Clause 3

HC Deb 10 April 1973 vol 854 cc1142-229

CONTINUATION OF POWERS UNDER SECTION 9 OF FINANCE ACT 1961

3.45 p.m.

Mr. Denis Healey (Leeds, East)

I beg to move Amendment No. 1, in page 4, line 30, leave out 'August 1974' and insert ' December 1973 '.

I hope, Sir Robert, that you will allow the debate on this amendment to range rather wider than is normal in Committee on the Finance Bill because, as you know, it is usual in Committee to treat the amendment on the regulator as an occasion for a general debate on the economic situation as it has developed since the Budget and the relevance of the Finance Bill to that situation as a whole. Perhaps that is particularly necessary this year because the Budget was brought forward a month to a date before that on which much of the important information which the House requires for full assessment was available. Indeed, I think the Chancellor himself would assent to the view that on the whole the Budget he introduced a month ago was a mini-Budget. He described it himself as neutral and he reserved the right to introduce a major Budget at a later stage in the year if things appeared to justify this.

In fact, we have now most of the figures available on which the Chancellor or the House would wish to base a judgment, but I am bound to say—and I am sure the Chancellor will agree—that they are rather ambiguous in every sphere except one. The figures for the growth in the gross domestic produce between 1971 and 1972 vary from an estimate of 1 to 1½ per cent. based on expenditure to one of 3 to 3½ per cent. based on output. As regards the critically important estimate of the increase in growth between the second half of 1971 and the second half of 1972—the Committee will recall that the Chancellor predicted an increase of 5 per cent. for that period in his Budget statement last year—the preliminary estimates so far available suggests that the real increase was substantially short of that. The preliminary estimates suggests 4.2 per cent. although, if the average data on output, expenditure and income are taken, then the increase is nearer 3 per cent. In any case, any estimate is substantially short of the prediction which the Chancellor made a year ago.

If we turn to the figures on money supply we find the astonishing range of 11½ per cent. annual rate in Ml but nearly 40 per cent. annual rate in M3.

If we look at the unemployment figures we find a continuous and very welcome fall in unemployment accompanied by a remarkable rise in the number of vacancies notified. This suggests that in fact productivity over the past six months has been rising rather more slowly than many of us hoped and expected. Certainly some commentators have seen in these figures some signs of over-heating in the economy. I do not think the Chancellor would deny that there are serious shortages of skilled labour already appearing in some industries, particularly in South-East England.

If we look at the trade figures, the figures over the past few months suggest that the trade gap is running at something near £300 million a year. But, again, I am sure the Chancellor would agree that if he succeeds in achieving the 5 per cent. growth rate over the next 12 months to which he has pledged himself, and if simultaneously business rebuilds its stocks and increases investment, as he hopes, then we may find that figure widening very substantially by the end of the year.

I wonder whether he would comment on the suspicion that I have that last month's figures at any rate were to some extent distorted by the effect of industrial action in the Customs and Excise Department. Perhaps he would say a word about that later.

As the Government made plain during the Budget debate, they have chosen on this occasion to combine the most optimistic interpretation of all these ambiguous figures and to move ahead into 1973–74 with no change in the basic policy to which they committed themselves a year ago so far as fiscal policy is concerned. Nobody hopes more than I do that their gamble will prove justified, but I do not think the Chancellor would deny that it is a very precarious gamble to which he has committed himself and the nation. Therefore he has a special responsibility to make absolutely certain that he neglects no measure whatever as Chancellor of the Exchequer which may contribute towards ensuring that the gamble comes off.

I should like to say a word or two about the two issues which he and I agree are the central issues to the success of his policy—first, the problem of investment and, secondly, the problem of inflation.

Dealing, first, with investment, I think he agreed in the Budget debate—and it was agreed by those who spoke on Second Reading last year—that the growth of productivity is the only sort of growth in which this country ultimately can be interested, because it is only growth in productivity which in the long run can bring any improvement in living standards. In speaking to this amendment later in the debate, I hope the right hon. Gentleman will say more about investment than he or his right hon. Friend the Secretary of State for Trade and Industry was prepared to say during the Budget debate.

The only real evidence that we have so far of investment intentions this year is that which was collected by the Department of Trade and Industry some months ago, filled out to some extent by the monthly declaration of investment intentions which is made by business men to the Financial Times newspaper. There are signs that the comparatively rosy outlook as regards investment which was revealed two or three months ago is giving way to a rather greyer outlook. This is not surprising. As a deliberate result of the right hon. Gentleman's own policy, the rates at which small businesses can borrow money are higher than the expected return that they can get on their capital. Secondly, small companies are already hit especially hard by the 25 per cent. increase in the tax on their profits which the right hon. Gentleman has given them every reason to expect will operate from next year and will affect their behaviour in the current year. Finally, there is no doubt —and we have an enormous amount of evidence on this—that the prices and incomes policy which the Government have now defined in their code will be a very severe deterrent against investment for very many business men.

It seems to me that the most important single factor in determining whether we shall get adequate investment this year —and let us recall that we are discussing this problem against a collapse of investment over the past two years with an 8 per cent. fall in 1971 followed by a 10 per cent. fall in 1972—will be the degree of confidence amongst business men that the welcome growth that this country has enjoyed for the past six or nine months will continue at least over the next two years.

Talking to business men in this country and in the United States, I find that they are far more influenced by their expectation of the general climate of economic activity than by any direct Government incentives. I do not think that the Chancellor of the Exchequer will deny that fear of a crashing stop within the next 12 months following on the very welcome boom that we have seen over the past nine months is already beginning to influence the calculations of many business men who would have said two or three months ago that they intended to increase investment this year.

After all, it is an unusual conjunction of events to find the Financial Times, The Times and the Daily Telegraph all taking the view that the economy is overheating and that unless the Chancellor of the Exchequer takes steps now he may face a very serious crash and even the need to deflate later in the current year.

I put this question to the right hon. Gentleman, and I am sure that in the light of what he said in his Budget statement last year he will not accuse me of scaremongering. He must know that it is widely assumed in the business community in Britain and abroad that we shall run into quite severe balance of payments difficulties later this year. I hope that the right hon. Gentleman will tell us today as he did a year ago that he is not prepared to sacrifice growth this year to the maintenance of an unrealistic parity any more than he was last year.

The right hon. Gentleman is to be congratulated for his tenacity in steadfastly refusing to join the Common Market float and in reserving the right to keep the £ floating as long as he thinks it is in British interests to do so. His tenacity has given him the opportunity to meet a balance of payments deficit, which he hopes is temporary, by letting the rate fall still further. If he decides to intervene to support the rate when he gets under pressure, there is no question but that he will encounter a serious run on sterling. If that is likely to follow, that in itself will make people expect further deflationary action by the Chancellor of the Exchequer in purely fiscal terms. I hope that the right hon. Gentleman will assure the House and the country that he will be as steadfast for the rest of the year as he has been over the past few months in meeting pressure on the £ by allowing the £ to find its own level. But if the right hon. Gentleman gives that assurance, as I hope he will, that in itself will increase the inflationary pressures on the economy.

I now pass to the problem of inflation, which has dominated all our discussions of economic affairs over the past 12 months. I gather that the Morgan Guaranty Trust has estimated that the £ has depreciated against a weighted average of other currencies by some 12 per cent, since last June. When he speaks later, perhaps the right hon. Gentleman will correct that figure if I or the Morgan Guaranty Trust have it wrong.

I understand that that in itself is likely to have contributed some 2½ or 3 per cent. to the inflation from which we have suffered since last June. Although in some respects the inflationary problem seems to be improving, in others it is hardly improving at all.

The one really unambiguous indicator that we have had available since the Budget debate a year ago is the latest figures for the retail price index. Oddly enough, those figures were delayed a day when we took Treasury Questions a fortnight ago, so that we were not able to discuss their implications in detail. I have no doubt that the Chancellor of the Exchequer will tell me that they were not delayed. But he will not deny that the increase in the retail price index shows that since the so-called standstill or freeze was introduced five months ago, prices have been rising at an annual rate of nearly 8 per cent. and that food prices have been rising nearly three times as fast as they were during the same period 12 months ago.

Moreover, I think that the right hon. Gentleman will agree that we cannot expect to see a fall in food prices in the coming months. We are likely to see further increases not least as a result of the phasing out of the sugar and bacon subsidies to which the Government have already agreed.

We have many new price increases already visible or on the way. The prices of many commodities are bound to continue increasing this year, especially the price of oil. We have a 20 per cent. increase in the price of steel to industry predicted as a result of the Government's agreement that the British Steel Corporation shall assimilate its prices to those laid down in Common Market rules. We have the value added tax already creating havoc in our high streets.

On top of that we have the certainty of very substantial increases in the housing component in the cost of living largely as a direct result of the Government's own policy, with rent increases of up to 50p a week for council house tenants coming in two weeks, with swingeing rate increases already under way and with an increase in mortgage payments of about £1 a week for mortgage holders.

This is a very serious outlook for the ordinary man and woman. But it is also one which is very serious for the right hon. Gentleman's policy. His phase 2 policy, which came into operation only 10 days ago, assumes that earnings will go up only 8 per cent. pre-tax during the coming year. That will not be enough to cover the increase in the cost of living which can now be confidently predicted. This means that millions of people in this country, particularly poorer people, will get no increase at all in their real living standards this year, and for many of them there may be an actual fall in standards.

4.0 p.m.

This conclusion is reinforced by the answers given by the Chief Secretary to my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) the other day, because the answers he gave to Written Questions showed that if the average rate of growth in recent years continues up to 1977 there can be an increase in private consumption of only between 7 and 8 per cent. over the next four years, an average annual increase of something under 2 per cent. I hope that the Chancellor of the Exchequer will clear up the confusion into which we have all been thrown by the Chief Secretary's statement on Second Reading only a week ago, that the 5 per cent. increase in living standards, which he claimed the country had enjoyed over the first two years of Conservative rule, will be continued in the future—or that, to quote the words of the Prime Minister, the startling increase in living standards, he claimed, "was no mere flash in the pan". For it seems to me that the figures I have quoted—and if I have got them wrong I am sure the Chancellor will tell me where they are wrong—are quite inconsistent with this boast, unless of course the Chancellor is now preparing, as some newspapers suggest, swingeing cuts in public expenditure.

Is that the case? We are always being told about this but we are never told whether it is so. The Secretary of State for the Environment told the House the other day that he is to find £15 million, for subsidies for mortgage payers, from elsewhere in his budget. We listened with vigilant attention to his speech yesterday for some indication where that cut is to be made but were given no indication whatever. The House and the country need an answer to this question because the success of the prices and incomes policy depends on the answer, and the success of that policy is essential to Government policy in every other field of the economy

As the Chancellor knows, our complaint about the Budget on this side of the House is that it does nothing to assist the success of the Government's counter-inflation policy. On the other hand, it does a great deal to make its success more difficult The Chancellor may pride himself—if that is the right word—on the success of the standstill in earnings, and he can accept Mr. Hugh Scanlon's statement about this in the spirit in which it is offered. I dare say that the Chancellor may find that phase 2 of the policy over the next few months is broadly successful on the earnings side. But as the Government have so often made clear, in the autumn we move to a phase 3 policy which we have been robustly reminded, against foul imputations to the contrary, will not be tougher than phase 2 will be but more flexible and more relaxed than phase 2.

The problem that the Chancellor has created for himself by delaying a decision on the Budget judgment until the evidence is clearer is that if the gamble turns out to be mistaken and he is obliged, in the autumn, to impose big increases in taxation, or big cuts in the social services, which might then be the case, he will be doing so at a moment when he has to rely far more than he has in the previous 12 months on the good will of ordinary men and women in this country to make his counter-inflation policy work. There, as I tried to suggest in the Budget debate, is the danger of the rather complacent attitude which the Chancellor has taken so far to the economic indicators.

I would put it to him that in this situation, where otherwise the cost of living is to rise at least as far as earnings, and earnings are starting off six months behind a 4 per cent. increase in the cost of living which will have taken place during the freeze, he must do more to control those prices which he can control if he is not to find the whole of his counter-inflation policy collapsing, just as phase 2 comes to an end.

I was in the United States last week and had an opportunity of talking to those who were responsible for the startling success of the American counter-inflation policy on which the British Government have so closely modelled their own policy. I had an opportunity of having luncheon with the President's chief economic adviser just an hour after he had had to tell the Press that in the first month of phase 3 the cost of living had gone up by 2.2 per cent.—and not only food and commodity prices but right across the board—a rate of increase of some 26 per cent. a year.

There is no doubt that those responsible for controlling inflation in the United States are deeply worried about their ability to avoid the explosion which has so often in the past followed a temporary success in controlling earnings, unless drastic and quite unprecedented action is taken in the cost of living field. This is why the President has encouraged the beef boycott and has fixed ceilings to the cost of meat, something this Government have steadfastly refused to do, no less steadfast I might say, than President Nixon's refusal to do it until 10 days ago.

Looking at the problem into which the Government may be moving, the Chancellor's gamble may come off, and I am sure everyone on this side of the House will be happy if it does, because, as my hon. Friend the Member for Birmingham, All Saints (Mr. Walden) said, nobody on this side wants to inherit the kind of situation the Government would leave behind them if their policy were a total failure. The problem is that in this whole field of economic management the Government are in a state of total intellectual confusion and political demoralisation.

Mr. Dennis Skinner (Bolsover)

Surely not intellectual.

Mr. Healey

I believe that it is intellectual confusion. Let me tell my hon. Friend how much I admired the presentation of his own budget to the House ten days ago. I have doubts about its contents, but I believe that both sides of the Committee agree that his presentation was excellent and refreshing.

But the trouble is that the Government have been forced to abandon the principles on which they entered office and in which, there is no question, a majority of their supporters sincerely believed. Yet the Government have no confidence or conviction that the new course they have adopted is the right one. The result is that in their economic policy the Government clearly have no fixed sense of direction. Their tax policy, their social policy and their economic policy are all now pulling in opposite directions. The only movements they do make—they rarely last more than a day or two— when we get a sense that the Government know where they are going are those made when their minds have been concentrated by the prospect of some election or other coming along within the next week or two. Then we find the Government shooting off quite rapidly in one direction or another.

Let us take their attitude to the food element in the cost of living, the element which more than anything now threatens to wreck the American Administration's approach to the problem of inflation. The only contribution the Chancellor was prepared to make in his Budget to this problem was to give away £110 million to reduce the price of peanuts and lollipops just at the moment when the Government were increasing the price of school meals, cutting school milk and refusing absolutely to subsidise essential foodstuffs on the ground that they could not do so without rationing. Yet what do we find today? The House was discussing it only a few moments ago. The Government are subsidising the housewife in Omsk and Irkutsk as to 80 per cent. She is to get her butter from us at about 20 per cent. of the cost price and we are to pay the difference to the farmer and to the Community. At this moment, when the Government are cheerfully subsidising the happy Soviet housewife— one can imagine the smile spreading over those chubby cheeks as this cheap butter pours across the Iron Curtain—the Government are still sticking to the rigid line that there can be no subsidy of foodstuffs, because that would distort competition and force them to bring in rationing.

Let us look at the housing problem.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

The right hon. Gentleman complains about Government expenditure being too high, he speaks in the same terms about money supply, and now he calls for subsidies on food. Could he tell the Committee how he proposes to pay for those subsidies?

Mr. Healey

Yes, certainly I will tell the Committee. I would not have given £110 million to reduce the cost of lollipops, candyfloss and peanuts, which will in no respect reduce expenditure on those goods. It will not help the housewife. It will help only the dentist. Children will still receive the same amount of pocket money, but they will get a little more ice cream or candy floss for it. I would have used that money to reduce the price of essential foodstuffs, one of which is butter.

Mr. J. Bruce-Gardyne (South Angus)

That would not get you very far.

Mr. Healey

It would get me £110 million far—and it would be a wiser way of tackling inflation than was the Govern- ment's decision to reduce expenditure on commodities which damage children's health instead of building it up.

Mr. John Pardoe (Cornwall, North) rose—

Mr. Healey

No, I am sorry; I must get on.

To take the housing situation, at the moment when the Government are determined to inflict whacking increases in council rents they have decided to hand out £15 million to the owner-occupier. I have worked out that the Government are paying roughly £4 for every vote they expect to get in the local elections. If I have the figures wrong perhaps the Chancellor of the Exchequer will correct me.

The Chancellor told the House something quite different in his Budget speech. He said that he would meet the enormous Government deficit by borrowing from the private sector at the expense of the building societies and other institutions. In fact this was the way in which he sought to persuade those who complained about his spending money like a drunken sailor and by which he sought to square the circle. Yet the plain fact is that he turned tail at the first whiff of grapeshot. It reminded us so well of how the Government turned tail in respect of their lame duck policy when Rolls-Royce got into trouble.

Does the Chancellor believe in the policy by which he said he would square the circle and solve the problem of Government borrowing requirements this year or does he not? Will he subsidise his competitors every time if failure to subsidise those competitors gets him into trouble with the electorate? If he feels this policy to be so wonderful—we are told that he thought of it in his bath— how does he intend to meet the central problem of economic management which he revealed to us so clearly in his Budget speech?

4.15 p.m.

The fact is that there is now a dangerous gap which has opened between what the Government believe—and here the hon. Member for South Angus (Mr. Bruce-Gardyne) recently expressed the Government's real view far more honestly than they have dared to express it—and the steps which they are compelled to take, because what they believe is obviously false and because when they follow the path of Tory principle it gets them into electoral trouble.

We all recall so well that the Financial Secretary, for whom we have a certain affection, was recently quite indifferent to these wider political considerations since he occasionally uses the sort of phrases so beloved by the hon. Member for South Angus. We recall his saying on 2nd April that the fiscal reforms the Government are adopting can encourage people to work harder and management to operate more efficiently. It can reduce discrimination and remove distortion in production and consumer choice …". —[OFFICIAL REPORT, 2nd April 1973; Vol. 854, c. 150.] I wonder whether the Financial Secretary made this point to the Chancellor of the Exchequer in the bathroom, if he were allowed in, at the moment when the brainwave hit the right hon. Gentleman. This is what the Government really believe but it is certainly not what they actually do.

The Financial Secretary has now acquiesced in a value added tax which covers under half of consumer expenditure, which has been tailored to precisely those social conditions which he told us it was immoral for tax policy to try to meet when he was speaking to us about VAT a year ago. As a result we have adopted a system of VAT which costs the Government 6,000 extra civil servants to police inadequately, which imposes enormous burdens on ordinary people as unpaid tax collectors and which brings in a smaller yield than did the Selective Employment Tax which it is intended to replace.

