HC Deb 20 November 1967 vol 754 cc935-52
The Chancellor of the Exchequer (Mr. James Callaghan)

With permission, Mr. Speaker, I will make a statement about the measures announced by the Government during the weekend, and I will circulate in the OFFICIAL REPORT a copy of the statement which I issued on Saturday evening, announcing that with the concurrence of the International Monetary Fund the exchange rate of the £ had been lowered from 2.80 dollars to the £ to 2.40 dollars to the £.

The accompanying measures provide for an increase in Bank Rate to 8 per cent.; a limitation on bank advances except to priority borrowers especially exporters; an increase in hire purchase deposits on motor cars to 33⅓ per cent. and a maximum repayment period of 27 months; an increase in Corporation Tax to 42½ per cent.; the abolition of the export rebate now costing just under £100 million a year; the withdrawal of the extra amount received by manufacturers in the S.E.T. premium except in development areas thus saving over £100 million.

My right hon. Friend the Lord President of the Council will make a statement on the changes in Parliamentary business that now become necessary. I will, therefore, confine myself this afternoon to a statement of the effects and underlying objectives of the decision.

This change in the value of the £ will, of course, have the effect that the things we buy from abroad will cost us more and things we sell abroad will become cheaper for people overseas to buy.

This has both advantages and disadvantages. On the credit side, there will be substantial help to our balance of payments. On the other hand, because we shall need to pay higher prices for some of our imports we must expect in the coming months a small but noticeable rise in prices.

There will be no need for all prices to rise and the Government intend to maintain a careful check on the movement of prices in the coming months to ensure that there are no unnecessary increases. Because some rise in prices is inevitable, the Government will take, at the right time, the steps that may be necessary to protect the most vulnerable sections of the community from hardship.

This will not be done by increasing overall demand, but by bringing about, in a non-inflationary manner, the required redistribution of purchasing power for the benefit of those who are worse off and who would otherwise suffer.

The advantage of devaluation is that it sharpens our competitive edge. From now on it will be markedly cheaper for overseas customers to buy British exports. This offers us a great opportunity to increase our overseas sales.

The moment has now come for all manufacturers, designers, salesmen to cash in on the entirely new and favourable conditions which the change in the exchange rate has created in overseas markets. This opportunity needs to be exploited with vigour. This is an advantage that we must keep. It could be frittered away if delivery dates were not kept, quality was not up to standard and large wage claims were made and conceded, which would have the effect of increasing the cost of our goods.

This remains true despite rising prices. Where there are large and genuine increases in productivity this can be reflected in wage bargaining. The Government have already begun consultations with the T.U.C. and the C.B.I. on the existing prices and incomes policy, to ensure that it measures up to the needs of the new situation. As I said in my statement on Saturday, a strict watch will be maintained on dividends.

The primary purpose of this change in the rate is to enable this country to secure lasting and substantial improvement in its balance of payments—of at least £500 million a year. Such a change round would have a profoundly beneficial effect on all aspects of our policy: on our foreign policy, our standing in the world, and our prospects for securing economic growth and full employment. But it would all be dissipated if the inevitable rise in prices were matched by a general increase in wage rates. This is what I meant in July when I said—I will read again what I said: Those who advocate devaluation are calling for a reduction in the wage levels and the real wage standards of every member of the working class of this country."—[OFFICIAL REPORT, 24th July, 1967; Vol. 751, c. 99.] The position is this. Without devaluation, during the course of 1968 personal consumption would have gone up, we estimate, by 3 per cent., but we would have had a substantial—and unacceptable—balance of payments deficit. As I see the situation developing after devaluation, the bulk of the increase in personal consumption that would have taken place will be transferred to exports and we shall get rid of the deficit. This is the price we shall have to pay.

When we come to 1969 we should be able to afford a rise in personal consumption and this will be coupled with a continuing improvement— [HON. MEMBERS: "General Election."]—in the balance of payments. Then we shall begin to feel the benefit of the action we have taken now. Devaluation will start to reduce unemployment, as soon as our exports begin to increase and the exporting industries call for more workers. I expect to see unemployment moving down steadily from the end of the winter onwards. This will not, of course, deal by itself with the problem of regional unemployment where it is caused by structural changes in our traditional industries. And it follows in this, as in a number of other ways, that the Government's policy for strengthening the regions, Scotland, and Wales must continue and be intensified.

