and urgency. However, a little more is needed in order to legislate on the general lines which we suggest.

What have the Government done about restrictive practices? Every time the Prime Minister goes to a trade union conference he says, with that vivid gift of phrase which we all so much admire, "Tear up your rulebooks!", and, of course, nobody bats an eyelid. There are two things which we can do about restrictive practices. They could be examined by industrial courts in the full light of publicity, but one never gets rid of restrictive practices when there is a wage freeze. No one will sell his rulebook for nothing. They never have. That is why I think that this wage freeze is ill-conceived.

I have given a few suggestions to the right hon. Gentleman about how he ought to behave. I doubt whether he will take them, however. We cannot simply pack up. Our difficulties are fundamentally marginal, but we have allowed ourselves to drift into a very dangerous situation. Can we not pull ourselves together and be more sensible in ways which make economic sense? The Government have thrown so many things overboard, that it is possible to entertain a faint hope that they may one day deviate into sense. Alas, it is only a faint hope.

6.49 p.m.

Mr. Stanley Orme (Salford, West)

The House will not expect me to try to follow the arguments of the right hon. Member for Flint, West (Mr. Birch), particularly when some of his basic solutions are to put back prescription charges and to remove the cost of school meals from the Exchequer. If this is the type of solution which the Conservatives offer, it is not the solution which we on this side will propose. I listened with great interest to the Leader of the Opposition's analysis of the present crisis. When he came to his remedies—of which he had none—we saw that they were Tory packages rolled up again in "if's" and "but's". I am convinced that the House was not very interested in them.

We must look at the present position and we must break the boundaries within which we are now looking at this crisis. Within these boundaries, we are limited to the measures and the remedies which we can take. My hon. Friend the Member for Salford, East (Mr. Frank Allaun) spoke about Britain's role in the world, particularly from the military point of view. This is certainly one sphere in which the present boundary must be broken, I hope by a Labour Government. The present position is absolutely ludicrous, for, on the one hand, we are not able to balance our payments, while on the other, we are trying to maintain a world role, with bases and forces east of Suez and in Western Germany. It is only a myth to suggest that Britain has such a world role to play or that, because of our present role, we are listened to in the councils of the world. While this is happening, the foreign bankers are dictating our domestic policy to us.

I say with sincerity to the Government that unless we are prepared to break these boundaries and initiate fresh thinking and policies, particularly in the military sphere, the present economic crisis will only lead to further crises. A change in our attitude is vital and our basic problem is, of course, the balance of payments. the gap between success and failure is very narrow.

However, anybody listening to some of the tales of woe, particularly those told by hon. Gentlemen opposite—about Britain not producing the necessary goods, not moving forward economically and not trying to meet its industrial problems—should recognise those statements for what they are. They are not true. Last year, we produced more in goods—I am not speaking about monetary totals—than we ever produced before. As my right hon. Friend the Chancellor pointed out, productivity has risen by 31 per cent. in recent months, although this increase has been hidden or absorbed by external costs; overseas expenditure and higher prices of imports.

Britain is not in the doldrums. The balance of payments has hardened at about £350 million to £400 million in recent times and it appears that the foreign bankers are not prepared to underwrite that sum. It is about time that we in this country accepted the realities of the situation, got these people off our backs—particularly some hon. Gentlemen opposite, who speak in grandoise terms about Britain's world role—and stood on our own feet. We can do that only if we change our present policies.

I suggest to the Government that it is rather late to start blaming the seamen's strike for our present difficulties. Many of my hon. Friends and I counselled how the seamen's controversy could have been avoided at an early stage. We were told that, by some means, the strike would show the foreign bankers could have confidence in us and that we were standing up for the prices and incomes policy. It was inferred, when my right hon. Friend the Member for Nuneaton (Mr. Cousins) resigned, that that, too, would result in confidence being shown in the Government because they were being firm about the prices and incomes policy.

In fact, the reverse has been the result. Recent policies in this matter have had an absolutely catastrophic effect and we have paid a dear price for the weeks of the seamen's strike, a strike which legitimately and honestly could have been settled very early on, in the interests of the seamen, for we might easily have granted their just demands at the time when they were made.

I wish to speak, as a trade unionist, about the important issue of productivity. A lot of nonsense is talked about the subject and it is said that there is a feeling abroad that increased productivity can be obtained only by manufacturing industry. This is not so. Increased productivity can be obtained in many ways, and even this place could do with a bit of examination from the productivity point of view.

Mr. Frank Allaun

What about a time and motion study?

Mr. Orme

It might produce some illuminating results.

Whatever hon. Gentlemen opposite say about liner trains, they must bear in mind the recent London bus agreement and the increased productivity that has been obtained on the railways ; for example, the extension of electrification that is taking place. A smaller labour force is producing this increased produc- tivity and these men are proud of the technological achievements which they are making.

Sir A. V. Harvey

Would the hon. Gentleman admit that the electrification of the railways that has taken place in the North of England was put in hand during the Conservative Government's period of office?

Mr. Orme

I know the facts, but I am endeavouring not to make this a political issue. I am dealing with the productivity aspect of the matter and the hon. Gentleman will, in any case, agree that this electrification was long overdue.

Increased productivity has also taken place in, for example, the hospital service. Maintenance workers in the service are attempting to negotiate a productivity agreement with the Ministry of Health. The mining industry has also shown what increased productivity means and the cooperation of the miners has led to the introduction of machinery and new technology which has resulted in great productivity increases being made, with half the industry's labour force. Credit is due to the miners for the co-operation they have given.

I have sought to show that productivity is something that goes right across the board and that it is not something that can be achieved merely by exhortation. It must be related to facts and wages. A high-wage economy, linked to high productivity, gives the economy the independence we need. How do the Government expect to obtain higher productivity with a wage freeze and a deflationary policy which will create unemployment and short time working? How do they expect workers to throw over what are sometimes called—by people who do not understand the facts—restrictive practices which have been built up over many years to protect workers who fear unemployment and short time working? If those very circumstances are created, how can the Government expect workers to give up processes which they have built up and supported for many years?

I fear that the present policy will hamper our aim to increase productivity. My right hon. Friend the Member for Nuneaton gave the best exposition that has so far been given in the House of this issue. He showed that he understands what increased productivity means. He knows what makes workers tick and what motivates them. It is a pity that we have not been following some of the policies which he has been advocating. I would like to see the Government establish a "Ministry of Productivity", so that this issue was not dispersed among many Departments. Increased productivity will not be obtained merely by discussing the matter at trade union annual conferences. Only on the shop floor will this and similar issues be resolved.

I have been gathering some facts about previous wage freezes. I do not wish to make comparisons between the Thorneycroft freeze of 1957 and the Selwyn Lloyd freeze of 1961. Comparisons of this sort are usually made by hon. Gentlemen opposite when they cannot give a better answer. I am more interested in how the Government can tackle these problems—and to find a solution we must go back to the Cripps era of the late 'forties and early 'fifties. At that time I had not long been back from the Royal Air Force. I was back in industry again and working in engineering as a shop steward.

The bitterness created over that wage freeze permeated right through into the middle of the 1950s, because of its unfairness among working people that has not yet been eradicated. It is obvious that another wage freeze at the present time will not work fairly. It will work unevenly.

Let us look at the matter in some detail. The workers in the public sector will be the first affected, those workers whose purse strings are controlled by the Treasury. The railwaymen, the firemen, the policemen, and the National Health Service workers, all these workers who, at the moment, have wage claims in the pipeline, are now at the mercy of the wage freeze. They will either have it thrust upon them and have to accept it, or there will be exceptions which will create bitterness amongst other sections that are excluded—all this when we are trying to create an era of productivity and increased production.

What about the workers in the private sector? Because of the deflation and temporary and other unemployment and short-time working that will be created, some will not get any increases, but other workers in the parts of industry which will still be working full time will be able at least to fight for increases or maintain the present position inside their industry.

What about the salaried workers in many of the large industries who have built-in escalation clauses for yearly increases? Will they be excluded? What about the self-employed and people in all types of professions? How can one legislate against all these sections? One cannot, and this is where the unfairness comes in. It falls on the unorganised workers, because they are the people who can be tackled in large groups and are in easily recognisable sectors. Millions of other workers can escape through a loophole in the policy. That is absolutely monstrous.

Mr. Eric Lubbock (Orpington)

Would not the hon. Gentleman agree that one loophole which no wages policy can stop up is the worker paid by results, the worker in engineering on piece work who can earn more by his own efforts?

Mr. Orme

This is, again, a question of productivity negotiated at the point of production. In the classic phrase, this is where the "wage drift" comes from. But it is not wage drift. Such earnings are negotiated with productivity in mind. I have negotiated thousands of such agreements as a shop steward, and one does not get productivity bonuses just for snapping one's fingers. It is necessary to get production to get productivity bonuses. In consequence, workers can still fight for this, although the squeeze goes on and they therefore find it harder than previously.

Alongside this question, there is the question of rents and mortgages. When I went home last weekend the first question that I was asked by a person who is just buying a house was, "Will our mortgages be frozen as well?". And what about council house rents? If the cost of these vital things continues to increase when a worker is on a frozen wage, perhaps with his overtime cut, he is put in an almost intolerable position. As a result, workers will have to take the only action open to them to try to improve their conditions. This will not help to achieve the production and productivity that is required.

Then there is the question of prices. I noticed on the very day after the Prime Minister's statement that the prices of important foodstuffs were increased by some of our very loyal firms. This is an example of what happens when there is appeal for restraint on prices, and similarly in relation to dividends.

This is the issue that broke the freeze of the Cripps period. We had a wage freeze which was imposed for certain sectors and an appeal for price and dividend restraint. Dividends were not paid out at the time, but were paid out at a later date. These things are not overlooked by people in industry. If a man does not get a wage increase, if it is put off for six or 12 months, he never gets it. It is an anachronism that the very opposite should happen in relation to capital.

This brings me to the Prices and Incomes Bill. It was not relevant before, and I fail to see its relevance now. When we were involved in negotiations on prices and incomes and I met my right hon. Friend to discuss the whole question who were told that the Bill would work voluntarily. Then it was found that it could not work voluntarily, the punitive provisions were put in, particularly those in relation to the trade union movement to which my hon. Friends and I objected, and we were told that that would he sufficient, and that it would need an Order, passed by both Houses of Parliament, to bring Part II into operation.

We were then told last week by the Prime Minister not only that the Bill will be rushed through, but that at the same time further Clauses will be put in, and the Bill will be made far stronger than we ever expected when it was first produced. This was done before the ink was hardly dry on our decision to give the Bill a Second Reading.

The issue of the Bill is of grave concern among industrial workers throughout the country. It affects every one of us. I am in favour of a prices and incomes policy, and I make no bones about it. But it must be a policy that is fair and works right across the board, and it should not have punitive provisions.

We shall not achieve it by coercion. We shall not get workers producing and working for the type of society we want by coercion. Other ways must be found of doing it. The way of coercion will lead to real difficulty. The Prices and Incomes Bill is not relevant to our present situation, and should be withdrawn.

I come now to some alternative suggestions that my hon. Friends and I feel should be undertaken by the Government at the present time. I shall leave the Opposition behind me on these issues, because we feel we have some basic alternative proposals to solve the problems facing us. When all else has failed, the Government might try some Socialism. The people expect a Labour Government to practise Socialism, and if we do not introduce some Socialist measures but introduce the classic capitalist attempted solution they will feel that we have no real solutions of our own.

If the solution means that we cannot maintain full employment in a full employment economy, with a shortage of skilled labour, then the mixed economy upon which we are living and working cannot be made to work under those conditions. The Opposition admitted that they cannot make it work, because the Leader of the Opposition has said this afternoon that he welcomes the wage freeze and recognises that there must be unemployment. We do not accept either of those premises. We feel that there are other ways of tackling the problem, apart from productivity, which I have already dealt with.

When the Chancellor is stuck—this has happened to other Chancellors on the other side of the House—and he wants to take drastic measures to save the economy, where does he turn first? He turns to the public sector. To the credit of the Government, they have not cut expenditure on housing, schools and hospitals, and we are glad to accept that. It is the difference between what this Government are doing and the Selwyn Lloyd freeze. But massive reductions in public expenditure on electricity, on roads, on local government projects have been made.

If the Chancellor turns first to the public sector, which is only 20 per cent. of our economy now, how much better it would be if he could turn to that sector and it was 50 or 60 per cent. of the economy. [Interruption.] I know that hon. Members opposite will not like this, but they will have to listen. If the Chancellor controlled that sector and could turn to it in such circumstances as these, with that much of the direction of the economy in his hands he would have the fiscal and physical means open to him to do a great deal.

It is for this reason that I consider that the time has come not only for the steel industry, on which we voted yesterday, but for others of our basic industries to be brought under public control. I add to that that banking and insurance, also, should be very carefully considered with the same end in view.

Mr. J. Bruce-Gardyne (South Angus)

Is the hon. Gentleman suggesting that the case for extending public ownership is based on enabling the Chancellor to wield his axe yet more extensively so that we have a still more extensive recession than we shall have now?

