HC Deb 11 April 1967 vol 744 cc983-92

In the Government's view the growth is likely to be about 3 per cent. per annum. Getting such a rate of growth would mean an extra £1,000 million a year in real resources. That is a great deal better than many people have thought possible. Such a strategy has implications for the pressure of demand, the level of incomes, and the phasing of the growth. I would now like to discuss these. But the message is clear. Britain need not stagnate at home in order to pay her way abroad.

As regards unemployment, such a policy in isolation would have no material effect on present levels—apart, of course, from seasonal variations. There is hardly need for me to say that the Government could not agree to leave the issue like that. The problem is basically inside the development areas—it is there that the Government are concentrating their efforts.

But the problem is not only one of regional unemployment. Our purpose is to achieve over the years a faster rate of growth of our productive capacity and a fuller use of our manpower both nationwide as well as in the development areas. Under the guidance of the First Secretary, the N.E.D.C. will be concentrating on this problem during the coming months.

(a) Conditions for Growth

The achievement of these objectives depends on a number of things. It depends partly on our ability to raise the growth of productive capacity in manufacturing industry, since we are so largely dependent on that sector for the growth of both exports and investment. It also depends on overcoming the shortages of skilled labour which in the past have caused acute bottlenecks whenever economic activity and employment were allowed to expand for any length of time. In the third place, it depends on a better regional balance of employment. The attainment of these three objectives would, in time, bring about a considerably faster rate of growth of our productive potential than we have had in the past.

How far we shall succeed in exploiting that potential, and secure both a steady and a fast rate of economic growth will, however, depend on a fourth factor—on our success in achieving a long-term incomes policy. I do not need, in this Budget statement, to go over in detail the far-reaching measures that are now beginning to make themselves felt in all of these fields—measures such as the investment grants system, the work of the training boards in industry, the Government's regional policies, and the work of the "Little Neddies" on higher productivity. My right hon. Friends who will be speaking later in the debate will cover these particular matters.

(b) Regional Balance

As regards the regions, I should emphasise that the measures taken so far to help them are having an impact. But the position is not nearly good enough. Everyone knows that there are usually jobs to be found in the Midlands and South, subject to localised industrial fluctuations in, for example, the car industry, and that the real waste and pain concealed behind the national averages lies in the unemployment in the development areas. Last June, when unemployment in London and the Midlands was down to 0.8 per cent., and there were three unfilled vacancies for every person out of work in these areas, unemployment in Scotland and Wales and the Northern Region did not fall below 2.4 per cent. And in December, when unemployment in London and the Midlands was no higher than 1.4 per cent., in Scotland, Wales and the Northern Region it was 3.3 per cent.

In a general reflation, if pressure on the labour market pushes up wages, it is the pressure in London and the Midlands that matters. A more even regional balance of employment would ease this problem and, more important, it would stop the economic waste and the hardship that our fellow citizens endure in the development areas. We do not intend to accept defeat on this problem. By comparison with a national labour force of 25 million men and women we are discussing the raising of the numbers employed by say 100,000 in the development areas. If we could do that the rate of unemployment there would be reduced to the present national average. But it is a persistent structural problem and one which requires a radical solution.

That is the reason why the proposal for regional differentiation in the S.E.T. premiums which was published last week is of such importance and of such urgency. I made it clear when the S.E.T. was introduced that the possibility of regional differentiation would be examined. I need not repeat here the technical details or arguments that are set out in the Green Paper. I will only say one thing. As is explained in the document, the payment of a large premium of £1 or £2 per worker per week is a way of raising the level of employment in the regions by making their products more competitive. So it should not lead to any burden on the balance of payments nor to any need to take countervailing measures to check demand in the rest of the country. Indeed, it should make it possible to reduce the national average rate of unemployment. It is a possible way of improving our economic performance and achieving a most desirable structural change, desirable economically and socially, without prejudicing the achievement of our other objectives. I ought to add that in the medium-term assessment of the internal and external outlook, to which I have referred, no credit was taken for the benefits which might come from the implementation of these proposals. The potential effects of the measures could become very important over a period of years. If so, we would at last be on the way to overcoming our most persistent structural problem.

As to timetable, consultations are taking place. If the Government decided to proceed with the scheme in the light of these consultations, the necessary legislation ought not to be particularly complicated. It would be possible for legislation to be put before the House for implementation during this year.