We are out for export-led growth. The purpose of this devaluation is to shift the emphasis of production towards exports. I emphasise that this is a shift in the use of our resources and that the reductions in public expenditure and private consumption are intended to make that shift possible and are not deflationary. They will not reduce total production. Indeed, as exports go on rising so total production will increase.

As regards public expenditure, the Government are cutting the expected rate of growth by £400 million. Details were given in the statement I issued. As regards defence, we are satisfied that the reduction of £100 million in the Budget planned for next year can be made within the framework of the defence policies announced last summer. The cuts will involve the cancellation of certain programmes, a reduction in research and development expenditure, certain building cuts and a reduction in stocks, although there will be some offsetting transition al expenditure and an increase in sterling terms in the cost of purchases overeas and the pay of our troops.

The Government have decided that there should be curtailment in the capital expenditure programmes of the nationalised industries together with other public expenditure of £100 million a year. In the totals which we will achieve there is no padding and no credit for expected short falls in expenditure. Final details will be announced in due course.

The International Monetary Fund has concurred in the devaluation. Moreover, a number of other important countries have expressed their understanding of the necessity of the decision, and many have already announced that they will not be altering the value of their own currencies. The very fact that a movement in the value of sterling causes this worldwide reassessment of the position of individual countries is a measure of the deliberation that must precede the taking of such a step by this country.

The new rate of 2.40 dollars gives us a substantial competitive advantage without leading other countries to follow us. In this sense, the operation of last week has already got over its first hurdle. The Government particularly appreciate the understanding reaction of a number of sterling area countries, the value of whose holdings of sterling has now been reduced in terms of foreign exchange.

Another heartening factor has been the willingness of a number of Governments and central banks to come forward with offers of credit facilities. These facilities are not a loan to us. They are not intended for us to live on nor do we intend to use them for that purpose. They have been assembled as an indication that the international monetary centres of the world are united with us in their determination to put an end to speculation against one of the world's key currencies. A further reinforcement will be the standby of 1.4 billion dollars for which we have applied from the International Monetary Fund, and the total financial resources for this purpose will therefore be around 3 billion dollars.

Mr. Speaker, it was with great personal regret that I came to the conclusion that it was necessary for me to recommend devaluation as an act of policy to the Cabinet last week. But the change having been made, and the new parity having been fixed, I believe that the House as a whole will agree that, provided we are ready to pay the cost, we have a great opportunity to improve our position, to expand our exports rapidly and achieve a strong surplus with a fully employed economy. That is the Government's purpose.

Hon Members

Resign.

Mr. Iain Macleod

The Chancellor of the Exchequer will be aware that his long statement gives rise to many questions which we shall wish to probe in the two days' debate which, I understand, is to be announced. He will be aware that we do not accept either his diagnosis or his prescription, and that we look forward to debating these.

I put only one point now to him. He quoted, and tried to explain away, one sentence from his speech of 24th July which is an utter condemnation of devaluation. May I remind him that he also said—that if we devalued—and I use his own words: We should break faith with Governments and private citizens overseas. The right hon. Gentleman went on to say: I just do not want either to devalue our own word or to bring down the standard of life of our own people."—[OFFICIAL REPORT, 24th July, 1967; Vol. 751, c. 100–21.] The Chancellor of the Exchequer will know that I am using his own words. He has done all these things. He has broken faith. He has devalued his word. He is planning to bring down the standard of life of our own people. He is an honourable man. Will he resign?

Mr. Callaghan

I am obliged to the right hon. Gentleman for putting the question so succinctly. I will give him an equally succinct answer. I recommended the Cabinet to devalue. It accepted my advice. It is my immediate responsibility to see that the operation is successful.

Mr. Dickens

Is my right hon. Friend aware that not withstanding one's criticisms of the deflationary aspect of the package, I believe that he and the Cabinet are to be most warmly congratulated on their decision—[Interruption.]

Mr. Speaker

Order. This is an important set of questions. We ought to have quiet. Mr. Dickens.

Mr. Dickens

I repeat that the Chanceller of the Exchequer and the Cabinet are to be most warmly congratulated on making this decisive break with the past, in that the exchange rate will no longer be first priority in Government economic policy. Does not my right hon. Friend now agree that, having taken the decision, it must be fully exploited by having physical controls over prices, mobilising private assets abroad, imposing further restrictions on the outflow of private capital, and making further heavy cuts in overseas defence expenditure?

