ECONOMIC SITUATION

HC Deb 24 July 1968 vol 769 cc701-32

Mr. Speaker

Before the first debate begins, I would remind the House that we are debating topics—each in turn. The first one out of the Ballot was the Economic Situation, and in a moment I shall call the hon. Member for Louth (Sir C. Osborne) to open the debate.

Any hon. Member who wishes to speak in this particular debate must intimate to the Chair that he wishes to do so. Sir Cyril Osborne.

9.36 p.m.

Sir Cyril Osborne (Louth)

After the rather high drama and the sad debate on the Report of the Committee of Privileges and the rather kindergarten debate that has just ended, I should like to bring the House back to the problem of the earning of our daily bread. I want to ask a few pertinent questions about the real facts of our economic situation.

People outside the House are confused and mystified by the conflicting estimates of our economic situation that are given by different Ministers at different times. At one time we are told that we are facing bankruptcy, at another that everything is all right. The people would like to know the truth. I ask the Financial Secretary to tell us the facts. I hope that he will be able to give us answers that will help both sides and reassure people outside.

My first question is: is the country about bankrupt or is it facing an economic miracle? It cannot be doing both. Which statement is true of our situation? A few weeks ago, the Governor of the Bank of England was highly publicised as going round Europe seeking new and very big loans in order to bolster up sterling and save it from a second devaluation— to save Britain from welshing on her overseas debts. After a while, and some great work, the Governor of the Bank of England came home with what is called the Basle agreement, a 2,000 million dollar standby agreement, in his pocket. There was an immense sigh of relief at his success.

Mr. Russell Kerr (Feltham)

Will the hon. Member—

Sir C. Osborne

No, I have only just started.

Hon. Members

Give way.

Mr. Speaker

Order. If the hon. Member for Louth (Sir C. Osborne) does not give way, the hon. Member for Feltham (Mr. Russell Kerr) must keep his seat.

Sir C. Osborne

I have been waiting six hours to make my speech and I have hardly started.

Mr. Arthur Lewis (West Ham, North)

Start again. [Laughter.]

Sir C. Osborne

Hon. Members opposite may think that the economic situation is very amusing, but my constituents do not. [Interruption.]

Mr. Speaker

Order. We begin the debate in the way we are going to continue it. We are not going to have a running commentary by the hon. Member for Feltham.

Mr. Russell Kerr

On a point of order. I do not wish to delay the debate in any way, but there is a difference between a loan and a standby arrangement. That is the only point I wished to make.

Mr. Speaker

Order. There is a Parliamentary way of making interventions, if the hon. Member who has the Floor gives way. Otherwise, they must keep quiet.

Sir C. Osborne

I am much obliged, Mr. Speaker. Neither the loan nor an agreement has yet been accepted. It has been only partially agreed. That pretended correction was, I think, out of place.

The seriousness of our situation was set out by theEconomist, in a leading article on 22nd June, when it said: In the first quarter of 1968, the balance of monetary movements out of Britain was the worst ever recorded; in consequence, the country's total balance of payments deficit in the six months to March was running at the annual rate of £1,352 million compared with £776 million which the wicked Tories left behind them in 1964. The Economist went on: To pile on the gloom, the monthly trade figures for May have shown the same deficit of £86 million as they did in April, which means that since that horrible first quarter the average visible trade deficit has actually got £21 million a month worse. This is the position as seen by theEconomist.

The Financial Secretary to the Treasury (Mr. Harold Lever)

Will the hon. Member give the date?

Sir C. Osborne

Yes, I thought I gave the date. It was 26th June this year in a leading editorial.

Mr. Russell Kerr

In a leading Tory paper.

Sir C. Osbome

This statement by theEconomist justifies the Chancellor when he is at his gloomiest. It justifies him in saying that, no matter what opposition may arise either in this House or in the trade union movement against the prices and incomes policy, it must go through because of these facts. A very few weeks later we had the first welcome export figures. The June figures were a great improvement. Everyone in the House and in the country was delighted to see them.

The Prime Minister let them go to his head, as it were, for in the speech at Newton on 6th July he said, of the Tories: They read the comments of expert and keen-eyed overseas observers. They have read the view objectively expressed that Britain is on the way to an economic miracle. The Prime Minister was very careful not to say that he said this, but the very fact that he used the phrase in one of his key speeches and emphasised it showed that he would employ this if it ever came in useful to him and if circumstances justified it. If not, he would deny that he had said there was an economic miracle, but the newspapers took it up and most of the headlines said, "Economic Miracle: Prime Minister".

The Chancellor, on the one hand, has been telling us time after time—and I respect him for it—that we face a three-years' hard slog.

Mr. Harold Lever

Two years.

Sir C. Osborne

Well, a two years' hard slog—I would not wish to misrepresent the Chancellor—and this justifies the austerity which he unfortunately has to impose on the nation under the prices and incomes policy. On the other hand, the Prime Minister hints—he does not go so far as to say that it will happen—that an economic miracle is about to burst. They cannot both be right. Either one is over-painting the picture too darkly or the other is overpainting it too brightly.

My constituents and others outside ask which of those two Ministers is telling the truth. Whom can they trust, the Chancellor or the Prime Minister? As some of them say to me, "Are we in for a merry Christmas, the Prime Minister rather suggests, or will the kids' sweets have to be rationed, as the Chancellor of the Exchequer rather implies?"

If the Prime Minister is correct, and an economic miracle is just around the corner, my workers ask why the busmen's wage increase should not be granted when it has been agreed to by the municipalities and the trade unions have come to a productivity agreement to support it. If there is an economic miracle round the corner, why deny those men the wage increase which they feel that they have earned and are entitled to receive?

Others of my constituents who are in the seafaring world ask why the Prime Minister keeps British seamen's wages at the lowest level of any group of men in Europe doing a similar job. I find it hard to give them a reasonable and sensible reply. A housewife constituent said to me last week, "Why are the Government freezing my husband's wages and letting my grocery bills increase every weekend?" If there is an economic miracle round the corner, I would like to know from the Financial Secretary what satisfactory answer I can give. Whom are we to believe, the Chancellor, with his realism, or the Prime Minister, who paints the clouds with sunshine?

