BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 22 March 1972 vol 833 cc1523-646

4.7 p.m.

Mr. Roy Jenkins (Birmingham, Stechford)

I begin, as last year, by congratulating the Chancellor upon his presentational performance. I found it a most impressive performance. Last year I referred to his considerable feat of compression. This year he was longer, but I make no complaint about that. He was not as long as I was on at least one occasion, and if the test is millions per minute I calculate that he put his rate up from £5½ million last year to £9 million this year. I am bound to say that that is about the only index figure in the British economy which has shown any favourable movement over the past year.

The salient and paradoxical fact with which we are confronted is that this is a large concessionary Budget born out of failure. The year 1971 has been the worst for an increase in national output since 1958 and the worst for unemployment since 1939. Twelve months ago with unemployment at 750,000 the Chancellor set himself to do some moderate reflation and at least to prevent a further deterioration in the level of unemployment. He failed. In July he went further; he used the regulator and predicted a downward movement in unemployment within a few months. Again he failed.

The further measures which the Chancellor took during the autumn proved equally ineffective. Unemployment has exceeded our worst expectations and has continued, so far at any rate, to mount almost inexorably. This is the central problem we face in our economy today, and the Government have a record of unmitigated failure in dealing with it. If we look back at the Chancellor's winding-up speech in last year's Budget debate—and winding-up speeches are sometimes a better guide to a Chancellor's instinctive thinking than the carefully-written, weighed and moderated remarks of the Budget Statement—we find that almost all his appraisals of the problems and likely developments of tins economy were false. He was optimistic about private manufacturing capacity and thought that it might well exceed the forecast of a ½ per cent. increase. In fact, we have had a significant decrease.

On the other hand, the Chancellor was cautious last year about the short-term balance of payments outlook and clearly expected a smaller surplus in 1971 than in 1970. He also described as "dangerous nonsense" The Times' view that we were virtually free of overseas debt. In fact, we nearly doubled the surplus in 1971, and have been prevented from paying off every penny of short and medium-term debt only by the fact, which he mentioned yesterday, that the I.M.F. would not take any more dollars, although we have far more than enough, and it has, too.

At the same time last year the right hon. Gentleman played down unemployment. He had little to say about it at that stage except that it all depended on getting pay settlements down. This, in my view, goes right to the heart of the intellectual confusion which has bedevilled the Government's whole approach to reflation. They have never, until recently at any rate, been able to make up their mind whether or not they wanted to use unemployment as a deliberate weapon in the battle against wage increases. The result, not unnaturally, has been an ineffectual muddle. They have alternated between some reflation on the one hand, little and too late and generally misdirected as well, and, on the other, lectures that nothing could be done for unemployment until wage inflation was squeezed out. The Chancellor appeared to deny that yesterday afternoon, but he was unconvincing.

The right hon. Gentleman said one thing last April. He tried to do another in July. He did not succeed. He has not succeeded since. Indeed, it was not until near the end of the miners' strike—a most surprising moment for a conversion on this issue—that the Prime Minister and the Government decided that they had to try a new approach because their old one had so manifestly foundered; they had, for the first time, to try to put their heart into reflation and seriously try to get unemployment down.

Now they have embraced some fairly massive reflationary measures. But what a story of 21 wasted months it has been; 21 months of the strongest balance of payments in our history frittered away without any real movement in our economy, with derisory investment levels, and with men being unnecessarily thrown out of work, week after week, month after month.

Even now I wonder exactly what the strategy is. First, it appears to me unlikely that the Budget, fairly bold though it appears, will reduce unemployment over the next year by more than 150,000 to 200,000. About 800,000 seems to me to be the likely figure a year from now, unless the school leaving age makes a presentational change. Mr. Samuel Britten in the Financial Timesthis morning was less optimistic and put it at between 800,000 and 900,000.

At the same time it looks—though there can be no absolute certainty—as though this year, as opposed to last, the surplus is likely to melt away. That in itself—some reduction at any rate—is not a tragedy. Yesterday the Chancellor uttered some remarkable words. He said: … I am sure that all hon. Members in this House will agree that the lesson of the international balance of payments upsets of the past few years is that it is neither necessary nor desirable to distort domestic economies to an unacceptable extent in order to maintain unrealistic exchange rates, whether they are too high or too low."—[OFFICIAL REPORT, 21st March, 1972; Vol 833, c. 1354.] I agree with the Chancellor, but I wonder whether the Prime Minister did not feel a twinge of conscience, even a flush of shame, when he heard those words. In 1967 when we, somewhat belatedly as it now appears, changed an unrealistic exchange rate—[Interruption.] I was a member of the Cabinet, and I share full responsibility then. When we changed the exchange rate, the present Prime Minister chose to treat it—perhaps through simple incomprehension; perhaps just for deliberate party political purposes; perhaps for a combination of the two—as the greatest imaginable humiliation; as almost the biggest national defeat that we had suffered since the Battle of Hastings. I hope that the right hon. Gentleman now regrets the hysterical hyperbole that he used on that occasion.

Mr. Peter Hordern (Horsham)

Would the right hon. Gentleman remind the House of what he said in a television broadcast? Did he not describe devaluation as a defeat?

Mr. Jenkins

I think I did. I certainly did not describe it as a national humiliation. I certainly did not use the words which the Prime Minister used. Indeed, I rather think I used the word "setback", and not "defeat", but we can look that up. In any case, it was one thing for me, in the circumstances of having responsibility for the new position, facing the matter realistically, to use those words, and another for the Prime Minister, then the Leader of the Opposition, to use different words which were totally uncalled for, and which were, clearly, nonsense in view of the doctrine which the Chancellor enunciated yesterday.

That leads me to another of the unemployment alibis which the Government have sought to erect. This is the view that the economy which they took over was so depressed that the past two years of mounting unemployment was inevitable. I think that that is straightforward nonsense. Of course, with the benefit of perfect foresight, which is rarely given to any of us, it would have been right to start reflation in the autumn of 1969. The balance of payments had turned decisively, although that was not widely recognised on the Conservative Front Bench, least of all by the present Chancellor of the Exchequer, who spent that time engaging in a particularly foolish policy with Mr. Chapmen Pincher about the falsification of the trade figures. Still more, the Budget of 1970—and I say this frankly—should have been bolder. There was fear of a give-away electioneering Budget. I do not think that it would have helped politically. The country had had too much of that before, in 1964 and 1959. It was what was needed economically, but the information on which this could be seen did not become available until later.

But the idea that the new Government, when they came in, immediately saw the problem and began to deal with it and act decisively to deal with the deflationary position bears no relationship to the truth. The Prime Minister, it will be within the recollection of some hon. Members, was first obsessed by the growth of the money supply in the second quarter of 1970. It was too fast. He thought that that was the main problem with which we bequeathed him. But, of course, it was nothing like as fast as that which the right hon. Gentleman has now, and with which he is apparently happy to go on.

Mr. Iain Macleod, in July, 1970, firmly, clearly and overtly resisted any reflation. There were excuses for his taking that attitude at the time. He had had only a short time in which to consider the position. But in the autumn the present Chancellor, with no such excuses, when it was clear that the case for expansion was overwhelmingly necessary, took exactly the same course.

An Hon. Member

So did you.

Mr. Jenkins

I was actually discussing the autumn of 1970, and, although I think the present Chancellor was fumbling a little with his hand on the wheel at that stage, he was not actually asking me what to do.

Instead of the right hon. Gentleman moving rapidly as he should have done in an expansional direction then, by which time evidence had become overwhelmingly clear, he began to make unnecessary room for taxation reductions by a whole series of mean and niggling public expenditure savings. He took action on school meals and school milk, dental and prescription charges, cut the rate support grant, abolished the Consumer Council and the imposed museum charges. These are still with us today. Some of them are still being fought through. What possible justification there is for them in the present economic climate I would very much like the Chancellor or someone else to tell us.

Perhaps the Secretary of State might do so. I dare say he might find it agreeable occasionally to get on to a wider field. We have never yet begun to hear an answer. Since then we have had the fumbling, the ambiguity and the ineffectiveness of the past 18 months culminating in yesterday's belated lurch towards expansion.

I draw a distinction between the Chancellor's tax changes and his management of the economy. The former are carefully and often skilfully thought out. I do not always agree with the results, but I pay tribute to the work he does and the work that he gets others to do for him. It is detailed, ingenious and thorough. I cannot say the same for his attitude and approach to demand management. I do not think it occupies his mind to the same extent. He is a tax Chancellor, not an economic strategist, and on his strategy I raise some fundamental questions, not only about the past, where he has a record of almost unbroken failure, but about the future, too.

Yesterday the Chancellor used fine words and some fine platitudes about setting our economy on a secure course for sustainable growth. The trouble is that the words have been used too often before, and the trouble is also that they were not backed by action to underpin our competitiveness. By all means, with a balance of payments surplus of £950 million adopt a fairly relaxed attitude towards it. But what happens if, as appears likely, the surplus runs away over a year or 18 months and we are still at the end of it left with a stubborn 800,000 unemployed? How does the Chancellor get out of that box? What is then his strategy? Does he believe that the economy can long withstand the switch from public sector surplus of £856 million, which was the position in 1970, to deficit financing of no less than £2,441 million, for which he is now budgeting?

My fear is that the Budget will in due course lead to the need either for swingeing and unacceptable public expenditure cuts or for substantial taxation increases. At one stage yesterday I thought the Chancellor was going to announce an immediate programme of public expenditure increases. He talked most eloquently about the persistence of bad schools, of old hospitals, of slums and of urban squalor. With a great deal of money to give away, why does he not do more about them? There is a lot of unemployment in the building industry. [HON. MEMBERS: "No."] Of course there is. He could have made an effective attack against unemployment and could have made a direct improvement in the amenity of life. My fear that he will move to a position in which the choice will be either unacceptable public expenditure cuts or the need for further increases in taxation is fortified by the fact that, while some of the short-term measures of the Budget have an approach to fairness, the long-term ones are a great deal less so. If taxation is to be increased, therefore, at least under a Tory Government it will be done upon a more regressive basis. The element of justice in the Budget is short term and the injustice is long term.

Let me explain this by reference to personal direct taxation. The threshold is raised and the benefit which runs through remains constant at £52 a year up the scale. That is the immediate impact, and that is what most people believe. It is in itself a desirable change, although the munificence of the exemptions from tax look a good deal greater at first than at second sight. In an inflationary climate threshold concessions are essential if income tax is not to bite deeper all the time. Many of those taken out of tax have only just been brought into it, not by a significant improvement in their real position but by a simple movement of wages and prices. Even after the concessions of the Budget there will be almost exactly the same number of tax units as there were after my 1970 Budget. Furthermore, many of those taken out will be back in again within this year, before the next Budget. There is no question about that. In addition, many of those getting the £1 a week will from October pay £1 a week in rent increases as a direct result of the Housing Finance Bill. They will also pay a bit more for the increase in national insurance contributions as well. In addition, the arrangements announced by the Chancellor give no benefit at all for the 3 million householders who already pay no tax. There is no benefit, for instance for the low-paid with large families, where some of the very worst poverty exists.

Mr. Peter Rost (Derbyshire, South-East)

What about F.I.S.?

Mr. Jenkins

There is no new "fizz" in this Budget, and if even the hon. Member thinks that F.I.S. has solved the problem of child poverty in large families, he is very gravely mistaken indeed. A combination of modified increases in personal allowances with an extension of family allowances which Mr. Macleod firmly promised the Child Poverty Action Group before the last election might have provided a fairer spread of benefits. Furthermore, as the Chancellor must recognise, his indirect taxation remissions have not been angled at the groups in real poverty. These groups do not buy many of the goods in the two higher ranges, certainly not in the top range. In fact, the purchase tax changes have been angled to give them virtually no help at all.

If we look beyond this, beyond the immediate impact, to the longer-term position—and it is a balance between the two to which I would like to draw attention—to the changes in 1973–74, £300 million is to be spent or forgone on lessening the stiffness of the progression above £5,000 a year and to granting an exemption to investment income. This is intended to be a long-term change, and it is a very expensive one. It certainly means substantial benefits—and I am not sure that the House appreciated this yesterday—to those with big unearned incomes. For a married couple with £15,000 a year investment income the tax charge will be reduced by £1,482 from the present level. Put the other way round, the net amount retainable from purely unearned income at that level will be increased by no less than 29 per cent.

I cannot regard this and associated changes as a desirable way of spending £300 million, particularly as at the end of the day it will still leave us with the long plateau between entry into tax and £5,000 a year of earned income with no progression at all, which is one of the undesirable features of our present system and almost uniquely undesirable by international standards.

Equally, there is a whole range of other proposals which will amount for certain fortunately placed people to a substantial erosion of their tax base. Stock options are one: the restoration of the tax allowance for borrowing is another and a particularly glaring one. Even the Daily Telegraph City Editor came out against it yesterday morning. He wrote: There is a case for letting the Government forget this particular undertaking, which if it is to be meaningful would amount to little more than an invitation to Stock Exchange speculative excess. This morning the City Editor of the Daily Express was even more damagingly enthusiastic about it. Under the column head "Punters' Charter" he wrote: 'Heads I win—tails the taxman loses'. That must be the jubilant motto this morning of the men who make share prices move—institutional fund managers and the rich, surtax-paying City punters. For both, happy days really are here again. But it is the stock market speculator especially who has not only the reason but the incentive to cheer. Gone is the Labour ban on offsetting bank interest against personal tax. This single measure alone could spark off a feverish share buying stampede. I doubt whether anybody contemplated in advance the peculiarly unfair way in which the Chancellor would do this. The small borrower, by the Chancellor's arrangements to get round a particular administrative problem, is to be refused relief on the first £35 interest, in other words, on any transaction except house purchase in which the overwhelming majority of the population are likely to engage. At the same time, on the next £350 interest, or £3,500 interest, where the concession becomes far more valuable because tax rates will almost certainly be far higher, the concession if it runs freely is standing equity on its head by the way in which this highly undesirable arrangement has been carried through.

Equally misguided is the change in corporation tax, which was foreshadowed last year. It is the basic change, not the choice between the two possible methods, with which I am primarily concerned. The change will give far greater benefits to shareholders than it will bring to the economy of the country. There is likely to be a considerable increase in the proportion of profits now put out in dividends—on which, of course, the tax will be much lower. Companies which use their profits for investment will be worse off than before; yet the overwhelming evidence from other countries as well as from here—from the United States, Germany, France and Japan—is that the great bulk of companies' investment comes out of ploughed-back profits. Only the marginal proportion of 5–8 per cent. of the financial requirements of industry comes from capital issues, even in the most developed capital markets in the world. This applies in Britain as well as in America.

There is no help in what is proposed to a higher rate of investment; indeed, the picture is likely to be even worse. What influences the investment plans of many companies is the rate of tax the company itself bears on its profits. Under the new system this will be increased because the new rate of corporation tax will be 50 per cent. The general picture which emerges is of a higher rate of tax on profits used for investment and a much lower rate of tax on dividends, which is a disincentive to invest and another bonus for the dividend earner.

Then there are the estate duty changes. I am in favour of the exemptions, both the general one of £15,000—I moved to £10,000 in 1969—and the special additional £15,000 for widows, but I am not in favour of reducing the rates generally and spending about £20 million on it, even if the Chancellor justifies this by a reference to real values in 1949 terms.

I believe that in the world of the future inherited wealth in all its forms should play a progressively and substantially smaller part in the determination of standards of living, and this move is in precisely the wrong direction. The Chancellor wants us to consider an inheritance tax as opposed to estate duty. We can, of course, consider it, although I shall do so with considerable caution. I want social redistribution and not merely redistribution between the various members of rich families. I find it quite extraordinary that we are asked to consider the whole long-term question of the passing of property from one generation to another with a gifts tax and the problem of exchanges inter vivos apparently excluded from the terms of reference. Everyone knows that this is a crucial element in the passing of property from one generation to another, and its exclusion is not only extraordinary but totally unacceptable.

I turn now to value-added tax. None of us on this side welcomes this tax. On entering the Community we must accept it in some form, but the Government committed themselves explicitly to this tax whatever the outcome of the negotiations. Indeed, they have hastened to introduce it long before they faced the need. Had they been wise, they would have delayed its implementation until the last possible moment.

We object to this tax for a number of reasons. First, it will almost certainly increase the cost of living by a substantial amount. It did so in Holland, Norway, Denmark and Belgium, and fears of this effect have caused postponement in Italy. Experience has shown that a change of this kind in indirect taxation does not lower prices by the full amount where tax is reduced and can increase prices by more than the full amount where it is increased or imposed for the first time. I shall need a good deal of convincing if the Government wish to argue otherwise. Second, it will make the indirect taxation system less flexible. Third, despite the apparently simple form in which it is introduced, it will still place a heavy administrative burden on industry and commerce as well as on the Government. Fourth, I am not convinced that the transitional problems raised will be as smooth as the Chancellor suggested Those concerned remain very worried. We shall pursue these matters vigorously in the Finance Bill.

I turn next to industry and the development area differentials. We welcome the retreat from dogma on investment grants. On 4th November, 1970, the Chancellor devoted two columns of Hansard and four separate arguments to explaining why they were ineffective, expensive and administratively cumbersome. The retreat has been slow. No doubt it has been painful for the right hon. Gentleman, but waiting for it has been still more painful for those losing their jobs in Scotland, the Northern Region and Wales. I trust that he will continue his retreat, taking in R.E.P. on the way. Indeed, I regard the continuation of R.E.P. as at least as desirable as the restoration of investment grants. Certainly on what he has announced so far I do not think he has done nearly enough for the regions. I understood that the Government had some proposal similar to that in the Private Member's Bill of my hon. Friend the Member for Stockton-on-Tees (Mr. William Rodgers). Perhaps we shall hear something about this from the Secretary of State for Trade and Industry this afternoon.

I come finally to pensions. I cannot regard the increase as generous. Pensioners today are no better off, and conceivably a little worse off, than they were in the late autumn of 1969. They are certainly no better off in absolute terms; in relative terms they are a good deal worse off. They will become absolutely worse off without question for the next seven months. They will then for a short time, as I calculate it, be perhaps 6 per cent. better off than in 1969. Before the next increase in 1973 they will then again be probably worse off than they were in 1969—quite certainly they will not be significantly better off. In other words, there will be no real increase for four years—no real increase when there is £1,200 million to distribute this year and nearly £2,000 million promised for a full year; no real increase, when £68 million goes to death duties, when £300 million goes to those with sizable investment incomes or incomes of above £5,000 a year. I do not think there will be many of us in this House who would deny that we regard pensioners as the most needy and deserving group in the country. This is not generosity. In the context of this Budget it is meanness, and it will be widely recognised as such.

I can, however, welcome the plan to study the amalgamation of the social security system with tax credits and P.A.Y.E. It appears to me that the Select Committee is a good means of proceeding, and I trust it will make progress.

As my right hon. Friend the Leader of the Opposition said yesterday afternoon, there are parts of this Budget which we can welcome, but there are other parts to which we do no such thing. The big immediate measure is substantially less regressive than last year's proposals. But this will have mainly a short-term effect.

I hope the Chancellor of the Exchequer will make the most of the euphoria he may have felt last night, and even this morning. All his Budgets and mini-Budgets looked better than they wear. Many of those now excluded from tax will be brought fairly rapidly back into the net, a good number of them this year. Fiscal drag will continue its almost inexorable effect. But the longer-term measures are in most part regressive—and many highly regressive—because they restore or create special fiscal privileges which can be enjoyed only by limited groups, and it is those which will persist. That is the long-term imprint which the Chancellor wishes to leave on the tax system. I do not see here any strategy for ending injustice, for abolishing poverty, for uniting the nation. I see a Government who have been frightened by their own policies, who have wasted 21 months, who have acted belatedly and yet without careful economic consideration, and who a year or two from now will be paying, and will be asking the nation to pay, too, for the penalties of their unnecessary mistakes.

4.45 p.m.

The Secretary of State for Trade and Industry and President of the Board of Trade (Mr. John Davies)

It has been the established custom of the House for the President of the Board of Trade at this stage in the Budget debate to speak at some length on the subject of our international trading position. I shall, of course, respect fully that tradition, though as a result of the modest extension of the duties of the President of the Board of Trade I have a wide field of matters to deal with, particularly in terms of regional policy, which unfortunately will lead me to speak for rather longer than is my wont. For this reason I must resist the invitation of the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) to follow him on a variety of lines of great interest ensuing from my right hon. Friend's Budget, because if I were to do so it would make my speech even longer.

Our trading performance during 1971 has been exceptionally good. We achieved a record surplus on current account of over £950 million, which is over 50 per cent. better than the previous record surplus of £611 million in 1970. In fact, there have been a succession of records achieved in 1970—[Interruption.] I am speaking in terms of our trading activity.

Our visible trade, traditionally in deficit, showed a record surplus of nearly £300 million, while net invisible earnings continued to improve and reached a record level of over £650 million; and our reserves reached a level of £2,700 million. We started 1972, then, with a very strong balance of payments position overall.

As regards our visible trade, exports, valued on a balance of payments basis, increased by 13 per cent. in 1971, of which 8 per cent. came from higher export prices and 5 per cent. from an increase in the volume of trade. This increase in volume was better than in 1970 when the increase was only 3½ per cent. We matched the increases in volume of our main manufacturing competitors and held our share of world trade in manufactures in 1971—at around 11 per cent.

The value of imports increased by 9 per cent., volume growing by some 5 per cent. and prices by 4 per cent. The rise in imports in1971 was greater than would have been expected on past relationships between imports, gross domestic production and stock building and was particularly marked in the con- sumer goods sector in the second half of the year. The Chancellor's Statement yesterday substantially reinforces the expansionary forces in the economy, and with the expected build-up in stocks we must clearly allow for an acceleration in the volume of imports.

If our visible trade position is to remain sufficiently strong it is crucial that we curb cost inflation. We are not the only country suffering from cost inflation, but so far we have been amongst the least successful of major trading nations in checking the impact of inflation on export prices. Over the last two years our export prices have increased by 16 per cent., a rate double that of our main competitors. While in the short run rising export prices, clearly, may raise the value of our exports, over the longer term the price competitiveness and future profitability of our exports must be gravely at risk.

The immediate prospects for maintaining our good export performance are still favourable. The outlook for world trade is one of increased expansion over the next two years, and our entry into Europe will mean further opportunities in some of our fastest growing markets. The reduction from 6½ to 6 per cent. in the rate of interest for fixed-rate medium and long-term export finance announced by my right hon. Friend the Minister for Trade the other day should also help exporters maintain their competitive position. Provided that we tackle inflation successfully, our present balance of payments position combined with the present under-use of our capital and manpower resources gives us a unique opportunity to achieve strongand sustained economic growth, to modernise and expand industry, to improve our productive and competitive power, and to make a stronger and more lasting impact on the problems of the regions.

Turning to the present industrial and regional problems which face us, we are all agreed that present level of unemployment, investment and industrial production is unacceptable. But, unsatisfactory as is the present position, we must put it into a longer-term context, and face up to the hard truth that the economic performance of the United Kingdom has been steadily falling behind that of other major industrialised countries for many years. We cannot let this go on. We must start the hard climb back. As a result of the successful negotiation of membership of the Community, a wealthy and expanding market of upwards of 300 million people will now be wholly open to British commerce and industry. The massive and imaginative measures which my right hon. Friend the Chancellor of the Exchequer announced yesterday provide the necessary impetus to growth and investment which are necessary to attain so many of the purposes to which I have referred.

Growth at home and growth of our external trading performance are the two pre-requisites for a stable, fully-employed and prosperous society. But growth which boosts some parts of the country and allows others to continue in decline is unacceptable, too. This is where our regional policies come in, and it is their inter-relationship with our national economic policies which makes for success or failure in attaining a national equilibrium.

Regional policies alone do not substantially create investment or enhance economic activity, though they can contribute to a better use of national resources. Here I take issue with the right hon. Member for Birmingham, Stechford, who sought specifically to indicate that regional differentials in themselves create investment. In my experience, that is very seldom the case. The real cause of increased investment is the movement forward of the economy, and it is the incentives which can shift the emphasis of that investment and not, to a large degree, create it. The main impact of regional policies, however, is to induce national prosperity to spread itself more evenly than it would otherwise do. When the national economy is going forward the regions go ahead as well. When it is in the doldrums, so are they.

Mr. Dan Jones (Burnley)

Not necessarily.

Mr. Davies

The statistics show it. But perversely the regions slow down earlier when things are sluggish and are slower to respond when they pick up. Over the long haul their problems persist and intensify.

In considering how best to attain the equilibrium of which I speak there is a need first and foremost to analyse the relative response of individual parts of the country to the impetus of growth, both in terms of today's situation and the future. We must also seek to identify the seeds of decline before they lead to widespread physical deterioration and unemployment.

