CONTINUATION OF POWERS UNDER SECTION 9 OF FINANCE ACT 1961

HC Deb 11 May 1971 vol 817 cc216-301

Mr. Dick Taverne (Lincoln)

I beg to move Amendment No. 1, in page 7, line 26, leave out 'August' and insert 'February'.

The Chairman

Order. I have a short announcement to make to the Committee. Following upon representations which have been made to me by right hon. and hon. Members on both sides of the Committee, I have decided to vary my provisional selection of Amendments for this first debate. I think that it will be for the convenience of the Committee if, with Amendment No. 1, we discuss Amendment No. 13, in page 7, line 27, at end add— ( ) Section 9(2) of the Finance Act 1961 shall be amended by leaving out the words 'by the addition or deduction as may be prescribed, of such percentage, not exceeding ten per cent.' and inserting the words 'by the addition as may be prescribed of such percentage, not exceeding 10 per cent., or the deduction as may be prescribed of such percentage not exceeding fifteen per cent.'.

Mr. Taverne

This is a debate on the regulator, and in the past this has been the occasion for a major debate on the economy. Today, it is right that we should begin the Committee stage of the Finance Bill on the Floor of the House with another such debate.

The Amendment is not just a token one. Taken with Amendment No. 13, it is designed to deal with the situation in which we find ourselves. We tabled an Amendment, Amendment No. 3, in page 7, line 27, at end add— ( ) In section 9(2) of the Finance Act 1961 for the words 'ten per cent.' there shall be substituted the words 'fifteen per cent.', which for technical reasons could not be part of this debate. However, the situation is covered by Amendment No. 13.

The joint effect of the Amendments is this. We accept that in normal circumstances the regulator should be limited to the power to decrease or increase taxation by 10 per cent. without new legislation. However, in present circumstances, we feel that the power should be amended to enable the Government to decrease indirect taxes by 15 per cent., but only for a six-month period.

I put forward three propositions in support of the Amendment. First, it has now become clear that the analysis of the situation at the time of the Budget was too optimistic. Information which has become available subsequently shows that the position was worse than it seemed at the time. Secondly, except for the developments of the last week on the foreign exchange market, the situation has worsened since the Budget. Thirdly, the present situation urgently demands a far greater degree of expansion than the Budget measures contain.

I make it clear at the start that it gives me no pleasure to offer a somewhat gloomy analysis. I do so in no partisan spirit, but only because the facts lend themselves to no other interpretation.

I ask right hon. and hon. Gentlemen opposite to study the facts carefully and to see how far the Government are in a position to contradict my points. I suggest to them that, if my analysis is right, the remedies that we propose follow logically. Even if hon. Gentlemen opposite are not inclined to follow us into the Lobby, which is understandable, at least they may bring pressure to bear in support of a change of course by the Government.

Let me first turn to the position as it was on Budget day. It is now clear from figures published by the Government that the Budget judgment was wrong, partly because it was based on a wrong analysis of the situation. The analysis may have been justified by the information then available, but it is now shown that it was too optimistic.

I draw the attention of the Committee to the contrast between the figures in the Financial Statement and those in the April issue of Economic Trends, My sources therefore, are the Government's own. Table 1 of the Financial Statement showed that the estimated increase from the second half of 1969 to the second half of 1970 was some 3.3 per cent. for consumer expenditure, 1.8 per cent. for public expenditure on goods and services for public consumption, 2.1 per cent. for private fixed investment,£150 million for stock building, and altogether an increase in the gross domestic product of 1.8 per cent.

4.0 p.m.

Let me now turn to the estimated outcome as shown in the April issue of Economic Trends, This shows that for the same period a slightly greater increase in consumer expenditure was balanced by a slightly lower increase for public authorities' consumption, that fixed capital formation was considerably down, from 2.1 per cent. to 0.9 per cent., that stockbuilding was lower, by about£50 million, that imports were lower, and that gross domestic product, according to the expenditure figures, grew at 1.2 per cent. instead of 1.8 per cent., or, if one averaged out all the separate indicators for the growth of g.n.p. they show an average increase of 1.5 per cent., instead of 1.8 per cent. In addition, we have had the figures for consumption in the first quarter of 1971, which show that consumption declined somewhat.

From those comparisons it emerges incontrovertibly that the economy was more sluggish during the fourth quarter of 1970 than was thought at the time of the Budget. That in itself suggests that corrective measures should have been introduced to take effect some time before the Budget, and certainly that the Budget measures should have been more expansionary. The Budget started from the wrong point.

I now come to my second proposition, to the developments since the Budget. What has happened since then to investment, prices, unemployment, consumption, and the prospects for exports?

Let me take the last first, because it is the one area in which there is at least some cheer. As an official spokesman I am, perhaps, under some inhibitions and cannot entirely freely discuss the question of exchange rates, but my feeling has been for some time that, with our present level of unemployment and unused capacity, the need for expansion is such that if our expansion led to a danger, as it might, of a balance of payments crisis then, rather than avoid the expansion, we should not treat the rate as sacrosanct. Indeed, we should take all measures to see that the expansion is export-led.

As a result of the events of the last week we have had a windfall on the export front because of developments with the mark and the dollar. The floating upwards of the German mark and the Dutch guilder, as well as the additional slight help from the revaluation of the Austrian and Swiss currencies, clearly improve the competitivenes of our exports and their prospects, and the total benefit to the balance of payments was estimated by Mr. Brittan in the Financial Times as being at least£100 million. At the worst that gives us a somewhat greater breathing space before present trends would once again lead to a balance of payments crisis, and it therefore removes to some extent some of the inhibitions which the Government may have felt, on balance of payments grounds, against expansion. There is the somewhat awful spectre that next winter we may have the appalling combination of high unemployment, stagnation, high inflation, and a balance of payments crisis, but that prospect has receded somewhat in relation to a balance of payments crisis.

Mr. J. Bruce-Gardyne (South Angus)

The hon. Gentleman implied that we should seek what he described as export-led growth, and be prepared to take a more flexible attitude towards the exchange rate with that end of view. Would he concede that a more flexible attitude towards the exchange rate would mean that the exchange rate would go up, and not down?

Mr. Taverne

Not if it was coupled with a policy of all-out expansion.

On the domestic front, the situation is about as depressing as I can remember it at any time. I start with the prospects for investment. During the Budget debate I challenged the Chancellor on the forecast contained in the Financial Statement which seemed to predict a fall in manufac- turing investment. The Financial Statement foresaw no rise in investment between the second half of 1970 and the second half of 1971, and a rise of only ½per cent. between the first half of 1971 and the first half of 1972. But, as there was a projected increase in shipbuilding and housebuilding, this seemed to suggest a fall in manufacturing investment. The Chancellor's answer was that the figure in the Financial Statement was a cautious one, and he went on to say: I would certainly hope that in the outcome we shall have a better figure for investment than that. I think that there is a good chance that the impact which the Budget as a whole has made will produce a better figure."—[OFFICIAL REPORT, 5th April, 1971; Vol. 815, c. 164.] The Chancellor then seized, perhaps somewhat rashly, on a survey which had appeared on the front page of the Financial Times that morning showing that in the euphoria which followed immediately after the Budget, when many business men were rejoicing at the tax cuts they had been given, there was an upturn in confidence.

But, unfortunately, every time the Government leap for joy at the sight of a speak of blue in the sky, thunder clouds immediately gather again more ominously than ever, and the last Financial Times monthly survey, published on 3rd May, showed a depressingly downward trend in capital spending intentions, even since the Budget. In the four-month moving total, which is a more significant indicator than any particular survey at any particular time, there was a 7 per cent. drop among those who expected capital investment to increase, and a 5 per cent. increase from those expected capital expenditure to decrease.

That shows a marked drop in expectations and, while the four-month moving average conceals the exact nature of what is happening, it looks almost certainly as though, after the boost of confidence in early April, the downward revision of intentions during April must have been very substantial. It now looks as though the figures for investment in the Financial Statement, which were depressing enough, must be revised even further downwards.

I now come to the problem of prices. The Government have expressed the hope that wage settlements would first level off and then gradually decline. It looks as though wage settlements may have levelled off at about the 12 per cent. mark. This is an average figure, and it hides the monstrous disparity between settlements in the public sector and those in the private sector, but the nature of the settlements in the private sector give no grounds whatsoever for expecting a downturn in the future, because several of the higher settlements are being signed for two-year periods, and this is a pattern which may be followed generally. It offers little prospect of a significant diminution in the growth of prices in the next few years. I shall deal later with factors apart from wages which increase prices and which the Government neglect.

As for the unemployment prospects, one can only say that the figures speak for themselves, and what utterly depressing reading they make!

If one turns to consumption and takes the tax cuts and the National Insurance benefits together, it must be somewhat doubtful whether the increase in consumption predicted by the Government will, in fact, materialise. The increased child allowances will, perhaps, give the greatest boost to consumption with the high proportion of the tax remitted that will be reflected in consumption. The other direct tax cuts, particularly the cuts in corporation tax and in S.E.T., will affect consumption by much less than half the total amount remitted. It is doubtful whether the total combined effect will increase gross domestic product by more than ½per cent. during the second half of 1971 or by more than 1 per cent. throughout 1972.

What, then, are the prospects? An objective analysis of the information available, on which I would appreciate the Chancellor's comments when he winds up and from which, I regret to say, hon. Members opposite will find it difficult to escape, points to a downturn in investment, a steady increase in unemployment, a continued rapid increase in prices, and in all probability a somewhat lower increase in consumption than the Budget projects. The only cheer lies in some better prospects for exports.

I turn now to my third proposition—the need for a rapid expansion, with which these Amendments are concerned. It follows logically from the analysis which I have placed before the Committee.

Hon. Members opposite still talk from time to time as if the Budget measures when they finally take effect will reverse the unemployment trend. There are frequent references to Budget measures to reduce unemployment. There was nothing in the Budget actually to reduce unemployment. The Chancellor himself made this clear. During the Budget debate I challenged the Chancellor on the issue of unemployment and I pointed out that a boost to make demand grow at 3 per cent., if it was realised, would merely slow down and not even level out the rise in unemployment. There is an increasing amount of evidence that productivity in manufacturing industry is now rising faster than 3 per cent.

The Chancellor did not deny my statement. Instead, he returned to the answer which has frequently been given—that in fact he would not deal with unemployment until inflation had first been cured. I quote from the Chancellor's final remarks in the debate on the Budget Resolutions: I cannot make any promise that unemployment will fall until we get a substantial reduction in the level of pay settlements… I could have brought about a reduction in the level of unemployment by giving a still larger boost to consumer demand than I have. But everything that I have said supports the view that it would have been irresponsible in the circumstances to do so."—[OFFICIAL REPORT, 5th April, 1971; Vol. 815, c. 166–7.] It is clear that the core of the Government's economic strategy is that unemployment must be allowed to rise, or cannot be dealt with until inflation is beaten. It is implicit in this strategy that the way to beat inflation is to allow unemployment to rise. This strategy is based on a fundamental fallacy. It is a costly fallacy which will cause an enormous amount of suffering. The whole thesis which seems to underlie the Government's strategy that there is a relationship between a given level of unemployment and the rise in prices, has been totally exploded. The so-called Phillips' curve, to use the technical jargon, has been discredited.

At what point is it now argued that unemployment will begin to affect prices? Is it at 1 million unemployed, 1½million unemployed, or 2 million unemployed? No doubt there is a point at which massive unemployment will begin to have an effect, but when? The Americans pursued precisely the same policy that the Government are now pursuing and they then abandoned it and at the time when they abandoned it unemployment had risen to nearly 7 per cent.

Why is it a fallacy? It is partly because it is clear that a high level of unemployment will not necessarily affect the willingness of individual firms to grant high increases. Part of the unemployment is caused by changes in structure and techniques, but these changes often have to be bought, new bargaining situations arise and there are pressures on both sides, not just on the union side, to increase pay.

Partly it is a fallacy because it is wrong to suggest that inflation need cause unemployment. A high settlement may cause individual firms to lay off staff, but an increase in national unemployment depends on aggregate demand. The Government have the means to increase this demand, to create expansion and the extra investment, but they have abdicated from this responsibility.

4.15 p.m.

Indeed if one looks at the nature of our present inflation, which is cost inflation, it is clear that stagnation increases costs. A fuller use of capacity would decrease costs. A 15 per cent. wage increase in the motor industry can be more easily absorbed when production goes flat out than when it is restrained in a stagnating economy.

Again, it seems clear that at present inflation is to a large extent a psychological phenomenon. Part of the reason for high wage claims is fear, a perfectly rational fear that workers will be left behind in the general scramble for wages, a fear that the cost of living will outstrip their earnings. Leaving aside the whole question of an incomes policy, to which the Government will in due course be driven for the whole economy and not just the public sector, expansion of production, and in particular a boost to expansion by direct action on prices through the use of the regulator, will increase earnings and lessen fear.

The Government are totally wrong to place all the blame for inflation on the unions and on wage claims. They totally fail to recognise that stagnation and the existence of unused capacity are in themselves contributory factors to inflation.

The Chancellor said in his Budget speech, and the Prime Minister has repeated this at Question Time, that he would not hesitate to use what means were available if the situation worsened beyond his expectations. It has worsened. As I have shown, the economy was more sluggish during the fourth quarter of 1970 than was thought at the time of the Budget. What evidence is available for 1971 shows a continuing downturn which is almost certainly deeper than the Financial Statement envisaged. It shows that the Budget judgment was wrong and should have been more expansionary. It certainly shows that action should be taken now to correct the mistakes of the past.

The Chancellor could take action either by increasing public spending or by using the regulator. As the situation requires early results, clearly it is the regulator which he should use. The Amendments are designed to enable him to use the regulator to a greater extent than was possible before. In the next six months this power will be needed. I commend the Amendments to the House.

The Minister of State, Treasury (Mr. Terence Higgins)

The debate which has been initiated by the hon. and learned Member for Lincoln (Mr. Taverne) follows a tradition which is now well established of discussing the general economic situation on the Clause of the Finance Bill which renews the regulator. This gives the Chancellor power to alter the rate of purchase tax plus or minus 10 per cent. to cope with variations in economic activity between one annual budget and another. I hope later to say rather more about the Amendments than did the hon. and learned Gentleman.

I suspect that the Committee will expect me to follow the hon. and learned Gentleman to some extent in the points he has made. Similar regulator debates have taken place each year since 1963, with the exception of 1969, when we found it more convenient to do it in the form of a debate on corporation tax, and last year, when Finance Bill affairs were very curtailed because of the impending election.

In 1968 and 1969 the debates took place in Standing Committee; but, whether they have taken place in Standing Committee or on the Floor of the House, they have been analytical rather than party political. The hon. and learned Gentleman adopted the same approach this afternoon. I hope to follow that same approach.

I have been glad to have participated in all the previous debates of this kind and to have had some part in establishing the tradition. I am now hoist slightly on my own petard. Having studied the debates I find also that these are largely occasions when Government back benchers and the Opposition put forward their ideas rather than opportunities for the Government Front Bench to put forward new policies. The reason is clear. These debates are very largely an extension of Budget debates and it would be very unusual indeed if the situation had changed very significantly in the meantime. The point which the hon. and learned Gentleman has made put too great a reliance on the short-term figures. I regard it as premature to make any significant change in my right hon. Friend's Budget judgment.

As my right hon. Friend made clear on 30th March, we face a uniquely difficult situation of cost-push inflation combined with rising unemployment. It is worth pointing out that this is one of the reasons why hon. Members tend to suggest wrong solutions. Most economic text books would suggest that cost inflation is not a situation which can persist over a significant period in the absence of excess demand. Yet our experience since the latter part of 1969 has disproved this. We have had rampant cost inflation at the same time as we do not appear to have had any excess demand in the economy as a whole. It follows, in our view, that demand management alone cannot provide the solution to the problems we face, although the regulator of course remains a very valuable weapon in our economic armoury, and this year —I go this far with the hon. and learned Gentleman—is of particular importance because the situation is clearly very complex. But it is limited to demand management and its potential use should, I believe, be looked at in the context of our broader economic policies.

Our objective in the Budget was to take measures which, in the fashionable phrase, will raise the level of employment so that it will grow in line with productive potential. This represents a significantly faster rate of growth in output than in the recent past. One has only to look at the Financial Statement to see that this is so. It is a rate of growth of output of about 3 per cent., which is much bigger than the rate has been recently, and is also significantly greater than it would otherwise have been if we had not done anything about the situation in the Budget.

There are those inside this House and outside it who have argued that the Budget judgment was wrong and that we should take steps in the Bill—and the hon. and learned Gentleman seemed to concertina the argument on the regulator —or in the regulator to deflate the economy or, alternatively, to raise demand much faster. Subject to points which may be made later in the debate, I think that it is true to say that the disagreement has been over our objective rather than with the measures which we propose as likely to achieve it. I think that the hon. and learned Gentleman raised the same point.

In this situation, it would be worth while setting out why it does not seem to us that either deflation or much greater reflation would be right at present and why we do not, therefore, feel that the additional powers the hon. and learned Gentleman is suggesting are necessary. It is difficult to find anyone who, in the present unemployment situation, is now arguing for deflation or that we should expand demand less than we propose to do—except, perhaps, those who seem to have misunderstood our monetary policy completely and who, denying that their use of monetary policy would create a situation of higher unemployment, talk as though by magic cost inflation can be cured by monetary means. No one really advocates massive deflation at present.

I want to take up the point which the hon. and learned Gentleman made with regard to unemployment and his assertion—as assertion it is—that the Government's policy is to try to cure cost inflation by massive unemployment. That is most certainly not the policy of the Government. The Phillips curve, which I have referred to in earlier discussion on the regulator, shows clearly, I agree, that the relationship between unemployment and prices has changed shape and has moved very substantially. So it probably is the case that, if we were to adopt massive deflationary policies or even the deflationary policies which have been used in the past to cure demand inflation, we would find that they were completely inappropriate, for such policies would involve a massive increase in unemployment, which would be quite unacceptable, and would involve a complete slump in investment, which would endanger our policy for future growth. I cannot see that to be an alternative to the Budget judgment.

