FINANCE BILL

HC Deb 11 July 1973 vol 859 cc1530-601

Order for Third reading read.

3.44 p.m.

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

I beg to move, That the Bill be now read the Third time.

By the standards of recent years this Bill has not been a heavy one and the Committee and Report stages have been less onerous than those we had become accustomed to. Nevertheless, it is right as we come to the Third Reading that, speaking from this Dispatch Box, I should say a few words about the main provisions of the Bill as they have emerged from Committee and Report and also very briefly and in accordance with precedent, comment on the general economic context in which the Government are asking the House to pass this Finance Bill. I shall also have one or two questions to put to right hon. Gentlemen opposite——

Mr. Joel Barnett (Heywood and Royton)

Answer some yourself.

Mr. Jenkin

—and the House will look forward to learning their answers. [Interruption.]

I start with VAT. When I moved the Second Reading of the Bill, on 2nd April—the day after VAT came into operation—I said that the introduction of VAT and the disappearance of purchase tax and SET marked a revolution in our indirect tax system. None the less, I expressed a cautious optimism that this major change would be effected without serious difficulties. Some hon. Members opposite, particularly the hon. Member for Heywood and Royton (Mr. Joel Barnett), gave vent to dire prophecies of disaster.

VAT has now been running for little over three months and we can begin to form a view as to which of us was right. So far from disaster, the House will, I know, be glad to acknowledge that the changeover has for the most part gone extremely smoothly. Businesses have quickly learnt how the tax works and almost all have adapted themselves to it successfully. I have no doubt, of course, that here and there there are still problems which require attention, and I expect we shall hear something of them today. One reason for this smooth changeover was that traders had plenty of time to prepare for it. The intensive and prolonged consultations which took place before last year's legislation was introduced were invaluable in ensuring the minimum of difficulties for the many hundreds of different trades affected by VAT.

The Customs and Excise was given a massive task, and it is certainly my experience that traders who have sought its help and advice are, for the most part, full of praise for the officials of that department.

Mr. Denis Healey (Leeds, East)

Will the right hon. Gentleman comment on the report in today's Daily Telegraph in which a Customs officer told the reporter that he is not surprised that many small business men and traders are packing up rather than attempting to master the intricacies of the new tax system?

Mr. Jenkin

I am happy to say that the Treasury does not form its policy on the basis of tittle-tattle from individual unidentified Customs officers. I am sure the right hon. Gentleman has had said to him, as no doubt many of my hon. Friends have, that there is high praise for the work of the local VAT offices in helping through the introduction of this tax, and I should not want anything that the right hon. Gentleman says to detract from that.

It is a reflection of the very thorough way in which the VAT legislation was prepared and scrutinised by the House last year that there is relatively little about VAT in the Bill. The main change provided by it is the relief for tax-paid stocks held at the commencement of VAT; there is no doubt that this relief was widely welcomed by the retail trade. Otherwise, the only changes are minor technical changes of machinery. One cannot but help contrasting all this with the introduction of SET. In the words of the Leader of the Opposition, then Prime Minister, on 11th May 1966: SET has crude and clumsy implications, but these will be relined in time. I think SET may survive and indeed will prove to be a tax of not inconsiderable elasticity of application and yield. I have no doubt that my hon. Friends will certainly agree that it was "crude and clumsy". As for "elasticity of yield", perhaps that was correct because the Labour Government doubled the rate of SET twice. But "survival"? No. There was never any chance of the survival of SET, for even in the year in which it was introduced its successor was already on the stocks. Curiously, it was in that same speech to the Press Gallery that the right hon. Gentleman told the world that the Labour Government were studying VAT.

Perhaps it is partly due to the Labour Party that after the 1970 General Election Customs and Excise was able to move so swiftly into top gear with the preparation of the tax, and we should like to express our thanks to that department now.

Mr. Tam Dalyell (West Lothian)

Will the Chief Secretary complete this happy picture by giving a comparison of the costs of collection of SET and of VAT?

Mr. Jenkin

If the hon. Gentleman will put down a Question I will provide him with the answer, but I have not got the figures to hand at this moment. Of course, more revenue is produced through VAT without all the nonsensical discriminations by which SET was disfigured.