What the Government have done about VAT is typical of their behaviour over the whole of the economy and their behaviour throughout and since the Budget. All these fine Conservative principles, this dedication to the market economy and the laws of supply and demand, have disintegrated into a sort of nervous opportunism—an opportunism which is so obviously lacking in honesty and consistency that it does not even win the political rewards which are its only justification and objective. For these reasons I shall ask the Committee to divide on this amendment.

The Chancellor of the Exchequer (Mr. Anthony Barber)

The right hon. Mem- ber for Leeds, East (Mr. Healey) concluded by talking about honesty and consistency. Therefore, it might be as well if I were to begin by answering two of his points.

The right hon. Member alleged that the last published trade figures of VAT were affected by industrial action of customs staff. I must tell the Committee that there was no such effect. [Interruption.] The right hon. Gentleman may not have asked that direct question, but he brought it in when referring to statistics about the cost of living and alleged that they were not published at the normal time, That also is not true.

It has become almost the custom in debates on the regulator to range fairly widely over the economic prospects for the year ahead. I agree with the right hon. Gentleman that this is an advantage because it enables the Committee to consider changes in the economy since the Budget and also to examine any new economic indicators which have appeared since.

First, I should like to say a word about the significance and the consequences of the amendment. Clause 3 continues, in what has become almost the traditional form, the Customs and Excise regulator introduced in 1961 by a distinguished predecessor of mine who is still with us but in a somewhat different capacity. The renewal to the date set out in the Bill—namely August, 1974 —in effect keeps the power in being until, in the normal course of events, the 1974 Finance Bill will have received the Royal Assent. It is to be expected that in that Bill the House will give the regulator power a further lease of life. In effect, what we have is a permanent power subject to annual renewal by Parliament. Whatever view is taken of the likely course of the economy, it is right that the existing Treasury power should be kept in being to be used if required.

The amendment would have the effect of making the period for the use of the regulator under the clause only four months long. The power would run from the end of August, when the existing power runs out, until the end of December. After that there would be between seven and eight months, from 1st January to the time when next year's Finance Bill received the Royal Assent, assuming it contained the regulator provision, during which the Treasury would not have the powers under the regulator.

I entirely agree that in practice a Chancellor would not expect to use the regulator in the early months of the year, because of the approach of the Budget, and that from the Budget onwards there is the alternative, if it is desired to change taxes, of amending the Finance Bill. But, clearly, there could be circumstances in which it might be necessary to act at any time. Therefore, I think that it is right to retain the power, as we have done in previous years.

I turn to deal with some of the points the right hon. Gentleman raised and in general to say something about the prospects for the economy, which are very relevant to the power we seek in the clause. In my Budget speech I said that the central objective of the Government's economic strategy was to maintain a faster rate of growth in national output. At the time of the Budget the indications were that we should broadly achieve an annual rate of growth of output of 5 per cent. over the 18 months to the current half year. The information since the Budget confirms that assessment and confirms that rapid expansion is being maintained. Nothing has emerged since the Budget to suggest that we are not on the growth path shown in the Financial Statement and Budget Report, or that we should not be able to sustain a 5 per cent. rate of growth over the next year or so. I must tell the right hon. Gentleman that without any qualification.

This year I had the benefit of an unusually wide spread of outside advice. Before the Budget The Times recommended that taxation should be increased by £1,000 million. The Economist thought that taxation should be reduced by £1,000 million. While it is certainly true that in the business of economic forecasting there are many uncertainties, one forecast can now be made with complete confidence. It is that The Times and the Economist cannot both be right. Certainly, The Times would take the view that my Budget judgment is more likely to be proved correct than that of the Economist. The Economist would take the view that my Budget judgment is more likely to be proved correct than that of The Times.

Anyway, I have come to a conclusion which is similar to that of many of my predecessors; namely, that the safest thing for me, as for any Chancellor in these circumstances, is to repeat that I stand ready to use the regulator in either direction if it proves to be necessary.

On the evidence now available I believe that we have the resources necessary to achieve our objective of a 5 per cent. growth rate over the next year or so. It is true that unemployment is falling rapidly, and everyone welcomes that, but the total is still too high. It is still above the previous peaks in the post-war period. It is even more above the previous troughs. For example, it is 300,000 above what it was in 1964. It is also important to note that recent studies suggest that there has been no major change in the structure of unemployment over the past decade.

Mr. Ray Carter (Birmingham, Northfield)

Has the Chancellor any explanation for the fact that, whilst it is true ihat unemployment is falling, employment as such is not rising? Why is there such a big discrepancy between the two figures?

Mr. Barber

The hon. Gentleman is probably referring to employment in manufacturing industry. There has been a big improvement in productivity. I think that I am right in saying that last year the improvement in productivity in manufacturing industry, by which I mean output per man, was 9 per cent. It was certainly a post-war record.

I was dealing with the question whether we have the resources necessary to achieve our objective of a 5 per cent. growth rate over the next year or so. It is true that against the unemployment figures there is a high level of unfilled vacancies. Some of the rise in vacancies over the past year I think simply reflects the increasing penetration of the employment service into the labour market. It should not be overlooked that the level of vacancies for last month was still below the levels in 1964 and 1965. The amount of overtime, which has been rising in recent months, is still substantially below previous peaks.

Another important indication is surplus capacity in manufacturing industry. The latest CBI industrial trends survey showed that the proportion of responding firms working below capacity was much the same as in the first nine months of 1970. I think that the right hon. Gentleman will agree that that was a period hardly noted for its high level of activity.

However, the recovery in industrial investment expected this year is vital. It was referred to in particular by the right hon. Gentleman. Industrial investment should rise sharply and so add substantially to capacity. The proportion of firms in the CBI survey expecting to increase investment in plant and machinery over the next 12 months is the highest ever recorded.

Business confidence, which I agree with the right hon. Gentleman is crucial to investment, is also high.

Sir Harmar Nicholls (Peterborough)

I hope that my right hon. Friend will study the sentence the right hon. Gentleman used about the impact of the high cost of borrowed money and the fact that the profit allowed on that money does not encourage investment particularly in small and medium-sized firms. We must find a way to let the hopes of profit justify taking on the burden of necessary borrowing.

Mr. Barber

I think that my hon. Friend and I are at one, in that we would both say that what motivates investment is the belief by a man in industry that if he goes ahead with his capital investment he will have a market in which to sell his goods, that he can sell them, and that he will make a reasonable return on the capital employed.

There is another reason why I believe that confidence is high, as the latest information from the CBI shows. I think that British businessmen do not put much weight on the gloomy predictions of the right hon. Gentleman.

Mr. Heaky

Read The Times and the Sunday Telegraph.

Mr. Barber

Perhaps I may refer not to newspapers but to the actual words used by the right hon. Gentleman last year in the debate on Second Reading of the Finance Bill, when he asked: Why should there be any confidence in his "— that is, my— prediction that we shall get faster growth as a result of this Bill? "—[OFFICIAL REPORT, 20th April 1972; Vol. 835, c. 799.] He had no confidence that this country would grow at a faster rate. He said so specifically, and he was quite wrong. I am sure that he is delighted that he has been proved wrong. He said so in his speech this year. But in the light of that prediction I think that people outside the House will take with a slight pinch of salt some of the rather depressing observations the right hon. Gentleman has made today.

Mr. Healey

Of course I made some false predictions a year ago, as the Chancellor did. I pointed out to the House the other day that he told us in last year's Budget that unemployment could not fall if earnings continued to rise; yet we had the biggest fall in unemployment coinciding exactly with the biggest wage explosion in our history.

I hope that the right hon. Gentleman will address himself to the point I made and the question I put to him about how he will meet a serious balance of payments deficit later in the year. I am not sure that I share the view expressed in The Times, Sunday Telegraph and Financial Times, but those newspapers are widely read by the business community. The Chancellor must take seriously the fact that businessmen take them seriously, and he must not ride off on a single false prediction, which he and I have often made in these debates.

I hope that the right hon. Gentleman will address himself to the question I put to him. Is he prepared to re-state on this occasion the undertaking he gave the House a year ago that he would not in a future balance of payments crisis sacrifice growth to an unrealistic parity?

Mr. Barber

The right hon. Gentleman has made a long intervention. Perhaps I may quote what he actually said last year on another subject, unemployment. [HON. MEMBERS: "Answer."] I will answer the question. The right hon. Gentleman said: we cannot look forward to any significant fall in unemployment over the coming year."— [OFFICIAL REPORT, 20th April 1972; Vol. 835 c. 797.] I am quoting from what the right hon. Gentleman said last year to show those outside the House—my hon. Friends know this perfectly well—that we cannot rely on the predictions of the right hon. Gentleman. It may well be, as any Chancellor knows—and if the right hon. Gentleman ever becomes Chancellor he will know too—that there are certain predictions and forecasts made which do not work out as intended. But it is certainly true to say that on the two main elements to which he devoted a lot of attention, growth and unemployment, he was completely wrong in each case and he will be proved to be held wrong once again.

Mr. Carter

Answer the question.

4.30 p.m.

Mr. Barber

I will answer the question. The right hon. Gentleman says he was misled because I referred to some correlation between incomes and employment. The right hon. Gentleman nods again, and I am pleased that he nods. I hope he will agree with his right hon. Friend the Leader of the Opposition, who has consistently taken the view—and I quote him—that restraint in incomes is our only guarantee of full employment. This is what I said last year, and it is what I say now. This is why we are taking the action we are taking at this time.

The right hon. Gentleman referred to the balance of payments. In my Budget speech I said that much of the deficit on visible trade this year would be offset by the surplus on invisibles. The figures in recent months support this assessment. Over the five months to February, the average deficit on current account has been about £20 million; that is, over the five months to February for which we have the latest figures.

If one were to take action on the dreary pessimism of the Opposition Front Bench, and the right hon. Gentleman in particular, coupled with the Opposition's demand for much higher public expenditure, the inevitable consequence would be a policy of higher taxation. This really is what the right hon. Gentleman is advocating.

Mr. Healey

The Chancellor has continued to suggest that he will answer the question I have put to him on many occasions and, indeed, in my speech on the Budget, as to whether he is prepared to repeat today what he told the House last year: that he remains determined not to sacrifice growth to the maintenance of an unrealistic parity. He will know that this is one of the anxieties most influencing business judgment at present. Will the right hon. Gentleman answer the question? Last year he was prepared to give this assurance.

Mr. Barber

I have made it quite clear before that there has been no change at all in my approach to growth and the balance of payments. The right hon. Gentleman may like to know that. I assumed he would have taken it for granted. The right hon. Gentleman must not write off all the observations he has made today. I am saying that the House and the country realise that the policy he is advocating would result in very much higher taxation for the people of this country. If he wishes to deny it, let him get up and deny it now. The truth is that he does not rise because he cannot deny it as this is the policy of the Labour Party and this is his policy. It is the only logical conclusion to be drawn from what the Opposition are saying about the economy and what they are advocating by way of increased public expenditure.

The way of the Opposition would once again lead to increased taxation, just as it did before, with all the implications that that would have for the pay and prices policy. The way of the Opposition would once again lead to a much slower rate of economic growth, just as it did before, and a slower rate of growth with all that that would mean for cutting back on living standards.

Mr. Joel Barnett (Heywood and Royton)

In view of what the right hon. Gentleman has just said about cutting back living standards, is he telling us he is planning to maintain an 8 per cent growth in personal consumption?

Mr. Barber

In real standards 1 can assure the hon. Member for Heywood and Royton (Mr. Joel Barnett) of one thing. By the time the next election comes, the annual improvement in living standards will be far higher than was the case when the right hon. Gentleman's party was in office and, what is more, it will be far higher than anything likely to be achieved by a Labour Government. I want now to turn to the economic outlook.

Mr. Barnett

Answer the question.

Mr. Barber

Over the next year or so we expect the rates of growth of the different components of demand to be more in line than 1972.

First, there is private consumption. The measures in last year's Budget were designed to boost private consumption in order to stimulate production and reduce unemployment. Consumers' expenditure in the second half of 1972 was 7 per cent. higher than a year earlier. The signs are that consumer spending has continued at a high level. The volume of retail sales was high in January and February, and in the three months to February was 9 per cent. higher than a year earlier. New car registrations, too, remain at a high level. But we expect the rate of growth of consumer spending, while still fast, to moderate over the next 12 months.

The second consideration is the rate of growth of public expenditure, which should slow down in the second half of the year.

Thirdly, with the recovery in world trade and higher domestic output, I expect the volume of exports to rise considerably after having been sluggish last year. There are already signs that the volume of exports is starting to increase. At the same time, the rate of growth of the volume of imports should not be as rapid as in 1972.

On the output side, industrial production in the three months to January was about 6½ per cent. higher than a year earlier. The Committee, I think, will welcome that. The rise in output has been particularly rapid in these months, representing an important addition to the flow of domestic supplies.

Our policies of expansion have also been successful in reducing the total of unemployed by about a quarter of a million since the peak a year ago.

A year ago I said that we were aiming at a rate of growth of 5 per cent. We are now achieving that rate, and we intend to sustain that rate over the next year or so. I believe that we have the conditions to enable us to keep on a 5 per cent. path without endangering our attack on inflation and without putting the balance of payments at risk. That is why, given the twin themes of expansion and the attack on inflation, I decided on a neutral Budget.

Mr. Tam Dalyell (West Lothian)

Before the right hon. Gentleman leaves the subject of public expenditure, he seemed to have lost track, doubtless inadvertently, of the question of my right hon. Friend on the £15 million which will be found out of the other expenditure of the Department of the Environment. Can he answer this question and tell us from where this money will come? In particular, will it, as has been rumoured, come from the programme for the cleaning of rivers?

Mr. Barber

The hon. Member for West Lothian (Mr. Dalyell)—indeed, anybody who has been in Government before —knows that within any departmental budget it is primarily a matter for the Minister in charge to decide and announce where the savings will be made. It is, I think, right that we should adopt the procedure that was adopted by the Government of the right hon. Gentleman. I will say without any qualification that the cost of that proposal will be matched by cuts to the same amount in the programmes within the Department of the Environment.

A moment ago I was explaining why, given the twin themes of expansion and the attack on inflation, I decided on neutral Budget. But all forecasting, on which demand-management must rely, is subject to uncertainties. It is possible that the pace of expansion may not be as fast as we expect. It is possible that it may be above the forecast path. That is why I stressed in the Budget speech that, if necessary, I shall not hesitate to act at any time of the year, in whatever direction the economy may require, on expenditure, on taxation or on monetary policy.

In the Budget Statement I made it clear that if our strategy for rapid economic growth is to succeed it is essential for our nation to control inflation. I said that when the Government had laid down definite limits on pay increases it was inconceivable that any Government would agree to a dispute being settled by an offer outside those limits. I expressed the hope that in these circumstances responsibility, moderation and common sense would prevail. That was a month ago. In the past month all the signs are that responsibility, moderation and common sense are prevailing. Not only was (he pay stand still observed, but we are seeing a growing recognition on the part of trade unionists throughout the country that the substantial pay increases which are available within the limits of stage 2 are fair and that they ought to be accepted.

That was the verdict of the coal miners when the offer which had been made to them was put to the ballot, as it had been the verdict of the gas workers before that. I am sure the whole House will agree that the results of the ballots in those two industries were victories for common sense. We now also have the acceptance of stage 2 increases by the teachers. In fact, the latest figures show that there have already been more than 60 settlements within the stage 2 limits, and as every day passes there are more settlements within those limits. What this shows is an increasing awareness that it would be wrong to take industrial action in defiance of a policy which applies a limit fairly to everyone and must succeed if we are to bring inflation under control.

Against this background, the proposed action for 1st May—May Day—which has been fostered by the Labour Party is now widely recognised as being wholly irrelevant. It is completely out of keeping with the mood of the nation. It is still not too late to call it off.

Mr. Skinner

Some hope!

Mr. Barber

"Some hope", says a member of the Labour Party. Perhaps I should ask the right hon. Member for Leeds, East, since he introduced this debate, whether, in the national interest, he will say here and now that he will recommend that it should be called off. He is a man of considerable influence in the Labour Party—

Mr. Brian Walden (Birmingham, All Saints)

Not if he says that!

Mr. Barber

I have a little more to say on this subject. I think I had better pass on.

With all due respect, and despite all the internal problems there may be, if the Labour Party is so stupid as to press ahead with this ridiculous gesture, I hope that the great mass of trade unionists who have more common sense will join with those who were always opposed to it in seeking to minimise the inconvenience that it will inflict on the general public. If the Labour Party persists in this brainless exercise and causes yet more discomfort to the long-suffering British public, 1st May 1973 will be one Labour Day it will live to regret.

The Opposition have made out no convincing case for the amendment, and I ask the Committee to reject it.

Mr. Pardoe

Is the Chancellor aware that the best possible way of securing what he wants to come about on 1st May is for the Government to declare it a national holiday? Those who are on strike and say they are on strike will not get paid for the holiday, while those who take the holiday and say they are taking it will get paid.

Mr. Barber

I considered that, but I came to the conclusion that as the event was likely to fail, this was not the occasion to take that action.

Mr. Pardoe

I was rather hoping that some people would get paid for taking the day off.

There are two fatal flaws in the economic policy of the last decade. They cropped up again and again in our last debate and will continue to crop up in all economic debates. First, there was the failure to carry out the planned devaluation in 1964 and, secondly, there was the Government's failure to introduce a statutory prices and incomes policy in 1970.

To make just one political point, if the Liberal Party had held the balance of power, as it will after the next election, both those fatal flaws would not have occurred because we would have forced devaluation on the Labour Government in 1964 and we would have forced a statutory incomes policy on the Conservative Government in 1970.

The country, the Government and to a certain extent the Opposition are all suffering from these basic flaws. The Chancellor of the Exchequer has given us figures of the CBI survey which show that business confidence is only just recovering from the consequence of the failure to carry out the planned devaluation in 1964. It was the tremendous squeeze and freeze which came as a consequence of delaying that devaluation for far too long that created the havoc in business confidence which caused the collapse of investment.

4.45 p.m.

Industrial relations may now just be recovering from this failure to carry out the planned devaluation in 1964. Industrial relations suffered for a long time, and are still suffering, from the aspirations of working people going ahead much faster than the economy was allowed to go ahead. That is the best possible recipe for national gloom and bad industrial relations. We are, unfortunately, not yet recovering from the failure to introduce a statutory prices and incomes policy in 1970. The present inflation rates show that that is so.