Mr. Orme

I was arguing that the Chancellor should have more control over the economy. It is the private sector which he cannot control and which gets up to its devious means of avoidance and every other device. It is that sector which gives the trouble, and it is that sector which must be faced. If the Chancellor were able to control it as I suggest, he would be able to plan ahead and avoid the pitfalls into which we have now fallen.

My hon. Friends and I who signed the statement issued last night, and many of those who signed the letter to The Times last Saturday, have set out a number of proposals which we feel the Government should take in trying to avoid or overcome the problems now facing us. I accept what the Chancellor said about unemployment, and I know that there is no one on this side of the House who would ever wish to see it or create it if he could possibly avoid it. This goes right through the Labour movement. It is a very emotive subject for us and one on which we feel exceedingly deeply. Therefore, to my way of thinking, it is not enough to talk of spreading unemployment about. We must think of preventing it altogether.

One family with an unemployed father, one unemployed mother, a widow who is finding it exceedingly difficult to get other employment in present circumstances, one elderly worker unemployed at 50 or 55—these are the people we should be thinking about. It is not easy to retrain them, with the best will in the world. There may not be the type of jobs available for which they can be retrained. Unemployment destroys human dignity, and the destruction of the dignity of one individual is enough for me. I was brought up and suffered in the late 1920s and the 1930s, and I do not want those times to come back. This is why the people look to a Labour Government to maintain full employment, and this is why we are pressing the Government so hard to take alternative measures.

In my view, the Chancellor of the Exchequer did not give a satisfactory answer on the question of selective import controls. He spoke of our E.F.T.A. agreements, but it is well known that if Britain commits any error under the E.F.T.A. agreements all the E.F.T.A. countries fall on us, but the E.F.T.A. countries take liberties weekly and monthly in relation to our position.

The Minister of State for Economic Affairs (Mr. Austen Albu) indicated dissent.

Mr. Orme

My hon. Friend shakes his head, but that is true.

We must take selective import controls and use them as a basic measure. It seems ludicrous to people outside the House that "one-armed bandits" and all manner of such things associated with what my right hon. Friend the Prime Minister once called the candyfloss society should come flowing in. There is no reason for it. There are many necessary commodities, wood frames and the like, which we could make in this country which are coming in from abroad, from Sweden and elsewhere, the import of which should at least temporarily be stopped.

Next, the question of the export of capital, particularly in investment in highly developed areas. The Chancellor dealt with this as one of the themes of the measures he is taking. The flow of capital in recent months and years into, for example, Australia and New Zealand is something of an eye-opener to us. This avenue, particularly in the sterling area, should be most closely examined. Indeed, my hon. Friends and I feel that the whole idea of Britain being a sterling banker should be closely re-examined. The concept of the £ looking the dollar in the face is a bit jingoistic, like the east of Suez policy.

In my opinion, we are trying to maintain for Britain a world role which no longer exists. We have a very important part to play in the world. We are a nation of highly skilled and highly developed people who can produce the goods and commodities which the world wants. We can virtually be a power house and a tool room, but we must get our priorities right, and one of them is not to masquerade about the world in the uniform of the 19th century.

We are now in the latter half of the 20th century, and we are running about, trying to keep up with ourselves, to impress people who are no longer inclined to be impressed. To be a world Power we must be a world economic Power, playing our part in the United Nations and elsewhere. I believe that we shall be listened to in the councils of the world because Britain has much to contribute. But the days of flag waving and jingoistic attitudes are over.

My Hon. Friends and I are putting forward these alternatives, and others, to the Government because we want the Labour Government to succeed, because for most of our lives we have worked and fought for a Labour Government, and we do not want to see them go down tied to the Conservative policies of the past. We believe that there are alternatives—I have tried to outline some—and we believe that, if the Government will listen to what we say and implement some of our proposals, changing the way in which the economic and political director is pointing at present, Britain will still have a part to play.

We can still maintain full employment at home. We can have an expanding economy and we can have our social services. But we shall not do it by regressive deflation, wage freeze and unemployment.

7.19 p.m.

Mr. Hugh Fraser (Stafford and Stone)

The hon. Member for Salford, West (Mr. Orme) has made a powerful contribution and shown the House some of the problems which exist within the Government and the Labour Party. I shall discuss some of the possibilities which are open to us today, but, before doing that, I wish to emphasise how serious our present situation is.

It is now 21 years since the end of the last war, and since then we have had no fewer than 11 sterling crises. What is alarming, and becoming more alarming, is the increase in the rate of spasm of these sterling contortions. Over the past 11 years they have been falling at an average rate of about one every three years, and they are now falling at the rate of one every seven months.

The other alarming thing is the amount of support that sterling has had to attract to keep it in position during the last 21 months or so, and the cost of that operation, which is rising. That must fill us all with some alarm as we are about to embark on the Summer Recess. I have considerable alarm when I look to the autumn, when we have the normal strains coming on sterling, when, in November, the surcharge goes and, further, when in the fairly near future the strains on the gold exchange standard to which the Prime Minister referred yesterday will clearly increase.

When we have Mr. Rueff, of France, and Mr. Triffin, who stands such extreme trials in the liquidity argument, agreeing on the dangers of the stresses on the gold exchange standard, it is time that those sitting on the Treasury Bench fastened their safety belts, or, at least, started something effective.

The problem here at home can be expressed in comparatively simple phrases. Ever since I can remember, and certainly ever since the party opposite has been in office, nearly every person in the country has, in spite of a mounting sterling crisis, improved his standard of living. That is an irrefutable fact. Another very simple fact is that, in spite of the export boost, exports have not risen to a point that meets our imports or our commitments overseas.

Those are the two basic problems of our economy, and I feel sure that throughout the House and the country there is a feeling that the lack of resolution of these problems has gone on for far too long under both our Government and the Government of the party opposite. Everyone now feels that, in this respect, enough is more than enough, and that we must resolve the problem. This problem has to be resolved now by a Socialist Government which, for good or ill—my personal belief is that it is for ill—are in office, but it is a difficult problem to resolve, especially now.

There are three possibilities now open to a Socialist Government. First of all, there is what I am sure the hon. Member for Salford, West would agree with me should be called a Schachtian Socialist system, a dirigiste system of government. The second is the deflationary package which the official Government have put forward. Thirdly, there is the possibility that ought now to be discussed here—we have discussed massive unemployment and we must get rid of many secret and sacred cows—of devaluation of the £.

This latter possibility is discussed in every market place and in every newspaper. Right hon. and hon. Gentlemen on both Front Benches have their lips properly sealed on the issue, but it is a subject that this House of Commons must discuss, because this debate is not about an abstraction, but about sterling, and the part it has to play in the world. It behaves us to speak on this subject, not representing our party, or our connections in the City, or anything else, but speaking as Members of Parliament, believing that what we say is in the country's best interests.

There is always another alternative open to hon and right hon. Members opposite, and that is that "Chairman Shinwell" should take them all and jump in the river, which seems to be the fashionable thing to do. However, perhaps we can leave that.

Let us now look at the three possibilities open to the Government today. First there is the Schachtian plan. The trouble with Schacht now is that he is not in the group of 20, 30 or 40 hon. Members opposite. I cannot see him present there, nor can I see Hitler, who was necessary to make Schacht effective. I think that the danger of those proposals, apart from the fact that they are personally repugnant to me, is that they are unworkable and reduce the standard of living.

Much has already been said about the Prime Minister's plan, on which I have only few comments to make. According to the Prime Minister, one of the real causes of spasm in the exchanges was the seamen's strike. If that statement be true, the power that the Prime Minister and the Government can exercise over further strikes is negligible. That was one of the most foolish remarks that could be made by a Prime Minister at the very moment when he was saying, "I will put teeth into the Prices and Incomes Bill." One strike, and sterling is off course. It is a most extraordinary statement.

I agree with the hon. Member for Salford, West that this wage freeze is unworkable. The reasons he adduced could scarcely be improved on. It will not work, it will be unpopular, and it will lead to grievances. More fundamentally, I believe that a purely deflationary solution is not the solution we should seek at the moment. Of course, there should be an element of deflation. Of course, it is absurd that the number of vacancies should be greater than the number of people available to fill them. Of course there have been errors in industrial relations, but I do not believe that this type of deflation proposed will be effective.

My right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd), when Chancellor of the Exchequer, imposed a deflation totalling about £250 million. The package now put forward by the Government totals rather more than three times that amount. Our two main tasks are to reduce internal spending and improve exports but the type of deflation now proposed tends to put up export unit costs. That has always been the case in the past—the unit cost of exports has gone up. Far worse than this, the effect of a deflation of this character and size is on public and private investment, which will be put back for 24 months.

It will do no lasting good, because the moment will come when the brakes are released and we are faced with precisely the same problem as before with more antiquated equipment, equipment that has not been kept up. At that moment, we shall have the old stop-go cycle starting again. I do not believe that is any more good enough. Imports are checked, but wage claims pile up whether under a freeze or deflation. If we look at the graph of wage claims during various periods of deflation, we see that they do not diminish but mount at almost precisely the same rate as previously. Then we get a release of the brake, people flood in with demands and we are again in a balance of payments problem. That is what we have seen.

Another thing which is frightening about this policy, and frightening for industrialists who hoped that things were now to go ahead, is that there is now no light at the end of the passage. The Prime Minister is buying time, as the Leader of the Liberal Party said. The public are "fed up" with politicians buying time and especially with people buying time to put that time to little good purpose. Deflation, like patriotism —they often seem mixed together—is not enough.

I want to say a few words about the issue of devaluation. I think it only proper that this should be discussed in this House. It is only proper that we should look at it for a few moments. Parity is what we are discussing. There is nothing to my mind particularly sacred about parity, that is to say, the level at which any currency is kept. The purpose of the parity of the £ is to serve the people of a country and to be worked in their interests. It is a line which is drawn and a line which in this country in my lifetime of nearly 50 years has changed no fewer than five times. There was a change in 1920, a change in 1925, a change in 1931, a change in 1940 and a change in 1949.

Those who think that it is almost sacrilegious to mention the actual value of the £ are in grave error. It has changed and undoubtedly it will have to change again. The question we have to decide —or rather to ask ourselves, not to decide, that is for the Government—is whether variation in the rate at this stage would be of advantage or disadvantage to our country. My right hon. Friend, in one of his more brilliant excellent speeches, pointed out one of the major disadvantages at: his stage which is having to pay back the money and increase prices, to go to those to whom we owe debts throughout the world. That is a very major factor.

On the two questions to which I referred at the beginning of my speech, which are root questions to our economy today—the questions of exports and of the standard of living we enjoy here—there must be considerable advantages in a devaluation of a controlled sort. It is no good hon. Members on either side of the House saying that the way to improve exports is to cut down home production to make more room for exports. I am in exports to a certain extent and I know that the way to increase them is profit and the margin of profit today is far too low. There is no money in it. The way to make exporting attractive is to make a slight variation in the rate of exchange.

In this country, when we talk about a wage freeze it applies to only 40 per cent. of the people. It is unfair that under 40 per cent. should be so struck. When we get a reduction in the purchasing power of money overseas we get a reduction instinctively and automatically in the level of the standard of living at home. I believe that this is needed today and it is done across the board. Of course, there are problems with other countries. Of course, the question of devaluation might set off a series of other devaluations throughout the world, but of one thing I am certain. We have to have a £ which is strong and a £ which is strong is not the sort of £ the Prime Minister seems to see, a £ which is upright, arid and virginal, a sort of moon goddess sometimes at 2.82 and sometimes a little slumped at 2.78. His relationship with the £ is rather like the relationship of a Prime Minister to Queen Victoria. She was rather ratty.

My idea of a £ is that of a handmaiden of the people, a bit of a slut, a girl I want everyone in the world to love. If they do not love her we have got to change her. The £ has nothing to do with the Union Jack; the £ is something which we exchange throughout the world. The only way to exchange it throughout the world is to make it attractive and rather slightly under-valued with a great strong economy behind it. For far too long hon. Members on both sides of the House of Commons have attacked, whether it be management or trade unions, generals or the Civil Service, and far too long this House itself has failed to take a lead.

7.38 p.m.

Mr. Robert Sheldon (Ashton-under Lyne)

The right hon. Member for Stafford and Stone (Mr. Fraser) always impresses us with his sincerity and his understanding of many of the problems facing us today, but when he talked about his desire to see the £ as a slut I think perhaps what he meant was his desire to see the £ as a whore loved and taken by everyone.

This may well be the situation that many hon. Members would like, but I would not go into it further at this stage. What I looked for in the economic measures announced by the Prime Minister on Wednesday last week was the long-term reassessment which I hoped might have been made by a Government coming into office with a long period ahead of it. I found great disappointment in that we did not have this kind of reassessment which the people of this country understood would be one of the consequences of a Government with a large majority, with a mandate to govern, with a mandate to take some necessary measures, many of which would be unpopular.

Because of this I regret, as many hon. Members will also regret, the expedients which were necessary to get us out of our immediate difficulties without at the same time touching upon some of the long term aims. If there is any time at which we can take the fundamental measures required to put the economy right it is now. There have been very few times in the last dozen years when these kind of measures could have been put. This year was one of those times. It is a pity that at the same time we still await the Third Reading of the Finance Bill, for so many of the measures in that Bill appear less relevant now than when it was introduced.