This brings me to my first question to the right hon. Member for Leeds, East (Mr. Healey). What would the Opposition do about VAT if the electorate were so unwise as to elect a Labour Government? The Labour Party has steadfastly and consistently opposed not only the details but the whole principle of VAT. The Opposition have voted against it on every possible occasion.

Mr. Speaker

Order. I hope that the right hon. Gentleman will excuse me for interrupting him. This is a Third Reading debate, and it is extremely limited.

Mr. Jenkin

I will not try your patience further, Mr. Speaker, but it will be within the recollection of the House that, on the whole, Third Reading debates of Finance Bills have been allowed some latitude on certain matters. However, I have posed the question, and no doubt the right hon. Member for Leeds, East will be able to give us the answer.

We have heard a great deal from the right hon. Gentleman about wealth taxes, property taxes, gift taxes and other taxes, but of the Opposition's views on VAT in future we have heard nothing.

I turn next to the Government's employee share savings scheme for which provision is made in the Bill and which my right hon. Friend announced in his Budget speech. There is no doubt that this part of the Bill has gained substantially from the very full discussions that we had in Committee; and, with the amendments which were accepted by the House last night, the scheme is a good deal more flexible and attractive than when the Bill was first introduced.

We have added the choice of an SAYE share option scheme. We have scrapped the complicated rules for reverse discounting for deferred payments under part-payment schemes. We have eased the rules about those who must be entitled to join the scheme for it to gain approval. All this will make it easier for firms to introduce SAYE share savings schemes and for employees to understand them. In addition, we have this year refined the share incentive and share option legislation which the House passed last year.

We are convinced that share schemes of all sorts have an important role to play in our economy, whether they be of the type appropriate for senior staff, executives and directors, or of the type appropriate for junior staff and shop floor workers.

On executive-type schemes I concede that we have not been able to meet all the criticisms that have been advanced, and, in particular, the Inland Revenue will continue to study the difficult problem of the unquoted subsidiary company.

I recognise and confirm, as I said last night, that there are often good grounds, wholly unconnected with tax avoidance, why the managers of such a company should be able to invest in that subsidiary company through a share option or share incentive scheme. But so far the difficulties have shown themselves to be formidable and seem to rule this out. While we have not been able to accept the proposals put to us by some of my hon. Friends, I shall be very happy to consider before next year any other constructive suggestions.

Sir Harmar Nicholls (Peterborough)

Whilst the Chief Secretary is entitled to be congratulatory to his right hon. Friend, because it was a wise Budget, this and other matters in it leave a lot to be desired for the small trader and the unquoted company. I hope he will keep in mind that in future Budgets they deserve special consideration, which has so far been denied them.

Mr. Jenkin

I must take issue with my hon. Friend. I do not think he was in his place last night when we accepted a new clause specifically intended to help the small trader and meet one of the central recommendations of the Bolton Committee on form-filling. I am sure my hon. Friend welcomes that.

The share savings scheme is open to the unquoted company, the small family company, just as it is to every public company. The problem to which I was referring relates to the unquoted subsidiary which is owned by a parent company.

Reverting to the SAYE share savings schemes, I must confess that the initial reception of my right hon. Friend's proposals was disappointing, but I should like to express our thanks to all those whose advice and criticisms have helped us to produce the more satisfactory package which is now in the Bill.

When this Bill becomes law we shall have on the statute book, for the first time in this country, a legislative framework which will give the shop floor worker a real opportunity to acquire a stake in the company for which he works on advantageous terms and without risk to his savings up to the point at which he becomes a full shareholder. I hope that as soon as it becomes possible, in the context of our counter-inflation policy, many companies will feel it right to take advantage of this legislation.

But let me make it quite clear that we recognise that the scheme is not necessarily suitable for all companies. There may be firms which feel that their objectives of creating good and harmonious employee relations may be more satisfactorily achieved by other means. It will certainly be no reproach if they decide not to introduce a scheme of the kind provided for in this Bill.

Furthermore, I hope that in time we may be able to develop other ideas to cater for employees in different walks of life—in the public service, in the nationalised industries, and for those who work for non-corporate employees.

There is much talk today about the need to involve employees more with the conduct of the firms for which they work, and there are many routes by which this objective may be achieved. I believe that share participation or asset formation, as Eric Wigham described it in The Times a day or so ago, is by no means the least important.