(c) Incomes Policy

A further condition of securing an acceptable rate of growth is a successful incomes policy. In any country, under any economic system, economic policy can be wrecked and social hardship caused if wages and prices get out of hand.

Against the background of last July, the success of the first nine months of the incomes policy has been of great assistance in restoring confidence in Britain's capacity to overcome her difficulties. Over the period of complete standstill, from July to December, hourly wage rates rose by less than one-tenth of 1 per cent. Manufacturers' selling prices were virtually unchanged. The success of the dividend standstill was almost absolute. But, as the T.U.C. has recognised, it is not enough to gain a temporary pause in the momentum of wage and price increases. We cannot go back to a free-for-all after July. On the contrary, it will be necessary to prevent any fresh impetus to inflation arising from the implementation after July of settlements that have so far been deferred. The T.U.C. sees the need for this continued discipline, and understands that the alternatives to it are disagreeable and socially unjust.

I would like to quote with the utmost approval what Mr. Woodcock said to the conference of trade unions in March. He asked what was the alternative to an effective incomes policy and then answered his own question like this: Those other measures"— that is, alternative measures— will be one or a combination of all these things: greater taxation to scoop money out that is secured by wage increases unrestrained; a slower rate of economic growth because of fear of the effect of rising incomes upon imports and upon export costs, which means more unemployment; using unemployment as an instrument of getting the stability you want; and less expenditure on public services like education, health, and so on. Those are the real alternatives. It is to stop this kind of development [HON. MEMBERS: "Read on."] I am still quoting Mr. Woodcock: It is to stop this kind of development that we have an incomes policy.

Mr. Woodcock did a very considerable service in putting the choice in such a stark manner to the conference of unions. At the end of the day they opted for an incomes policy. So there is no disagreement between the Government and the T.U.C. on ends. The difference is about the means to be employed.

This is not the occasion this afternoon to pursue those differences, but I draw two conclusions. First, in a free society like ours, the success of an incomes policy depends not only upon the Government's actions, but to an even larger extent upon the reactions of trade unions and employers in dealing with claims for higher wages. The Government must take that factor into account in deciding economic policy. Second, I shall have to watch, carefully, how far the incomes policy succeeds, and if there is a general scramble for substantially higher wages then Mr. Woodcock is right and I shall be forced to hold back economic expansion, unemployment will be higher than it need be, taxation will have to go up and there will be less to spend on hospitals, schools, housing and other public services.

The trade union conferences are now assembling. I urge them in the best interests of their own members to heed what I have said. The Government are not proposing to make the ordinary worker worse off. We are stating that if certain conditions are observed by him his standard of life will go up, his employment will be safeguarded and there will be a general and sustained increase in prosperity.

There is another side to this, and that is the question of other incomes, especially dividends. In a period when increases in pay will continue to be restrained I must ask that companies should exercise the maximum restraint in the distribution of dividends. I recognise that many of them may not be in a position to raise their dividends now. But the level of profitability is likely to increase, and there must still be moderation in distributions. The degree of cooperation which the Government have received in this matter over the last nine months encourages me to believe that industry will avoid provocative increases in dividends. If this belief turns out to be misplaced, fiscal or other measures will have to be taken.

I have dwelt at some length on two important factors in achieving a sustainable rate of growth, namely, getting a better regional employment balance and an incomes policy. There are, of course, many other factors, for example, training for skill and the need for a high level of managerial competence. The C.B.I. has asked me for certain assurances about the Government's attitude to business, because it claims that doubts about it could damage economic growth. I gladly respond to its invitation.

As I interpret the country's attitude to these matters, it is that the great majority of our fellow citizens accept the need for a mixed economy with Government enterprise and private enterprise working side by side. It is an economy in which the Government seem required by circumstances more and more to play an active part, for example, in such fields recently as aircraft, shipbuilding and the computer industry. Within that mixed economy it is the Government's policy that the private sector should be encouraged to be efficient and to expand. That means, among other things, that it must be profitable—it must be able to secure a good return on capital employed in order to encourage it to reinvest in new plant and machinery.

I claim that within the inevitable limitations of the last 2½, years the Government have done a great deal to carry out that policy, for example, through the export rebate, the investment grants, the S.E.T. premium—all cash in hand for industry—and the change-over to the Corporation Tax, with a lower rate of tax for retained profits. The Government would like to see a recovery from the present low level of profitability so that a better return is earned, but it should be achieved through greater efficiency and productivity and not through higher prices. In short, although private industry must pay its fair share of taxation—no more and no less, but just as much as anyone else, and no less than anyone else—and, while it must pay its fair share and, under a Labour Government, will pay its fair share, I have no intention of killing the goose that lays the golden eggs. I think that it was Colbert who said that the object of fiscal policy should be to pluck the maximum of feathers with the minimum of hissing.