There are three main areas in the classification of this analysis. First, there are those suffering from industrial decline of a persistent kind, divided between areas where this is most intense, and those where it is marginally less intense. These are what we call the special development and development areas. Second, there are those showing evidence of decline through obsolescence but not yet caught in a downward spiral. Here, too, there is a distinction to be drawn between those likely to need a more prolonged stimulus and those likely to respond to a temporary boost to lift them back on to a path of healthy growth. These are the intermediate areas and derelict land clearance areas. Finally there are those where natural circumstances allow a dynamic response to a growth situation so long as the balance of measures devised to create the desired equilibrium does not frustrate that response.

As the House knows, reconsideration of the boundaries of the various areas had led us to certain major conclusions outlined yesterday by my right hon. Friend. First, the special development and development areas are to remain as they are now, save only that the town of Winsford in Cheshire will be detached from the Merseyside development area and incorporated in the new intermediate area. This is unconnected with the main review and arises from a change of local circumstances. The town will, however, continue to be treated as a development area for regional employment premium purposes. An order to this effect will be laid before the House shortly. Second, the intermediate areas are to be greatly extended by the inclusion of the whole of the North-West, the Yorkshire and the Humberside Planning Regions, as well as those parts of Wales at present excluded from the assisted areas—that is, the North Wales coast, Monmouth and Chepstow. The necessary order to that effect will be laid before the House shortly. Finally, the derelict land clearance areas will remain as designated hitherto, subject to the modifications made necessary by the extension of the intermediate areas to which I have referred.

Mr. Gerald Kaufman (Birmingham, Ardwick)

The right hon. Gentleman talks about the North-West. As he knows, that is a notional area in that it could include Lancashire, parts of Cheshire and parts of Derbyshire. Can he be more precise about the boundaries of the new intermediate areas?

Mr. Davies

A White Paper will be published this evening covering all these matters. It will contain maps outlining where the boundaries lie. The extension of boundaries relates to the existing boundaries of the economic planning regions. I hope that that will assist the hon. Gentleman.

It is, of course, very difficult to draw lines on a map which wholly and precisely reflect the underlying economic realities. The changes which I propose will, however, simplify the assisted area map, and the major boundaries will be aligned for the most part on those of the economic planning regions. Taken together with the greatly improved assistance now to be available, these changes will provide a much more rational and effective base on which to build regional growth and regeneration.

Within this geographical framework there are five main tools with which to shape both national and regional development. They are investment incentives to stimulate modernisation and expansion of plant and buildings; infrastructure improvements to provide an essential base for industrial growth and improved environment; manpower policies to improve skills and, where desirable, mobility; development control to assist in attaining the more even spread of industrial prosperity; and selective support directed both nationally and regionally to foster the competitiveness of our industries and commerce.

All these together constitute the framework of regional policy. All have been most carefully reconsidered, and all are being substantially improved. I wish to say a very sincere word of thanks to my colleagues in the Department, both Ministers and civil servants, who have put in an immense effort in the review of regional policy which has been going forward.

I deal first with investment incentives. The Chancellor of the Exchequer has described the new system of capital allowances, applicable country-wide, which represent a major contribution to the cost of productive investment. From now on, all investment in plant and machinery, whether by manufacturing industry or by service industry, will obtain free depreciation—something which industry has long sought on the grounds both of simplicity and of effect. At the same time, all companies will be entitled to carry back trading losses attributable to free depreciation against profits of the three preceding years—a right formerly confined to the development areas. For industrial buildings, the new country-wide first-year allowance of 40 per cent. also is a major contribution to modernisation.

We believe in a powerful and clear-cut regional differential. The effect of extending free depreciation and the building allowances to the whole country is to remove the fiscal differential. In considering possible alternatives we need to remember what I said earlier.

Regional incentives in themselves do not create much investment, though they tend to canalise it into preferred areas. So the main task of fostering investment generally relies, as it should, on the promise of the economy and the profit incentive implicit in the tax system—now greatly fortified by free depreciation.

The canalising function aimed at moving investment to the regions, to be effective needs tobe simple, immediate, and as certain as possible. Successive adaptations and amendments have deprived our present system of these qualities. In addition, the principle of favouring incoming investment in comparison with that arising within the regions has been much criticised.

It is against these criteria that we have considered the problem, and my right hon. Friend announced the broad framework of our new policies yesterday. As I have mentioned, a White Paper giving further details will be available later today.

As the House knows, we have decided to supplement free depreciation by a system of cash grants—regional development grants—for the assisted areas. They will be payable as from today, 22nd March, towards capital expenditure incurred on new plant and machinery, mining works, new buildings and adaptations of existing buildings in the special development and development areas and towards capital expenditure on buildings only in the intermediate areas. The grants for buildings will also be available for two years in the derelict land clearance areas.

Mr. Dan Jones

Will these benefits apply to industries which have begun before Budget Day?

Mr. Davies

There is a differentiation between buildings and plant and machinery. I recommend the Hon. Gentleman to consult the White Paper, where this is set out in some detail.

Mrs. Elaine Kellett-Bowman (Lancaster)

Does my right hon. Friend include agriculture in industry?

Mr. Davies

No. I shall come to the precise area included within the sphere of these arrangements, but it does not include agricultural investment. The grants for buildings will also be available for two years only in the derelict land clearance areas.

The regional development grants will be made towards capital expenditure on premises wholly or mainly occupied for carrying on qualifying activities in manufacturing, mining and construction. These activities are broadly those described in orders II to XX of the Standard Industrial Classification. I must emphasise that at qualifying premises a wide variety of capital expenditure will be eligible for grants; for example, not only for manufacturing, but for storage, repair, research, works offices, and the like.

The payment of grant will not affect the recipient's taxation relief on the full value of his investment. This is valuable in itself in enhancing the benefit of the incentives and is an important simplification in present systems.

The new regional development grants will supersede both the building and operational grants available under the Local Employment Act.

The new grants in respect of buildings, unlike those at present available under the Local Employment Act, will not be limited by the provision of employment and will be equally available for new projects, expansions and the modernisation and adaptation of existing factories. We have felt it right to make grants for new building schemes figure prominently in our new arrangements, because of the part which a stimulus to building can play in modernising and improving our industrial infrastructure and in tackling the problem of industrial obsolescence and unemployment.

The arrangements I have described concentrate on manufacturing industry—albeit widely defined. This does not mean that the potential rôle of the service industries has been overlooked. The House will recall that last summer we took the very important step of extending free depreciation to these industries in the regions—and my right hon. Friend the Chancellor of the Exchequer has now extended free depreciation to them throughout the country. We have also embarked on a major review of the future locations of Government employment. Other specific aspects of service employment—for example, the use made of the Tourism Act—are kept under equally close review. In general, however, the main stimulus to service industries lies in raising the general level of prosperity in any given area, because much service employment is directly linked to the level of local economic activity. Our measures are aimed at doing this.

Second, the need to keep our infrastructure up to date and efficient, with speedy communications specially in mind, has been and remains a main plank in our policy for industrial and regional development. My right hon. Friend the Secretary of State for the Environment will enlarge on this later, but the White Paper to be published today will outline the further acceleration of work on certain key industrial routes in England, main routes in Scotland—with the development of North Sea oil a major consideration—and the completion of important strategic routes in Wales. Further details are given in the White Paper.

Third, manpower policies. My right hon. Friend the Secretary of State for Employment has already announced his proposals for a major reorganisation and improvement of the employment services, and these will have a profound effect upon the meshing of job opportunities and people on both a national and a regional basis. To this he has added his suggestions in his consultative document "Training for the Future" for a massive re-vamping of industrial training involving a much enhanced effort by the Government in providing training places, not least in the assisted areas.

The White Paper published today further develops these plans by new measures to assist employees who are willing to move their homes so that they can find satisfactory jobs. The Resettlement Transfer Scheme is to be made more attractive for workers who live in the assisted areas and move their homes to get new jobs. Also, improved payments will be available to people who have taken substantial courses of training under the Training Opportunities Scheme and have to move so that they can take advantage of their new skill. A new rehousing grant of £600 will be payable to married trainees instead of the previous grant of £100. A rehousing grant of £400 will also be available to workers with homes in the assisted areas who move to get new jobs, whether those jobs are inside or outside the assisted areas.

Fourth, development control. I.D.C. policy is possibly the most contentious of the tools available in shaping the pattern of industrial development in the country as a whole. Those in development areas argue for its more rigorous and intensive use; those in more naturally buoyant parts of the country see in it simply a means of holding them back without corresponding growth elsewhere. It is, however, an essential element of regional policy and we propose to maintain it, though with some important modifications.

The first principal change is that the requirement to obtain an industrial development certificate will be lifted altogether in the development and special development areas. I.D.C.s have been freely available in these areas for some time. The change will cut out unnecessary paperwork and will underline the importance we attach to development in these areas. An order giving effect to this decision will be laid before the House shortly.

Secondly, the Government have reviewed the size limits above which I.D.C.s are required in the rest of the country. The smaller the project the less likely it is to be mobile; and, of course, the smaller cases form the majority of the applications. Given this and the increased value of the new incentives, we have decided to raise the limits. The new limit in the South-East planning area will be 10,000 sq. ft., and the limit in the rest of the country, including the intermediate areas, will be 15,000 sq. ft. These changes will be particularly welcomed by small firms, whose needs were emphasised by the Bolton Committee's Report.

Finally, many representations have been made that the control inhibits modernisation. At present certificates are available for straightforward modernisation projects which do not involve any increase in employment. Wholesale relaxation here could damage the primary purpose of the I.D.C. system. On the other hand, given the need to modernise our whole industrial base, there is a case for some relaxation in suitable circumstances. We propose to adopt a more flexible attitude to applications concerned with modernisation wherever they arise. The effects of all these modifications in the I.D.C. control will be kept under review. In particular, I regard the new 15,000 sq.ft. limit as experimental.

My right hon. Friend the Secretary of State for the Environment will be complementing these changes by arranging for major industrial planning applications to be dealt with more quickly than heretofore.

Dr. John Gilbert (Dudley)

Do the Government intend to keep the present industrial development certificate policy after we have gone into the Common Market—if we go in?

Mr. Davies

Yes. I have said before, and I repeated today, that the Government regard the maintenance of an I.D.C. policy as essential to the pursuit of their regional policies.

Finally, I turn to selective assistance. I have never personally doubted that in regional policy terms a necessary counterpart to generalised incentives must be provision for a special effort to attract and sustain individual initiatives and projects which cannot, without help, receive full backing from private venture capital. Hitherto the framework for help has been provided by the Local Employment Act, with its strong employment link.

The Local Employment Act has undoubtedly proved a valuable and important instrument of regional regeneration, but its provisions do not adequately meet the broader needs of today. In particular, the nature of the Act generally limits the help which can be given to projects contributing to the modernisation of the regions. For these reasons, and in keeping with the general theme of certainty and simplicity, the building and operational grants made under that Act are being superseded by the development grants to which I have referred.

The arrangements under which Local Employment Act loans can be made will also be absorbed in a wider, more active regional effort in selective support as soon as the necessary legislation has received the approval of Parliament. In saying this, the last thing I have in mind is to denigrate the Acts and especially the conscientious and effective way in which they have been administered. In particular, I wish to pay a warm tribute to the Chairman and members of the Local Employment Act Financial Advisory Committee for the imaginative way in which their work has been handled and for the contribution they have made within the limits set by the Acts to regional policy generally.

But over and above regional issues there is a national problem of industrial regeneration, the need for which has become ever more evident. I have repeatedly said that there is no case at public expense for bailing out failure caused by ineptitude and incompetence, and I certainly have no intention of propping up incompetent managements who have contributed to their own downfall. Indeed, I have not done so—however much the Opposition may twist and turn in their endeavour to pin this on me. But I certainly am not nor ever have been an advocate of abandoning to their fate major sectors of British industry whose long-term success lies at the very heart of our industrial resurgence.

Both on the regional and on the national score there is a need for the means of action. I mean to provide the means and to equip it with the powers and resources to do the job. In a new and rapidly changing world—[Laughter.]. Hon. Members opposite may find that extraordinarily humorous but for me it is a matter of reality to which I have to address myself, as I hope they will. In a new and rapidly changing world industrial and commercial environment, the Government cannot stand aside when situations arise which industry and the financial institutions cannot meet alone. For example, the problems of the shipbuildingindustry—which I will discuss in greater detail later on—affect a number of regions and must be dealt with on a national basis.

We have therefore decided to take powers to help industry to modernise, adapt and rationalise to meet these new and changing circumstances. We have in mind especially the need to strengthen industry in preparation for entry to Europe. I detect a lack of enthusiasm among hon. Members opposite for that.

The Prime Minister will be nominating a new Minister for Industrial Development who will operate under my broad direction. He will take responsibility for private sector industry generally, with industrial development in the assisted areas a major part of his responsibilities. He will carry out his task in close association with the Secretary of State for the Environment and the Secretaries of State for Scotland and for Wales. He will be supported by an Under-Secretary of State.

The Minister will be in charge of an Industrial Development Executive headed at official level by an additional Permanent Secretary and a Director of Industrial Development who will rank as a Permanent Secretary. The former will be Mr. J. L. Rampton of my Department. For the latter the House will be glad to know that the I.C.F.C. has agreed to release on secondment Mr. L. V. D. Tindale, a director and general manager of the Corporation.

Mr. Dan Jones

I am pleased to hear that the shipbuilding industry will be in receipt of this special attention. May I bring to the right hon. Gentleman's attention and, through him, to the attention of the men he is nominating for this important task the significance of the aero-engine industry?

Mr. Davies

The aero-engine industry is already receiving the Government's attention, as is well known.

This Executive will include the divisions of my Department concerned with regional development and small firms, and the Department's regional offices. It will also be responsible for the new regional development grants. The divisions dealing with specific sectors of private industry are an essential part of the machinery for tackling regional industrial development as well as national growth and expansion and are also included in the new Executive. The Executive will be formally brought into being on 10th April.

Within the Executive a development unit will be set up. The unit will undertake studies of the problems affecting individual industries and major individual projects and will be available to help in appraising, negotiating, and monitoring particular projects. Its expertise will also be available to the Department of Trade and Industry generally. Our intention is that the unit should be compact, vigorous and strong. New staff will be recruited from the City and industry as necessary to ensure a full range of expertise.

The work of the Executive will be reinforced by a small but expert Industrial Development Board. I intend to appoint people experienced in industry, banking, accountancy and finance, and international industrial investment, with relations with Europe especially in mind. The board will advise generally on industrial problems and priorities and specific major cases for selective assistance. I am glad to announce that Mr. Gordon Richardson, Chairman of the Schroder Group and a member of the Court of the Bank of England, has accepted my invitation to become Chairman of the board.

Mr. Joel Barnett (Heywood and Royton)

What about the I.R.C.?

Mr. Davies

We will come to that. The new Executive is to have a regional organisation—I wish to stress this—developed from the existing regional offices of the Department. [Laughter.] This matter is not humorous; far from it. Hon. Members opposite, with grave faces, have consistently spoken to me day after day about the problems of regional policy. Here am I determinedly seeking to make an impact on the problem and there is an extraordinary and quite untoward degree of hilarity among hon. Members opposite.

In the assisted areas the regional arm of the Executive will have a positive rôle and the resources for encouraging industrial expansion and modernisation and in stimulating growth in particular areas. It will co-operate closely with local authorities and other bodies and agencies concerned with regional industrial development.

The existing regional economic planning councils and boards will continue in being; and the links between them and the new Executive at regional level will be strengthened so that regional industrial development will be fully integrated with land use and infrastructure planning. The regional offices of the new Executive in Scotland and Wales will work in the closest touch with the Scottish and Welsh Offices to ensure coordination of development policies, and similar arrangements will be made in the English regions with the regional offices of the Department of the Environment.

In Scotland and Wales, the Northern, the Yorkshire and Humberside, and North-West Regions, regional industrial directors will be appointed with similar functions at regional level to those of the director of industrial development at headquarters, with whom they will maintain the closest links. By this means the regional offices of the Executive will have direct accesss to the industrial and financial expertise of the development unit as well as to all the other services of my Department.

On the regions that I have mentioned, regional industrial development boards will be set up to advise on industrial opportunities and problems and in due course on applications for selective financial assistance. In Scotland and Wales appointments will be made in consultation with the Secretaries of State. Similar arrangements will be made for the South-West, and an industrial development office will be set up in Plymouth attached to the regional headquarters in Bristol.

There has been a continuing debate both about the need for and the circumstances in which selective assistance for industry might be introduced. Broadly, a consensus has been reached—for example in the evidence given by the C.B.I. and the T.U.C. and many distinguished industrialists to the Trade and Industry Sub-Committee—that in certain circumstances such assistance may be necessary and must certainly form an esential part of the attack on the problems of the regions.

But there is no similar agreement about the means by which this assistance should be provided. There are those that favour an independent agency as did the right hon. Member for Bristol, South-East (Mr. Benn). The House has debated, for example, the proposal put forward by the hon. Member for Stockton-on-Tees (Mr. William Rodgers), for a regional development corporation. The kind of body the hon. Member has in mind would have had a wide measure of independence for the way in which it spent public money.

For our part, we consider that there are clear advantages in locating this function within the Government. First, the functions of a body of this character are inevitably bound up with other activities of Government. Second, and we think conclusively, any new body to promote industrial development in the regions and elsewhere with substantial sums of public money available to it should be under the direct control of Ministers with appropriate accountability to Parliament—

Hon. Members

What about hiving-off?

Mr. Davies

The new Executive which I have described has been designed with these considerations in mind but to have the necessary flexibility to handle complex industrial problems in a speedy and effective manner.

Mr. Stanley R. McMaster (Belfast, East)

How will Northern Ireland fit into this new scheme, in view of the present unhappy circumstances there? Will the same type of assistance, through the Northern Ireland Government, be made available there to try to deal with Northern Ireland's problems?

Mr. Davies

Northern Ireland already has arrangements which to a large degree mirror those to which I am referring and has permanent access to advice to the degree it wishes from the Government here at Westminster on economic and social matters.

Dr. J. Dickson Mabon (Greenock)

Does the right hon. Gentleman realise that any feelings which he has about our response to this matter are reflected in the disillusion on his own side of the House? I ask that merely to put this question. In regard to the industrial development board which will apply in Scotland, what kind of budget—this matter was debated on the Regional Development Corporation Bill—will be allowed for in the first year? After all, this is a Budget debate. The Highlands and Islands Development Board had a budget of up to £2 million. What will the industrial development board in Scotland have for one year?

Mr. Davies

I am not yet ready to say; the hon. Gentleman will have to wait until the legislation comes forward, which will be soon. I have said that means, powers and resources will be available to these boards to carry out their tasks, and I mean that that will be so.

We in this country are fortunate to have an unrivalled variety of institutions providing essential financial services to industry and commerce, including the I.C.F.C. and F.C.I., which were set up to help the market meet the special needs of certain parts of industry. I must make clear that the powers to assist industry on a national basis which the Government intend to seek would not be used to supersede private sector sources of finance. It is only where those private sources alone cannot act to secure the survival or development of activities crucially affecting the national interest that the Executive could itself consider taking action; and even then a prime objective would be the attainment of early viability.

Last Wednesday the Governor of the Bank of England announced that discussions were to take place between the major institutional investors, the banks and the C.B.I., to develop more effective ways in which those institutions could collaborate with industrial managements to improve the direction and management of quoted companies. We welcome this important initiative, which perhaps foreshadows a major change in the approach and rôle of the institutions in their relations with industry. I welcome, too, the committee on the structure and practice of public companies set up by the C.B.I. Both of these steps should reinforce the action the Government are now proposing.

Mr. Edmund Dell (Birkenhead)

May I ask two questions? First, will this Industrial Development Executive be able to hold equity in the companies which it assists? Second, has the right hon. Gentleman given immediate instructions for the disposal of the assets of the I.R.C. to be stopped?

Mr. Davies

On the first question, the right hon. Gentleman must await the Bill. As for the disposal of the assets of the I.R.C, this has been discussed extensively in the House and there is nothing in what I am now suggesting which will in any way interfere with the decisions I have already announced to the House.

There are two industries in which I wish the new Executive to take an immediate interest. They are shipbuilding and machine tools. As far as shipbuilding is concerned, hon. Members will recall that in the debate on unemployment on 28th February I told the House that I recognised the danger of supporting a single group of yards—those involved in the Govan Shipbuilders project—when the difficulties faced by the industry were widespread. I said that I intended to look carefully at the situation of all our shipbuilding yards. But before I report the conclusions that the Government have reached I would like to say something about the immediate background to the Government's proposals.

Shipbuilding in the United Kingdom is faced with unprecedented financial problems. Inflation in recent years has meant that the many fixed-price contracts negotiated in a difficult market during the late sixties are now seen to be wholly unrealistic. In recent months a falling off in new orders—not confined to the United Kingdom Industry—has added to the industry's problems. Moreover, the shipbuilding industry has been operating in an international market where the terms of competition are frequently unfair.

The Government are determined to see a continuing rôle for shipbuilding in the United Kingdom. I am also sure that this industry must be fully competitive so that there is a real guarantee of stability to the thousands of workers directly and indirectly involved. Ninety per cent. of the employment in the merchant shipbuilding industry is situated in the development areas. As part of this effort, we must face up squarely to the problems involved in securing a major increase in productivity, and where necessary, better management.

It is vital in this context to develop the right policies for the longer term. We must face fundamental questions like the size and structure for the industry; how competitiveness can be firmly established; and the place of the industry in the E.E.C. and the world.

But the Government recognise an immediate need to safeguard employment and provide a period of stability. We have, therefore, decided to introduce a scheme of temporary financial assistance by means of tapering grants in respect of the construction and equipment in the period 1972–74 of new ships of over 100 gross tons. Ships for use by the Royal Navy or Government Departments will not be included in the scheme. The grants payable in respect of any ship and its equipment will be determined by reference to the contract price of the ship and the period of performance of the contract.

These grants will be at a rate of 10 per cent. on the contract value of work carried out in 1972, and at rates of 4 per cent. and 3 per cent. in 1973 and 1974 respectively. The cost of the scheme will depend upon the level of activity in the industry and the contract prices of ships under construction during the period 1972–74, but it is expected to be about £50 million in total. The necessary legislation and supplementary estimates will be introduced shortly.

The initial high rate of grant will provide for an early substantial injection of money into an industry which sorely needs it. The reduction to 4 per cent. in 1973 and 3 per cent. in 1974 in the rates of grant conforms with the new policy on shipbuilding aids now under consideration in the E.E.C. The character of the scheme meets the broad aims of the arrangements now being considered in O.E.C.D.

The Department of Employment intends to discuss with the shipbuilding industry the measures needed to bring about an improvement in industrial relations. We intend to seek assurances from individual companies that they are ready to co-operate fully with the Department of Employment in such discussions. We will also be seeking assurances from individual companies that they are prepared to co-operate equally fully in our appraisal of the longer-term prospects for the industry.

Mr. Anthony Wedgwood Benn (Bristol, South-East)

Is the £50 million scheme—I recognise that it depends on the amount of activity—over and above what has been estimated at £47 million for the four yards which formally comprised U.C.S.? Will Govan Shipbuilders, in addition to the £35 million which the company is to receive, be eligible for the 10 per cent. grant to which the right hon. Gentleman has referred?

Mr. Davies

As far as the Govan project is concerned, the amount of £35 million which I earlier mentioned is not to be treated in addition to the grants which I am now mentioning. In other words, these grants will, if provided, be deducted from the £35 million which will be available to Govan.

As for the Clydebank yard, the proposals put forward by the Marathon company are under consideration, but it is too early for me to quote figures.

Dr. Dickson Mabon

This matter is important not only for my constituents but for all who live in shipbuilding areas. There are two points about which the industry has made representations both to the right hon. Gentleman and to the Chancellor of the Exchequer. First, on the question of capital reconstruction, are we to take it that this is covered by the right hon. Gentleman's announcement about the Industrial Development Board and allied matters? Second, on the question of inflation insurance—this is vital in the selling of ships, particularly in relation to the Japanese—will there be a later statement in this context or are the Government turning down the representations that have been made to them?

Mr. Davies

The question of investment in the industry on a major basis is work which the Executive will be expected to carry out but which the Executive will do on the basis of a great deal of work that has already been actively pursued in the Department. We shall, therefore, be carrying on from there.

As for providing against inflationary tendencies in relation to shipbuilding orders, the arrangements which I have announced in terms of production grants are designed to meet problems of this sort. There will be no intention to find some other means of meeting inflationary effects on the industry.

The machine tool industry has suffered severely from the low level of investment by manufacturing industry in the past. Since mid-1970 falls in orders have led to significant redundancies and closures. There is a risk of a large proportion of its skilled manpower being lost. This could result in permanent damage to productive capacity in this vital industry.