My second question is this. Exports for June were the best monthly figures we have seen for ages. They were welcomed by hon. Members on both sides of the House—

Mr. Robert Maxwell (Buckingham)

Except by the Leader of the Opposition.

Sir C. Osborne

At least, I welcome them, and they are welcomed as much by the Stock Exchange as by the T.U.C Nobody wants to see our country go down. We all want to see it recover— sometimes, we say, "despite the Government". Those figures were extremely welcome.

We are, however, entitled to ask the Treasury for how many months or years those better export figures have to be achieved before Britain becomes solvent. Obviously, one month after the long series of depressing figures has not put us back into the black. We are still deeply in the red. I wonder whether the Treasury can give us an idea of the length of time for which those better figures have to be achieved month by month to make us solvent.

Does not the Treasury feel that too much ballyhoo was made of the last monthly figures? It engendered too much undue optimism that we were round the corner and that our troubles were all over. Is the Financial Secretary prepared to make a forecast of how exports are likely to go and what the gap between exports and imports will be during the remaining six months of this year? If we return to the bad figures, what little sterling balances are left will go. On the other hand, if we are to strengthen our financial position, it must be strengthened first by our exports. What, therefore, is the Treasury's forecast regarding exports in the next six months?

Third, the question of prices since devaluation. In reply to a Question from me about 10 days ago, the Chancellor of the Exchequer said that average import prices have risen since devaluation by 11 per cent., but our average export prices have risen by only 5 per cent. Since we have to import 50 per cent. of our foodstuffs and about 90 per cent. of our raw materials, we are paying, on average, 11 per cent. more for all those imports, according to the Chancellor, we export roughly only 30 per cent. of what we manufacture and on that we are receiving only 5 per cent. more, is it not obvious that the more we export: the deeper we run into debt? [Laughter.] I do not know why my hon. Friend laughs.

Mr. Maxwell

Perhaps this will help the hon. Gentleman. Is he aware that some imports carry an immense added value when they are re-exported by virtue of the skill and enterprise of British workers and management, so that £1 worth of imports may end up as £100 worth of exports?

Sir C. Osborne

That is true, but our 50 per cent. of imported foodstuffs are consumed here, not re-exported, and 70 per cent. of the raw materials we import are consumed here. My point is that any fool can give exports away or sell them at half price, as the hon. Gentleman should know from his personal experience; and he knows also that that is the way to Carey Street for an individual, for a firm or for a nation.

It is a serious question which I put to the Treasury. How long will the imbalance of prices continue? The Chancellor said 10 days ago that he hoped that it would not last much longer. But devaluation was eight months ago, and the 11 per cent. on imports is continuing, while we get only 5 per cent. extra on exports. That seems not to be helping us at all.

My fourth question follows a similar line. Last week, an important trade delegation came to this country from Libya. They went to see the President of the Board of Trade. They complained that, since devaluation, British prices had fallen by only 7 per cent. and they said that they would therefore not buy. Again, this was reported inThe Times and theFinancial Times, on Thursday last week, I think it was. I understand that we are the biggest buyers of Libyan oil. We obtain more of our Middle East oil from Libya than from any other source. We are having to pay Libya 11 per cent. more for the oil she supplies to us, and she complains that we have dropped our prices by only 7 per cent.

If, in this case, we are paying 11 per cent. more for what Libya sells to us, and Libya is buying from us at 7 per cent. less, I cannot see how this will help us in our financial difficulties. It may provide more physical work, it may make the economic machine work better though less profitably, but it will not help us with our balance of payments.

What exactly is our financial position? I understand that last year the adverse balance of payments was about £540 million. The Chancellor has said that he wants a surplus balance of payments of £500 million a year to build up his reserves. Therefore, we must earn an extra £540 million a year to make ourselves square, and he wants another £500 million a year in the kitty as well.

Last week theEconomist—the House will realise that I am a keen reader of theEconomist—estimated that our overseas debts amounted to 6.7 billion dollars, and they are repayable by 1973. If we are to repay those debts and not welsh on our obligations, that means another £500 million a year. Are my calculations correct? If they are, we as a nation must earn £1,500 million a year more than in 1967 and pay ourselves not a farthing extra for doing so, not consuming the extra personally or by Government, local or national. That is the real size of the problem.

If my calculations are right, should not the Treasury tell the nation? Does not this mean that the prices and incomes policy and wages freeze will be with us for as long ahead as we can see—at least 10 years? These are the truths that our people should be told.

Mr. Speaker

Order. I hope that the hon. Gentleman will acquit me of discourtesy if I remind him that he is the first speaker in the first of 28 debates that we hope to have tonight.

Sir C. Osborne

I am much obliged to you, Mr. Speaker. I thought that I was very lucky when I drew the position of first speaker in the Ballot. I hoped to be able to say my piece at about 3.30 p.m., and I have sat here pregnantly since then. I beg you to let me finish, Mr. Speaker. If you say that I have gone too long I shall sit down.

Mr. Arthur Lewis

I will say it.

Sir C. Osborne

The hon. Gentleman is not the Speaker yet. I shall curtail my speech as much as I can.

Does the Basle standby agreement for 2,000 million dollars mean that we have converted a soft currency undated debt into a hard currency dated debt? Have we guaranteed that the money will be repaid in either dollars or gold? If so, and the dollar is devalued and the price of gold is put up to 70 dollars an ounce, will not that double our liability, and should not we tell the people the price we are paying for this standby arrangement?

I calculate that our overseas liabilities in sterling amount to £5,900 million. We have already guaranteed to the remaining holders of sterling in Hong Kong that they will not suffer by a second devaluation. Have we given similar guarantees to other holders of sterling? If so, what is the liability involved?

After two more questions I will sit down, Mr. Speaker. TheEconomist estimated—this is the most serious figure of the lot—that the adverse balance of payments for the six months to March, 1968, was running at the rate of £1,352 million. If that is a correct estimate, it is a terrifying load on our people.