I am concerned not only about those two fatal flaws. They are history, water under the bridge. One can say that they happened and that it is unfortunate. I am concerned that the attitudes which led to those two fatal flaws are still with us. In the hearts and minds of most hon. and right hon. Gentlemen on both sides of the House there is a desire to get back to the good old days of fixed exchange rates and a free-for-all on the wages and prices front. There is a need for a permanent float—if with the crawling peg—which creates a certain stability in place of what might turn out to be anarchy if allowed to go on. There is also a need for a permanent prices and incomes policy.

There are certain questions that I wish to direct to the Government, and they are questions which the Chancellor of the Exchequer has touched on this afternoon and in previous economic debates. He certainly touched on the question of the Government's attitude to what happens when the balance of payments position gets out of hand which was fired at him by the right hon. Member for Leeds, East (Mr. Healey). The Chancellor is a good European, and so am I, but we do not have to go in a headlong rush for monetary union in Europe and acceptance of the French attitude to fixed exchange rates. It would be much better to say that we do not accept the need for a return to fixed exchange rates. We certainly do not want to go back into the tunnel or to have anything to do with the snake. We do not want to have anything to do with the French monetary union until such time as much greater progress has been made towards a federal Europe and a genuine democratic structure.

The Chancellor of the Exchequer did not answer the question about what happens next time the balance of payments position gets out of hand—if it is not already out of hand, which is a moot point. Business confidence requires a categorical answer to that question. The great majority of business men, whose confidence is just returning, need to know that the Government will not answer the next balance of payments crisis with the old squeeze-and-freeze measures.

The Government seem to want to get out of the ring on the prices and incomes policy. I cannot understand why. I am delighted that they have got into it. I have always wanted Governments in the ring on both prices and incomes. We cannot have full employment, a favourable balance of payments position, growth and stable prices without Government intervention in prices and incomes. So what should phase 3—and I believe it should be a permanent phase 3—be?

First, there is an essential need to insure people against rising food prices— not against all rising prices. It is unnecessary to insure anyone against a rise in the price of colour television sets. But the national psychology is such that it is essential to insure people against rising food prices.

The right hon. Member for Leeds, East made great play of the Opposition's answer on food prices, which is food subsidies. I am not intellectually against subsidies—I doubt whether many hon. Members on either side of the House are —but this question is very much more difficult than the Chancellor made out. It may be easy to talk about food subsidies as gesture politics, but one has to ask, how much would they cost? It is not enough to ask how much this year to stave off the crisis, but how much next year and the year after and for ever, because one thing which is certain about food subsidies is that they are the devil's own job to get rid of. Once they are imposed, they tend to stick.

In Committee on the Counter Inflation Bill we heard the hon. Member for Birmingham, All Saints (Mr. Brian Walden) rather favour open-ended subsidies for food. It may well be that they should be open-ended, but if the Opposition are to advocate food subsidies they have to be honest and to state clearly how much they are prepared for them to cost. The right hon. Member for Leeds, East did not recognise that when his Government were in power the actual Budget cost of food subsidies was brought down. Therefore there were pressures on the Chancellor of the Exchequer of that day, on the Minister of Agriculture and the whole Labour Cabinet, to get the cost of subsidising food down. There will be pressure on any future Government to do that once food subsidies are introduced.

I agree entirely with the right hon. Gentleman in his remarks about £110 million for sweets. I considered that an entirely foolish idea. But the suggestion made by the right hon. Gentleman would go precious little way towards solving the crisis generally. To do that would probably cost three times as much if it were to have a major impact on the price of food and, in consequence, on wages.

Having said that I do not accept that food subsidies would be the best way to deal with this problem, I think it essential to build into a prices and incomes policy a permanent insurance against rising food prices. I hope that the Government will accept the idea that this is a part of a prices and incomes policy and that before negotiations start on productivity deals and raising living standards everyone will be assured that their income will go up at least by what is necessary to compensate the man with average industrial earnings for the effect which the rise has had on his earnings over the last six months. Even if we had to adjust every six months, it would not be catastrophic. A simple straightforward flat-rate benefit calculation of the effect of the cost of food for the average worker would be easy. Of course it would be paid for not by the Government but by the employer. Food is crucial and once one removed the aspect of food prices from the negotiation one could get down to reasonable bargaining for the future.

Next we have to answer the question, what kind of penalties would one have in a permanent statutory prices and incomes policy? As I have said on several occasions in debates on prices and incomes policy, it is much preferable to use the fiscal means, to use a tax on inflation and to tax selectively the people who cause inflation whether by outrageous wage demands or by excessive price increases. Such a selective tax by national insurance contributions in the case of wage increases and corporation tax on company price increases would be administratively easy.

The Chancellor said that he believes that growth is possible and that we have the resources for growth for next year and the next two years or so. I should like to know from him or from some other Minister exactly what the words "or so" mean. It is clear from official forecasts that the growth rate in GDP will be much lower than the present level. The Chancellor is right to say that it is going on target now, but we shall be down to something less than a 3 per cent. growth rate within 18 months or two years' time on annual rates.

I believe that we have the resources to continue a growth rate of at least 3 per cent. for about five years ahead— and no one can see further than that. It would be helpful for business confidence if the Government could say that this five-year period is what they are aiming at and that they will aim for it to be certainly over 3 per cent. in the five-year period and over 4 per cent. in the first three years. They should also say that they will never sacrifice that growth target to a balance of payments crisis should it ever arise.

With those few comments on demands to the Government for categorical assurances for business confidence to go forward, I can see no case at all for doing what the amendment asks. If one believes in a planned economy, one believes in giving the Government of the day all the fine tuning they can get their hands on. I should like Governments to have more regulators than those we have at present. I will not vote with any degree of confidence in the Government's economic policies, but I shall not support the amedment.

Mr. David Knox (Leek)

The speech of the hon. Member for Cornwall, North (Mr. Pardoe) was its usual mixture of good sense and nonsense. I thought the point he made about devaluation in 1964 was very good sense. Indeed, I believe the Labour Party must regret, in retrospect at least, that it did not take that action. Had it done so, that party might still be on these Government benches.

The hon. Member said that a statutory prices and incomes policy should have been introduced in 1970. I thought that was nonsense, because irrespective of the intrinsic merits in a voluntary or a statutory prices and incomes policy, it was not practical politics at that time. As one who has always believed in a voluntary incomes policy and one who accepts a statutory policy in present circumstances, I do not believe that in June 1970—or at any point in 1970— a statutory prices and incomes policy was practical politics.

I welcome this general debate on the economy at the outset of our discussion of the Finance Bill in Committee. First, I make reference to the regulator. Like the hon. Member for Cornwall, North, I find it difficult to understand what this amendment means. It seems that it would provide a regulating power for about six months but clearly if one wants more sophisticated means for managing the economy one needs it for much longer.

Mr. Joel Barnett

I should tell the hon. Member for Cornwall, North (Mr. Pardoe) and the hon. Member for Leek (Mr. Knox), that it has been a well-known practice for many years to use this means for having an economic debate. My right hon. Friend the Member for Leeds, East (Mr. Healey) did not make the case for the amendment. We are concerned not with the amendment, as such, but with the economic debate.

[Mr. E. L. MALLALIEU in the Chair]

Mr. Knox

I understand that, but why could we not have had a sensible amendment instead of a foolish one? If the amendment had suggested September 1974, or something like that, it would have made sense, but the amendment is absurd as it stands. I have considerable respect for the hon. Member for Heywood and Royton (Mr. Joel Barnett) but the excuse he has advanced was not particularly convincing.

I am a strong supporter of the concept of a regulator. It gives to the management of the economy a greater degree of flexibility. Anything that does that should be welcomed and supported.

5.0 p.m.

In the Budget debate a number of hon. Members talked of the decline in the importance of the annual Budget. I do not regret this decline. I hope that it will continue. I think that it contributes to more flexible demand management. Whatever else we need to improve the standard of demand management, we certainly need greater flexibility. It is absurd to leave adjustments in the management of the economy from one spring to another. This is particularly so when we think of the time lag between the introduction of measures and then-taking effect. There seems no doubt that reflationary or deflationary measures take from 12 to 18 months to begin to bite. If flexibility is further restricted by our being able to take such measures only every 12 months, clearly we can get into serious economic trouble before things can be put right.

I welcome the renewal of the regulator powers this year. I hope that my right hon. Friend will not hesitate to use them, though I suspect that they will not be necessary in the current 12-month period.

Anything which contributes to greater flexibility will, in my view, help to improve the management of the economy —and there is plenty of room for improvement. Over the last 25 years there has been a steady deterioration. I hope that we have now moved into a period when this standard of management will improve again. I do not think that either party can feel happy about the way that things have gone during the past 25 years.

Since the end of the war our economy has been run on the basis of stop-go policies and measures. I am not a great admirer of this system, though I accept that the economy and the level of activity needs slowing down or speeding up from time to time.

The alarming thing about our experience over the last 25 years is that as each stop-go cycle has passed the stop part has got longer and deeper and the go part has got shorter and smoother. The deflationary dip of 1965–67 was longer and deeper than the deflationary dip of 1961–63. The 1961–63 dip was longer and deeper than the 1957–58 dip. The 1957–58 dip was longer and deeper than the 1952–53 dip.

The result has been that on each occasion unemployment has been higher than the previous occasion. We are now in a situation where we have had over 600,000 unemployed for between six and seven years. In my view, unemployment is and has been far too high for far too long.

Investment has been braked back with each stop. After each deflationary period has ended we have found it more difficult to get investment to increase, Britain has lost out against her competitors, and the British people have lost out in terms of their living standards.

In addition, the deficit on current account of the balance of payments has in each boom period got larger. This also suggests that there has been deterioration in the overall management of the economy. The fact is that, as each stop-go cycle has passed, the stop period has become longer and the consequences have become worse, and each go period has been shorter and the benefits have become fewer.

Up until 1960 the fine tuning of demand was, I thought, moderately successful. It now seems to be becoming more difficult to get it right if we are to judge by the practical results of what has been done.

Mr. Bruce-Gardyne

I think that my hon. Friend made a most important comment when he said that up to 1960 he thought that the fine tuning of the economy had been more successful than since. He will recall that it was in 1961 that we introduced the regulator.

Mr. Knox

My hon. Friend has made a perfectly fair point, but I do not think that that is necesarily the reason for the deterioration.

I find it difficult to understand why there should have been this deterioration. The information that the Government have today is better that it was in earlier years. In the 1956 Budget Mr. Harold Macmillan spoke about economic statistics as though it were a matter of looking up last year's Bradshaw. They are still out of date, but they are rather better and more up to date than at that time.

We have a better indicative planning structure today than in earlier years, with Neddy, and so on. These should enable the Government to manage the economy and manage demand more efficiently. Today we have the means for managing the economy with greater flexibility than at earlier times. I can only assume that the quality of demand management and the way that we have run our economy have deteriorated because the quality of political decisions has deteriorated. At the same time I think that there has been a deterioration in the conventional wisdom as represented by the pundits in the Press.

I do not make these remarks to make any particular party point, because they apply to both the major parties. However, an examination of the Labour Government's record shows that the situation was much worse under them than under the present Government.

I have mentioned that recent experience has been that each "stop" period has got longer and each "go" period has got shorter.

It is alarming that at the present time, only 18 months after the present expansion got under way, there should be a demand for stop or at least for a slowing down already and we should be hearing cries about over-heating. This is preposterous nonsense.

Today there are about 1½ million fewer people in employment than seven years ago. Yet the National Plan estimated that there would be rather more people available for employment today than in 1966. Therefore, it seems that a large number of people who are available for work today but are not in employment are not recorded in the unemployment figures. This hardly suggests over-heating in the labour market.

There are 700,000 people out of work today. By post-war standards that is far too many. It indicates that there is considerable slack in the economy and hardly substantiates the over-heating argument.

In addition, there is substantial underemployment of people at work. This is certainly my experience in industry. It is also the experience of most firms in my constituency with which I have had contact. I know that some are fairly busy, but about 75 per cent. of the firms in my constituency with whom I have discussed this matter still have considerable slack. They tell me that they could increase the output considerably without engaging further employees. I believe that this is true generally in the country.

I do not think that merchant bankers, stockbrokers or investment analysts and such people necessarily know or understand what goes on in industry. It is not in the interests of the owner of a firm to say to someone of that kind that he has substantial labour slack, because it suggests that he is not as efficient as he should be. I believe that the owner of a firm is likely to say that he is busier than he is; he will not let on that he has under-employment. I believe that when one talks to businessmen, especially about investment, raising money, and so on, they are unlikely to admit that they have this slack. I am therefore very doubtful when City people make claims about overheating in the labour market.

Certainly, in my constituency there is evidence of considerable under-employment of people at work. And, although I am willing to concede that there are labour bottlenecks in the British economy today—this is true of the building industry, but not in general terms—it is a great mistake to argue that, with 700,000 out of work and considerable underemployment of those at work, we are nearing a position of over-heating.

The same is true in terms of plant and equipment capacity. The manufacturing industries, which really count in producing economic growth, have, in my view and experience, plenty of spare capital capacity to increase their output. During the year up to December 1972, the labour force in manufacturing industries was reduced by 2¼ per cent. and output increased by 6¾ per cent. Although detailed employment statistics are always months out of date, the increase in employment that has taken place in the last 12 months has been mainly in the service industries. There is little evidence that there is not considerable spare capital capacity in the manufacturing industries.

Another factor which seems to substantiate that there is spare capacity in plant and equipment has been the sluggishness with which investment has taken off. If industry were operating flat out and had no spare capacity of plant and equipment, the investment boom would have taken off at an earlier point than it has done.

The present sitution suggests that industry is still using spare capacity that it created in the mid-1960s. My experience of industry supports that. There is still some way to go to take up the slack completely. It is only when it is completely taken up that the investment boom will take off properly.

The argument that the economy is reaching a point where it is in danger of overheating has not been made out. Those who have practical experience in manufacturing industry are not willing to support that argument. I hope that my right hon. Friend the Chancellor of the Exchequer will ignore the clamour which is made in certain quarters to slow down the rate of economic growth. If he were to do that the consequences in the long term for the British economy would be disastrous.

It would be disastrous to start slowing down after a mere 18 months of expansion. It is not enough to continue the present rate of growth for just another 18 months. That would mean that we would have maintained a growth rate of 5 per cent. a year for three years. If we are to establish the confidence of British industry, so that it will invest on a long-term basis, we must go for high and sustained growth for a longer period.

I hope that my right hon. Friend will go for an annual growth rate of 5 per cent. for the next five years. If that happened, it would give industry the confidence to invest and to create more capacity. Who knows, after five years of growing at 5 per cent., having first taken up spare capacity and then created the confidence to undertake more investment, we may well be able to increase the underlying rate of increase in the capacity of the economy from between 3 to 3½ per cent. at the present time to 5 per cent. We might well be able to achieve 5 per cent growth each year on a long-term basis.

Other countries have been able to do so, and I see no reason why we should not do so either. An act of faith is required in order to achieve high long-term growth and to pursue that growth policy in the future. My right hon. Friend is moving in the right direction. I hope that what I have said and what some of my hon. Friends may say will give him the encouragement to go further in future.

5.15 p.m.

Mr. Dalyell

Before the Chancellor of the Exchequer has to leave the Chamber, may I have a word with him on two subjects? I shall be brief, so as to enable him to go to his legitimate business. First, is it seriously argued that the Department of the Environment will somehow manage to find £15 million from its own allocation? That is the worst of all possible worlds. Departments such as the Department of the Environment do some fairly serious planning. Suddenly to say that it must find £15 million from somewhere is a most unsatisfactory way of managing a departmental budget.

Is it true—the Secretary of State for the Environment having said that the £15 million will be found from within the Department—that the head of the Treasury, with all the limelight that is on him in this situation, does not know from where the £15 million will be found? If the rumours are true, and it is to be found out of the wretched river cleaning programme, which, heaven knows, when we consider the Trent and other rivers is urgent enough, the idea of passing it back is the most inefficient way of using resources.

Secondly, REP has not been mentioned but the Chancellor talked about investment and confidence. If we are talking about business confidence in Scotland and in the other regions, REP is very important. Perhaps the money is not so important as the idea of continuity and the danger of being mucked around. The one thing that industrialists in the regions do not want are any more piecemeal changes. Cannot we stick to REP and recognise it as part of the system? In that way we will get continuous industrial growth. To be fair to the Chancellor, I shall now let him off the hook.

Mr. Barber

I am most grateful.

Mr. Dalyell

It is fortunate that the Minister of State is on the Treasury Bench. It was with him that I had correspondence on the use of resources. It is strange that we have not heard anything this afternoon about the public sector borrowing requirement. I should have thought that in any general discussion about the economy and its current state some mention would have been made by the Chancellor of that require- ment. I accept that he quoted The Times and the Economist and said that his judgment came between the two.

But, both newspapers mentioned one problem in common—the critical rise in the public sector borrowing requirement. I link that with a non-vituperative and perfectly serious discussion on the taxation system and the conservation of energy resources. I shall not be long.

A matter that concerns us a great deal is the future of Britain's power programme. It is no good saying, "Let us have a debate on fuel and power." That is not quite the issue. The issue, as my hon. Friend the Member for Birmingham, Northfield (Mr. Carter) knows very well, is that the capacity which will be made available to the generating boards to build up the kind of energy programme that we need in this country will depend on finance. An oil-fired power station is going ahead at Peterhead. There is the likelihood of a 2,000 megawatt station at Littlebrook in Kent, and a 4,000 megawatt station at Killingholme. Those are all oil-based power stations.

This is all happening in a week when there is likely to be a dramatic change in the energy policy of the United States. President Nixon is in the act of clearing the way for the importation of oil from the Middle East into the United States. Hitherto, there have been restrictions in the United States on the import of oil. It was thought that United States home industry had to be helped in every possible way. Now there has been a dramatic reversal of the situation. In the next few years the United States will become importers of oil in a big way. It is in that context, if we are to have a serious discussion on current economic planning, that it is important to focus attention on the money that will be available for investment in the public sector.

What will be available to the Atomic Energy Authority and the generating boards so that they may go ahead with some coherent and thought-out programme? As various Select Committees have discovered, the truth about the British nuclear industry is that because of the shortage of orders it has been impossible to settle on a system in which the bugs can be ironed out. I am referring to the various corrosion problems. It is not a technical problem. My hon. Friend the Member for Swindon (Mr. David Stoddart) knows a great deal about this matter. He knows, as do all of us, that this is a question of a regular supply of ample finance. Technology is no problem provided that one has a regular supply of money in order to make the necessary investment.