On the other hand, there are those who argue that the right answer is a massive programme of expansion. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) has perhaps been the most consistent in advocating this sort of policy, both under the last Government and since we took office. In that context, it is also true that the T.U.C. and many hon. Members have expressed the same view. I do not believe that a programme of massive expansion is the right answer. One cannot cure cost inflation by adding demand inflation to it. One cannot achieve a higher level of employment and economic growth which can be sustained—and I stress, "sustained"—by massive expansion of demand, because no conceivable increase in real output, which is what is important, could cover the kind of wage claims we are still getting, and even a temporary speeding up of a cyclical improvement in productivity would not close the very large gap which still exists between growth of earnings and productivity.

Mr. Taverne

Could the hon. Gentleman make his position clear? If he allows demand to expand simply in line with the growth of potential capacity, how does he deal with the point that this will still leave the enormous margin of unused capacity which exists at present and which will continue to exist? Is it not a fact that, in a situation where this massive amount of unused capacity exists, one can, without adding demand inflation, use up that unused capacity?

Mr. Higgins

The position was clearly stated by my right hon. Friend and quoted by the hon. and learned Gentleman himself. I do not believe that, if we were to go in for the kind of expansionist policy advocated, we could do so without endangering the present position, and if we tried to do so we would rapidly get back to the dreary "stop-go" cycle. If we are to find the right solution, it is important, as was implicit in the hon. and learned Gentleman's intervention, that we should not confuse growth in output, which is one side of the equation, with growth of productive potential, which is the other side. If we want a sustainable rate of economic growth, it is the growth of productive potential—which is essential and decisive—that we must raise, otherwise it will only be a short run solution. What we have to achieve is not a temporary solution. If we are to succeed in controlling inflation and achieving a sustainable level of high employment and economic growth, then we need the kind of solution we have suggested and not a short-run rate of expansion which would jeopardise all our long term plans.

Mr. Robert Sheldon (Ashton-under-Lyne)

Is the hon. Gentleman defining productive potential as unemployment which arises from greater use of our available resources?

Mr. Higgins

I must confess that I do not understand that intervention, but if the hon. Gentleman would care to spell it out in his speech we will pursue the matter then.

Mr. Sheldon

Hitherto, very largely the level of productive potential has been defined as the amount of unemployment created by a greater utilisation of resources. This is a circulatory argument. The hon. Gentleman says that the extra unemployment is due to extra productivity and this leads him to welcome the unemployment instead of decrying it.

Mr. Higgins

I do not welcome unemployment. I must confess that I think that the hon. Gentleman is rather confused in his analysis. But I will listen with interest to what he has to say later.

I want now to take up two other points made by the hon. and learned Gentleman the Member for Lincoln. First, I think that he underestimates the danger which the kind of policy he is advocating would have in balance of payments terms. Secondly, and very significantly, he totally disregards the effect that such a policy of even more rapid inflation is likely to have on those living on fixed incomes. That was a remarkable omission from his speech. The attitude is one of expansion at any cost and not to bother if we have demand inflation on top of cost inflation.

Mr. Taverne

I must correct that misrepresentation. I argued that a more rapid expansion would slow down the rate of inflation and not increase it, because it would make a better use of unused capacity and therefore bring down unit costs.

4.30 p.m.

Mr. Higgins

I appreciate that the hon. and learned Gentleman mentioned that, but I do not believe, for the reasons I have given, that that would be the outcome. There is considerable confusion here in the hon. and learned Gentleman's mind over the relationship between an individual firm's pricing policies and unused capacity and marginal and average costs. I do not wish to take the question up in detail now, because it would take a while to spell it out. But I do not believe that the policy the hon. and learned Gentleman is advocating would do other than endanger both the balance of payments and those on fixed incomes, and it would endanger our long-run plans.

There are those who argue that all would be well if we combined a policy of expansion with a prices and incomes policy. In this context it is important to note that the expression "incomes policy" has become virtually meaningless. It must be defined if we are to have any meaningful discussion about it. Therefore, I do not entirely follow what the hon. and learned Gentleman advocated. We have made it clear that we reject the concept of a statutory prices and incomes policy. The Labour Government demonstrated very clearly that the control of wages and prices by legislation would not work. We were subjected to a declaration of intent, seven White Papers, three Acts of Parliament, numerous statutory orders and over 150 Reports of the Prices and Incomes Board, but we ended up with the worst inflation ever. The hon. Member for Liverpool, Walton (Mr. Heffer) will agree that the policy was grossly unfair, and I do not believe that it is one which we should adopt.

Nevertheless, I do not believe that demand management in itself is enough. It is for that reason that the Government are pursuing the policy of a progressive and substantial reduction in the level of pay settlements to achieve steadier prices. If Labour hon. Members want to call that a prices and incomes policy, they can do so, though I prefer to look at it as part of a much broader anti-inflation policy.

It is important to relate the position we have taken on de-escalation of wage claims to the use of the regulator. It is clear that the present cost inflation stems from the devaluation in November, 1967, which increased import prices, and the subsequent increase in indirect taxation and so on in the Budget in April, 1968, and the further political events, of which we are all aware, leading up to the General Election. But we have no doubt that the cause of the present inflation is inflationary wage settlements. We have only to look at the figures of increasing costs and prices to see very clearly that this is so. We believe that we have had some success in our de-escalation policy, but clearly we have further to go. It is only if we pursue that policy that we can hope to overcome the paradoxical situation with which we are confronted. Therefore, we would hope to have had the support of Labour hon. Members in achieving that aim. It is remarkable that they have not supported us in this policy, even though I believe that it is the only one that is likely to achieve success. We must combine the policy of de-escalation with a responsible demand management policy.

Mr. John Pardoe (Cornwall, North)

The hon. Gentleman has said several times in the last few minutes that the Government are pursuing a policy of de-escalation of wage increases, and he has implied that it is succeeding. Will he spell out clearly why he thinks that it has been successful? What evidence has he that it has achieved any particle of success? How does he intend to increase its success in the future?

Mr. Higgins

The answer is fairly apparent. The hon. Gentleman has only to follow the trend of a succession of Settlements, particularly in the public sector. The hon. and learned Member for Lincoln referred to the massive disparities between the two sectors. There have been cases which have hit the headlines where the increase in the private sector has been very large. I am not sure whether the hon. and learned Gentleman thought that that was a good or bad thing, but I do not believe that that is generally the case. We have seen a considerable decrease, if we take the generality of cases rather than those which hit the headlines. But I do not dispute that we have further to go, and it is very important that we should persist with the policy we have adopted so far. I believe that it will be successful.

Mr. Norman Pentland (Chester-le-Street)

The hon. Gentleman repeats that the level of wage increases is coming down. The Prime Minister, the Chancellor and other members of the Government have said in recent weeks that because of high wage demands causing wage-cost problems, unemployment has increased to its highest level for over 30 years. Why is unemployment not coming down now, instead of increasing?

Mr. Higgins

There are a very large number of reasons which my right hon. Friend the Chancellor has given. The first is that naturally if we have inflationary wage settlements we become less competitive in export markets. That means that we do not sell as much, and employment in exporting industries therefore tends to decline. Second, conversely, to the extent that there are inflationary increases in industries competing with imports, those industries become less competitive and again employment in them tends to decline. Third, as I think the hon. and learned Member for Lincoln actually said, if we have big increases in wage costs relative to other costs, firms tend to economise. This tends to reduce employment opportunities and squeeze companies' cash flow, and in the longer term to reduce the level of investment, and thereby reduce long-run employment opportunities as well. Therefore, I see no difficulty in answering the hon. Gentleman's question. It is a shame that Labour hon. Members are not supporting the view I have just put forward, because if we really want to solve the problems we are facing it is in everyone's interest—certainly if we want a higher level of sustainable economic growth and a higher level of employment —to get the level of inflationary settlements down so that real wages can be raised for the benefit of the community as a whole.

The Amendments should be rejected, though the reason for rejecting the first is very different from the reason for rejecting the second. The first suggests that instead of being renewed for the normal length of time the regulator should be renewed only until February. The second is concerned with altering the rate by which the regulator can be operated. We should reject the first Amendment because it would severely curtail the powers the Chancellor has had ever since 1961 to alter the purchase tax rates and carry them through if necessary thereafter to the following Budget. If we accepted the Amendment, it would not only mean that we could not take action after February, but, as I understand the position, it would also mean that if we took action between now and then it would be reversed between February and the Budget. That would be a very strange situation. It might enable us to make the next Budget look more attractive on the surface, but it would be a very odd situation. Therefore, it is right that the House should follow the practice it has followed since 1961, and give the Chancellor the powers which successive Chancellors have had as to the timing of the regulator.

The second Amendment leaves the power to increase the regulator at 10 per cent. but increases the amount by which it may be reduced from 10 per cent. to 15 per cent. The precise reasons for this were perhaps implicit rather than explicit in which the hon. and learned Gentleman said. There is already probably some bias in the regulator in the direction sought by the hon. Member for Ashton-under-Lyne (Mr. Sheldon), who has moved similar Amendments on a previous occasion. The bias is in that direction anyway because it is estimated that a 10 per cent. surcharge would yield about£325 million additional revenue in a full year, whereas a 10 per cent. rebate would reduce the revenue by about£375 million in a full year, because of the expected differences in the elasticity of demand. Therefore, there is already some asymetrical effect in the operation of the regulator.

The power given to the Government by the Clause is already very substantial. As I have said, it is between£325 million and£375 million. That being so, this is a reasonable request for the Chancellor to make. We think that it would be excessive to increase that power further. It is essentially a question of not limiting the Government's freedom too much and on the other hand making the Government fully responsible to Parliament. It is perhaps paradoxical that I should suggest that if the Amendment is pressed to a Division we should reject it. But I believe that in these circumstances the powers for which we are asking in the Clause are adequate. If by any chance they should prove not to be so, I believe that the Committee will agree that it would be right and proper that we should make whatever proposals are necessary for more dramatic changes. But our present view is that the regulator powers for which we are asking in the Clause are adequate. They have been granted to successive Chancellors. Therefore, I hope that the Committee will feel able to renew the powers and will reject both Amendments—the Amendment on timing because it would curtail the powers too far, and the Amendment on the rate because it would extend them too far in the other direction.

Mr. John Nott (St. Ives)

On a point of order, Sir Robert. I felt rather strongly on the lack of opportunity for backbenchers to express their views about part of the Bill being divided and remaining on the Floor of the House and part going to Committee upstairs. That is history now, and I do not wish to raise the matter again, but what will be the position if we have four Front Bench speeches on each Amendment? Is it normal for there to be four Front Bench speeches on Amendments taken on the Floor? There will not be much opportunity for back benchers to have a say on the Bill if we proceed as we are proceeding this afternoon.

The Chancellor of the Exchequer (Mr. Anthony Barber)

May I help my hon. Friend and the Committee? In this debate it seemed to me right that I should be available to deal with any points which were not necessarily covered by what has just been said by my hon. Friend the Minister of State. It was not my intention to depart from the normal practice on these occasions, which is for one Minister to deal with a matter comprehensively and for another to be available if necessary, or in some cases for the same Minister to speak again and deal with any points that have arisen. I take the point, and I know the views of the hon. and learned Member for Lincoln (Mr. Taverne) on time. A great deal of time can be taken up by Front Bench speakers, and sometimes it is sheer duplication.

4.45 p.m.

The Chairman

None of these is a point of order for me, but I can assure the Committee, following what has been said by the Chancellor of the Exchequer, that there will be an abundance of opportunity for everybody to make their speeches as we go along.

Mr. Bruce-Gardyne

Further to that point of order, Sir Robert. Could you also give us guidance as to your intentions? Is it your intention that, having debated the Amendments, we should then have a further debate on the Question, That the Clause stand part of the Bill?

The Chairman

That is a matter about which the Chair is always reluctant to commit itself in the early stages of a debate. I reserve judgment on that point until the time comes. The hon. Gentleman, with his experience, will know what is the usual procedure adopted by the Chair.

Mr. Sheldon

The position of the regulator debate is now firmly established and it would not be irrelevant to point out how recent a tradition this is. I remember in the debates on the 1965 Finance Bill having difficulty with the Chair, as reported throughout a column and a half of HANSARD, when all I was trying to do was to point to alternatives to the regulator, so narrowly was the matter then interpreted. We have seen that this has subsequently been expanded to a whole debate on the economic matters which are before us. I do not quarrel with that situation, but welcome it.

I also welcome the fact that we have another new tradition, namely, that of a wide-ranging debate on Third Reading, a tradition, which I hope likewise will become firmly established. Certainly the economic matters which have been before us over past decades have not diminished and the opportunities for discussing them need to be extended. That these traditions have been created is a tribute to the way in which we run our affairs.

My Amendment deals with the problem of the regulator and how it can be used. In fact, the regulator downwards has been surprisingly rarely used. It has always been increased to take into account the worsening economic situation as it develops in the months following the Budget and my Amendment seeks at least to draw attention to the way in which it ought to be used, particularly at present.

My hon. Friend the Member for Heywood and Royton (Mr. Barnett) and I have put down Amendments of this kind over past years. The point is that we want to make it easier for the Chancellor of the Exchequer to inject some money into the economy when he thinks fit. The pity is that Chancellors have rarely thought of injecting such money, but instead have decided to pursue rather more restrictionist policies than I would have wished to see.

We now have for the first time a real and widespread acceptance of the need for a rather greater expansion of demand than has been the case in previous years. As a result I hope that the Chancellor, even though the power to reduce purchase tax and Customs and Excise duties by 15 per cent. might not be accepted by the Committee, will use the powers he has more than in the past.

The reason is that for the first time since the war the present Government are making use of the one economic weapon which Governments have forborne to use over the past 30 years. The great thing that has happened in the past year in economic terms is the decision by the Government to make use of one economic regulator which has been spurned by all post-war Governments: namely, the regulation of the economy through the increase in unemployment. For various reasons, largely historical and also because some Conservative Ministers remembered too well the problems which were associated with tying the Conservative Party to the spectre of unemployment, this has been a weapon which has not been used by Governments up until this year. What we have now seen is the full-blooded, professional use of unemployment as a new economic regulator which is a matter of massive economic and social importance. Its social importance is obvious to all.

The way in which this new regulator has come to be used must be seen in its social implications. I believe that there are few pure economic laws as such, but there are a great many more social laws upon which many of these economic laws depend. One of the strongest of the social laws is the law of fear. What we are trying to do is to base an economic assessment of the situation on an economic law which rests on the fear of people for their jobs. The whole economic argument for unemployment is that there can be a de-escalation of wages. This is possible if as a result of fear people are prepared to settle for a wage claim less than that which they require because they are frightened of their jobs; because they know full well that if as a result of an excessive wage claim they were to lose their job, another job would be much harder to find.

In my advice bureau in my constituency this weekend I have seen, as no doubt have many other hon. Members, many people who have come to tell me about fear for their jobs. They have not been made redundant, but they are frightened of redundancy because they know that it is in their area. My area is not one with a particular problem of this kind. It is near to the steel closures, but we are not affected as greatly as were many other areas. Certainly one-fifth of the people who come to see me in my surgery feared for their employment. I have never experienced this before, and it made me realise what my predecessors in the constituency had to face when they had difficult employment problems during the 1930s.

We are seeing this prime economic weapon used for the first time in a sophisticated way. In the past, there was the pre-Keynesian idea that extra wage demands led to inflation, but I thought that that had been pretty well demolished. Therefore, I am surprised at the Minister of State using an argument which would not have been very respectable in the context of the 1930s, and is far less respectable today. The hon. Gentleman said that wage demands led to unemployment. He well knows the opportunities given by the use of demand management, but many other factors are concerned and it is an over-simplification to say, as might have been said in the 1920s or 1930s, or much more likely in the 19th century, that our problems are caused because workers are asking for too much money.

Any economic theory which is based on this assessment, which is so hopelessly out of date, is doomed to failure. Those who try to blame the workers for being bloody-minded because they do not obey economic theories postulated by right hon. Gentlemen opposite fail to appreciate what is going on. These so-called "bloody-minded workers" are rather different from the workers in the 1930s and before.

These are people who will not acquiesce in the same way as did some of their predecessors. They will want tighter and tighter trade unions and will insist on getting whatever is available. One prominent trade unionist said that if there is to be a free-for-all, his union wanted to be part of "the all". Those in the Tory Party who worked hard in the 1950s, and all credit to them, to break down rigid attitudes will see their efforts bitterly disappointed because of the steps taken by the present Administration in an attempt to revert to what for so long have been abandoned policies.

[Mr. GEORGE WALLACE in the Chair]

Captain Walter Elliot (Carshalton)

I am following the hon. Gentleman's argument with interest. If he holds this view, why did his right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) when Chancellor of the Exchequer say that the most the country could afford was a maximum of 4 per cent. increase in wages—between ½and 4 per cent.?

Mr. Sheldon

We were then facing balance of payments difficulties and a reluctance, which I did not share, to make adjustments to the exchange rate. In fairness to his present Administration, one prominent Minister has made this point and it is the only respectable point that can be made about wage demands leading to inflation. That Minister is the Secretary of State for Employment who, in the winding up speech on the unemployment debate recently, said that inflation would cause balance of payments difficulties and if one accepts that the exchange rate is fixed then that, in turn, will cause unemployment. But it depends on rigid exchange rates which he did not spell out, but which the House will accept as an essential part of his argument. It is a respectable argument if one accepts the conditions which the right hon. Gentleman laid down. It is interesting to note that not once in that speech did he refer to what I would call the intellectually dishonest argument of wage demands being the natural cause of inflation.

We have had what has been called the numbers game. In the past few weeks various hon. Members, including myself, have tried to assess at what moment the Government will intervene to reduce unemployment. What are the numbers concerned? Many of us have had suspicions that the figure might be allowed to reach the 1 million mark. It would be the first time that that figure has been reached since the early days of the war. However, we have asked this question to no avail since we have had no answer as to the number. The Government must know, and at some stage their nerve will crack. The interesting thing is to know when it will crack and what they will do about it.

Whatever right hon. Gentlemen opposite, and indeed the Prime Minister, may say about unemployment being nothing to do with the Government and that they will merely sit back and watch the trade unions fight it out with the employers, while the Government stand idly by, nobody really believes that to be the case and certainly the electorate will not believe it. When it comes to the next election it will he no good pretending that unemployment is nothing to do with the Government. The electorate will know that it is to do with the Government, and will vote accordingly.