The causes of our economic difficulties go back a long way. One of the most important is the decline in exports to the Commonwealth. In the years 1950 to 1959, exports to the Commonwealth and the sterling area averaged 48 per cent. of the whole of our exports. Since 1960, they have never been over 40 per cent. and last year dropped to only 35 per cent. That drop represents about £600 million worth of exports to markets we had previously enjoyed.

This is one of the fundamental problems that we must overcome and it is largely due to the fact that imports into Commonwealth countries were biased in favour of British manufacturers, mainly because we had considerable control over their tariffs. Frequently, too, we had some control of their economies so that we were able to arrange favourable trade agreements which helped our exports. Finally, many of those who made the purchasing decisions in these countries were filled by people favourably inclined to Britain, for many of them had come from here. All these factors are indefinable. Some of them exist no longer and in some places have been replaced by an anti-colonialist sentiment. Commonwealth trade as a whole is increasing but we are not getting the benefit of the increase. Although our exports to other countries have been increasing, this by no means counters the massive drop in Commonwealth trade, which was a traditional source of our prosperity. That is the first of the long-term causes of our economic difficulties.

The second cause, to which attention was drawn by my hon. Friend the Member for Salford, East (Mr. Frank Allaun) is the level of Government expenditure overseas. Last year, this was £454 million net and it must be remembered that this is paid for fundamentally by exports. The Government spends overseas about 9 per cent. of what we as a country earn in exports. Before the war the average was 1½ per cent. From 1932 to 1938 we spent £6 million in Government expenditure a year out of exports of £800 million. The peak year was 1938 when the figure rose to £13 million, which was 1½ per cent. The second cause then of our post-war economic difficulties is that, pre-war, we spent 1½ per cent. of our exports on Government expenditure overseas and this has risen to 9 per cent. in the post-war years.

The long-term solution lies, obviously, in more exports, but the immediate solutions must be considered. They are all unpalatable. The first is heavy and prolonged deflation. The second is devaluation with short sharp deflation. The third is import controls. The fourth is defence cuts, in particular east of Suez.

I also mention, for the record, the possibility of an incomes policy not because I place much credence in it but because, having failed with the other options, unfortunately there are many people who feel that our economic salvation still lies there. For my part I would accept that an incomes policy, if it were to reduce inflation by a ½per cent. or 1 per cent., would be worth having. But we must not make the mistake of assuming that it can solve our economic difficulties. It can help on the margin and that is not to be scorned, but it is not by any means central to our economic difficulties. It does not provide the central solution.

The first of the real alternatives is heavy and prolonged deflation, which is before us now. First, we have unemployment, which may be even more massive than we have heard so far because, if deflation is to work properly, unemployment must be massive. If we do not get unemployment, it is a sign that the deflation is not working. But unemployment, as my hon. Friend the Member for Salford, East mentioned, would lead to an increase in restrictive practices and to a lack of co-operation in industry.

The advantage of this kind of deflation is that so much foreign exchange is not requires: to pay for the imports to be consumed by the unemployed. They produce nothing themselves but neither do they consume so many imports.

The third result of unemployment is that wage rises become less frequent, prices do not rise so fast and we become more competitive overseas. But coupled with this is the massive disadvantage of a down-turn in investment. Despite the investment grants, fundamentally investment only takes place when the manufacturer can see a chance of selling his product and unless he does see that he will not invest, certainly not at a time of prolonged and heavy deflation.

That investment is lost for all time We lose its production and the growth which comes from it—and thereby the only chance of a real solution to our economic difficulties. The other result of heavy and prolonged deflation is that exports are likely to increase as manufacturers find little other outlet for their pods at home, but that is a crude way to improve exports.

It is reckoned—although it is rough arithmetic—that £30,000 million of the gross domestic product is equivalent to £5,000 million gross imports, which gives a ratio of about 6 to 1 between produc- tion and imports. So, for £1,000 million of deflation, there is a reduction of £200 million in imports. If one regards that figure as the goal, one deflates by £1,000 million.

If this deflation is not enough, foreign traders and bankers are not likely to be satisfied. If it is truly deflationary, we shall get all the evils I have mentioned, but probably exaggerated. My fear is that we may fall between the two—that we shall not be deflationary enough to satisfy the foreign bankers and traders while being too deflationary to allow growth, even a limited growth, to proceed.

The other course, also mentioned by the right hon. Member for Stafford and Stone, is devaluation, but I would couple with it short sharp deflation, which is a necessary accompaniment. We did not devalue in 1964 and I supported the Government in their refusal to do so because of the lack of capacity in the economy at the time. Had devaluation taken place then, we could not have been sure that we would have got the exports from those factories which had not capacity sufficient to increase their exports. If at the same time imports had remained high, we would have had no benefit from devaluation. But if one deflates at the same time, one hardens the home market, restricts it, and moves labour into factories where it is needed. As a consequence, capacity becomes available because of lack of home demand and one is able to make use of it and so export with the price advantage that devaluation brings in its train.

Mr. Gwilym Roberts (Bedfordshire South)

Would not my hon. Friend agree with me that both he and the right hon. Member for Stafford and Stone (Mr. Hugh Fraser) tend to neglect the one great disadvantage which occurs with devaluation, which is the automatic rise in the cost of units of production in terms of the higher cost of imports and in terms of the pressures for high labour costs and so on which follow such a move automatically and which are far greater than any retaliatory effects?

Mr. Sheldon

Imports which come in also go out in the form of finished manufactures and of course devaluation plays no part in that, but the other consequence of devaluation must be a short sharp deflation to limit imports, which in any case would be limited because of price rises consequent upon devaluation.

But these arguments about devaluation tend to be a little academic. As we now know, the arguments are not economic, but rest very largely on the political reputations of those people who have committed themselves to this solution, and that must always be allowed for.

The third of the alternatives is the introduction of import quotas. The advantage about import quotas is that for the first time a measure of certainty is introduced into the balance of payments equation. One acts directly upon the balance of payments and one can tell in advance exactly what the level of imports will be and can determine with some assurance the balance of trade in advance.

The difficulty of this alternative is in its working. I have sold to countries overseas when they have slapped on import quotas and the result to international trade has been confusion. But other countries have used them to great effect. We are denying them to ourselves when we have difficulties much greater than those of many other countries which have employed them in the past. They are difficult to work and I do not accept them easily. I suggest them as an alternative only because I am convinced that the other alternatives are even worse. As I said at the beginning, we must all look at these problems not to find ideal solutions but to find solutions which must be acceptable if we are to get our balance of payments right.

E.F.T.A. and G.A.T.T. allow import quotas, admittedly under duress. Manufactured goods imports amount to more than £1,000 million and we could obtain about £150 million from that and about £30 million from machinery and transport and probably £50 million from miscellaneous manufactured articles. The import savings would then give us roughly the figures required, which most hon. Members would accept as being about £200 million, or £250 million, or £300 million.

The fourth of the solutions for our economic difficulties lies in defence cuts and in particular those east of Suez. Total expenditure at the moment is about £293 million in foreign exchange and a total of about £605 million. What concerns me most is that the icy blasts which are blowing throughout our economic structure do not seem to blow quite so closely or quite so icily on defence expenditure, to which we should turn for some savings.

The four alternatives which I have mentioned—heavy prolonged deflation, devaluation coupled with short sharp deflation, import quotas and defence cuts, in particular east of Suez—are all unpleasant, but we have to take our choice among these four. The trouble is that these options which should have been open to us have been closed because the reputations of so many rest on their remaining closed. In the months to come our task must be to start reopening some of these options which have been closed a little too early. It is time to get our priorities right and our priority is not to preserve the stands taken by individual Ministers.

It is not the maintaining of an overvalued currency and still less the supporting of military postures with money which we do not have. Our priority must be economic growth and must be industrial expansion and it is to those objectives we should now turn.

7.55 p.m.

Sir Arthur Vere Harvey (Macclesfield)

I am sure that the whole House will have listened with interest to the speech of the hon. Member for Ashton-under-Lyne (Mr. Sheldon) who spoke with great sincerity. I was impressed with that part of his speech which referred to loss of exports to the Commonwealth. I have studied certain aspects of this matter. Some years ago I was in Australia, trying to sell British aircraft. Of course, I did not succeed—although I got very near it.

The fact is that, apart from a few small aircraft, not a British aircraft has been sold in Australia since the days of the Viscount, 12 years ago. Yet the Australians expect to sell us their goods, as do the New Zealanders. The Canadian market is dominated by the United States. It is said that we should reverse that trend, but the Australians are now trading with Japan and also with the United States, to a great extent.

The salvation of this country, of course, is Europe. I was against going into Europe a few years ago, but I have come round completely and I now believe that Britain has to face up to going into Europe.

Mr. Lubbock

I am sure that the hon. Gentleman is right about the sale of airliners, but am I not equally right in saying that the Beagle 206 has been sold in Australia?

Sir A. V. Harvey

But not a major aircraft. The Beagle is a small, executive aircraft costing £15,000 or £20,000, and I was talking about fighters and bombers and large airline aircraft. I think that I am accurate in saying that none has been sold, which is deplorable.

The answer is to consider going into Europe, yet 80 hon. Members opposite have signed a Motion against our doing so. The Government and the Labour Party as a whole have to face up to this issue of what they are to do about Europe, because we are not doing

o make the best of friends in Europe. We shall soon not be wanted and as politicians we have a duty to consider such a move.

Do not let us "kid" ourselves as Members of Parliament that the public today has a great respect for politicians; it has not. By and large, the public is sick and tired of politicians and wants some action. It wants some straight talk and it wants something done. It does not want the flannelling, day in and day out, which it has had in recent years.

In his television broadcast last week, the Prime Minister said that all was going well until three weeks before, which takes us to about the fifth week of the seamen's strike. But all could not have been going well in the fifth week of the seamen's strike. The right hon. Gentleman is now blaming the seamen's strike, but he must have known when the strike had gone on for several weeks that its reprecussions on the country's economy would be very serious. I was not taken in by that speech. In denying my right hon. Friend the Leader of the Opposition the right to reply to that controversial speech, the Governors of the B.B.C. acted disgracefully and did not do their duty to the public.

There is not a great deal wrong with Britain at heart. We are a great nation and we probably have the best craftsmen in the world, covering all industries. We have good, hard-working, honest people and there is nothing much wrong with them. What is lacking today is the lead. Why has the pound not strengthened in the last week? Why does it stand almost where it stood a week ago when the measures were introduced? I know that we must not talk about devaluation, and I do not intend to do so, but I would have liked to have seen the pound considerably stronger after the introduction of these immediate measures. I am not convinced by the Chancellor of the Exchequer waving a statement about what the bankers in Europe told him yesterday. I am convinced by what the exchange rate is today, and it is not very healthy.

The public and the House have to face a very serious situation. I do not want to overstate the position, but I do not think that it is possible to do so. It is largely a question of confidence. I agree at once that when the Labour Party came to power in October, 1964, it inherited a problem, but it was a problem and not a crisis. The Government changed it into a crisis. [HON. MEMBERS: "No."] Oh, yes. The right hon. Member for Leyton (Mr. Gordon Walker), who was then the Foreign Secretary, without a seat in the House, visited Washington 10 or 12 days after the election in 1964, on 27th October. There had been time to look at the books. He said in Washington that there was no question of increasing the Bank Rate.

That was one of the first pronouncements made. It was only six weeks after that that the Prime Minister went to Washington with the begging bowl. The Labour Party cannot have it its own way, because Ministers made these pronouncements after they had taken over and looked at the books. The 20 months since the Government took over have brought about one of the worst chapters in the economic history of this country. We have had instant government and look at the result of it. The remedies have usually been too late and ineffective.

More recently, on Monday, 11th July, a statement was issued from Government sources and reported in all national newspapers. The Financial Times reported it as follows: Although the position of sterling will continue to be watched closely, there are at the moment no proposals before the Government for extra economic measures to be introduced before September, when S.E.T. comes into force. It is being stressed in Whitehall that S.E.T. will have a considerable effect, taking over £300 million of purchasing power out of the economy. The view yesterday was that sufficient had been done to deflate the economy for the time being. That was two weeks ago yesterday. The Chancellor was answering a Question the following day and I put a supplementary to him, asking whether he realised that the country and foreigners expected drastic and immediate action. The country was waiting for it. The right hon. Gentleman just put his head down and I did not receive an answer.

At that time something was beginning to happen and three days later the dam burst. Then the Prime Minister elected to go to Moscow. When the President of the United States called him to inform him of the proposed bombing of the strategic targets he dissociated himself from it and thought that a quick visit to Moscow would placate the Left wing of his party. That is what he thought but he made a hasty judgment. If he had had the strength of mind and the courage he would have come to the House, faced it out, and within 24 hours he would have seen that the photographs of the bombing proved that the targets were indeed strategic targets.

The right hon. Gentleman committed himself to going to Moscow on an ill-conceived trip and really got the "brushoff" from the Russians. Mrs. Nehru, who had been there, left that day and the flags were taken down before the Prime Minister arrived. He did more harm than good, and he will no doubt be questioned on this when he visits the United States. What did he do last Saturday? Here was the country confronted with this crisis and he was in Liverpool reopening "The Cavern" "pop" club. [Laughter.] Hon. Gentlemen may laugh, but ask his constituents what they thought about him. Mine in Macclesfield did not think much about him.