Therefore, we return to the question of the public sector borrowing requirements. It is true that it may be dangerous to make a greater commitment in the public sector, for interest rate and other reasons. But if we do not do this, how shall we face up to the kind of energy problem that Britain and Europe as a whole will face, in the very different situation that now faces the United States? Hitherto, energy policy has been really a matter of costs. Yes, there have been various social considerations, such as unemployment and social costs in the mining areas. But now energy policy becomes very much a question of world reserves. It is in that light that an energy policy must be framed.

The general question I raise, on the general debate on the economy, is, what will the nation do about the shortage throughout the world of liquid hydrocarbons? Should we have an economic system which allows us to burn them for the next 15 years, as has been our wont, or should we decide that we have to face up to the fact that, if we do not act as if we were in a crisis situation, we shall have a real crisis in the 1980s and 1990s, or at any rate sooner than we think?

There cannot be an answer today, but markers have to be put down. We have to think in terms of an "energy-added tax" and the way in which the fiscal system can be geared to the conservation of energy. I do not know much about housing policies, but I know that in a total situation such as this we have to think in terms of energy conservation; we must think of double glazing and the building regulations. One cannot take this out of a general context.

Linked with the question of the public sector borrowing requirement is the whole question of future energy supply, which deservedly is now becoming fashionable throughout Western Europe. What thought are the Government giving to a fiscal system which will take into account the shortage of reserves and not only short-term costs as we have known them?

Mr. Bruce-Gardyne

Like the hon. Member for West Lothian (Mr. Dalyell) I want to say something about some aspects of the public sector borrowing requirement. I agree with him that this is essential to our discussions. I hope that he will not think me carping if I tell him that I shall try to relate my comments on the public sector borrowing requirement perhaps rather more directly to the subject of the regulator debate this afternoon.

We were entitled to some explanation from the right hon. Member for Leeds, East (Mr. Healey) of what his amendment is supposed to mean. I hazarded the guess, in a seated intervention, that perhaps the right hon. Gentleman did not know what it meant. But at least, I hope that before the debate is concluded the Opposition will tell us what the amendment is supposed to mean and what it is designed to achieve. That is not an unreasonable request.

I was inclined to think that it was a mistake to hold the regulator debate so soon after the Budget, and much sooner than we have previously held it. However, listening to my right hon. Friend the Chancellor I began to have second thoughts to some extent. He told us a little more about his strategic intentions, to which I shall return shortly. But I pick up what the right hon. Member for Leeds, East, had to say in relation to the Question on 6th April from his hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) to my right hon. Friend the Chancellor on the resources table in the White Paper "Public Expenditure 1976–77". I feel responsible, to some extent, for the terms of the reply, because it was I who initially asked the Treasury to provide that information. I am grateful to the Treasury for doing so. But if the right hon. Gentleman is to use information such as that which is supplied in that answer in the way that he used it this afternoon, I cannot believe that it is likely to encourage the Treasury to help us in this manner in the future.

My purpose in asking the Treasury to provide this information and the additional resources table was simply to spread the full range of hypothetical possibilities of resource growth over the period we are discussing. That is all. I made that quite clear at the time and have done so since then. The right hon. Gentleman picked this up and came very near to implying that the low resource growth, which was a hypothesis laid out in the answer to his hon. Friend's Question, had in some sense now been accepted by the Government as a clear indicative possibility. That is not a fair proposition to make from that Answer.

Mr. Healey

The hon. Gentleman must not suggest that it is wrong for hon. Members to use information made available to them in answer to Questions from himself or from anyone else. If he takes the trouble to read again what I said—I have had the advantage of reading it in the last few minutes, as I have been correcting my speech—he will find that I related the implications of the figures precisely to the assumptions on which they were based. What surprised me was that the Chancellor, having been presented with two quite independent arguments suggesting that there would be a heavy fall in private consumption during the coming year, chose not to reply to either of the arguments. This can only justify the suspicions of some of my hon. Friends who believe that the Government are planning for a severe cut in the rate at which private expenditure is rising and a real cut in the living standards of millions of our fellow citizens.

Mr. Bruce-Gardyne

I shall study carefully in HANSARD tomorrow what the right hon. Gentleman said. It seemed that he was arousing expectations that the Government were accepting a hypothesis —very clearly a hypothesis—about a cutback in consumption. My only purpose in getting the table on the record was to have the whole range of hypotheses which seemed possible. I am grateful to the Treasury for that.

On the general subject of the regulator, I have always been very dubious about our wisdom in renewing the regulator. I was fascinated by the comments of my hon. Friend the Member for Leek (Mr. Knox). I believe he was absolutely right in suggesting that our attempts to fine-tune the economy were somewhat more successful in the 1950s than they were in the 1960s. I do not happen to think that they were successful in the 1950s, but I think that in the 1960s they were utterly disastrous. That leads me to the conclusion that perhaps we might be better off without the regulator. However, it is conventional to accept that we shall continue with this rather dubious device for another year. I shall not break convention on this occasison. It has enabled us to have from my right hon. Friend the Chancellor a more up-to-date assessment of the course of the economy. He gave us a number of very interesting indications of his present thinking.

5.30 p.m.

The main point that my right hon. Friend added to our fund of knowledge was that the Government were now thinking in terms of sustaining the present rate of growth in the economy over a further year or 18 months. He assured us that he was not in the least concerned about the possibility of this leading to so-called "over-heating", or demand problems in the domestic economy. He based this on the assumption that, in the months ahead, the rate of growth in private consumption would begin to decelerate, that the rate of growth in public expenditure would decelerate after a few months and that exports would grow and imports tend to stabilise.

If all these predictions of my right hon. Friend are right, life will indeed be rosy in the months ahead. My biggest anxiety, I confess, is about public expenditure. I know, of course, that we have the predictions of this curvaceous development over the years ahead, taking us down to virtually nil growth in public expenditure in the later years of the series of the PESC review. But notwithstanding what Mr. Samuel Brittan told us in the Financial Times yesterday morning, which I am sure we all read with great interest, I do not see to date any clear or convincing indication of any forthcoming reductions in public expenditure.

Indeed, I thought that last week another very modest increase was announced— and we have yet to hear from my right hon. and learned Friend the Secretary of State for the Environment where the offsetting economies in his Department are to come. He was asked that specific question and he specifically gave no answer. So I should like to know a little more about how soon the rundown in the rate of increase in public expenditure will occur and where precisely the cutbacks or reductions are to be expected.

My right hon. Friend did not tell us much more today about the condition of monetary policy. I received a Parliamentary Answer from the Minister of State on the question of the money supply only yesterday. I asked: … what was the increase in the money supply, in the latest period of three months for which figures are available, expressed at an annual rate and measured by the M3 and Ml definitions and by reference to the increase in notes on circulation with the public respectively; and whether this was in accord with the Government's monetary policy. His reply is worth quoting for its poetic beauty: In the three months to mid-February Ml increased at an annual rate of about 11 per cent. I do not consider that the recent three months' figures for notes and coins in circulation with the public and for M3, expressed at an annual rate, are a reliable indicator of the direction of monetary policy though, for what they are worth, they are 18 per cent. and 40 per cent. respectively. Then comes the touch of poetic beauty: Clearly, were these figures meaningful they would not be in accord with the Government's monetary policy."—[OFFICIAL REPORT, 9th April 1973; Vol. 854, c. 196–7.] That, I thought, was very attractive.

Mr. Robert Sheldon (Ashton-under-Lyne)

Might it not be that it is because they are not in accord with the Government's policy that the Government do not consider them meaningful?

Mr. Bruce-Gardyne

The hon. Gentleman should not make a suggestion like that. I would not dream of pursuing it.

I hope that my right hon. Friend's attention has been drawn to the comments by W. Greenwell in their latest monetary bulletin. They make a very good point. After discussing the shortcomings of M3 and,also Ml incidentally—they do not entirely share the Minister of State's high estimation of Ml—a high estimation which varies occasionally when Ml starts playing traitor and showing a higher rate of growth than M3—they say in their bulletin: … the other measure of ' spending money ' notes in circulation with the public"— which they put at 16½ per cent. on the latest figures, and not my hen. Friend's 18 per cent.— would appear to be the best indication at present available of the true monetary growth. This is a serious view from a serious source, which might be worth further consideration by the Government.

I should like to hear the Government's intentions about interest rates. It is here that this debate can serve a useful purpose. There is a certain amount of contradiction—perhaps that is too harsh a word; say "uncertainty"—in the noises emanating from the portals of Whitehall on the subject of the outlook for interest rates.

I should like to start by quoting in evidence the Chief Secretary, who, in our debate on the Counter-Inflation Bill on 27th February, talking about competition and credit control, said: I can respond to the requests of my hon. Friends the Members for Oswestry … and South Angus by assuring the House that it is not our intention, by resorting to quantitative restrictions, to throw away the striking gains in the efficiency of the financial sector that have been achieved under the new arrangements. That would be a retrograde step,"— this is the important point— and one that would not avoid the need for high interest rates if an excessively rapid growth in the money supply is to be reduced." —[OFFICIAL REPORT, 27th February 1973; Vol. 851, c. 1345.] That was my first piece of evidence. My second was my right hon. Friend's Budget Statement, in which he said, as has often been pointed out: With real demand expanding, the objective must be to prevent a large borrowing requirement from leading to too rapid a growth of money supply."—[OFFICIAL REPORT, 6th March 1973; Vol. 851, c. 252.] Not, perhaps, a very precise statement. However, it was accompanied, in the March Quarterly Bulletin of the Bank of England by a very precise statement: The calls for Special Deposits have helped to prevent the Government's expenditure adding undesirably to bank liquidity; and the strong rise in interest rates should help to reduce the demand for money and so induce a somewhat slower rise in the money stock. My next piece of evidence is the Minister of State, speaking in the Budget debate on 8th March, when he said: Prices have adjusted quickly and the higher structure of rates established in the markets should enable the authorities to sell stock on the scale required."—[OFFICIAL REPORT, 8th March 1973; Vol. 852, c. 722.] But item number four in this evidence —this is the one which concerns me— came from the reports of the graphic comings and goings in Downing Street of the building societies' leaders last week. In the Evening Standard of Wednesday 4th April, under a heading which had something to do with the building societies being left on their own, and which was corrected within hours, Mr. Robert Carvell wrote: … Mr. Barber told Building Societies Asso-cation chiefs that the current crisis "— in mortgage rates— is likely to blow over and they ought not to take panic action in coping with short-term difficulties. The inference was that there was a Treasury expectation of falling interest rates generally in the next few months. Was that inference justified? If it was, the implications for monetary policy against a background of the assumed borrowing deficit which we face this year are remarkably disturbing.

I have heard suggestions from Government circles, and not the outermost Government circles, that interest rates are far too high and are almost to be treated as a treasonable situation in the light of phase 2. We need a rather clearer statement here and now of the Government's expectations and intensions for interest rates in the months ahead if they are to fund their borrowing requirement.

I conclude with one final piece of evidence. I believe, unlike some of my hon. Friends, perhaps, and certainly unlike hon. Members opposite, that, at the root of our problems up to now, during the period of this Parliament, and the root of our problems in the months ahead, has been and is the excessive rate of growth in public expenditure.

I would like to draw the attention of my hon. Friend the Minister of State to the statement of my right hon. Friend the Chancellor of the Exchequer in his official statement on public expenditure which he made in the autumn of 1970. He then said: The effect of the policies which have been applied in recent years is all too clearly seen in the way national income has been used. In 1964, the public sector accounted for 44 per cent. of the gross domestic product. By 1969, that proportion had risen to 50 per cent. —exactly half our national output. In our view, this trend is unacceptable."—[OFFICIAL REPORT, 27th October 1970; Vol. 805, c. 38.] I entirely agree, but, as my hon. Friend would agree, this has been a trend which has been continued.

My hon. Friend must believe me. The latest figures which I have from my hon. Friend the Chief Secretary, which he gave in a Written Answer on 6th April were as follows:

"Total public expenditure expressed as a percentage of gross domestic product was as follows:

					Per cent.
1964–65	…	…	…	…	43.2
1970–71	…	…	…	…	50.3
1971–72	…	…	…	…	49.9
1972–73	…	…	…	…	50.8

The percentage for 1973–74 is unlikely to differ significantly from that for 1972-73, although the estimate at this stage suggests that there might be a small reduction."—[OFFICIAL REPORT, 6th April 1973; Vol. 854, c. 175.]

The Minister of State, Treasury (Mr. John Nott)

I shall be speaking later in the debate, but I wonder whether my hon. Friend will agree that he also received a letter from the Chief Secretary which produced figures on a rather different basis. These figures were of public expenditure on goods and services, which showed that the trend had gone the other way.

Mr. Bruce-Gardyne

The figures which I was quoting in that last series which I gave are precisely the figures that my right hon. Friend the Chancellor of the Exchequer was quoting in the autumn of 1970 and he said that the trend was unjustifiable. The trend was unjustifiable in 1970 and is still unjustifiable today.

Mr. A. E. P. Duffy (Sheffield, Attercliffe)

The hon. Member for South Angus (Mr. Bruce-Gardyne) cannot accept all the claims of the Chancellor, nor share in all his confident predictions, and neither can I. I hope he will allow me to touch on some of them later, but I wish to take issue with one of his points at the outset.

The hon. Member repeated the Chancellor's description that this Budget was neutral, but he must acknowledge that it is neutral only in a technical sense, in relation to the overall balance of Government spending and revenue. As my hon. Friend the Member for Heywood and Royton (Mr. Joel Barnett) said on Second Reading, it is far from neutral. As my right hon. Friend the Member for Leeds, East (Mr. Healey) reminded the Committee yet again this afternoon, in deciding to let the economy go on expanding at over 5 per cent. a year the Chancellor is taking a decided gamble. How much of a gamble turns, as most commentators seem to have agreed in recent weeks, on the annual rise in productive capacity. The continued expansion must put a strain on that capacity. It may, perhaps sooner than many of us wish to see, show signs of overheating; that is, if the slack runs out sooner than the Chancellor expects.

The hon. Member for Leek (Mr. Knox) drew on his local experience in repudiating any suggestion of overheating. I found that difficult to accept. I have taken the trouble in the last few days to inquire of my local employment exchanges to find out the state of the local labour market. The experience in Sheffield and district is that there is already an acute shortage of certain categories of labour. As my hon. Friends would expect, these are all shortages of craftsmen, although it is remarkable, at this late stage in the post-war period— throughout which we have all been agreed on the need for retraining and retooling the labour force—that we should still be acutely short of key workers in our economy.

5.45 p.m.

I was much interested in the Chancellor's second claim, that capacity is as great now as it was just a year ago. It is difficult to dissent at this stage from his further and all the more important claim that the economy will proceed comfortably along its growth path over the next year or so. Unfortunately, as my right hon. Friend the Member for Leeds, East said, there must be an element of gamble involved, and that gamble may be precarious.

Another sense in which the Chancellor is surely taking a gamble is his treatment of the balance of payments. He has repeatedly emphasised that our balance of payments will not henceforth inhibit growth, and by floating the pound last summer and resisting pressures to re-peg sterling prematurely he suggests an awareness of the need to avoid the errors of 1961 and 1966. He recognises that there can be no further depreciation of sterling if the Government's counter-inflation policy is to succeed. Already he must be aware that higher import prices have seri- ously jeopardised the prices side of stage 2 and that it has not therefore developed according to plan. He must also be aware that we on this side of the House are not wholly convinced that he will be able to keep his nerve and maintain his pledge.

The Chancellor, given his reluctance, which he displayed yet again in answering my right hon. Friend's questions, is presumably prepared to allow the balance of payments to deteriorate over the next year or so, but to defend the present sterling exchange rate surely means borrowing abroad and using the ample official reserves. In this way he doubtless seeks time for the counter-inflation policy to succeed on the basis of a continuing rise in output and in living standards. We are interested in his claim that under this Government living standards will be higher, but he can be in no doubt that a condition of the success, or certainly the maintenance, of his counter-inflation policy is a rise in living standards, but also without any intensification of inflation which he would undoubtedly get if there was a further sterling depreciation.

It seems that the counter-inflation policy is being given overriding priority. All other problems of economic management are postponed for solution in 1974, by which time the Chancellor hopes that inflation will be under control, but, as my right hon. Friend reminded him, he will be coming dangerously near at that point to jeopardising his own party's election timetable.

The twin objects, then, of the Government's economic policy are a 5 per cent. annual growth rate and control of inflation. I assume that hon. Members on both sides of the House will join the Chancellor in hoping that the Government's gamble will pay off. It will be hoped that such all-out expansion will secure the prize of a successful counter-inflation policy, but we must keep repeating that the counter-inflation policy must be rooted in popular consent. I have no doubt that if my hon. Friend the Member for Ashton-under-Lyne (Mr. Sheldon) catches your eye, Mr. Deputy Speaker, he will later spell out as only he can just what that means for the industrial worker, and that overheating and demand pressures on prices will not develop before mid-1974.

As the Economist pointed out on 10th March this year Treasury forecasters have not had a particularly good track record since budget forecasts have been published … all the forecasts to date have been wrong". The hon. Member for South Angus seemed to share that pessimism. One of the major doubts over the prospect of achieving a sustained rate of growth is the question of how rapidly industry will start to run into production bottlenecks as a result of a slow rate of investment during the last two or three years, despite the Chancellor's claim this evening about capacity.

The Chancellor's assurance last month that the present system of incentives in industrial investment will continue at least until 1978 is important especially for those who represent constituencies in assisted areas. It will confer upon such areas a much-needed continuity and stability and will enable them to underpin regional development at a critical time. Furthermore, the latest survey of investment intentions published at the beginning of the year by the DTI showed that a surge in investment was on the way, but that it would probably not reveal itself until much later on, and it was suggested that this might not happen until next year. That must throw into doubt the Chancellor's claim that capacity can sustain growth and, therefore, throw doubt upon his growth target.

I do not doubt that the Chancellor is right when he says that industry wants to invest because, as he says, it is vital. The latest CBI trends showed a remarkable revival of optimism and expectations of spending. But what will be the effect on that optimism of record interest rates? Moreover, what will be the effect of continued industrial unrest if consent for his counter-inflation policies is not forthcoming? What will be the effect for controls on prices and profit margins and for that net borrowing requirement which disturbs some of his hon. Friends.