The Government have therefore decided to assist the industry on the lines of a proposal made to it by the machine tool E.D.C. for additional and accelerated public sector purchasing. We are making arrangements which I hope and believe will result in the placing of orders to a value of between £9 million and £10 million within the next six months or so covering the Royal ordnance factories and dockyards, Government training establishments, British Railways, universities, polytechnics and further education colleges.

Additional grants of about £1 million will be made by the Department of Education and Science to universities in consultation with the University Grants Committee. In respect of the polytechnics and further education colleges the cost, estimated at between £4 million and £5 million, will be met by the Department of Trade and Industry outside the normal financial arrangements with local education authorities. Supplementary Estimates as necessary will be laid before the House in due course.

Mr. Stanley Orme (Salford, West)

Many hon. Members will welcome direct Government intervention into the machine tool industry, and the method of purchase is one which we have been pressing. When it comes to firms such as Alfred Herbert, will the Minister be prepared to consider taking steps if it rums into financial difficulty, which it could do, despite added aid?

Mr. Davies

Questions of that sort must be left to consideration in the light of events as they emerge.

I apologise for having spoken at such length—[Interruption.]—but I have been dealing with a subject of the utmost importance to every hon. Member in both his national and constituency rôle. I have, of course, been conscious of the many pressures there have been to expedite the results of the review of regional policies we have undertaken. I have been determined not to yield to those pressures by taking hasty decisions in an area of work which, by its very nature, calls for long-term and sustained measures.

The complex of decisions announced yesterday and today constitutes a comprehensive new approach to the persistent problems which successive Governments have faced. I add to that the hope that all who are concerned with the purposes involved will recognise the objectiveness and the absence of doctrinaire points of view—[Interruption.]—implicit in the policies I have outlined.

Hon. Gentlemen opposite are constantly asking for concerted attacks on regional policies, but they are curiously inept at recognising them when they see them. I hope they will recognise this for what it is—[HON. MEMBERS: "We do."]—which is a determined attack on the problems which successive Governments have faced but to which they have failed to find solutions.

Their full effectiveness will take time to realise. It cannot be otherwise. These are long-term measures, not interim palliatives. They need to be sustained and supported by all whose aim is to achieve that national equilibrium to which I have referred. I earnestly hope that both that support and that sustenance will be forthcoming.

5.38 p.m.

Mr. Jeremy Thorpe (Deven, North)

Well, well. We live in changing times. Nobody would accuse the right hon. Gentleman of being doctrinaire. Indeed, some would regard him as the poor man's Wedgwood Benn. Others might think him the best Socialist we have. Certainly the right hon. Gentleman is the Government's bicycle pump man. He goes around pressing air into every available bicycle tyre he can find anywhere in the country hoping that in the end something will result from his efforts.

We are particularly interested in the new Minister. This is intervention in private industry on the grand scale. We only need the right hon. Member for Wolverhampton, South-West (Mr. Powell) to be appointed to the job, the Land Commission to be brought back and the Post Office to be renationalised to provide more employment and we shall have Socialism in our time. I trust that we can rely on Her Majesty's Opposition to offer hope and encouragement to the private sector—[Interruption.]—because many of us regard a mixed economy as having attributes which we should perpetuate if we can.

I confess, though, that these new measures appear, if I may moderate my terms, to show a slight lack of confidence in all the measures which have gone before. If I were an unfair man—I should not wish to be thought one—I should say that it was a devastating self-indictment by the Government.

I cannot say that there was a sense of enthusiasm shared by all the Secretary of State's right hon. and hon. Friends sitting behind him, because they did not automatically accept the full package. However, they must realise that the right hon. Gentleman pre-digested it and they are still masticating it. Perhaps the fact that they are still thinking about those problems will give them greater sympathy for those who have to pay dental charges, because there will be many other Conservatives throughout the country who will be using their teeth for that purpose. Therefore, no one will accuse the Secretary of State of being a doctrinaire Conservative. I assure him of that, and I believe that in saying that I can speak on behalf of the whole House, something I rarely presume to do.

I congratulate the Chancellor of the Exchequer on the clear exposition of his speech—not least, the clear exposition of negative income tax. I noted that at the beginning of his broadcast last night he had as his backprop a picture of Mr. Gladstone. I have noticed over the years what an incredible fascination the Tory Party has for worshipping others' ancestors. I hope that the Chancellor, for whom I have a high personal regard, will not think me offensive when I say that do not regard him as exactly a chip off one of the Hawarden oaks. I do not think that he is exactly cast in the Gladstonian rôle, although he may have implied it in his broadcast yesterday. I must say, for a start, that Gladstone would never have allowed us to have got into this mess in the first place.

So much for my ancestors and for my gratitude to the Chancellor for his respect for them.

It is ironic that the three matters proposed by the Chancellor on which I find myself in the greatest agreement are, first, the reintroduction of investment grants—a policy that the Conservative Government rejected after introduction by the Labour Party—and two other matters which have been for long advocated by the Liberal Party, namely, the concept of a negative income tax, which is one of the fairest ways of giving social security benefits without the necessity of the 44 different means tests we have at the moment, and also the inheritance tax.

I find much attractive in the concept of an inheritance tax as opposed to the normal death duty system, because this is a way in which to spread wealth. But I agree with the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) that gifts inter vivos must be brought within the consideration of this matter if it is to be meaningful.

We must realise what the Budget seeks to do. We face the fact of entry into the Common Market, where we shall face formidable competition—formidable competition in an economy which has, in my view wrongly, been traditionally protectionist, and increasingly protectionist, over the last 30 years. I say that as one who may be known to have evinced enthusiasm for going into Europe. We do it at a time when, as the right hon. Gentleman himself said, we have a very low growth rate, a frighteningly low level of investment and very heavy unemployment. The test of this Budget is not the euphoria which it may give to right hon. and hon. Members on the Government side, but what effect it has in curing these three economic maladies.

The first and most welcome reference which I heard in the right hon. Gentleman's speech was that relating to exchange rates and the danger of having unrealistic exchange rates. It is perfectly true that the stop-go policies Britain has had since the war have been largely dictated by the priority which Governments of the day attached to maintaining the exchange rates of the pound. As the right hon. Member for Stechford said, it makes a nonsense of the Conservative Party regarding devaluation as the proof of abject failure in the management of the economy.

I believe that we should regard exchange rates as far less of a virility symbol than they have been in the past. The logic of this is that we should have flexible exchange rates and that we do not go back, as the Chancellor will be advised to do by Treasury officials and the Bank of England—they will both be wrong—to fixed ones. Nothing would be more debilitating and nothing would contribute more to lack of confidence, confidence being the first thing we must get if investment is to be built up.

There is certainly no lack of credit available for persons wishing to invest. We need to alter the expectations of people in industry—the expectations that over a three, four or five-year period it will be worthwhile investing. We must realise that the lead time—that is, the time factor between the authorisation of investment and when the products come off the production line—is increasingly lengthening.

That is why management concentrates very much on the prospects of three to five years ahead when making its decisions about investment. That is why management must feel that it can have confidence, not for one year but for three, four or five years, that there will not be sudden changes in taxation, sudden restrictions on credit, and that stop-go will be back with us again.

I was pleased that the right hon. Gentleman referred to the machine tool industry, which is a barometer. What I think is very alarming at present is that the Olympia exhibition, which is normally heavily subscribed by people who wish to display their wares, has space available. There are firms which have paid their one-third deposit for their stand but which have not got the money to make up the balance. There are firms which are withdrawing from this exhibition of machine tools. What we might consider is that exhibitions of this sort which are related to exports get generous Government assistance if they are held, for example, in Brussels or in Calais but, comparatively speaking, no Government assistance if they are held in Britain.

Turning to the question of the development areas, I agree with the right hon. Gentleman that what is even more important than the differentials and the incentives is the general climate of confidence. Two things must be done—first, to see that we have flexible exchange rates and, second, that we have an economic climate which will not be subject to violent fluctuations.

Having said that, there is no doubt that differentials are of importance. Were they not, we should not have had three successive different Governments introducing them and varying them from time to time. A very interesting article in the Financial Times by Mr. John Trafford in November, 1971, showed that the disparity between the incentives in development areas and special development areas compared with the non-development areas was probably smaller in Britain than in any other leading Western European country—in other words, the incentive to go to a development and a special development area is much less in Britain than amongst many, if not most, of our Western European competitors.

I welcome the 100 per cent. free depreciation allowance but, whatever the Chancellor says, it devalues the differential between the non-development areas and the development and the special development areas. Although of course I welcome the assistance to development areas as opposed to special development areas, I believe that a differential of only 2 per cent. will cause increased difficulties for the special development areas. There fore, although I am delighted to hear that the industrial development certificate policy is to continue, the raising of the levels to which the right hon. Gentleman referred is very retrogressive. I hope we shall hear something about office development permission, which I believe again was a retrogressive move.

I further think that we must step up public expenditure. Here again I agree with the right hon. Member for Stechford. Public expenditure in development and special development areas can make investment in those areas much more attractive. I do not merely mean better roads; I mean making development areas pleasanter places to live in. That is very important.

If we are to have incentives equivalent to those of our European partners in the development and special development areas we shall either have to retain the R.E.P. or at least a variant of it—I accept that we cannot keep it in its present form—or we shall have to consider a regional payroll tax, with the special development areas and development areas totally exempt. I do not believe the present incentives will be sufficient to do the job.

Of course, I welcome the fact that we now have an annual review of pensions, and I welcome the 12½ per cent. increase. But in the cold light of the morning it will not look quite as generous as yesterday's euphoria would suggest. I do not believe we shall ever get equity in pensions until they are linked to average industrial earnings, which my colleagues and I have long advocated. To express pensions as a percentage of average industrial earnings is the only guarantee that pensioners will not be left behind in the queue.

There was reference to the family income supplement, of which there has been a very low uptake so far. There is a band of people who are paying tax and do not qualify for F.I.S. but are amongst the very poor. There is a large slice of the population for whom the Budget does nothing very much to help and others for whom it does nothing at all. Of course I welcome the raising of the threshold, which is an extremely good move, and the increased personal allowances, but they are an incredibly blunt instrument. I accept that it must be a blunt instrument, according to the Chancellor, because of coding problems for the Inland Revenue. But the fact that an 18-year-old living at home with his parents receives precisely the same personal allowance as a married man with a non-employed wife, three children and possibly a mortgage makes it seem a blunt instrument.

It is the lowest-paid for whom there has been no relief in the Budget. The only cry from the Government side is "F.I.S.". But that has very great drawbacks. My colleagues and I have been campaigning for the past month or so to show the problems of the low-paid workers, people in agriculture, council employees, shop workers, people in catering and the nursing professions, and outworkers in industry. We have come up with some horrifying examples of the underpaid, the low-paid: men earning only £10–£11 for a full week washing up in an extremely well-known restaurant, not in this case in London; girls working long hours and earning only £8–£9 a week; secretaries with low earnings. We came across a case the other day in County Durham of a secretary earning £11 a week. These are the people who are not helped by the Budget, the people whom we must assist if we are to achieve equity. If we had guaranteed minimum national earnings, the Chancellor would be in a strong position to resist what he rightly decribes as inflationary wage claims. I do not believe that the Budget helps the people whom I have described.

The tax credit is a refinement of and, from what I can see of it, an improvement on the concept of the negative income tax. It is welcome, but ironically the mere fact that the Chancellor has canvassed it underlines the problem of the low-paid. It accentuates and not only admits the problem but draws it to our attention. I hope we can phase out many of the means tests. How many cases are there of the married man who by earning £2 a week more then loses £2 a week in various benefits he receives, so that he is not better of at the end of the day? If we can see that allowances are given not only to those paying tax but those who do not, in terms of a cash payment, we shall build up a more humane and equitable society.

I welcome the Government's initiative on this. The Select Committee is the wholly right body to consider it. The way in which the Chancellor has consulted Select Committees is making admirable use of the House. This is the sort of rôle we should be discharging, and the fact that occasionally the Chancellor even takes account of what a Select Committee has said is immensely flattering and a very unusual experience for the House.

On inheritance, I do not go along with the right hon. Gentleman. I wish to see wealth spread. I believe that if the incidence of death duties payable is lower on those estates which are spread as opposed to those which are concentrated, it is a painless way of encouraging people to spread wealth.

The provision on unit trusts is a good move. I am not quite so certain about share options because the provision is far too restricted, being for middle and top management. I wish to see a far wider ownership of shares, right down to the factory floor.

The opposition to V.A.T. from the right hon. Member for Stechford had all the ring of conviction of a man who one might have thought had always been opposed to all the fiscal innovations in the Common Market. It was as interesting a departure from certain previously held beliefs as we heard in another speech in the course of this debate.

The Government have probably got their V.A.T. zero rating and exemptions right. But we must see that companies do not get round the £5,000 turnover limit by forming associated companies or having a holding company. This is probably a Committee point. I am sure the Financial Secretary will be able to tie a very tight knot to prevent that.

Whilst I perennially operate as many overdrafts as I am allowed to, I do not see why the taxpayer should have to give me a tax benefit for so doing. When the Labour Government ended the tax remissions on overdrafts, although I realised that it would not be exactly helpful to me, I welcomed it. The Chancellor's decision is retrogressive; it is the sort of measure that is not necessary to stimulate the economy and is not helpful for a Government who want to achieve a national incomes policy and control inflationary wage claims, and who claim that they are holding the balance fairly between all sides of the community.

The provision on charities is to be welcomed. It seems ironic now that we are encouraging people to give to charities, quite rightly, whilst charging others to go and look at them. But that was in the Government's doctrinaire Conservative period. Now we are moving into their new philosophy.

We shall not get on top of inflation, we shall not solve the problem of the wage inflation spiral, until we look after the low-paid, until we have guaranteed minimum earnings. I do not believe we shall get investment until there is real confidence and the Government prove that they will not change their policies year in and year out. I know that the Chancellor intends that that shall not happen. The fact remains that it has.

I hope that the Chancellor will achieve his growth of 5 per cent. I think that somewhat optimistic but I hope I am proved wrong. We should realise, however, that if the Budget and the management of the economy restore confidence and lead to an increase in investment and production and a lowering of the unemployment rate, that is not leading the country into the promised land but merely enabling it to catch up with its competitors after a very sluggish performance ever since the war. If we can do that, at least we shall have made up for many wasted years and we shall have learned some lessons. If we can do that we can compete in Europe and take advantage of entry into the E.E.C.

But let us not think in the euphoria of the Budget that it is some wonderful sleight of hand. It is the Budget of a Government who face the problems of unemployment, low production and low growth, who are rightly worried and concerned and who are now prepared to try anything to reverse the process. This is a Government who realise that, unless they can achieve it, the competition which will face this country in the Common Market will be perhaps the fiercest challenge economically that it will ever have to face.

6.0 p.m.

Mr. Christopher Tugendhat (Cities of London and Westminster)

On one point at least in the speech of the Leader of the Liberal Party I find myself in agreement. If the Budget achieves its targets, if we get 5 per cent. growth and all the various other things which we hope will happen as a result of the Budget, it will not take us to the promised land but will simply enable us to catch up with people who have been forging ahead of us for far too long. The fact that we feel excited—and I think that everyone feels excited, on this point at least—at the prospect or opportunity of a 5 per cent. growth—is in itself a symbol of how far we have fallen behind. This is a rate of growth which in many other countries is taken as a matter of course; in some it is not even regarded as very good. The fact that we regard it as something which may be at last within our grasp, but which will in itself need great efforts, is symbolic, much as I would like to see such a growth achieved.

Before dealing with the question of economic management, I want to turn first to one particular aspect of the Budget. Although the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) congratulated the Chancellor on the innovations which the Budget includes, it is right to say more about them. Last year's Budget and this one are two very important reforming Budgets. The taxation changes they have initiated and foreshadowed, although not necessarily introduced, represent a considerable number of reforms. We have seen changes in direct taxation and in company taxation, the value-added tax, and now the inheritance tax and negative income tax ideas. Taken together, these represent the largest package of reforms for a very long time.

The right hon. Member for Devon, North (Mr. Thorpe) talked about Mr. Gladstone. I do not know that one need go back as far as that, but one nevertheless must go a long way back to find a Chancellor whose reforms were as substantial as those which have been introduced by my right hon. Friend. On this point the House can unite in congratulating him.

Almost as important, or perhaps even equally important, is not just the changes themselves but the manner in which they have been conducted, with Green Papers and public discussion. Without any desire to resurrect old squabbles, one can contrast this system of taxation reforms with that of the Labour Government, whose reforms were introduced without sufficient consultation and perhaps in a rather hurried and unprepared state. The manner in which this Government's taxation changes have been introduced represents in itself a considerable reform and one which I hope will be followed by Governments of all parties, should the Conservative Party be unfortunate enough ever to lose office.

I also congratulate my right hon. Friend on the extent to which he has continued to fulfil important election pledges. I am thinking particularly of the help for small companies, of the allowance of interest against tax, of the help for unit and investment trusts, of the initiatives on share options and of the lifting of the death duty threshold. I realise that these, unfortunately, do not command universal approbation, but they were important promises made when we were in opposition and they represent an important strand in our thinking. They have a social impact, and they make it easier for a great many people to save and acquire capital out of income, which at the moment is extremely difficult to do, and they encourage people to set up and run small businesses.

We believe—as do many people who are not ordinarily Conservative voters—that it is right to encourage people to save out of income and try to establish an independent financial and economic position. Far too many people find that they are dependent on very large organisations, whether privately owned or State enterprises, and the opportunity that the Budget provides for people to establish the kind of self-reliant economic position which we have always supported is most important. We all realise the need for large enterprises, whether State or privately owned, but it is desirable that people should have the opportunity to build up businesses of their own, to be able to pass them on to their children and to be able to run them in an efficient fashion.

I realise, of course, that much poverty remains. I feel that this is not a party point. No one who represents a large urban constituency in any part of the country can be under any illusion about the pockets of poverty to be found in our great cities. I feel that the manner of the tax reliefs is designed to achieve some progress in this regard. I am pleased that, instead of cutting the basic rate, my right hon. Friend has raised the threshold and that the ideas put forward in the value-added tax proposals are designed to ensure that it bears as lightly as possible upon the section of the community least able to pay.

I think, too, that the Government's pension record, although one always wants to do better, bears comparison with that of any Government since—to take another Liberal forebear—David Lloyd George conducted his initial reforms before the First World War. But, of course, pensioners and the people suffering from the worst forms of poverty are also those worst hit by inflation, and it is inflation which has done the greatest harm to their position in the last few years. This brings me to my main point about the Budget's economic management.

There is no doubt that my right hon. Friend has taken a considerable risk about inflation. Everything is, in effect, being subordinated to growth. I am sure that the great majority of people share my view that my right hon. Friend was right to make this choice. With 1 million unemployed and the enormous spare capacity that we have, with entry into the E.E.C. before us, no one could have forgiven him if he had not put growth as the principal of his priorities, but the fact remains that we are running serious risks over inflation and it would be wrong to ignore them.

We must recognise that if the Budget strategy does not succeed, the inflationary risks we have run will remain as real as they are now, and we shall run into very serious difficulties in that event. The important question is whether the Budget will work. Shall we get 5 per cent. growth? Will unemployment come down? Will regional problems be eased?

When my right hon. Friend sat down yesterday, I was not happy with the outlook in the regions. There were aspects of what he had said about them which made me unhappy. In particular, I feel that the extension of the intermediate areas may well not be a wise idea. I realise that it is agreeable for the constituencies included in it, but the wider one extends these investment incentives the harder it is to get companies to go to the points where they are actually needed. This is a serious fact. A great deal of the country already is a development area of one sort or another, and this tends to mean that one is often paying companies to do what they would have done anyway, and it does not necessarily mean that one is getting them to go to the places where they are needed.

So much has happened since my right hon. Friend sat down yesterday with regard to regional policy, however, that it is difficult at this stage to produce a completely well thought out resumé of what one feels about it. The arrangements are certainly most interesting, and, speaking as the Member for the City of London as well as for the City of Westminster, I know that the gentlemen whom the Secretary of State has been so fortunate to secure to help him in his plans are people of the highest possible calibre, and we should all be pleased to see them entering the service of the State in this sector.

I am delighted, too, that the Government are setting up a structure which will be subordinate to Parliament. I always felt that one of the weaknesses of the Industrial Reorganisation Corporation was that it had a great amount of money at its disposal without being answerable to Parliament for what it did with it. Regardless of the type of structure established, and I am sure that we shall have more debate on that later, it is of the utmost importance that the expenditure and the policies followed should be open to questioning here.

Mr. Robert Sheldon (Ashton-under-Lyne)

Is that not a small point, the much more important one being what has happened since the I.R.C. was disbanded, which is that the splendid staff team has been broken up? We shall have to recreate those whose services we wantonly threw away.

Mr. Tugendhat

I hope the hon. Gentleman will forgive me if I do not go into great detail on that point. I knew many of those who worked for the I.R.C. Such people were in large part young men who saw this as a temporary job. They came in from the Financial Times, banking and industry. They decided to spend a short time there and then moved on to highly-paid jobs in the City and industry. Some of them have risen very high. It is wrong to talk about breaking up the staff in this way, because had the I.R.C. remained in existence, and it had some important disadvantages, I very much doubt whether many of the people in it at the time the Labour Government went out of office would still be in it now.

Mr. Tam Dalyell (West Lothian)

The hon. Gentleman has a long and genuine interest in the problems of the regions. Could he talk to some of his constituents about the borrowing powers of the nationalised industries, because nothing has been said by the Secretary of State about the constrictions under which, for example, the generating boards arc working? The generating boards, following the Vinter Committee, should make up their minds on investment decisions and be given the capital without which they cannot modernise.

Mr. Tugendhat

I feel I am being led astray, away from my main theme. I have always felt, and I am delighted that the hon. Member should share this view, that it would be right to allow the nationalised industries to go to the market for capital. Since he mentions the electricity industry, I know that Sir Ronald Edwards felt that, too, when he was chairman of the Electricity Council. On the whole, my constituents are always prepared to lend money for commercially viable propositions, and I have no doubt they would be prepared to do so for the nationalised industries. That is something of a diversion, and I would like to return to the regions for a minute.

I have mentioned one doubt that I had about the Chancellor's policy. My other doubt concerned the emphasis on investment rather than jobs. I appreciate that we do not want to persuade a lot of people to work in old-fashioned industries of 19th century rather than 20th century vintage producing no reasonable return. We have no desire to make work simply to provide jobs to no purpose. The real need in the regions is for commercial employment. If we look at the requirements of the regions it can be seen that it is necessary to think not only of encouraging companies to spend but of encouraging them to spend in such a way as will create employment.

For instance, there is little point in giving an enormous investment grant and capital allowance and goodness knows what else to a chemical company which will spend hundreds of millions of £s—as happens in these areas—to build a plant which provides employment for about 70 people. This is an aspect of regional policy about which we should think seriously.

We must not allow ourselves to think only of Government measures. We must also think about the position of trade unions. I know that hon. Members opposite may feel that I am making a party point.

Mr. Gwynoro Jones (Carmarthen)

Why not?

Mr. Tugendhat

Why not, indeed? Hon. Members opposite may feel it is a partisan point without substance, but I hope that my partisan points have substance. My experience of industry and industrialists to whom I have spoken is that the labour troubles in some regions are a serious disincentive to investment.

Mr. John Mendelson (Penistone)

indicated dissent.

Mr. Tugendhat

I see the hon. Member for Penistone (Mr. John Mendelson) shaking his head. It may well be that some companies overdo the labour problems in the regions and exaggerate things, but I must tell him, reporting the many conversations that I have had with industrialists, British and foreign, that they are extremely disturbed by what they believe to be the level of labour unrest in certain parts of the country. It is too high, and this is an important disincentive to investment. I have found that industrialists believe that the attitude of trade unions in parts of the country is a serious problem which discourages them, and I fear there is no gainsaying that fact.

Mr. John Mendelson

I have yet to meet a single major industrialist in South Yorkshire, in my own area in particular, who has even mentioned that as being one of the reasons for lack of investment. Most are convinced that they can reach arrangements with their work-people. What they all say is that as long as they have no expectation of being able to sell their goods they will not invest. If the hon. Gentleman looks at the Stock Exchange developments after the so-called boom this morning, he will see that by 12.30 p.m. those whom he represents took the same view as that which I am expressing.

Mr. Tugendhat

Most of the people on the Stock Exchange do not live in my constituency. They only come in to work. I do not know whether they had that point in mind. I agree that the opportunity to sell is critical, but I maintain that labour unrest is a serious problem.