Perhaps I may be allowed to put a second question to the Opposition. Would they intend to keep the SAYE share savings scheme, or would they scrap it? They have already condemned the executive-type share savings and share incentive scheme—more's the pity! But last night when I asked the hon. Member for Dudley (Dr. Gilbert) whether the Labour Party would scrap the SAYE type of scheme there was a deafening silence. We look to the right hon. Member for Leeds, East to inform the House today where he stands on this issue.

Finally, before I sit down I want to make a few more general remarks about the economy and about the Government's economic policy of which the proposals in this Bill form part.

In his Budget speech the Chancellor said that the main aim of our policy is to sustain a high rate of economic growth. Last year the economy was set on a course of 5 per cent. growth at an annual rate over the 18 months up to the first half of this year. This year's Budget was designed to maintain that growth rate up to the first half of next year. The latest figures show that the economy is growing broadly in line with those forecasts and that we are achieving our growth objectives.

Over the past 18 months the economy has been based largely on a rapid rise in consumer spending, and this was essential both to cut unemployment and to stimulate production and investment. These aims are now being achieved.

Unemployment has fallen sharply—down by 300,000 since March 1972, which I am sure is welcomed on both sides of the House. Since the second half of 1971 industrial production has been rising at an annual rate of about 8 per cent. Investment is now rising strongly and all the surveys of the Department of Trade and Industry and the CBI and of the Financial Times indicate a considerable rise in investment during the rest of this year, and continued strong expansion next year. Engineering orders are at a very high level and on a rising trend.

Exports, too, are growing strongly. Indeed, the volume of exports this year has risen faster than we expected at the time of the Budget. The volume of exports in the first five months of 1973 was 12 per cent. over the level in the second half of 1972. Although imports are also rising, it is important that the volume of exports is rising at about twice the rate of the volume of imports. That is a trend which I am sure everybody welcomes.

Mr. J. Bruce-Gardyne (South Angus)

My right hon. Friend has pointed out that last year consumer expenditure had risen rapidly. He pointed out that from here on it looked as if industrial investment and exports would rise rapidly. Presumably the implication is that there would be rather less room for the rate of growth in consumer expenditure to be maintained. Can my right hon. Friend give the House any indication of how the Treasury expects that change to come about?

Mr. Jenkin

My hon. Friend has anticipated my next remarks. I was about to say that there has been a lot of talk about a danger of overheating. I think it is to that to which my hon. Friend is adverting. Despite the faster growth and despite the gloomy forebodings of certain commentators, the evidence as a whole does not point to overheating. We believe that the margin of slack in the economy is sufficient to maintain these faster growth rates for some time yet.

The level of unemployment remains high by historical standards and the rate of fall has begun to slacken. Although the level of unfilled vancancies is also high, it is our view that ample resources of labour are available to enable us to achieve our growth objectives without running into major shortages. Manufacturing capacity, too, still leaves room for substantial growth.

I now turn to the balance of payments. We always foresaw that the rapid rise in demand would lead to a substantial rise in imports and for a while a deficit on current account. That has been seriously exacerbated by the unprecedented rise in world commodity prices. Although we expect that the rise will abate, it will be some time before the faster growth of the volume of exports offsets the rise in import prices. We can therefore expect—we do not need to be unduly despondent or anxious about it—several more months of current account deficit before the position improves.

Mr. Douglas Jay (Battersea, North)

Can the right hon. Gentleman tell us whether the growth in the payments deficit has been, like everything else, in accordance with the Government's expectations?

Mr. Jenkin

The rise in the price of imports and the extent to which the terms of trade turned against us were not forecast. I doubt whether they were forecast by the right hon. Member for Battersea, North (Mr. Jay). As I have just indicated, it is that turn which is one of the major factors in the current account deficit. I stress again that in the first months of this year the volume of exports has been rising at about twice the rate of the volume of imports. Furthermore, that is during a period when firms have been buying materials and machinery in considerable quantities to provide the resources for the faster growth and for the investment which we all welcome.

Our aim is to sustain the expansion of the economy. It is upon that that all else depends. Although there is no danger of overheating at the moment, we have already recognised that perhaps that could become a danger at a later stage and that strains on the economy might develop during 1974. That is why on 21st May my right hon. Friend the Chancellor announced his measures to moderate the rate of growth of public expenditure for 1974–75.