Lastly, all hon. Members on both sides must have been worried by the last figures of employment and the fact that they are the highest for the last 30 years. More than 580,000 men are completely and permanently unemployed. Over the year from May, 1967, industrial production increased by 4½ per cent. and industrial employment dropped by 1.7 per cent. Industrial productivity increased by 6 per cent., but unemployment within industry dropped by 7 per cent.

If the Prime Minister's policy of July, 1966, is to succeed and we are to redeploy our labour and use it more efficiently, does not this mean that we shall create more and more unemployment? What plans have the Government to find jobs for the men who are being deliberately put out of work by the Government's policy?

There are many more questions that I should have liked to ask, but with that I sit down.

Mr. Speaker

Order. I remind the House seriously, and may again do so from time to time during the evening, that we have 28 debates ahead of us, and that if each lasts even one hour we shall be here till somewhere towards the end of the week.

10.2 p.m.

Sir Arthur Vere Harvey (Macclesfield)

I shall be as brief as I can, Mr. Speaker. I want to put a few questions to the Financial Secretary about the standby loans.

What concerns me is that after the first meeting in Basle was completed the Governor of the Bank of England, Sir Leslie O'Brien, made a statement at the airport, and that was followed up in the House by the Chancellor of the Exchequer, but we have heard nothing from the meeting as such. Those were the only individuals who referred to the meeting. There ought to have been an agreed statement by the central banks about what took place or what progress had been made up to that date.

My hon. Friend the Member for Louth (Sir C. Osborne) referred to the negotiations as being completed. They are far from completed. The discussions will go on with Commonwealth countries until well into September.

I hope that everybody in the country will realise that, while the standby loans are necessary, if we draw on them interest has to be paid and at the end of 10 years we have to pay back the capital. We are not getting something for nothing from the central bankers. We never do. The funds cannot be used for any trade deficits in the monthly payments. They are for a specific purpose. We should realise that it is a tragedy that the country has had to borrow, or even contemplate borrowing, such large sums of money.

The Government are in trouble. There is no doubt about it. They are getting the House up at the earliest date that I can remember for 23 years—a week before the House of Lords, whose Members are not paid to do their job. We know why the House is going into recess the day after tomorrow. The Government want to get us out of the way. But that is not the matter—

Mr. Speaker

I trust that the hon. Gentleman will come to the topic that he is supposed to be discussing.

Sir A. V. Harvey

I am just coming on to that, Mr. Speaker.

I say that the Government are in trouble, and so is the country and every person in it. We all know what has happened during the four years since October, 1964. The Government inherited a problem, but it was not a crisis. They turned it into a crisis. It all culminated in the devaluation of the pound in November last year. The Prime Minister should have gone on television and made a different speech; he should have told the people "This is it", and admitted the mistakes and said, "We shall take rigid controls tomorrow, if necessary, dealing with the regulator, hire purchase, and so on", and brought it home to the people that the situation was serious. But he did not do that.

It was left to the Chancellor to bring in his Budget, which has begun to bite only during the last few weeks. We have had a boom in industry over the last six or eight months, one of the biggest booms since the end of the war. When we ought to have been selling motor cars abroad, they have been sold on the home market. This was a big tragedy and has set us back enormously. I imagine that the Government did not do what they ought to have done because they were afraid that the unemployment figures would go up during the winter months. Now the country will begin to pay the price.

Prices have risen since devaluation by nearly 4 per cent. In September the doubled Selective Employment Tax is bound to affect the cost of building, transport and many other items, and this, in turn, will increase the price of our exports. Confidence is missing, not only in Britain but overseas. So often have the Government broken their word that people are not prepared to trust them. Our E.F.T.A. partners are dismayed, particularly in view of the 15 per cent. surcharge. The Government gave about nine months' notice that the import tax would be taken off. Now we could use this tax to help us out of the present situation by limiting imports.

I remember the hon. Member for Woolwich, East (Mr. Mayhew) saying that the Government would be on trial for three months. He warned that if the Prime Minister's predictions about the upturn of industry did not work out, their economic strategy would have to be scrapped. I have not heard the hon. Gentleman speak recently. He is not even in his place. [AN HON. MEMBER: "Did the hon. Member give him notice?"] I admit that I did not give him notice that I would mention him.

Many foreigners believe that we in Britain are not prepared to tighten our belts. I do not have that impression as a result of my discussions with people in factories and workshops. They are doing a decent job of work, but they are not getting the right lead from the Government. While 60,000 additional civil servants are occupying millions of feet of office space industry is being asked to put a fine comb through its organisation, rationalise and reduce staff.

The week following devaluation the Transport Bill was introduced. That did not impress the foreign bankers who were wondering whether the Government intended to continue pursuing socialist policies. I appreciate that the Labour Party came to power with a mandate to do most of the things that it has done, but when the country was going through a desperate crisis the Prime Minister should have said that a brake would be put on all controversial legislation for six or eight months.

Mr. Speaker

Order. I remind the hon. Gentleman that we are discussing the Consolidated Fund Bill. We can debate errors of administration in the Government. We cannot debate the necessity to get rid of legislation of which he disapproves.

Sir A. V. Harvey

If the Government would face up to these problems they could do a lot to alleviate the position. Consumer spending is now 10 per cent. higher than it was last year. It is beginning to tail off, but this trend is too late in arriving. The regulator should have been used at the right time and the Chancellor of the Exchequer, who was appointed shortly after devaluation, must accept full responsibility for that, although the Prime Minister said that he was the overlord.

Spending is still too high. People have no confidence in sterling. Whether it be motor cars, or pictures, or cases of liquor, people are putting their money into anything rather than savings. I want to see the Government doing something to encourage savings. Much could be done to get people to put their money aside—for example, through special interest rates, bonuses or reduced taxation.

I congratulate our exporters. Many of them are doing a wonderful job. But the import figure is still dangerously high. It has fallen a little but there is nothing to crow about with a deficit of £50 million in one month, even if it is better than a deficit of £96 million in a month. We have a long way to go to improve on the situation, and we must improve on it.