Mr. Callaghan

That is a contribution that my hon. Friend will no doubt wish to make in the debate, and I will deal with it then. I do not accept the view that the £ has been given first priority: the only question was at what rate we should limit the increase in personal consumption. We were trying to do it over a long period, hoping and expecting—and, indeed, this policy will have to be reinforced—that the restructuring of British industry would enable us to overcome the disequilibrium that has existed for some years.

We have now had to make a sharp break in that policy, and it will have an effect on the standard of living, But, having made that sharp break, we can look forward to a substantial cheapening in export prices, and that should be our salvation.

Mr. Selwyn Lloyd

I am not going to ask the right hon. Gentleman a controversial question at all today, but will he answer a simple question of fact? During these discussions, was an offer made of a loan with or without conditions?

Mr. Callaghan

There were not discussions on an internationally agreed basis. A number of bilateral talks took place, because, as this operation has been carried through in an extremely successful manner—[HON. MEMBERS: "Oh."]—as the reactions of many other Governments has shown. If that arouses incredulity, I quote the contribution of Mr Hubert Ansiaux, the Governor of the Belgian National Bank: This is the first in history to be accompanied by so much international consultation and so much care to avoid international disturbance. I wish to deal with the right hon. and learned Gentleman's question. I was interrupted by the ejaculations of his colleagues. There were a series of bilateral discussions in which countries came forward and offered to put credits at our disposal in order to maintain parity. There were no conditions attached to these. They were the normal banking arrangements that were given. I came to the conclusion that it was irresponsible to go on borrowing on the short-term in this way because I could not see the balance of payments coming right in 1968. It was for that reason, therefore, that I had to come to the conclusion I did.

Mr. Swain

Seeing that countries which supply all our oil are not to devalue and companies which are exploiting North Sea gas are American-based companies, will my right hon. Friend tell the House how devaluation will affect the fuel policy of the Government? If it is to be detrimentally affected, will the Government review the fuel policy more in favour of coal?

Mr. Callaghan

Yes, Sir. I have thought about this problem, naturally. My hon. Friend and the miners will recognise that the effect of devaluation itself does give them the equivalent of a tariff against fuel imports. It makes oil cheaper and coal relatively dearer—[HON. MEMBERS: "The other way round."]—oil dearer and coal cheaper, I meant to say—and to that extent the miners will, of course, derive a benefit from the operation.

Sir E. Bullus

Would the Chancellor confirm that he made this decision a fortnight ago? Could he then reconcile it with the Answer which he gave me less than a month ago, on 24th October, when he gave a categorical assurance that he would not devalue the £ in the months ahead?

Mr. Callaghan

Yes, Sir. No Chancellor can escape this dilemma. I was very well aware that when I gave the hon. and gallant Member that Answer I was putting myself under a suspended sentence of execution.

Mr. Atkinson

The Chancellor said that the measures announced to a large extent depend upon the degree of price stability achieved during the coming 12 months. With that in mind, will he announce as a matter of earnest policy that so far as commodities and services provided by the Government are concerned there will be no increase in either prices or costs during the coming 12 months?

Mr. Callaghan

I think that would be a large undertaking to give. I would not like to do it without reflection, but, certainly, in so far as goods and services supplied by the Government are not affected by the higher costs of imports, there is no case for an increase in the prices of them and to that extent I can give the assurance.

Mr. Thorpe

Since the immediate alternative is increasing stagnation and unemployment, is the Chancellor aware that many of us accept the inevitability of devaluation while deploring the lack of planning and the mistiming and regard it as an inevitable price to pay for following Conservative economic policies? [Interruption.] May I ask the Chancellor, who no doubt regards this with more seriousness than some Opposition hon. Members do at the moment, whether he does not regard this as the last opportunity to get the economic structure of this country right?

Will he give urgent consideration to immediate tariff cuts to produce greater efficiency before the Kennedy Round, a real effort to get incentives in our taxation policy with particular reference to abolishing the Selective Employment Tax, and a real initiative towards the creation of a European reserve currency so that sterling is never again under these unilateral pressures?