Thus, the evidence is not overwhelmingly on the side of fast and sustainable growth. At this point I wish briefly to quote Mr. Patrick Hutber in the Sunday Telegraph of Sunday week. He is in touch with City opinion in a way that I am not, and he related the viewpoint that he had found to be most widely held in the City a week or so ago. He said: It is the belief that after this year's Budget the Government doesn't really deserve to get away with it. To this school of thought it is that £4,600 million borrowing requirement, and the state of the gilt-edged market, which are really ominous. Confidence may not be as broadly based as the Chancellor claimed. Even demand may falter. We may know a little more about that when we discuss VAT, but the Economist cast doubt on this only last week. Prices have been rising faster than wages under the freeze and this will start to show up in consumer spending. Just what consumer spending has been doing in the last week only those with contacts with the retail trade will really know, and they must admit that they were unprepared for it. A worsening balance of payments may well constitute a further drain of demand out of Britain.

The Treasury is already rumoured, as my right hon. Friend mentioned—and no doubt this will hearten the hon. Member for South Angus—to be reverting to its traditional rôle of watchdog and to the cutting back of public expenditure. We are entitled to ask where this would happen, in which Departments. If the Departments are the Department of the Environment and the Department of Trade and Industry, will the Chancellor remember what I said a few moments ago about the need to sustain regional policy?

With the greatest good will for the Government's priorities, the targets for growth and counter-inflation, I do not believe that either will succeed if there is renewed confrontation. I am sorry, therefore, that the Chancellor did not take this opportunity in the Budget of providing a certain measure of tax relief that could have had a sufficient psychological impact on his targets, especially of counter-inflation, to reduce the possibility of confrontation and to make more likely a wider basis of consent.

Mr. David Madel (Bedfordshire, South)

I agree very much with what the hon. Member for Sheffield, Attercliffe (Mr. Duffy) said in the first part of his speech when he remarked on the shortage of key workers in certain parts of industry and on the need for a bigger programme of retraining and a fuller debate in the House on the matter. Such a debate would not be possible under the terms of the clause because we would be unable to go into sufficient detail.

The debate has followed traditional lines covering subjects varying from United States policy on oil and coal to why the Conservatives did not introduce a statutory freeze in 1970. Well-ridden hobby horses have had another good go round the track this afternoon.

There were two points which the Chancellor made about present economic conditions which were more important. First, he pointed out that the amount of overtime being worked was not at full capacity, although whether we should work as much overtime as we do is another question. I feel that the question whether it is socially desirable that more overtime should be worked in certain industries could be looked at. He also said that spare capacity was now roughly what it was in the first nine months of 1970, which was not a particularly happy time for economic expansion. Perhaps that underlines the point that the government might have gone for earlier reflation in the summer of 1970.

The Chancellor mentioned that unemployment was too high and must be brought down. Again, I hope that the Government are doing sufficient to get more people to go into what might be called the social services industry. There is an increasing demand for more people to be employed in these Government services.

The right hon. Gentleman for Leeds East (Mr. Healey) mentioned two points when discussing costs which are likely to be incurred by the average person in the next six to eight months. First, he mentioned rates. Whoever runs the town halls next year will still be faced with the antiquated problem of rates. Unless we quickly get a new form of local government finance, the Treasury will face an open-ended commitment on the rate support grant and ratepayers will be committed to everlasting increases in the rates. In view of the local demand for more expenditure on the social services, education and all the things that local authorities have to finance, it is not possible to continue with the present system unless there is an open-ended cominitment on the rate support grant or unless the Government are prepared to stand back and let rates rise year after year. It is vital that some of the points which are in the Green Paper on local government finance are brought forward in a Bill and that there is some other form of local taxation to finance the rates.

The right hon. Member for Leeds East mentioned the cost of oil. We are here discussing the regulator. I think I am right in saying that the regulator has never been used downwards since it was introduced in 1961. It has nearly always been used to increase taxes. Every Chancellor says that he will use it in whichever direction he thinks is necessary. With the inevitable increase in oil prices, there is a case for using the regulator on the price of petrol fairly soon. The price of petrol reflects itself in a whole range of consumer goods and services, and as the Chancellor has said he would not hesitate to use it he might consider giving a tax cut on the price of petrol.

The Chancellor also said that he was happy with the settlements in the gas and coal industries and that the teachers had accepted stage 2. He said that we were now well set for stage 3. This is the nub of what I want to say. We are putting a tremendous burden on the Pay Board. The Government are saying "over to you" for the Pay Board to solve these difficult questions on the level of pay settlements. The country accepted the standstill and stage 2 because it was severely frightened by the rate of inflation leading up to the end of the calendar year 1972. But, from speeches that have been made and judging by forecasts, we can see that the rate of inflation had abated considerably since last November. The same mood of fear about inflation in the economy will not be with us in the autumn when reports start to come through from the Pay Board, and we must remember that it will be working with a background of rising raw material prices—world commodity prices which are beyond the control of this country.

6.0 p.m.

First of all, I should hope that, as the Counter-Inflation Act provides, the Pay Board and the Price Commission will soon amalgamate. In my view, it makes sense to bring the two bodies together, whatever it may be called—Prices and Incomes Board perhaps. The main thing is that the Government have committed themselves to letting an independent body try to work out the level of pay settlements, and it makes sense to bring the two bodies together, and it is going to work with a background, according to a recent poll, in which 70 per cent. of the people in the country feel that the present share-out of wages is unfair.

Secondly, in my view it must concentrate as much on hours, conditions of work, holidays and sick pay as on the actual level of pay settlements. Little, or at any rate not enough, emphasis has been placed on these matters in previous wage negotiations. If it does this and explains to people the nature of many jobs that are done, it will have a better chance of succeeding.

Thirdly, it has got to do something about geographical pay settlements. Most firms, and the Government themselves, do not pay sufficient regard, in my view, to the high cost of living in the South East compared with the rest of the country. The Burnham Committee gives a London allowance, and that is a source of aggravation and a matter which is going to the Pay Board. It does not make sense to confine that London allowance within the Greater London area. It should extend to the whole of the South East.

If there is a failure of agreement on incomes, the Chancellor's growth rate plan will be wrecked. It is absolutely essential that the expanded Pay Board should succeed in changing the climate of opinion in this country. We have spent too many years on both sides of the House of Commons running each other down, and throughout the country, on pay settlements, arguing who is getting more out of industry, who is putting his or her back into making the economy expand.

If we have a failure on incomes in the autumn there will be a serious weakening of the social fabric of the country. But, given that the Chancellor will stick to growth and the Pay Board has a climate of abating inflation in which to work, I hope that by the autumn voluntary pay settlements will come about and we shall avoid a series of industrial collisions such as we have had in the past 12 to 18 months. Nothing would deter overseas investors more than a series of industrial disputes in this country. That is the sort of thing that will make us fail in the 5 per cent. growth rate—the fears of industrial disputes after October.

Mr. Carter

The hon. Member for Bedfordshire, South (Mr. Madel) specu- lated on what the merger of the Price Commission and Pay Board might receive as a title. It might well end up being called the Costs and Emoluments Board, but I think Prices and Incomes Board is probably the last title it will receive, although I am quite sure the merger will come about and the resultant body will get some title or other.

Nothing much has been said so far in the debate about VAT and its introduction. This is rather surprising, because there is a storm of public indignation about the way VAT has been introduced and the way in which the changeover is taking place. My postbag has been full of letters from people, housewives in particular, complaining about shopkeepers profiteering at their expense. We read in the local Press about indignant people who find that in the changeover from one tax to another exorbitant profits are being made.

I believe that this is due in part to the fact that the Government have not gone well enough about their job of informing the public of the way in which VAT is going to change the taxation structure, or how it is to be introduced, and this applies particularly to my city, Birmingham. The Treasury has carried out a national campaign of advertising, placing advertisements in national newspapers and various other media. Unfortunately, the principal newspapers of Birmingham—the Birmingham Evening Mail and the Birmingham Post —have been left out of this. I suspect that other newspapers of this kind in other provincial cities up and down the country have not received the kind of advertisement that has been placed with many national newspapers. This affects people in such cities. In the case of Birmingham, the Evening Mail is read by more people than is any other single newspaper in circulation in the city.

I refer in particular to the lower-income groups. These are the people who are complaining most about the changeover to VAT. It would seem—this is my supposition—that they are unable to question sufficiently intelligently the way the changeover has taken place and the new prices that are being charged simply because they have not been informed through their local newspapers. The Birmingham Evening Mail is probably for many people the only newspaper they will read in the course of a day.

In a parliamentary answer to a Question from my hon. Friend the Member for Colne Valley (Mr. David Clark), the Financial Secretary to the Treasury said that advertisements of this kind were placed on a purely commercial judgment. I would ask him, as the campaign is still under way, to look once again at the manner in which these advertisements are placed to see whether or not provincial papers such as the Birmingham Evening Mail and possibly the Manchester Evening News are getting their fair share of advertising, because this affects many millions of people in city areas up and down the country.

What has also become clear in the course of the past week is that the weights and measures departments in town halls—

The Financial Secretary to the Treasury (Mr. Terence Higgins)

I think it right to point out, and I hope I carry the Committee with me, that the tradition of this debate which has been established over a great many years now, at any rate since 1964 or so, has been that it should be a debate on the regulator, the purpose being to discuss the general economic situation. I think I am right in saying, Mr. Mallalieu, that that is the basis on which the Chair has normally exercised its discretion in these matters. It is not for me, of course, to say anything one way or another on the issue, but I think I should point out that there are subsequent debates on VAT, and so on. I would not think that my hon. Friend would expect in this debate to reply to the kind of point which the hon. Member is making now.

Mr. Carter

All I can say is that if that has been the trend in the past a sufficient number of people had departed from it prior to me for me to believe that perhaps I was in order in raising this point and in raising others which I intend to raise. The debate so far has been very wide-ranging indeed.

Mr. John Biffen (Oswestry)

Try the butter mountain.

Mr. Carter

Well, butter will no doubt crop up. I am sure it will not be left aside. It is too big an obstacle either to avoid or to fail to recognise. I shall not deal with it, but I have another important point after VAT which I have no doubt the Minister similarly will not be too pleased to have to deal with.

I ask the Minister, on the point I raised, particularly as he was the Minister who gave the answer to my right hon. Friend on newspaper advertising, to look at it once again because I do not think that most newspapers, and through them the people who read them, have been too well served by the manner in which the advertising campaign has been carried out.

Mr. Neil McBride (Swansea, East)

Does my hon. Friend recall that a weights and measures inspector on television declared that they had received their final instructions only two days before the operation of the tax, and would he agree that this is a failure on the Government's part?

Mr. Carter

I am sure that is a failure of Government policy. Unfortunately, I did not see the television programme although I have evidence in the city of Birmingham that the weights and measures department has not got sufficient staff to cope with the many and varied complaints that are being put to it. I will not take this point any further because, clearly, on the basis of what the Minister has said, he is not prepared to answer this kind of point. Perhaps we shall have an opportunity in Committee upstairs to raise this once again, when he will be rather more prepared.

There is another subject about which the Financial Secretary probably did not expect any question to be raised, and that is motor car insurance premiums. I feel that it is especially germane to this debate—

Mr. Higgins rose—

Mr. Carter

—though, judging by the look on your face, Mr. Mallalieu, you do not agree, and, clearly, the hon. Gentleman has doubts as well. I wonder what they are.

Mr. Higgins

I hope that I carry right hon. and hon. Members on both sides of the Committee with me when I remind the hon. Gentleman that the tradition which has grown up over the years is to have a wide-ranging debate on the general economic situation. Both parties, in Opposition and in Government, have welcomed that. I hope that the hon. Gentleman will allow me to say that if it is possible to raise any subject under the sun, that is better done during the Consolidated Fund Bill debates rather than in this debate.

The Second Deputy Chairman (Mr. E. L. Mallalieu)

Order. The details of the working of a specific tax hardly come within the scope of this debate. Certainly the generality of the economic situation does.

Mr. Carter

One of the great arguments in favour of tradition is that it is dynamic and is constantly evolving and changing. If I add just a little to that tradition today, I am sure that it will not destroy either the content of this debate or that of future debates.

When I refer to motor car insurance premiums, I am not referring to taxation but to matters which arise out of the Counter-Inflation Act and in part out of last year's Finance Act. They were referred to by my right hon. Friend the Member for Leeds, East, and the Chancellor of the Exchequer himself has made reference to the Counter-Inflation Act.

My point about motor car insurance premiums arises directly out of the Counter-Inflation Act. I should not have thought it was straining the traditions of this debate or the general rules of our proceedings to raise this matter, especially as I have tabled parliamentary Questions to the Secretary of State for Trade and Industry and have received entirely negative answers on a matter of great public interest. As we have a Treasury Minister with us today who is responsible for Government economic policy, I feel that we might perhaps get some response from him, even though his attitude so far has given no indication of that.

Last week the major motor car insurance companies one by one announced in the Press that they had applied to the Government for increases in their premiums. Figures quoted ranged from 5 per cent. to 20 per cent. Under the Counter-Inflation Act additional powers were devolved upon the Secretary of State for Trade and Industry in respect of motor car insurance premiums. The Act provides for the right hon. Gentleman to examine any applications for increases and to decide whether they are justified. In parliamentary Questions to the Secretary of State for Trade and Industry I asked how many companies had applied for increases, what was the nature of those applications, and what he intended to do about them. I received from the right hon. Gentleman an entirely negative answer.

When we were considering the Counter-Inflation Bill in Committee hon. Members were assured time and time again that if we had Questions on price increases or pay awards, whether they were with the Price Commission, the Pay Board or the Minister, we could table Questions and would receive answers from the Ministers responsible. It is not good enough for the Financial Secretary to tell me today that I am stretching the terms of this debate. I have already asked the Minister responsible for answers which I was assured in Committee that I would get, only to find that I have not been given them. For that reason I raise the matter again today.

6.15 p.m.

I can assure the Minister that if we fail to get answers to Questions of that kind we shall seek every opportunity that we can to raise these matters in other ways. I make no apology for doing so today even though, apparently, I have caught the Financial Secretary unawares. In view of the nature of the legislation that this House has passed, I believe that we have to be extremely watchful. My fear is that, applications having been made to the Secretary of State, decisions will be taken during a parliamentary recess. That is not good enough. If it is possible for the Press to have available to it all the information that I have mentioned, why cannot it be given to hon. Members?

I hope that the Financial Secretary can give us some answer on this matter. I appreciate that it is not strictly within his purview, but it concerns the Government's economic policy for which he is responsible and with which he can deal.

I turn now to a matter which is perhaps within the traditions of this debate. It has been referred to already, although it may be that it was out of order then. It concerns investment. I want to compare the present investment situation with the rosy economic picture which the Government constantly put before our eyes. It is a staggering fact that in every year of this Government's tenure of office investment has fallen as a percentage of the GNP. This is a unique figure in British economic life since the war. I do not know how the Government can declare that the British economy is running at full steam, at maximum efficiency and with the future assured. If we are to have any assurance at all about the future, it must be out of the fact that investment is rising and providing us with the plant, equipment, machinery and factory space which can provide the jobs, the opportunities, the products and hence the markets of the future. I do not believe that the investment picture that we see gives us any hope for the future.

In an intervention 1 referred to the present employment position. It is true that unemployment is falling. Looking at the statistics, clearly it is equally true that employment is not rising. I do not know the reason for that contradiction. It may be that the Government do not know. I am sure that there are hidden factors at work. For example, it is clear that fewer women are at work today compared with the position four or five years ago. This has something to do with equal pay. More probably it is because the jobs which they used to do are no longer available since men who have been unemployed for long periods are being given these employment opportunities. The jobs are lost to women. It means that the employment picture, too, gives us no great hope for the future.

I wonder what the Press and the establishment generally would have had to say about a Labour Government if their economic performance was turning out in the way that the present Government's is. We still have massively high unemployment and falling investment. The pound can by no means be described as strong. We are running into a balance of payments crisis, and still we have skyrocketing inflation. To me, all that does not add up to a picture of sound economic performance. Yet only this afternoon the right hon. Gentleman the Prime Minister told us that we have a booming economy and there is really nothing to worry about as far as the future is concerned. I am extremely concerned about the future. I am worried about Britain just after it has entered the Common Market, with the enormous and powerful continental competitive forces by which we are now faced. If we had entered the Common Market 10 or 15 years ago British industry would have been in a very powerful position, not in terms of modernisation and efficiency but in numerical terms; and probably we could have won markets which would have ensured that British industry would have had the capital wherewithal to have improved its base.

Clearly, however, that is not the picture now. We are faced with French industrial capacity which is highly efficient and modernised, and with a similar German machine. Italy, too, in the motor car industry, the machine tool industry and various other aspects of industry is far in advance of what we are here. It is said by some of those who look at the British economy and feel that it is not doing as well as it could, that capitalism is outmoded, that it can no longer function properly in the kind of economy we have had in this country over the past 30 years. I do not believe that that is the case at all, because, after all, capitalism is doing pretty well elsewhere.

I believe that in every area of our development where entirely new methods are required it is not a question of capitalism versus socialism but simply a matter of trying to re-gear and retool machinery some of which is over 200 years old, 100 years older than that of many of our competitors on the Continent. It is going to require quite superhuman effort on the part of of the British people, the British nation and the British economy for our industry to take its place equally alongside its continental competitors. I believe that for the Government to pretend that the economy is moving towards that position is the height of obscurantism. We arc not moving that way at all.

If I may refer back to investment, only one of our EEC partners has a lower level of investment than we have; that is Italy. The time has come, as I have said on numerous occasions in the past, for the Government to be entirely honest with themselves and with the British public outside. I believe they would be surprised at the response. What I am sure of is that we can no longer carry on deluding ourselves into believing that somehow, by manipulating this or that, we can break out of the difficulties that we are in.

The difficulties we face are enormous, and before long, with this Government or the next, measures of a quite fundamental nature will have to be taken to put right the ills of the British economy. So I hope that in the course of this Finance Bill we can once again, as many of us did in the Counter-Inflation Bill, point out to the Government precisely what they have to do in order to put the British economy right; and in order to do that they have first to stop deluding themselves.

Mr. Ridley

If the hon. Member for Birmingham, Northfleld (Mr. Carter) had confined himself to the last point he made, on investment, his contribution would have been entirely relevant and of a better length. I feel this is not the time to discuss insurance premiums. I shall confine myself to the management of the economy and will touch at some length on the hon. Member's point about investment towards the end of what I have to say.