The other problem I have found industrialists, British and foreign, dwelling upon is the growing demand by trade unions for parity of pay as between the Midlands and the South-East on the one hand and the regions on the other. I know the arguments from the union side on this score, and I do not wish to engage in an argument on that. All my experience leads me to believe that companies feel that if they have to pay the same amount of money in Scotland as they pay in Birmingham or Dagenham or other places in the South-East it is not worth undertaking the other considerable economic and commercial disadvantages involved in entering a development area. The unions are not doing their members a service in the long run by demanding parity of pay when in many ways the cost of living and housing and other costs are lower in the regions. I feel that this is a serious factor in deterring investors from going to the regions.

As for the growth target of 5 per cent., I am sure the Chancellor would not take it as a sign of disrespect if I say that hon. Members and people outside have learned to be chary of Treasury forecasts. If one backed Treasury forecasts one would not have had a terribly good track record in recent years. Larger reflationary boosts are needed to secure given increases in output than was at one time the case. It is difficult for economists, whether in the Treasury or elsewhere, to know precisely how much to pump into the economy at any given time. In the time that has elapsed since the Chancellor sat down yesterday I have been fortunate enough to speak to a number of leading industrialists and financial personalities, and I have not found them as optimistic about the prospects of achieving 5 per cent. growth as I would have hoped. Notwithstanding their doubts, I feel fairly optimistic. For one reason the Chancellor can always do a bit more later on if this proves to be necessary.

Apart from that, I feel more optimistic than some industrialists and some people in the financial community. In large part industry has been given what it wanted in terms of free depreciation, and if the C.B.I.'s advice on anything means anything at all, then the persistent and consistent advice that we have had from it on free depreciation must now lead to some increase in investment by industry. If on this matter, to which industry has devoted so much time and trouble in the past nothing results, it will be a great disappointment to us all and cast serious doubt on almost any form of surveying that there may be; almost as big a surprise as the General Election result in view of the opinion polls.

Another thing that we have which is important is the relaxation of the restrictions governing inward investment in this country by foreign companies. This country has an unrivalled opportunity to attract investment from Common Market countries. Generally the big continental companies have invested far less here than the big British companies have invested on the Continent, and the relaxation of restrictions on inward investment may prove to be much more important than some commentators in the newspapers this morning realise. I think that in the long run this may turn out to be quite a significant feature of the Budget.

Although I am optimistic about the 5 per cent. growth and think that we may reach it, I do not at this stage think that it is possible to be very optimistic about the outlook for unemployment. I have no doubt that unemployment will come down, but the shake-out of labour that has taken place in recent years is a deep-seated phenomenon and the increase in productivity that we are seeing in British industry now is also a significant and striking feature of the industrial scene.

There are industrialists who believe that productivity is increasing by 5 per cent. a year. If that is the case, one can draw one's own conclusions about the results of a 5 per cent. growth rate. It will not lead to a particularly striking decline in unemployment. I hope that we shall see the level fall below 850,000 before Christmas. I shall be surprised if it is below 800,000, though I hope that it will be. I do not blame the Chancellor for not doing more. We have seen that he has taken grave risks on the reflationary front. Had he pumped more money into the economy it might have been too much. We are like a drug addict who needs constantly larger fixes to achieve euphoria, until the point is reached when the size of the fix needed to bring about euphoria might be the size that kills him. We are reaching that point in this country with reflationary boosts to the economy.

One obvious point which arises from the Budget is how industry and the trade unions will react in terms of prices and incomes. Industry has been given what it wanted. It has been given free depreciation and unrivalled investment incentives in the development areas. It has been given a desirable form of corporation tax. Almost everything that industry could have asked for from the Government has been granted.

Much the same applies to the trade unions, though I dare say they will not be so generous as to admit it. The Government have gone for growth, as the T.U.C. requested. They have taken steps to cut the cost of living. They have provided a fiscal pay increase to every taxpayer. The time has come, as the Chancellor said yesterday, when the country will not be patient with those who try to put their sectional interests before the national interest. More important, the time has come for unions and employers alike to recognise that no Government economic strategy can succeed without their co-operation, and I hope that this co-operation in the form of both price and wage restraint will be forthcoming now that the Chancellor has established a framework in which the just demands of almost every section of our economy that is concerned in this matter have been met.

Several Hon. Members rose—

Mr. Speaker

Order. The debate has continued for rather more than two and a quarter hours and there have been four speeches. I have a long list of hon. Members who want to catch my eye. I hope that those who are called will have some regard to the time factor.

6.24 p.m.

Mr. Gwynoro Jones (Carmarthen)

As a Welshman I shall endeavour to follow your suggestion, Mr. Speaker.

It is interesting to note that the hon. Member for the Cities of London and Westminster (Mr. Tugendhat), in what was a basically sound, logical and cautious speech, reminded his right hon. Friend the Chancellor of the Exchequer and his Front Bench team that they must not be over-optimistic about unemployment and inflation. It is significant that at no stage did the hon. Gentleman give credit to the Chancellor of the Exchequer and the Secretary of State for Trade and Industry for changing their minds and acknowledging that, having assessed the situation and having found that, after all, the basic regional policies pursued by the previous Government were right, they decided to go along with them. Listening to the Chancellor of the Exchequer yesterday and to the Secretary of State for Trade and Industry today, everyone on this side of the House was waiting for an announcement even of a national plan. Perhaps the Minister who winds up the debate will announce it this evening.

This Budget is essentially a Budget born out of failure. It is a Budget which is born of a vastly different course from that which the Government set out upon. On 27th October, 1970, the Chancellor announced cuts in public expenditure and the abolition of investment grants. He also announced the abandonment of the cost benefit study into regional incentives and into whether allowances were better than grants. The right hon. Gentleman also announced at a later stage an increase in the cost of school meals and the fact that school milk was no longer to be supplied free to children of seven and over. All that was to save a mere £9 million. Yesterday it was the same right hon. Gentleman who has now announced a major change in regional policy, and no words from this side of the House can match the condemnation which the Secretary of State for Trade and Industry made of his own policy in the last two years. That condemnation is strengthened by the fact that the thousands of workers in the regions who are now unemployed need never have been out of work. Jobs have been put at risk, factories have been closed, investment plans have been abandoned and massive redundancies have been announced.

In Wales alone in 1971 20,000 jobs were lost, affecting scores of firms. In my own county, 27 firms announced more than 2,000 redundancies. Often the lack of investment grants was given as the major reason. Sir Val Duncan, the Chairman of Rio Tinto Zinc, who set up a factory in Anglesey and created 900 jobs, said about nine months ago that if it were not for the investment grants he would not have gone there.

The Chairman of the National Coal Board in announcing the abandonment of a multi-heat plant at Abernant which would have provided 600 jobs, said that the sole reason for the change was the abandonment of investment grants. I recall the Association of Rhondda Industries writing to the Secretary of State for Trade and Industry and saying categorically that the removal of investment grants would hit small firms which were not making a profit and which were dependent on direct cash incentives in the first few years of their operation.

Over the last two years numerous warnings have been handed to the Government. The Government inherited a regional policy which was basically sound. It was not perfect, but it was a policy born not of 1964 but of 1967, and even hon. Members on this side of the House tend to disregard that. In three or four years investment grants and development area policy did not match the number of jobs being lost. Far more jobs were lost in Wales than were created. In six years 60,000 jobs were lost while 42,000 new jobs in manufacturing industry were created.

Let us compare the number of jobs being lost in that period with the jobs lost during the last two years. In that six-year period 30,000 jobs were lost in mining and quarrying inhales. That was vastly different from what we have experienced during the last two years. Of the 21,000 redundancies in Wales in the last year only 130 were in the mining industry. The vast majority were in mechanical and electrical engineering and in aerospace, modern industries for which the previous Government provided factories in Wales.

The hon. Member for the Cities of London and Westminster was considering the possible disadvantage of having the same basic wage level in various regions of the country, but the facts tend to disprove what he was saying. In the five years from 1965 200 new firms came to the Principality as a result of the regional development policy then operating. The inheritance left for the Conservatives after the 1970 General Election, although not perfect, was basically sound. It was based on investment grants and direct cash incentives. But the Conservatives came to power with a commitment to review the whole situation and to carry out their own thorough-going study. They stated this in their manifesto. We have had no thorough-going study. Grants were abolished before any sort of study was conducted. We were told that allowances would answer the problems of the regions. On further examination the Government stand condemned. Hon. Members on the Government side might find it difficult to pursue this point, but it must be hammered home. A change of policy after two years in power has wrought endless havoc in the regions.

An I.D.C. policy which increases the limit to 15,000 sq. ft. of factory space will cause damage. In reality the figure will be almost 30,000 sq. ft., because if a manufacturing company does not need I.D.C. approval on a factory of 14,999 sq. ft. and it can apply later for a further 15,000 sq. ft. extension it will eventually have premises the size of an advance factory in a development area.

In 1968 more than 16,000 new jobs were created in Wales. In 1969 the figure was 16,700; in 1970 14,650; and in 1971, it was 5,600. I trust that when the Minister replies tonight he will tell us quite clearly how investment allowances have helped Wales to secure more jobs since June, 1970. If hon. Members are not persuaded by the figures showing the number of jobs created let me explain the situation in terms of I.D.C. approvals for industrial building. In 1968 8.1 million sq. ft. of industrial building was approved. In 1969 the figure was 7.6 million sq. ft.; in 1970, 8 million sq. ft.; and in 1971, 2.9 million sq. ft. It is no wonder we have had a major change of policy by the Secretary of State for Trade and Industry and also a major admission that what the Government have sought to do over the last two years has failed to meet the needs of the regions.

The Chancellor's chide to the unions saying how wages are ultimately to blame for unemployment, redundancies and all the problems facing this country is by now famous. But what he said was not true, and I call in aid the Prime Minister when he was Leader of the Opposition. On Thames Television on 30th April, 1970, two months before the General Election, when the opinion polls were going against him and every vote, trade union or not, actually mattered, he was asked if he thought the unions were to blame for the price spiral, which was then only 6 per cent. He told the interviewer: I think you are being unfair to the unions and to the workers in saying that this price explosion is due to a wage explosion. He was quite right. The C.B.I. in Wales carried out a survey before the 1971 Budget of 194 manufacturing firms, asking them for the basic reasons for the fall-off in demand and for the abandon- ment of investment programmes. I quote from the Western Mail of that period: Somewhat surprisingly, the survey fails to confirm the view expressed by the C.B.I. itself and others that rising wages and labour disputes are major factors affecting industry's willingness to invest. These two factors are at the bottom of the list of reasons singled out by firms in their replies as reasons for not going ahead with projects. I am sure the C.B.I. in Wales does not tend to support the Labour Party but I am prepared to accept the results of its survey.

There is a further point on the alleged connection between high unemployment and high wages and on the suggestion that the wage explosion caused high unemployment. Perhaps someone on the Government side will address himself to this. Areas of high unemployment are not areas of high wages. Why is it that areas like West Wales and South Wales have unemployment well above the national average but wages well below the national average? Where is the connection? It is high time hon. Members opposite, if they want to prove their case, gave us the answer. Which firms in which part of the country and how many of them have actually said that wages have been a direct cause of the problem? The opposite has been the case.

The Budget contained an acceptance that the regional policies inherited by the Conservatives in 1970 were basically sound because in essence we are returning to that sort of situation. The grants are not as high but there is an extension of the areas. It has been difficult in parts of West Wales and in Carmarthen to get industry to establish itself there even with the lavish grants provided under the Labour Government. They amounted to £1 million a week, and still industry was loth to come to these areas. The reasons were bad communications, remoteness from the market and many other things. But if the areas which qualify for assistance are to be widened, as they are in Wales—and the hon. Member for Flint, West (Sir A. Meyer) will be delighted at the news—those parts which found it difficult before will find it even more difficult now.

There are parts of the Budget which deserve support. It is easy for us to say that pensions should have been increased even more. But it would be churlish of us not to welcome what has been done. Nevertheless they have not received the sort of priority treatment they deserve. This was the basic minimum which the Government should have accepted as a starting point, to be increased during the course of the Budget consultations.

The Chancellor has given a £1 a week wage increase in the form of the income tax reduction, but within a few months that £1 will be worthless than half what it is today. Rents are supposed to increase by £1 a week, although it might not be £1 a week to all families. It might be 50p for more than half the families in this country.

One is not talking of a major change with a direct cash increase of £1 for ever more. This is ephemeral, short-term action. I congratulate the Secretary of State for Trade and Industry on his change of mind. Lame ducks are now to be made respectable and investment grants are to be introduced. We knew two years ago that investment grants were worth pursuing. The Government stand condemned in that it has taken them two years and an unemployment figure of 1 million to accept that the basic policy of the Labour Government was right. Why did the Government condemn thousands of workers who were in jobs in Wales in 1970 to dole queues and redundancy payments? They are now saying that they are sorry that these chaps have been on the dole for nine months, all is forgiven and they will start afresh.

The Prime Minister's "at a stroke" has been one of the longest strokes in history. When the time comes for the Government to go to the country they will not be forgiven for their irresponsibility to the regions and for taking no account of the economic situation. The sooner the Chancellor admits this the better. We are still not convinced that he has any grasp of the situation. He has no idea what unemployment will be in a year's time. Can he imagine the day when under this Government unemployment will come down to the ridiculously high level of 600,000, which was what it was under the Labour Government?

This is a Budget born out of chaos and failure. It is an admission by the Chancellor and the Secretary of State for Trade and Industry that in the last two years they have not only been wasting their time but have caused havoc and hardship to far too many people.

6.42 p.m.

Mr. Peter Hordern (Horsham)

The hon. Member for Carmarthen (Mr. Gwynoro Jones) has spoken strongly about unemployment in his constituency and in Wales. The right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) also spoke forcefully about unemployment, saying that the Government had a record of unmitigated failure. His peroration was very strong. For a right hon. Gentleman who believes so little in the twists and turns of public opinion polls and in the strength of perorations he must have destroyed some of the hopes of his supporters about his prospects for the leadership by the strength of his remarks this afternoon.

Every hon. Member who has so far spoken in the debate has concentrated his remarks on unemployment. It is at once the most deep-seated and intractable problem of our times, but no one can say that it is of recent origin. Nor can it be claimed, as hon. Gentlemen opposite have claimed, that it is entirely due to the policies which the Government have carried out. One needs to go back many years for the seeds of the responsibility for unemployment. Hon. Members will recollect an important series of articles by Mr. Allen in the Sunday Times in the early 1960s which compared the number of people required to perform certain manufacturing tasks in this country with the number of people required to perform the same tasks in other countries. These analyses showed that we suffered from a state of over-employment in industry at that time. To this state of affairs was added the industrial problems and the industrial stagnation which appeared during the late 1960s.

As the House will recall, there was a period of statutory control of prices and incomes which bore heavily on companies. Corporation tax was increased from 37½ per cent. to 45 per cent. As a proportion of the G.N.P. company profits fell from 15 per cent. to 10 per cent. between 1964 and 1970. All these influences had a major effect on the ability of companies, with their stagnant production, to continue with their existing higher level of employment. But it was on the tax which was designed specifically to fall on employment that responsibility mainly lay. I refer to selective employment tax. Judging by the remarks of the right hon. Gentleman this afternoon, one would have thought that he would have done his best to reduce that tax. It might be worth reminding the House of what actually happened.

In July, 1966, on the seasonally adjusted basis, unemployment was 305,000. Selective employment tax was introduced in September of that year. In December, 1966, unemployment rose to 448,000. By March, 1968, it had risen to 508,000, and was at that time that S.E.T. was increased by 50 per cent. In April, 1969, unemployment has risen to 518,000, and S.E.T. was increased by 10s. 6d. per head. In July, 1969, unemployment rose to 576,000, and that was the time when the premium was withdrawn from manufacturing industry. The right hon. Member for Stechford doubled the tax on employment at the time of the worst unemployment figures since the war.

It comes ill from the right hon. Gentleman to criticise the Government about unemployment. It is more than strange that the man who was responsible for the highest increases in taxation in history should criticise my right hon. Friend and the Government who have been responsible for the largest reductions we have ever seen for not doing enough about employment.

Mr. Sheldon

If S.E.T. was the cause of unemployment, why is it that following the reduction in S.E.T. there has been an increase in unemployment?

Mr. Hordern

As I explained earlier, the causes of unemployment are deep-seated and do not apply only to the time in which the Government have been responsible. The causes came much before then. The origin of unemployment was many years ago, and I am saying that unemployment was made worse by the imposition of S.E.T. at a very bad time. It is true that the reduction in S.E.T. has not yet had a significant effect, nor, I willingly admit, have the other measures taken by the Government, but it does not lie in the mouths of hon. Gentlemen opposite to criticise us for not doing as much about unemployment as they did. After all, we have reduced taxes, whereas the Labour Government concentrated on increasing them.

It would be a justifiable complaint against the Government if they had not done everything that could reasonably be done to fight unemployment. Where the Labour Government imposed higher taxes on companies we have reduced them. Approval has been given to extra public expenditure amounting to £900 million. New development areas have been created. It is all very well for hon. Gentlemen opposite to take pleasure in the restoration of investment cash grants. Instead of saying that we would prefer investment incentives, we have provided both for investment incentives-free depreciation—and for investment cash grants. That shows that the Government are determined to deal with unemployment.

The Government have declared their intention of doing everything reasonable to cure unemployment. Some of my hon. Friends might think that they have gone even further than that. There is no means of guessing what the Industrial Development Executive which my right hon. Friend announced this afternoon will cost. All we know is that the Minister will be armed with a cheque book to go into the regions. No one can tell how much he will use that cheque book. I have never thought it wise to put any Minister in that position. His aim will be to put right what years of neglect and stagnation have done. Whatever one may think of it, no one can say that this Government do not care about unemployment, but I shall need to know a lot more about these proposals before forming a final judgment on them.

Again on the subject of unemployment, I think it unwise to make a distinction between manufacturing and service industries in attracting companies to development areas. The trouble with the development areas is that they tend to work on such a narrow industrial base. This is why I regret that the new building grants relate to industrial building and not to commercial building. One of the problems of the development areas is to attract commercial and business firms to them. At least as good and as generous grants should, in my view, apply to service industries and to commercial firms such as insurance companies as now apply to industrial concerns.

Moreover, despite the announcement today by my right hon. Friend the Secretary of State for Trade and Industry, I think it unwise in principle, at least—I believe it to be unwise in practice, too—to interfere with market forces. Industrial and commercial firms wil eventually go to the development areas because the cost of housing and of services has become too high in other parts of the country. If housing is not allowed to reach its economic level, no amount of inducements will make companies go to the development areas.

Everyone can make his own diagnosis of the present position and the demand effect of the Budget, but I believe that it would be altogether too sanguine to expect a recovery in employment to march exactly in step with our economic recovery. The truth is that many firms have found, possibly to their surprise, that they can produce the same quantity of goods with far fewer people. Many are finding labour costs now so high that they will inevitably become increasingly careful about the number of men they take on their books.

I believe, therefore, that unemployment will persist long after economic recovery is under way, and until a large measure of redeployment is carried out. The only genuine cure for unemployment comes when firms are expanding fast and becoming so profitable that they need to take on more workers. That expansion, I believe, is at last beginning to appear, and this Budget will do much to help it on its way.

The Chancellor said that growth was proceeding in the second half of last year at the rate of 5 per cent. So often in the past, as soon as it seemed that we were achieving a respectable rate of growth we found ourselves up against capacity restraints. But we are nowhere near that position today. Not only do we have a high level of unemployment; we have extraordinarily low capital utilisation by industry as well. Stocks have been run right down, and investment has remained flat. Companies are in a much leaner and hungrier position than they have been for a long time. They have been so caught out in previous years by the false prospect of sustained growth that they will not be caught out again by any inducements or exhortations. Orders in the book are all that matters to them.

If this Budget has an immediate and substantial effect on demand, we could once more find themselves upagainst the limits of capacity. But I do not think that it will have that effect. Nor do I think that it is a question of not creating sufficient demand. I believe that consumers, too, are more reluctant now than they were to buy consumer durables, and they are more likely to continue to save a relatively high proportion of their earnings. This is why I think it was right to concentrate so much of the extra demand created by the Budget at the lower income scale, apart from the necessity to do so because of the effects of inflation.

Therefore, although I think we shall see much more rapid growth in future, I do not believe that we shall come at all quickly to a level of full capacity.

For the money supply, that is just as well, for if, by chance, we had been operating at anything like full capacity, the effect of the staggering increase in the fourth quarter last year would have been catastrophic. Of course, the increase was very largely involuntary. No less than £1,779 million had to be found from domestic sources because the foreign exchange inflow was so heavy, and over £1,000 million was borrowed from the banks, leading to a direct increase in the money supply itself.

This inflow was the direct consequence of the troubles of the dollar, and we are by no means the only country to suffer these consequences. Indeed, up to November—these are the latest figures which I have been able to obtain—despite some problems of definition, it is clear that the money supply of France, Germany, Italy, Belgium and the Netherlands was rising in every case as quickly as our own, and largely for the same reason.

It is true, also, that those countries are all working nearer their limits of productive potential than we are, so that their risk of inflation is greater even than ours. But that is no comfort to us. As the economy begins to grow, as we all hope it will, all the success which has been achieved in reducing the rate of inflation will be at risk unless a firm grip is taken on the money supply.

It may be that something will be done about this problem in concert with other European countries. I welcome the move announced by my right hon. Friend in allowing companies to send £1 million or so for projects overseas, and some of the other decisions, such as the easing of the voluntary restriction programme on overseas investment.

But, in the last resort, we must insist on managing our own exchange rate to protect our own domestic economy. This seems to me to lie at the heart of the matter. I particularly welcome my right hon. Friend's remarks in this context yesterday: Moreover I am sure that all hon. Members in this House will agree that the lesson of the international balance of payments upsets of the last few years is that it is neither necessary nor desirable to distort domestic economies to an unacceptable extent in order to maintain unrealistic exchange rates, whether they are too high or too low."—[OFFICIAL REPORT, 21st March, 1971; Vol. 833, c. 1354.] I regard that as a very significant observation.

It seems to me that many of us have become too influenced by the size of the boost to demand that the Budget will bring. The National Institute referred to £2,500 million, the Economist to £1,000 million. The truth, surely, is that fine tuning in circumstances of this sort is a pretty meaningless exercise in the conditions we now have of high unemployment and unused capacity. In these conditions, no one can guess with certainty how demand will be used, except for that part consumed by the public sector. Here again, I refer to the potential effect on the money supply, and, therefore, on inflation, of the huge public sector borrowing requirement, which is to be no less than £3,358 million in the coming year.

The truth is that the borrowing requirement would not have had to be so high if the nationalised industries had not had to keep their prices artificially low. Nor would it have been so high if the nationalised industries were not all in such a poor financial state generally. The Government should have a serious look at these industries and announce what their future policy is to be towards them. It looks a little obscure to me at present.

We cannot look to the public sector for economic success. It is to the private sector that we must look, and it is here that progress is now more exciting than for many years past, and it appears to have gone almost unnoticed. I refer to the trading income of the company sector. Ever since the third quarter of 1970, company trading income has been rising strongly, and the increase between the third quarter of 1970 and the third quarter of 1971 is no less than 23 per cent.

There are good grounds for believing that this trend is being continued and that at long last the proportion of the gross national product taken up by company profits is rising rapidly. More than anything else, our miserable economic record of the last seven years was due to the fact that company profits were depressed as a proportion of the G.N.P. This is the source from which further employment will come. This is where higher investment will come. This growth and improvement is the core of the Government's economic policy, and its success is at last becoming apparent. There will be plenty of time to consider both V.A.T. and the new form of corporation tax.

Mr. Joel Barnett

How does the hon. Gentleman reconcile this desire for increased profits with the Government's support of the C.B.I. initiative to restrain price increases by 5 per cent. and thereby to restrain profits?

Mr. Hordern

The C.B.I. initiative on the prices front was a most useful one, but I do not imagine the hon. Gentleman is so naïve as to think that the only reason why company profits rise is related to the margins which they can charge. It is a matter of increased efficiency. The hon. Gentleman is too wise to fall for that kind of thing, and he surely will be the first to welcome the increase in the proportion of G.N.P. now taken up by corporation profits. That is a sector in which further employment can be found and from which further manufacturing capacity will come.

We shall consider in the Finance Bill the proposals for V.A.T. and corporation tax and the interesting matter of the tax credit system. All these proposals are revolutionary, and what will be remembered long after the arguments about demand effect and money supply is that in the course of two years the Chancellor has produced a unified rate of income tax, a single rate of a single expenditure tax, and a simple form of corporation tax. No Chancellor in history has had so much influence on, and success with, the Inland Revenue as has the present Chancellor. He has encouraged investment and has made a very complicated code of tax intelligible even to the layman. What is more, he has reduced taxation, and reduced it in the right places, and by a record amount. That constitutes a remarkable record by any standard.

7.03 p.m.