Mr. Callaghan

These are questions which I should debate with the right hon. Gentlemen rather than attempt to give an answer offhand. As to the timing and nature of the operation, outside those who wish to take some party advantage, the rest of the world believes that the timing of the operation and the manner of its execution have been exceedingly well carried out. The degree of consultation that took place with all the major areas affected—[HON. MEMBERS: "On Friday?"] Yes, on Friday.

The degree of consultation which took place has undoubtedly resulted in our being able to take this step without incurring the hostility of those adversely affected by it and has enabled them to readjust their decisions, or to consider whether they should readjust them in a calm atmosphere. That was well worth Friday, because if we had gone into this with the hostility of the rest of the world and without securing their cooperation as we undoubtedly have done, it would have cost far more than any loss on the exchanges on Friday last.

Mr. Ashley

Will my right hon. Friend agree that, in spite of devaluation, the need for an effective prices and incomes policy, which has been opposed by the right hon. Member for Enfield, West (Mr. Iain Macleod), the need for a viable regional policy, which has been opposed by the right hon. Gentleman, and the need for cuts in military expenditure, also opposed by the right hon. Gentleman, are now more necessary than ever? Would the Chancellor further agree that cuts in the social services which will not be opposed by the right hon. Gentleman will not be contemplated by this Government?

Mr. Callaghan

I am obliged to my hon. Friend for exposing the tawdriness of the Opposition Front Bench in this matter. There is no doubt that the policies the Government have followed so far are not reversed nor made unnecessary by devaluation. Devaluation can only be regarded as a supplement to those policies in every respect, in relation to prices and incomes, to regional investment and the restructuring of our industry. This is the only way in which we shall secure the massive turn-round in the balance of payments now open to us.

As to the social services, they should not be tampered with because there is no need to tamper with them. What we want is a shift in real resources and not in payments or benefits of this character. Therefore, there is no indication, and certainly it is not my policy to recommend, that there should be any major change in social services at this moment.

Mr. Boyd-Carpenter

Can the Chancellor explain how increasing Corporation Tax which, as he knows, falls mainly on companies trading overseas, will help exports?

Mr. Callaghan

Corporation Tax falls on every kind of company, whether it trades overseas or at home. I trust that those companies trading overseas will have very much larger profits as a result of this devaluation so that they may take full advantage of the opportunities offered to them. It is for that reason that it seems to me, in view of the very large increased profitability of industry that is likely to take place over the next 12 months, and in view of the fact that we are asking all sections of the community for sacrifice. we should not put industry in a position where it can make very large, exceptionally large profits in this manner. I want them to make profits, but, likewise, there is every reason why, provided they keep their investment up they too should make a contribution to the task which has to be fulfilled.

Mr. Mendelson

While accepting the export advantages that will accrue and which my right hon. Friend has described, may I ask him to bear in mind that the inevitable increase in the cost of living will bear heavily upon workpeople? If he talks in terms of controlling dividends will he also bear in mind that this is a completely different operation from controlling wages? Will he make quite sure that the group of workpeople who suffer by increased cost of living will share in the increased profits of export trade?

Mr. Callaghan

The best way in which we can increase our share of the profits is by ensuring that we have a large and vigorous increase in our export trade. We can then expand the whole of our industrial production and that will mean a rising standard of life. But for the moment, and in the meantime, what we have to do is to get a shift of resources out of personal consumption and public expenditure into exports.

Sir T. Brinton

Will the right hon. Gentleman explain why most of the measures he has proposed clobber the very people who are to be our salvation, through his proposals for extra Corporation Tax and the withdrawal of the S.E.T. premium, the reason for which was precisely to encourage industry because it is by industry that we obtain our exports?

Mr. Callaghan

The export rebate and that part of the premium to which I have referred have met with considerable international criticism. [Interruption.] Hon. Members opposite are still intent on making party points, are they? As I was saying, these have met with considerable international criticism of a growing character. Our industries which export will get a substantial price advantage if they choose to do it that way. No doubt they will choose whichever is in their interests. [Interruption.] The international consideration we shall have to bear in mind, if hon. Members opposite will forget their party points for an instant, is that a wave of protectionism is sweeping throughout the world.

The United States Government are having to resist fierce attempts being made to impose tariffs against our goods. If we can remove the export rebate and other items of that sort, it strengthens other Governments throughout the world, including the American, in their resistance to such pressures for additional tariffs because we shall have no particular advanatages of this kind except for the inbuilt advantage that devaluation itself concedes.