What will the Government do? If they are to be held responsible, they must acquire the power. This is one of the cardinal lessons that was learned in the election of 1959, namely, that if it is claimed that the country has never had it so good and that that is the result of Government action, then when the country has it bad, the country knows whom to blame. The country will not praise the Government one moment and forget about them the next. If they are held to be worthy of praise, they will also be held to be worthy of blame. This is a political fact which we have all absorbed thoroughly.

It is interesting to see what the Economist said about wage demands on 24th April: It has thus become impossible to say with honesty that the Government's anti-inflation policy is succeeding. When Ministers go on pretending that it is succeeding, they are trying to fool the public—and may be succeeding in fooling themselves. Sooner or later, an incomes policy is going to have to be brought into being. Ministers prefer not to believe that yet. 5.0 p.m.

An interesting point was in a comment from the Minister of State who said that there was some doubt as to what we mean by an incomes policy. I do not know whether that was the first cuckoo of doubt, the harbinger of the creation of this grey area, and perhaps it is out of this that a policy will emerge. It is not what right hon. Gentlemen opposite, speaking on behalf of the Government, were saying before. This change in attitude that will come from the Front Bench opposite will be studied word by word by many right hon. Gentlemen on this side of the Committee. The change will come. The interesting questions are, when and in what form?

What are the Government doing about the levels of growth meanwhile? The intervention I made in the speech of the Minister of State was not perhaps a suitable method of putting an argument across, and I should like to expand on that now. At present we know that the policy of the Government is that the economy should grow at the rate of its productive potential. What does that mean? It means that if we assume certain productivity increases in industry of such and such a per cent., we can say that that is the underlying growth of the economy and we will match demand in accordance with the underlying real growth. One is a genuine growth, the improvement in the weighing of our productive processes, and the other is the way in which Government manages the economy to go roughly hand in hand.

How do they define this productive potential? It is done by saying, "If there were no extra goods produced what would be the increase in unemployment?" Presumably people would not want labour; they would then fire their people and the increase in unemployment would be a measure of the underlying in- crease in productivity. That is a measure, and, to be academic, it is very good. It sounds perfectly logical, and there is some case for it. The difficulty is that although it is much more easily calculated than any other method, it takes a static situation into account—it says that there will be no effort by Government to improve productivity, the Government will not be involved in increasing production.

It is only when we consider the alternatives that we see how inadequate such a policy is. We can turn from the vicious cycle on which the Government are engaged to the virtuous one of increasing demand, bringing pressure of demand upon our factories, bringing pressure of demand to lead to an increase in inventiveness, a reduction in unit costs and the increase in sales that comes from this. This is the path being followed by most of the expanding economies of the world today but it is the one that the Government reject. Instead, they prefer to sit back with this vicious cycle of unemployment leading to a lack of productive increase as measured by the productive potential. This ought to be changed. One of the things that many of us hoped for when Iain Macleod came on the scene was that there would be a change because he accepted some of these arguments of growth. One great disappointment that what we had was a reversion to some of the static policies of the past.

We know that the situation has changed fundamentally in the last few days by the mark revaluation and the revaluation of other currencies. This has been estimated as putting somewhere between£100 million and£140 million on our balance of payments. Taking the respectable argument used by the Secretary of State for Employment, that means that we can expand by a number of times the balance of payments surplus that will arise directly out of these currency revaluations. That means that we can expand not only by£130 million or£140 million but several times that. That is the new factor. If we take Sam Brittan's argument that the increase in retail prices may be only 0.1 per cent. or 0.2 per cent., that is not a figure that should inhibit us with our inflationary rates of retail price increases of 8 per cent. to 9 per cent.

There is the strongest possible case for using the regulator. If we do not, we must not be surprised if we see bankruptcies rising even higher. One of the interesting figures was that in the last quarter of 1970 insolvencies were at their highest level for ten years. If there are certain economic disadvantages with which we are associated, there is one thing with which the Tory Party has always been associated, and that is insolvency. With Rolls-Royce and these other matters no one will stick his neck out and say when the end is in sight.

My hon. and learned Friend the Member for Lincoln (Mr. Taverne), mentioned capital investments. One item of great significance, and even more depressing than other figures, is the figure given by the Machine Tools Trade Association showing that the level of new orders in the United Kingdom for machine tools in the last quarter of 1970 was 42 per cent. less than it was in the first quarter of 1969. To me, machine tools represent the very heart of industrial progress. This the best indicator of the kind of industrial Britain that I hope to see. Instead of progress, there is this massive decline in the figures.

No one opposite can look forward with any confidence after the kind of Budget that we have had and the kind of Finance Bill that has succeeded that Budget, coupled with the kind of policy still being pursued by the Government. The only thing we can say to the Government is: "You have the regulator, we are giving you greater powers to make use of it in a more expansionary way, and any restrictionist attitude cannot be blamed upon this side. For God's sake use the measures we have given you."

Mr. Nott

Before dealing with the main burden of my speech may I assure the Chancellor that, in spite of my earlier point of order, I am delighted that he and the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) will be winding up the debate. It has been particularly difficult to speak on economic debates in this Parliament. The Budget debate was heavily over-subscribed and I could not get in on the Second Reading of the Finance Bill. In addition we have not had an opportunity as back benchers to discuss the division of the Finance Bill. Altogether it has been rather a frustrating time.

Since we have been passing through a rather stirring economic period, I hope my right hon. Friend will understand the points of order that I have been raising over the last week or so, particularly as my speech will be of a slightly candid nature and I know there is nothing worse than a candid friend.

The debate on the regulator, while it is a rather and topic, has always given the Committee the opportunity of a fairly wide-ranging debate on the health of the nation. By pure coincidence and somewhat ironically, it takes place today while our nation's economic destiny is being discussed—one might almost say auctioned—in the corridors of Brussels. At the heart of this debate must lie the outcome of the next 10 days of British history which in my view will be decided not on economic, but strictly on political grounds, and rightly so. Nevertheless, the consequences of a positive or negative outcome or even worse, no outcome of any sort at all is likely to have such far-reaching economic consequences for the nation and the future of demand management that I cannot leave them entirely out of the debate.

As I want to say some critical things about the Common Market—I shall relate this wholly to the regulator—I should make it clear that I always used to be a supporter of our entry on political, not economic grounds—grounds admirably expounded by the right hon. Member for Stechford in The Times yesterday If, however, the economic obligations are so great in the transitional period as seriously to restrict our growth in the intermediate term and the currency rules so rigid as to prevent us operating to secure our national survival from accelerating world inflation, I shall have to look very carefully indeed at the terms since they could involve serious political consequences for this country during the next few years.

Since the war British economic policy has set itself four prime objectives, all of which taken together are believed to increase the real wealth of the British nation. Those objectives I could list as a full employment target, a balance of payments target, an incomes policy or an incomes growth target, and an economic growth target.

I shall not, although I am tempted to do so, embark on the question of whether more rapid economic growth will enhance or detract from the quality of life. That is a subject on which the right hon. Member for Stechford talks fairly frequently. Suffice it to say that I find it interesting, when referring to economic growth, that more and more Americans, inhabitants of the richest country in the Western world, should want to come to live in this country which, according to certain statistics, is rapidly becoming the poorest. I also find it interesting that the British people, who apparently are aware that real wealth is increasing extremely faster than here in the Common Market countries apparently wish to stay outside. I should be foolish to seek the answer to this question, because it would require a judgment whether the British people were not rather more sophisticated than their politicians, and that might lead me into all kinds of trouble with the Committee of Privileges, my right hon. Friends, and others.

Like Mr. Joe Rogaly of the Financial Times I sometimes wonder whether the economists are not a little misguided. Is the level of our growth, tuned here and there by the regulator, not increasingly becoming an exaggerated issue? Should we not be more interested, as was said the other day, in how many people are healthy, sane and active rather than how many hospitals we are building? Should we not be rather more interested in how many people are properly, not improperly, educated than in how many more schools we are constructing, and whether those who possess a home find it comfortable and nice to live in rather than whether we are building more homes?

I cannot deal in this debate with economic growth and the growth target, but I have some scepticism on how we measure the real wealth of the nation. I recognise that steady economic growth is desirable for all the material benefits which it brings, but whether any so-called dynamic effects, assuming that we will achieve them if we enter the E.E.C., will materially improve the quality of life in Great Britain seems to me an open question and certainly it is not the issue which should decide our entry into the Common Market.

That was certainly in order, but perhaps not very closely related to the regulator. I come now perhaps more closely to the economics of the matter—namely, incomes policy, balance of payments and full employment, which are all very much related to the level of demand.

I believe that the period of Labour Government, the so-called Socialist experiment of 1965 to 1969, was a total, abject failure because it relied, in order to reconcile the objectives which I have outlined, on internal demand management through fiscal methods, coupled with an incomes policy, which failed to work, and a fixed exchange rate which, by force of circumstances, the Socialist Government abandoned.

Had we had a truly Socialist policy of demand management by fiscal means coupled with rigid import licences, or some variant of the same, and a fixed rate of exchange, all operating in a truly Socialist environment where there was a consensus on what constituted a fair system of pay differentials on a national scale, then the Socialist policy might have worked. As it is, I think that it showed up the total fallacy of an incomes policy, because even a Socialist Administration, financed by the trades unions and heavily represented in the House of Commons, was palpably unable to create a social consensus on what constituted a fair system of wage differentials on a national scale.

5.15 p.m.

I have noted the recent study by the Department of Employment. If one discounts its partiality and what I believe to be many erroneous facts, it is still admitted that the effects of an incomes policy can only be temporary and nothing more.

If anyone wishes to read some really good arguments against an incomes policy he should pick up Professor Clegg's recent book and start at the end and work backwards. The last chapter is entitled, "Will the unions co-operate?" Professor Clegg lists a whole series of reasons why they will not. But then, by a great act of faith—he has great faith in incomes policy—he gives the answer: yes, they will. I thought that the arguments led me to precisely the opposite conclusion.

Looking back over the past 10 years, it is true that all Chancellors have given top priority to stimulating exports and private business investment. But since, in conditions of exceptionally buoyant world trade, our share of world exports, except for the odd hiccup or two immediately following devaluation, has consistently fallen, it is evident that every Chancellor has failed.

Efforts have been made by every Government to restrain consumption and Government expenditure in order to release resources for private investment. But, despite all the efforts which have been made by Chancellors of every party, it is ironic that in every downturn of the trade cycle private investment has taken the biggest knock. At no time has it been more evident than now.

I have complete confidence in the determination of the new Administration to tackle Great Britain's problems, and I think that they have started well. But nothing can remove the evidence—the hon. and learned Member for Lincoln (Mr. Taverne) listed many of the points—of very unsatisfactory export figures, buoyed up by the terms of trade, rising imports, static fixed investment, growing consumer spending and what looks to me like rising Government expenditure as well. I should be a liar, or anyhow a sycophant, if I were to say that I thought that the figures showed anything else.

I should, in passing, mention Government expenditure. The Government were to be congratulated in the mini-Budget for financing many of their tax reductions by increasing charges. This was a welcome change which has increased the citizen's freedom of choice. I applaud the whole exercise. It was extremely well done. But if Government expenditure were to be defined in a meaningful way instead of by the so-called Treasury definition—namely, as that proportion of the national output which is devoted to collective rather than to private purchases —I believe that it must now be rising very fast. Indeed, in the last three months it has looked to me to be getting out of control in relation to the recently published White Paper.

I must repeat that the items of Government expenditure which matter are not transfer payments like family allowances, pensions and school milk and meals, which, however financed, are part of private purchases, but items like Rolls-Royce and Concorde and tribute to the Common Market's peasants. These are items which come out of the real resources of the British nation.

Our predicament is clear. More than in any other European country, the level and growth of effective demand in Great Britain is decided by the share which exports take up out of our total productive capacity and the amount which imports represent of our total consumption. It seems clear that, in a capitalist economy, private investment—this is the problem which everyone mentions—is demand-induced, and it will remain so.

The Secretary of State for Trade and Industry can pour money endlessly down the throats of private industry in tax allowances, grants and subsidies, but, in the last resort, private investment in industry is demand-induced, and allowances and grants and even interest rates are a marginal matter. They can be important, but they are not the critical determinant in private investment.

Mr. Tam Dalyell (West Lothian)

Is one right in understanding the hon. Gentleman to say that he would have left Rolls-Royce to stew in its own juice?

Mr. Nott

I do not want to get drawn into a debate of the RB.211—

Mr. Dalyell

That is exactly what the hon. Gentleman said.

Mr. Nott

It is not what I said at all, but it is a different subject, which I am not debating now.

The difficulty is—this is my critical point on the regulator and where I totally disagree with the Labour Amendments—that any release of consumer demand at present will create an immediate demand for imports, long before that demand works its way through, by higher investment, into greater capacity for our exports.

Mr. Dick Douglas (Clackmannan and East Stirlingshire)

The hon. Member is presenting, to me at least, a peculiar argument. He has argued that investment is demand induced. Now he is saying that, if we did something about the regulator, we should have a surge of imports. Is he now saying that the demand induced in investment in the domestic economy should be going to exports, the potential for international markets, and that private industry in this country is deficient in that respect?

Mr. Nott

That is what I am going to say, but I have not got there yet.

Any release of consumer demand through the use of the regulator—the Labour Party are talking about moving it not upwards but downwards, because they are expansionists—will release an immediate demand in imports long before that demand creates higher investment in British industry to create additional capacity for exports. Here I confess my own failure. I arrived at the truth rather late and at the same wrong time as Professor Schiller. Until six months ago, I did not believe in floating rates of exchange. I came to advocate them as the only remedy to stop the appalling rate of domestic inflation in this country, which we will increasingly suffer from the dollar deficit.

In my last speech on the economy, on 18th February, I concluded with a warnning which has come true in a way which I never anticipated—that, with the dollar deficit as it is, and the inflationary effects which would come upon our economy, we would run into serious difficulties. Now, as a result of the last weekend, the position is even worse for us, because the pressure now in terms of the dollar deficit is far more upon sterling than it was before the revaluation of the European currencies.

I remember the smile on the face of the tiger—if I may refer to the Chancellor as a tiger—when I mentioned my conversation to him. It was hard to discern whether it was inspired by pity for the fact that a lamb had fallen prey to the ravishing intellect of my right hon. Friend the member for Wolverhampton, South West (Mr. Powell) or whether he really felt, paternalistically of course, that I did not know or realise how he was hemmed in by the negotiations for the Common Market.

Of course I appreciate that no member of the Government or even of the Labour Party Front Bench can properly discuss exchange rate policy while the Common Market negotiations are going on, but it is the prerogative of the backbenchers to discuss things which need to be discussed and leave it to the Front Benches to say, as the Chancellor does, that he will go "as far and as fast" on Werner as everybody else and give important assurances about the immutability of our parity in Copenhagen. I understand some of the facts of political life and I know that he cannot answer any of the points which I am making, but since he will not be able to resist the economic facts of life for ever on exchange rate policy, I must make these points just the same.

If the regulator is used at present to lower taxes, it will lead to a rapid deterioration in the balance of payments, because the growth of imports will always tend to lead to growth of exports, and exports will follow the growth of productive capacity rather than lead it. This is our problem.

I am convinced that Bretton Woods is wholly out of date. It may have made some sense and it has served us well for many years, but, with the growth of a truly international currency market—the Eurodollar market—it is palpably incapable of preventing huge currency flows, and the speculators—or, to be more accurate, the large multi-national companies which are conducting their business and increasing the real wealth of the Western world perfectly legitimately—can now bring national currencies down, and they will continue doing so. May we be preserved from Lord Balogh and all his ways, because he suggests that the only way to control this is by controls on the Eurodollar market, which would be disastrous.

There are only two ways out of this predicament. The first is the "break or bust" school, of which the original mentor was my right hon. Friend the Member for Barnet (Mr. Maudling) who now has many followers on the Labour Party Front Bench; the hon. Member for Heywood and Royton (Mr. Barnett), the right hon. Member for Manchester, Cheetham (Mr. Harold Lever) and the hon. and learned Member for Lincoln (Mr. Taverne) all now follow that philosophy although they also complain about the balance of payments deficit which they inherited in 1964. I should have thought that, with a fixed exchange rate and even a balance of payments surplus of£600 million—our balance of payments surplus is not that strong—we would fail again, because the time lag before our capacity for greater exports was built up would be too great.

So the only second way out of the predicament, I believe, is to float the pound. The weekend's devaluation of the pound and the dollar against the European currencies will flood us with as many dollars as flooded Frankfurt. It may not happen immediately, but we will have the same problem. It will have very damaging results on internal price levels in this country.

Cost inflation is a serious problem. However, even if the Chancellor's policy of de-escalation—I am not sure what its correct name is in the current jargon, something "minus one" is the term I believe—is wholly successful—and it is to be hoped that he gets wage settlements down to the same level as the growth in production—the problem of internal domestic inflation will still not be solved while the dollar deficit continues at its present level.

5.30 p.m.

If the Chancellor and his Treasury colleagues can produce the outstanding tax reforms in this Budget and, more important, if they have the dedication and perseverance to get them through the Inland Revenue and Civil Service—which hon. Gentlemen opposite never had, although they shared many of the objectives which my right hon. Friend achieved in his Budget—then they will be equally capable of radical thinking in demand management.

A reduction of taxes by use of the regulator will not overcome or solve the problem. There is no radicalism in the regulator. It is an old-fashioned and out-of-date weapon which I hope will never be used again to release personal consumption. We do not want consumption-led growth in Britain, but export-led growth coupled with an ending of inflation.

I am convinced that our Common Market priorities are paramount now. I understand the problems completely, but these negotiations must be out of the way, one way or the other, by the end of June. [Interruption,] I have not said whether I am for or against the Common Market in these remarks; Werner is an economic nightmare although the right hon. Member for Stechford thinks it is a happy dream.

The right hon. Member for Stechford has a great European ideal, but I must not be led into a discussion of the Common Market, except to say that the right hon. Gentleman foresees a Europe rather as it was in the Middle Ages, with Norwich, Dijon, Lyons and Winchester as great, prosperous cities paying their tribute not to the Mother Church in Rome but to the bureaucracy in Brussels. It is indeed a high ideal. I do not share it, but I understand it.

I believe in a Common Market of nation States. As we have had a traumatic weekend, with the common agricultural policy having, I hope, been knocked on the head once and for all, and the idea of a monetary union having been put back for ever, things look happier.