Many items and materials imported could be avoided. We are told that it would be wrong to have import control. I myself think that it would be wrong and would not help. But are the Government considering deposits being called for when imports are ordered? I recognise that it is a complicated matter and that other nations might introduce similar provisions. But these matters should be gone into because unless the import bill is reduced considerably, I cannot see an answer to our problems since, eight or nine months after devaluation, we are paying far more for our imports than before.

I do not want to impinge on the debate on unemployment to be initiated by the hon. Member fof Ebbw Vale (Mr. Michael Foot), but that subject, also, is wrapped up in this debate. We have 500,000 unemployed in July and the trend has been going that way for five months. From next month onwards, it must increase considerably. It is no way to run the country to have 500,000 unemployed in July. Hon. Members opposite attacked the Conservative Government year after year, but the figures were nothing like this.

The Government have run out of time. They have lost the confidence of the people. We saw that in Wales last week. They have also lost the confidence of the foreigners. Last week, the Labour Party got one of the biggest hidings that it has had for many years. No hon. Member opposite is safe in his seat today. Their sins will find them out as soon as they go to the country.

10.14 p.m.

Sir Douglas Glover (Ormskirk)

The House should be grateful to my hon. Friend the Member for Louth (Sir C. Osborne) for having chosen this subject for debate and also for being fortunate enough to gain first place in the Ballot. I only wish that a subject of this importance had begun to be debated at 3.30 p.m. rather than at this time of night. It is perhaps the most important subject the House is likely to debate during the lifetime of this Parliament.

I do not want to be as depressing as my hon. Friend. I believe that the country will overcome its problems. In some ways, I believe that it is tackling them and that the situation is showing signs of improvement. But I do not think that any statesman did a greater disservice to the nation—and I sympathise with him— than the Prime Minister did in his broadcast to the nation the day after devaluation. Being human, I understand the pressures on him at that moment, but from that point on he made the task of his Ministers and the nation doubly difficult in overcoming the problems brought about by devaluation.

Devaluation was a great defeat for the country and its economic policies over a good number of years. To present it to the nation as something of triumph was the most disgraceful distortion of the facts to which this nation has ever listened on television. It has doubled our problems. First of all, when one devalues one's currency it may take months or years to work through. Money is like water in a cistern. It does not change, and one does not have two values, one at home and one abroad. If our £ is worth 17s. 5d. abroad compared with its value in November last year, before devaluation, it will eventually be worth 17s. 5d. at home. That is why there is this constant rising of prices.

A Government that really believed in the future of the nation and was not concerned with party political popularity would hammer this fact home to the nation, day after day. It is an inevitable consequence of the action that we were forced to take last November. I receive letters in shoals from my constituents asking what the Government intend to do about rising prices. The Government cannot do anything, because by the very fact of the devaluation, by their policies, they made it absolutely certain that nearly all prices would automatically and inevitably increase therefore reducing the standard of living.

The second reason why I criticise the Government is that there was no campaign to alert the nation to the fact that immediately after devaluation we were bound, for some months, to have disastrous trade figures. The Government ought to have been hammering this home. Why? Because when one devalues one's currency, admittedly one makes it cheaper to sell one's goods abroad, but at the moment of devaluation one's order books are empty and it will take six, nine or 12 months for orders to come in, to go through factories, and to be shipped overseas and sold.

Imports immediately go up in price, and for the first six or nine months the import Bill is immediately increased, while one's exports slowly and surely overtake that rise. The last month has shown that there is a tendency, a movement in the right direction with our exports. I hope and believe that we shall produce better figures in the autumn and early next year. The Government should have been alerting the nation to thinking that it is facing a siege economy.

Any Government with any sort of appreciation, and the party opposite is supposed to be full of economists, would have been aware of this. To allow, under these conditions, a consumer boom, to encourage it, was criminal irresponsibility. It meant that it was far more difficult to export goods, because each factory is concerned, has to be concerned, with its profitability, and if there is a streaming list of customers representing home consumption, outside the factory door, the inevitable result is that less goods are produced for export than would be the case if conditions at home were more stringent and difficult.

Last month, our trade figures showed a deficit, although they were a big improvement on the figures for previous months. What our situation would be if it were not for our overseas investments I shudder to think. Only our overseas investments, our invisible earnings, and the activities of the City of London have kept the ship, although waterlogged, afloat.

Mr. Stanley Orme (Salford, West)

Drivel.

Sir D. Glover

It is not drivel; it is true.

Our visible trade deficit is colossal, and it is reduced, albeit to still terrifying proportions, because of our invisible earnings. Were it not for them, our position today would be even more serious than it is.

Mr. Orme

That is not true.

Sir D. Glover

Although there are signs that we are moving in the right direction, the thing which worries me is whether we are moving at anything like the speed necessary to overcome the problems which face the nation. Suppose that our exports increase in the next six or nine months. They must increase at a far more rapid rate than they have shown signs of increasing to achieve anything like the surplus for which the Chancellor of the Exchequer budgeted. I cannot see us getting anything like a £500 million surplus in any consecutive 12 months starting in 1969. This would mean an enormous increase compared with anything that we have the right to expect.

Therefore, the Government must do something drastic about our imports, if only for a temporary period. They should consider some system whereby consumer and manufactured goods are paid for at a much earlier date before delivery, because many of them are bought on credit. As a free enterpriser, I am a great believer in the credit necessary for all international trade. What I am worried about is that, although the trend in exports is going in the right direction, I do not see how they will reach anything like the figure needed in the time span before international confidence once again begins to shake in considering whether Britain is overcoming its problems. Therefore, the Government must consider the problem of our import bill, if only during the next 12 or 18 months.

This would bring the problem which the hon. Member for Ebbw Vale (Mr. Michael Foot) is to discuss in our next debate—unemployment. It is not any part of my task to solve every one of our problems. The Government's misguided policy, the double-think and double-talk, and the bad leadership which they have given the nation have created the problem. Therefore, in the long run, it is far more important, even for those out of work, that we overcome our economic problems that it is to arrive at a short-term solution which will lead to greater problems in six or nine months. For the reasons I have given, the Government are condemned out of hand, and they should resign.

10.24 p.m.