Mr. William Hamilton (Fife, West)

The reference by the hon. Member for Horsham (Mr. Hordern) to the enormous changes in the tax structure recalls to my mind a report made by the Estimates Committee three or four years ago, and the latter years of the Labour Government when the Inland Revenue staff told us that they simply could not take on any more work. They said that the new taxes which had been introduced by the Labour Government had imposed upon them such burdens that if any further burdens were to fall upon them—well, they almost threatened to strike. It is rather significant that not a cheep of protest came from those same civil servants—the same Civil Service staff association—despite the two Budgets of the present Chancellor of the Exchequer. It makes one wonder where their loyalties lie.

Hon. Members

Disgraceful.

The Financial Secretary to the Treasury (Mr. Patrick Jenkin)

The hon. Gentleman will regret that remark. It is a disgraceful accusation against officials of the Inland Revenue who have served both Governments with great loyalty and who have carried out some very hard work. I ask the hon. Gentleman to withdraw that remark.

Mr. Hamilton

I stand by what I said. I believe that the Financial Secretary read that report, and, indeed, took part in the debates at that time. It was made clear in the evidence of the Inland Revenue staff associations that they were being overburdened with revolutionary tax proposals which were being put forward by the Labour Government; and we have had not a single word from them as a result of the last two Budgets.

Mr. Jenkin rose—

Mr. Sheldon

Would my hon. Friend not accept that one of the interesting aspects of that report, which I also read, was reflected in the questions put to the civil servants, and in particular the questions which arose when they were asked if they were being overworked? Surely most people when asked such a question would tend to answer "yes". What was most peculiar about that report was that nothing further was attempted in examination. It is hard to blame the civil servants. Perhaps the people more responsible were those who asked the questions of the civil servants, and the Ministers who did not try to overburden more usefully those civil servants.

Mr. Hamilton

What my hon. Friend says is probably right. I think, on reflection, that I was a little harsh in my castigation and questioning of their political affiliations, and I think I would wish to withdraw that particular remark. However, it is significant that the tax changes which have been made in the last two Budgets must have imposed far heavier burdens on those staff than the Budgets introduced by Labour Chancellors.

Mr. Joel Barnett rose—

Mr. Hamilton

I must not make a long speech since I know Mr. Speaker dislikes me very much if I attempt to make an unduly long speech.

I wish to refer to one point made by the hon. Member for Horsham. There is no evidence to prove any direct relationship or indirect relationship between the imposition of S.E.T. and the growth of unemployment. There is no proven relationship between them.

I come to the crucial point of what has happened in economic debates over the last decade or so. I am glad to see Mr. Speaker in his place, because I took out a quote from his Budget speech when he was Chancellor of the Exchequer in 1962, almost 10 years ago to the day. This is what he then said: … I believe that the incomes policy has proved its worth."—[OFFICIAL REPORT, 9th April, 1962; Vol. 657, c. 966.] I would only point out that it is still proving its worth after 10 years.

I was so interested in this subject that I went back 100 years to the year 1872—

Mr. J. Bruce-Gardyne (South Angus)

Gladstone?

Mr. Hamilton

No, it happened to be a Mr. Dodson, on 25th March, 1872. The total income tax income in that year was £9.06 million. The figure is now nearly £7,000 million. The Chancellor of the Exchequer at that time pointed out that Estimates for 1872–73 were £74.915 million and the revenue for 1871–72 was £74.535 million. He was most concerned about the consumption of coffee and chicory. The consumption of tea had risen fourfold in the last few years since 1840. He went on to say pretty well what the Chancellor of the Exchequer said yesterday. What he said was: It is also desirable"— he was speaking about reductions in taxation for the lower income groups— on the ground that there is no class of the community who are so severely pinched by taxation as the lower classes of income tax payers. Everything seems to hit them. They pay income tax, they pay house tax, and their principal consumption is the consumption of articles on which taxes are still and will be retained. Their tea, their coffee, their sugar, their spirits, their beer … and then they are heavily immersed in taxation in the shape of local rates … I must say also that I have been really shocked by the letters I have received from persons in the position of gentlemen, making pitious appeals to me from time to time to give them time or to excuse them because they really know not where to lay their hands on the money they were called upon to pay. The Chancellor of the Exchequer last year looked after that lot. The gentlemen who made their pitious demands were looked after in last year's rich man's Budget. Therefore, if we compare yesterday's Budget and the last one, we have to be thankful for small mercies because this is not such a blatantly obvious rich man's Budget as was last year's.

But, let us make no mistakes about it, there are elements in it which are gestures to the richer sections of the community. My right lion Friend the Deputy Leader of the Opposition referred to some of these matters this afternoon. There were the concessions made to unearned investment income, there were the noises made about a revision of the form of death duty, and there were the concessions on interest paid on credit. All these were concessions to the richer elements of our society.

The Tory cheers at the end of the Budget speech yesterday and the euphoria exhibited on the benches opposite reminded us very much of similar scenes last year. At that time the Chancellor of the Exchequer said that he had reduced taxation by £1,400 million. Within 12 months we had a rapid escalation of inflation, a rapid escalation of unemployment and a worsening relative situation in the regions because the Government, with their dogma, said that they would produce a more effective regional policy by doing away with wasteful investment grants.

I remember the hon. Member for South Angus (Mr.Bruce-Gardyne) asking how many thousands of pounds per job the Labour Government were spending because of investment grants. His advice was accepted by the Prime Minister. It was he more than any other back bencher who persuaded his Government to change from investment grants to investment allowances, with the result that we have the highest unemployment in Scotland and the regions since the 1930s. We have paid the price, we are still paying the price, and we shall go on paying the price for at least the next 12 months, if not the next two years.

We have had no improvement whatever in industrial relations, despite the great hoo-ha that the present Government created by introducing their Industrial Relations Bill. We had the waving of Order Papers at that time. Today it is not even a "lame" duck, it is a "dead 'un". It will make no contribution to the improvement of industrial relations.

The Government claim to have contributed to a lessening in the increase in prices. What we are seeing in prices is a much more insidious development, and that is the exploitation of the consumer by manufacturers and retailers in reducing qualities and quantities. I have drawn attention to this in the case of tinned fruit, cosmetics and a whole range of commodities where the consumer virtually is buying a pig in a poke.

I received a large package by post this morning—I thought it might have been a bomb—and inside was what was supposed to be a container of face cream. When opened, the container within the container was half the size of the outside packaging. The housewife who bought it thought that she was getting twice the quantity. The same applies to canned fruit. The amount of syrup in a tin of fruit in many cases is now more than half the total contents. Prices remain stable, perhaps, but the qualities and quantities that the consumer is buying are greatly reduced. But this Government have dismantled any kind of protection that we sought to build up in our time in office.

In addition to that relatively hopeless situation for the consumer, we have still vast numbers of people on or under the poverty line. My right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) referred to this today. They will not be touched by the Budget proposals. Over the course of the last year or two, we have had a savage growth in what is called "the wage trap". My hon. Friend the Member for Oldham, West (Mr. Meacher), in a very good article in the Guardian yesterday or the day before, showed the effect of the Wilberforce proposals and the miners' wage increases. The face worker who was granted a wage increase of £4.50 on top of £32 odd will in reality receive very little. By the time he takes into account the loss of purchasing power since his last increase in November, 1970, the increase in income tax and national insurance contributions and the loss of some other benefits, his actual increase in real terms from November, 1970, to today is 8p.

There is nothing or very little in the Budget for a highly paid miner. On the contrary, he will pay a considerably increased graduated pension contribution. He is in the bracket which pays the increased contribution of which the Secretary of State for Trade and Industry spoke today. The miner will pay it, and the pensioner will get a miserable basic increase of 75p. in October which by that time will have been virtually eroded before he gets it, and he will have to wait a further 12 months for another increase

The Government have taken no account of the Housing Bills which are now going through the House and which will double rents for all people in council houses, in public corporation houses and in the private sector as well. Even with the rent rebates, every tenant in Britain will be paying increased rents. I know that the Secretary for State for Scotland has said that some people will be paying no rent at all. They will be very few in number.

The White Paper of October, 1970, made it clear that the Government's basic intention at that time was to reduce housing subsidies by between £100 million and £200 million a year over what the Labour Government would have been spending under their subsidy arrangements. So whatever the working man gains in tax concessions either with the last Budget or and with this one, he will probably lose in increased national insurance contributions and his increased rent. What has happened in the past year will continue next year. The real standard of living of millions of ordinary working people will be reduced under the terms of this and the last Budget.

I was appalled by the speech today of the Secretary for State for Trade and Industry. It was breathtaking. He would have done better to read it standing on his head. That would have been the appropriate posture for him. I remember his speech at the Tory Party conference in October, 1970, when he was cheered to the echo for saying "We are going to be rough and tough. Everyone is going to stand on their own feet. There will be no subsidies for any kind of industry. The Government intend to stand aside and let everyone sink or swim by their own efforts". Now the right hon. Gentleman says that he was wrong all the time. What the devil will he say at the Tory Party conference this year? What will be the reaction of those Tory battleaxes in their fancy hats when the right hon. Gentleman says to them "I am sorry, girls"—old girls, young girls and new girls—"Two years ago I told you that I would be a ruthless Minister rooting out all these inefficient industries and the morass of incompetence that the Labour Government created. That was wrong. I intend to set up new bodies. We dismantled them two years ago. I shall re-establish them, and they will have carte blanche to go into Scotland and elsewhere to build up what I promised you would be destroyed". Heaven help him. I hope he escapes with his life from that conference.

However, there is one element which causes people in Scotland a great deal of concern. I am surprised that the Secretary of State for Scotland has agreed to it. It appears to be a relatively minor point, but it is important. The relaxation of the I.D.C. procedure, whereby the lower limit is to go up from 5,000 to 10,000 sq. ft., was a recommendation of the Hunt Committee. It was rejected by the Labour Government. This is important in the Highlands of Scotland, and, indeed, in the new town of Glenrothes and elsewhere. The junior Minister at the Scottish Office responsible for industry knows the importance of it. There are many factories in Scotland, and, I dare say, in parts of England and Wales, of less than 10,000 sq. ft. which employ a significant number of people. A factory employing 25 people is extremely important in certain parts of the Highlands of Scotland. If that relaxation is agreed to, it will have considerable adverse effects in parts of Scotland and in the development areas which depend on those small industries.

I hope I have said enough to indicate that the Chancellor of the Exchequer made great gestures yesterday. He appeared to create the impression that all he did yesterday and last year had been carefully planned. But it was forced on him because of the Government's fear of the political consequences of massive unemployment combined with massive inflation. The Government knew that the combination of those two factors was extremely unpopular. That is why the Chancellor of the Exchequer took the gamble which he took yesterday. I am not sure that it will pay off. The right hon. Gentleman unleashed a consumer-led boom which will inevitably lead to further balance of payment problems, maybe to further devaluation, probably to a stop-go, and certainly to an unemployment figure next year which will still be unacceptably high, and if we get a severe winter, it might still be 1 million.

7.22 p.m.

Mr. David Knox (Leek)

First, I should like to welcome the prominence of Europeans on the Opposition Front Bench and, indeed, on the Opposition benches generally. We have not seen a great deal of them in recent weeks. I am pleased to see them back again. It is a very pleasant change.

I congratulate my right hon. Friend the Chancellor of the Exchequer on his Budget. In the past I have been critical of some of the measures he has introduced. However, I welcome the measures which he introduced yesterday.

For the benefit of hon. Gentlemen opposite, I welcome the announcement made by my right hon. Friend the Secretary of State for Trade and Industry this afternoon. Hon. Gentlemen opposite are not alone in welcoming some of those measures.

There has been a general welcome in the House to the Budget introduced by my right hon. Friend yesterday. There may be some quibbles but there is general agreement that the main provisions of the Budget are correct and sound.

The Budget will not really be judged on our reaction in the debate; it will be judged in the long term on two main scores: in the first place, on the effectiveness of the tax changes which have been introduced and, in the second place and probably more important, on its contribution to demand management.

On the tax changes, my right hon. Friend the Chancellor has introduced the second part of his package of tax reforms. I hesitate at this stage to comment on them, because I think that one needs rather more information about them and rather more time to study them in detail. However, my right hon. Friend has ensured, by his action last year and this year and by the proposals which he has for the future, that he will go down in history as one of the great reforming Chancellors. He is in the process of introducing a package of changes, a package of reform of taxation, far greater than any introduced by any previous Chancellor. The scale of these changes clearly indicates that he is in charge at the Treasury. He is doing, not in detail but in general, what the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) would have liked to do but what, despite his many qualities, he proved he could not do when he was Chancellor. In my view, my right hon. Friend is earning and deserving a very great deal of credit.

I want to speak mainly about the contribution of the Budget to demand management. I warmly welcome the fact that the Chancellor's tax cuts added in excess of £1,000 million to demand. It means that the total tax cuts under my right hon. Friend will be in excess of £3,000 million. It is worth making the point that under the last Government taxation was increased by that amount. Overall, therefore, my right hon. Friend has now undone the damage which right hon. and hon. Gentlemen opposite did when they were in office.

There cannot be any doubt that massive reflation is very much needed. It is needed because of the high rate of unemployment and of under-employment of those at work in the British economy today. It is also needed because of the slow rate of economic growth in this country. Fortunately, reflation deals with all these problems.

I thought that the leader in The Times today, which in general terms was rather grudging, nevertheless hit the nail on the head when it said: From now until the end of their term of office, the Government will be judged above all on their ability to reduce the level of unemployment. It is right and proper that this should be so, because I view unemployment as the greatest evil facing the country today. I am pleased that in his Budget my right hon. Friend placed such priority on the reduction of unemployment.

Unemployment is an evil because it involves a waste of resources which could be used for higher consumer expenditure, higher investment expenditure and higher social and public expenditure. Unemployment is an evil because to be unemployed is an affront to human dignity. All the talk about social security benefits in no way destroys that point. Unemployment is an evil because of its effect on national morale. It has been rising steadily for the last six years. It has increased four-fold since the summer of 1966. Indeed, many people are very worried about when it will stop rising. Those in jobs already are concerned that they might be the next to be out of work. This is hardly conducive to a stable society or a society where people get the maximum possible out of life.

The trouble in dealing with unemployment is that measures to reduce it take a rather long time to become effective. In my view, it takes between 12 and 18 months before measures to reduce un- employment, or indeed to increase it, are really effective. This means that yesterday's measures will not be fully effective until next summer or the early autumn. They are none the less welcome for that. Nevertheless, it is important to recognise that the measures introduced in this Budget by my right hon. Friend will take some time to work through the economy.

It is equally important to recognise and accept that, because of this time lag, it is rather doubtful whether the measures introduced last July have yet been fully effective on the level of unemployment. I guess that it will be the summer or early autumn of this year before they are effective. I expect that there will be some marginal reduction in unemployment at that time. I do not stress this too much because the degree of under-employment in industry is so considerable. I agree with some of my hon. Friends that it will be some time before any reflationary measures will have a direct substantial effect on the level of unemployment.

Mr. Donald Stewart (Western Isles)

What does the hon. Gentleman mean by "under-employment"?

Mr. Knox

I mean people at work who are not fully employed. For example, if a manager is managing 20 people and five of them become redundant, he is still a manager but he is managing 15 people rather than 20. Therefore, he is not fully occupied. There are other reasons for under-employment, but I hope that example will suffice for the present.

For more than six months the Opposition have made a great deal of noise about unemployment. But, because of the time lag between the introduction of measures and their becoming effective, I should have had a great deal more sympathy with them if, in October, 1970, when I made my maiden speech, they had supported my plea for reflating the economy then to deal with the problem of unemployment. They did not do so. The right hon. Member for Stechford, who is their official spokesman on economic affairs, did not call for reflation until about 12 months ago. With the time-lag between the introduction of measures and their becoming effective, even if reflationary measures had been introduced last spring at the time the right hon. Gentleman suggested, there would still have been 1 million people out of work this winter.

I have welcomed the reflationary measures in this Budget in the same way as I welcomed the measures last July. They indicate clearly that my right hon. Friend the Chancellor of the Exchequer has not been conned into believing that the nature of unemployment is substantially different today from what it has been since the end of the war. It is different in size only. It has always seemed to me an extraordinary view to put forward that unemployment today is different, because for a period of about five years from the time of the mini-Budget of the right hon. Member for Cardiff, South-East (Mr. Callaghan) in November, 1964, we had a series of economic measures designed to reduce demand. We had frequent and substantial increases in taxation, excessively high interest rates, a series of penal credit squeezes and vicious hire-purchase restrictions, all deliberately designed to reduce the level of economic activity and to increase the level of unemployment.

Now, in the last six to 12 months when those deplorable objectives have been achieved, we hear all this talk about unemployment being different. What has happened is the inevitable result of the measures introduced, not by the present Government, but by the right hon. Members for Cardiff, South-East and Stechford. The high level of unemployment is due to the fact that total effective demand falls substantially short of supply potential. Just as it was in the 1930s, unemployment today is due to an insufficiency of demand, and the way to cure it in the 1930s is the way to cure it today—by increasing demand.

Last July's measures were the first step for many years in the right direction in this respect. Their purpose was to increase demand in excess of the increase in capacity—in other words, to use up spare resources. The measures introduced yesterday are a powerful reinforcement of the July measures and they should, in the long run, make some contribution to get unemployment back to more acceptable levels.

I wish to consider the supposed benefits of the recent increase in unemployment. Some people think that there are some advantages in today's unemployment, because, so I am told, it is the shake-out in over-manned concerns that is responsible for today's unemployment. The justification for this argument is that there has been an increase in labour productivity. It is true that labour productivity has increased in the last few months; but that is only half the story. Since 1966, when the economy was last operating at a fairly high level of activity, labour productivity has increased. But so has the under-utilisation of labour in employment. This is true at all levels.

I referred just now, in replying to the intervention of the hon. Member for the Western Isles (Mr. Donald Stewart), to what happened at management and supervision level. This is also true among clerical workers and skilled workers in factories. It is borne out by one's contact with industry. A firm I know claims that it could increase output by 10 per cent. without taking on one extra employee and increase it by 20 per cent. by recruiting only a very small number of extra employees. It is a firm in or very near to the constituency of the hon. Member for Birmingham, All Saints (Mr. Brian Walden). This is probably true of the economy as a whole. It is certainly true of manufacturing industry. There are large under-utilised resources of capital and labour.

Today unemployment is just over 4 per cent. of the working population. Bad as this is, it does not begin to reflect the shortfall in the under-utilisation of total capacity in industry and commerce, which is, I guess, between 10 and 15 per cent. This happens for a number of reasons. There is, first, the practical difficulty for industry of reducing the number of people supporting an industrial or commercial process by the same proportion as the fall in the demand for the product they are making or the service they are giving. Secondly, there is the necessity for firms to retain certain overhead services, irrespective of their workload. They retain plumbers, whether they are operating at half capacity or full capacity. The same is true of electricians and similar people.

Thirdly, firms tend to keep on as many highly skilled people as possible, whether they are fully occupied or not. Fourthly, labour is under-utilised because firms, in the modern world, have a social conscience. They do not like making people redundant. They are loath to do it. Even if the demand for their product falls, they tend to retain their employees. It is significant that the two periods when unemployment has risen most in recent years—1966 and early 1967, and again last year—were periods in which profits fell most. In my view the principal reason for the heavy redundancies of last year is the reduction in profits rather than the reduction in the demand for the services provided or the goods produced by firms.

To me it is incredible that anyone can argue that an industrial situation such as that which we have in Britain, with a high measure of under-employment of people at work, indicates a stronger and more virile industrial structure. It is beyond my wit to understand this. Therefore, I cannot see that the so-called shake-out has done any good. Indeed, I believe that it has done a great deal of harm.

My second point concerns the question of structural unemployment, which is blamed by some for the present level of unemployment. My hon. Friend the Member for Horsham (Mr. Hordern) suggested that firms had discovered in the last year or two that they could produce the same quantity of goods with fewer men. With the greatest respect, this is hardly surprising. It is what economic growth is about. It is a process of long standing. I do not deny that there has been some structural unemployment in the last year or two, but it has been going on since the Industrial Revolution. I hope that it will always go on, because it is an indication that economic growth and progress are taking place. Structural unemployment is a measure of economic progress, of one industry's product being overtaken by something new and better.

There is nothing wrong with structural unemployment. It is good and beneficial for the people. People engaged in the stage-coach construction industry became structurally unemployed with the advent of the motor car, and nobody would wish to turn back the clock in that respect. What is wrong today is that there is insufficient demand to absorb those who become structurally unemployed. There was structural unemployment back in 1955, when 1 per cent. of the working population was out of work. But demand was high enough to absorb those people quickly. I should have thought that the way to deal with structural unemployment was no different from the way in which one deals with unemployment generally. Of course retraining is important, but even without substantial retraining I believe that an increase in the level of demand will deal with this problem.

I welcome the Budget very strongly, particularly because of its likely effects on demand. At this stage it would be foolish of anyone on either side to claim with absolute certainty that the measures are just right. But in my view they will make a real contribution towards the reduction of unemployment. If they prove insufficient it will not be an indication of weakness on the Chancellor's part if he introduces further measures. All I ask is that he keeps this matter under constant review and that he will not hesitate at any time in future to introduce further measures should he deem them necessary.

7.41 p.m.

Mr. Dan Jones (Burnley)

I find it easy to follow the hon. Member for Leek (Mr. Knox) in saying that what we saw yesterday was a reformist Budget, and also that one of the most vicious antisocial scourges in the country is unemployment. Unlike the hon. Member, I know that problem from personal experience. I do not have to read any book or go through any academic exercise to understand what kind of an evil it is.

While I will not be led into an argument with him, I do not agree entirely with the hon. Member's analysis of how unemployment comes about. When he attempts to compare unemployment under the Labour Government with the present unemployment, I will let arithmetic speak for me, because it speaks rather more eloquently than I can. When we were in power, unemployment was just over 500,000. Now it is more than 1 million. Whatever is said, those facts cannot be altered.

Mr. John Hall (Wycombe)

Is the hon. Gentleman saying that if there is a change of Government when the tide is half in, the new Government are responsible for the high tide?

Mr. Jones

I have said nothing of the kind: I have only just begun my speech. But the changes in economic policy in 1970 contributed substantially to unemployment. In the regions the whole climate of industrial activity went down remarkably. That is what I mean, and I am sure that no one will dispute it.

This is a repentance Budget. I know that many hon. Members on this side will take those remarks in rather a griping manner, but if we allow the penitents' bench for the drunkards, we should allow it to the Tories as well. If they see the light, I rejoice, and I shall say as much in my constituency. I hope that these measures will be followed up, since they will do nothing but good for the country.

This does not mean that there are not legitimate grievances, and I will confine my remarks to those which affect people. After all, if politics is not about people, then what the hell is it for? One section of society requires the Chancellor's charity or compassion rather more than his pronouncements yesterday suggested. We are given to understand that all taxpayers will be £1 a week better off as a result of income tax concessions. I rejoice that that is so, but why on earth did he not bring the old-age pensioners up to that level as well? Surely, if we are attempting to dispense justice that is the most needy section of society. My wife spends a good deal of time in the constituency with the old people. I get it regularly from her. When are we in this House going to take the action which will bring about the necessary reforms at least to give them not a living but a decent existence?

The 75p rise will not be operative until the autumn. In North-East Lancashire winter comes rather early. Long before that 75p is in their hands, those people will face additional fuel and light bills. They will have spent the money before their receive it. I will not dwell on that point, because I want to obey the strictures of the Chair to be reasonably brief, but I hope that in Committee the Opposition will force through Amendments bringing that amount up to at least £1.

The Chancellor now has a prestige in the Government which is second to none as a result of his remarkable achievements after an awfully bad start, when he followed the late Iain Macleod, whom I knew very well and deeply respected. The Chancellor today has an authority that few people in this House would have accorded him when he took on that tremendously difficult job. I ask him to use that authority with compassion and to remodel his figures on the lines I suggest. I certainly expect the Labour Party to move those Amendments and, if necessary, take them to a Division.

I was also pleased to hear the remarks today of the Secretary of State for Trade and Industry. I do not want to make a political point of the change from investment grants to investment allowances. I believed that it was a mistake to discontinue the grants two years ago. That decision made a great indentation in the most vulnerable part of industrial society, the regions. The experience in my own constituency and in the North-East Lancashire area suggests that this could have been prevented. However, we are now told that the measures for which at one time the Conservative Party bitterly criticised us are to be reinstituted. I rejoice at that.

We are also told that a board will be set up in the North-West, headed by an experienced and knowledgeable man, which will review the whole of this area to determine its needs. One could be forgiven for thinking that this is unnecessary, because in the many years that I have been in North-East Lancashire there has been almost a bi-annual review.

In North-East Lancashire 250,000 people are constantly and to our disadvantage overshadowed by Manchester and Merseyside. I have a measure of healthy scepticism about being part of that umbrella, for we might figure in a very secondary rôle under it.