I appreciate that the Chancellor cannot answer many of my questions. I hope, nevertheless, that he has noted my remarks and that I have not been too critical of the Government.

Mr. Eric S. Heffer (Liverpool, Walton)

When we discuss industrial relations I frequently see hon. Gentlemen opposite wander into the Chamber, sit down for a few moments, look around in a perplexed way and then wander out again. I feel like doing the same in this debate, for this is a complicated matter and there has been some learned and witty discourse.

Previous speakers have given their views on what should be done to solve the financial problems that face Britain and Europe. I will not follow that path. I have always believed that one should concentrate on those things about which one knows most. However, there are certain matters on which the Government should be challenged.

The Minister of State repeated the statement that is frequently made in the House from the Treasury Bench, particularly during Questions to the Prime Minister and the Chancellor of the Exchequer that wage inflation is leading to high levels of unemployment and that, at all costs, we must de-escalate wages. The de-escalating of wages has become the latest demand. I cannot call it the latest panacea, because it is not a new idea. The mill owners were probably the first in the field at the time of the Industrial Revolution to claim that all the problems of the economy would vanish if only the dreadful workers would not insist on higher wages. That same argument is being used today, but in a modern context—that if only the workers would be happy and content with what they are getting, or perhaps a little less, all our problems would be solved.

The hon. Member for St. Ives (Mr. Nott) pointed out the fallacy of this argument and the fact that other factors must be taken into account if our problems are to be solved, and these factors have nothing to do with workers' wages. Of course, the Government are hoping that if they use the descaltion argument often enough, sufficient people will eventually believe it. It is, in other words, a red herring which the Government hope will divert attention from their failure to deal with rising unemployment, the lack of investment and all the other ills.

It is time that this de-escalation of wages argument was pinned once and for all. After all, we have never been given evidence to show that rising wage levels result in economic difficulties and unemployment. Indeed, hon. Gentlemen opposite are even using the de-escalation argument in connection with the balance of payments. When the Labour Party were in power we heard a lot about the balance of payments. But now hon. Gentlemen opposite are fusing the two arguments and are hoping thereby to have a red herring which will draw attention away from their failure in many respects.

I recall that at Question Time the other day the Minister of State for Employment used the classic argument—if I can dignify it with the word "classic" —about the need for a satisfactory balance of payments, but he used it in a totally different context. Today the Minister of State said that higher wage levels would suck in imports. I would not worry too much about the balance of payments just now. We have a surplus and we need not retain a gigantic one. Perhaps it would not be a bad idea to lose some of this enormous surplus.

Mr. Peter Rost (Derbyshire, South-East)

What about the overseas debt?

Mr. Heffer

The arguments that hon. Gentlemen opposite use in this context are incredible.

I agree with the removal of purchase tax on some items. I also agree that we should increase the general demand to reflate the economy. I am not even about to give a list of purchase taxes which could be removed. But some should be removed. This is a serious proposition which ought to be examined.

No one has satisfactorily answered the whole question of a wages policy. I have also been looking at Professor Clegg's book, but I have not yet finished reading it. It is regrettable that I did not start at the end and work through to the beginning.

There are three ways in which the question of incomes can be tackled. First, there is a way which we have never tried but which the Labour Party, before 1964, actually advocated. That was known as the "planned growth in incomes". What began as a planned growth in incomes ended as a sort of freeze of incomes, and holding incomes down. But with a planned growth in incomes one also has to have a greater measure of control of the economy as a whole. I am glad to see that I am taking the hon. Member for Oswestry (Mr. Biffen) with me on this. He may totally disagree with it, but he sees the logic of my argument. We have to get back to the concept of a planned growth in incomes and to the logic of that, but at the same time we must have an extension of economic controls throughout the whole of our economy. If that is done, we can really begin to deal with the problem of incomes in this sense.

Another way of dealing with incomes is the statutory incomes policy, which the Labour Government had, based upon the concept of the "norm". I can remember saying in the House that this was an absolutely fantastic argument. If a man earns£150 a week and receives an increase of 2½per cent., that is not bad. But for a man earning£8 10s. a week who has an increase of 2½per cent., that is terrible. We cannot have an incomes policy based upon this type of norm. It is not fair and it does not deal with the lower-paid worker. I have heard the argument that we should say to draughtsmen, for instance, who are amongst the higher-paid sections of engineering workers, "This year, do not ask for an increase because we intend to give an increase to farm workers." That would be very laudable if it worked in practice. But the draughtsmen know that if they do not ask for an increase, that does not mean that there is less profit in engineering, or that the profits are being put into the farming industry to help raise the level of farm workers' wages. Under our system it does not work out. They do not gain anything by not asking for higher wages because the sums of money involved are not there. It is not done like that. I am not saying that it could not be done. It could be done with the planned growth in incomes of which I have spoken. It means also the extension of planning and controls in other directions.

We did not do that in six years of Labour Government. Unfortunately, we did two things: we partially had an incomes policy based on the norm; and —I disagree with my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon), although I do not think that he would disagree with me—we partially used unemployment also. There is no question about that. I remember very well the arguments in the House. I remember pointing out that I did not accept the theory that the development areas should have their unemployment lowered and that other areas, such as Birmingham, should allow unemployment to increase until we had a sort of overall acceptable limit of 500,000 unemployed. I did not believe it then and I do not believe it now. I know that my hon. Friend the Member for Ashton-under-Lyne did not believe that, and he was being kind to the Front Bench. I am not being kind to anybody. I want a policy and I want us to learn some lessons from that period.

The Labour Party have to return to a policy which they always pursued, from 1945 onwards, when our first demand, always, was for full employment. We always argued for that. That was written large, in huge letters, in all our manifestoes, except the last one. It will be in the next one as far as I am concerned. We on this side of the House should be absolutely dedicated to full employment.

5.45 p.m.

Hon. Gentlemen opposite have taken a somewhat different view about full employment. The third way of dealing with the problem—and trying to keep wages down—is to allow unemployment to rise. That is what they are doing at present. They are using unemployment as an economic regulator. They are trying to pretend that this is not so, but they know that it is so. If they are not using it as an economic regulator—and the hon. Gentleman shakes his head—what are they doing about the problem? If they do not believe in it as a regulator, let them do something positive. That is possible in modern society. Keynes existed. He was an economist whom all of us, at one stage in our lives, have read. The regulators can be used in a different way, and not for unemployment. The hon. Gentleman really cannot get away with it.

In this situation we have to do two essential things. First, there must be a general upturn in the economy, as proposed by the trade union congress. There must be a reduction in the levels of purchase tax to help in that direction. There must be greater investment. I was terribly scared at one stage during the speech of the hon. Member for St. Ives when it seemed that he would have allowed Rolls-Royce to go. He did not want Government expenditure of any kind in that direction. I should like to tell him—I reiterate what I said recently—that Cammell Laird's shipyard would not exist now had the Labour Government not intervened; now it is beginning to make a profit once again. In modern society we have to have Government intervention in a positive direction.

We cannot believe that we can go back 200 years. We can do that only with utterly disastrous results. So the first thing is to see a general upturn in the economy by the measures which I have proposed.

Second, the House must state again and again its complete conviction that, whatever we do, we shall bring in measures which will reduce unemployment. We must recognise that this is not just a wastful use of people but that its long-term effect on our economy can be tremendously harmful.

Ever since the end of the war, Liverpool has had a pool of unemployment, and it is the residue of the pre-1940 days. The men who make up that pool have never been trained. They have never had jobs. They represent resources which have never been used, and it is a crime in our society that this should be so. For that reason, whatever else we may do in this House and whatever party is in power, we must be dedicated to the idea of removing unemployment, which is one of the biggest curses ever.

Mr. John Biffen (Oswestry)

Like other speakers in this debate, the hon. Member for Liverpool, Walton (Mr. Heffer) used the occasion for a kind of economic tour d'horizon, In saying that, I hope that I am not anticipating any constitutional changes which may imply that French will have parity with English at some future date. As the hon. Member for Ashton-under-Lyne (Mr. Sheldon) said, it has become characteristic of this debate for the Committee to discuss the economy in general. I hope that I shall not cramp the style if I revert to what I intended to say originally by relating my argument to the use of the regulator.

Before doing so, however, perhaps I might comment on one or two of the points made by the hon. Member for Walton. In respect of an incomes policy, I say only this before we become caught up in another kind of vortex of debate on the subject. The hon. Gentleman spoke a lot of good sense and gave the Committee his sound analysis that, for the control of incomes to have any meaning, it will have to be pervasive and statutory. I hope that he will communicate his views to his right hon. Friend the Leader of the Opposition, who looks as though he will go for the illusory and easy option that, somehow or other, given a few nods and winks, it can be worked out on a voluntary basis with the C.B.I. and the T.U.C.

Then I wish to comment on the hon. Gentleman's reference to unemployment. I do not wish to engage in a debate on unemployment. But I do not think that the hon. Gentleman is right in asserting that it was a deliberate policy of the Labour Government to increase unemployment, any more than I accept the assertion of the hon. Member for Ashton-under-Lyne that my right hon. and hon. Friends are …engaged in the professional use of unemployment. The rise in unemployment that we are witnessing is probably much more pro- found and much less capable of that kind of analysis. I suspect that the task of understanding the phenomenon and then producing the best remedies is hindered rather than encouraged by the way in which we conduct some of this debate—

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

Mr. Biffen

I am glad to see that I have the support of the hon. Member for Stoke-on-Trent, Central (Mr. Cant).

I shall not dwell on this point, because I want to talk about the regulator. However, in view of the remarks of the hon. Member for Walton, I felt that it was a fair observation to make.

I come, then, to the speech of my hon. Friend the Member for St. Ives (Mr. Nott). I fear that he is showing signs of political infection. The virus of Powell-ism is spreading. He sounded Gaullist in his views of Europe as well as championing monetary controls and a floating exchange rate. My hon. Friend is treading in dangerous territory. It is most encouraging. There was a totality and credibility about his arguments which made very convincing listening, and he has put forward a case of substance which ultimately will have to be met and answered.

The hon. Member for Ashton-under-Lyne has a claim on some of our affections for this debate. As he rightly said, he became involved in an "up and downer" with the Chair some years back, trying to widen the terms in which we could discuss the regulator. I was greatly struck by the hon. Gentleman's remarks two years ago in a debate on the same topic, when he said: We must remember that although the regulator in theory provides for regulation down as well as up, the downward movement has never been used."—[OFFICIAL REPORT, Standing Committee F, 11th June, 1969; c. 27.] I take that as an oblique compliment to my right hon. and hon. Friends that we are discussing the regulator and taxation in circumstances in which it is thought that there can be reductions in taxation. I suppose that we should be charitable, enough to welcome it.

Even so, I was pleased to hear my hon. Friend the Minister of State indicate that he would resist these Amendments. I put his mind at rest by saying at once that I shall be an enthusiastic supporter of his in the Lobby. The reason is that I believe that our economic management is delicately balanced and that that balance would be moved in an unfortunate way if the regulator were used in a downward direction.

I believe that it is still not sufficiently appreciated that, during the course of last year, what was expected to be a public sector surplus of£244 million turned out at a deficit, setting aside the distorting effect of the Post Office strike, of£357 million. That was a turn-round of something like£600 million and, incidentally, almost double what would be the full effect of the use of the regulator. In other words, the impact of the regulator would be peripheral compared with many features in the management of the economy unknown or unplanned by the Government.

In that situation, my right hon. Friend the Chancellor of the Exchequer has proposed in his Budget a deficit on public sector spending, again discounting the slight distortion created by the postal strike, of£1,469 million. That is an increase in the public sector deficit of over£1,100 million.

Those who are concerned with the monetary rôle in Government policy must be slightly concerned about how that increase in the deficit is to be financed. I accept the indication being given by my right hon. Friend that it need not have an effect upon Government monetary policy. But we should have to be charitable almost to the point of fault if there were not just a suspicion at the back of our minds that such an enormous increase in the deficit might lead to more relaxed monetary controls than might otherwise be the case.

I say that because, if inflation continues, as it shows every sign of doing, that deficit will be a good deal larger than the planned figure of£1,469 million. My reason for arguing that is that the public sector is a very substantial employer of labour. In those circumstances, rising wage costs normally increase public sector expenditure more greatly than they increase the buoyancy of the revenue. That being so, I am particularly anxious that the gap between Government revenue and Government expenditure is not further widened by the downward use of the regulator.

[Miss HARVIE ANDERSON in the Chair]

6.0 p.m.

I conclude by giving three other reasons why I hope the Government will resist these blandishments. The argument is that we need a boost to general activity in the economy. This was the point made by the hon. and learned Member for Lincoln (Mr. Taverne), and it echoed the powerful speech of my hon. Friend the Member for Leek (Mr. Knox) on the last day of the Budget debate.

We have the opportunity of a fortuitous boost to activity in this country, derived from the floating of the mark and the guilder, and the revaluation of the Swiss franc and the Austrian Schilling. These are valuable export markets in which, presumably, we shall be able to trade that much more competitively. We should accept this as the occasion from which we can derive an impetus to further industrial activity and, above all, an export-led increase in activity, rather than a consumer expenditure-led increase.

Second, there is a temptation, which I want my right hon. and hon. Friends to resist, to lower Excise duties as some preliminary to the implementation of a value added tax. I am not now going to rehearse my objections to such a tax. There are powerful advocates for it. I have in mind my hon. Friend the Member for Worcestershire, South (Sir G. Nabarro) who has indicated his expectation, and his hope, that a value-added tax will include those commodities now covered by Excise duties, and naturally enough there will then be the argument, "Let us narrow the differential while we can, let us try to do it through a partial use of the regulator". Indeed, my hon. Friend the Member for Worcestershire, South has put down Amendments and new Clauses which demonstrate that that is what he has in mind.

I find it distasteful, on my sense of social priorities, that we should be thinking of redistributing our taxes so that they will fall less heavily upon wines, spirits and tobacco, and possibly be extended to cover such commodities as children's clothing and shoes. If the regulator were used in some way to reduce the impact of Excise duties, I should regard that as a foretaste of socially unacceptable changes in the pattern of our indirect taxation.

Third, I ask my right hon. and hon. Friends to resist the temptation to lower purchase tax on motor cars as a way of offering some additional boost to the motor trade. My hon. Friend the Member for Bedfordshire, South (Mr. Madel) made an extremely eloquent constituency speech—that is meant as a tribute, and not otherwise; we all have constituents—on the virtues of the use of the regulator to boost motor car production, and he talked about the substantial potential in increased output in the motor trade given the existing capacity.

I accept my hon. Friend's argument, but I ask my right hon. and hon. Friends to reject his proposal, and rather to take advantage of the other weapon that is available. We have the Crowther Commission's Report on credit control, and it seems to me that we have here an excellent piece of advice. I hesitate to offer my own refined piece of fine tuning as to what ought to be the next move in hire-purchase relaxation, but if the Government, wishing to pursue prudent fiscal policies, nonetheless feel that they have a credible monetary policy which lies at the centre of their economic strategy, no Report could have been more welcome than that of Lord Crowther.

It seems to me that the Crowther Report, although we may argue about the impact that it might have on the velocity of money supply, is an excellent document for the monetary school in economic management. By a happy coincidence it provides exactly the sort of boost that is sought for by my hon. Friend the Member for Bedfordshire, South, and would be sought for by my hon. Friend the Member for Worcestershire, South, another eloquent advocate of the motor trade, and I suspect that a revival in the motor trade, more than any other single aspect in the industrial field, would communicate itself to engineering generally, and the level of investment in engineering, reaching possibly even the machine tool trade, which was mentioned by the hon. Member for Ashton-under-Lyne.

My right hon. and hon. Friends have the chance of taking a step towards the dismantling of selective controls which hitherto have been exercised through the hire purchase regulations, and relying upon broad monetary disciplines. That is a policy which would commend itself to many on these benches, because we believe that to adopt such a policy would be to tread the paths of economic liberalism, and to avoid the inflationary financing by capricious tax changes. It would ensure that the gains of the last few months of imaginative tax reform would not be lost, at the prospect of continuing inflation.

Mr. Pardoe

The hon. and learned Member for Lincoln (Mr. Taverne), in opening the debate for the Opposition, gave the impression that the Government had the power to determine both the level of demand and the level of investment. I think that that is a false premise, because I doubt very much whether the Government have anything like the power to control the level of investment which they have assumed, and which all Governments up to this time have assumed. I suggest that investment, if it follows anything, is more likely to follow demand, and business men's expectation of future demand for their products, than any incentives by way of tax, grants, or otherwise.

I accept, in the light of experience of development policy, that it is possible by means of investment grants to change the pattern of investment. It is possible to persuade a business man to invest in Cornwall, rather than in Birmingham—I wish that business men would do so more frequently—but I do not believe that it is possible for the Government, through various stimuli, to encourage investment as a whole. I refer the hon. and learned Gentleman to the latest issue of the Moorgate and Wall Street Review in which the point is proved conclusively.

The Opposition appear to believe that demand can be significantly managed by the regulator. I doubt whether it can be done in the way the Opposition expect. I think that the regulator is a useful tool of demand management. I am not convinced that it would be a useful tool today, anyway in the form in which it is in the 1961 Finance Act because, if there is no close connection between demand, as measured by the level of unemployment and cost inflation, the regulating demand is pretty useless if we wish to reduce unemployment.

The Government—I took the Minister of State up on this point in the middle of his speech—seem to believe that the solution to our present economic problems is the de-escalation of wage claims. Even if it were true—I think it extremely dubious; this is the third economic fallacy I have attempted to destroy—I do not believe that the attempt is succeeding. The Government are not de-escalating wage claims. It is not sufficient for the Minister of State to tell us that there are one or two highly publicised excessive wage claims going through. He obviously implied Ford and, I suppose, Vauxhall and others like that.

It is not only on the front pages of the pop Press that one gathers information about the level of wage claims and wage increases. It is in extremely detailed documents such as those produced by the incomes research bodies and by the various Government Departments. The pages of such publications, which document wage claims day by day, week by week and month by month, show only too clearly that there is no de-escalation. In any case, even if we accepted that there had been some moderate de-escalation, are we to say that the economy can allow increases of 12 per cent.? Perhaps that is a de-escalation from 14 per cent. which was the figure one might have taken six months ago.