Mr. Patrick Jenkin (Wanstead and Woodford)

I do not intend to detain the House for long, particularly as the debate started very late and as there are many other subjects, as you have reminded us, Sir, to be debated.

My hon. Friend the Member for Louth (Sir C. Osborne) put a number of very pertinent questions to the Financial Secretary. I have no intention of following my hon. Friend on all those. I have no doubt that the Financial Secretary will do his best to answer them. I shall concentrate on two of the topics which all those who have spoken tonight have mentioned—one being the progress of the balance; of payments, and the other being the prospects for sterling and the state of Basle negotiations.

I would in a debate of this sort have wished to have dwelt on a third, namely, the disturbingly high level of unemployment, but as this will be the subject of the next debate I will eschew that altogether.

I will make one general prefatory remark before turning to the two subjects on which I shall concentrate. Since devaluation last November, the economic picture until quite recently has been one of almost unrelieved gloom. It was abundantly clear that the Government's strategy was not working or, if it was working, was working very much more slowly than they had indicated. The consumer spending spree, which lasted well into the middle of the year, rapidly undid any of the good which the cuts announced on 16th January may have done. Our import bill continued to soar and exports showed little sign of the upturn which the Government appeared to expect would follow devaluation.

Meanwhile, sterling remained weak. Indeed, the £ was bumping along at the very margin of the official limits. There was a continued outflow of money from London as the sterling balances trickled away due, as my hon. Friend the Member for Macclesfield (Sir A. V. Harvey) so rightly said, principally to a continued failure of confidence. This remained at a very low ebb.

Accordingly, we had a Budget of unprecedented severity introduced in an atmosphere of crisis following upon the gold speculation and the Washington talks. The fear at that time and for some weeks thereafter was of a collapse of the whole international monetary system, with the most appalling impact on world trade had it happened.

Since then there have been a few events which make the situation look a little brighter. Perhaps the most important— this may surprise hon. Members opposite —has been that, contrary to expectations, the American Congress accepted the tax increase and that immediately has relieved pressure on the dollar. The dollar is the dominating currency in world trade. I believe that this has been the most helpful event.

There has been the Stockholm Agreement on the special drawing rights, the announcement of the Basle negotiations and the general direction which they were taking, and, finally, the June trade figures. All these are useful and welcome signs of an improvement in our economic situation. These do not—certainly not separately; indeed, not collectively— warrant the exaggerated cries of optimism which appear to have been aroused in some quarters.

It is a measure of the depth of pessimism in which we have been wallowing that we have become so inured to it that, at the first flicker of a swallow's wing portending the summer, voices— indeed, responsible voices—have been heard proclaiming that economic salvation is just round the corner. Loose talk, as my hon. Friend the Member for Louth reminded us, of an "economic miracle" on the part of the Prime Minister is no less dangerous than continued irresolution and failure to grapple with the situation.

One of the few consistent paths trodden by the previous Chancellor, the present Home Secretary, was his tendency always to be too optimistc about prospects. Some of the Ministerial reactions to these recent events which I have mentioned make it apparent that the same temptation to make over-optimistic assumptions exist.

The attitude of this side of the House is perfectly clear. We welcome any sign that there is an improvement in our economic situation. There are the improved trade figures and the return of confidence in the £. We welcome the fact that money is beginning to trickle back into London. These things are good for Britain, but I would emphasise that they are not by themselves the salvation of our economy. Still less would I accept any criticism that pointing out that these things are not our salvation amounts to a lack of patriotism on the part of those who make these statements.

I now turn to imports and the balance of trade. The June figures show that imports, seasonally adjusted, were £616 million compared with an average for the previous four months of over £650 million. Therefore, it was a source of great relief that the upward trend in 1968 was no longer being sustained.

I would make two points about this. First, the improvement is a very limited one. The figure of £616 million is only £1 million less than the January figure for imports, which was £617 million. Indeed, if one takes the first six months of 1968 and compares them with a comparable period in 1967, imports have been running at an average monthly rate of £120 million higher than in the previous year. Even in June, the improved figure still left a crude trade gap of £50 million for the month. Though there has been an improvement, we are most emphatically not yet out of the wood.

The second point about imports is that the figures for the first six months show that there was a hump—a fairly steep rise and then in June a decline. This directly reflects the post-devaluation spending spree which became such a notorious feature of the results of the Government's policy after devaluation. We can now see abundantly clearly the extremely damaging effect which the Government's refusal to take immediate action following devaluation had on the economy. There is no doubt that the processes which the Government ought to have set in train following devaluation were delayed and that this has correspondingly delayed the correction of the balance of payments deficit, which was the only possible benefit that could have flown from devaluation.

The June figures, as I say, may only be a single swallow in the summer, and not too much emphasis should be placed upon them. Therefore, we must await the July figures. If the improvement is sustained, it will be a welcome sign that we are moving towards economic solvency. But if the improvement is not sustained, I believe that very serious questions will arise whether the Government will or will not have to take further measures.

The Government have rightly, in my view, ruled out any question of a return to import controls. My hon. Friend the Member for Ormskirk (Sir D. Glover), in suggesting as a possible alternative a prior deposit scheme, or something of that sort, was also ruling out import controls in the sense of quota controls. I believe that the Government would be absolutely right to resist the pressures which come from many quarters to introduce controls. The usual argument is that we would be subject to retaliation if we did, and this is certainly a valid argument. But I would remind the House that there is an even more important argument: that it would directly conflict with our long term objective of making our economy more competitive. Import controls inevitably amount to protection of our indigenous industry. The 15 per cent. temporary charge on imports undoubtedly had that effect. It was good that it was removed when it was. Any form of quota controls would be even more so.

I turn now to exports, because our balance of trade depends also on exports. These have risen, but by nothing like as much as the Government would have hoped, and the long delay to which my hon. Friend the Member for Ormskirk referred is certainly taking a very serious form. I cannot believe that, taking the prospects for imports and exports together, the Government can now seriously be expecting a surplus in the second half of the year. Indeed, as a number of my hon. Friends have said, the prospects of their achieving a £500 million surplus next year must now appear very remote indeed. No doubt the Financial Secretary will give us some idea of the Government's thinking on these lines. I beg him to speak frankly and tell the country the truth. It is better that we know the truth than that we continue to be fed on a pap of optimism which is of no value to anybody.