Mr. Henig

Is my right hon. Friend aware that there was some alarm over the prospect of co-operation from industry resulting from the remarks of Mr. John Davies, of the C.B.I., on television, immediately after the Prime Minister had informed him of the Government's intention? Has my right hon. Friend in mind any specific plans not merely to encourage industry to take advantage of the better opportunities for exports, but to make it do so?

Mr. Callaghan

I had the privilege, with the Prime Minister, of seeing Mr. Davies on Saturday night and I did not get that impression from anything he had to say to us then and I do not believe that it will be the approach either of Mr. Davies or of the C.B.I.

Mr. John Hall

Does not the Chancellor agree that, despite what he has said, if we are to get full benefit out of the temporary advantage that devaluation gives us, the Government are bound to follow a severe deflationary policy? Is it not misleading to tell the public anything else?

Mr. Callaghan

I am sorry that the hon. Gentleman still has not understood what devaluation involves. It does not involve depressing total production or output, but shifting it. It means using the opportunity to curb private consumption and public expenditure in order to get thes shift of resources required into exports.

The expectation is that there will be no deflation, that production will rise as exports take up, with an increase in our gross national product. The measures we have proposed, which the House may not yet have fully appreciated, will take effect over a period of nine to 18 months so that the two factors merge in together. This is not an overall deflation in the economy, but something designed to shift resources from one field to another and then, we hope, production will expand.

Mr. Bellenger

Can my right hon. Friend say whether, in fixing the Bank Rate at 8 per cent., his bilateral talks included an increase in the American discount rate?

Mr. Callaghan

Every Government take their own decisions on these matters. Bank Rate will remain at 8 per cent. no longer than necessary to do the job required of it.

Mr. Peyton

Why has the right hon. Gentleman reserved the pillory for himself, since not only did the Prime Minister take personal responsibility for the economy some time ago, but, also, this is the third time on which Socialist policies have brought this country to the humiliation of devaluation? Does not the right hon. Gentleman think that three times is too much?

Mr. Callaghan

We have a system of Cabinet responsibility in this country and I am the Minister who is responsible for both the recommendation not to devalue and the recommendation to devalue and I fully understand my responsibility in that connection.

As for the second part of the hon. Gentleman's supplementary question, I will now tell the House something that I have not said for three years. I now propose to say it if the taunt is to be thrown around that three times is more than enough.

When I had been in office for one month I was approached by a very senior monetary authority in Europe, a person known to everyone concerned with this field, who spoke, as he said, on behalf of the Six. He said that he believed that we ought to devalue by between 10 and 15 per cent. So if there is any accusation—[HON. MEMBERS: "Oh."]—if there is any accusation—

Hon. Members

Resign.

Mr. Speaker

Order. Noise does not help.

Mr. Callaghan

If there is any accusation that this devaluation is the result of the Labour Government's economic policy, I say to the hon. Member for Yeovil (Mr. Peyton) and to the Conservative Party that it was the view of many distinguished authorities that, when the Conservative Party left office, this country was in a state of fundamental disequilibrium.

I rejected the view that that gentleman put to us. [HON. MEMBERS: "Alibis."] I am not looking for alibis. I am trying to get hon. Members opposite to understand the truth. I rejected the advice then because I believed that it was right that this country should make every effort, through prices and incomes policy and in every other way, to overcome that fundamental disequilibrium rather than take what would then have been regarded as the soft option of devaluation. [HON. MEMBERS: "Resign."] You left us in this state.

Mr. Speaker

Order. The Chair must resist the implication in that last remark —"You" being the Chair.

Mr. Michael Foot

Will my right hon. Friend accept that what many of us wish to see is the speediest possible return to a policy of expansion and the speediest possible curtailment and reduction of the unemployment figures? Since it has become increasingly apparent to everyone—except, it seems, to the benches opposite—that the old exchange rate was a principal obstacle to the achievement of these aims, will my right hon. Friend also accept that many of us rejoice that now we have got this albatross off our necks?

Mr. Callaghan

I am sure that many of my hon. Friends will say, "We told you so".

Mr. Heffer

My hon. Friend the Member for Ebbw Vale (Mr. Michael Foot) did not say that. Accept it in good faith.