So I do not think that that policy is working. I know very few people outside the ivory tower of Government who believe that it is working. Most independent commentators today—the Economist, the Financial Times—are stating clearly that the Government are in dire danger of falling into that most dangerous of all political traps—that of believing their own propaganda.

I am sorry that I missed the earlier remarks of the hon. Member for St. Ives (Mr. Nott). The hon. Gentleman spoke in favour of a floating exchange rate. He implied that he had been somewhat converted to this view by the right hon. Member for Wolverhampton, South-West (Mr. Powell). I do not think that the right hon. Gentleman has converted many people to this view. I can assure the House that I was converted to the concept of a floating£some time ago and before the right hon. Gentleman called it a national totem pole. I personally have believed that the£was over-valued at least since 1962 and, indeed, am able to produce public records to show that I said so.

I thought that the contribution of the hon. Member for St. Ives was at any rate a more honest one than that made by the hon. and learned Member for Lincoln. When the hon. and learned Gentleman was confronted with the problem of the Opposition's desire for greater expansion—we all want greater expansion—he implied that at the end of the day they would be prepared to sacrifice the£to get that expansion. What I want to know from the Opposition is whether this is the line they are peddling. I am prepared to sacrifice the£for expansion. The hon. Member for St. Ives possibly would be prepared to do so. Are the Opposition saying categorically that they would either be prepared to float the£—completely or within limits—or that they would be prepared to devalue? The last time the Labour Party was faced with this choice it opted for squeeze; it opted for unemployment, as the hon. Member for Liverpool, Walton (Mr. Heffer) reminded us.

I have great doubts whether the Opposition, if they were in power again, would opt for devaluation or for a floating exchange rate. I hope that they would. However, the enormous weight of orthodoxy which bears down on the shoulders of any Government—the great mass burden of the Treasury and of orthodox banking opinion—would ensure that they probably did not go along with what they may now be prepared to talk about.

I do not believe that we can have expansion without being prepared to float. I should like to see some sort of stabilisation in the floating, because one never quite knows where floating will end, although, on the basis of the evidence of this weekend and, indeed, on previous evidence such as the Canadian experience, one tends to believe that if one floats it will not be very far from the base from which one started. In other words, all the pessimists—all the Jeremiahs—said that the Canadian floating would be disastrous and that there would be a terrible turmoil. In fact, there was no such turmoil.

I believe that if we were to introduce the crawling peg whereby we had a sliding limit, this would introduce an element of stabilisation. If it is not necessary—I do not think that either I or the hon. Member for St. Ives thinks that it is necessary—nevertheless it would go a long way to overcome the doubts and fears of orthodox financial opinion.

Mr. Nott

I should not like the hon. Gentleman to think that I am in favour of letting the£float without supporting it. If the£were to be floated I should still want the Exchange Equalisation Account to be in the market.

6.15 p.m.

Mr. Pardoe

One can manage the float in various ways. So probably it is true that we are all in favour of management.

I move now briefly to the essential point about the regulator which I wanted to make in the Amendment I have tabled but which has not been selected. The regulator is an essential tool of demand management and is, therefore, very orthodoxly Keynesian and, for that reason, was perhaps to be welcomed when it was introduced. It was introduced in the Finance Act, 1961. It is as well to remind ourselves of the purpose for which the regulator was introduced. Section 9(1) of the Finance Act, 1961 says: If it appears to the Treasury that it is expedient, with a view to regulating the balance between demand and resources in the United Kingdom… Does that apply today? Is that a sufficient reason for the regulator? Are, for instance, the connections between the total level of demand and unemployment accepted today as they were in 1961 when the regulator was introduced? The first thing to say about it, I suppose, is that it is undoubtedly a form a substantial intervention by Government in a free economy. For that reason, I doubt whether the Government would introduce this provision if it had not been introduced back in 1961. The Government of today are, so they say, against intervention of this detailed sort.

However, I should like to widen it. The regulator seems to apply to too narrow a range of taxes. Indeed, the purposes spelled out in the first part of the Section seem to me to be far too narrow. I do not think that it is just a question of regulating the balance between demand and resources because we are no longer at all sure that that is the best method of ensuring full employment or indeed of stabilising prices.

Therefore, I should like to widen it to try to cover an incomes policy. I accept that in an incomes policy the Government's rôle is limited. The hon. Member for Walton suggested that when the Labour Party was last in Opposition it was in favour of a planned growth of incomes. I always thought that this was nonsense, because, as the hon. Gentleman admitted, it requires a degree of control over details of the economy which seems to be to be quite impossible and unacceptable. So I do not believe that Government can control incomes by means of a detailed day-to-day or week-by-week or month-by-month intervention.

However, the Government ought to be able to erect bastions against outrageous increases, because it is after all the outrageous increases which, if any increased incomes are causing inflation, are undoubtedly doing so. I therefore suggest to the Government that they might widen the regulator so as to act specifically on outrageous increases.

Mr. Heffer

Will the hon. Gentleman define what he means by "outrageous increases"?

Mr. Pardoe

I accept that the hon. Gentleman believes that no level of wage increase causes inflation. I believe that this is an untenable position.

Mr. Heffer

The hon. Gentleman must not say that he accepts that I think that there is no outrageous increase. I just want to know what he thinks is an outrageous increase. It is not what I think or do not think about it. What does the hon. Gentleman say is an outrageous increase?

Mr. Pardoe

I do not think that there can be any argument but that any wage increase which is over and above the increase in the level of production within the industry concerned must be inflationary. This would mean that, as the national output will perhaps rise by 3 per cent., if we believe the Treasury, or by 2 per cent., if we believe the National Institute, any wage increase over 2 per cent. or 3 per cent. is bound to be inflationary. Obviously, I am not suggesting—although the Labour Government suggested it and tried to operate it—that we would be successful in keeping increases down to that level. It might even be that we should try to keep them down to the level of overall inflation, which is partly what the T.U.C. has suggested in its proposal to divide wage claims into their two component parts—first, productivity and a genuine increase in the standard of living and, secondly, that part which is required to compensate for rising prices.

I would have thought that there is a level which most reasonable people would accept as being highly inflationary within a particular industry. Again, I am not asking that the Government should intervene in particular industries, because that brings them too far into the day-to-day running of the economy. But I suggest that we should state from year to year a level of, say, 7 or 8 per cent. or whatever it may be, and say that those who gather an increase in incomes per head, or those industries which pay an increase in incomes per head, over and above that level must pay for the damage they do to the rest of us by inflation. I see no reason against that. It does not seem to me to be monstrously interventionist; nor does it totally distort the balance of the economy, which is the argument against most forms of incomes policy which have been put forward.

There are various ways in which one can act on the willingness of employers to grant outragous increases—or inflationary increases, if the hon. Member for Walton prefers that term—and on the willingness of organised employees to use their giant's strength to win them. One can do it in various ways—for example, by increasing the level of unemployment. But no one knows how far one has to increase unemployment to stop inflation. The Phillips curve is dead. The Minister of State said that it had shifted. I did not know that it had done that, and if he knows where it has shifted to, then he is a better man than I am. I do not think that anyone knows. One could use control of credit to ensure that the number of bankruptcies rose so that employers could not pay higher increases because they would go bankrupt if they did. That is all part of a similar policy.

Again, one might use selective cuts in import duties so as to force employers who granted large increases to think again and toughen up their bargaining attitude. One could come to the policy enunciated by the T.U.C.—the division of pay claims between the part needed to compensate for increased prices and the part needed to increase the real standard of living. I think that that is a very good short-term policy. I support it wholeheartedly in the short term. I think that it could be outrageously inflationary in the long term, but as an emergency measure it is an excellent idea. It would be a guarantee to the employer that he was not going to be overrun by inflation.

But I believe that with all these things a tax on inflation is essential. Various methods have been proposed. There was the suggestion by Michael Fogarty, Director of the Social and Economic Research Institute in Ireland, in a lecture to Irish trade unionists in March last year. There was the suggestion by Professor Sydney Weintraub in the Lloyd's Bank Review for perhaps a tax on companies which would try to ensure that companies had a built-in resistance, bolstered by Government taxation, to stop granting excessive wage increases.

A much more specific suggestion is that put forward by the Economist for using a kind of regulator on National Insurance contributions. It would be possible—and it would be even more possible if we did what I have often advocated, which is to have a percentage payroll tax instead of a lump-sum flat-rate National Insurance contribution—to ensure, by means of a regulator of National Insurance contributions, that, if an employee obtained an increase which was more than society reckoned to be cognisant with stemming inflation, the excessive increase would be paid back to the Government in increased taxation. That seems to me a perfectly legitimate means of Government intervention.

All I am suggesting is that, if we are to go on enforcing the regulator, we need to widen its purpose from the terms set out in 1961 in order to ensure that we can use it to act directly upon inflation and the inflation of pay as a whole—and I use "pay" in its widest possible sense, applying it to all sorts of pay. It should be possible to use it not just under the 1961 Act, on Customs duties and purchase tax, but on the National Insurance contributions as well and on other direct taxes which apply to the individual. This could bolster the Government's defences against unnecessary cost inflation.

Mr. Kenneth Baker (St. Marylebone)

The Liberal Party has not been in control of our national economic affairs since 1914. If what we have just heard from the hon. Member for Cornwall, North (Mr. Pardoe) is an updating of Liberal economic thinking, it is as well that the Liberals have not had the opportunity since 1914 to get their hands on the levers of power. We have heard from him a definitive statement of Liberal economic policy which is confused and naïve. He wanted an incomes policy against outrageous increases without defining what outrageous increases were. He seemed to believe that, by floating the£, expansion would somehow follow. The argument for floating or not has little to do with expansion or contraction. The whole point about floating the£is that one lets the market determine the level of value of the currency.

It is said that this would avoid situations in which, for example, politicians like Mr. Nixon would sit in the White House, as he did last week, refusing to devalue, while politicians like Herr Brandt would sit in Bonn, as he did last week, refusing to revalue. If the£had floated last week, the likely effect would have been that it would have floated upwards, which would have meant not expansion of the British economy but, if anything, a marginal contraction.

The currency crisis, which is the background to the debate, adds a certain piquancy and a certain drama and excitement to the debate. Because it is inextricably involved with our negotiations with the Common Market, it means that we have not only an economic drama but also a high political drama. This will be a very exciting summer politically for us all. I cannot but recall the character in "The Importance of being Ernest" who said, "The suspense is terrible—I hope it will last".

We should be grateful that, in the recent currency crisis, sterling was not playing a central rôle. I cannot help feeling that, if the right hon. Member for Huyton (Mr. Harold Wilson) had still been in No. 10 Downing Street last week, he would have felt deeply resentful of the fact that sterling was not playing its customary starring rôle in a currency crisis. The centre of the stage was an irresistible magnet to him. He could not resist the chance of being the bride at every wedding and the corpse at every funeral.

But I hope that no one in the House will think that what happened last week—the floating of the deutschemark and the guilder and the Swiss and Austrian revaluations—is a solution. It is merely a temporary stop-gap to the problems which beset the Western world. If President Nixon believes that he has got some measure of relief for the dollar, it is the sort of relief that a sick man gets when he turns over in bed. There is still no cure. He has eased the cramp. He has eased his comfortless position. But the same inherent troubles are there.

I hope that the Government and the Bank of England will use the opportunity of not being involved in a major currency crisis to try to work out what they think is a long-term solution to the abiding currency problems of the Western world. No situation is static. Already a currency flow has begun and it will change course in the next few days and weeks across the frontiers. It may well be that within the next year or so the£will come under pressure from one source or another, and then we cannot sit aside and not make a decision.

6.30 p.m.

The Government last week resisted the temptation to float, in my opinion correctly. It must have been very tempting last Thursday or Friday to float the£with some of the other currencies. I hope that the Government, having resisted that temptation, will make clear to British industry the enormous opportunity the Government have given it by retaining the present parity with the dollar. The Government should lose no chance of stressing what an opportunity it is to increase our exports.

I calculate from what the hon. and learned Member for Lincoln (Mr. Taverne) said that the net effect on consumer demand of Amendment No. 13, which I believe is to decrease the regulator by 15 per cent. for six months, is about£125 million to£150 million in injection—[An HON. MEMBER: "It is£500 million."]—In that case it would be a substantial boost to demand. But if the Opposition are arguing for a boost to consumer demand, a much more effective means would be to consider the recommendations of the Crowther Committee, particularly on the effect of hire-purchase controls, which are a blunderbuss of an economic weapon, especially in relation to the car industry. I hope that if the Government are thinking of reflating later this year or early next year they may be considering doing it through substantially reducing or modifying, or perhaps eliminating, hire-purchase controls, rather than acting through purchase tax and the regulator.

What is the Opposition's economic policy in the present state of the British economy? We have heard various suggestions, but no authoritative statement from the Opposition Front Bench. Some hon. Members opposite said in the Budget debate that they wanted a prices and incomes policy. There were others who said, "Never a price and incomes policy." Others said that there should be immediate and substantial reflation, with the implied risk on the balance of payments and upon sterling. The hon. and learned Member for Lincoln was courageous to say that the risk of devaluation of sterling was one that he personally was prepared to take—and, I imagine, the Opposition Front Bench. The former Chancellor, the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) said in the Budget debate that his main criticism of the Government's economic policy was that the reflation in the Budget should have been earlier. When the right hon. Gentleman complains that a Chancellor has acted too slowly, we should pay great attention to his words, because he has had great personal experience of acting too slowly. After the devaluation in November, 1967 four precious months were wasted while he did nothing. He threw away the first valuable advantages of devaluation. Whoever winds up this debate for the Oppositions should tell us clearly tonight exactly what is their economic policy.

The Government's economic policy, as stated in the two Budgets, is crystal-clear. The two taken together are the most reflationary measures in this country since 1945, with tax cuts in the current financial year of about£950 million—and of that only about£30 million to the very rich, the surtax payers. I accept the argument that not all that£950 million is going straight into consumer demand, but about£300 million to£400 million is. One could argue that that figure would be higher if one included some of the other taxes as going into consumer demand.

This is coupled with a monetary policy, which some critics on this side think is far too loose, which amounts to allowing industry and private borrowers to have virtually as much money as they want. We are not having a credit squeeze or credit freeze. If businesses want to raise money, they are finding it quite easy to do so.

The Government are to be congratulated on their measures of reflation. They have my support, though not the support of all my hon. Friends. There is scant regard for the Government's reflationary measures. I refute completely the argument used three times by Opposition hon. Members this afternoon that the Government are using unemployment as an instrument of economic policy. I could not support a Government that were deliberately doing that, and I do not believe that the Government are. The level of unemployment, which I find very regrettable, is explained very largely—not entirely—by substantial structural changes in the pattern and level of employment in our economy. Therefore, I do not accept the criticisms made by hon. Members opposite that we are using unemployment in a callous and indifferent way. That has never been the object of the Conservative Party. It is certainly not the object of this Government. If it were, I would cease to support them.

Mr. Cant

I agree with those who argue that in our discussions of our present economic problems we place too little emphasis on the fact that the terrible phenomenon of the inter-war years—structural unemployment—is re-emerging, and that it is a consequence of serious technological change.

In these circumstances, to some extent all our talk about macro-economic policies methods of demand management, is not irrelevant—quite—but is certainly of only a limited value.

I support the Amendments, but not because I belong to the school of "expansion or bust". I do not. I hesitate to say this, but I have a certain amount of sympathy on this score with the hon. Member for Oswestry (Mr. Biffen). It is a source of embarrassment to me politically that we think alike on so many occasions. Some expansion is called for. I think that this should be undertaken in the whole area of reducing indirect taxation because the fundamental flaw in the Government's policies was that on the one hand they were denouncing cost inflation as the problem in the economy and on the other doing everything possible to raise the cost of living through their tax policies. This will be proved to be a fundamental error. The hon. Member for St. Marylebone (Mr. Kenneth Baker) argued that the German revaluation should persuade us not to go in for any reflation of the economy. I would argue the reverse. This helps us considerably in moving the terms of trade in a limited area in our favour.

I believe that, because it does this, it gives us that little extra room for manoeuvre which we on this side of the House feel is required and which could lead us to the argument for rather more demand in the economy. I agree that if we expand demand seriously we shall run into all the problems so eloquently described by Conservative hon. Members. But the argument that if we increase demand we increase the import bill, suffers from the wrong kind of emphasis. Analysis of what happens to the import bill under additional aggregate demand reveals that it is not a question of people in this country importing more foreign cars, taking more foreign holidays or increasing consumer demand for imported goods. The horrible fact about our import bill in the upward cycle of business activity is the increasing component of imported capital equipment. We would do well to remind ourselves that a lot of what we are saying about the consequences, in balance of payments terms, of an increase in demand, is a terrible criticism of British manufacturing industry.

I shall not pursue that, because I do not want to embarrass any hon. Member opposite any further. We are always pointing an accusing finger at the trade unions, at the workers and their restrictive practices, their inordinate demand for wage increases. But the main accusing finger could be pointed at management in British industry. It is the relative inefficiency of British industry that should bring forth our major indictment.

A lot has been said about cost inflation. I am sure that reasonable people, like the Liberal spokesman on economic affairs, the hon. Member for Cornwall, North (Mr. Pardoe), are right when they say that we cannot live with 18 or 24 per cent. increases in wages on the one hand and an increase of only 3 per cent. in output on the other. That is perfectly true, but the situation is far more complicated than that.

I admire the Prime Minister because he has an incredible capacity to stand at the Dispatch Box week after week enunciating what he believes is the supreme truth about our economic situation, using tedious repetition time and again. He has come to believe his own propaganda. People ask how long he will carry on with this policy, which is the Phillips curve removed endlessly to the right, and I would answer that he will carry on with it indefinitely. He is determined to break the will of the trade union leaders and he believes he can do it.

Mr. Heffer

He is on a hiding to nothing.

Mr. Cant

He believes he will win, but I would much rather lean on the experience of my hon. Friend the Member for Liverpool, Walton (Mr. Heffer). I am glad I have raised these points because my hon. Friend has reassured me.