I think it is significant that every one of my hon. Friends who has spoken during this brief debate has mentioned the Basle discussions. These and the discussions which are going on in the sterling area with the overseas sterling area countries have serious implications indeed. These negotiations both at Basle and with the overseas sterling area are in progress and I do not want to say anything to embarrass the Government in the course of these talks. We welcome the evidence of what these negotiations represent in terms of international cooperation, and undoubtedly they will help to relieve the short-term pressures on sterling, but I think that it is right to look at the wider implications.

The object of the whole exercise appears to be to reassure the overseas sterling area relative to their balances which they hold in London. The effect of the agreement which is under negotiation appears to be giving either a gold guarantee or a dollar guarantee for a first tranche of the sterling balances. My hon. Friend the Member for Louth asked the Financial Secretary whether he would say anything about that yet. Obviously there is a great difference whether it is a gold or dollar guarantee. This country has a right to know at the earliest possible opportunity.

The House will remember that on 8th July my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), who is a notable expert in these highly technical matters, suggested, when the Chancellor of the Exchequer made his statement about the discussions which were taking place with the Bank for International Settlements, that the successful outcome of these negotiations will only have the effect that the sterling balances will pass from creditors over whom we have some measure of control, into the hands of creditors over whom we shall have no control whatsoever."—[OFFICIAL REPORT, 8th July, 1968; Vol. 768, c. 50.] Can the Financial Secretary comment on that? Whether it is a gold or a dollar guarantee that is intended, is that a not unreasonable description of the effect of these negotiations? Is it not the case that once again we are buying a short-term relief from the pressure on sterling at the risk of making our long-term position substantially more difficult?

Secondly, is it a fact that different terms are now being offered to different countries in the overseas sterling area on the basis of which they will get the guarantee represented by the Basle agreement? Is it the case that stiffer terms will be offered to those smaller, weaker countries which are not in a position to resist them, and rather more generous terms will be offered to the stronger, more developed countries which are in a position to call the tune? I must warn the Government that any attempt to discriminate between countries in the sterling area has the gravest implications for the future of the sterling system as a whole. While one must draw a distinction between the reserve rôle of sterling, and the rôle of sterling as a trading currency, it is right to point out that these are not entirely unrelated. I plead with the Government to tread most warily.

The Government do not need to be reminded that, over the major proportion of past years, when we have had a balance of payments surplus it has been achieved by invisible earnings. We have achieved a credit on the visible account only seven times in the last 150 years. It has been our invisible account which has put us in credit and allowed us to build up our enormous overseas assets. If we damage the sterling area by taking short-term measures to relieve ourselves from a short-term crisis and if the result is to damage our invisible earnings, the harm done will be serious and irretrievable.

Devaluation represented for the Government a radical departure from the economic strategy which the country had followed for the previous 20 years. There are many penalties and disadvantages attached to it. My hon. Friend the Member for Louth spelt them out in stark terms. But the one advantage which we might reasonably hope to gain is that for the first time since the war we shall be able to move into an export-led expansion. I agree with theLondon and Cambridge Economic Bulletin which said: It is clearly much too early to assess how the new strategy is working. If anybody wants a reason—that is the reason why we felt it right not to press for a full-scale economic debate at this stage. It is much too early to assess how the new strategy is working. Nevertheless, this brief debate has given an opportunity to a number of hon. Members on this side of the House to ask questions of the Financial Secretary and an opportunity for him to answer them. I hope that he will take full advantage of it, and be as frank with the House and the country as he can.

10.42 p.m.

The Financial Secretary to the Treasury (Mr. Harold Lever)

I am sure that the House will be grateful to the hon. Member for Louth (Sir C. Osborne) for having chosen this subject and also for the way in which he presented it— and, in general, for the questioning, information-seeking approach that he has shown throughout, which is in somewhat agreeable contrast to the demagogic ebullience of some of his right hon. Friends in their addresses on this subject elsewhere. I was grateful to the hon. Member for Wanstead and Woodford (Mr. Patrick Jenkin) for the moderate and reasoned nature of his speech. I am grateful, too, that he recognises that it would be premature to pass any sort of final judgment on the way in which the Government's economic strategy is working. I wish that he would draw that fact to the attention of some of his right hon. Friends before they venture down upon the City in bouts of well-calculated pessimism.

For those reasons I prefer the approach of the hon. Member for Louth. Admittedly he is confused and mystified, but he obviously takes more account of his leader's speeches than most people of consequence at home and abroad. Perhaps when I have finished my explanation he will see the matter in better perspective.

It is no part of my argument to suggest that the Government, the country and the people have not very serious problems to face—both economic and monetary. Over the last three years we have run an aggregate deficit on current account, excluding investment account, totalling £655 million. That has had to be met by borrowing, just as the £400 million in the year previous was met by borrowing by the Government then in power. I am not going to indulge in the ludicrous and naive cross-talk which immediately and directly attributes a balance of payments surplus or deficit for the year in question to the Government in power in the year in question; we have to make a more realistic survey, over a fair period of time, of what the problems are and how the Government of the day are facing them.

I want to get some facts into perspective. A serious problem is represented by the fact that in the last three years— 1965, 1966 and 1967—we have been unable to move our current account into surplus. This has caused an increase in our net indebtedness of £655 million.

There were other monetary movements, some of them very considerable, in the same period, but none of those represented any addition to net indebtedness in any real economic sense or any real financial sense. They represented either money borrowed in order to enable us to finance new investment acquired abroad, or they represented money borrowed in order to pay off existing creditors who were asking for the repayment of their money.

So all this dangling of neurotic large-scale figures before the public is utterly beside the point. We have the real enough problem that in the last three years we have had an aggregate current deficit of £655 million which, together with the deficit of 1964 under the previous Government, totalled something over £1,050 million of net additional debt incurred in the last four years by the British people as a whole and the British economy as a whole. That has very unfortunate monetary consequences, especially in a world troubled by monetary instability, but do let us keep it all in proportion.