It now seems to be fashionable to talk not so much about money supply as about overheating. The two are not the same, because it is quite possible to have too great a money supply without overheating. It simply means one has jacked up one more on the ratchet to the point where there is a higher level of inflation but not the excess demand. I am afraid it is equally possible to have at the same time a high rate of money supply growth and overheating, and I fear that that may be what is happening here.

My hon. Friend the Member for Leek (Mr. Knox) almost overheated himself in denying that there were any signs of overheating. If I pour a little cold water on him I hope he will not sizzle. There are obvious signs that the economy is moving to an overheated state. We can leave out of account the overseas account. It is true that a surge of high import prices will be coming through from the food and raw material commodity increases of which we have heard. But the Chancellor was right when he said he expected exports to turn up as a result of our devaluation—and the net effect of the overseas account must be neutral so long as the Government continue to let the pound float.

Here, I underline the words of the hon. Member for Cornwall, North (Mr. Pardoe). I do not believe we have realised what a transformation of the economic situation has come about since all the major currencies started to float. It means that unfair trading cannot continue. The effect to which it has smoked out the Japanese is not yet generally realised, because their game was to rely on an under-valued currency to force their exports into every country in the world. They did this by insisting, through the banking system, on channelling into the export industry funds which would not otherwise have gone there, and as a result they denuded the standard of living of their people by their failure to invest in social and domestic matters which would have increased that standard of living.

This is no longer possible, because the yen has been up-valued by 30 per cent. against the dollar and the Japanese standard of living has actually gone down as a result of this, despite the peoples' hard work of 20 years. Political pressures will only add to economic pressures to make the Japanese desist from what they were doing. I would only say in passing—it is relevant to this debate— that if we choose this moment to try to emulate the Japanese performance we are doing so at the worst possible moment and at a time when such action could not possibly succeed so long as we continue to float our currency.

I mention that only to dismiss any connection there could be between the overseas account and the domestic economy, at any rate in the long run. My right hon. Friend believes investment is going to rise. I very much hope he is right. I am not quite so optimistic, though there are signs that there is an increase coming. But this in itself will add to the pressure of demand if we are talking of overheating, and already there are very strong signs of a labour shortage, particularly in some areas, and also a shortage in some skills. In my own constituency several industrialists have told me they are short of labour. It must be said that one is hearing more and more of wage settlements which have been arrived at to secure, or to hold, labour—settlements which are well above phase 2, and which, but for the fact that they might be stopped, I would be prepared to spell out by name here and now.

I am certain that in areas where it does not come into the full light of the day the norm is already being exceeded. I am fairly dubious about the norm being exceeded in some of the recent major public sector settlements. I agree with the hon. Member for Birmingham, North-field that it is extraordinarily difficult to obtain detailed knowledge of the exact terms of offered and accepted pay increases in the public sector, because Ministers seem very reluctant to give the full details. I hope we may be given them in the future. I have no doubt that demand is very strong and will become stronger, and that as the year passes the signs of overheating will become more and more apparent.

[Captain WALTER ELLIOT in the Chair.)

6.30 p.m.

I turn to the question of the borrowing requirement which was discussed by my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne). It is impossible to speak on this matter at this time without referring to the mortgage position which we debated yesterday. It is not so much that the extra £15 million has increased the Government's expenditure—because we are told that it is to be saved elsewhere—nor is it the amount that causes me alarm. What is rather odd is that at a time when the Government have been bidding hard to attract all available funds to meet their borrowing requirement they should have done something which will encourage extra saving in building societies and also extra demand for houses through increased demand for mortgages —which in turn will add to the overheating, if that is the right diagnosis of what is happening.

Therefore, on the two fronts of financing the Government's borrowing requirement and keeping demand in check, the Government's action seems to have had a considerable psychological impact counter to what the Government are seeking to do. I hope that this will be the last example of their going in two directions at once. Indeed, I think that we may be at the top of the cycle.

That brings me to the question of counter-cyclicality. We heard a great deal on this topic in years when the economy was slack. I wonder what my hon. Friend intends to do about counter-cyclicality in the coming months when the economy is reaching capacity. This seems to me to be an ideal time to cut Government expenditure. This is the classical moment to do so for it would remove demand from the British economy if the Government were to make fewer demands on resources.

I particularly urge my right hon. Friend the Chancellor of the Exchequer to let his eye rest on fuel prices. The hon. Member for West Lothian (Mr. Dalyell) made a fair point in suggesting that in a gathering fuel crisis we should tax fuel, but instead of taking that course we are subsidising fuel. We are paying the gas, electricity and coal industries to keep down their prices. This adds to the demand for and the consumption of fuel. It also adds to the Chancellor's financial difficulties, because he has to borrow money to pay the subsidy.

I should like my right hon. Friend to see whether he can save the major part of the £500 million which he is now spending on nationalised industry subsidies and the interest that is being forgone on capital. This course appears to be right in every sense of economic policy at this time because it would enable my right hon. Friend to save money at a time when it is classically correct to do so.

I come to investment and take up one or two points made by the hon. Member for Birmingham, Northfield. I believe that we are thinking about industrial investment in the wrong scale. We have had a deplorable performance over the decades. I do not refer to the last two years and I seek to make no party point, but am saying that we have had nothing like the level of investment that is necessary to sustain one of the foremost industrial nations.

I have just returned from a three-week visit to the United States. The most striking difference between this country and America—and it is evident in every factory that one visits, in every town, city or, indeed, in any house in which one finds oneself—is that assets are renewed perhaps two or three times more quickly than they are in this country. The vast scale of investment in research and development has carried their economy through. It is difficult to understand why, in the long term, Britain has been unable to think of investment levels even half what they should be— and certainly even a quarter of the Japanese investment level—and why, also, we have been unable to identify the real factors which have prevented this happening.

The right hon. Member for Leeds, East (Mr. Healey) was right to say that this should become our major preoccupation. He was not referring to growth or to inflation, although it must be said that inflation is highly relevant to investment because if inflation is high, investment is less likely to occur. We must direct our attention to seeing why we cannot achieve this attitude of seeking to replace our assets and create more investment, since this is the policy which has made many other countries grow so fast.

Labour Members must take some share of the blame that this has not happened, because they have consistently attacked profit. They have consistently demanded that those who make successful investments and, indeed, those who make money, should be taxed very heavily. To some extent they have created a climate which discourages people from making successful investments and which has envisaged confiscation of people's money.

There is a problem in terms of labour relations and the trade unions' attitude to investment. But I believe that the achievement of a higher investment level should replace my right hon. Friend's priority of growth. Indeed, I do not know what "growth" means. Growth can mean taking up the slack of capacity, it can mean inflation, or it can mean genuine investment, leading to a higher standard of living in the future. It can mean a mixture of all three. A definition of growth is hard to give. But if my right hon. Friend would only substitute measures designed to increase investment I would go along with him wholeheartedly.

This topic is relevant to the debate that is to be held tomorrow. It is a great shame that the Opposition should wish to press an attack on tax reliefs which have gone some way to encourage invest- ment. We must make sure that inflation does not get further out of hand. This is another reason why I am worried about the borrowing requirement. I believe that, in turn, it will damage our investment prospects.

Finally, we must make absolutely certain that the prices and incomes policy does not have the further effect of squeezing profit margins. I believe that earnings are rising faster than 8 per cent., but that prices will be held down by the Pay Board, because it is easier to hold down prices than wages. This is by far the greatest danger of all. It reduces the margin of profit and the money available for investment, and it also reduces an investor's confidence that this is the right place in which to invest.

My advice to the Government is to ease up on price restraint and to hold, if they must, to their policy of wage restraint, because that could be the biggest impediment to growth in the future.

Mr. Eric S. Heffer (Liverpool, Walton)

It is always a pleasure to be called to speak after the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) in debates on the Finance Bill. I have taken part in these debates with the hon. Gentleman on a number of occasions. He always argues the classical, old-fashioned laissez-faire Tory case— and he does it admirably. He is well backed by some of his hon. Friends, who are distraught at what is happening. They now see a Conservative Government constantly intervening in economic affairs. My heart bleeds for them, because they are upset when they see Tory policies being abandoned.

I used to feel the same when I saw Labour's policies being abandoned in a Tory direction. I got very upset about that. It is interesting to try to discover what are Tory policies and what are Labour policies for prices and incomes. It could be that a prices and incomes policy is neither Labour nor Tory, but is something in the middle—something which is neither one thing nor the other. I shall not pursue that question now, because I am going slightly away from the things about which I wanted to speak. I am always fascinated by the problem facing hon. Gentlemen opposite. Should there be some control of the economy, or should there be no control whatsoever?

I now propose to say something about the question of overheating and the fact that we are apparently reaching a position in which there is a shortage of labour. This is most interesting, because the unemployment figure is now about 750,000. We must look seriously at the problem. In certain areas—for example, the South-East and the South—a shortage of labour is developing, but in other regions—for example, Scotland, the North-East, Merseyside and South Wales —there is no shortage, except perhaps in certain skilled trades.

This is not an easy problem to deal with. The need is for a much better regional policy than we now have to deal with high levels of unemployment in the regions. In many respects the Industry Act offers more carrots than did the Acts brought in by the Labour Government, but the Government must do more than they have done so far to solve the problem because that measure will not deal with it entirely.

The real requirement for regional development—and I know that I shall now lose any sympathy that I ever had from the hon. Gentlemen opposite—is greater Government intervention in order to make certain that industries are developed and directed on a publicly-owned basis. Only in that way shall we get to grips with the problem of unemployment in the regions.

Bricklayers in London are earning about £20 a day—the same is true of people in other trades—but they are not trade-union bricklayers. They are self-employed, lump-labour bricklayers. Is not that inflationary? They will not be caught by the prices and incomes policy, or the counter-inflation policy, or whatever it is called. They are outside it. What are the Government doing about that? What do the Government propose to do about other developments in self-employment which are bound to follow from their policy?

Lump labour began to increase as a result of the Labour Government's prices and incomes policy, and the practice is growing up in many industries. It is to be found in the engineering and clothing manufacturing industries, and other industries will find that self-employment is a developing practice. How do the Government intend to deal with that? How does that fit into their counter-inflation policy? What ideas have they for dealing with that problem?

This is an important matter, because these self-employed people are not paying any tax or paying for their National Insurance stamps. They are not contributing one bit to the development of our society. This is free enterprise, laissez-faire capitalism in its extreme form, and I suppose hon. Gentlemen opposite welcome it, but certainly the Government do not.

Mr. Ridley

Does the hon. Gentleman think that some of the self-employed people to whom he referred also sign on as being unemployed and account for some of the 750,000 unemployed?

Mr. Heffer

I am not denying that in certain industries some people are signing on as unemployed and receiving benefits while continuing to work at lump labour jobs. There is no question about that. I am not denying that that is happening. In fact, I am saying that what the hon. Gentleman has said is true. To that extent the unemployment figure of 750,000 may be slightly inflated, but we know that some people who are unemployed are not added to the figures, so the stated figures are not accurate.

The Government ought to remember that when the Labour Government brought in their freeze there was an initial success. There always is in such circumstances. I am not surprised that the trade unions are not smashing through the barrier of the Government's policy. They did not smash through the barrier when the Labour Government brought in their policy. They grumbled at the time when Mr. Speaker was Chancellor of the Exchequer, but they did not smash the barrier.

What the Government must remember is that if wages are held down, or an attempt is made to hold them down, and at the same time prices rise, their policy will be in jeopardy. There can be no doubt that the prices of fresh food and other items are rising rapidly. Incidentally, I wonder how those who voted for our entry into the EEC feel now. I wonder how they and some of my colleagues who supported the Government feel when they realise that one of the Government's first actions, now that we are in the EEC, is to try to stop further price rises under the mad CAP system. We are being asked to pay high prices for butter, while some of it is being sent to Soviet Socialist Russia at low prices. This is an amazing situation. I have never heard anything so mad in all my life. I wonder how all those who voted for our entry into the EEC feel about it now. But that is by the way, and I come back to the question of prices.

As I said earlier, prices are rising, and the question is what will happen when the cork is taken out of the bottle and we get to phase 3. The Government may be able to hold things in check for a time. Everybody is saying that Hugh Scanlon is marvellous, and that he is turning the other cheek, but I draw the attention of the House to the second part of his speech, in which he said: Sooner perhaps than the Government expects, an explosion point will be reached if prices and other important elements of the working-class budget continue to rise, while wage restrictions continue to be imposed. Sooner or later the cork will be taken out of the bottle and the champagne will come bubbling over. It did with the Labour Government, and it will do the same with this Government.

The Government should take note of those of us who are always being attacked in the House and the country as members of the mad Left. We warned our people what would happen. Too often they did not take notice of us. We are also warning the present Government, as some of their hon. Friends are warning them, that we are getting into a situation in which, when the cork comes out of the bottle, the inflationary process that we have known up to now will seem as nothing. It may be thought that the number of industrial disputes is high now, but if the present policy is continued it will be even higher. That is my warning to the Government.

Mr. Biffen

It is customary for this debate to range tolerably widely, and it it has lived up to that reputation today.

I was fascinated that the hon. Member for Liverpool, Walton (Mr. Heffer) should touch on the highly topical problem of the common agricultural policy and the prospect of butter sales by the Community to the Soviet Union. Our debate is graced by the presence of my hon. Friend the Member for Derbyshire, West (Mr. Scott-Hopkins), who has been doing sterling work for the British housewife in the Strasbourg Assembly. But the House should know that in the pursuit of that admirable end he has been assisted by Signor Cipolla, the Italian Communist. Possibly one reason why the Labour Party is so inhibited from sending its delegates to Strasbourg is the tortured history of that party and the consequences for the signatories to the proscribed Nenni Telegram.

The Temporary Chairman(Captain Walter Elliot)

Order. This is a wide-ranging debate, but I hope that the hon. Gentleman will not go too much into the subject of the Common Market.

Mr. Biffen

The Conservative parliamentary representatives at Strasbourg are happily swinging along with the Italian Communist party, or is it the other way round? Has the proselytising zeal of my hon. Friend managed to draw the Italian Communist Party in train? Either way, the matter deserves the widest possible publicity, but I agree that it probably goes rather wide of the clause.

Therefore, I return to pay my fee to the debate by talking about the terms of the clause, which concerns the regulator. In its enthusiasm for wider-ranging debate the Committee has probably been at fault in overlooking the real difference in the use of a regulator which was based upon purchase tax and the prospective use of a regulator based upon value added tax.

Like my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne), I am no accolyte at the religion of fine-tuning in economics. But if Ministers are to purport to fine-tune by the use of a regulator tax of this variety there is at least a good case for saying that the old purchase tax—particularly in conjunction with the hire-purchase regulations then available to the Government, which have now happily lapsed—enabled the Government to operate directly and with much more effect on identifiable areas of the economy, particularly in respect of the motor industry and consumer durables, than will be possible for Governments in future, given the range of taxes that we now have.

I make that statement just as an observation, neither to endorse the position nor to register discontent that that should be so. But it leads me to believe that we should be unwise to be too liberal in the use of the VAT regulator, in view of its tremendous ramifications upon the retail trade.

One of the things for which my hon. Friend the Financial Secretary to the Treasury can take real pride is the ease with which we have moved to a value added tax with a relative absence, notwithstanding what was said by the hon. Member for Birmingham, Northfield (Mr. Carter), of real militancy in the retail trade or among the consuming public compared with what happened in our sister States in Continental Europe.

Mr. Higginsindicated assent.

Mr. Biffen

I am delighted that my hon. Friend agrees. My message to him is not to push his luck too far, not to have frequent changes in the rate of value added tax between one Budget and another. That would cause immense and, in my view justifiable, irritation to the retail trade, particularly under the general supervision conferred upon the inspectorate of weights and measures by the counter-inflation legislation. It will be a matter of irritation if every time there are changes in value added tax there is also to be scope for the kind of generalised complaints that I think will inevitably Mow from that.

Hon. Members have understandably used this occasion to relate their remarks rather more to the totality of taxation produced by the taxes referred to by the clause and to make one or two general economic comments. I want to take up the points made by the hon. Member for Liverpool, Walton. He and a number of others who have spoken have been concerned about the extent to which there may or may not be developing what is popularly called "overheating". What cannot be denied is that there is now developing evidence of at least a selective if not a general, shortage of labour. I am glad that the hon. Member for Liverpool, Walton agrees. I fear that for the rest of my speech he and I are likely to be in some kind of agreement. Although I have not yet received an invitation to accept honorary membership of the Tribune Group, I always travel hopefully.

Some of my hon. Friends have cast doubt on the general proposition that there is an emerging and identifiable tightness in the labour market. It is always difficult to find evidence for this kind of argument, but I should like to put the views of the managing director in the United Kingdom of an organisation called Manpower—an international service organisation supplying its own employees to industry and commerce. He is a person with authority to speak on the subject. Obviously, he has a direct interest, but if I were quoting Mr. Callard on the chemical industry his views would be treated with respect, even though we should bear in mind that he is the Chairman of I.C.I. The managing director of Manpower in this country, Mr. Lance Secretan said: Very acute shortages of skilled staff are developing through the country, and in some cases there are even signs of shortages of unskilled workers. If the ambitious plans of employers, nationally, to hire additional staff are to be achieved these shortages will be exacerbated. Severe regional imbalances between available skills and the vacancies being notified are already occurring and will get worse. That is precisely the kind of evidence that should make us a little cautious about our policy to attain the levels of growth in the domestic product which have now become almost a ritual in Government statements on the prospects for the economy.

Other implications involve the whole of the counter-inflaltion policy, and have been referred to by the hon. Member for Liverpool, Walton. A number of my hon. Friends see the policy as one of conflict and triumph, with the disputants being the Government and trade union leaders, and more particularly national leaders of the character of Mr. Scanlon and Mr. Jones. I believe that my hon. Friends are mistaken in that analysis. I do not believe that either Mr. Jones or Mr. Scanlon is disposed to provide a confrontation, if that was ever in their minds. The test of the policy will be in the much more diffuse working of the market place.

7.0 p.m.

The hon. Member for Liverpool, Walton, speaking of money being earned by bricklayers, mentioned the figure of £20 a day being picked up by people on the lump. He is a wise man with that knowledge because, of course, he touches on precisely one of the major areas of shortage in which we are now endeavouring to see how the policy will match against this developing market situation and, therefore, the exact area in which we would naturally ask a question of my hon. Friend the Minister of State at the Department of Employment.