The Prime Minister, who is the nerveless wonder of British politics, dashes off the suggestion that he is using unemployment as a measure of policy with which he is going to win the battle with the working class. He has to allow unemployment to rise until the point is reached—and he may win this battle—when the spectre of unemployment will be severe enough to make trade union leaders think more than once about the sort of wage claim they will put in. But what a price we are paying. I wonder whether at night he ever turns over on his lonely couch and thinks about the problem of the people who are unemployed. If he ever does think of them, I have no doubt he can dismiss this spectre by saying to himself, "They are responsible because they have brought this on to themselves through wage-cost inflation."

When one looks at these rather large wage claims and then thinks of the inflation with which trade unionists have had to live over the past year—and with which they probably will have to live in the coming year—running at 8 per cent. per annum, all they are doing is seeking to maintain their very existence if they achieve around 16 per cent. increase.

The Government are speaking with two voices. They are saying that the workers are responsible for the increase in cost inflation, when at the same time the Chancellor admits that he has not only financed inflation in the past year but is prepared to do so again in the current year. Where are the Government getting this money? How does money supply manage to increase by 12½per cent. per annum? Where has Friedman gone? He must be hiding somewhere underneath these benches.

This is a serious issue and the answer is that the inflation which exists at the moment is not a consequence of greedy and grasping trade unionists but a consequence of the increase in money supply financed through the Euro-dollar market. How can we tolerate a situation when everything we seek to do to get our unemployment under control is undermined because the United States, in dealing with its balance of payments deficit, adopts an attitude of what is now technically called benign neglect? If we are prepared in one way or other to allow our money supply to be increased by the balance of payments deficit of the United States, and if we are prepared to allow our situation in this country to be responsive to the calls of international corporations, then let us not blame the trade unions. We must find some other solution to the problem.

I have not seen any evidence in what has been said by the Chancellor of the Exchequer or by any of his right hon. Friends to give me very much hope for the future. If believe that there are other ways of tackling the problem. At this moment of time it would be appropriate to have a gentle measure of reflation. If we do not grasp some other alternative, then the Prime Minister, who is responsible for the total policy of this Government, will produce a society in which the bitterness and social divisions that is caused between the classes when we reach one million unemployed will not be easily erased in the next generation.

Mr. Peter Hordern (Horsham)

I generally agree with the remarks of the hon. Member for Stoke-on-Trent, Central (Mr. Cant) in our economic debates. He is, as I recall, a staunch supporter of the Chicago school. He is not a member of the Freiburg school, nor is he a member of the boom-and-bust brigade to which many of his hon. Friends belong.

It may seem odd that we should be discussing whether the Chancellor should have the power to alter the rate of purchase tax as a method of fine-tuning the economy, when we are in the middle of an economic blizzard blowing outside. This is certainly no weather for fine-tuning. Nevertheless, it is an important power to have. The question is whether the Chancellor should have the power and whether he should use it. In my opinion he should not use it. The reason is that there is a considerable degree of reflation proceeding at the moment, which is not readily obvious, but which will become obvious as the months go on.

It is interesting to observe the Opposition's attitude which seems to form itself into three different schools of thought. There is the school of thought presented by the hon. Member for Liverpool, Walton (Mr. Heffer), who is an out-and-out expansionist, and many of his hon. Friends agree with him. There is the school of thought represented by the hon. and learned Member for Lincoln (Mr. Taverne) who told us today that he was in favour of expansion, which he coupled with a personal view that he was in favour of a floating exchange rate. When one of my hon. Friends suggested that the rate would probably float upwards, the hon. and learned Gentleman answered a little too quickly, "But not if the economy were to react in the way that it would by using the regulator." That was an admission that he would agree that the use of the regulator in a downward direction was a direct addition to our costs because the cost of imports would rise appreciably and at once.

The third school of thought is represented by many right hon. and hon. Gentlemen opposite, mostly by the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) and by the right hon. Gentleman the Leader of the Opposition. It is refreshing these days to find those two right hon. Gentlemen agreeing about anything, so we should not complain if they agree on at least one item of policy, namely, that of having a voluntary incomes policy in combination with an increase in reflation.

This leads one to ask why the right hon. Member for Stechford and the Leader of the Opposition are now so keen on exerting a voluntary incomes policy when just a year ago they were concerned to drop it. What conditions now obtain which are so different from the situation a year ago? Certainly prices were rising every bit as fast then as they are now and nobody could say that the rate of unemployment was at all satisfactory in the first six months of 1970. It does not seem to me that the intransigence of Mr. Jones and Mr. Scanlon have altered very much. Although this is an entirely hypothetical question, one of the most regrettable parts of the Opposition's incomes policy is this specious idea that a voluntary incomes policy can be combined with deliberate reflation, as if the voluntary incomes policy would ever be sustainable by the Labour Party or by the trade unionists themselves.

The fact is that there is no chance of operating any form of voluntary incomes policy after the experience of the last few years. At least it could be said that the Leader of the Opposition and the right hon. Gentleman recognise that it would be wrong to allow purchase tax to be cut as a measure just by itself. Even with the present level of unemployment, they think it would be wrong simply to stimulate demand. That surely is right. Nothing could be worse than to stimulate consumer demand when industry has not the capacity to meet it. Imports would rise rapidly and our balance of payments would quickly suffer. Even more to the point is the fact that, contrary to general belief, there is no discernible credit squeeze in operation at the moment. Indeed, the situation is very much the reverse. The clearing banks have plenty of money to lend and are actively seeking ways of lending it. The difficulty they have is to find creditworthy customers.

There is a serious shortage of liquidity in companies, but the reason for this is very clear. It is that the return on industrial assets has fallen from an aver- age of 15 per cent. in 1964 to 10 per cent. last year. This return is quite inadequate to cover the cost of new investment and that is why there is so little of it today. It is not that there is so little confidence in the outlook but simply that, after years of increasing corporation tax and the Labour Party's antipathy towards profits, there is no reserve for companies to use for investment.

What my right hon. Friend has done about the situation is to reduce the cost of borrowing and to reduce sharply the rate of corporation tax. As a result the return on investment should allow a clear margin of profit, and it is this more than anything else that ultimately will increase the level of investment.

If purchase tax were reduced, all that would happen would be that a fillip would be given to consumption at the time when the money supply was increasing as fast as wage increases themselves. I know that the 3 per cent. rate mentioned by my right hon. Friend in the Budget applied only to this particular quarter. But what concerns me is how much the Chancellor will be able to reduce the growth in money supply to any significant extent. In his Budget my right hon. Friend said that he does not intend that the growth of money supply should accommodate the going rate of inflation. But events have moved a very long way since the Budget.

7.0 p.m.

The mark has been floated, as has the guilder. The Swiss franc and the Austrian schilling have been revalued. Sterling at its fixed rate is definitely more attractive than it was. Meanwhile the flow of dollars, the prime cause of all this unrest, will continue. In this stage of uncertainty that alone is the most certain element. As long as the mark floats, there is nothing in it for those who hold dollars. The Swiss franc is not as attractive as it was. It is beginning, at last, to look like Cinderella's turn. It is a comparatively new experience for sterling to be in such demand that maybe we should not complain about it too much. It is no use pretending that the maintenance of a fixed rate of sterling in a period when sterling is in demand from overseas will not create considerable difficulties in controlling the money supply.

No one can forecast with any precision how fast it will grow. It seems likely that with a large borrowing requirement to which my hon. Friend the Member for Oswestry (Mr. Biffen) referred, as well as a considerable funding operation in the gilt-edged market, to be done this year, the Government will find it very difficult to keep growth in money supply to anything like the growth in output or productive potential. There is in process a considerable degree of reflation and it will not be long before this is noticed. It would have been much better had this process been carried out deliberately as a matter of policy by my right hon. Friends but I do not believe that this is the position. It is more that the power to control our economy is vitiated by the production of United States dollars. The solution is, of course, to float the£. The argument has so far been confined to economists and central bankers on a somewhat academic plane.

Mr. Bruce-Gardyne

My hon. Friend said that the solution was to float the£. That was the solution to the problem created by the American Government's attitude towards the dollar. In a sense the more logical solution would be to achieve a change in the American Government's attitude towards the dollar.

Mr. Hordern

It is better to change something over which we have control rather than attempt to change things over which we have no control. It would be surprising if this pressing matter did not become a matter for political decision, and sooner rather than later. We have to recognise that the production of dollars, and in particular the production of Euro-dollars, poses problems on a quite different scale from anything contemplated at the time of Bretton Woods. Only 11 years ago the Euro-dollar market was about 1,000 million dollars. Last year the size of it was 50,000 million dollars. Can exchange rates, narrowly drawn, provide a tolerable defence to this sort of expansion? I do not think they can.

The stand that the Government have taken, over wage increases and price increases in the public sector should not be allowed to be undone because of Mr. Nixon's need to get himself re-elected. Therefore, we should float. I recognise the difficulties in which my right hon. Friend is placed. For one thing he said that he would not float some months ago. For another thing it would not endear us to the French particularly during the negotiations over the Common Market. I do not want to press my right hon. Friend. I do not believe that there is a particular urgency to float at the moment, but when and if the issue of the Common Market is resolved—and I believe that it will have to be resolved one way or the ether in the coming months—the issue of floating the£will become an important issue for the Government.

I hope that when the time comes the Government will take the right course which is—given all the technical factors and the ability of the American authorities to increase the supply of dollars and therefore vitiate the control of the economies of Western Europe, and of our economy—to float the£. In that context increasing or decreasing purchase tax may be a very small consideration. While advancing this power to my right hon. Friend, as I am sure the House will, I hope that he will consider very carefully the number of points that have been raised on the subject of floating the£.

Mr. John Horam (Gateshead, West)

I had not thought of making any remarks on this Clause because, as a graduate of June, 1970, I have not appreciated this traditional elephantias, whereby we look at the whole sweep of economic policy on two small Amendments which do not worry me too much either way. I hope that that does not put me out of order. The point I want to make is simple. The Government's Budget judgment was that they would expect to increase the gross domestic product by roughly 3½per cent, between the first part of this year and the first part of next. This was predicted on a growth of consumption of about 5½per cent.

The Government will not get this growth. It is not happening at the moment and it will not happen in future, first, quite simply, because savings will prevent it. The rate of savings is already high and will increase. Inevitably, for psychological reasons—because people do not want to spend their money when they realise that the unemployment situation is worse and that they might be individually threatened by it—that will happen. Unemployment is at the root of this and it is caused by the Government's lack of an alternative policy to unemployment for coping with the problem of inflation.

We thus have a central dichotomy at the heart of the Government's policy. On the one hand they are trying to expand the economy, telling shareholders and bankers that their liquidity is good, asking why they do not invest, while on the other hand they are taking a tougher line with the unions, telling them that they do not want to hear too much from them, that they want to cure the problem of inflation and that the unions will have to do it for them. The contrast is quite clear. It is like trying to run when standing on one's tie, or for this Government the analogy might be better put by saying standing on one's beard, since this puts some kind of date on the economic policies which they are pursuing.

Nothing very much will happen as a result of these policies. The situation may improve to a minor extent in one or two ways, but it will get worse in others. I do not think that the unemployment situation will improve. We shall get worse and will lose more growth. We shall fall further behind in the economic growth table. Equally, price inflation will not improve markedly.

As my hon. and learned Friend the Member for Lincoln (Mr. Taverne) said, in the first place we have a two-year built-in effect, as a result of some of the wage agreements concluded this year. Secondly, the Government have placed great store on their hopes of an improvement in the wage situation as a result of the demands negotiated and agreed for the next time round. We are already beginning to see these new demands and they will not be at a lower level that those of the past 12 months.

Thirdly, since price inflation is going up a rate of roughly 8¾per cent. per year, there is a circular effect. The existing high prices will affect wage demands, which will continue, maybe slightly moderating but still at a high level. Finally, even if some success is achieved by these means, it is bound to be slow. What is the good of a policy which comes down from 14 per cent. in one year to 12 per cent. the next, to 10 per cent. the year after and 8 per cent. the year after that? By that time we have lost the ball game.

What is needed is something more decisive on two fronts. First, we need an incomes policy. We have had my hon. Friend the Member for Liverpool, Walton (Mr. Heffer) talking about his version of an incomes policy; we have had the hon. Member for Oswestry (Mr. Biffen) talking about his non-version of an incomes policy; and we have had the hon. Member for Cornwall, North (Mr. Pardoe) talking about his version. I hope that I have squared my political pitch by mentioning all three parties. Obviously one can argue about it indefinitely, but the central solution is there.

The Government argue mainly that an incomes policy cannot work because it flies in the face of their feelings about freedom. That argument is totally nonsensical. To an ordinary worker the market forces are just as anti-freedom as is any kind of planning.

Secondly, the Government argue that the last prices and incomes policy was a manifest failure, because it became unpopular and therefore could not be sustained. It became unpopular because we had to make a net transfer of resources into the balance of payments as we had a large balance of payments problem. That is why the prices and incomes policy pursued by the last Government became unpopular. It did not fail or become unpopular because of the principle; it was because of the situation then facing the Government.

The last Government had to keep down the standard of living to a small percentage increase for two consecutive years. Therefore, that policy became unpopular and, because of the feelings which that process engendered, one result was wage inflation. There were other factors, but that was one element. Therefore, the whole thing, if properly understood, is related to the balance of payments problem which the Government finally surmounted; not to the principle of a prices and incomes policy. I think, therefore, that the Government will inexorably return to this policy.

By treating cost inflation as cost inflation and getting to the root of the problem and not, as in this peculiar argument of the Government, about not wanting to add demand inflation to cost inflation, ignoring that this leaves open how one deals with cost inflation, and in addition having a prices and incomes policy, we shall be able to go ahead at a higher rate than we have so far achieved.

Because there is such a large amount of unemployment, and because of the Government's policies towards inflation, any injection which they make into the economy will be less effective than it might otherwise be, because people will be less free in their spending and therefor the consumption and multiplier effect will be mitigated. If we cope with inflation by means of a prices and incomes policy it will not be totally successful, but the extent to which it succeeds leaves us that much freer to go ahead faster for growth.

This whole notion of incomes policy is as important to the second half of the twentieth century as the Keynesian revolution was to the first half of the twentieth century. It is important to get this right with all the planning involved. The hon. Member for Oswestry looks at me in a rather forbidding manner. I accept that this is as important as pump priming and all the rest in the first half of the twentieth century, and I think that inexorably we shall proceed towards this solution to our problems. I think that this is as modern thinking as laissez faire economists and Marxists on both sides are out of date.

[Mr. JOHN BREWIS in the Chair]

Mr. Bruce-Gardyne

One thing which I always enjoy about the so-called regulator debate is that it seems to provoke a certain amount of mild anarchy on either side of the Committee. As a mild anarchist, I find this attractive.

We all recall the formidable speeches by the hon. Member for Birmingham, All Saints (Mr. Brian Walden) in the regulator debate of 1968. This afternoon we have heard a number of speeches which have, shall I say, incorporated an element of mild dubiety towards our respective Front Benches. I shall try not to add too much to the totality of mild dubiety in my brief comments as I want to be rather eccentric and concentrate primarily on the Clause.

First, I want to pick up one remark by the Minister of State in his opening speech when he said that no one on either side advocated massive deflation. He is absolutely right.

7.15 p.m.

The question is where we place the balance of priorities at the margin between the dangers involved in the evils of unemployment and the dangers involved in the evils of inflation. I do not think that any hon. Member on either side believes that Governments of either party have conducted or are conducting a policy designed to achieve, and based upon the achievement of, higher levels of unemployment.

What worries some of us still is where precisely the Government's priorities lie between the achievement of their growth objectives for the economy and the observance of their monetary balance. If the achievement of the growth objectives has priority, then some of us would have some anxiety about the inflationary implications of this priority.

I want to concentrate on whether we should renew the regulator power. I was delighted that the hon. Member for Cornwall, North (Mr. Pardoe), on behalf of the Liberal Party, joined me in putting down an Amendment to question this very point. However, in his speech I discovered that I had harboured a cuckoo in the nest. His demand was not that we should not have the regulator, but that we should have something bigger, more impressive and all-pervasive.

I think that in these debates we should indulge in a modest degree of self-criticism to the extent of occasionally rereading the speeches which we have made. It is always good for us to do this.

Mr. Timothy Raison (Aylesbury)

Not aloud!

Mr. Bruce-Gardyne

I said "reread", not "repeat".

I notice that in the last regulator debate in which I participated I prophesied a good deal of doom and destruction. I am happy to say that my prophecies were somewhat exaggerated. This form of self-criticism is particularly desirable in terms of the regulator debate because it shows that our judgments can often be wrong.

I understand that the regulator is designed as an instrument of instant economic management. My right hon. Friend the present Chancellor of the Exchequer put this quite clearly in the debate when the regulator was first introduced on 1st June, 1961, when he said that it was designed to provide a means of stimulating or discouraging consumption according to the general state of the economy."—[OFFICIAL REPORT, 1st June, 1961; Vol. 641, c. 520.] If we accept that this is what I should be inclined to describe as the fine tuner's tuning fork and if the short-term judgments on both sides can be somewhat fallible, I cannot help wondering whether this instrument can on occasion be dangerous. If we regard the history of the use of the regulator, this anxiety may be somewhat reinforced.

The hon. Member for Cornwall, North pointed out that so far the regulator has been used on three occasions, and on each occasion in an upward direction. It has never been used in a downward direction and it has never been used alone. On each occasion, it has been used as part of a crisis package. What emerges is that it is hard to argue that, in any of those packages, the regulator was indispensable, and on at least one of those occasions—in 1966—and possibly more than one, it was one of several substitutes for an act of devaluation without which the other measures were most unlikely to be successful.

We should also consider at least two occasions when the regulator was not used and when many people, with the advantages of hindsight, would feel that it should have been used. One was the occasion when, before the present Speaker left office as Chancellor in 1962—we have it on the authority of Mr. Samuel Brittan and it has never been challenged—he intended to use the regulator in a downward direction. It was never used, but I cannot help wondering whether, if it had been used at that time, it might have been a more sensible operation than some of the fairly massive reflationary steps taken over the following 12 months.

Then there was the occasion when the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) took office, when, again, many commentators would feel that he would have been well advised to use the regulator in the immediate aftermath of devaluation, rather than waiting for his Budget at the end of March. All that one can say about this history is that neither the use nor the failure to use the regulator has shown that it is at all times a particularly wisely-used instrument of short-term economic management.