Surely if the Prime Minister had a sense of responsibility it was the last thing he should have done. He could well have asked his hon. Friend the Member for Liverpool, Exchange (Mrs. Braddock) to have deputised for him. He ought to have been working on the economic plans at Downing Street, or making a pronouncement on the economy. The nation does not want this rather cheap popularity, put over so frequently on television.

Mr. Bob Brown (Newcastle-upon-Tyne, West)

Surely the hon. Member recognises that this type of "pop" music, which he seems to denigrate, has made a contribution to the economy of the country.

Sir A. V. Harvey

I recognise that. I have two sons. This music "blows away" day and night. Some of it I enjoy. While it has made a contribution to the economy I do not think that Britain's reputation, of Carnaby Street, and being "with it" and all that, has made much impression abroad when we are borrowing money to the extent that we are. However, I certainly do not denigrate such music.

Had the Prime Minister made his statement a week earlier, instead of going to Moscow, I wonder how much he would have saved in sterling which was being spent in support of the £. Figures today suggest £90 million or £100 million. This is a clear case of dereliction of duty. This is an enormous sum of money, belonging to the taxpayer.

Mr. R. B. Cant (Stoke-on-Trent, Central)

On the authority of the Financial Times one must surely accept the fact that the seeping away of our national blood in foreign exchange, and so on, to which the Leader of the Opposition referred, was a consequence of the fact that our importers were going into the leads and lags market and getting their foreign exchange in advance of requirements.

Sir A. V. Harvey

I shall come to that. I have it in my speech and I will cover that point. I am talking about firms covering their position for goods ordered.

The Prime Minister must accept the main responsibility for what has happened—not his Ministers. This has been a one-man band from the time that he took over in November, 1964. He must accept full responsibility. We were told about 100 dynamic days and on another occasion how we were to take the pants off the Americans. We have had all of this silly talk and gimmick.

No one in this debate or during the past week has mentioned Rhodesia. We were told earlier in the year that the Rhodesian problem would be settled in a matter of weeks, not months. I think that Mr. Ian Smith is having a quiet laugh to himself at the way things are going for him. This matter has to be resolved. What is it costing Britain? It must be costing £80 million to £100 million a year. There are loss of exports of £38 million to £40 million a year and the high price of copper and chrome in Zambia.

Of course, Rhodesia is being hurt. The sanctions are beginning to bite. But the Rhodesians will last out longer than we will unless we look to ourselves. This matter has to be resolved. How can we afford to lose £100 million a year in Rhodesia, and what will happen when the problem is settled? They will not suddenly buy British goods.

The same applies to South Africa. Today, there is resistance there against British goods. I do not agree with apartheid any more than hon. Gentlemen opposite do. There is a balance in our favour in trading with South Africa, of £50 million to £60 million a year. It is one of the few countries where there is a favourable trade balance. Until recently most of the gold mined in South Africa found its way into the world via the London bullion market. Even that seems to be drying up today.

We have the Air Force in Zambia and we withdraw a Coastal Command squadron from Gibraltar and announce it in the Press yesterday, in the middle of our negotiations with Franco. I asked the Prime Minister today, at Question Time, about this, and said that it was ill-timed. He said that it was only a coastal squadron. That does not matter a bit. When the 13 million Spanish people read their newspapers today and tomorrow they will think that the British are withdrawing from Gibraltar. No one seems to have considered the problem. I agree that the squadron must be withdrawn, but let us leave it there until the negotiations are over with the Spaniards. The Government do not seem to consider these problems. Their solutions are half-thought-out and half-baked.

The measures put before the country are too restrictive, in my view. Many of them do not bite until well into next year and there are no incentives and no savings. One hon. Gentleman opposite said that one could not drive the British people. One can take a horse to water, but one cannot make it drink. The same thing goes for the British people. They had a rough war and they had difficult years after the war. They have never had a very good time until the last few years. People are getting better off all the time; they have commitments with mortgages ; some are trying to educate their children and to give them a better chance than they had. They can see all of this in ruins during the next few weeks and months as a result of the policies brought about by this Government. How are young married couples to raise a mortgage, and at what rate? Where are they to live?

I was talking to the president of a large Continental bank last week in London and he was quite impressed by the measures being taken. He told me "Really, there is no speculation as such, or very little. It is firms who are covering their position forward for goods on order, or for which they have to take delivery. They are covering their position in case something goes wrong." He said, "We are not concerned whether the £ is weak today or strong tomorrow. What we are concerned about is good housekeeping". I said, "What do you mean by good housekeeping?" He said, "For our bank, we have HANSARD flown over daily. One of our senior clerks goes through every line of it".

Eighteen months ago, the Minister without Portfolio was winding up a debate dealing with pensions. This was after the Government had got their loans from the foreign bankers. The right hon. Gentleman said, "If they do not like it, they can lump it." That did not go down too well. It is all very well to say that we are being dictated to by bankers, but we borrow money from them ; they have been good enough to lend it. This cuts both ways. We have to have a respect for people trying to help us.

Mr. Mendelson

I would not question the accuracy of the hon. Gentleman's statement about the senior clerk who religiously reads HANSARD, but did he deliberately or inadvertently misunderstand what my hon. Friend the Member for Stoke-on-Trent, Central (Mr. Cant) said? He did not deal with foreign bankers. He dealt with people in the City of London who advanced the date of buying foreign currency which is good for them but bad for Britain.

Sir A. V. Harvey

If the hon. Gentleman would like to put the question to me, I will gladly give way.

Mr. Cant

There is a little confusion here. Over the past few days quite a number of businessmen, presumably patriotic, have been buying foreign exchange forward. It is undoubtedly the forward exchange rate which is the weakest part of the situation.

Sir A. V. Harvey

The hon. Member for Penistone (Mr. Mendelson) could not have been listening. I dealt with that point. The majority of people who buy foreign currency forward are buying to cover the situation when they have to take delivery to pay for goods. That clears up that point. [HON. MEMBERS: "No."] The hon. Member for Penistone, obviously, is not enjoying my speech. He is trying to make heavy weather of a minor point. I am making my speech in my own way, and I intend to continue to do so.

Mr. Mendelson

The hon. Gentleman has not answered the point.

Hon. Members

He has.

Sir A. V. Harvey

I have answered the point. My hon. Friends think so. They must be more intelligent than hon. Members opposite.

Mr. Dickens rose—

Sir A. V. Harvey

I will not give way again. We have been asked to be as brief as possible.

Going back to good housekeeping—[HON. MEMBERS: "Running away."] The hon. Member for Penistone must learn to keep quiet. If he does not like my speech, he can go outside and have a drink.

We have had this doctrinaire argument about the nationalisation of steel. If we wanted to get the confidence of the foreign bankers—and the Prime Minister is in for 4½ years ; at least he thought he was-[HON. MEMBERS: "Hear, hear."] I do not think that he will be, but I will come to that point later. Had he come to the House and said, "We still believe that there is a case for the nationalisation of steel, but there are more urgent things afoot. We shall even leave the Prices and Incomes Bill until the crisis is over", that would have made little difference to vesting date. I am sure that the £ would have strengthened if a statement like that had been made.

Why did the Government announce months ahead that the import surcharge would be taken off next November? They had enough trouble putting it on. They caused bad blood with the E.F.T.A. countries. Having put it on, and the E.F.T.A. countries realising the position that Britain was in, it should have been left on. This could amount to a loss of £150 million. But the Government made the mistake, for convenience sake, two or three months ago at an E.F.T.A. meeting by saying, to appease the E.F.T.A. countries, "We are taking off the surcharge in November." That was bad judgment, because it should remain on. We cannot leave it on now because the E.F.T.A. countries have been told that it will come off.

I want to put one or two propositions to the Government whereby some money could be saved. The Government have ordered military aircraft from the United States to the tune of £1,000 million. Of course, they have not to be paid for yet; I believe that there are credit terms for up to about seven years. Certainly, the Prime Minister will not be responsible for paying back this money. I am the first to admit that there are far too many projects on the drawing board for the aircraft industry, but to "scrub" the lot and to order these aircraft in America, as we have done, has loaded us with an enormous debt for years to come. I do not know whether there are any escape clauses, but the matter should be considered, to see whether we can get out of some of those commitments.

I want to deal with the more immediate requirements of B.O.A.C. and B.E.A. B.E.A. is supposed to be run as a commercial business. Goodness knows, criticisms can be made of it when 400 pilots sign a petition saying that they are dissatisfied with the management. Most people who travel by B.E.A. have had some unfortunate experiences over the the last year or two with bad time-tabling and discomfort.

B.E.A.'s initial order of 24 Tridents has been delivered. These Tridents were too small. It was always visualised that there would have to be a Mark II. If B.E.A. had had the Mark II in the first place and had worked out the right specification we would probably—I do not put it higher—have had an order from Japan for Tridents. But the wrong aeroplane was ordered. I flew to Malta at Whitsun in the middle of the night, on the cheap rate. We had to land at Rome for an hour to refuel. The Trident could not go to Malta without doing so. There are 15 large Trident 2Es due for service in 1968. The Chairman of B.E.A. says that he will require another 30 to 40 aircraft from 1968–69. I believe that to be true. The traffic is growing, and he must have them in order to compete with other countries. Sir Anthony Millward is on record as saying: If we could find a British aircraft to compete with the Boeing 707/200 or 737 or a stretched DC9 we will buy it. At the moment, there is no sign of such an aircraft. He said that a 200-seater VC10 had interesting possibilities if the price could be brought down to the right figure. If B.E.A. has its way it will order aircraft to the tune of £80 million in dollars.

I have spent 40 years in this industry. We have to save foreign exchange. There is nothing wrong with British aircraft. Even if it means subsidising the British Aircraft Corporation to enable it to tool up to build the aircraft—I understand that it will cost £10 million—at least we will save on foreign exchange, and we shall be employing men who want a job in the months ahead. Surely it must be right to order British aircraft for B.E.A. at this time. I hope that the Government will tell us something about this matter during the debate.

There are merits in having a fleet of aircraft of one type. B.E.A. has done quite well on British aircraft, with the exception of the last few months. I am sure that it has to have a British aircraft.

B.O.A.C. has never been British-minded. It has always wanted to buy American when it could. The Conservative Government gave the wrong terms of reference to the new Chairman of B.O.A.C. They should have told Sir Giles Guthrie, "If the VC10 works, you have to keep it". But £250,000 was spent on propaganda advertising the VC10, saying that it was quiet, serene, sound, and so on. The Corporation spent the next two months of the summer three years ago denigrating it, saying that it was no good and that it was expensive to operate.

This could not have been more unfortunate, because as events have turned out the VC10 is probably one of the best aircraft in the world and a great credit to British craftsmanship. It is quiet and has a wonderful record. It is well sought-after. I admit that it is rather more expensive to operate and to buy, but if we want an aircraft which will take off and land in half the distance of a Boeing there is a penalty for it, and the penalty in this case is weight which must be paid for in fuel consumption. But if the aeroplane is getting a percentage load factor higher than that of Boeings and can offset the increased costs, surely it is doing well as a money spinner.

The Americans are queueing up to buy this aircraft. Surely, in this great crisis of ours, B.O.A.C. and the Government must look at the VC10 Superb, the stretched version carrying over 200 passengers. Even at this late stage, it would be far better, recognising that the Corporations must operate on a commercial basis, for the Government to underwrite losses if, for any special reason, they occur. Clearly, we should be employing our own people and conserving our finances.

I want to make one plea to the Chief Secretary about agriculture, of which very little has been said in this debate. In this country we have probably some of the best farmers and we produce the best food. Our farmers need only to be given the signal, through the National Farmers' Union and the Agricultural Workers' Union, to go ahead and they could produce an extra £100 million or £150 million worth of food a year.

We are told that if we were to do that we would not sell our motor cars and refrigerators to Denmark and elsewhere. The French, however, feed themselves very nearly 100 per cent., but they still have a very good export record. Britain must try to do this and thereby conserve foreign exchange. Agriculture could make a great contribution.

The Prime Minister, rather reluctantly, last week admitted that unemployment might go up to 460,000. The danger is, once unemployment starts, how does one stem it when confidence has gone and the rundown begins? I am not convinced that it can be stopped at that figure.

Those of us who have seen the problems before must hope and pray. I well remember the problems. When I left the Royal Air Force, in 1930, I had the greatest difficulty in getting a job. Eventually, I got a job by going out to Manchuria and selling aeroplanes at £12 a week. It was a miserable ride getting there and it took me 14 days in the train.

These are different days and people have their opportunities. We cannot have large-scale unemployment. I do not want over-employment, but the measures taken by the Government have been overdone. Had they shown more courage, I think that the Selective Employment Tax would have done the trick with a little bit more. Clearly, however, when the Prime Minister was in Moscow, the civil servants and the Chief Secretary at home all had the cold towels on their heads over the weekend working out what to do. The Prime Minister came back exhausted. One had only to see him on television to realise this. I had never seen him in that state before. What state was he in to sit at the Cabinet table and decide what was best for Britain?

It has been a poor do, to say the least of it. The Government cannot simply go ahead with Socialism. They must do what is right for Britain. I do not ask them necessarily to do things that we recommend. First things must come first. I believe that Britain can pull itself out of this mire, but not if the Government pursue the policies which they introduced last week.