I therefore appeal to the Minister to try to ensure that the head of the new board will have attached to him a personal assistant whose main responsibility will be the economic viability of North-East Lancashire. If I could obtain that undertaking I would tell the people in this part of the country that in the new measures there is greater hope.

The Secretary of State spoke about the shipbuilding and machine tool industries. I know both reasonably well. I raise no objection to the fact that they occupy so much of the time and attention of the Government. However, I urge the Government to accept that other industries require capital and that one should not take a cloistered view of machine tools and shipbuilding.

I urge the Government to make a thorough review of the aircraft industry, and particularly the aero-engine side of it. The right hon. Gentleman said that the Government were anxious to assist industries which could show their national worth. In other words, the industries which warrant help are those which are making a contribution to our economic well being. I accept that yardstick. However, I urge the right hon. Gentleman to take cognizance of the salient features of the Smeeton Report; I would be out of order in developing this point, about which I could speak for a long time. I trust that my comments about this will be borne in mind.

In the last five or six years the air craft industry has earned for Britain £277,984,000, a staggering total. Indeed, it has been suggested that the aircraft industry is one of the few industries in Britain which in the 'sixties increased its share of world trade. In a few years this industry has increased its proportion of our exports from 10.2 per cent. in 1964 to 14.5 per cent. in 1968–69. In these years, Britain's share of exports in manufacturing generally fell from 12.6 per cent. to 10.2 per cent. An increase in a few years in exports worth £176,178,000 is considerable. Surely the aircraft industry is of extraordinary value to the nation and deserves as much attention as, for example, shipbuilding and machine tools.

I spent last Thursday at Rolls-Royce in Derby. I was particularly interested in the RB211, not only in the present aero-engine but in the Mk II version. It is expected to be a world beater. Indeed, in my view there is nothing to compare with it. It fits into most of the needs that society is demanding, including its anti-pollution qualities.

Having said that, I must tell the House that I was concerned about the lack of confidence on the part of the workers at Rolls-Royce. Their experience of February, 1971, was traumatic, and they have not got over it. Their confidence was undoubtedly undermined at that time, and they now need understanding.

The Mk II version of the RB211 will, to be frank, require further infusions of capital to bring it to the point when it will be even more successful than the Mk I. I repeat that this is an aero-engine which will more than compare with any other in the world.

Nowadays the Government always refer to Britain entering Europe when they talk in terms of the value of exports. I remind the House, however, that we are not yet in the E.E.C. Considerable obstacles lie ahead. But when we are finally in, British industry will have the most fierce, the most highly competitive and the most damning challenge that it has ever faced. There will have to be some new thinking on both sides of industry.

If the Government really believe that going into Europe in January, 1973, will necessarily provide our economic salvation, then I can only warn them that they may be making a fatal mistake. I readily admit that anything I say will not greatly impress the Prime Minister. He is absolutely dedicated to joining. I think he is seeking a place in history, but he may not get the one he envisages.

If the Government feel that joining Europe is the only avenue ahead for our economic expansion, then I plead with them not to overlook other matters. Will they please pay attention to Asia? I was recently in Hong Kong and India. Hong Kong is normally thought of as a Crown colony comprising some 4 million people. I agree that it has a population of about that number, but it is the shop window of Asia. A couple of weeks ago about 1,000 buyers were in Hong Kong; I regret that there were not more British products on display.

I cannot imagine a place which more successfully enshrines the British democratic way of life in Asia than India. That nation deserves as much economic support as we can give. That support should be given on the basis not so much of financial patronage as of reciprocity. Bearing in mind the raw materials that we could obtain from India in return for the sophisticated goods that we can offer, it is clear that any economist advising the Government could make a worthwhile study of this matter. Instead of looking in the insular direction of Europe I recommend the Government to look that way as well, because they may well find that a study of the question of increasing our exports there would be well worth while.

When the Government set up the North-West Regional Board and elect that responsible and knowledgeable man as chairman, I ask them to consider appointing a deputy for him who can look after the much-needed interest of North-East Lancashire.

8.1 p.m.

Mr. Peter Rees (Dover)

I hope that the hon. Member for Burnley (Mr. Dan Jones) will forgive me if I do not follow his particular constituency interest. I was happy that there was so much common ground between us. I share the hon. Gentleman's concern that the volume of trade between Britain and Hong Kong and India should be maintained whether we are within or without the Common Market.

I applaud and echo the generous compliments which have been paid to my right hon. Friend the Chancellor and his reforming Budget. I shall enlarge on those compliments in the course of my speech. I am sure that the hon. Member for Burnley will accept, as will other hon. Members opposite, that we share his concern for the old-age pensioners. It is perhaps unfortunate that pension increases have often to be announced far in advance of the actual increases being paid. We have been told so often of the administrative difficulties. These are often exaggerated. Possibly the true fault lies with ourselves in that we expect too much of a Budget. We expect a Budget to contain something for everbody. That is a slight miscasting of the Budget and of a Chancellor's rôle.

My right hon. Friend the Chancellor compressed so much into his speech that it would be impossible for me in the time at my disposal to comment on much of it. Therefore, I will not comment on my right hon. Friend's economic judgment. I greatly welcome his statement on exchange rates. I hope that it will enable us in the future to avoid the traumas to which we were exposed in 1967. I say for the benefit of the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins), who regrettably is not present to hear this, that, if the Prime Minister described devaluation in 1967 as a humiliating defeat, it was because the Government of the day had committed their prestige, such as it was, and their skills, such as they were, to the maintenance of the then exchange rate. If they were compelled to alter that exchange rate, it could be seen only in the context in which they wanted their efforts to be seen—as a failure of economic management.

I hope that for the sake of all of us that atmosphere has now altered. I contrast it with the atmosphere last year when revaluation was announced. I hope it follows that we have worked that feeling out of our systems and that we shall be able to contemplate adjustments in the exchange rate with perfect equanimity.

The Budget is overall, and above all, a fair one. Even the hon. Member for Fife. West (Mr. William Hamilton) was moved to declare it not such a blatantly rich man's Budget. Coming from the hon. Gentleman, that is almost a compliment. The remissions are distributed widely.

The right hon. Member for Stechford was not even able to trot out that rather shop-soiled figure, the bachelor with unearned income of £100,000 a year. The right hon. Gentleman modestly lowered his sights to the married couple with unearned income of £15,000 a year, which indicated, perhaps, a more moderated tone for our debates. Perhaps we shall be spared those rather tired gastronomic metaphors we heard last year, such as "gravy train for the rich". The right hon. Gentleman said, however, that there was no benefit for the 3 million households which do not pay tax. It is trite to say that a Budget is designed to impose and remit burdens. There can be no remissions of burdens for those who do not bear burdens.

Even so, taking the long-term view—the right hon. Gentleman invited us to take a long-term view in his conclusions—his proposition was wrong, because the proposals for negative income tax provide a very welcome prospect of relief for all of us, for the 3 million households which do not pay tax as well as for those of us who do. We may differ as to the fall or the amount of relief—that is very much the stuff of our debates. I hope we can agree on the methods, and we can all agree that simpler methods are desirable.

I very much hope that the Select Committee will come up with some constructive suggestions and will not be overawed by the obvious practical difficulties which will no doubt emerge on close analysis of the problem.

While I am on the question of the equity of the Budget, may I say how much I welcome the relief for those people, of whom I have encountered many in my constituency, who exist on incomes of between £500 and £600 a year which, by some freak of our fiscal system, are described as unearned incomes. I have met some of these people who are paying one-tenth of their incomes in tax, and surely this is nothing short of a scandal. I am delighted that my right hon. Friend's measures will immediately lessen the burden on them and will ultimately take them right outside the scope of tax. I am sure that both sides will welcome those measures.

Above all, I welcome the Budget as the second instalment in a great programme of fiscal reform. The Leader of the Liberal Party was affected to see in the Chancellor's speech a genuflection at Mr. Gladstone's shrine. We on this side have fiscal reformers of equally respectable traditions. I will mention only the younger Pitt and Addington. We can with equal confidence genuflect at their shrines.

I welcome both the objectives which the Chancellor has set us and the methods by which those objectives are to be achieved. I welcome the Select Committee procedure. I declare a slight interest in it, as I was privileged to serve on the Select Committee on Corporation Tax last year. I congratulate my right hon. Friend on accepting, against the weight of departmental advice, the conclusions of that Select Committee in favour of the imputation system rather than the two-rate system.

If I may venture a criticism of the departmental evidence given to us, I do this in no carping spirit, because, unlike the hon. Member for Fife, West, I recognise the administrative burdens on the Department. It was, perhaps, over-concerned about the avoidance of tax. This was a theme which ran through the Department's whole approach.

I commend to my right hon. Friend and to my hon. Friend the Financial Secretary that, when they come to frame the provisions to bring into charge to tax sale and lease-back transactions, which do not involve any great measure of avoidance of tax, they should do so in the most liberal spirit possible consistent with their former pronouncements.

I welcome the pattern that the Chancellor described for corporation tax. I have always felt that a corporation tax should both encourage companies to invest—this my right hon. Friend has done by his free depreciation proposals—and encourage companies to distribute, which again my right hon. Friend has done by his imputation proposals.

I have never seen any great virtue in retentions. I recognise the argument which the right hon. Member for Stechford advanced that so many companies finance development out of retentions, but the Select Committee on Corporation Tax heard much conflicting evidence on that and at the end of the day I remain unpersuaded that retentions are necessarily the most worthwhile way of financing company development. Unless one is convinced that the company will earn a better return on profits retained than those profits would earn if distributed to shareholders and reinvested on the open market, retentions demonstrate no particular virtues. In any event, my right hon. Friend has considered that problem, and the reduced rates he proposes for the smaller expanding companies and the relaxation of the close company provisions which he proposes will both favour retensions by that small class of company.

The practical experience which we all have at our disposal, the experience of the measures introduced by the right hon. Member for Cardiff, South-East (Mr. Callaghan) in his Finance Bill in 1965, which was avowedly designed to penalise distributions and encourage retentions, should not encourage us to think that those fiscal measures will stimulate growth.

As an appendage to the proposed corporation tax measures, I welcome the proposals in regard to stock options. All of us who have had to consider these problems recognise that certain stock option schemes have been abused. They have been designed more to create a quick capital gain for the beneficiaries than to stimulate interest in the companies and to provide an incentive for those who work in them. But the measures introduced in 1966 were far too crude, far too blunt a weapon. I hope my right hon. Friend will be able to bring in liberal measures that will enable companies to introduce genuine stock option and incentive schemes that will provide a real incentive for the people who work in those companies and harmonise their interest with the companies for which they work.

I move to the question of estate duty. Whatever scheme Harcourt had in mind when he introduced it in 1894, the tax has now become one of extreme complexity, arbitrary in its incidence and confiscatory in its operation. The right hon. Member for Stechford affected to admire it, but then he admires so much of the Liberal past and perhaps even a little of the Liberal present. I look forward to reading in due course the distillation of Lord Keynes' fiscal wisdom in the right hon. Gentleman's new book In my view the tax no longer justifies itself. It produces perhaps £400 million a year, but that is considerably less than many other direct and indirect taxes with which we are burdened. It is, I suspect, retained because it is a social or political measure.

I do not know how far we on the Government side have to pay lip service to redistribution, but I believe that estate duty is not a redistributive tax. It is a confiscatory tax, and there is no equivalence between confiscation and redistribution. If it could be converted into an inheritance tax at a moderate rate, I think it could be claimed to have become a redistributive measure.

It has been said that if we have a reform of estate duty we must couple it with a gift tax. But in effect the charge on gifts inter vivos has become a gift tax since it covers a period of seven years preceding the death of the deceased.

In the context of estate duty I welcome particularly, as an interim measure and foretaste of things to come, the decision to give the relief for widows and widowers. This is a long overdue measure. I do not believe that the administrative complications will be very great.

I warmly welcome and support the Budget for its fairness, which I hope will be recognised throughout the country, and for the prospects it offers of carefully thought-out and considered long-term fiscal reform.

8.14 p.m.

Mr. Patrick Gordon Walker (Leyton)

I agree with the hon. and learned Member for Dover (Mr. Peter Rees) about the importance of the Chancellor's remarks on not allowing an over-rigid exchange rate to distort our economy. I thought that was the most significant phrase in the whole of the Budget speech. It is very important that a Chancellor has frankly and openly said that for the first time. That part of his speech was very much to be welcomed.

I hope the hon. and learned Gentleman did not really mean that we should not worry about tax avoidance, that we should be liberal about it—in other words, that we should encourage it. Unless checked, tax avoidance is one of the greatest sources of inequity and justified envy that can be imagined in the tax system. The hon. and learned Gentleman used the word "liberal", and said that we should not worry too much about tax avoidance, or that we do worry too much about it.

Mr. Peter Rees

Perhaps I may correct a misapprehension. My criticism was that we should not be obsessed with tax avoidance, because such an obsession leads to too many distortions of the tax system. When I referred to liberality, I merely suggested that the proposals on sales and leaseback, specifically mentioned in the Budget Resolutions, should be framed liberally, because I did not regard them as a gross form of tax avoidance, or of tax avoidance at all. I share the right hon. Gentleman's sentiments about tax avoidance, and merely said that we should not be obsessive about it.

Mr. Gordon Walker

If the hon. and learned Gentleman shares my general views on tax avoidance, I have no quarrel with him, except perhaps on this particular issue, but I do not want to pursue that argument. I shall take up a number of his other points in the course of what I have to say.

Although the Chancellor, naturally, did not say so, the structure of his Budget this year was dictated by the major miscalculation which he made last year. Last year he intended, by what was then an unprecedented injection of new money into the economy, to secure that by now there would have been sufficient increased spending to gear up the economy again and reduce unemployment again. He said so openly and clearly.

What has happened is that a disproportionate part of this new money has gone into increased savings instead of increased spending. In 1971 savings went up by over £150 million, and I think a good deal more than that, because that is a dubious figure in our statistics. It is just a residual figure. At any rate, the increase of saving instead of spending frustrated the Government's whole economic strategy as set out last year in the Budget and the second Budget. This was not an accident. The Government were directly responsible for that frustration of their own policy because they pursued a deliberate and calculated policy of clawing back a large part of the extra purchasing power that had been given to the mass of the people by increased charges for school meals and milk, health charges, higher rates and rents and so on. As a result of the Government's taking back from the ordinary, general run of the people the greater part of the purchasing power that had been handed out to them, most of the new purchasing power was left in the hands of the better-off. It is well known that the wealthier people are, the greater is their propensity to save a higher proportion of any fresh income accruing to them. But on this occasion this general tendency to save was greatly intensified, because the fear of unemployment now menaces everyone, including executives. No one is now free of the fear of unemployment. Therefore, many of the better-off, also fearing unemployment, found it prudent to save all they could against a rainy day. We find, therefore, the extraordinary phenomenon of people saving greatly enlarged sums at a time of rising prices, which is normally a condition in which one does not save because, obviously, savings lose their value.

If the Government had pursued the opposite policy, if they had left a large part of the new purchasing power in the hands of the general mass of the people, a far greater proportion would have been spent, because the poorer half of the com- munity spends its income much faster than the richer part. The economy would by now have begun to be reflated and we would have less unemployment.

The worst result of the Government's miscalculation last year was the persistently high rate of unemployment. The Chancellor and his colleagues deplore unemployment as if it were some visitation of nature with the cause of which they had nothing to do. They deplore it like unseasonable rain or an unexpected cold patch. But through the failure of their strategy last year, induced by their own policy, they helped to bring about the high and, even worse, persistent level of unemployment. From their failure last year to reflate the economy has come the shake-out without the redeployment of labour. A shake-out as such is not a bad thing. A constant redeployment of labour is good in a rapidly developing economy. But if one gets shake-out without redeployment, with no drawing back of people into other kinds of jobs, one gets a high and persistent level of unemployment. That is the cause, and not all these fancy and disingenuous explanations which the Prime Minister thinks up from time to time and lectures us about.

It was the failure of the previous inflationary dose to work that induced the Chancellor in this Budget to apply a still heavier dose, but fundamentally, although it is not quite as bad as last year's dose, the new dose has many of the same defects. I understand the explanation of the hon. and learned Gentleman, but it still remains a fact that no help at all is given to the very poorest section of the community, the people below the threshold of income tax, who are the people most in need and who would certainly spend any extra income which could by any device be put into their hands.

One always welcomes increases in retirement pensions, but those proposed in the Budget are not generous. It would have been better if the Chancellor could have found more money for them, not only in human terms but again in economic terms, because retirement pensioners also rapidly spend any increase of income that comes into their hands and, therefore, get it working faster towards reflation and the reduction of unemployment.

The consequent effect on the purchasing power of the increase in retirement pensions has, of course, been considerably offset by the increase in national insurance contributions. It is desirable that increases in contributions should be not on a flat-rate but on a progressive rate, but it remains true that the amount of purchasing power that has been generated by increasing the retirement pensions has been also reduced by the £400 million increase in contributions. So we really have nothing like the net increases in spending power which one might think by looking solely at the amount by which pensions have been increased.

The major adverse factor which forms the sinister background to the Budget, and about which the Chancellor said nothing, is the sharp increase in rents of all kinds about to descend upon our people. Soon, very many of our fellow citizens will be paying 50p more in rent, and, therefore, at one blow that £1 a week will be cut in half. Add to this the increased national insurance contributions that many will have to pay and allow for an even moderate increase in prices, and the vaunted £1 a week will be heavily eroded. Where one finds, as will be the case, that many people have to pay £1 a week more in rent, they will be positively out of pocket—and, of course, many other things are going up as well. But I am thinking particularly of the enormous impact of rent increases which will take away a very large part of the £1 a week from the less well off section of the community—which means half or three quarters of our people.

This time again, therefore, the Government, through a combination of their fiscal and social policies, are going to claw back much of the extra purchasing power that was apparently given in this Budget to the mass of the people. I think we can expect the results of the Chancellor's doctrinaire prejudice in favour of the better-off to have much the same consequences as last year.

I come to the sad conclusion that we cannot expect, as a result of this Budget, plus the increases in rent and the other things I have mentioned, that unemployment will be very greatly reduced. I think that the figures given in his brilliant speech by my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) were just about right. Indeed, the Chancellor may well have produced a recipe for continuing high unemployment combined with continuing inflation. That is what we got as a result of his last Budget, and it looks as if we may well have that recipe again, with unemployment perhaps not as high as it is now but still insufferably high, together with inflation.

I am pretty sure that the somewhat hysterical cheers that greeted this Budget will, like the similar cheers which greeted the last one, turn before long to chagrin, frustration and disappointment.

8.26 p.m.

Mr. David Lane (Cambridge)

In contrast with the view of the right hon. Member for Leyton (Mr. Gordon Walker), I believe that this is a go-ahead Budget which the country will regard as bold and fair. It offers the prospect that Britain can press on steadily, although not spectacularly, for several years ahead. I also congratulate my right hon. Friend and his colleagues not only on a Budget which will be positive in its immediate effect but on their continuing progress, in the longer term, with the development of new structures for our tax system on the foundations laid, among others, by the late Iain Macleod.

Looking at the economy today, there are three obvious weaknesses with each of which the Budget will help considerably—inflation, unemployment and lack of confidence. Inflation is still right at the top of public anxiety. At home, it is the poor and weak who suffer most, and overseas, in our trading position, as my right hon. Friend the Secretary of State for Trade and Industry said today, it has led to a 16 per cent. increase in British export prices over the last two years. The Government have already had some success in slowing the rate of inflation down, and there will be public support for their continuing battle. So I hope the Government will go on talking loud and clear about it and acting firmly, and particularly that the Chancellor's appeal yesterday to the trade unions will be heeded, as I believe it will.

Unemployment is rightly condemned in the strongest terms by my right hon. Friend and other Government spokesmen. There is a good chance now, with these measures on top of earlier measures, that the trend will be reversed in the immediate future and that we shall then see a gradual reduction. But I utter a word of warning, as others have done, about the problem in the regions. The new incentives announced are good but many of them, of course, will lead to capital-intensive investment. What we need is also investment that will generate more jobs. Here I hope Ministers will keep up pressure on the local authorities to get on faster with the improvement of the infrastructure, and I look forward to hearing what my right hon. Friend the Secretary of State for the Environment says about that tomorrow.

The third main problem is lack of confidence. I believe that the Government have now created the right climate and it is up to industry to respond. We have talked always in the past of private enterprise as the mainspring of economic growth. Let it now be enterprising, and let us hope particularly for a response from smaller companies, for which I was especially glad that my right hon. Friend announced extra help yesterday. Companies large and small now know much more where they stand, with a clear vision ahead for an unprecedentedly long time in relation to tax changes. They can be consistent and confident in forward planning.

Another important factor in restoring confidence will be the dialogue now developing between the Government, the C.B.I. and the T.U.C. I warmly welcome this, as I am sure it will lead in the national interest to progress in discovering the extent of the common ground within industry and in the Government for the objectives we all want to achieve.

I turn now to the tax changes and the Budget judgment. I believe that it is broadly a right judgment, if a little on the risky side, because already there is so much pressure in the pipeline of demand. But I think that my right hon. Friend was right to take the risk and I welcome what he said, very significantly, about exchange rates.

The tax changes are fairly spread, and I think that most people would acknowledge that. As for the balance between direct and indirect tax reductions, I would have liked rather more reduction of indirect taxes to take still more pres- sure off prices. I was disappointed, and I hope that this will be borne in mind for future occasions, not to hear of plans to reduce either or both petrol tax and fuel oil duty. Looking at the yields from different sorts of indirect taxation, it still seems absurd that the amount we get from betting and gaming is so relatively small. I hope that this will be scrutinised in future. My right hon. Friend stressed yesterday that after the major changes next year the total of indirect taxation will be further reduced.

I am glad to see the Minister of State here because I know how much care and trouble have been taken by him and his colleagues in working out the right system of V.A.T. I am delighted that it has been possible to make the provisional standard rate so low. It will be necessary—and I accept what I believe is in the Chancellor's mind—to keep exceptions to the minimum. I welcome the simplicity of this and the exclusion of small businesses on a very broad scale. I have always felt that the alarm in the minds of our constituents and businessmen generally about this new tax was exaggerated. Both the speech of the Chancellor and the full explanation in the White Paper should go a long way to allay their anxiety.

One criticism that has been made is of the alleged failure of the Budget to do enough for the lower-paid and worse off. We shall never do enough, but in the context of this situation the Government should be congratulated, particularly on increasing pensions for the coming autumn. We have already heard cries that this is not enough, but it must be remembered that we now have moved to the basis of annual reviews and in annual terms the forthcoming increases will be the largest ever made by any Government over a 12-month period. We must also remember the other benefit improvements announced today, and the increase in family income supplement, about which we had already heard. On the other side of the coin there is the action by the Minister of Agriculture a short while ago to take pressure off the price of milk and other basic foodstuffs.

We had a general re-statement of industrial policy from the Secretary of State this afternoon, and this new version is a courageous and practical step forward. I believe that the mix we have been told about today will be more effective than any previous package by any Government. There is great advantage in keeping under the control of the Government and under the scrutiny of this House the arrangements now being proposed.

I welcome the encouragement to the arts in various parts of the Budget, particularly to the British Museum, the National Gallery and the National Trust—again proving that, whatever is said by some exaggerating critics opposite, the arts will get great and, I hope, continuing benefit from the present Government.

I also join in the warmest possible welcome to the long-term scheme to amalgamate P.A.Y.E. and the social security system and the proposal to put this scheme to a Select Committee—a further example of "open government".

With other hon. Members from both sides I spent last weekend at the Königs-winter conference, and no one going there could fail to be struck by the air of vigour, hard work and prosperity in Germany. But I am certain that Britain can match and indeed outdo the German economic performance if we now make use of the opportunities that are open to us. In previous measures and above all in yesterday's Budget the Government have given a clear lead, and I believe the country and particularly industry will follow it.

8.36 p.m.

Mr. Donald Stewart (Western Isles)

I hope the hon. Member for Cambridge (Mr. Lane) will excuse me if I do not deal in detail with his remarks. He put them forward in his usual moderate and fair way, and there is little I could take exception to. I entirely agree with his point that there should be heavier taxes on gambling and betting. It is utterly ridiculous that an individual can win £500,000 on pool betting and at that stage have no liability to tax on that sum.

Hon. Members on the Opposition side have said that the Chancellor has been forced to produce this Budget by the unemployment situation, and there is some truth in the charge. One hon. Member said the cause of unemployment was largely the same as in the 1930s, but I think the Government have realised that, although the figures are approaching the 1930s level, they are no longer dealing with a 1930s population, and they have had to learn the hard way. I do not indict the Government alone for the unemployment. The Labour Government can equally be indicted for the rising figures attained by the time they left office.