I now turn more directly to the question posed by my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne). Rather like the dog that barked in the night, it is remarkable how little we have heard from the Opposition about the statement made by my right hon. Friend the Chancellor on 21st May. Perhaps there are two reasons for that unaccustomed self-denial. First, unlike their exercises in cutting public expenditure, my right hon. Friend's package has been announced not to cut back the growth rate but so that it should be sustained. Second, it was no panic measure involving cutting back contracts—[Interruption.] It took a long view, did it not? There was no cutting back of contracts in midstream. It was an example of careful foresight, with decisions taken in good time to enable them to have effect without major disturbance of key public expenditure programmes. The measures were taken to ensure that next year we shall have room for the higher investment, for the continued expansion of exports and for the reasonable rate of increase in personal consumption which faster growth implies.

I now pose my third and last question to the Opposition. We shall no doubt hear a lot of doom and gloom from the right hon. Member for Leeds, East about inflation, prices, sterling and other matters. But, given that the economy is now expanding rapidly, with both exports and investment surging ahead and unemployment falling, would the Opposition now take action to cut back demand? We are entitled to know their answer. Would they raise taxes?

The Chancellor of the Exchequer (Mr. Anthony Barber)

It is what they did before.

Mr. Jenkin

If so, would they raise income tax or indirect taxes, or would they put additional tax on beer, petrol and tobacco? Would they reimpose credit restrictions? We are entitled to know their policy. They are putting themselves forward as a potential alternative Government. We are entitled to know what they would do. All these things, as my right hon. Friend said, are exactly what they did before, and the country is entitled to know whether they would do so again.

Our priority is to maintain the faster growth. The Bill carries forward the Government's policies for faster growth, for tax reform, for encouraging savings and for fostering wider share ownership. Those are objectives which command wide support in the House and in the country.

4.6 p.m.

Mr. Denis Healey (Leeds, East)

We are all delighted that the right hon. Gentleman the Chief Secretary is now training so assiduously for the role which he will shortly hold in Opposition. I shall have the greatest pleasure in announcing my first Budget from where the right hon. Gentleman was standing. From the remarks which you have addressed to the right hon. Gentleman, Mr. Speaker, you would probably regard me as being out of order if I opened my first Budget this afternoon.

I am not surprised that the Chief Secretary had so little to say about the economy and about the Bill. The Bill is now generally regarded as a lollypop mini-Budget. It is a Budget which is as unjust as it was irrelevant. For most people that is summed up by the fact that the right hon. Gentleman the Chancellor of the Exchequer chose to give £110 million to reduce the price of humbugs and candyfloss when housewives throughout the country were collapsing under the rising price of essential foodstuffs.

The Chancellor described the Budget four months ago as neutral. He readily confessed—and I do not blame him—that he was uncertain about how events would develop. He warned us that he would not hesitate to act if events developed in such a way as to require action. We had the first action a month or so later when he cut public expenditure by £500 million. We are, of course, still waiting for the real Budget. Most of us feel that that Budget is not likely to come until the autumn. We all hope that tomorrow's trade figures will not force action in the next few weeks before the House rises.

The basic dangers in the right hon. Gentleman's strategy are more obvious today than four months ago. The Bill is largely responsible for the fact that this year the Government have a borrowing requirement of over £4,000 million. That is equivalent, give or take £100 million, to the tax reliefs which the Chancellor is boasting of having made this year.

The right hon. Gentleman has made no cuts in public expenditure to offset the cuts which he has made in taxation. We heard this afternoon that the right hon. Gentleman the Prime Minister has firmly decided, despite opposition from some of his Cabinet colleagues, to go ahead with the frivolous proposal for Maplin airport, evidence against which proposal is accumulating day by day as more experts have an opportunity to study the facts. The Government are now committed to spending another £30 million to subsidise the export of Common Market butter to the needy Russians who will then export it at a higher price to the even more needy Brazilians.

So far as we were able to understand it from the Chancellor's speech during the Budget debate, he plans to meet the Government's enormous borrowing requirement, which is totally unprecedented, by borrowing money from the British public at interest rates which have no precedent in our history. We all know that that is the main factor which threatens to force the building societies to raise mortgage rates up to and maybe beyond 10 per cent.