It is by no means a state of affairs that entitles anyone to talk about the country being a bankrupt country. I should like, without any intention of encouraging false optimism or belittling the magnitude of our problems, to point out that though in the four years—including the year of Tory Government— we have added to our net indebtedness by about £1,050 million, it is absolutely certain that our assets abroad in that period have increased in value by a considerably greater amount than £1,050 million—

Mr. James Dickens (Lewisham, West)

Would my hon. Friend agree that serious as this deficit on current account is, it is rather less over the four years in question than the foreign exchange costs of overseas military spending, and of private investment chiefly in advanced industrial countries?

Mr. Lever

I can give the answer to that question in one simple figure. If in 1965, 1966 and 1967 we had had no Government defence or aid expenditure, we would have run, in those exceedingly difficult years, a surplus on current account of £700 million.

Let it not be said that I agree with any argument that suggests that we should have given up aid or that we should have abandoned our defences during that period. There is nothing in recent events that encourages me to believe that defencelessness is an agreeable situation in which to find oneself. I hope that hon. Members will be realistic enough to know that one had to make adequate defence provision in the situation thai followed the war. I do not complain of the criticism about the amount and style, but the idea that we wasted money on defence because no-one attacked us or had no manoeuvres on our borders while we discussed our political problems does not seem to me to be an argument of great cogency.

The fact remains that a nation that ran a surplus, before it discharged what it considered to be its defence and aid obligations in the world, of £700 million in the last three years, can hardly be described as a bankrupt nation, unless one wants to say that in the discharge of those obligations we were guilty of great folly because if we were bankrupt we had no right to take on aid obligations or defence obligations. But, of course, I absolutely reject the suggestion that it would have been right to abandon either.

Sir C. Osborne

Would the Financial Secretary be good enough to break down that £700 million surplus, and say what was for defence and what was for aid?

Mr. Lever

I have the figures, but I do not think that the House would appreciate anything that would inevitably turn the debate into a statistical lecture. I would rather concentrate on the main figures that I have given. There we have a very real problem, and because of the nature of the monetary system and of our own United Kingdom sterling monetary system, these deficits, amounting in 1965, 1966 and 1967—and with the deficit of the previous year—to over £1,000 million, accompanied by monetary movements within the monetary system within which we work, a world monetary system that was far from safe, perfect and stable, presented real problems to our people. I do not want to minimise them or to encourage any kind of euphoria about them.

The first thing is that the net indebtedness of this country has not grown by the astronomical figures which are constantly quoted at us. Nor has account been taken in the course of these pessimistic monologues of the vast increase in our assets abroad which has taken place during the same period, which undoubtedly must be considerably more than the increase in our net indebtedness.

Mr. Patrick Jenkin

Do the hon. Gentleman's figures take into account the increase in the pre-devaluation indebtedness expressed in terms of overseas currency with the obligations in terms of overseas currency and the increase which was attributable to the fact of devaluation itself?

Mr. Lever

These figures are a broad summary of the actual facts of the nation's position which derive from the shortfall in earnings in the last three years. They are entirely accurate and represent the true economic circumstances. Serious problem as it is, it is not adding in a gigantic way to the net indebtedness of the country.

So far as concerns devaluation I do not want to be steered off into a vast mass of technical computation, but I will give a sentence on this. In terms of liabilities abroad, it reduced sterling liabilities in international terms. On the other hand, it caused a rather lesser sum on forward account losses, but this does not alter in any fundamental way the character of the sum I have mentioned.

The Basle Agreement has caused a great deal of comment. What I say about it will be candid and frank, but I cannot undertake to tell the House the details of the negotiations which are going on at present with the sterling area countries. I thought the hon. Member for Wanstead and Woodford was below his usual form in, as it were, speculating on an offensive hypothesis without any evidence which is justified and hoping that I would repudiate it. First, I should like to know what evidence he has for supposing that this or any British Government would bully weaker members of the sterling area by giving them adverse treatment compared with stronger members of the sterling area. I do not know if that is the experience he thinks other Governments have had, but it is nothing to do with what is going on at present.

On the Basle Agreement I have been asked to comment on the suggestion, which was perhaps best put by the hon. Member for Walsall, South (Sir H. d'Avigdor-Goldsmid), that the agreement will result in our taking on a dated dollar debt whereas before we had an undated soft currency sterling debt. The Basle Agreement will do nothing of the kind. The Basle Agreement is a standby agreement. It comes into operation only when a sterling balance holder wants his money. At the time when a sterling balance holder wants his money, that is not a sterling debt; it is an external sterling debt. That is to say, the money he wants is in any currency in the world he chooses to specify, usually dollars. It is not a loan. My hon. Friend the Member for Feltham (Mr. Russell Kerr) was quite correct, it is a standby credit which would work in a see-saw fashion and there is no increase in indebtedness if the standby is taken, but sterling indebtedness is less. The hon. Member for Walsall, South, who is usually very knowledgeable on these things, got it completely wrong in supposing that we are turning a soft currency debt into a hard currency debt. We operate the Basle Agreement only as a standby. Only when repayment is due and payable in dollars or other currency does it operate. Therefore, what really happens is that we are turning what will be an immediately payable hard currency debt into a deferred payable hard currency debt.

The hon. Member said that we were changing creditors. The first thing to be said about that is that it is not at our option. It is the creditor deciding that he wants to be paid. The hon. Member for Walsall, South may regret it, the hon. Member for Wanstead and Woodford may regret it, but the fact remains that one of the duties to one's creditor is to pay him his money when he wants it back. This money is on short call and is liable to be repaid whenever asked for.

Mr. Ronald Bell (Buckinghamshire, South)

I understand what the hon. Gentleman is saying about the Basle Agreement, but is the purport of what he has said that we have not reached any completed agreement—I am not asking about any negotiations which are in progress—about existing sterling debt to a sterling area country being repayable at a rate of exchange fixed now?