This Budget, as all Budgets, is like the curate's egg—it is good in parts, and I approve of many parts of it. The Chancellor is to be congratulated on his imaginative proposals. The public will be glad to be finished with Budgets which consist of playing about with 6d. off income tax, 2d. off cigarettes and 6d. on whisky, all according to whether the Government were about to face a General Election or had just had one. The public will welcome the new system under which they can see more clearly the taxes which they are liable to pay.

There will be a general welcome for the various reforms of taxation, particularly the amalgamation of P.A.Y.E. and social security benefits. These things will make it easier for individuals and small firms to plan their way ahead. The increase in old-age pensions is also to be welcomed, but I agree with those who have said the Government's figure is inadequate—although this criticism could be levied at all Governments. It is regrettable that the Chancellor, having gone so far and spread about so much largess in so many directions, did not take the not very bold step of making the increase payable immediately. The Government and previous Governments have underrated the willingness of people who can afford it to pay increased taxation to allow the old people of this country to have a decent standard of living.

The raising of the ceiling of tax liability will also be welcomed by many people. We should not be churlish about that. Many people will be taken out of the tax bracket, and this is highly desirable. I am surprised that, with so many millions to give away, only a few months ago the Government were saying that the £9 million to be saved on school milk was essential to the economy. Surely that was a remarkable piece of meanness which in retrospect cannot be justified.

Hon. Members will not be surprised that I share the view of the leading Scots trade unionist, Mr. John Lloyd, who recently said: I am coming slowly and painfully to the conclusion that the answer to Scotland's economic problems is a Scottish Government. That solution is abundantly clear to me and to the substantial body of opinion of Scotland that I represent here.

I will make one or two suggestions to the Government from a Scottish viewpoint. A Scottish oil development fund should be financed from the revenues of the oil finds in the Scottish sector of the North Sea. Let no one argue that there is not a Scottish sector, because it is referred to in that way in the Continental Shelf Jurisdiction Order, 1968. This fund should be administered by a Scottish Industrial Development Corporation with extensive powers to develop the industrial infrastructure in Scotland which is so badly needed.

The Chancellor is mistaken if he imagines that economic improvement in England will of necessity spread to Scotland. If it does, it will be in an extremely minor way. The fund should be used for granting special incentives to firms which set up their headquarters and locate their senior management, experts and so on in Scotland. Too many Scottish firms are merely branches of firms which are south of the Border. When, as in the present times, they come by hard days, the Scottish branch is the one that is closed down.

I suggest the abandonment of the proposed housing legislation, which will hit Scotland far harder than it hits England. In Scotland there is a much larger sector of public municipal housing, and many of the benefits from the Budget will disappear and be taken up by increases in rents arising from the legislation. This is one sector in which Scotland cannot be treated merely as an appendage of England.

There are two matters I looked for and failed to find in the Budget which would greatly have assisted my constituency, which is an area with the highest unemployment, the highest cost of living and the highest transport costs in the British Isles. The first is a reduction in the fuel tax. That would have been of tremendous benefit to the Highlands and Islands, and I very much regret that the Chancellor did not see fit to include in his Budget a reduction in fuel tax. Secondly, the Government should con- sider giving increased subsidies to the shipping services which serve the outlying islands. These areas have tremendous disadvantages which are aggravated by high transport costs.

I make these brief points in the hope that they will be passed on and acted on. Generally, as I said, I welcome the many benefits which accrue to the United Kingdom and to individuals from the Budget. There are a few points on which I am not in agreement, but on the whole I think it is a fair Budget.

8.45 p.m.

Mr. Piers Dixon (Truro)

I, too, like my hon. Friend the Member for Cambridge (Mr. Lane), am delighted that my hon. Friend the Minister of State is here this evening, and I add my congratulations to him on the great work he has done on the value-added tax.

The Government had difficulties over a number of administrative problems and, in particular, over tax-paid stocks. Where commodities are readily identifiable, the Government propose to take measures which will relieve traders of the obvious difficulties involved. But I question whether traders will not have considerable difficulties regarding products which are not readily identifiable. I should have thought it within the capacity of the Treasury to devise a means of resolving this problem. There must be some means whereby traders in products not readily identifiable could have the purchase tax which they have already paid on their stocks taken as a credit against the value-added tax liability which will become due as from April, 1973.

It should be possible, in my view, to devise a system of self-assessment, traders being invited to make their own assessment of their stocks. Certainly there would have to be the occasional spot check by the Customs and Excise, but I cannot conceive that the great majority of traders in this country would not be absolutely honest and I think it unlikely that we, the taxpayers, would lose more than £1 million or £2 million in that situation. Indeed, the introduction of the value-added tax should be seen as an exercise in good will and trust.

When the value-added tax comes in, many hon. Members on both sides will be making special pleas for such-and-such a product or service to be either exempt or zero-rated. I shall adopt a somewhat different approach. Far from thinking that there should be any products or services with exemption or zero-rating, where that is not proposed, I should prefer the whole thing to move in a different direction. Indeed, I should like quite a number of things which are proposed to be exempted or zero-rated to suffer the value-added tax. It is no part of the Government's business to dictate to us what are so-called necessities or so-called luxuries. This is the very negation of government.

The value-added tax has certain regressive features and in a humane society, where those regressive features exist, they should be put right through increases in old-age pensions, family benefits and other direct methods.

Why should motor cars, in effect, suffer a value-added tax higher than that levied on other products? Is it for us to distinguish between products in this way? Why should we say that it is wrong or more morally incorrect for someone to buy a motor car rather than something else. My right hon. Friend the Chancellor said that he had to balance his books and he had to have the equivalent amount of money. I should have been much happier to see a proposed value-added tax of 11 per cent. on all the products suggested instead of 10 per cent. and an added figure for motor cars.

Equally, where is the logic in the zero-rating of fuel? Is it up to us to decide that it is humanely more necessary, or morally more correct, for people to spend money on fuel and not on clothes? Possibly there are some people who prefer to spend money on clothes than on fuel.

Mr. Donald Stewart

Fuel is a necessity for old people.

Mr. Dixon

The hon. Gentleman says it is a necessity. That is a subjective judgment. [An HON. MEMBER: "Not in Scotland."] In Cornwall the weather is more clement.

Another item to be zero-rated is fares. Why should it be made simpler for citizens to travel a long distance in order to commute to their jobs than to find jobs nearby? In this case we are proposing to use the V.A.T. system to distort the economic process.

Possibly the most priggish of all the proposed zero-ratings is that on books and newspapers. One of the problems in this House is that it contains too many intellectuals. I confess to being an intellectual myself. I much prefer reading books, which is a great joy in my life, to watching television, but it is no part of my job, or the job of any hon. Member, to dictate to our fellow citizens that it is more moral and economically correct to read books than to watch television.

I wish to conclude with an observation on the Common Market. It is generally well known that from 1975 onwards we shall be required to pay up to one per cent. of V.A.T. to the European budget.

Mr. Donald Stewart

If we go in.

Mr. Dixon

If we go in—which, although not a certainty, seems highly probable. I think even the hon. Member for the Western Isles (Mr. Donald Stewart) will agree with that.

People may suppose that, if value-added tax is thought likely to raise £1,500 million at a 10 per cent. rate, then logically a 1 per cent. contribution to the European budget would involve this country in a maximum payment of £150 million to the European budget. There is considerable misunderstanding about the operation of V.A.T. in Europe and about our requirements as to payment. It is not simply to be 1 per cent. of whatever are the commodities on which we in our wisdom in this House chose to levy V.A.T. In the Common Market we shall be required to have a base for V.A.T. which conforms to the base in other countries. Otherwise one could cheat. Therefore, it is clear that, as and when we enter the Common Market, our maximum obligation to contribute a portion of V.A.T. to the European budget will be much larger than £150 million. It might be £200 million, £250 million or £300 million. The Treasury Ministers will be more familiar with the arithmetic than I.

I suspect that this consideration was very much in the Government's mind. One might suppose that the distinction between products which are exempted and those which are zero-rated was merely a matter of administrative convenience, but I suspect that my right hon. Friend the Chancellor of the Exchequer had little leeway if he was thinking in terms of the Common Market. I suspect that in the case of those products which are zero-rated, my Government were compelled by the expectation of going into the Common Market to extend zero-rating to a number of commodities on which exemption would not be allowed. We can have zero-rating but, if we zero-rate a product, none the less that product comes within the total base. Therefore, if we choose not to levy a 10 per cent. value-added tax on a product like food, we are nevertheless still compelled to contribute up to 1 per cent. of what the value-added tax would have been to the European budget when the time comes.

I shall be interested in due course to see whether my interpretation of our obligations under the Common Market is true.

8.56 p.m.

Mr. David Stoddart (Swindon)

I have only a few minutes at my disposal. Therefore, I can deal only shortly with a couple of points.

It is true that the Budget was greeted with euphoric cheers by right hon. and hon. Gentlemen opposite. I suppose we must not begrudge them that, bearing in mind the bitter dregs that they have had to swallow in the last few months. However, there were certain omissions from the Budget. It is well known that if we want to generate full employment the best way of doing it is to increase public expenditure. I can see very little of that increase in this Budget.

I am very surprised at this important omission bearing in mind that there is so much in the public sector which needs to be done. We want new hospitals and new schools. Why has not this opportunity been taken to extend nursery education, which is a very important part of education? Why have not the Government restored the cuts which were made recently in secondary school building? I have a very overcrowded primary school in my constituency. It cannot be extended. My local authority has suggested that if a new secondary school were built the primary school could be moved into those buildings. So far the Government have not allowed my authority the necessary money for that secondary school, even though they acknowledge that it is the right way to solve the problem in the long term. Why have not the Govern- ment come forward with money for this sort of project?

Then there is the railway system, in which I am especially interested since the Railways Board contemplates closing down the Swindon locomotive workshops thereby putting 1,300 of my people out of work. Only yesterday, Plessey announced another hundred redundancies in my area. The unemployment situation is worsening. Here was an opportunity for the Government to pump money into the railway system which might have given work to the Swindon railway workshops and kept employed 1,300 highly skilled, stable and responsible people. That is the kind of provision for which I was looking in the Budget. We have not had it. In this respect I believe that the Government are making a very big mistake. It is one that they have been making ever since they came into office by trying to cut down on public expenditure, as they did in their first mini-Budget, and trying to get the economy moving with private expenditure only.

I said that I had two points. My second point concerns the Housing Finance Bill. I have sat for many long grinding hours on the Standing Committee which is considering that Bill. Unfortunately, the Government have put a guillotine on it, otherwise I should have spent a great many more grinding hours on it, since I believe that that is the only way to deal with such a vicious and reactionary Bill.

My right hon. Friend the Member for Leyton (Mr. Gordon Walker) said that the £1 a week in income tax relief would be taken away. However, he did not tell the whole story. The fact is that the £1 a week will not only be taken away this year. As far as I can see, £26 a year, or 50p a week, will be taken away ad infinitum. This is not a "once off" thing. This will continue over a very long period. I am surprised that the Government did not take this opportunity, if they wished to contain inflation, to drop this infernal Bill.

My final point concerns house prices generally, which are rising in a most amazing and devastating manner. It is in this sphere that the Government should have come forward with proposals. There is no doubt that people—particularly young people—are being hit very hard indeed by the vicious rising spiral of house and land prices. I should have thought that the Government would have taken the opportunity in this Budget this year, when there is so much money available, to do something about the real problems facing this country in the public sector.

9.1 p.m.

Mr. Brian Walden (Birmingham, All Saints)

In rising to speak for the Opposition on this Budget, I feel rather like the Ancient Mariner stopping the wedding guest on the way to the feast. Therefore, I apologise to the Financial Secretary for delaying for a short time his participation in the celebrations which I understand from his right hon. and hon. Friends are well nigh universal from boardroom to doss house. If I claim some right to delay him, it is on the basis of something once said by one of Genghis Khan's generals, which reminds me of this Government: that they were certain that the Golden Horde had won a famous victory, but they were not too sure where they were. My impressions were more than reinforced by the speech made by the Secretary of State for Trade and Industry, a matter to which I shall return ere long.

When one hears Tory Chancellors talking about the value of investment grants and lightheartedly discussing the possibility of the revaluation of the exchange rate of the pound, one wonders whether one is in the real world any more. There is a danger that at this celebratory banquet right hon. and hon. Gentlemen will get indigestion from too much eating of words. That, again, reminds me of the Secretary of State for Trade and Industry, upon whose heroic speech I must now make a few comments, but not too many, else my right hon. Friend the Member for Bristol, South-East (Mr. Benn) will never forgive me. He is away loading his gun at this moment in the sure and certain knowledge that wherever he points it he will score a bull's-eye.

I must make some reference to the right hon. Gentleman's speech today. It was extraordinary. The Secretary of State appeared a bit annoyed, and also rather surprised, at the reception that it was getting. But, then, he has not been in politics very long, and perhaps he does not always read his own speeches, nor too many of those of his colleagues.

Mr. Gordon Walker

Where is he?

Mr. Walden

Doubtless the right hon. Gentleman is at an important meeting. My right hon. Friend need not worry about that. The right hon. Gentleman is no doubt at a meeting with Tory backbenchers. If not now, he will be soon.

The right hon. Gentleman seemed to be worried that his own side of the House appeared to be treating his speech with a certain stoic gloom and that we were treating it with a certain hilarity. He thought that we did not grasp the fact that we live in a changing world, a phrase which he kept reiterating. It was not the changing world which amused us so much as the changing minds. We did not think that there was sufficient acknowledgement of where some of these ideas had come from.

On a cursory glance at this document, "Industrial and Regional Development", I notice, for those of us interested in semantics—what politician is not?—that it contains on the first page the word "new" four times. The word "new" also appears frequently on the second page. The only thing new about most of this scheme is the Government's understanding at last of the value of investment grants. That is what is new about it. They have at last realised that the policies which they were formerly pursuing do not have the impact on the regions that they had hoped. Though I cannot endorse every word of this document—indeed, I have not read every word of it; my right hon. Friend will be commenting at length on it tomorrow—in general I do not think that we shall find it too difficult to accept some of the recommendations made in it. We might even have some constructive suggestions to make.

Reading the document, it seems to me that it is a kind of composited I.R.C., D.E.A. and, if one takes paragraph 17, Ministry of Power. Since a new Minister is to be appointed—the Minister for Industrial Development—my suggestion to the Government would be to contact Lord George-Brown, who would seem to be an admirable man to run a Ministry which is to operate under this philosophy—a very different philosophy from the one which the Conservative Party put forward at the last General Election and has been pursuing intermittently ever since. I am not altogether happy about the regional features of the Budget, but I will deal with those later.

The first thing that I wish to turn to is the extraordinary reaction to the Budget among hon. Members opposite and their friends in the Press, much assisted by the strange way in which the Chancellor of the Exchequer tends to put the situation into which he has got himself. Let us consider why the Chancellor feels that We now have a rare opportunity to secure a sustained and a faster rate of economic expansion". He gave a number of reasons, and I particularly liked this one: Second, we are starting from a position where there are more unused resources than there were at the beginning of any previous period of rapid expansion since the war. He can say that again! Reading it quickly, or listening to it, one might think that it was the Chancellor's ingenuity and skill which had brought us to that position, instead of a gross miscalculation, not only last year but in all the mini Budgets he has introduced.

The right hon. Gentleman went on to say: Fifth, both the current balance of payments and our reserves position are much stronger than they were at the beginning of previous periods of expansion."—[OFFICIAL REPORT, 21st March, 1972; Vol. 833, c. 1354.] From reading that, one might have assumed that he had planned to get it that way. But, as my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) said, that was not the case. The Chancellor did not realise that the balance of payments surplus would grow to this amount, and, if he had realised it this time last year, it would have alarmed him.

I do not wish to be too harsh with the Chancellor. I have always liked him personally, and I thought that his Budget speech was, in some ways, a masterpiece. Certainly it was a masterpiece in terms of exposition; there is no doubt in my mind about that. But we cannot have too much of this self-congratulation. The Chancellor of the Exchequer is like Columbus on his return to the Court of Spain. Columbus set out to get to India. If one turns up in a different place, there must be some modicum of restraint about how far one takes credit for what one has done. The scenery may be beautiful and the opportunities enormous, but the fact remains that one was not going there in the first instance.

I will be fair to the Chancellor. He said much earlier in his career that he was not a man for fine tuning. In terms of demand management, that has turned out to be very true. Not only is he not a man for fine tuning; so far he has not been able to plug in the set. There are, however, redeeming features in the structure of what he has tried to do. What I would regard as a redeeming feature and what right hon. and hon. Members opposite would regard as a redeeming feature are two different things. But I am delighted—and here I take up a point made by the hon. Member for Leek (Mr. Knox), which I thought was an excellent point and with which I agreed, although it was very much skin off his Government's nose—that we have got rid of the nonsense about how there are sinister new forces at work in the labour market which mankind has never wotted of before which are responsible for the present level of unemployment.

There has been a shake-out. A study will be published by a friend of the Opposition in the near future in which the estimate will be made that the new unemployment which has come about since the Government came to power contains perhaps a 10 per cent. element, no more, which is due to a factor impossible to isolate, which obviously has something to do with technology and which may well have something to do with the peculiar situation of the engineering industry.

Even yesterday the Chancellor could not resist the temptation to repeat all this stuff about shake-outs, high wages and all the rest of it. But the logic of his own Budget is that overwhelmingly people are unemployed because of demand deficiency. John Maynard Keynes is alive and well and writing the best sections of the Chancellor's speech over in Great George Street—although he would not have endorsed the little bit we had, which I suppose was meant to be self-congratulatory, about the strength of National Savings.

Of course one has to congratulate those who work hard to produce this, but I should have thought that this might have suggested something to the Chancellor. He said that the amount of National Savings outstanding, including accrued interest, increased by £733 million, or about 8½ per cent. This is the best result ever recorded".—[OFFICIAL REPORT, 20th March, 1972; Vol. 833, c. 1348.] Yes indeed, and about the worst possible year to record it.

It says a great deal about the regressive nature of the Chancellor's supposedly expansionary measures last year. Since I have mentioned Keynes, I can conclude what I have to say about demand management by saying that at last, after numerous false starts, the Chancellor has fully grasped the perfectly simple proposition which he and the rest of us have always understood that, if one wants to boost demand, it is a very sensible idea to give the money to the people who are most likely to go out and buy something.

At least in this Budget the Chancellor has made some attempt to do that. His previous measures may have done something for the "pacemakers" of the right hon. Lady the Member for Finchley (Mrs. Thatcher) but they did not do a great deal for demand. The savings figure amply demonstrates that, if one did not take all the other figures which demonstrated it as well.

What happened was that there was a miscalculation not only of the amount of money which needed to be injected into the economy to bring demand up to a satisfactory level but also of how that money should be apportioned. The dogmatism of hon. Members on the Government side got in the way of their demand management. This year, at least there has been some attempt to do something about that.

I welcome, as practically every other speaker has welcomed, what has been done in terms of the threshold and in terms of purchase tax cuts, although I will want to say more later about what seem to me to be the gaps in what the Chancellor has done. I will mention one right away. The Chancellor's comments on R.E.P. were rather Delphic. Some of my hon. Friends have suggested that there might be a loophole in it, but I will not take an unpleasant view. It must stand as it appears to read, that it will be phased out over a period from September, 1974—and it should not be. The Chancellor should think about this again.

The trouble with what the right hon. Gentleman is doing in respect of the regions is that it will encourage capital-intensive projects. It is bound to do so. Moreover, having looked at the interesting maps which are appended to the other document we have received today, one can see that a very large section of the country is now being treated either as a development area or as some kind of special case. I have serious worries that a good deal of the money which will be spent here will be given to companies which intended to go and develop capital projects in those areas anyway. What it will not do, in my judgment, is have any significant impact on employment in those areas—and it needs to.

We need to find the means of putting people back to work, especially if—I do not think that this is so at all, but I will come to it in a moment—this Budget were to have the effect of soaking up the unemployment due to demand deficiency generally, in which case we would find ourselves back with the old problem of having regions which in terms of employment were lagging strikingly behind the rest of the community.

For instance, repairing demand deficiency would do a great deal for my region, the West Midlands; it would pull it back up towards the top of the employment scale. That would simply dramatise the Chancellor's problem. R.E.P. is the best way I know to ensure that there is a direct inducement for manufacturers in development areas to employ more labour.

There is another advantage of R.E.P. which should be attractive to the Chancellor. Previous Tory attempts to get demand right in a reflationary way have a rather unhappy history. Tory Chancellors overshot in 1959 and 1963. There must be a slight worry in the Chancellor's mind, despite the fact that many of his hon. Friends are telling him that he has not done enough. The hon. Member for Leek, for example, urged him to come back in July and do more.

Mr. Knox

I did not say that my right hon. Friend had definitely not done enough. I said that if circumstances proved that he had not done enough, he should look at the matter again. There is a distinct difference between what I said and what the hon. Gentleman said I said.

Mr. Walden

I accept that. Perhaps I was too lighthearted about the hon. Gentleman's remarks.

I suspect that the Chancellor might have a different worry on his mind; not that he will have to come back in July to do some more but that perhaps he has done too much, and this is where R.E.P. comes in with another advantage. Giving a direct subsidy to producers has some anti-inflationary effects, and to that extent exports are assisted.

I ask the Chancellor, if the pledge is hedged around with words which allow him a way out, to take the way out and consider very carefully before getting rid of what, in terms of employment and regional policy, could be most valuable to the Government—a policy which meets no objection from Europe. Indeed, this is not one of the many things that we cannot do because the E.E.C. will not permit us to do it. The E.E.C. is beginning to initiate R.E.P. and is regarding it as one of the most sensible features of our regional policy.

Mr. Bruce-Gardyne

The hon. Gentleman has criticised the capital-intensive nature of the incentives proposed for the regions and has implied that they might go to firms which would have gone to those areas anyway. I have some sympathy with this argument. Is he aware, however, that this was used by Dr. Jeremy Bray in his case against the whole concept of investment grants?

Mr. Walden

I am aware of Dr. Bray's work on this. The difficulty of the hon. Gentleman's argument is that one eventually gets into the position, which to some extent the Government did, of deciding that one cannot directly affect the regions by subsidies of this kind. However, that is not a position into which we can afford to get. I know the problem in terms of investment grants, but if we are to take seriously the need to reduce unemployment, we must choose the least bad method available in terms of its distorting effect, and in my view R.E.P. is the least bad method in this context.

I was interested in the point, relating to unemployment, made by the hon. Member for the Cities of London and Westminster (Mr. Tugendhat). He said something which must have sent a chill up the spines of those occupying the Government Front Bench; namely, that they were expecting an increase in growth, in G.D.P., of about 5 per cent. whereas the predicted figure for output was an increase of 5 per cent. That is not the figure I have. The predicted amount comes to about 4 per cent.

Mr. Tugendhat

I said that some industrialists with whom I had been speaking were talking in terms of 5 per cent. I was speaking in reported speech, as distinct from expressing a personal opinion.

Mr. Walden

I accept that. Nevertheless, the figure I have been given is 4 per cent. If growth goes up 5 per cent, and output 4 per cent., the amount of leverage left to decrease unemployment will not be great. That is not a difficult point for anyone to grasp, and many people have already grasped it.

I very much doubt whether there will be a significant reduction in unemployment. My right hon. Friend gave some estimates, and I thought they were, if anything, optimistic. I hope I am wrong because with this amount pumped in in this way—by a consumption-led boom—one wants to see a sharp reduction in unemployment.

However, I do not believe that that will necessarily come about, and I am dubious whether the policy suggested by the hon. Member for Leek—to "Keep pumping it in until unemployment comes down dramatically"—is economically, fiscally or politically possible for the Government. I think they may have got themselves into a very difficult situation over unemployment. I blame them for that; it is their fault. The problem could and should have been foreseen. From the time they took office, instead of making irrelevant cuts in public expenditure, they should have been working the other way round. I derive no pleasure from saying that the Government have got themselves into this very difficult situation.

I want to look briefly at the whole effect of a consumption-led boom. Nothing can show that the Chancellor has miscalculated and is now needing to act in desperation more than the fact that he has chosen this way of doing things, because he is aware, as everybody is aware, that an export-led boom, if it were possible, and if it could have the kind of effect that we want in the short run, would be infinitely preferable.

There is everything to be said structurally against a consumption-led boom. I want to make this point briefly in regard to exports and imports, because many of my right hon. and hon. Friends will want to deploy this point from the Front Bench later in this series of debates. I thought that the Secretary for State for Trade and Industry was exceedingly complacent about Britain's trading performance. I noted him as saying that our trading performance was exceptionally good. The right hon. Gentleman is very easily satisfied. I do not think that Britain's export performance as of now is particularly good at all. Admittedly it is higher than the forecast, and the import figure is about the forecast figure, so we have done well on that. But we have one of the slowest rates of growth in exports, and, to be fair, in imports also, of any developed country.