8.23 p.m.

Mr. Michael McGuire (Ince)

I do not propose to follow the hon. Member for Macclesfield (Sir A. V. Harvey). For more than a moment I thought that we were debating the aircraft industry.

Many a Member listening to this debate must have been reminded of the catchphrase that was associated with the continuous cinema shows: "This is where we came in". We have seen crises of this kind before, and we have seen this kind of treatment before. Governments always say that the treatment is necessary, and generally they go on to say that the cure will be lasting; and Oppositions always disagree.

If one could view the situation as a comedy, one could be forgiven for thinking it amusing in a traditional sort of way, but it is not amusing. While the remedies proposed might reduce the temperature of the fevered patient, as they have always succeeded in doing in the past, there is no reason supported by history to suppose that they will effect a final cure.

Unlike nearly every other hon. Member, I do not profess to be an economist. If I were an economist, I hope that I should have the grace to be ashamed of my so-called science. Never, so far as I know, has so much credence been given on such slender grounds to economists. Their reputation is rivalled only by the astrologers and, if we are to judge them by their performances—that is, their forecasts—it is just about as well-founded. Had they gone in for tipping winners in newspapers, they would not have lasted a season.

I am sorry to have to say it, but it seems to me that the success or failure of the present rescue operation will be judged on the amount of unemployment that it produces. It is easy to talk about unemployment in a detached sort of way if one is not in danger of suffering from it. A lot of people will suffer, and they will not like it. It will not make their plight more bearable if the experts tell them that it is for the general good.

I remember that when the man who went down from Jerusalem to Jericho fell among robbers, there was only one man who felt sorry enough for him to bind his wounds, take him to the inn and leave two pence with the innkeeper. Words are still as plentiful as they were thousands of years ago, and twopences are still as scarce.

"Redeployment" and "retraining" are transquillising words to use. They give, and are meant to give, a feeling that the Government have the whole thing in hand and that everything will be all right. But more than words are needed. The raw facts are that redeployment of men and families—because families are concerned—is a very difficult thing to achieve. The notion that unemployment in one area can be remedied by employment in another area is plain poppycock. Men cannot be moved about like pawns. The notion that retraining facilities or even plans for them are available is also poppycock.

One of the expected results of the new economic policies is that a big number of our soldiers, and their families, who are now overseas will return to this country. If they return, the Government will know something about the difficulties of redeployment. To look back upon one's days in the Boy Scouts and to think nostalgically of living under canvas will not help to solve that problem. Accommodation goes with some jobs, and the people who hold those jobs should not let their impoverished imaginations run wild, because if they do there is a danger that they will not be the only things which run wild.

The hire-purchase restrictions on motor cars, even on furniture, may be all very well, but why should anybody think that the working people who aspire to own a refrigerator need to have their appetites damped down? The Joneses have had them for a long time. Why should the Smiths not have them? Refrigerators and reduced costs in milk delivery, for instance, go together. Not to let one's right hand know what one's left hand is doing may be all very well when dispensing charity, but we are not talking about charity; we are talking about economics. The Treasury economists should know that there is a strong economic connection between refrigerators and milk deliveries, or perhaps what is widely suspected is really true, and they still take their milk at blood heat.

Why should washing machines be made hard to get? Must young people setting up house either go dirty or send washing to the laundry? They will have to do one or the other, because they are not making dolly tubs any more, and the Prime Minister knows, after last Saturday's outing, that rubbing boards went out with the skittle groups.

I checked up on one thing today, and 1 was delighted to have my views confirmed. My hon Friend the Member for Salford, West (Mr.Orme) referred to the candyfloss element, and I have been looking into the position of "one-armed bandits." I was glad to have confirmed that a licence fee is to be imposed, though I believe that it should be more than the proposed £75 on a 6d. machine and £37 10s. on a 3d. machine. That licensing is long overdue, and it could very well be £100. I do not think that anyone could object that it would be hard to collect, because people who keep dogs have to license them, and so do those who keep television sets and radios. It will be a very lucrative source of revenue, and it is one to which not many people can object, save those who try to sell them.

I almost hesitate to mention the amount of currency and the reserve function of the £. Everyone is talking about inflation, by which I suppose they mean the amount of money in relation to goods that is in existence. Who is making it? I know that the Mint makes the pennies and sells them at a loss. Things have come to a pretty pass when 4s. in pennies will bring 5s. as metal. The Mint makes a profit on its so-called silver coins. However, the real money is made on the paper. I have often wondered whether some ill-disposed organisation has muscled in on the business and is printing and circulating bank notes illegally. It cannot be the Government who have done it, because Ministers are always deploring it. I wish that someone would look into the business and stop it.

It seems to many of us that the Vs function as a reserve currency does not help the national economy as a whole. I know that the fact that sterling is a reserve currency is supposed to bring oodles of wealth into the country which would otherwise stay out. However, no one who says that is ever specific as to the amount that it brings in, or who gets it when it comes in. What is quite certain is that the present crisis has been caused largely because the owners of that reserve have been in a hurry to get out of it.

The Government have quite properly set up various commissions to examine various things.

Mr. Stratton Mills

I am sure the hon. Member for Ince (Mr. McGuire) will recall that in 1965 the non-governmental "invisibles" came to £583 million.

Mr. McGuire

I will leave the hon. Member for Belfast, North (Mr. Stratton Mills), if he is called by you, Mr. Deputy Speaker, to give us a brilliant exposition on that one.

I think that the time has come when the whole subject of the use of sterling as a reserve currency should be examined. It may be profitable to some that sterling should continue to be a reserve currency, but what is increasingly intolerable to the country is that, when sterling gets a chill, the country's industry has to go to bed, and the stock remedy is massive unemployment.

I urge the Government to set up a commission to look at this. I think that it will have the support of hon. Members on both sides of the House.

8.33 p.m.

Mr. Ian Gilmour (Norfolk, Central)

The hon. Member for Ince (Mr. McGuire) has given a most comprehensive and competent condemnation of all the Government's measures. From his speech, I assume that he will be voting for the Motion.

I sympathise a great deal with what he said, particularly about economists and the folly of thinking like Boy Scouts. This afternoon, the Chancellor said that the best way to answer abuse was to give the facts. In fact, he has not been abused, though I intend to abuse him.

The Chancellor conspicuously did not give the facts. No less than three times he talked about the rise in import prices. What he failed to mention was the rise in export prices. It is true that the price of imports has risen 3 per cent. since January of this year, but the price of exports has risen by 2 per cent. During the time that the Government have been in office, the terms of trade have been singularly in their favour. Export prices have gone up by 5 per cent., whereas import prices have gone up by only 3 per cent.

When he replies to the debate I hope that the President of the Board of Trade will repudiate the idea that the Government have been hard done by as a result of the terms of trade and the rise in import prices, because they have been well favoured by the terms of trade. Rather belatedly, the Prime Minister has also become very much in favour of facts. During his television broadcast he said: All our history proclaims that in the British people there are deep reserves of strength and power which are brought out to the full when the people of this country are told the facts and when they are told what has got to be done. What were the fact which the Prime Minister was telling people only 16 weeks ago in order to bring out these deep reserves of strength? In his constituency, he said: A new Labour Government's action will strengthen our financial position and make sure that ' never again do we drift into debt'. We have not drifted, we have plunged.

The right hon. Gentleman was addressing a small audience then, but in a party political broadcast he said: And the success we have achieved so far in a bare 17 months towards paying our way, towards achieving a lasting economic strength and independence, let this not be underrated. It would be difficult to underrate it.

This may have been due to the hurly-burly of the election, but a deeply considered statement—and he must have considered it very carefully indeed—appeared in the party manifesto, part of which the Chancellor read this afternoon. He did not read the bit which was rather bizarrely entitled, "Facing the Facts". It said: During the past 18 months Britain has faced, fought and overcome its toughest crisis since the war. That may have made our foreign creditors a little surprised.

But even when the Prime Minister was returned with a majority of 100, he still did not face the facts. Even when he was telling the British people what ought to be done, he did not give them the facts. He used the bogus import prices argument again. He said that people had started buying more and more goods from abroad. That is correct, but he did not say that the reason was that the Government had held down production, that it had been utterly stagnant. He referred, also, to the seamen's strike. That argument has also been exploded today. His fourth reason was that the dollar had been having a difficult time.

The Prime Minister is at last learning. This is better than he did last year. In his explanation for the economic crisis last summer, in his statement on 29th July, be blamed the effect of Japan's grave dollar shortage on her purchases from Australia ", and also the impact of the Chinese gold buying spree." —[OFFICIAL REPORT, 29th July, 1966; Vol. 717, c. 747.] Last year, it was Japan and China. This year, it is America. I wonder which country it will be next year. Judging from the excellent maiden speech of the hon. Member for Carmarthen (Mr. Gwynfor Evans), next year it will very likely be Wales.

The Prime Minister has already been strenuously attacked for his handling of the economy, but it sometimes seems to be forgotten that the man in charge of the economy is the Chancellor of the Exchequer. He is responsible for the nation's finances and it is his bungling that has landed us in this situation. There has been some speculation in the Press because the Prime Minister has been devalued about his future, and the Chancellor of the Exchequer has been mentioned as a likely successor. This seems remarkably unfair when one considers the Chancellor's record. As the right hon. Member for Orkney and Shetland (Mr. Grimond) said, the Government's financial record is wholly bad, and is quite clear.

The Chancellor of the Exchequer does not have much in the way of credentials for becoming Prime Minister. It is often said that he is very much concerned about his place in history. If he is not to have a place in history rather like the utterly incompetent Whig Chancellors of the 1830s, the right hon. Gentleman will have to do a great deal more than doctor the record in HANSARD. He will have to doctor almost every speech that he has made, both inside and outside the House, and he will have to blot out almost entirely his two Finance Bills the latest one of which, as the hon. Member for Ashton-under-Lyne (Mr. Sheldon) said, is already irrelevant.

The Chancellor has boasted about his new fingertip controls for the economy, but it is not much use having fingertip controls if one operates them with one's feet. That is what the Chancellor has been doing. It is sometimes said that the Budget is out of date and that the economy should not be controlled by a once-and-for-all Budget each year. The Chancellor has certainly brought in that reform.

We all know how badly the latest crisis was handled during the last fortnight. The situation was already serious, but the Government talked us into a crisis. The Chancellor and the Prime Minister, as a result of their delay, had to do a demolition job not only upon all their promises and loud words of the last four years and the last two elections, but also on the economy. As an economist—not at all unfavourable to the party opposite—pointed out, they now have a policy of "stop-go-reverse".

What makes matters worse is that the Chancellor has not been able to mitigate his own follies by preventing or taking advantage of the follies of his colleagues. He has been unable to prevent the introduction of the Iron and Steel Bill, and he has been unable to cash in on our special relationship with America. As Mr. Walter Lippmann recently pointed out, this special relationship is one of satellitism to Washington. One advantage of this special relationship might be that we should be able to sell arms to America—but we cannot sell arms to America because hon. Members below the Gangway opposite object to their being used in Vietnam, which is the only place that the Americans would want to use them. Therefore, we do not get any advantage out of our satellitism. We get our debts guaranteed, but are unable to make any money by doing business with our masters.

The Chancellor's excursion into foreign policy has already been commented upon. He has put forward the idea of housing the British Army of the Rhine under canvas in this country, together, I suppose, with the wives and children, but most hon. Members on this side of the House and many hon. Members opposite think that Britain's future lies in Europe, and it is not the best way of convincing Germany and the other European countries that we would be a suitable member of the European Community for the Chancellor, having broken a lot of treaties in the past, to go around threatening to break all our obligations in Germany.

At the weekend the First Secretary said that doctors often disagree about diagnosis and prescription. That is true, but they do not usually agree to end up butchering the patient, which is what has been happening in the last few days. All that the Chancellor is prescribing may make the symptoms less obvious, but it will certainly make the patient a good deal more ill, and make it more difficult for him to recover in future.

After the 1964 election, the Prime Minister, at the Labour Party Conference, said: The way to a strong £ is through a strong economy, not by creating unemployment, not by holding production down, raising costs, deterring investment and creating the insecurity which breeds restrictive practices on both sides of industry. Those sentiments have been echoed by hon. Members today. They were wise words. But the Chancellor has so mismanaged the economy since those words were spoken that the Government now feel compelled to do all the things that the Prime Minister then denounced, and with a severity and relish absolutely unparalleled previously.

I was going to follow the suggestion of hon. Members opposite and say what should be done, but they have had a great deal of advice, and as other Members wants to speak I will spare them my advice. The Chancellor has done more damage to the British economy in his tenure of office than he can ever undo. But he could mitigate it by resigning. It is not the First Secretary who should resign, but the Chancellor of the Exchequer.

8.45 p.m.

Mr. R. T. Paget (Northampton)

My first point refers to the escalating costs of the Rhodesian confrontation. I warned the Government at the time how they were climbing out of control. According to the Financial Times of this week, copper will cost us up to an extra £100 million on the balance of payments by the end of this year, and that is only one of the items which have got out of control. To it is now being added the diversion of South African gold as well as of South African trade. We just cannot afford this to continue.