This I did on Wednesday, 4th April, when I asked: What was the estimated weekly earnings for self-employed bricklayers, plasterers and glazed tilers in the building and construction industry on 8th November, 1972, or the nearest available date; and what are the corresponding earnings on 1st April 1973 or the nearest available date? My hon. Friend replied: I regret that such information is not available."—[OFFICIAL REPORT, 6th April 1973; Vol. 854, c. 167.] Can any of my hon. Friends—and particularly my hon. Friend the Financial Secretary, as he and I will recollect days passed when we hunted joyfully as a pair on this subject of prices and incomes— put his hand on his heart and say that men on the lump in the building industry today are not earning more than they were on 8th November? No Member of the House seriously doubts that men on the lump are earning more than they were earning on 8th November, nor that in the period in prospect they will confine their marketability to £1, plus 4 per cent.

That is the emerging reality, that is the message which lies behind the comments of Mr. Lance Secretan, and that is the message I hope will be taken to heart by my hon. Friend.

Mr. Nott

In view of the debates which are to follow on Value Added Tax 1972 I believe the House would like my intervention to be fairly short. There is all the more reason for it to be short as my right hon. Friend in his opening remarks answered, and 1 believe showed to be unjustified, most of the forebodings which were disseminated by the right hon. Member for Leeds, East (Mr. Healey).

Mr. James Dempsey (Coatbridge and Airdrie)

Am I to understand that the intervention of the Minister indicates that we are completing the debate on this amendment, or will back benchers who have been trying to get in for some time still have an opportunity to catch the eye of the Chair after the hon. Gentleman has made his speech?

The Temporary Chairman

From the point of view of the Chair, it makes no difference whether Front Bench spokesmen have spoken or not.

Mr. Nott

The technique of the right hon. Gentleman on these regulator debates does not vary very much. He has admitted in his opening remarks that the key to investments by businessmen in this country is confidence, and this formed a large element of his speech. But he then proceeded to find every single factor he could which might undermine that confidence.

The right hon. Gentleman talked of the fear of a crashing stop, whereas I believe this fear is concentrated mainly in the pages of The Times. He emphasised the trade gap rather than, as I think would have been more helpful, the current account, which recently has been in relatively small deficit of approximately £20 million a month. He mentioned a high level of unfilled vacancies as evidence of overheating. As my right hon. Friend said, these can probably be explained by the better penetration of the Department of Employment into the labour market, and in any case unfilled vacancies are now well below their 1964 levels. Then, having said all this, he expected us to nod in sympathy when he looked at us, if I may say so, rather like a spaniel, and said that he prayed that the Chancellor's gamble would come off. I must say that we smiled a little at those remarks.

After all—I shall quote just one of his forecasts—last year he said: … for large sections of the working class there must have been a fall—for some a very large fall—in living standards."—[OFFICIAL REPORT, 20th April 1972; Vol. 835, c. 800.] The fact of the matter, as the right hon. Gentleman is well aware, is that the real disposable income of the British people generally during the past years has risen at a faster rate than in any year since the war.

I can best sum up my opening remarks by quoting from the speech of my hon. Friend the Chief Secretary when winding up the regulator debate last year: Some of us had hoped that by now the right hon. Member for Leeds, East would have occupied his position long enough for us to have some idea of what the Labour Party would do were they in our stead. He would be the first to agree that there was no real attempt at an analysis of the problems and certainly with offer of an alternative. All we had was a long diatribe of doom and disaster, some parts of which—and I am sure that this was more due to his relatively short period in office than to any malice—he will, on reflection, regret."—[OFFICIAL REPORT, Stand-Committee E, 19th June 1972 c. 1124–5.] We all remember very well that debate upstairs in Committee, and the right hon. Gentleman will remember the incident particularly well in view of subsequent comments made by the hon. Gentleman.

Mr. Healey

They were not very helpful.

Mr. Nott

I do not believe the right hon. Gentleman would wish me to go into the remarks he made about sterling in Committee on that occasion, but we remember those remarks very well.

Public expenditure has formed a fairly large proportion of this debate, and I should therefore refer to the subject briefly. As has been repeatedly made clear in the House, the public expenditure programme of the Government shows a satisfactory trend over the medium term. I do not think anybody has disputed that fact. My right hon. Friend the Chancellor has made it clear he is always prepared to act in the short term should the interests of the proper management of the economy require it.

The Opposition should make up their minds whether or not they are in favour of cuts in public expenditure. They are very well aware that the short-term increases in the programme are attributable to social security expenditure, countercyclical expenditure and expenditure in the regions. If they wish to cut any of these, I wish they would stand up and say so.

Of policy additions for 1973–74 which total £1,098 million, £207 million related to social security. The Opposition will not wish to argue that this addition should not have been made. Of the remainder, £177 million was for countercyclical measures and no less than £475 million related to expenditure in the regions where the problem of high unemployment continues; and expenditure which brings idle resources into use costs the economy relatively little. If the right hon. Gentleman and hon. Gentlemen opposite want to cut any of these items, I wish they would stand up and say so.

To my right hon. Friend the Member for South Angus (Mr. Bruce-Gardyne), I say that our public expenditure commitments must be looked at in the light of the substantial unemployment which existed 18 months ago. As to the future, this was set out very clearly in the Budget Statement when my right hon. Friend said that the forecast path of public expenditure on goods and services was for a relatively rapid growth up till about the middle of this year, after which there was a marked slowing down.

Table 4 on page 10 of the Financial Statement sets out clearly our reasons for expecting the rate of growth of public expenditure to slow down in the second part of this year and onwards.

Reference was made by my hon. Friend and the right hon. Member for Leeds, East and several other hon. Gentlemen, to the article in yesterday's Financial Times written by Mr. Brittan in which he commented on an Answer given to the hon. Member for Ashton-under-Lyne (Mr. Sheldon). This answer showed a low growth variant of the resources table in Cmnd. 5178 in which GDP was assumed to grow at 2.7 per cent. per annum from 1971 to 1977. There developed a short argument between the right hon. Gentleman and my hon. Friend the Member for South Angus on this point. We have never argued that the 3.5 per cent. variant shown in the public expenditure White Paper was, to use Mr. Brittan's term, a central case. Equally, we would not accept that the low variant of 2.7 per cent. should be regarded as a relevant alternative for policy purposes.

Mr. Brittan in this article, which was an important one, admits that a variant of 2.7 per cent. based on the GDP trend between 1960 and 1970 is pessimistic, because it does not allow for the large amount of spare resources which existed in the economy in the initial year of that table; namely, 1971. Even a growth rate of 2.3 per cent. to 2.6 per cent. for private consumption would be a considerable improvement on the rate achieved by the Labour Government. During their period of office private consumption grew at the abysmally low rate of 1.9 per cent. per annum. So far under this Government it has grown at an annual rate of 5.1 per cent., representing a real improvement in the standard of living of the British people.

The hon. Member for Cornwall, North (Mr. Pardoe) said—I agree with him entirely—that the crucial figure was that for productive potential. The Government have admitted—I admit again— that at present it is difficult to say what is the underlying growth of productive potential in the economy. But the National Institute and Professor Paish take a relatively optimistic view of the growth of productive potential in the economy at present, and they indicate that a considerably higher growth rate than that between 1960 and 1970 is obtainable.

My hon. Friend the Member for Leek (Mr. Knox) mentioned again the continuing surplus capacity in manufacturing industry. The latest CBI industrial trend survey showed a substantial surplus capacity, and we expect a sharp rise in industrial investment this year, thus adding substantially to capacity in the forthcoming year. The proportion of firms in the CBI survey expecting to increase capacity in plant and machinery over the next 12 months is the highest on record, and I believe that my hon. Friend was right in saying that there is still substantial slack in the economy.

Much was made by the right hon. Member for Leeds, East, the hon. Member for Cornwall, North and other hon. Members of the possible constraint of the balance of payments. We have not, however, seen the deterioration in the current account which was forecast in some quarters last year. The figures in recent months support the Chancellor's assessment in his Budget speech that much of the deficit on visible trade this year will be offset by the surplus on invisibles. With the faster growth of home supplies, the demand for imports should ease. We should congratulate ourselves on the recent performance of our exports, which have risen strikingly this year. Much of the recent rise in volume has been to the highly competitive markets of Western Europe and North America.

Although visible trade has continued in deficit—indeed, it has been in deficit for most of the last 150 years—our invisible earnings have kept down our current deficit to a modest level. We have good prospects on the current account. Our competitive position has been much enhanced by the depreciation of sterling, and our exporters will be able to take full advantage of the expansion in world trade which is now well under way.

7.15 p.m.

I was challenged by the hon. Member for West Lothian (Mr. Dalyell) and others to say something about the borrowing requirement. I do not want to speak about it at length because in several debates in the last two months this topic has been fully discussed. The Government's economic policy is intended to ensure that an enhanced rate of output can be achieved in conjunction with steadier prices, and monetary policy will be consistent with these objectives. Hon. Members should not be misled—I know that my hon. Friend the Member for South Angus was not misled by this figure—by the broad definition of money supply, M3, as the recent increase has been largely attributable to structural changes and, in particular, to the large increase in certificates of deposit. The Government have now stopped the tax loophole on these CDs, and short-term interest rates have fallen in the last month or two, making it no longer profitable to borrow from the banks on the one hand and immediately to re-invest that money in CDs on the other. Certificates of deposit were yielding 12 per cent. at the beginning of March and the rate is now down to 9⅝ per cent.

I have a great deal of respect for the firm in the City mentioned by my hon. Friend, but I do not think that the amount of notes and coin in circulation is of particular significance. Amounts vary to meet the public's convenience, but no relevant conclusion about money supply can be drawn from the figure of notes and coin in circulation.

I accept that the borrowing requirement is high, but it is inflationary only so long as it is financed in the banking sector. The Government's firm intention, as shown by the new securities announced in the Budget, is to finance the borrowing requirement in a non-inflationary way. The reverse yield gap is extremely wide, and if inflationary expectations continue to diminish I am confident that the Government will continue to be successful in selling their securities to the non-bank public. We are reasonably confident in that regard.

Mr. Healey

Do the Government plan to continue to subsidise their competitors in this market as they have subsidised the building societies?

Mr. Nott

The right hon. Gentleman must appreciate the facts. I have already pointed out to my hon. Friend the Member for South Angus that during the past two or three months exceptional circumstances prevailed in the money market. The tax-gathering season was forcing up short-term interest rates to unusually high levels, and consumer spending was running at an unusually high level in that period. Over the period from the beginning of March to the present there have been unusual circumstances in that short-term market. It might be appropriate, although I have not spoken for long—

Mr. Bruce-Gardyne

Will my hon. Friend make clear for the benefit of the House whether it remains the Government's belief that high interest rates will be required in the months ahead to finance the Government's borrowing requirement in a non-inflationary manner?

Mr. Nott

My hon. Friend knows that no Treasury Minister has ever given a forecast of interest rates. [Interruption.] That was not a forecast, that was comment on what had happened in the immediate past! What will bring down long-term interest rates in the future is success in our fight against inflation. I hope very much that hon. Members opposite will co-operate with us in this most important fight.

I think I should conclude my remarks because there are several other debates still to take place. In doing so I refer to the official Opposition amendment, which already has raised a certain amount of derision. I realise that it was tabled to provide for a short debate on economic policy, but it is nevertheless strange that if it were carried it would significantly reduce the Chancellor's freedom of economic management in the first eight months of 1974. I could not quite grasp the comments of my hon. Friend the Member for Oswestry (Mr. Biffen), because at one stage he was kind enongh to say that in our careers at one time we hunted as a pair.

Mr. Biffen

I was referring to my hon. Friend the Member for Worthing (Mr. Higgins).

Mr. Nott

1 am sorry. I do not think my hon. Friend the Member for Oswestry and my hon. Friend the Member for Worthing (Mr. Higgins) did hunt as a pair when it was a question of wishing to work into the regulator a discrimination which, fortunately with the regulator on VAT, we have to a large extent eliminated. So far as I could understand the remarks of my hon. Friend the Member for Oswestry, he was sorry that we could not make a distinction between consumer goods and other items. I took him to mean that he would prefer—because this is the only way I could see the problem sorted out-different rates of VAT rather than a single unified rate. Although he was concerned about the effect in certain circumstar.ces of VAT on retailers, the great thing about a VAT regulator is that if it were changed—and, of course, under a Labour Government it would certainly be a change upward—it would not change retailers' stocks. The old regulator had a very adverse effect on retailers' stocks.

Referring to the amendment, I can understand that the Opposition dislike all order-making powers to raise revenue duties or indirect taxation. By putting shackles on some future mythical Labour administration, they seek to prevent their own right hon. Friends from ever damaging the poorer sections of the community, as happened when the regulator was activated upwards by the Labour Government in 1966 and 1968. It is interesting that the Opposition spend so much time talking against the regressive nature of indirect taxation, because when they left office in 1970 taxes on expenditure represented 19.4 per cent. of the gross national product and by 1972 taxes on expenditure had been reduced during our period of office to 17.3 per cent. and this year the figure will be even lower. So let us hear rather less from hon. Members opposite about the regressive nature of indirect taxation because their record does not allow them to make these remarks. As the Chancellor said, had VAT been introduced to raise the same amount of revenue as when they were in office the rate would be not 10 per cent. but 15 per cent.

Our policies are designed to raise the real living standards of the British people, and in that main objective we have been dramatically successful. The right hon. Member for Leeds, East, whose Government had one of the worst economic records in British history, has been reduced to carping about our achievements and to woeful prophecies which will prove as inaccurate this year as they did last.

Mr. Robert Sheldon (Ashton-under-Lyne)

Each time we have this regulator debate we start by talking about the tradition of the debate, a tradition which extends no longer back than 1968. We are finding a newer tradition in that on each occasion I remind the Committee how recently this tradition was established. I was one of the very few people who used to speak on the actual use of the regulator, so my qualifications in this debate are impeccable.

Nevertheless, this became a very useful vehicle for an economic debate. Starting in 1968 when Iain Maclecd prevailed on the Chairman in Standing Committee that this was a long-standing tradition— having invented it only a few minutes before—we have been accustomed to finding that this fits in very usefully as a way of explaining, discussing and debating the changes which have taken place in the economy over the period between the introduction of the Budget and discussion of the Finance Bill in Committee.

When we look at these changes we see that there is one thing which appears very clear. That is that the Government are pinning their hopes more and more on the hopes of growth in the remaining part of this year and the early part of next year. It is becoming rather more akin to the kind of dash for growth that we witnessed in the summer months of 1964. I am one who believed fervently in the great hopes for growth which seemed possible in 1970 when Iain Macleod asked for a few months to examine the situation. I stated in debate that I was prepared to give him that time because it was important to get this matter right.

There was uniquely at that time an opportunity to get this country on this long-term path for growth with the very high balance of payments situation, with the confidence that could be engendered in industry as a whole and by means of harmonious relations between both sides of industry and diminution of the gap between rich and poor. The basis for such an achievement was clearly within our grasp. The situation, of course, since then has deteriorated rapidly.

The first cause I see for that deterioration has been the decline in confidence of British industry directly attributable to the actions of the Government, the way they related the tough, abrasive measures to the investment plans of industry, their talk about "lame ducks", the tough policy that industries which could not succeed would have to go to the wall. This was hardly the kind of talk calculated to engender in industry the expansion, the optimism and, indeed, the confidence about which Conservative Governments in the past have always made a great deal of play.

Conservative Governments always talk about the confidence of industry and the need to maintain that confidence. The worst attack on that confidence came from the Government themselves. So we saw that, instead of those harmonious relations between Governments and both sides of industry, we had this division, the division between rich and poor, about which we have heard so much. So we started the main interest in the running of the economy by the present Chancellor in the details of tax reform which we have come to accept as a mark of his Chancellorship.

As we start the examination of the details of tax on this first day in Committee on the Finance Bill, I should point out that the Chancellor and I at least share one common interest in our addiction to taxation matters, and I am sure that from either side of the Committee we could spend many hours together talking of the relative merits of different kinds of tax curbs and advantages that accrue.

But there is an important distinction between the Chancellor of the Exchequer and myself. It is that I regard this as an interest, a hobby, something which I think would be a useful reform, but from which I never expect too much, but the Chancellor seems to have set this interest at the cornerstone of his economic achievements. He has tended to be blinded by his own enthusiasm for tax reform as an end not only in itself, but because he attributed rather too great a result to what might be available from it. The dash, drive and thrust that he expected would arise as a result of the tax reforms did not come to pass. Meanwhile, the economy has gone into a steady decline.

[Sir ROBERT GRANT-FERRIS in the Chair]

7.30 p.m.

So we found ourselves at the beginning of last year—I think that most people would set that as the critical time—with unemployment rising to over 1 million, with the Industrial Relations Act causing the industrial troubles, and with the panic at that time that led to the rapid expansion in public expenditure and the ruination of a policy of considered and feasible increases in public expenditure in the light of that which was available for the proper projection of such expenditure.

On 12th March the Chief Secretary to the Treasury, referring to the General Sub-Committee of the Select Committee on Public Expenditure, said: We therefore reject the committee's conclusion that our public spending over the next 12 to 18 months will constrain personal consumption to a rate significantly below that of total output. It just is not true."—[OFFICIAL REPORT, 12th March 1973; Vol. 852, c. 912.] We cannot help but compare that forthright statement with the statement that we heard today from the Chancellor of the Exchequer and the echo in the speech by the Minister of State. This conclusion by the General Sub-Committee of the Expenditure Committee of this House was denied in the strongest possible terms by the Chief Secretary, and the Chancellor today said that the rate of growth of consumer expenditure is going to moderate. That is how I put down his words. I think they are a fair transcription of what he said. The Minister of State added his echo. No one, least of all my hon. Friends the Members for Liverpool, Walton (Mr. Heffer) and Sheffield, Attercliffe (Mr. Duffy), can doubt the consequences that can arise from this rather less buoyant state of affairs when consumer expenditure and earnings fail to increase in the manner predicted by the Government.

It is clear that the way in which public expenditure got out of control found another echo in the speech by the Chancellor of the Exchequer on 6th March when he said: there will be the strictest control of expenditure, both on existing policies and for any new proposals."—[OFFICIAL REPORT, 6th March 1973; Vol. 852, c. 250.] One could not help but compare that strong forthright statement with the statement that we had only last week about the £15 million to help those with mortgages. Where that £15 million will appear in any future expenditure White Paper I do not know. Many of us doubt that we shall ever be able to trace it or find where it has gone.