Mr. Callaghan

I hope that my hon. Friends will understand. I accept what my hon. Friend the Member for Ebbw Vale (Mr. Michael Foot) has said in the spirit in which he meant it. I meant no offence. I need friends at the moment. I have plenty of enemies opposite. I think that the change in the rate, provided we are ready to pay the temporary cost and to maintain our competitive edge, will undoubtedly have a beneficial effect on employment and on production in this country.

Mr. Turton

Has not the Chancellor made an important omission in the measures which he has outlined: the replacement of a substantial quantity of food imports by increased agricultural production? Will he now arrange for a special review to ensure an extra £200 million expansion in British agriculture in the coming year?

Mr. Callaghan

Yes, Sir, I accept what the right hon. Gentleman says. There is a case for reviewing the implications of this on agriculture. My right hon. Friend the Minister of Agriculture has already begun on this and he will, of course, have further opportunities during the Price Review.

Mr. Mayhew

Is my right hon. Friend aware that there will be wide agreement that of the few and difficult courses that were open the decision to devalue was undoubtedly the right one? As to defence, however, does my right hon. Friend recall Ministerial statements that defence expenditure was already at the absolute minimum required to fulfil our commitments? Therefore, will he say how it is possible now to save £100 million without reducing the commitments and, if it is possible now, why it was not possible before?

Mr. Callaghan

My right hon. Friend the Secretary of State for Defence will in due course give full details of the cuts in research and development and in other directions that he proposes to make. They are not particularly welcome to him, but they are a necessary part of the transfer of resources that we need into the export field.

Mr. Ronald Bell

Are the Government now getting rid of their Hungarian advisers?

Mr. Pavitt

Can my right hon. Friend do anything about a special tax on the ill-gotten gains of British speculators who have been gambling on the pound in the last few months?

Mr. Callaghan

So far as they have made capital gains which will accrue to them and be realised in less than 12 months, they will, of course, have to pay Capital Gains Tax on them at the full standard rate of Income Tax. If they accrue over a period of longer than 12 months, they will have to pay Capital Gains Tax at 30 per cent.

Mr. Birch

It is widely reported that the right hon. Gentleman reached his decision a fortnight ago. Can he say how much money was spent in supporting the spot rate in that period, how much was needed on the forward market and what the extra cost of repayment will be?

Mr. Callaghan

The right hon. Gentleman, who has served at the Treasury, would never have dreamed of giving such an answer when he was there, and I certainly do not propose to do so either.

Mr. Shinwell

Will my right hon. Friend realise that although there are difficulties and problems ahead—we appreciate that, and I have no doubt that the Government will tackle them with resolution—nevertheless, as long as opposition is expressed by the other side of the House, he will have the support of this side? The real danger to himself and the Government is of the Opposition supporting him. When that happens, he will lose the support of this side.

Mr. Callaghan

I hope that the Opposition have taken note of that.

Mr. Nott

Will the Chancellor say whether, on Friday of last week—I am not asking for the amounts, as my right hon. Friend has done—the Bank of England was supporting the forward rate in the market after the Cabinet had decided the day before to devalue?

Mr. Callaghan

No, Sir, I am not ready to answer that question.

Mr. Wyatt

Will the Chancellor accept that his conduct over the last few days has indeed won him many friends in many unexpected places? Will he give the House an assurance that he will not rely on voluntary restraint to prevent rises in wages unaccompanied by increased productivity, but that he will at once introduce legislation to make sure that the value of the action of devaluation is not lost?

Mr. Mendelson

Pay no attention to that. My hon. Friend should speak for himself.

Mr. Callaghan

My right hon. Friends the Minister of Labour and the Secretary of State for Economic Affairs are this afternoon discussing the issues which arise out of this with the General Secretary of the Trades Union Congress and other members of the T.U.C. I would not, therefore, wish to go too deeply into this matter, except to say that the Government do not believe, in present circumstances, that additional legislation in this field would yield us the benefits that we need.

Mr. Sandys

Having been forced totally to reverse the economic policy on which they were elected, is it not the duty of the Government to seek a new mandate from the people?

Mr. Callaghan

That is a matter for my right hon. Friend the Prime Minister. If, however, I may express an opinion, as long as the Prime Minister can command a majority in this House it is to this House that he is responsible.