I believe that these measures are bound to change the balance against exports. They are almost certain to do so. They are almost certain to touch off, to begin with, a sharp increase in imports, which must be foreseen and accepted. They will also orientate industry marginally towards home production. It is all very well to say, as Ministers tend to say, that the opportunities are there in Europe or elsewhere, or because of this incentive or that incentive. The plain truth is that some margin of effect must be allowed for having a softer home market and a pattern of investment which will conform to it. Our export performance will not sharply improve. I expect it to do worse and it is axiomatic that we shall suck in more imports.

I am glad that the Chancellor has become enlightened on the subject of changing the exchange rate. He will need to be about 1973 or the beginning of 1974, quite apart from any changes he can get before then, which I very much hope that he can, in our present rate against the dollar, which I regard as too high. There would be no objection from this side if the Chancellor could tell us that he had managed to secure a revaluation that was more favourable to us in export markets.

Apart from that, there may well be a devaluation of the pound, inevitably because of the stone which is at the heart of these measures—the drain on the balance of payments. Particularly when taking account of the consequences of our joining Europe, it may well be found that it is just as well that the Chancellor has become converted to rationality on this subject.

I want to say a few words about the gaps in the Budget. Everybody has mentioned the question of pensions. Nobody thinks that the increase is adequate. I rather doubt that the Government do either. There was one amusing passage of arms earlier today when the announcement was being made. One Conservative back bencher said "We have given as much in the two years we have been in office as the Labour Party gave when it was in office". Yet it remains a fact that the real value of the pension is no better than it was in October, 1969. So what that Conservative back bencher was saying was that the rate of price inflation under the present Government has been unprecedented. That indeed is so. Between January, 1970, and January this year there was a more rapid rise in prices than there was in the period between January, 1966, and January, 1970. In food prices there has been a dramatically greater rise.

All that is demonstrated by constant increases in the pension by the present Government is the Government's inability for a very long time to curb inflation and the fact that, even though halved, inflation is running at a rate that necessarily erodes—[Interruption.]—Of course they have halved it, from an unprecedently high figure—[HON. MEMBERS: "Hear, hear."]—an unprecedently high figure under their management. I can give the figures. In January, 1970, the index of retail prices on all items stood at 135.5 compared with 114.3 in January, 1966. In January this year it stood at 159.1. All that increase, except four points, has taken place under this Chancellor's management of the economy. The sharpest period of increase was not immediately after he assumed power. It ran in the early part of 1971. On food the figures are even more dramatic.

The pension increase has been eroded by inflation. It seems to me—and I want to choose my words with care and not go too far—fundamentally wrong that more was not done for pensioners in a Budget in which the claim is that the average man will gain £1 a week. Comparatively, the poverty of pensioners will go on growing if we take the view of them that we take now.

I am equally alarmed about the lack of family allowances for the first child, which is to me an even more serious problem. I know that family allowances are not politically popular. That has dawned on all of us. There is an intellectual difficulty here, or, if there is not, there should be. I do not know whether Treasury thinking runs along these lines, but it probably does. Although we wish to assist large families below the poverty line, we do not socially want to encourage large families. We must accept that, for all the reasons of over-population, environment and so on.

But for that very reason generous family allowances should have been given for the first child. I dare not go too far, I suppose. I will simply say that in some circumstances I would not necessarily be against a taper on family allowances after the third child, but I must not commit my party to that. The fact remains that something should have been done in respect of the first child. That would have been the best and most equitable way of assisting the sort of people who will not greatly benefit from the Budget. As for the social point about increased families, there are better ways of dealing with that when the country gets its morality in line with its self-interest.

I do not regard the Budget as particularly fair. I heard the hon. Member for Chelmsford (Mr. St. John-Stevas) saying it was a great national Budget and that it proved how much the Tory Party's hearts bled for the poor. I also heard, much more relevantly, the speech of the hon. Member for the Cities of London and Westminster in which he welcomed all the hand-outs which were to be given to or exploited by his constituents. They amount to a considerable sum. That seemed to me to lie much nearer the heart of the Budget than anything done in respect of poverty, which in any case does not fiscally match up to what the Government do socially.

There is no point in deciding to help the less well-off and those on average earnings by Budget concessions if the help given is then clawed back by regressive and reactionary social policies. I will not go into them all. Conservative Members are well aware of what will happen. There will be sharp rent increases and increases in various other social charges. All of this is bound to erode the money given fiscally; all of it is bound to take money out of demand, and in that sense those policies will operate entirely against what the Chancellor is trying to do.

One can, if one likes, say that the Government are reshaping the pattern of payments, but the Budget is not supposed to be that sophisticated; it is supposed to be a nice blunt instrument for getting demand up quickly. In that sense, the Government's social Ministries and social policies are wholly out of line with their fiscal policy, and both suffer from a complete absence of any reasonable incomes policy that the people can regard as just and fair.

I want to give one view on the economy which I do not often hear in debates of this kind but which I profoundly believe. I do not believe that the country will ever get the productive effort we want until something is done about the burning social resentments which the miners' strike again has brought out into the open. There is a deep-seated feeling amongst the less well-off in the community that they are unjustly treated. I think that feeling is rational, but, rational or not, it is something to which the Treasury should be applying itself—as, indeed, should the whole Government. Until the Government create an incomes policy which does not violate that deep feeling and instinct, much of what is done in the Budget will in any case be abortive.

9.31 p.m.

The Financial Secretary to the Treasury (Mr. Patrick Jenkin)

The hon. Member for Birmingham, All Saints (Mr. Brian Walden) deserved a somewhat fuller House for what I understand was his first appearance at the Dispatch Box in his capacity as a financial spokesman for the Opposition. He has spoken often from that Box in other capacities. When we sat opposite, it was always to us a matter of astonishment that he never spoke from this Dispatch Box. But there may have been reasons for that.

My right hon. Friend the Secretary of State for Trade and Industry has sent a message asking me to apologise on his behalf to the hon. Gentleman and to the House for his absence during the hon. Gentleman's speech. He is on his way, having been unexpectedly delayed. I am sorry that he did not have a chance of hearing any part of the hon. Gentleman's speech.

I take up at once what the hon. Gentleman said about pensions. I find the accusations made by the Opposition about them very hard to stomach. For the first time pensions have been increased in two successive years. By next autumn pensions will be one-third as high again as they were last summer. If we had stuck to the policy of the Labour Government we would not have been having any discussion on pensions this year at all. There would have been no question of doing anything until next year. The accusation that either we have not done enough or that we should be paying them earlier this year is, coming from the Opposition, humbug.

Mr. John Mendelson

What about the cost of living?

Mr. Jenkin

I am coming to that. The hon. Member for All Saints also mentioned prices. As my right hon. Friend made clear yesterday, the rise in the price index is going at half the rate of six months ago. That represents a massive progress in curbing inflation and no section of the community will benefit more from that than the old.

My right hon. Friend told the House yesterday of our main decisions on corporation tax and made it clear that I would fill in some of the further details on how the new system will work and how it will apply to special types of corporation, and I hope the House will bear with me a few minutes while I fill in those details. There will, of course, be a White Paper with the Bill.

I begin by echoing my right hon. Friend's tribute to the Select Committee and to its distinguished Chairman, my hon. Friend the Member for Walsall, South (Sir H. d'Avigdor-Goldsmid). It was a notable achievement to have produced a unanimous report. Not the least valuable of the benefits of the Committee's work is that we now have in a single, readily comprehended form a wealth of factual detail about how the company tax system works—how it applies to inward and outward investment, how building societies, life assurance companies and so on are taxed. There are useful summaries on the tax systems of other countries.

Corporation tax need no longer be regarded as an arcane mystery to be left to the initiated. All hon. Members who take an interest in financial matters now have the facts at their fingertips. This House is better equipped to challenge the Executive. This is indeed "open government." I am glad of the welcome that it has had from both sides of the House.

I turn to the tax itself. As the Chancellor told the House, we have accepted the recommendation of the Select Committee that we should have an imputation system rather than a two-rate system. The argument has always been evenly balanced. Hon. Members may remember that in 1965 my right hon. Friend moved, and I seconded, an Amendment that we should have a two-rate system. In 1970, speaking from the Opposition Front Bench, I suggested that the imputation system might, after all, have certain advantages. Last year the Green Paper expressed a preference for the two-rate system on domestic grounds, and it certainly would be simpler to understand. The first Inland Revenue memorandum to the Select Committee included a brief description of the two taxes. The two-rate system took up six lines and the imputation system 25 lines. When the Committee balanced the arguments it became pretty obvious at an early stage what the advantages were, and the Committee's preference was clear. My hon. and learned Friend the Member for North-wich (Sir J. Foster), with his usual perspicacity, put it very simply but wholly accurately as early as Question No. 85 in the evidence when he asked: Would not the advantage of the imputation system in negotiating with countries like the United States outweigh the very slight disadvantage that the imputations system has from the point of view of administration? The Committee decided that it did, and we accept that.

What is this imputation system? It is worth a couple of minutes to describe it. It has five essential elements. First, a company pays corporation tax at a single rate on its profits, whether they are distributed or undistributed. Second, the deduction of income tax at source from dividends will cease. Companies will still deduct income tax from interest and other charges but not from distributions. Third, when paying dividends the company has to make an advance payment of corporation tax related to the amount of the dividend. It is absolutely crucial to recognise that the payment made to the Revenue at the time the dividend is distributed is what I have called it, an advance payment of corporation tax, or A.C.T. as I expect we shall come to know it.

Fourth, the payment of A.C.T. in relation to the dividend will confer upon the United Kingdom resident shareholder a tax credit equal to the amount of the advance payment. In other words, that part of the company's corporation tax liability is imputed to the credit of the shareholder. He will be regarded for his own personal income tax purposes as having received the sum of the dividend and the credit. The tax credit will, however, be set off and will satisfy the basic rate income tax liability on the dividend. An exempt taxpayer will be able to claim the tax back from the tax office. A higher rate taxpayer, or one liable to the investment income surcharge, pays the higher rate tax or surcharge on the dividend plus the credit.

When the company comes to pay its corporation tax bill after the end of the year the A.C.T. already paid in a year will be set against the assessment and that company will pay over only the balance to the Revenue. I emphasise that the key to understanding the system is that the tax paid by the company at the time it pays a dividend is an advance payment of corporation tax and not income tax deducted at source.

I apologise to the House for having inflicted that upon it. I hope it has helped some hon. Members—[Interruption.] Perhaps the right hon. Member for Devon, North (Mr. Thorpe), who seems to be in some difficulty, will understand the rest of my speech.

Mr. Richard Crossman (Coventry, East)

It is worse than before. I lost confidence in the hon. Gentleman half way through.

Mr. Jenkin

I will not repeat it again for the benefit of the right hon. Gentleman. He can read it all in New Statesman this weekend. If a dividend is to carry a tax credit in the bond of a resident shareholder, it follows that the company must have paid to the Revenue at least the equivalent amount of corporation tax. If that were not so the Revenue might be put in the position of giving credit for tax which it had never received. For this reason any company which pays a dividend must have a minimum United Kingdom corporation tax bill to cover the tax credit allowed to the shareholder. This too the Select Committee recommended. In the Committee's words there must be a minimum corporation tax charge as an essential element".

Mr. Joel Barnett

May I confuse the situation a little more? Suppose that a company makes a loss. Would that credit be allowed against it?

Mr. Jenkin

No. If it distributes a dividend at a time when it makes a loss, the most it can do is carry the credit through to the next year. At the time it pays a dividend it has to pay the tax, but against the corporation tax it can carry it forward and there would be a limited right to carry it back. This is why we have not been able to accept any of the schemes put up for instance by the international companies for allowing the spillover against the taxpayer's own liability.

I should like to mention a point about preference dividends because there has been speculation in the Press about how the system will affect them. The answer is that if for any preference shares in existence at April, 1973, a company's articles specify a rate of dividend in fixed percentage terms or their equivalent, the company's obligations will be adjusted so that it pays a dividend of such an amount as when the A.C.T. is added to it is equal to the old fixed rate of dividends. Thus a 10 per cent. preference share existing at April, 1973, will, assuming a rate of A.C.T. of three-sevenths, means a dividend of £7 to the shareholder and £3 paid as A.C.T., not as some have suggested £10 to the shareholder with A.C.T. of £4.3 or three-sevenths on top going to the revenue. If we were to do the latter it would confer on preference shareholders a wholly uncovenanted and unnecessary benefit. There is a further point which should be made. Because the tax payable at the time of a dividend being paid is A.C.T., the so-called "foreigner effect" referred to in the Press this morning, is avoided.

I turn now to cases where special treatment is needed. First I will deal with building societies and co-operative societies, on which a question was raised yesterday by the hon. Member for Willesden, West (Mr. Pavitt). In the light of the recommendation of the Select Committee these bodies will be subject to the same rate of corporation tax as small companies—that is, on the illustrative figures, 40 per cent., and the cost of the relief will be £7 million. The Select Committee made a similar recommendation about certain unincorporated associations and other bodies of a broadly non-profit-making kind which have objects of a public nature. This raises considerable problems of definition because this category covers a very wide range of organisations including trade unions and the Conservative Central Office, and it may be that not all of them should be treated in the same way. The only practical way of dealing with the problem is to have further consultations in the light of the choice of system we have announced, and later this summer the Inland Revenue will be initiating discussions with interested bodies. Any proposals which result will be brought before the House next year but they would have effect from the beginning of the new lax.

Life assurance companies are another special case. For many years they have been liable to tax at a conventional rate of 37½ per cent. on the investment income of their life funds, so long as it is reserved for policy holders. Under the new tax system this conventional rate will cease to apply to dividends from United Kingdom companies which will carry a tax credit as I have described. For other investment income which is subject to corporation tax, the 37 per cent. rate will stay unchanged in spite of the increase in corporation tax from 40 to perhaps 50 per cent.

I come now to close companies, on which I must elaborate on what my right hon. Friend said yesterday. We regard the simplification of the close company rules as one of the major benefits of the new system. My right hon. Friend stressed that the close company legisla- tion is needed only where significant amounts of revenue are at stake. Accordingly he announced that in addition to the substantial raising of the threshold enacted last year, three further steps will be taken. First, the maximum required standard for trading profits will be reduced from 60 to 50 per cent. To put it another way, a percentage of trading profits which a close company can retain without challenge will be increased from 40 per cent. to 50 per cent. Second, where a trading company's shortfall in distribution is no more than £1,000, the Revenue will take no action. Third, where a company's income is apportioned to the shareholders, we are raising from £100 to £200—or 5 per cent. of the total apportioned if that is less—the amount below which no charge will be made on a single individual for the purpose of tax at the higher rate and surcharge. The results of these measures, together with those taken last year, will be that four-fifths of the trading close companies which were within the shortfall in 1970 will cease to be liable after 1973.

Mr. Joel Barnett

What is the total profit of the one-fifth: is it higher than the profits of the four-fifths?

Mr. Jenkin

That I cannot tell the Hon. Gentleman without notice, but I will write to him. Over and above this, we propose further to simplify close company rules by making the following three changes.

First, rents, royalties, annuities and annual payments will no longer be treated as distributions. Second, annual payments which are made wholly and exclusively for the purpose of a company's trade will no longer be apportioned to the participators for surtax. Third, dividends will in future qualify for short-fall if they are paid "within a reasonable time" of the end of the accounting period even if this is longer than the present 18 months.

For the limited number of trading companies which remain subject to shortfall, we intend to recast the provisions which determine whether or not a company has distributed enough to avoid an opportionment. The way in which the 1965 legislation was put forward led many people to believe that the Inland Revenue must claim the maximum shortfall except where the taxpayer succeeds in displacing that claim if he can. Under the new system it will be made clear that the inspector should, where possible, agree an appropriate level of distribution with the company, and an opportionment will be made only if there is disagreement and the inspector is satisfied that more could be distributed without harm to the business. This will, I am sure, help companies and their advisers to understand how the legislation is supposed to operate. If the company appeals against the apportionment, the procedure will remain as it is now. The company will need to bring forward evidence in support of its view. It will then be for the inspector, if he can, to rebut the evidence or show why it does not lead to the conclusions contended for by the company. Thus, the often heard complaint that it is "60 per cent. or else"—the Revenue assures me that it was never intended to be like that—will be finally scotched.

I will now say a word about the transitional arrangements. From the start we were determined to eschew anything like the complicated refinements of the 1965 transitional provisions. Yet we cannot risk doing nothing if we are to prevent what could be a very substantial loss of tax if large numbers of dividends are postponed from 1972–73 to 1973–74. So we propose three simple alternative tests.

First, any company which pays at least as much in 1972–73 as it paid in 1971–72—that is, which does not reduce its dividend in the year before the changeover—will on that test alone be in the clear. Second, if it cannot satisfy that test then so long as its dividends in the two or three years after the changeover are no more than a stated percentage of taxable income—we propose 50 per cent.—it, too, will be in the clear. Finally, if it cannot satisfy either of those tests, we propose a straightforward scheme by which the dividends in the four years spanning the change of system are averaged.

There is always a conflict between simplicity and the prevention of avoidance. These are, I concede, fairly rough and ready transitional provisions, but they are simple to understand and easy to operate and will allow the transition to the new system to take place with a minimum of administrative constraints.

There is one small point on personal tax which I should like to make in addition to the announcement made by my right hon. Friend yesterday. The House will remember that my right hon. Friend's main Budget proposal was to raise tax thresholds very substantially—and this has been universally welcomed—by the biggest ever increases in the main personal allowances. There was one consequential change which he was not able to mention which I should like to refer to. That is the limit for small maintenance payments to divorced and separated wives and their children—that is, the limit below which such payments have to be made in full and not subject to deduction of tax at source.

During last year's Committee stage the hon. Member for Heywood and Royton (Mr. Joel Barnett) asked me to review these limits. I promised to do so and I have done so. The limit for these small maintenance payments depends on the level of the income tax allowances, for they determine whether the recipient of the payments will have to pay tax by direct collection if it is not deducted at source. The present limits, which were fixed in 1968, are £7.50 for weekly payments and £32.50 for monthly payments. Yesterday the Treasury made an order raising them to £12 and £52 respectively. It will apply from 6th April next to payments under maintenance orders made on or after that date. If a maintenance order is varied or revived after that date, the new limits will apply from the date of variation or revival.

For payments under current maintenance orders, the new limits will come into force in a year's time, on 6th April, 1973. This follows what has been done on previous occasions when the limits have been altered by the Finance Act. It gives the parties and the Revenue time to ensure that the change takes place smoothly, and avoids the confusion which would be likely to arise from going over from deduction at source to payment in full in the middle of the tax year. I hope that this will be welcomed as easing the problems of a particularly hard pressed category of taxpayer.

I have one or two points to make now about unification. I am sorry, though I quite understand, that the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) is not here to hear what I have to say, as he made some criticisms on this score this afternoon. Not altogether unexpectedly, the right hon. Gentleman criticised the proposed relief for investment incomes. Last year many of my hon. Friends argued that we should have scrapped the distinction between earned and investment incomes altogether. The Opposition argued that the distinction should be substantially retained intact on the ground that investment incomes at all but the lowest levels should be taxed more heavily than earned incomes.

By fixing the starting point at £2,000 and the rate at 15 per cent., the Chancellor aims to steer a middle course. Two thousand pounds is a reasonable first slice, and 15 per cent. is a fair differential for the higher investment incomes. It has been complained that £2,000 is too high. I disagree completely. First, it is by no means only at the lowest levels of income that the distinction between earned and investment incomes seems unreal. Many hon. Members on both sides know from their correspondence how hard it is to explain to people living in retirement on income from savings, or to divorced or separated wives dependent on maintenance payments, why they should be more heavily taxed than people who have the same income in the form of pension or earnings. Moreover, people in this position are far from all being low income tax payers. Bearing in mind that 30 per cent. of the benefit of unification goes to the 11 per cent. of tax payers who are retired, I should have thought that what we propose is the least that we can do and still lay any claim to fairness.

Second, it has always seemed to me absurd to encourage savings and yet penalise the results. Third, we are bringing our system more into line with foreign practice. Finally, if we pitched the starting point much lower, we should have to make a large number of small assessments on quite modest incomes, and this would go far to nullify the administrative savings by unification.

I come now to some of the reactions to the statement by my right hon. Friend the Secretary of State for Trade and Industry at the opening of the debate. Right hon. and hon. Members opposite have comforted themselves by claiming that the investment incentive and regional package announced yesterday and today simply puts the clock back to pre-27th October, 1970. This is specious nonsense.

I take, first, the new incentives. Instead of universal grants paid to firms all over the country, the new cash grants are confined to the assisted areas. They are far clearer and simpler to understand because the same rate of grant applies to buildings and plant. Moreover, as my hon. Friend the Member for Horsham (Mr. Hordern) said, they come on top of nation-wide free depreciation, and they are, in effect, tax-free instead of taxed.

There are two consequences of this. First, the combined effect of nation-wide free depreciation and regional cash grants is far more profit-related than was the old pre-1970 grant system. Their combined value is worth about three times as much, on a discounted basis, to a development area firm which is profitable than to one which is unprofitable. Labour's grants subsidised both indiscriminately.

Second, the regional bias—

Mr. Dan Jones rose—

Mr. Jenkin

Will the hon. Gentleman forgive me? I must get on.

The regional bias is now much stronger and much clearer than ever before. Here, I challenge the assertion made by the right hon. Gentleman the Leader of the Liberal Party. Comparing the proposed incentives with any previous system, using discounted cash flow techniques, for every £100 invested in plant and buildings the discounted regional advantage will be a full £18 in development areas and £20 in special development areas, which is higher than at any time during the Labour Administration. Moreover, because the new type of grants do not affect the tax allowances, this increased margin is clear, certain and universal in that it applies whatever the mix of industrial plant and buildings.

To take the new Industrial Development Executive, hon. Members opposite delude themselves if they believe that this is simply the I.R.C. reborn. We criticised the I.R.C. over the years because it was spending public money without accountability to this House. The new Executive will be headed by a Minister answerable to this House. The I.R.C. pursued its own course of action independent of other departmental policies. The new Executive will be fully integrated with the complementary work of all other Government Departments involved such as the Department of the Environment, the Department of Employment, and the Scottish and Welsh Offices, as well as the Department of Trade and Industry and the Treasury.

Last and most important, the I.R.C. was always seen by hon. Members opposite as a means of extending public ownership into private industry. The new Executive is but an extension to the field of industrial modernisation and re-equipment of the selective assistance which we now already provide for employment. There will be no wheeling and dealing in the Stock Exchange. No industrialist need fear that it will be used to achieve nationalisation by stealth.

This second full Budget which my right hon. Friend has put before the House fully lives up to the promise of the first. This, too, is a great reforming Budget. In the short term, of course, it will be judged—and rightly judged—by its effect on growth, on employment and on investment. It will be judged by its impact on inflation—on the contribution it makes to more stable prices and lower costs. Much will depend on the response it gets from those who negotiate pay claims whether as management or unions.

My right hon. Friend can point to many measures which help towards these aims. The huge increase in personal allowances will take £2¾ million out of tax altogether, will raise the threshold for earners by well over £3 a week and will cut the tax of those who remain liable by £1 a week. We are constantly told that take-home pay is what counts today. The Budget helps here.

A further major cut in purchase tax will directly cut prices. The V.A.T. proposals, by zero-rating almost all food, all house building, fuel and fares and by exempting rents, and by foreshadowing a rate which will be at least as low as any in Europe, recognises the needs of lower-income groups. The pension increase—an uprating of 12½ per cent, following on last year's 20 per cent.—represents a further real improvement in the living standards of the elderly.

For industry—a major new boost to investment and a new deal for the regions giving them a bigger, and clearer margin of advantage than ever before—the Budget is a massive stimulus to innovation and expansion.

Nothing should now hold us back from the prospect of sustained growth for several years ahead.

In the longer term the Budget will be seen as the second stage of the Government's programme of tax reform. The country can now see that we have indeed embarked on a radical overhaul of the whole fiscal system; and we are doing it openly, in consultation with industry and the professions, and with the help and advice of the House of Commons.

The unification of income tax and surtax, the new, neutral corporation tax, the ending of the discriminatory purchase tax and S.E.T. and their replacement by a much more neutral V.A.T., the review of death duties—and further ahead, perhaps the most far-reaching reform of all, the fusing of P.A.Y.E. and social security into a single coherent tax-credit system—all these changes are not just part of the process of modernisation and rationalisation, though they are certainly that. They are all essential to the long-term strengthening of our economy—fitting us to face the challenge and the opportunities of the Community, helping to sustain a rate of growth much faster than we have known since the war, and so enabling us to build that better life for all our people which must surely be the overriding purpose of politics.

Debate adjourned—[Mr. Jopling.]

Debate to be resumed tomorrow.