Sir A. V. Harvey

Before the hon. Gentleman replies, may I question his references to my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid)? I have not seen my hon. Friend for four or five hours. I do not know to whom the hon. Gentleman is referring.

Mr. Lever

The hon. Member for Walsall, South was quoted in his absence with a degree of reverence which is well justified by his experience in this matter. Even his absence is effective in argument and has to be answered. I have answered it. I am putting out that if and when, as we all hope, the Basle Agreement comes into operation, it will not transfer a soft currency debt to a hard currency debt. It will be a hard currency debt immediately payable, transmitted to the international lender who lends it for a period of years.

I have been asked the reason for changing our creditor. It was not the British Government who chose to change the creditor. It is the creditor who desired to be repaid. Hon. Members should know that in the ebb and flow of international events, in the uncertainties, switches and changes, no country, however strong or well governed, if immune from a creditor's request to have his money repaid.

Devaluation must have been a shock to many sterling area countries. I am not making any comment or complaint about this. If any of them want their money, it is perfectly within their rights and it would be entirely a breach of their rights for us to refuse it. But for goodness sake let us get the agreement right and bear in mind that the sterling area debts with which we are dealing derive not from the incompetence of the Government, or even the incompetence of the previous Government, but from the last war. They are the price we paid in emerging victorious from the last war. However changed about in their ownership, they represent a deadweight of debt which was saddled on the Government of Britain in 1945 and which has continued at broadly the same level ever since.

The hon. and learned Member for Buckinghamshire, South (Mr. Ronald Bell) asked whether we have reached any final agreement. No, we have not. It has been clearly stated that the Basle discussions were concluded and thereafter there were to be consultations with the sterling area. Nobody has suggested that any agreement has been reached. When an agreement is reached, of course the House will be properly informed.

I shall not waste time at this late hour giving a summary again of what my right hon. Friend the Chancellor said about the Basle arrangements as proposed. What my right hon. Friend said stands. It is obvious that the next stage will be the completion of consultations with the sterling area. If any agreements are reached, no doubt the House will be immediately informed.

I have dealt so far as I can with the monetary situation, and with complete candour, because it is nonsense to talk about the Basle Agreement as adding in any form to our net debt. I will deal in a sentence with the questions raised by the hon. Member for Louth on the export-import situation. The hon. Member said that import prices have gone up and that export prices have not gone up as fast. Everybody knew that this would happen. It is one of the debit sides of devaluation. The credit side comes later. There is no doubt that the export prices will tend to improve and that the import quantities will tend to come down. At what pace exactly, I cannot say. The hon. Gentleman is anxious that I should engage in the hazardous task of forecasting. I must decline the invitation. I notice that he does not give any forecast himself. I do not see why he should expect me to be able to predict every ebb and whirlpool of world trade in the months ahead.

All I can say is that I am absolutely satisfied that we are moving in the right direction, and that we shall move from a deficit on our balance of payments to a surplus. This is not optimism derived from the last month's figures. Hon. Members will recall that when I had the privilege of addressing the House well before these figures were known, I made the same statement. I am happy to see some evidence in support of it in the July figures. I entirely agree that we cannot count on one month's performance. We must watch the situation in the months ahead. But I am sure that the Government's policy is right and that it will produce the right results.

On the question of getting the debit side of devaluation at the beginning in the way we have discussed and collecting the credit side only if we preserve the necessary self-disciplines which enable the export drive to go ahead, drawing in the labour and material which will make it successful, this is what the Government are determined to achieve, and it is what they will achieve. That is why I say that the hon. Gentleman has missed the point of the recent speeches of the Prime Minister and the Chancellor of the Exchequer.

Perhaps I ought to mentionen passant that, although much is said about the £50 million deficit figure of the last month, it ought to be borne in mind that when that figure falls from 50 to nothing we shall be not just square but well in front. The £50 million is not the extent of the current deficit last month. In fact, it does not take into account the net balance on invisible payments. By the time we have our deficit down to zero from the £50 million and our visible trade figures in balance, we shall be running a handsome current surplus. The gap is still large. It still requires immense effort, but it is not a terrifying or intimidating task for the British people.

There is nothing inconsistent between what the Chancellor said and what the Prime Minister said. If the hon. Member for Louth will read the Prime Minister's speech in full and the Chancellor's speech, he will see that it all adds up to this simple proposition. Yes, we have two years of hard slog—hard slog, let it be said, with the highest standard of life that the British people have so far ever enjoyed, hard slog with the highest level of social services that the British people have ever enjoyed, but nevertheless hard slog. No one is keener than I am that the expectations which my hon. Friends express for a rising standing of life and rising social services should be justified. But the hard slog is there, and the economic miracle is showing signs of appearing.

What is the economic miracle?—that for the first time we are looking forward to seeing in 1969 a Britain expanding at a rate of production well above what was the average for the years of Tory rule, and doing so with a surplus on our balance of payments. I shall not predict what the surplus will be, but that there will be a surplus and that we shall be expanding, and expanding steadily, I am prepared to predict. I am confident that that will happen, given no major untoward event at home or abroad.

I cannot guarantee to the groaners that there will not be a world war or a big recession in America or South America, but granted the existing out-turn in world trade, as seems probable, and in European trade, as seems probable, I am satisfied that in the next year we shall see what has never before been achieved in the whole 23 years since the war, that is, a rapidly expanding British production accompanied by a surplus on the balance of payments.

When the Prime Minister talked about an economic miracle, he never left any doubt about who will perform it. It will be performed not by the act of a kindly Providence but by the efforts, self-discipline, energy and talent of the British people. It is we ourselves who will bring about that miracle. What is more, we shall do it against a much stabler sterling area system than there has ever been in the 23 years since the war, the absence of which has so much magnified our problems and bedevilled all our economic planning in an endeavour to bring about the situation I have hopefully described for 1969. I do not mini- mise the effort that must be made to bring this about, but I confidently see the possibility of its achievement if the Government's policies are firmly supported.

Therefore, I see two years of hard slog, that success of our balance of payments, an expanding production, and then the opportunity to ensure a rising standard of life and rising social services for our people on the most solid basis seen ever since the war.