Mr. Sandys

You are afraid of losing your seats.

Mr. Emrys Hughes

Is the Chancellor aware that anybody who escapes from a straitjacket deserves to be congratulated and that the only wonder is that the Government did not struggle more fiercely before? In reference to the defence cuts, does not my right hon. Friend think that the reason why we were in the straitjacket was that we have gone in for £370 million on a Polaris programme and are spending £1,000 million on American aircraft, and that this is the time to review such things?

Mr. Callaghan

Clearly, overseas expenditure on defence holds us back, but my hon. Friend and the country will miss the truth of the situation if they believe that this is the sole or even the major reason. The basic reason is that we have not been selling sufficient exports which, together with our invisible income, would put us into balance-of-payment surplus. Until we can get that cost-sales relationship right, we will not get a satisfactory balance. This, I believe, gives us the opportunity of doing so at a very substantial cost to ourselves.

Sir C. Taylor

Will the Chancellor say whether, if we had not indulged in generous overseas aid to the so-called developing countries, if we had not indulged in sanctions against Rhodesia, if we had not had the dock strike and if we had not done away with prescription charges and suchlike, we should have been in the same situation as we are today?

Mr. Callaghan

That is clearly a matter of debate and of opinion, not of fact.

Several Hon. Members rose—

Mr. Speaker

Order. We must move ahead.

Following is the statement:

The Government have decided that, in order to achieve a substantial surplus on the balance of payments consistent with economic growth and full employment, the exchange rate of the £ should be lowered, from 9.30 p.m. tonight, Saturday, 18th November, from 2.80 dollars to the £ to 2.40 dollars to the £, a change of 14.3 per cent.

This change brings with it fresh opportunities —but at a heavy cost. The main opportunity is that our exporters should be able to sell more goods overseas such as motor vehicles and tractors, ships, aircraft, chemicals, textiles and much else. But if we are to derive the full benefit from it we must reduce the growth of demand by consumers at home in order to shift the use of our resources to exports and import saving. We need an improvement in our balance of payments of at least £500 million a year, and the Government intend to ensure that this is achieved.

The banks are therefore being asked to limit bank advances except, of course, to priority borrowers, especially exporters.

Bank Rate is being raised to 8 per cent. immediately.

From midnight tonight the hire-purchase regulations on the sale of cars at home will require a minimum deposit of 33⅓ per cent. and a maximum repayment period of 27 months.

The Government propose to curtail public expenditure in the following ways. Defence expenditure will be reduced by over £100 million next year. Except in development areas, the extra amount received by manufacturers in the S.E.T. premium will be withdrawn, thus saving over £100 million. Other public expenditure including nationalised industries capital expenditure will be reduced by £100 million. The export rebate, now costing just under £100 million a year, will be abolished, since it will no longer be necessary.

The major disadvantage of the change in the exchange rate is that it will cause a rise in certain prices, though this will not happen all at once. It is essential that price increases should be confined to those unavoidable cases brought about by increased import costs. It is essential, equally, to ensure that these price increases do not result in large wage claims and settlements, for such action would mean that industrial costs would go up once more and the competitive benefits of devaluation would be frittered away.

The Government are, therefore, entering into immediate discussions with the T.U.C. and the C.B.I. in order to ensure that the operation of the agreed policy on prices and incomes measures up to the requirements of the new situation.

A strict watch will be maintained on dividends; and it is proposed to raise the rate of Corporation Tax, due to be fixed in the next Budget, to 42½ per cent.

It is the Government's firm intention to take, at the right time, the steps that will be needed in order to protect the most vulnerable sections of the community from hardships resulting from the change in the exchange rate.

In accordance with the rules of the International Monetary Fund the change in our exchange rate has been notified to the Fund, who have concurred. We have made a formal application to the I.M.F. for an immediate stand-by of 1.4 billion dollars and have been assured that this application will receive prompt and sympathetic consideration. Further credit arrangements have already been made with a number of overseas Central Banks which together with the new I.M.F. stand-by, if approved, will provide new resources of around 3 billion dollars.

By Royal Proclamation to be submitted to the Queen in Council tomorrow the banks in the United Kingdom will be closed to the public on Monday, 20th November. Bank staffs should report for duty as usual. The Stock Exchanges will also be closed on Monday.