(d) Public Expenditure

Now I come to another condition of achieving sustainable growth, namely, a proper balance between public and private expenditure.

As the Committee knows, we inherited extremely large programmes for future expenditure both by the Government and by local authorities and nationalised industries. The greater part of those programmes is being carried out in the essential social and economic services, despite our external difficulties, with the result that the last three years have seen a substantial shift in the allocation of resources from private consumption to the public sector. This has led to improvement in what I have labelled our collective standard of living, as expressed in more hospitals, schools, roads, etc. We aim to keep a balance between improve- ments in personal standards and collective standards.

We have, therefore, in the context of the long-term planning operation announced by the First Secretary last November, launched an exercise to bring our long-term expenditure programmes into line with growth prospects up to 1970 as we now see them and to reconsider priorities between the different long-term programmes. This is a large and complex exercise. Changes in expenditure have consequences reaching far into the future, as is the case, for example, with investment in human skills, such as the training of doctors and teachers, or investment in physical assets which take long to construct and have a long life.

We are examining these consequences, looking at the long-term social and economic benefits of different expenditures and their costs; and we shall weigh the relative merits of more public expenditure in total as against more private expenditure, notably private consumption, recognising that the level of taxation is the lever which must balance the two. I can say that we are assessing the problem and weighing the balance more systematically than has ever been done before. And that is right: this is a field where techniques of economic and social analysis have been advancing rapidly.

This exercise is now in progress. But two issues were clear before we started. First, public expenditure, notably public investment, will still rise rapidly this year. In our present circumstances I do not regard that as a cause for alarm. It is quite justifiable that during a period when private investment is declining public investment should be allowed to advance quite rapidly, so expanding the infrastructure of society and raising the collective standard of living. But, of course, the corollary of this proposition is that when private investment recovers there should be enough room for it. Private investment will recover—indeed, we have taken many steps to induce such a recovery.

This means that public expenditure, which cannot be quickly changed, must be reined back in good time. Otherwise, a recovery in private investment superimposed on a continuing rapid increase in public investment could quickly lead to a renewed overload on the economy—unless we were ready to impose swingeing increases in taxation. For these reasons, my approach to the level of public expenditure is not confined to the medium term. We are already focussing particularly on 1968–69, with a view to moderating next year's prospective increase in expenditure, and by this means to making room for the expected recovery of private investment.

(e) The Medium-term Outlook

Before I consider the immediate outlook for this year, I would like for a minute to look at what the broad prospect before us means for our people.

I have already said that a rate of growth of 3 per cent. a year will mean that the gross national output is rising at a rate of about £1,000 million a year. How will these extra resources be used? A good deal of this increase will be needed to bring the balance of payments into surplus and to expand and improve our capital equipment. Nevertheless, a considerable part of it will be available to raise the level of personal consumption. Added to that there are the benefits of rising collective consumption in the shape of improving social services and public amenities. As our policies have shown, we are determined to eradicate hardship and squalor as befits a prosperous society.

These prizes are within our grasp. There is always a tendency to swing from the depths of gloom to excesses of optimism. We are now emerging from the valley of gloom and can begin to see the outline of the landscape we shall be travelling through in the next three years. It will be new country, especially as time wears on. The coming year can be seen quite sharply and I will describe it in a moment. As to later years they look something like this. First, we intend to maintain a balance of payments surplus earned through a sustained export drive, and by a reduction—which will grow steadily bigger in the later years—in Government overseas defence expenditure. Next, we foresee an expansion in the economy year by year but avoiding an excessive inrush of imports, by maintaining the pressure of demand at a reasonable level and by making fuller use of skilled manpower. Third, there will be a strengthening of those regions where unemployment is above the national average rather than a headlong rush into general indiscriminate reflation such as previous Administrations allowed.

This is the path we intend to follow. We have set out on it with marked success, and I hope that we shall not fall into the trap of believing there are short cuts to our destination, or that we can achieve it by violently changing direction. Nor would closer relations with the European Economic Community affect this view. At this moment no one can foresee whether we shall be marching with the Community or not. If the conditions are right, we hope to do so. But either way—in or out—we need a healthy economy and a strong balance of payments.