Clearly, everyone has agreed that, if the regulator is to be used during the coming 12 months, it is most likely to be used in a downward direction. In other words, in the words of the Chancellor in 1961, it will be to stimulate consumption. We have to remember that that is at a time when, according to the Treasury's own forecasts, the growth of consumption is already expected to be the largest element of expansion in total demand—even if one accepts, as I might be inclined to do, some of the reservations of the hon. Member for Gateshead, West (Mr. Horam) on the likelihood of fulfilment of the Treasury's forecasts in this respect.

So the use of the regulator in a downward direction in the coming 12 months could be expected to add a further stimulus to consumption, at a time when the Treasury has already forecast that consumption is likely to be rising pretty substantially. Of course, I can see the case for the use of the regulator as an anti-inflationary device, because of its effect on prices, but I wonder whether that is how it is likely to be used.

We should carefully consider the comments of Sir Douglas Allen to the Wilberforce Committee in this connection. The key phrase in his evidence was this: Whatever I can say about demand management policy—and I cannot say a great amount—in 1971, I can assure the Court that, if the situation produced a tendency for unemployment to rise, there are plenty of means the Government could take to prevent it. No one would dispute that foremost among these different means would be the use of the regulator.

What I dispute is whether the use of the regulator would have any of that sort of dramatic effect which seems to be expected of it on levels of unemployment. I have said before that I sometimes think that managing the British economy is like driving an armoured car backwards, where one's field of vision is very limited, one's access to controls is remote and sluggish and consequently there is an inevitable tendency to over-compensate.

Much of the present level of unemployment reflects the monetary policies pursued by the right hon. Member for Stechford in his last year of office. I do not complain about those policies, because it is a fallacy to imagine that one could hope to cure the sort of inflationary stampede which we were beginning to experience at that time and have experienced since without accepting some diminutions in levels of employment and investment.

But if it is true that present levels of unemployment are closely related to those monetary policies 18 months ago, surely it must be pure wishful thinking to imagine that the use of the regulator later this summer or autumn could have any significant effect—indeed any effect at all—on levels of unemployment this winter or next spring.

The kernel of my anxiety about the renewal of this power is that if we seek to use the regulator in the way that Sir Douglas Allen seems to have implied, we shall be placing exaggerated expectations upon it, and as those exaggerated expectations of its immediate effect on levels of unemployment turn out to be disappointed, there will be an endless impulsion, an inclination, to repeat the dose and repeat it, and thereby to add to the substantial demand pressures which we shall probably be adding to the economy at a later stage in 1972.

I sometimes wish that those on the Labour Front Bench who have had fairly recent experience of Government and who must know from their own experiences that unemployment is not an economic factor which responds rapidly to sudden changes of direction would desist from clamouring for forms of instant action which, if taken by any Government, could lead only to disappointment with the lack of results which they would achieve.

Mr. Dalyell

I do not think that the hon. Member for South Angus (Mr. Bruce-Gardyne) should be under any illusions about us. We have been reluctantly driven to the conclusion that the Government are using unemployment as an instrument of economic policy, if only in a negative sense, in the sense that they have not put full employment anything like at the top of their priorities. We genuinely believe this.

I should like to endorse the speech of my hon. Friend the Member for Gateshead, West (Mr. Horam), particularly what he said about there being all the difference in the world between having a prices and incomes policy from the springboard of a strong balance of payments and trying to do it from the basis of a weak balance of payments.

My point is an abbreviated question to the Chancellor. Is the Treasury doing any serious work on the whole question of the use of the regulator as it affects the multi-national company? A great deal could be said about it, but, in shorthand, there is an enormous difference between using the regulator, really applying it to the traditional economy which we have known until the last 10 years, and doing it on the basis of an economy where the multi-national company, with its multi-national decision making, is providing more and more of the worthwhile jobs.

What work is the Treasury doing on the use of the regulator and how that use can be altered by the existence of the increasing growth of the multinational company?

7.30 p.m.

Mr. Barber

The whole Committee will agree that this has been a useful and wide-ranging debate. Hon. Members on both sides will also accept, whether or not they agreed with the views he expressed, that my hon. Friend the Minister of State dealt comprehensively with the speech of the hon. and learned Member for Lincoln (Mr. Taverne).

In the past six weeks we have had a succession of economic debates, and rightly so in present circumstances. My hon. Friend the Member for St. Ives (Mr. Nott) said that the Budget debate was over-subscribed and that he had not had an opportunity of getting in. I managed to get into the Budget debate twice. [Interruption,] I was also able to get into the Second Reading debate, which was followed by a debate on broad economic policy, principally on unemployment, on the day following the Second Reading debate. My hon. Friend the Member for Oswestry (Mr. Biffen) will, therefore, understand why on this occasion I can give him an assurance that I do not intend to indulge in a tour d'horizon,

Mr. Biffen

I welcome my right hon. Friend's comment in this respect. He will appreciate, however, that hon. Members in all quarters of the Committee are anxious to have, at an early date, an indication from the Government of their reaction to the recent changes in monetary arrangements in Western Europe. Would my right hon. Friend care to use this opportunity to confirm that the House will be given a chance to hear the Government's view on this subject quite soon?

Mr. Barber

I recognise that a few hon. Members have suggested that, now or later, we might allow the rate of sterling to float. I have always respected those who take this view, and it is useful in a wide-ranging debate of this kind that it should be expressed. However, I made my views clear on the arguments against floating rates as a general system in the speech I made to the I.M.F. meeting in Copenhagen last September.

Mr. Biffen

rose—

Mr. Barber

I will answer my hon. Friend's question.

I believe that the considerations which I then outlined remain valid. Those views about a general system of floating rates were, I believe, fully shared by the other Governments, but it was agreed that there should be further study of some improvements in the exchange rate system, and this included the possibility of temporary floating in particularly difficult circumstances.

Inevitably, as was anticipated last September, these studies are bound to take some time, but the important point about what has happened this week in relation to what has been said in today's debate is that both the Governments who, for the time being, have ceased to maintain the normal margins, have explicitly stated their intention that this is to be temporary.

A number of matters of great significance have been raised today, and as I indicated at the outset, after the remarks made by my hon. Friend the Minister of State I do not wish to detain the House for too long. As for the Official Opposition Amendment, I hope that, on reflection, after the explanation which was given by the Minister of State, it will not be pressed because it has become clear that it would not achieve the objective which the hon. and learned Member for Lincoln had in mind.

The hon. and learned Gentleman seemed to suggest in his opening remarks that the Government should now take steps to reduce the level of unemployment without regard to the pace of cost inflation and particularly without regard to the level of pay settlements. I believe that that is a most dangerous contention and that such a policy is a prescription for a return to the worst sequence of events which we experienced at times in the past, because the inevitable consequence would be a situation of excessive demand, and this would inevitably lead in due course, as we experienced in the past, to a slamming on of all the brakes.

As some of my hon. Friends have rightly pointed out, it is entirely untrue to say that the Government are deliberately using unemployment as a means to combat inflation. The hon. and learned Member for Lincoln put forward what seemed the rather extraordinary idea that the answer to inflation was to put one's foot hard down on the accelerator and expand as fast as possible. This, he said, would lead to a fast rise in productivity and, therefore, as I understood his argument, to a slower rise in unit costs. I guess that if he and his colleagues were in government now they would not be putting forward such wild notions.

I recognise, as has been said, that the relationship between the level of unemployment and the rate of wage inflation is not what it was sometimes thought to be. It is, I would have thought, incontrovertible to say that it is reasonable to expect that any significant increase in the pressure of demand would tend to add to cost inflation.

The April unemployment figure was certainly higher than any of us in this Committee would have liked to have seen. I must say, in frankness to hon. Members, that it is possible that even though the absolute level of unemployment may fall, the seasonally adjusted underlying trend may go on rising for another month or two.

Mr. Sheldon

rose—

Mr. Barber

I will give way in a moment.

In my Budget speech I explained that, in the absence of any Budget changes, the prospect was for a rather slow increase in output during the present financial year. This was why—I will not go into the details again—I proposed a number of tax changes designed to lift the rate of increase in output over the next year, but broadly in line with the increase in our productive capacity.

In spite of assertions to the contrary during this debate, there is really very little reliable new evidence on which to base a revision of the Budget forecast of output. A few more economic indicators have become available, some of which have been mentioned today, but most of them deal with the first quarter, or the period before the Budget, and many of them are difficult to interpret. As I have said at Question Time, because of the postal strike some of them, like the Index of Industrial Production, relate to the period well before the Budget.

Mr. Sheldon

The right hon. Gentleman has given some useful information about unemployment, particularly when he said that, seasonally adjusted, the figures would be rising in June and July. Can he say what is likely to happen in August, when a large number of school leavers come on to the labour market?

Mr. Barber

I said, having chosen my words carefully, that the April unemployment figure was higher than any of us would have liked to have seen. I then said that it was possible that, even though the absolute level of unemployment might fall, the seasonally adjusted underlying trend might go on rising for another month or two. I thought that, as the question of the unemployment level had loomed large in this debate, it was right for me to tell the Committee frankly of this possibility.

I wish to repeat a warning which I have given before about cost increases. If we are to see a rise in exports and a slowing down in the rate of imports, with a renewed willingness among businessmen to invest, we must remain competitive with other countries. It has been pointed out that many other countries have also had large increases in their labour costs in the last year. However, the fact is that they are making very determined efforts to redress the situation in their countries, and it would be very foolish and imprudent on our part if we were to assume that they will not succeed. This is why we, too, must succeed with our policy of de-escalation of pay settlements. If we do, the prospect of rising output and demand is good. If we do not, a further boost to home demand would lead to trouble in the balance of payments and would also aggravate the difficulty of dealing with our major problem of cost inflation.

My hon. Friend the Member for Oswestry referred to the extent to which the events of the last few days in the foreign exchange markets would be liable to affect our economic performance over the next year. At this stage, any judgment should be a somewhat cautious one. A great deal depends on the level at which the deutschemark floats and for how long it floats. But obviously, as I think my hon. Friend was implying, in so far as the exchange cross rate with sterling appreciates, our exporters will find the German market a more attractive one. Moreover, the appreciation of the Austrian schilling and the Swiss franc, the currencies of our two E.F.T.A. trading partners, is bound to be beneficial to our sales in those countries and should strengthen our position in other markets. While I repeat that a fairly cautious view is called for at this stage, my hon. Friend was absolutely right in saying that these developments create a new opportunity for British exporters. I hope that they will not be slow to seize it.

In my Budget speech I explained why I came to the conclusion that some addition to demand was called for, and then I made a reference to the regulator, which we are now discussing, and I said: If after the Measures I am about to announce have been allowed a reasonable time to have their effect, a further stimulus is needed, the usual instruments are always available."—[OFFICIAL REPORT, 30th March, 1971; Vol. 814, c. 1370.] One of the instruments to which I was referring was the regulator. Therefore, the question we have to ask ourselves is whether, in the intervening period between the Budget speech and today, a reasonable time has elapsed. That period is, to the day, precisely six weeks. It would be wholly unrealistic and, indeed, ludicrous to pretend that a reasonable time has been allowed for the measures to have their effect.

One of the major mistakes that any Chancellor of the Exchequer can make is to chop and change from month to month, with the inevitable consequence that those who have to take decisions in business have not the remotest idea of the course that the Government have set themselves. Obviously, we may and we do differ about individual proposals in the Budget. But I think that we are all agreed that one of the good points about the Budget as a whole is that it lays down a strategy not just for the immediate future, but for a considerable period ahead. Of course, if the situation changes, the regulator is there to be used. If I did not take that view, there would be no point in including Clause 6 in the Bill, the Clause which provides the power that we are discussing.

I return to the question: has a reasonable time elapsed for the measures which I announced to have their effect? I ask the Committee to bear in mind—

Mr. J. T. Price (Westhoughton)

I have been listening to the arguments for some two hours now. Does the Chancellor realise that whilst he may take this extremely cautious view of the future—naturally we do not condemn him for caution, because he has a great responsibility—the Stock Exchange has been far shrewder in assessing what is likely to happen? The Stock Exchange boom, which is not an artificial one, against an economic blizzard outside, is anticipating what will happen when the Government are forced in the autumn to take this reflationary measure. Every shrewd investor who operates on the Exchange, and is very often using the new money available for that purpose, has taken this view. It is not my view, but that of responsible opinion in the City.

7.45 p.m.

Mr. Barber

I believe that the interpretation which the hon. Gentleman has put upon what has been happening on the Stock Exchange is completely false. When one is considering whether a reasonable time has elapsed and whether the regulator is or is not likely to be used in the autumn, it is worth bearing in mind that a number of the tax changes which I proposed have not yet come into operation. For example, the cut in S.E.T. does not become operative until 5th July, and from then on, considering the cut in S.E.T. alone, for the following nine months there will be a cut in taxation of no less than£290 million. That will certainly have its effect, not only on non- manufacturing industries, which ultimately bear the burden of S.E.T., but on the manufacturing sector, because it will mean a reduction in the forced loan to industry of about£100 million.

Mr. J. T. Price

And on real property values, which have increased by 12½ per cent., since last—

The Temporary Chairman

Order.

Mr. Barber

There is another decrease in taxation which is bound to have a significant effect and that is the improvement in the child allowances, which I announced, because these are still to be reflected in the pay packets. Inevitably it was bound to take some time for the necessary recoding to take place, but it is expected that the improved child allowances will be reflected in the pay packets by July at the latest. This will involve a further cut in taxation this year, as from the time when they are reflected in the pay packets, of£163 million. In addition, there is the second cut in corporation tax of 2½per cent. This reduction is in respect of payments of corporation tax which become due, in general, on 1st January, 1972. I hope very much that that reduction will be—or, perhaps, even has been—to some extent anticipated. But, nevertheless, here again the cost in the financial year 1971–72 is£55 million.

I do not say this in any party spirit, but so often, over the years, it seems that we have over-stimulated demand and acted precipitately, with the result that later on we have had to slam on the brakes, with all the consequences which we know only too well. As one of my hon. Friends has rightly said, this year taxation will be some£1,000 million less than it was when the right hon. Gentleman left office. Of course, when in Opposition, he wants us to make further cuts.

When I wound up the Budget debate, I explained why I believed that it would have been irresponsible to boost consumer demand more than I am doing. The whole House wants the level of unemployment to fall. But as I said in that debate: I cannot make any promise that unemployment will fall until we get a substantial reduction in the level of pay settlements."—[OFFICIAL REPORT, 5th April, 1971; Vol. 815, c. 166.] The Budget was designed, after a time, to slow down the rise in unemployment and then to halt it. But its success in achieving this will depend, above all, on the progress of de-escalation of pay settlements.

The right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins), during the Budget debate, said that …a Chancellor should be judged much more by how he manages the whole economy…than by the tax changes…"—[OFFICIAL REPORT, 31st March, 1971; Vol. 814, c. 1529.] If it has to be one or the other, the Committee will fully sympathise with the right hon. Gentleman for wanting to draw a veil over his own tax changes. After all,£1,293 million in higher taxes over three years is a record which even a less sensitive historian than the right hon. Gentleman would probably want to forget.

In this financial year, we have put forward proposals, many of which are embodied in the Bill, for reductions in tax rates to the extent of about£1,000 million. I have never under-rated the problems that we face, especially the cruel and difficult problem of inflation. I respect those whose views differ and those who put forward alternative policies. Throughout the period of this Government, we have been consistent in our approach. Under the leadership of my right hon. Friend the Prime Minister, we are resolute in our determination to deal with our short-term problems in such a way as not to be deflected from carrying through the long-term measures necessary to reform the structure of our economy. We intend to carry these policies through to their full fruition for the benefit of the whole nation.

Our immediate aim is the de-escalation of pay settlements. As we succeed in that aim, the way will be clear to get unemployment down to a tolerable level and to slow down the rise in prices.

Despite these two great problems which we face at present, there are other encouraging signs. Sterling is strong. Most of our overseas debt has been repaid. Personal savings are rising. The nation, if not the Opposition, welcomes both the Industrial Relations Bill and the Budget as evidence that at last we have a Government who are determined to carry through fundamental reforms in the interests of the nation as a whole.

Mr. Roy Jenkins (Birmingham, Stechford)

I can agree with the Chancellor of the Exchequer at least in saying that we have had a wide-ranging and interesting debate. Even the hon. Member for St. Ives (Mr. Nott) will agree now that we had almost an adequate ration of backbench speeches and perhaps, after four hours, the hon. Gentleman will forgive two further brief interventions from the Front Benches.

I enjoyed many of the contributions, especially some of those from the benches opposite. The hon. Member for Oswestry (Mr. Biffen) spoke with a certain air of messianic condescension to his own party, as one who has a unique grasp of revealed truth and who, from statements that we have had recently, has participated, although vicariously, in making the Prime Minister, Prime Minister and presumably in making the Chancellor of the Exchequer, Chancellor of the Exchequer.

Then we had the hon. Member for South Angus (Mr. Bruce-Gardyne) and the hon. Member for St. Ives, to whom I have referred already. The hon. Member for South Angus began by saying that he "wanted to be eccentric". I thought that eccentricity was an act of spontaneity. Therefore, it did not altogether surprise me that his speech was a good deal less eccentric, certainly less engagingly so, than that of the hon. Member for St. Ives. The only eccentric feature in his speech was his description of his technique of Army driving. But that sounded more dangerous than eccentric.

The hon. Member for St. Ives raised a number of interesting issues. He spoke with what he described as the freedom of the back benches about floating rates, future parity of sterling, and our attitude in a position where at least temporarily some people are floating. I make only two comments. I think that the Chancellor of the Exchequer, to deal with a little temporary difficulty, nailed his colours to a couple of masts too firmly in Copenhagen. We shall see what happens. On the other hand, while I have no dogmatic objection to floating, I thought that the hon. Member for St. Ives looked for two rather contradictory benefits. In a couple of sentences, he talked first of the value of our floating, presumably upwards, to repulse an inflow of dollars which would be damaging to us from an inflationary point of view. Then he talked about the value of floating, presumably downwards, to give a stimulus to our exports. I think that he will agree that it is difficult for both to happen at the same time.