Rhodesia is an independent country. We can do nothing to stop it. We can make it a poorer independent country, or an independent country which is more dependent upon apartheid South Africa, but we cannot stop it being independent. When we recognise independence, the terms do not matter very much. We had elaborate negotiation on terms with Ghana, Uganda and Nigeria. They were all torn up. Recognition of independence must be upon the basis of good faith and one's influence depends not upon the terms but upon how one gets on with the country and how helpful one is to it afterwards. The runaway costs of this confrontation are something which we cannot afford to see go on.

My main theme is that the case we put against the Tories was wrong priorities. Nobody put it with more eloquence than the Prime Minister. We did not say that their intentions were evil, that they wanted unemployment or did not want production, but we said that when it was a choice between the industrial interests and the financial interests they gave the priority to the financial interests. Thus, the moment production began to climb and financial difficulties occurred, production was made to conform to finance.

We said that that was wrong, that if we were to get production we must make finance the servant of production, and make the value of our currency conform to the needs of the production programme. It must find its value at the level necessary for the production planned. This was the case which we made against the Tories. This was the stop-go policy: the preference given to the financial interest over the industrial.

I remember talking to my right hon. Friend the First Secretary—I was very close to him in those days—back in 1964, and urging him not to take the planner's job unless he was given control of the Treasury. Any planner who cannot control money, which is the instrument which controls production in any price economy, does not have a real job. He has only the pretence of a job, a "phoney" job.

The essence of a planned economy is that the planner controls the money. In my view, the Chancellor should not have been put in the Cabinet at all. He should be a subordinate in a planning administration to a real economic Minister.

I have all along been a critic, sometimes a bitter one, of the present Government. I know that a great many of my hon. Friends reckon that this is bitterness on the part of somebody who was left out. I suppose that we are never entirely successful in analysing our motivation, but I do not believe that that reckoning is correct in my case. I have never suffered from a particularly burning ambition, and I have a feeling that I am a great deal happier as a relatively insignificant freeman than I would be as a great servant. I am not unhappy about my position. Indeed, I think that it suits me better.

It was the decision—it was taken in 1964—to make the maintenance of the £ our first priority that upset me, because that seemed to me to deny everything about which we had ever spoken. It was the acceptance of the Tory thesis, which had been criticised all along—the preference of the City, of banking and of financial interests over industrial interests. I believed that that would lead us to the position at which I came into the party, the position of Macdonald, in which we would find a Labour Government preferring unemployment to exchange control. That is where, it seems, we have arrived.

What about the Measures which have been introduced by the Government? The thing to notice about them is that they are not measures which we have chosen. I do not believe that anyone on the Government Front Bench believes that they will help the economy. Nobody imagines that the economy will be helped by measures that kill investment dead. They are measures which have been chosen because it is believed that they will impress foreign bankers. They are, therefore, measures for the bankers and not for the country.

Save very temporarily, I do not believe that the measures taken by the Government will work. We will be in the same position again, probably in a shorter time, and we will be all the weaker because of the production we will have lost. That is why I say that this is Conservative policy. It is the policy adopted by the Conservatives over the years, and it will not work for us any better than it worked for them. Indeed, it will work rather worse for us because we inspire rather less confidence in the bankers.

My right hon. Friend the Prime Minister was distrusted because those bankers thought that he was a Socialist. I think he is distrusted now for himself. [Interruption.] What should we do? I believe that the first and essential thing is exchange control. In a situation in which we really believed in the need or a priority of production and in the guidance of the direction of production, that is the first thing about which we would all agree. We agreed about it in 1914 and again in 1939. The very first action we took when we went to war—when production and the guidance of production became essential—was to put on exchange controls. Until that is done one is not the master of the situation and one cannot take a proper decision. At this time we do not need munitions of war but munitions of peace; export and investment goods. It is only if we have exchange control that we will be able to govern that direction.

I turn to the question of devaluation. The right hon. Member for Stafford and Stone (Mr. Hugh Fraser) made an interesting speech on this subject. The effect of devaluation is to increase the profit margins on exports and to lower them on imports, but there are two small but important points to remember. Devaluation does not raise one's domestic prices to anything like the level of the devaluation itself. If one imports about one-fifth of one's consumption, then when one devalues by 10 per cent. that is a 2 per cent. increase in prices and not a 10 per cent. increase. Indeed, it is generally a great deal less.

The second thing is that, according to The Guardian, the Prime Minister said yesterday that if we devalue everybody else will, and that will create a liquidity crisis. Really, what utter nonsense! If everybody devalues, that simply means that the price of gold is raised, and raising the price of gold is the classic method of increasing international liquidity, from the lack of which we are suffering, so that if that was the result it would be admirable.

In point of fact that would not be the result. The result would be that some nations who export to us would devalue with us so that their imports would not be put at a disadvantage, but the nations to whom we export would not devalue, and that means that the increase of prices would probably be only one-tenth of our devaluation because about half the people from whom we import would devalue with us. But the particular point at which we control our exchange is highly debateable. The one important thing if we are going to get out of these troubles is that in this crisis, which is as serious as wartime, we do control our exchange.

Let us take the question of interest rates. Nobody really sanely imagines that 6 and 7 per cent. is a rational interest rate. It is necessary in order to attract foreign money to support our banking position. It does that, but it makes an awful mess of the shape of our economy. It means that an inflation is imposed on us, because otherwise the burden of debt would be intolerable. If one does not write off one's debts by 3 or 4 per cent. per annum, the weight of a real 7 per cent. would be intolerable.

Before it is possible to begin to make the economy make sense, it is necessary to exercise those controls, that is to say, freeze the sterling balances, make them available for commercial transactions, and control the leads and lags, so that they keep level with commercial transactions.

We have had plenty of experience of it in two wars, and all the time during the 1945 Government. This is necessary to extricate ourselves from our position as world banker which we cannot afford on our reserves. A research project in America came to the conclusion that it did not pay the Americans to run a reserve currency. They get their money from the world at interest rates which are often half those which we have to pay to get ours. That is some illustration of the amount we lose by trying to run that business.

The other thing we have to cut down on is the pretence of being a world Power. We just cannot afford the cost of the Indian Ocean, east of Suez commitment. Merely bringing troops home is not relevant. We should be cutting down on the Fl 11 s, the frigates which are being developed at £20 million apiece for an oceanic role, the aircraft carriers. The "Ark Royal" will be costing us £30 million in a year or two to prolong its life for a year or two for the oceanic rôle which is beyond us.

We should now be cutting down on the amount of expenditure for a capacity that will not develop for several years. Surely, we should not be cutting down on N.A.T.O. at this time, when we are trying to get European unity and urging General de Gaulle to come in. What do we get for it? After all, we had to cut off immigration from the Commonwealth, and here we shall create an artificial immigration of these men, with all their dependants. When we think of the housing requirement that would result, to bring these people back at this stage is crazy. Agriculture could set off their cost by increasing production for an internal price incentive.

I would not particularly object to this Motion of no confidence in the Government if it were not for the implication that it involves confidence in right hon. and hon. Gentlemen opposite. After all, they were the people who created this mess; our trouble is that we have simply followed them. When we find that the solution advanced by the right hon. Member for Flint, West (Mr. Birch) for this great problem of our being extended as a world bank without the reserves and as a world power without material is prescription charges and charges for school meals, I find that he and his party as an alternative to the present Government present a very unhappy option.

I wish there were a Socialist alternative. I believe that what the country wants is a Socialist alternative. We are not providing it. Socialism is a faith. One does not get it without dynamic drive, and, as we found in the distant days when I first came into this party, the job of driving a leader who does not believe in Socialism to take the path we believe to be right does not work very well.

9.3 p.m.

Mrs. Margaret Thatcher (Finchley)

My first pleasant duty is to congratulate the hon. Member for Carmarthen (Mr. Gwynfor Evans), who made such an eloquent and original maiden speech. He certainly gave us a new interpretation of the Prime Minister's mistakes. I note that he wanted a separate Government for Wales. This would, of course, solve some problems for England, because presumably he would take with him the right hon. Gentleman the Chancellor of the Exchequer, who would then be able to make as much a mess of Welsh problems as he has made to date of the problems of England and the rest of the United Kingdom.

When in the past we have had periods of stop-go, we have during the period of stop usually managed to solve the immediate balance of payments problem. I believe that this is the first time when we have had a prolonged period of stop —more prolonged than any other—but have not solved the balance of payments problem. We can contrast previous occasions. My right hon. Friend the Member for Flint, West (Mr. Birch) took one of these occasions, that of the Peter Thorneycroft measures which solved a particular set of problems.

I will take the year 1961, when my right hon. and learned Friend the Member for Wirral (Mr. Selwyn Lloyd) also had a problem on his plate. He also took certain measures; he also borrowed money, but the significant thing is that the money he borrowed from the International Monetary Fund, some £535 million, was repaid within a year and the Bank Rate of 7 per cent. which he instituted for a short time was down to 4½ per cent. within ten months. So at least that period of stop was a good deal shorter than the present one. He took measures. He clearly meant business. The problem was solved, and we were ready to go ahead again with a period of expansion.

This time we have had a period of stop in production for a very long time. The rise in production which began in 1964 finished, in effect, in January, 1965, when the index of industrial production for all industries was 133, exactly the same as the latest figure. We have had stop over all that time.

The Chancellor made certain excuses for our present problems. He spoke about the terms of trade. But they were against us in 1964. In 1965 they were with us, which helped us enormously, and in 1966, it is true, they have turned against us. But I agree with the hon. and learned Member for Northampton (Mr. Paget) when he says that a good deal of this could have been foreseen. Surely the rise in copper prices was fore- seen just as soon as the Rhodesian crisis broke. Surely the rise in import prices was foreseen just as soon as the Vietnam war was stepped up. These things did not come on the nation as a surprise. They could and should have been foreseen.

The present Government have attempted to make rather too much of an excuse of the seamen's strike. Those who have any personal connection with trade and industry know that the vast majority of our exports got away during that period. The first question one asked was, "How much got away? ", and the answer usually was, "The whole lot". There were certain exceptions, for example, exports to Australia and New Zealand, which did not get away, but the vast majority of our exports got away during the seamen's strike, thanks to the efforts of shipping clerks and transport departments in many industries who arranged for them to be carried in other ships. I said at the beginning of the seamen's strike that we should watch it carefully, because I thought that the Government would try to lay all their troubles at the door of the seamen's strike, which is exactly what they have now done.

I turn now to the general strategy of the Budget, such as it was. I say "such as it was" because it was, in fact, conspicuous by its absence. My right hon. Friend the Member for Enfield, West (Mr. Iain Macleod) said at the time how wrong he thought the Chancellor's timing was. How right my right hon. Friend was and how wrong the Chancellor was. The main purpose of the annual Budget is to plan the course of the economy in the year ahead. As soon as we heard the Budget, we knew that there would have to be another one within a comparatively short time, and we made that point during our debates. Never has a Budget imposed such a large tax burden but left our creditors with the view that it was soft.

It was a Budget which had a certain psychology behind it, the idea that it must not hit the ordinary elector, that anything done must be done in such a way that it did not bring home the seriousness of the situation to the people who by their action could have remedied that very situation. So now we have an extremely savage package of deflationary measures. These are not Tory measures. I cannot think of any period when we have had such a severe package at any one time.

It is worth while looking at the timetable of deflation as it appears from the latest package. In this July we have the regulator, which, it is said, will produce about £150 million in a full year. We already have the hire-purchase restrictions which will cut borrowing by £150 million, though it is not specified over what period. There is quite a lot of deflation to start with. Then, in September, the period when most economists were in any event expecting a down-turn, several other measures come into effect. The first five months of Schedule F will have to be paid on dividends. The Selective Employment Tax is taken out of the economy at a rate of £90 million a month. In October, for the first time wage-related contributions for unemployment benefit and sickness benefit have to be paid, and this will amount to about £76 million in a full year. In October, the postal rates will go up, amounting to £20 million in a full year. The betting and gaming tax will start then, too. In November, the travel allowance reductions come into effect.

This is an extremely harsh timetable for deflation, but it is not all. The deflation policy goes on into next year. In January, £1,000 million will have to be paid in Corporation Tax and £248 million in Surtax. In February, the reverse position will be true when rebates and premiums start to be repaid. In September next year there will be another Surtax deflationary packet taken out of the economy. Even that is not all. Deflation will continue until 1967–68 with the cuts in investment programmes and the building controls. This is not merely a programme for deflation; it is a programme for contraction. It will mean that we shall go on having a contracting economy for a considerable time to come.