The Minister of State amended the figures for the counter-cyclical expenditure to those that were given in the Report of the General Sub-Committee. This is an unsatisfactory way of conducting our debates on this matter. The Sub-Committee produced a report, and, instead of commenting on it properly, the Chief Secretary made one comment which was manifestly wrong. There was disagreement, and the Minister of State, in an aside, tried to correct it this evening.

At the end of the day we must consider that the Government have four main variables which they are able to control: how much they raise in public expenditure, how much they tax, the amounts that are left for personal consumption, and what is left for investment. If they increase one they must make corresponding changes in the others. When they find that the additions that they make relating to the disposition of all these variables do not add up, they are bound to be on a course that cannot be sustained. It is more than likely that the Government are on such a course. If they realise this, then, rather than spending their main periods of examination on taxation, they might be better placed to move towards a better understanding of how we should be progressing to obtain the growth that we so urgently need.

The Chancellor of the Exchequer, as recently as the Budget Statement on 6th March, said: Since we came to office, we have reduced taxation on a scale unprecedented in our history. Taxation as a proportion of gross domestic product has been cut from 35 per cent. to 30 per cent."—[OFFICIAL REPORT, 6th March 1973: Vol. 852, c. 240.] It is still a matter of great pride, even at a time like this, that the right hon. Gentleman cuts taxation from 35 per cent. to 30 per cent.

Mr. Nott

What is the hon. Gentleman recommending? Is he recommending that we return to the low growth of output and private consumption and the greatly increased tax rates of the Labour administration?

Mr. Sheldon

I am recommending that we do not borrow £4,400 million in an attempt to avoid taxing properly the results of the expenditure that the Government have undertaken. Although they have reduced taxation from 35 per cent. to 30 per cent., they have increased the borrowing requirement from almost nothing to about 8 per cent. of our gross national product. This financial arrangement is causing so much of our present inflation.

In his Budget Statement on 30th March 1971 the Chancellor of the Exchequer said: For 1971–72, the Central Government's borrowing requirement is now forecast to be a little over £600 million ". Later he said: The monetary policy which 1 have announced reflects my determination not to allow an undue expansion of the money supply."—[OFFICIAL REPORT, 30th March 1971; Vol. 814, c. 1396.] This was some determination. Rather than tax properly, as he should have done, he allowed the borrowing requirement to get out of control because public expenditure is also out of control.

Mr. Barber

Does the hon. Gentleman, who always speaks fairly about these matters, agree that he is advocating either increased taxation or reduced public expenditure, or both? If he agrees with that, which must be the only logical conclusion from what he is saying, may I ask what he has in mind?

Mr. Sheldon

I should think that the Chancellor of the Exchequer would be the last person to take pride in a borrowing requirement that has reached unprecedented levels. The whole Committee knows that that borrowing requirement will have to be paid for by one Government some day, and that that Government will have to raise it by taxation. The Chancellor should not boast that he has made tax cuts, on the one hand, and, on the other hand, has left others to pay for that massive borrowing requirement which has caused the greatest inflation in our history. This inability to tax has led to an excessive dependence on the increase in the borrowing requirement. The Government have pumped all this money on to the market, and the inflation is largely due to what the Government have done. They are the prime culprits.

Mr. Bruce-Gardyne

Since the hon. Gentleman seems to be coming to his peroration, and as the Opposition apparently intend to divide the Committee on this amendment, may I ask him to explain what the amendment means and what the consequences of its being carried would be?

Mr. Sheldon

Ever since Iain Macleod put down the first amendment to extend the time it has been a symbolic debate. It is a Division on the Government's economic policy. This is how it has been treated each year. We have reached levels of absurdity in the money supply which have rarely been reached before due to the borrowing requirement. The Government are busy trying to sell securities to the non-banking domestic public. They are competing with building societies, and, as my right hon. Friend the Member for Leeds, East (Mr. Healey) said, they are subsidising their own competition. Only the writers of fantasy could have devised the situation that the Chancellor has brought about.

The Chancellor sets up high interest rates and then subsidises the results of his own actions.

Mr. Barber

I can understand that the hon. Gentleman and other hon. Members take a particular view about the borrowing requirement. However, there is a great difference in that my hon. Friends have said frankly what they would do to reduce the borrowing requirement. I ask again what would the Opposition do? It is no good saying that the borrowing requirement is too high. At least one of my hon. Friends has said publicly that he advocates increasing taxation. Is that the view of the Opposition? If the Opposition would cut public expenditure, which part of public expenditure would they cut?

Mr. Sheldon

The right hon. Gentleman should not pride himself on reaching the highest level of borrowing requirement that has ever been reached. That is not a matter for congratulation. [HON. MEMBERS: "Answer."] The Chancellor has brought about inflation. If he genuinely considers that the borrowing requirement is a better alternative than taxation or a massive rate of inflation, let him say so. Let him come to the Dispatch Box and say that he accepts that the borrowing requirement, with its attendant inflation, is something that he is prepared to accept rather than increased taxation. When he says that honestly and openly we will know that he is the man to blame for the level of inflation over which he now presumes to preside. He gives subsidies, as his right hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) says, to anything that comes along so as to preserve the policy on which he has embarked.

The highest level of absurdity was reached when the Government considered mortgages. Money was given to those who have the perfect inflation hedge, the people who have cheap rates of interest after tax relief and the ability to escape capital gains tax. They enjoy estate duty provisions and improvement grants. The people who benefit from such fiscal advantages are those to whom the money is being given. No one can say that that is other than grossly unfair and a

policy that has no basis in equity or in common sense.

In 1970 the Government could have gone for growth. They had an excellent opportunity and they could have succeeded. But even now the Chancellor, with a base which is nothing like as good as it was then, puts forward a policy of growth and the policy of hope which he has come to espouse. The Chancellor, as my right hon. Friend the Member for Leeds, East said, is taking a gamble. He knows full well that the advice that he is getting, some of which comes from within the Treasury, points to the fact that there is trouble ahead due to the high levels of public expenditure. The Chancellor apparently does not believe these forecasts, although we note the change in the way that he denies some of our suggestions. He hopes for something to turn up.

The Government's policy is one of hope. It is hope that his growth gamble will come right in the end. The Chancellor has not convinced the House. We hope that he is right, but the lack of conviction which he has expressed this afternoon deserves to be condemned.

Question put, That the amendment be made:—

The Committee divided: Ayes 163, Noes 191.

Division No. 101.]	AYES	[7.44 p.m.
Allaun, Frank (Salford, E.)	Dormand, J. D.	Jenkins, Rt. Hn. Roy (Stechford)
Armstrong, Ernest	Douglas, Dick (Stirlingshire, E.)	John, Brynmor
Ashton Joe	Duffy, A. E. P.	Johnson, James (K'ston-on-Hull, W.)
Barnett, Joel (Heywood and Royton)	Dunnett, Jack	Jones, Dan (Burnley)
Bennett, James (Glasgow, Bridgeton)	Eadie, Alex	Jones,Rt.Hn.Sir Elwyn(W.Ham,S.)
Bishop, E. S.	Edwards, William (Merioneth)	Jones, T. Alec (Rhondda, W.)
Blenkinsop, Arthur	English, Michael	Judd, Frank
Boardman, H. (Leigh)	Ewing, Harry	Kaufman, Gerald
Booth, Albert	Faulds, Andrew	Kelley, Richard
Broughton, Sir Alfred	Fitch, Alan (Wigan)	Kerr, Ruasell
Brown, Hugh D. (G'gow, Provan)	Fletcher, Ted (Darlington)	Kinnock, Neil
Buchan, Norman	Foot, Michael	Lamble, David
Buchanan, Richard (G'gow, Sp'burn)	Forrester, John	Lamond, James
Butler, Mrs. Joyce (Wood Green)	Freeson, Reginald	Lawson, George
Campbell, I. (Dunbartonshire, W.)	Galpern, Sir Myer	Leadbitter, Ted
Carmichael, Neil	Gilbert, Dr. John	Lee, Rt. Hn. Frederick
Carter, Ray (Birmingham, Northfield)	Ginsburg, David (Dewsbury)	Leonard, Dick
Castle, Rt. Hn. Barbara	Golding, John	Lomas, Kenneth
Clark, David (Colne Valley)	Gourlay, Harry	Loughlin, Charles
Cocks, Michael (Bristol, S.)	Grant, John D. (Islington, E.)	Lyon, Alexander W. (York)
Cohen, Stanley	Griffiths, Eddie (Brightside)	Lyons, Edward (Bradford, E.)
	Hamilton, James (Bothwell)
Concannon, J. D.	Hamilton, William (Fife, W.)	Mabon, Dr. J. Dickson
Conlan, Bernard	Hannan, William (G'gow, Maryhill)	McBride, Neil
Crawshaw, Richard	Harper, Joseph	McCartney, Hugh
Cunningham, G. (Islington, S.W.)	Harrison, Walter (Wakefield)	McElhone, Frank
Dalyell, Tam	Healey, Rt. Hn. Denis	McGuire, Michael
Davidson, Arthur	Heifer, Eric S.	Machin, George
Davies, Denzil (Llanelly)	Horam, John	Mackenzie, Gregor
Davies, G. Elfed (Rhondda, E.)	Hughes, Mark (Durham)	Mackle, John
Davis, Terry (Bromsgrove)	Hughes, Roy (Newport)	Mackintosh, John P.
de Freitas, Rt. Hn. Sir Geoffrey	Hunter, Adam	Maclennan, Robert
Dempsey, James	Irvine, Rt. Hn. Sir Arthur (Edge Hill)	McMillan, Tom (Glasgow, C.)
Doig, Peter	Jenkins, Hugh (Putney)	McNamara, J. Kevin
Mahon, Simon (Bootle)	Pavitt, Laura	Strang, Gavin
Marquand, David	Peart, Rt. Hn. Fred	Thomas,Rt.Hn.George (Cardiff,W.)
Marshall, Dr. Edmund	Perry, Ernest G.	Urwin, T. W.
Mason, Rt. Hn. Roy	Prescott, John	Wainwright, Edwin
Mayhew, Christopher	Price, William (Rugby)	Walden, Brian (B'm'ham, All Saints)
Meacher, Michael	Rees, Merlyn (Leeds, S.)	Walker, Harold (Doncaster)
Mellish, Rt. Hn. Robert	Rhodes, Geoffrey	WatKins, David
Mendelson, John	Roberts, Albert (Normanton)	Weitzman, David
Millan, Bruce	Roberts,Rt.Hn.Goronwy(Caernarvon)	Wellbeloved, James
Miller, Dr. M. S.	Roderick, Caerwyn E.(Brc n&R'dnor)	White, James (Glasgow Pollok)
Milne, Edward	Rodgers, William (Stockton-on-Tees)	Whitehead, Phillip
Molloy, William	Rowlands, Ted	Whitlock, William
Morris, Alfred (Wythenshawe)	Sandelson, Neville	Williams Alan (Swansea W.)
Morris, Charles R. (Openshaw)	Sheldon, Robert (Ashton-under-Lyne)	Williams, w T (Warrington)
Morris, Rt. Hn John (Aberavon)	Short,Rt.Hn.Edward (N'c'tle-u-Tyne)	Wilson, Rt. Hn. Herold (Huyton)
Mulley, Rt. Hn. Frederick	Sillars, James	Wilson, William (Coventry, S.)
Murray, Ronald King	Silverman, Julius	Woof, Robert
Oakes, Gordon	Skinner, Dennis
Ogden, Eric	Spearing, Nigel
Orbach, Maurice	Spriggs, Leslie	TELLERS FOR THE AYES:
Oswald, Thomas	Stallard, A. W.	Mr. Donald Coreman and
Owen, Dr. David (Plymouth, Sutton)	Stoddart, David (Swindon)	Mr. James [...]
Parker, John (Dagenham)	Stonehouse, Rt. Hn. John
NOES
Adley, Robart	Hall, Miss Joan (Keighley)	Monks, Mrs. Connie
Allason, James (Hemel Hempstead)	Hall, John (Wycombe)	Monro, Hector
Archer, Jeffrey (Louth)	Hall-Davis, A. G. F.	Montgomery, Fergus
Astor, John	Hamilton, Michael (Salisbury)	More, Jasper
Atkins, Humphrey	Hannam, John (Exeter)	Morgan, Geraint (Denbigh)
Baker, Kenneth (St. Marylebone)	Harrison, Brian (Maldon)	Morgan-Giles, Rear-Adm.
Baker, W. H. K. (Banff)	Haselhurst, Alan	Murton, Oscar
Balniel, Rt. Hn. Lord	Hastings, Stephen	Nabarro, Sir Gerald
Batsford, Brian	Hawkins, Paul	Neave, Airey
Bell, Ronald	Hayhoe, Barney	Nicholls, Sir Harmar
Benn Rt. Hn. Anthony Wedgwood	Hicks, Robert	Noble, Rt. Hn. Michael
Biffen, John	Higgins, Terence L.	Normanton, Tom
Body, Richard	Hltey, Joseph	Nott, John
Bowden, Andrew	Hill, John E. B. (Norfolk, S.)	Oppenheim, Mrs. Sally
Bruce-Gardyne, J.	Holland, Philip	Page, Rt. Hn. Graham (Crosby)
Bryan, Sir Paul	Holt, Miss Mary	Pardoe, John
	Hooson, Emlyn
Buchanan-Smith, Alick (Angus,N&M)	Hornby, Richard	Parkinson, Cecil
Buck, Antony	Hornsby-Smith, Rt.Hn.Dame Patricia	Percival, Ian
Burden, F. A.	Howe, Rt. Hn. Sir Geoffrey	Powell, Rt. Hn. J. Enoch
Butler, Adam (Bosworth)	Howell Ralph (Norfolk N)	Price, David(Eastleigh)
Carr, Rt. Hn. Robert	Hunt, John	Prior, Rt. Hn. J. M L.
Chichester-Clark, R.	Hutchison, Michael Clark	Proudfoot, Wilfred
Churchill. W. S.	Iremonger, T. L.	Pym, Rt. Hn. Francis
Clark, William (Surrey, E.)	Irvine, Bryant Godman (Rye)	Ramsden, Rt. Hn. James
Clegg, Walter	James, David	Rawlinson, Rt. Hn. Sir Peter
Cockeram, Eric	Jessel, Toby	Redmond, Robert
Cooke, Robert	Jones, Arthur (Northants, S.)	Reed, Laurance (Bolton, E.)
Coombs, Derek	Jopling, Michael	Rees, Peter (Dover)
Cooper, A. E.	Kaberry, Sir Donald	Rhys Williams, Sir Brandon
Corfield, Rt. Hn. Sir Frederick	Kellett-Bowman, Mrs. Elaine	Ridley, Hn. Nicholas
Cormack, Patrick	Kimball, Marcus	Rippon, Rt. Hn. Geoffrey
Costain, A. P.	King, Evelyn (Dorset, S.)	Roberts, Wyn (Conway)
Crowder, F. P.	King, Tom (Bridgwater)	Rost, Peter
d' Avigdor-Goldsmid, Maj.-Gen.Jack	Kinsey, J. R.	Russell, Sir Ronald
Dean, Paul	Kitson, Timothy	St. John-Stevas, Norman
Deedes, Rt Hn W. F.	Knox, David	Scott-Hopkins, James
Digby, Simon Wingfield	Lambton, Lord	Shaw, Michael (Sc'b'gh amp; Whitby)
Dykes, Hugh	Lament, Norman	Sinclair, Sir George
Elliott, R. W. (N'c'tle-upon-Tyne,N.)	Lane, David	Skeet, T. H. H.
Eyre, Reginald	Langford-Holt, Sir John	Smith, Cyril (Rochdale)
Fenner, Mrs. Peggy	Le Marchant, Spencer	Smith, Dudley (W'wick & L'mington)
Fidler, Michael	Longden, Sir Gilbert	Soref, Harold
Fisher, Nigel (Surbiton)	Luce, R.N.	Speed, Keith
Fookes, Miss Janet	McLaren, Martin	Stanbrook, Ivor
Fortescue, Tim	Maclean, Sir Fitzroy	steel, David
Fowler Norman	McMaster, Stanley	Stewart-Smith, Geoffrey (Belper)
Fox Marcus	McNair-Wilson, Michael	Stodart, Anthony (Edinburgh, W.)
Fry, peter	McNair-Wilson Patrick (New Forest)	Stoddart-Scott, Col. Sir M.
Gardner, Edward	Madel, David	Stokes, John
Gibson-Watt, David	Mather, Carol	Stuttaford, Dr. Tom
Gilmour Sir John (Fife, E.)	Maxwell-Hyslop, R. J.	Taylor, Edward M.(G'gow.Cathcart)
Goodhart, Philip	Mills, Peter (Torrington)	Taylor, Frank (Moss Side)
Gorst, John	Mills, Stratton (Belfast, N.)	Tebbit, Norman
Gray, Hamish	Miscampbell, Norman	Thomas, John Stradling (Monmouth)
Green, Alan	Mitchell,Lt.-Col. C.(Aberdeenshire,W)	Thompson, Sir Richard (Croydon, S.)
Griffiths, Eldon (Bury St. Edmunds)	Mitchell, David (Basingstoke)	Tilney, John
Grylls, Michael	Moate, Roger	Trafford, Dr. Anthony
Gummer, J. Selwyn	Money, Ernie	Trew, Peter

Tugendhat, Christopher	Wells, John (Maldstone)	Worsley, Marcus
Turton, Rt. Hn. Sir Robin	White, Roger (Gravesend)	Younger, Hn. George
Waddington, David	Wiggin, Jerry
Walder, David (Clitheroe)	Wilkinson, John	TELLERS FOR THE NOES:
Walker-Smith, Rt. Hn. Sir Derek	Wolrige-Gordon, Patrick	Mr. Kenneth Clarke and
Ward, Dame Irene	Wood, Rt. Hn. Richard	Mr. Victor Goodhew.
Weatherill, Bernard	Woodnutt, Mark

Question accordingly negatived.

The CHAIRMAN, being of the opinion that the principle of the Clause and any matters arising thereon had been adequately discussed in the course of debate on the Amendment proposed thereto, forthwith put the Question, pursuant to Standing Order No. 48 (Debate on clause or schedule standing part), That the Clause stand part of the Bill: —

Question agreed to.

Clause 3 ordered to stand part of the Bill.