It was also interesting, within a few minutes of the hon. Gentleman talking about the embarrassing inflow of dollars and its deleterious effects, to hear in the course of the speech of my hon. Friend the Member for Liverpool, Walton (Mr. Heffer), the parrot cry from the benches opposite, "What about our debts?" I hope that we can begin to bury that now. We cannot have it both ways. We cannot at the same time be deeply embarrassed by the present inflow of dollars. There is no doubt that the balance of payments surplus that the Government inherited, combined with the sustained strength of sterling, means not that the medium-term debts have all disappeared—though they are fairly limited in extent at present—but at least that the idea that there is a tremendous albatross hanging round the necks of the Government is nonsense. I hope that we shall hear no more about it, even from such a superficially partisan speaker as the Financial Secretary.

The hon. Member for Horsham (Mr. Hordern) spoke about the Government's monetary policy, which to some extent impacted upon what the hon. Member for St. Ives said about the inflow of dollars and the possible effects of it. I do not suppose that the hon. Member for Horsham will wish to go on record as agreeing with me, but I am not sure that he disagrees with me basically too strongly.

I am mystified about the Government's present monetary policy. I have no idea—I hope that the Chancellor has—whether it is neutral or passive or, if it is between the two, exactly at what point it is. I think that the Chancellor of the Exchequer said that it will be passive for the next three months and that after that he does not know. Presumably, we are half way through the three months, as it is six weeks since the Budget. In other words, it is not containing inflation, but he hopes, after three months, that if inflation needs to be further contained, he will use a monetary policy which might contain inflation rather later than it was necessary to use it to contain inflation. That is the position which has been put forward on the monetary policy.

The Minister of State was less lucid than usual. When he spoke in opposition, I remember thinking that he spoke responsibly and that he would be happier in government. I was not sure today that he would not have been happier speaking in opposition. Several times he said that he could not follow my hon. and learned Friend the Member for Lincoln (Mr. Taverne) and my hon. Friend the Member for Walton. I could not follow the hon. Gentleman a lot of the time. He is a lucid thinker and speaker. I believe that the reason why I could not follow him was that he was speaking to a very unhappy brief.

There is a fundamental gap in the centre of the Government's logical thinking about the relationship of the expansion of the economy to the present level of wage settlements. We all agree that there is a severe cost inflation problem at present. The Government have often a little over-simplified the reasons to which they attribute it. It is there, and no one will dispute it. At the same time, it is clear that the economy is being worked well below capacity. If anything, as time goes on and as productivity increases, the gap between capacity and the level at which the economy is worked is increasing. That cannot be disputed. One result is the present totally unacceptable level of unemployment.

I was not sure what the Chancellor of the Exchequer was saying today. He appeared to be telling us that the figures, seasonally adjusted, would get worse for a month or two. Was he telling us that they would not get worse for more than two months? If so, that is encouraging news. However, I notice that he does not confirm it. He would be rash to do so on the basis of the present policy.

I fear that the seasonally adjusted figures are likely to continue to get worse for quite a bit longer. We have the economy operating well below capacity. Furthermore, what is clearly the case, six weeks after the Budget it is difficult to say that we have firm evidence about what has happened to the economy since the Budget. What we have increasing evidence about is that the base level on which the Budget was planned was falsely seen before the Budget. The level of activity was believed to he higher when the right hon. Gentleman was drawing up his plans than apparently is now the case. Therefore, this is an important factor to be taken into account.

8.0 p.m.

What undoubtedly is the case is that there is substantial slack in the economy. I should not for a moment advocate piling demand inflation on top of cost inflation, but there is a good deal of room to expand the economy without getting near to doing that. How can it be otherwise, with unemployment at 800,000-plus, and still rising, and with that unemployment not now confined, though worst, to the weaker regions but growing rapidly in the hitherto prosperous areas of the country, such as the Midlands? How can it be pretended that there is not a considerable degree of slack?

It is a false argument—and no doubt this is one reason why the Minister of State was unhappy—to say that additional expansion of the economy would pile demand inflation on top of cost inflation. If the Chancellor's argument—and this is the central, logical fallacy—is that it is not possible to give any stimulus to growth until cost inflation—which he attributes wholly to wage increases—has been brought under control, why did he make any concessions at all in his Budget? That is the logical gap in the Chancellor's argument. Why is it right to take measures which will prevent unemployment from rising still further at some time in the future, but not right, with this gap of unused capacity, to take measures which will bring it down?

Our other objection to the Chancellor's measures is to some considerable extent based on the timing of them. I think that the right hon. Gentleman should have acted earlier. Every Chancellor should not tinker too much, and it certainly is the case that measures take a little time to work through in their effect on the employment situation, but there would have been a substantial case for acting last autumn, which I envisaged in my last Budget Statement, and there would have been a great case, given the present unemployment position, for acting in the Budget by means of measures which would have bitten more quickly than those which the right hon. Gentleman chose to take.

The Chancellor said that some of the measures would not come into effect for some time. It will be a long time before the effect of the cut in S.E.T. builds up, and the other changes will take some time to come into effect. We can debate this further on the new Clause dealing with purchase tax. The Chancellor could, and should, have acted more quickly, but he deliberately chose not to do so, and there is no question but that the prospect confronting the economy now is in almost all respects—except the external prospect, which is for the moment very good—dismal. It is one of rising unemployment. It is one of a dismal in vestment forecast. The level of projected increases put forward in the Financial Statement were themselves pretty derisory, and it is far from sure that those will be achieved.

The indications are that the performance will be worse than even those dismal projections. The prices prospect is bad. Most of the internal factors are bad. Therefore, in this traditionally rather general debate on the regulator I think that we are justified in saying that we cannot feel confidence in the Government's handling of the situation. Because the Government have chosen the wrong inflationary measures because they have timed them wrongly, and because of the logical fallacy in believing that additional expansion would pile demand inflation on top of cost inflation, we believe that the adoption of our proposal—although we have no confidence that the Government would use it properly—would give them a little leeway to deal with the situation. Therefore, although we shall not press Amendment No. 1, because there are valid reasons for the Government's view, we propose to press Amendment No. 13 to a Division, and I ask my right hon. and hon. Friends to join me in the Lobby in due course.

Amendment negatived,

Amendment proposed: No. 13, in page 7, line 27, at end add: ( ) Section 9(2) of the Finance Act, 1961 shall be amended by leaving out the words 'by the addition or deduction as may be prescribed, of such percentage, not exceeding ten per cent.' and inserting the words 'by the addition as may be prescribed of such percentage, not exceeding ten per cent., or the deduction as may be prescribed of such percentage not exceeding fifteen per cent.'—[Mr. Sheldon,]

Question put, That the Amendment be made:—

The Committee divided: Ayes 165, Noes 195.

Division No. 360.]	AYES	[8.5 p.m.
Allaun, Frank (Salford, E.)	Hamilton, James (Bothwell)	Pannell, Rt. Hn. Charles
Archer, Peter (Rowley Regis)	Hamilton, William (Fife, W.)	Pardoe, John
Ashton, Joe	Hamling, Willam	Pavitt, Laurie
Bagier, Gordon A. T.	Hannan, William (G'gow, Maryhill)	Pendry, Tom
Barnett, Joel	Hardy, Peter	Pentland, Norman
Beaney, Alan	Harrison, Walter (Wakefield)	Perry, Ernest G.
Bidwell, Sydney	Hart, Rt. Hn. Judith	Prentice, Rt. Hn. Reg.
Bishop, E. S.	Hattersley, Roy	Price, J. T. (Westhoughton)
Blenkinsop, Arthur	Healey, Rt. Hn. Denis	Price, William (Rugby)
Boardman, H. (Leigh)	Heffer, Eric S.	Rankin, John
Bottomley, Rt. Hn. Arthur	Hooson, Emlyn	Reed, D. (Sedgefield)
Bradley, Tom	Horam, John	Rees, Merlyn (Leeds, S.)
Brown, Hugh D. (C'gow, Provan)	Houghton, Rt. Hn. Douglas	Roberts, Albert (Normanton)
Buchanan, Richard (G'gow, Sp'burn)	Hughes, Rt. Hn. Cledwyn (Anglesey)	Roderick, Caerwyn E.(Br'c'n&R'dnor)
Campbell, I. (Dunbartonshire, W.)	Hughes, Mark (Durham)	Roper, John
Carmichael, Neil	Hughes, Robert (Aberdeen, N.)	Ross, Rt. Hn. William (Kilmarnock)
Carter-Jones, Lewis (Eccles)	Hughes, Roy (Newport)	Sheldon, Robert (Ashton-under-Lyne)
Castle, Rt. Hn. Barbara	Irvine (Rt. Hn. Sir Arthur(Edge Hill)	Short, Rt. Hn. Edward (N'c'tle-u-Tyne)
Clark, David (Colne Valley)	Jenkins, Hugh (Putney)	Silkin, Hn, S. C. (Dulwich)
Cocks, Michael (Bristol, S.)	Jenkins, Rt. Hn. Roy (Stechford)	Sillars, James
Cohen, Stanley	Johnson, Carol (Lewisham, S.)	Skinner, Dennis
Concannon, J. D.	Johnson, James (K'ston-on-Hull, W.)	Small, William
Conlan, Bernard	Johnson Walter (Derby, S.)	Smith, John (Lanarkshire, N.)
Crawshaw, Richard	Jones, Dan (Burnley)	Spearing, Nigel
Crosland, Rt. Hn. Anthony	Jones, Rt. Hn. Sir Elwyn (W. Ham, S.)	Spriggs, Leslie
Cunningham, G. (Islington, S.W.)	Kaufman, Gerald	Stoddart, David (Swindon)
Dalyell, Tam	Kerr, Russell	Stonehouse, Rt. Hn. John
Davies, Denzil (Lianelly)	Kinnock, Neil	Strang, Gavin
Davies, Ifor (Gower)	Lambie, David	Summerskill, Hn. Dr. Shirley
Deakins, Eric	Lamond, James	Swain, Thomas
Delargy, H. J.	Lawson, George	Taverne, Dick
Dell, Rt. Hn. Edmund	Leadbitter, Ted	Thomas, Rt. Hn. George (Cardiff, W.)
Dempsey, James	Lee, Rt. Hn. Frederick	Thomas, Jeffrey (Abertillery)
Douglas, Dick (Stirlingshire, E.)	Leonard, Dick	Thomson, Rt. Hn. G. (Dundee, E.)
Douglas-Mann, Bruce	Lestor, Miss Joan	Tinn, James
Duffy, A. E. P.	Lewis, Ron (Carlisle)	Torney, Tom
Eadie, Alex	Lipton, Marcus	Urwin, T. W.
Edwards, Robert (Bilston)	Lomas, Kenneth	Varley, Eric G.
Edwards, William (Merioneth)	Lyon, Alexander W. (York)	Wainwright, Edwin
Ellis, Tom	Lyons, Edward (Bradford, E.)	Walker, Harold (Doncaster)
English Michael	McBride, Neil	Watkins, David
Evans, Fred	McGuire, Michael	Weitzman, David
Fisher, Mrs. Doris (B'ham, Ladywood)	Mackenzie, Gregor	Wellbeloved, James
Fitch, Alan (Wigan)	Mackintosh, John P.	Wells, William (Walsall, N.)
Fletcher, Raymond (Ilkeston)	MacPherson, Malcolm	Whitehead, Phillip
Fletcher, Ted (Darlington)	Marsden, F.	Willey, Rt. Hn. Frederick
Ford, Ben	Mendelson, John	Williams, Alan (Swansea, W.)
Forrester, John	Millan, Bruce	Williams, Mrs. Shirley (Hitchin)
Fraser, John (Norwood)	Morris, Alfred (Wythenshawe)	Williams, W. T. (Warrington)
Galpern, Sir Myer	Morris, Charles R. (Openshaw)	Wilson, Alexander (Hamilton)
Gilbert, Dr. John	Morris, Rt. Hn. John (Aberavon)	Wilson, Rt. Hn. Harold (Huyton)
Ginsburg, David	Murray, Ronald King	Wilson, William (Coventry, S.)
Golding, John	O'Halloran, Michael
Gourlay, Harry	O'Malley, Brian	TELLERS FOR THE AYES:
Grant, George (Morpeth)	Orbach, Maurice	Mr. Joseph Harper and
Grant, John D. (Islington, E.)	Oswald, Thomas	Mr. Ernest Armstrong.
Griffiths, Eddie (Brightside)
NOES
Adley, Robert	Blaker, Peter	Carlisle, Mark
Alison, Michael (Barkston Ash)	Boardman, Tom (Leicester, S.W.)	Chapman, Sydney
Astor, John	Boscawen, Robert	Churchill, W. S.
Atkins, Humphrey	Bowden, Andrew	Clarke, Kenneth (Rushcliffe)
Baker, Kenneth (St. Marylebone)	Bray, Ronald	Cockeram, Eric
Baker, W. H. K. (Banff)	Brinton, Sir Tatton	Cooke, Robert
Barber, Rt. Hn. Anthony	Brocklebank-Fowler, Christopher	Coombs, Derek
Batsford, Brian	Bruce-Gardyne, J.	Cooper, A. E.
Bell, Ronald	Buchanan-Smith, Alick (Angus, N&M)	Cormack, Patrick
Bennett, Dr. Reginald (Gosport)	Buck, Antony	Critchley, Julian
Benyon, W.	Bullus, Sir Eric	Crouch, David
Biffen, John	Butler, Adam (Bosworth)	Crowder, F. P.
Biggs-Davison, John	Campbell, Rt. Hn. G. (Moray & Nairn)	Curran, Charles
d'Avigdor-Goldsmid, Sir Henry	King, Evelyn (Dorset, S.)	Rees, Peter (Dover)
d'Avigdor-Goldsmid, Maj.-Gen. James	King, Tom (Bridgwater)	Rees-Davies, W. R.
Dean, Paul	Kinsey, J. R.	Renton, Rt. Hn. Sir David
Deedes, Rt. Hn. w. F.	Knox, David	Ridsdale, Julian
Dixon, Piers	Legge-Bourke, Sir Harry	Roberts, Michael (Cardiff, N.)
du Cann, Rt. Hn. Edward	Le Marchant, Spencer	Roberts, Wyn (Conway)
Edwards, Nicholas (Pembroke)	Lewis, Kenneth (Rutland)	Rossi, Hugh (Hornsey)
Elliot, Capt. Walter (Carlshalton)	Longden, Gilbert	Rost, Peter
Eyre Reginald	Luce, R. N.	Russell, Sir Ronald
Fenner, Mrs. Peggy	McAdden, Sir Stephen	Sharples, Richard
Fookes, Miss Janet	MacArthur, Ian	Shaw, Michael (Sc'b'gh & Whitby)
Foster, Sir John	McLaren, Martin	Skeet, T. H. H.
Fowler, Norman	Maclean, Sir Fitzroy	Soref, Harold
Fox, Marcus	McMaster, Stanley	Speed, Keith
Fry, Peter	Macmillan, Maurice (Farnham)	Spence, John
Gardner, Edward	McNair-Wilson Michael	Sproat, Iain
Gibson-Watt, David	Made), David	Stainton, Keith
Gilmour, Sir John (Fife, E.)	Mather, Carol	Stanbrook, Ivor
Clyn, Dr. Alan	Mawby, Ray	Stewart-Smith, D. G. (Belper)
Goodhew, Victor	Maxwell-Hyslop, R. J.	Stodart, Anthony (Edinburgh, W.)
Gorst, John	Meyer, Sir Anthony	Stoddart-Scott, Col. Sir M.
Gower, Raymond	Mills, Peter (Torrington)	Stokes, John
Grant, Anthony (Harrow, C.)	Mills, Stratton (Belfast, N.)	Stuttaford, Dr. Tom
Gray, Hamish	Miscampbell, Norman	Sutcliffe, John
Green, Alan	Mitchell, Lt.-Col. C.(Aberdeenshire, W)	Tapsell, Peter
Gummer, Selwyn	Mitchell, David (Basingstoke)	Taylor, Sir Charles (Eastbourne)
Gurden, Harold	Moate, Roger	Taylor, Frank (Moss Side)
Hall, John (Wycombe)	Molyneaux, James	Taylor, Robert (Croydon, N.W.)
Hall-Davis, A. G. F.	Money, Ernie	Tebbit, Norman
Hamilton, Michael (Salisbury)	Monks, Mrs. Connie	Thatcher, Rt. Hn. Mrs. Margaret
Hannam, John (Exeter)	Monro, Hector	Thompson, Sir Richard (Croydon, S.)
Harrison, Brian (Maldon)	Montgomery, Fergus	Trew, Peter
Harrison, Col. Sir Harwood (Eye)	More, Jasper	Tugendhat, Christopher
Haselhurst, Alan	Morrison, Charles (Devizes)	Vaughan, Dr. Gerard
Hay, John	Mudd, David	Waddington, David
Heseltine, Michael	Murton, Oscar	Walder, David (Clitheroe)
Hicks, Robert	Neave, Airey	Walker-Smith, Rt. Hn. Sir Derek
Higgins, Terence L.	Nicholls, Sir Harmar	Ward, Dame Irene
Hiley, Joseph	Noble, Rt. Hn. Michael	Warren, Kenneth
Hill, James (Southampton, Test)	Nott, John	Weatherill, Bernard
Holland Philip	Onslow, Cranley	Wells, John (Maidstone)
Holt, Miss Mary	Oppenheim, Mrs. Sally	White, Roger (Gravesend)
Hordern, Peter	Owen, Idris (Stockport, N.)	Whitelaw, Rt. Hn. William
Hornsby-Smith, Rt. Hn. Dame Patricia	Parkinson, Cecil (Enfield, W.)	Wiggin, Jerry
Howe, Hn. Sir Geoffrey (Reigate)	Pike, Miss Mervyn	Wolrige-Gordon, Patrick
Hunt, John	Pounder, Rafton	Wood, Rt. Hn. Richard
Iremonger, T. L.	Powell, Rt. Hn. J. Enoch	Woodhouse, Hn. Christopher
James, David	Price, David (Eastleigh)	Woodnutt, Mark
Jenkin, Patrick (Woodford)	Proudfoot, Wilfred	Wylie, Rt. Hn. N. R.
Jennings, J. C. (Burton)	Pym, Rt. Hn. Francis
Jopling, Michael	Raison, Timothy	TELLERS FOR THE NOES:
Kershaw, Anthony	Redmond, Robert	Mr. Paul Hawkins and
Kilfedder, James	Reed, Laurance (Bolton, E.)	Mr. Tim Fortescue.
Kimball, Marcus

Clause 6 ordered to stand part of the Bill,