I turn now to some of the sayings of the Prime Minister. He now appears to be resolved to deal with the crisis. We have heard a great deal of this before. It was after the initial crisis in November 1964 that the Prime Minister said at the Guildhall dinner: We shall not hesitate to take any further steps that at any time are or become necessary. If anyone at home or abroad doubts the firmness of that resolve and acts upon their doubts, let them be prepared to pay the price for their lack of faith in Britain. People did doubt the Prime Minister's good intentions, for a few days later we had the first great crisis of confidence. Bank Rate went up and the Prime Minister came to the House and said that at this particular time a crisis of confidence had developed. So much for the Prime Minister's resolve on that occasion. The House knows what has happened since. There have been successive Budgets and successive measures. So again, in his Prime Ministerial broadcast on 20th July, the Prime Minister said: We are determined to take action which will show that the people of Britain are ready once and for all to play their full part in putting right the economic weaknesses. The question which everyone asks is why should we believe him now when he has said it all before and has done precious little about it? This is one of the problems of the present set of measures. No one believes the Prime Minister any more and no one trusts him any more, as the hon. and learned Member for Northampton pointed out. The Prime Minister's problem is that Britain's creditors now understand him perfectly. Because they do so they are suspicious of anything he says. It is very ironic that this is the contribution which the Prime Minister has brought to a nation which built up its trade and financial position on trust. In two years the Prime Minister has destroyed trust in the Government's word. It is not surprising that many people are now hesitating before judging the measures brought forward. They are not judging the measures themselves; they are judging the set of men, headed by the Prime Minister, who brought them into operation.

The Prime Minister missed his vocation. He should not have taken the job of a man of decision but should have stayed as a commentator, for, like sorry wine, he makes excellent vinegar. We had the famous week, that was the week that was, starting on the 11 th July with the report in the Financial Times that the view of the Government was that there was no need for additional measures to deflate the economy. The next day it was announced that there would be no help from the banks for the purpose of meeting Selective Employment Tax payments, and the next day the Prime Minister cuffed the "Sell Britain Short" brigade. On the Thursday we had the trade figures. Then the Prime Minister came to the House saying that more was needed but he had not a clue as to what it was.

So we had one of the greatest somersaults of all times, a somersault which I think the British electorate will never forget, because I do not think that ever again can they believe what the Prime Minister says.

My right hon. Friend the Member for Flint, West has had something to say about the reserves and the fact that precious little of them belongs to us. We are, of course, in this crisis after all the known solutions have been tried and have failed, after the terms of trade have been with us, after there has been the most massive international support of all time, and after there has been the most colossal run-down of the true reserves. Perhaps people do not realise the extent to which the Government have lived on capital built up before they came to power.

It is as well that previous Chancellors of the Exchequer did not liquidate the dollar portfolio and put it into the reserves., otherwise it would not have been available now. [Interruption.] It never actually went into the reserves—which is just as well. It would certainly have gone before if we had had a Socialist Chancellor of the Exchequer.

We have also had the penalty of the disinvestment of dollar securities, which brought in £70 million last year. Had not previous Governments acted in a way that built up private overseas investment there would not have been enough for the Chancellor to run down now. The final indignity was the Gold Coins Order. making it an offence for anyone who did not hold sovereigns on 27th April, 1966, to buy as much as one sovereign. What an indictment of the Government. It was a ridiculous Order.

There is, of course, the difficulty of telling anything from the published reserve figures. The April edition of the Banker described the Chancellor's statement of 1st March as a … virtuoso display of how to juggle with reserve figures". What a commentary on the Chancellor of the Exchequer. It is also clear from the June Quarterly Bulletin of the Bank of England that during February and March there were a number of borrowings, at any rate to the extent of £54 million, which o did not reflect in the reserve figures.

There was a very obscure sentence in the Bulletin which led the Economist to comment: This makes the notionally clean reserve figures as irrelevant as the crude figures. Therefore, my right hon. Friend the Member for Flint, West was right in saying that precious little of our reserves belongs to this country.

During the debate, there have been a number of comments about devaluation. My view, and I believe the viewpoint of the Opposition as a whole, is that we are absolutely against devaluation.

The President of the Board of Trade (Mr. Douglas Jay)

As a whole?

Mrs. Thatcher

As a whole. Hon. Members on both sides have expressed their different personal opinions, but I think that my right hon. Friend the Member for Flint, West made the point when he said that if we were to devalue we would, of course, have to repay the colossal amount of debt at a very much higher rate than at the moment. There were severe penalties from devaluation on the last occasion. We devalued in 1949, and in 1951 we had the biggest rise in the cost of living that we have ever had. It hit pensioners extremely badly, and it was not until 1958 that we really managed to pull out the effects of devaluation and give real pension increases. I further believe that those who advocate devaluation are often seeking for a kind of "economist's stone" that will turn everything to gold. They want some simple solution to all our problems. I do not believe that there is ever a simple solution to be found, and it is certainly not that one.

I turn now to an analysis of the package presented to us. My right hon. Friend the Leader of the Opposition referred to the Chancellor's statement, reported in the Financial Times today, about his attitude to the wage freeze. There was, of course, another warning, this time by the First Secretary of State, reported in The Times of 4th July. The report said: Referring to a newspaper poll claiming massive support for a wage freeze, Mr. Brown said one course would be to halt all wage increases, but he did not think that was the way to do it. Even if it could be made to work, with all the unfairness involved to the lower paid, the freeze could not go on for ever and the position would be worse when it came off. The Government would still have to find the answer to making the policy work in the longer term. So I am not asking for the freeze. I am not saying that nobody should put up prices, declare increased dividends, and get increased wages and salaries. What I am saying is that they should all be examined '. So we are in the difficulty that it looks as though we are to have a freeze. The Prime Minister said that he would not enforce it by elaborate statutory controls, which presumably means that he is prepared to enforce it by statutory controls. My right hon. Friend the Leader of the Opposition thought that if it came it should be voluntary. The Prime Minister, then, is prepared to have statutory controls, the First Secretary does not believe in it, and the Chancellor of the Exchequer does not rate it very highly when he is talking to our European friends.

This scarcely seems the way to introduce a wage freeze or encourage the trade unions to take part in it. Moreover, on the day when it was announced the position was made extremely difficult, because those who had already had increases granted wanted to know what the position about those increases was and they were given conflicting replies. For example, Gas Council officials were insisting that the 4 per cent. award would be paid and Department of Economic Affairs officials were telling union leaders that they were stalling it. What a way to run a Government! What a way to try to inspire confidence in anyone!

I turn now to the cuts in expenditure for nationalised industries. It is difficult to analyse these, because they were given in detail only yesterday in answer to a Question, but I note that in the Sunday Times this week it was suggested that a reduction for the electricity industry of the size proposed would mean cutting right back on the work of reinforcing the local cable network. Cutting this expenditure would mean that the slightest accident or overload could black out a fair sized suburb, and one doubts whether it is wise to take that risk in these circumstances.

But perhaps the cut is more fictitious than real, as with a number of other proposals, but if there can be a cut of £24 million in the electricity industry without undue difficulty, as the Chancellor seemed to indicate at the beginning of the debate, it would seem to show that the electricity people have been very wasteful if there can suddenly be a cut of £24 million without any effect. At any rate, personally I think that these cuts should be viewed with considerable suspicion.

A year's advance payment for telephone rentals is to be demanded. Are old folk to be exempt from that requirement? Many of them must have telephones and need new telephones where they have not yet been installed.

The private building and office controls will not bite until 1967, which once again means that the Government are continuing the inflation until that period.

As various hon. Members from this side of the House have pointed out, there is a tremendous lack of incentives in the present package, in sharp contrast with Mr. Butler, now Lord Butler, when he had a similar situation to cope with from 1951 to 1953. It was noteworthy that in a poll published on 24th July, the majority of Britain's leading industrialists said that they would emigrate if they were younger men at the start of their careers. They felt that the present economic crisis was but one in a series of crises still to come.

This is perfectly true in the lack of an incentive policy in taxation. I note that there is a 10 per cent. charge on Surtax which will take Surtax levels almost back to where they were for one year in wartime. It puts up the top rate to some 19s. 3d. in the £, which is no encouragement to those extremely able people upon whom we depend. The hire-purchase restrictions and the regulator were expected. I have noted that the effect of the regulator will be reduced because of the action of my right hon. Friend the Member for Barnet (Mr. Maudling) in reducing Purchase Tax. In one of his Budgets he reduced the top Purchase Tax considerably.

Most of us regret the cuts in information services overseas. On hotels, we wish that the Government would make up their mind. They are doing away with investment allowances and have added the Selective Employment Tax to the difficulties of the hotel industry. Then they attempt to give a little bit back in loan assistance. I hope that the President of the Board of Trade or the Chancellor will give some clearer guidance to close companies. As the Chancellor knows, they are told to increase their dividends and they suffer considerable penalties if they do not. Who are they to believe? Are they to believe the latest statement that they must freeze dividends, or are they to believe the inspector of taxes who will tell them that they have to increase dividends at certain times? Ought we not to have a new Chancellor's umbrella? There have been a considerable number of positive proposals put forward on previous occasions. Many of us have said what we feel should be done to produce an efficient economy and to get the economy towards expansion once again and out of its present difficulties.

Many of these measures were taken by Mr. Butler, as he then was, in 1951, towards 1953, when he faced a deficit running at the rate of £800 million a year and faced a loss in the reserves in the second half of the previous year of some £547 million. He, too, announced an emergency Budget in November, followed by a very serious Budget in April. The following year he announced an incentive Budget and introduced cuts in taxation—a completely different approach and attitude from that of the present Government.

I would suggest that if we are to move forward once again we must concentrate on some of the policies of modernisation. This means dropping the new system of incentive grants, because these mean that allowances are given regardless of profitability. We believe that the old system was a good deal better. It means dropping the development levy on industrial development, contained in the Land Commission Bill, whereby an industrialist who develops his land has to pay 40 per cent. levy. This is quite absurd. It also means dropping the present Selective Employment Tax and premiums to industry, which would result in keeping in business those who are inefficient and who ought to go out.

That would mean that we should have a good deal more competitiveness in industry. If the Prime Minister is in earnest, he should instruct the Royal Commission on Trade Unions and Employers' Associations to report within six months, with a view to taking legislative action. I would suggest, too, that he tightens up the Restrictive Trade Practices Act along the lines prepared by the last Conservative Government, and deals with the taxation system which persuades top men and women to stay in Britain. We have had a very considerable deflationary package presented to the House. We have no lack of confidence in the British people, but we have no confidence whatever that this Government has either the will or the ability to put matters right.

9.24 p.m.

The President of the Board of Trade (Mr. Douglas Jay)

I have noticed in this debate today what is perhaps a very natural wish to believe that some alternative policy must exist or some device must be available which offers this country an easy and painless way out of the difficulties of living and earning its living in the modern world.

The Leader of the Opposition, if he thinks that there is one, certainly did not tell us very clearly what it is. He proposed that we should move to what he called an open plain of opportunity and his only precise proposal was to put a new tax on food imports. Anyone who really believes that there is some easy way out of these difficulties does not understand how ambitious are the aims which we have set ourselves as a nation.

If we are to maintain something like ½per cent. unemployment with over 20 per cent. of our national income staked in international trade, and we are expected to maintain a flow of civil and military aid to poorer countries, and to do it in a world where international currency reserves are increasingly inadequate, then the margin of safety between deficit, on the one hand, and deflation, on the other, is bound to be narrow. In such circumstances, we cannot afford, even for a short time, the luxuries of a shipping strike or of a runaway price inflation.

With adequate expanding gold supplies or credit in the world, this would be less difficult. But the world's currency reserves, despite all the efforts at reform of the United States, ourselves and the Commonwealth countries in the last few years, have been expanding even more slowly than they did in the years leading up to the 1929–1932 depression. That is, of course, why both the United States and the United Kingdom during the last three years have been compelled, much against their will, to restrain both overseas investment and aid, to the injury or less fortunate nations. That is why interest rates are tending to rise all over the world. I think that a very heavy responsibility will rest on anyone who frustrates much longer all attempts at modernisation of the world currency system.

All this affects us more acuately than most, not merely because we are managers of a reserve currency, but as a nation so heavily involved in international trade. Our exports today represent 16 per cent. of our national income compared with about 10 per cent. for Japan and 4 per cent. for the United States. When one looks at events in perspective, one sees from these and other figures what a remarkable effort this country has made in increasing its exports to meet the challenge since 1945.

It is a remarkable fact that between 1900 and 1938 there was no increase at all in the volume of United Kingdom exports. Nevertheless, between 1946 and 1965, our exports rose in volume by 150 per cent.—that is, they more than doubled. As a result, while, in 1938, our exports were paying for only two-thirds of our visible imports, last year they paid for 95 per cent. of them. Indeed, our exports both to the E.E.C. and E.F.T.A. —curiously, it is the same figure in each case—have risen by 70 per cent. since 1960.

At the end of 1964 and throughout 1965 the present Government put into operation a whole series of new export incentives, services and export promotion measures which I described in detail in the Budget debate. What have been the results since then? It is worth looking at the figures. In 1964, before these measures were put into force, world trade in manufactures rose by 15 per cent. in value, and total United Kingdom exports by 5 per cent. In 1965, world trade rose by only 11½ per cent., but United Kingdom exports rose by 7 per cent. In that year, United States exports rose by only 5½ per cent. During the first five months of this year, before the shipping strike, total United Kingdom exports rose in value by 9 per cent.

In volume, our exports rose 3 per cent. in 1964, 5 per cent. in 1965 and 6 per cent. in the first five months of 1966, or faster than the National Plan target of 5¼ per cent.—a creditable response by British industry to the new facilities and services offered to it. Over the first six months of this year, even including the strike month of June, our exports to Canada are 17 per cent. up in value and to the United States 32 per cent. up. To the Soviet Union, in the first six months of this year, our exports have risen by 27 per cent. and to Eastern Europe as a whole, excluding the Soviet Union, by 36 per cent.

I warned the House in the Budget debate that we must reckon on a rise in the value of imports this year since we successfully held down the rise to only 1 per cent. in 1965 and since our national income and output are rising. So far, in the first five months of 1966, partly due to higher prices, imports have risen in value by 7¼ per cent. above those for the corresponding months of 1965. Therefore, despite this rise in imports, the visible trade balance up to the time of the shipping strike had improved a little further this year. Neither our visible trade balance nor our commercial invisibles, apart from tourism, had given any pretext for a psychological shudder in the exchange markets.

What, then, has caused the present difficulties? The first cause, as almost all hon. Members in the debate have recognised, is that Government expenditure overseas, desirable as it often is, in civil and military aid has risen far too high—for instance, in Germany in particular. Secondly, import prices, as the hon. Lady the Member for Finchley (Mrs. Thatcher) recognised, have risen faster than export prices this year. Thirdly, the shipping strike, while damaging in itself, led to exaggerated deductions from the June export figures.

I agree with the hon. Lady, as to the June export figures, that some people might think it highly creditable to British industry to get £350 million of exports in a month when outward sailings of British ships had come practically to a standstill. Nevertheless, the hon. Lady would be quite in error in suggesting that the shipping strike had no effect on our exports in June. The figure dropped from about £420 million to £350 million, clearly due to the shipping strike. The deductions drawn from this in the foreign exchange market, however, were exaggerated.

The export figure can reasonably be expected to recover from the June total as the effect of the strike wears off. We shall not, however, as a Government, rest content with the whole series of export promotion schemes which have been launched in the past two years. We are preparing further new measures. To give some examples, I believe that there are practical possibilities of expanding mail order export business, and I am investigating these with those who are most experienced in the trade. Secondly, the Export Credits Guarantee Department is examining the feasibility of extending the very successful financial guarantee scheme to direct loans to buyers in certain cases below the existing £2 million minimum.

Thirdly, we shall extend to Germany in September the operation, which has proved effective in the case of the United States, Canada, and Australia, by which British commercial officers from those countries visit systematically a number of British firms in this country and stimulate exports. I have also decided to introduce a scheme, which was mentioned by my right hon. Friend the Prime Minister and of which the hon. Lady the Member for Finchley asked particulars, for encouraging our own tourist industry to expand its earnings with the help of development loans from the Government. In response to the hon. Lady's request, I will give some details.

The scheme will have to be selective and not indiscriminate. The loans, therefore, will be available only for hotels which can show that capital expenditure on new buildings, building extensions or new installations of fixed equipment will result in significant new or increased earnings from their overseas visitors. The rate of interest to be payable on the loans will be the Exchequer lending rate, and the maximum period allowed for repayments will be a term of 15 years. For any given project, the loan will not normally exceed 50 per cent. of the cost of the development, and there will be a lower limit of £10,000 for each loan. The scheme will operate initially for one year, and the total of the loans to be approved during that year will be up to £5 million. We shall consult representatives of the industry about the working of the scheme.

Nevertheless, this and all the previous export promotion measures, however energetic, will be frustrated if we allow the level of home demand to pull back potential exports into our own markets. Without the restraints announced by the Government last week, I do not believe that our exports could have been expected in the second half of this year to continue the encouraging rise which we achieved up till the summer. The evidence seems to be overwhelming that, in 1964 and 1965, and potentially again this summer, the rise in income and demand had reached the point at which exports were being sucked back into the home market. In the summer and autumn of 1964, as the right hon. Member for Barnet (Mr. Maudling) will remember, exports actually fell. That was one main reason why we had sunk into such hopeless deficit by November, 1964. If the Tory Government of that summer had acted in July, the slide of that autumn could have been avoided.

After the restraints imposed at the end of 1964, exports began to rise in the first half of 1965, but were again flagging in the summer months. Had we not introduced the further curbs in demand which we did in July of last year, all the signs are that we should not have achieved the strong upward rise of exports last winter and spring. But now I believe that an excess demand similar to those of the summer of 1964 and 1965 has begun to appear again. Numerous exporters have told me recently that it is shortages of skilled labour and components and the shortage of manpower generally due to the pressure of home demand which are holding back exports, and not shortage of orders. With unemployment down nationally to 1.1 per cent., incomes and retail prices rising and imports pressing upwards, it is unquestionably prudent to act now and not let things slide as right hon. Gentleman opposite did in 1964.

Mr. Reginald Maudling (Barnet)

If the pressure of demand in October, 1964, was so high as to frustrate exports, why did the Government say in 1964, in their White Paper, that there was no undue pressure of demand?

Mr. Jay

We said that there was an undue pressure of demand—[Interruption.]. If right hon. and hon. Gentlemen opposite will let me finish, we said that there was an undue pressure of demand after measures had been taken to check imports, and that was what they did not do. [Interruption.] The right hon. Member for Barnet has not followed the story. It was the checking of imports which led to the excess of demand and it was his failure to do it that led to the trouble.

Mr. Maudling

The White Paper in October, 1964, said quite clearly that the Government had found no undue pressure of demand on resources. If the right hon. Gentleman cannot remember those words, he should.

Mr. Jay

What the right hon. Gentleman still does not realise is that that referred to the period before the measures were taken to check imports. If he looks at the White Paper again, he will see that that is so. For that reason, we do not intend to repeat those mistakes now.

This afternoon, fears have been expressed, which I am sure are sincere, that the Government's measures may involve massive unemployment, or outright deflation. No one who examines the figures, rather than some of the wild assertions that are knocking around, will find evidence for extreme estimates of that kind. We heard exactly the same fears expressed in the debate last July, some of them from the same people. All the same predictions about heavy unemployment were made then.

During the debate on 28th July—the dates are almost always nearly the same—I replied—to the sceptism of some hon. Members—that serious unemployment was not to be expected and that the Government's measures were "curtailing excessive demand" and not imposing outright deflation. What happened, in fact and not in mythology? Unemployment, which was 1.2 per cent. last July, rose to a winter peak in January of only 1.5 per cent. and is now 1.1, but the effect on our exports and imports was to bring the situation nearer balance by the end of the year.

If anyone thinks that the policy announced last week will produce a disastrous effect on employment, let him look at the figures. The Government hope to curtail home demand by about £500 million a year below what it otherwise would have been. But total final expenditure in this country today is running at about £40,000 million a year and rising at about £2,500 million a year. Even total consumers' expenditure is now running at about £23,000 million a year, and rising at about £1,500 million a year. Therefore, although £500 million sounds a lot when the hon. Lady the Member for Finchley adds it up item by item—

Mr. Cyril Bence (Dumbartonshire, East)

It is a lot.

Mr. Jay

—and she got the arithmetic right, it represents little more than 1 per cent. of total expenditure, and only 2 per cent. of consumers' expenditure which is itself rising at 6 to 7 per cent. a year. This merely represents a rather smaller figure than the annual increase going on at the present time. Nobody who looks at these figures, and not at his own preconceptions, can believe that some of the more gloomy predictions made in the last few days will be justified.

On the other hand, I believe that these curbs will mop up sufficient excess demand to improve, as last year, the balance between exports and imports. A rise in our total export earnings, visible and invisible, of £150 million above what they would have been, and a fall of £150 million on our imports and overseas spending, would be decisive for our balance of payments. Yet £150 million is only 2 per cent. of our total earnings overseas, or of our total spending overseas. This is why comparatively small adjustments of home demand can be decisive for our balance of payments, and, because of the inadequacy of our reserves, about which many hon. Members have spoken, decisive also for the strength of sterling.

What these measures will do, I believe, by reducing the excess home demand, is to allow resources to shift into production for exports. In the congested areas manpower will be taken on by firms now acurately short. But we are also now achieving a far more even spread of employment over the whole country, and the new selective measures of building control and office control will speed up this improvement still further.

Unemployment in the development areas is now lower than it has been at any time for 10 years or more. The Board of Trade is now building, or planning to build, 73 advance factories in these areas. They are wholly exempt from the new deferments, and they are only one part of the development programme going forward in these parts of the country.

Since the 40 per cent. new investment grants were announced for development areas in January, there has been a marked increase in the demand for factory space in these areas, especially in Wales, which was particularly neglected by the party opposite, and where the Ford Motor Company is planning large expansions of employment at the Swansea plant, which is, of course, close to the coal mining area. I am sure that this will be welcome to the hon. Member for Carmarthen (Mr. Gwynfor Evans), who made an eloquent speech, but who has not stayed for an answer.

As a result of these successful policies the spread of unemployment between the fortunate and less fortunate regions is being evened out. The right hon. Gentleman may like to know the figures. In July of this year the spread between the most fully employed regions, at 0.7 per cent. and the least fully employed, at 2.4 per cent., was 1.7 per cent. In February, 1963, at the unemployment peak, it was 3.6 per cent. This evening out of employment over the whole country means increasingly that the effect of disinflation is to get manpower into more important jobs and not to throw people out of work.

The policies announced this week will help to carry this process even further. By exempting the new wider development areas entirely from the tighter building control, and by extending the office control in the congested areas we are intensifying the relative priority now given to the development areas. I intend, also, during the period of these measures to intensify still further the industrial development certificate control in the congested areas, but to continue to grant I.D.C.s freely in development areas.

It is not only geographically that these restraints are selective. Pensions, insurance benefits, housing, hospitals, health and schools are entirely exempt. This means that all these are given a new and greater priority over the less essential forms of building and of expenditure which are being temporarily restrained. I believe, therefore, that much the greater part of manpower released from the less essential jobs will be put to work on exports and other more valuable tasks, and not left idle. But if this is to prove wrong—and we can all be proved wrong in our predictions—and if these new restraints prove more than was necessary to correct the balance of payments, and unemployment increases seriously, it is quite possible to relax.

In those circumstances, it would certainly be the intention of the Government to do so. Both the regulator control of indirect taxes and hire-purchase restrictions can be varied up or down at a few hours' notice, with an immediate effect on the economy. I do not know why it upsets the right hon. Gentleman so much to think that there is a prospect of relaxation; it is not beyond the bounds of possibility.

Simultaneously with the transfer of manpower to exports, or to import saving, it is certainly necessary to raise output per man, or productivity. That we are doing and shall do, for instance, in the shipbuilding industry, where my Department, together with the shipbuilding unions and management, have been pressing on with the Geddes proposals. The right hon. Member for Flint, West (Mr. Birch) asked about restrictive practices. Already in the shipbuilding industry the boilermakers have agreed to work out a major demarcation agreement. Five local interchangeability agreements have been concluded and the unions have agreed that the Shipbuilding Industry Training Board should provide training courses for shop stewards. In addition, two shipbuilding mergers have already taken place and others are planned as a first step towards the regrouping of the industry. The Government are pressing on with all these proposals.

At the same time, to combat restrictive practices generally on the management side of industry the Monopolies Commission—and the right hon. Member the Leader of the Liberal Party has always asked for this—is working faster and more energetically than it did under the previous Government. Six references have been made to the Commission in the past 18 months; seven are now being investigated; four reports have been made, and three have been substantially accepted and, where appropriate put into force by the Government. We mean to proceed vigorously in this campaign against restrictive and monopoly practices on both sides of industry.

The complaint of the Leader of the Opposition today—and his speeches have not been notably helpful to sterling—seems to be not that these measures of restraint should not have been taken at all, but that they should have been taken earlier. I suppose he thinks, or they are trying to say, that taxation ought to have been raised more steeply in the Budget in May. I would like to know, then, why he did not say so at the time. If that is the complaint, why did he and the Official Opposition vote against the tax increases in the Budget and go on voting against them throughout the summer, as the Opposition's one contribution to a problem which they now say can he cured only by more restraints and not by less?

Now that excess demand has again been checked, there is no reason why exports should not forge ahead in the coming months as they did after last July. Of course, it will be a long and hard struggle to get even our current balance of payments into steady surplus —nobody should be under any illusion about that—but it is perfectly within our power, given the necessary resolution and restraint. Our prices are very widely competitive in world markets to- day. We are already the largest exporters in the world of a number of products from farm machinery to commercial vehicles and from wool and textiles to washing machines and aero-engines. It is delayed delivery dates which have been holding us back.

The one thing now which could defeat our exporter's efforts would be a runaway rise in costs and prices. We are, after all, and have been for 15 years, fighting a fierce price and costs battle with very keen competitors. Surely, then, a six months' standstill—only six months —and another six months' restraint is a premium worth paying for victory in this battle, which is so nearly in our grasp. There are many pensioners who experience much more than a six months' standstill in increasing their incomes.

Such restraint would transform our prospects on the export front and everyone who knows the keenness of the export struggle believes that that is necessary. Provided that it is fair and that it applies to prices and dividends as well as to wages and salaries, there is no question that the national interest demands it and that a very heavy responsibility will rest on anyone who deliberately seeks to undermine it.

I believe that a Government who have controlled rents, who have imposed a Capital Gains Tax, who have raised Surtax rates, who are applying the same curbs to prices and incomes, who have substantially improved pensions and other social benefits and who plan to do so further, not merely have the right to ask for such a standstill, but have the national duty to make it succeed.

Debate adjourned.—[Mr. Harper.]

Debate to be resumed Tomorrow.