I gather that the right hon. Gentleman may have had some success in the pressure which he has exerted on the building societies during the last week or so. Can he give us any guarantee that if the rate does not go up to 10 per cent. this month it will not go up to 10 per cent. in August?

Does the Chancellor still believe that he has any chance now of bridging his borrowing requirement by raising savings from the British public when he knows that his prices and incomes policy—the Central Statistical Office has published the facts—has compelled people to use up their savings in order to maintain their standard of life and when the Page Report has shown that every man and woman who bought a £1 savings bond in 1970 is 13 pence worse off today?

The Chancellor cannot claim that the climate he has currently produced has any chance of producing savings on the scale necessary to bridge his borrowing requirement. Of course, if it does not do so, the enormous size of the borrowing requirement is bound to give a new boost to the rocketing prices from which the whole country is suffering and to increase tendencies towards over-heating in some sections of the economy.

The Chancellor told us repeatedly in March and April that he was confident that he could maintain a 5 per cent. growth rate for a year or so. We were led to believe that he thought that we could continue to grow at 5 per cent. until at least next Easter. Does he still believe it possible to maintain growth at that rate through the winter in the economic climate which his Budget has produced?

It is well known to all businessmen, and patent from the Government's statistics, that there are most serious bottlenecks in the South-East region, and therefore, if the right hon. Gentleman wants to maintain growth at anything like the present level for another year or so, he will have to get increased activity in the regions. How on earth does he expect to do that when he has recommitted himself in the last few weeks to end the regional employment premium next years?

The second major threat to the Government's strategy is the balance of payments deficit. The complacency shown by Ministers in our debates last March did not last very long. So far this year, the balance of payments deficit has been running at the rate of about £800 million a year and we all noted that the Chief Secretary was careful to warn us that we were likely to get some very bad trade figures to follow, at least for the next few months.

How does the Chancellor propose to meet this deficit? So far he has sought to do so by borrowing abroad at second hand through public authorities. So far as I am able to discover—and the economics correspondent of the Daily Telegraph takes the same view—about 40 per cent. of our putative £800 million deficit this year has already been covered by public authority borrowing.

But the situation is changing fast. Interest rates in Britain are going down while interest rates abroad are going up. How does the Chancellor hope to persuade the public authorities to continue covering his deficit if they can borrow abroad only at higher rates than they get here? Will he solve the problem by rising interest rates in Britain once again?

We all know that the very disturbing trade figures and their effect on the balance of payments are the main reason for the fact that in recent weeks the £sterling has been falling in value, not only as fast as the dollar but even faster.

This devaluation, which reached 18 per cent. on a weighted basis last Friday, is directly related to the very disturbing performance of our balance of payments.

We are all glad to see that there has been some recovery in the parity of sterling—if that is a word one can use in a world of floating rates—in the last few days. But we are bound to suspect, after the communiqué issued on Sunday, that this may have been due to intervention by central banks.

There is no doubt that the Government are relying heavily on the fact that we now have a currency which is undervalued, as the Chancellor described it on Monday. This gives us a very substantial competitive advantage and I hope that our exporters will take the full benefit from it. But I am sure that the right hon. Gentleman will agree that none of his fellow finance ministers in EEC countries would allow him to join their float at a parity at which the pound was seriously under-valued.

I hope that we shall hear something later about the dog that did not bark in the Conservative night. Can we have a clearer statement from the Government, an undertaking that they will not join the Common Market float until inflation in this country is very much more solidly under control than it is? It is clear that, although the Common Market countries are continually pressing Britain to join the float, they will not allow us to join unless we have a parity at which the pound is not under-valued. If we went in at a higher parity, however, we could say goodbye to all our hopes of ever bridging the balance of payments gap.

But, of course, although the Chancellor sought to persuade the country a year ago that floating the pound was a painless device which had nothing to do with devaluation, I do not think that even the meanest intelligence—as the Chief Secretary called it—would hold that view today. The devaluation of between 15 and 18 per cent. from which the£sterling is suffering at the moment is responsible for about half the increase in import costs, which is one of the major causes of inflation in this country.

Although I know that economists differ on the precise percentage of a parity fall which is reflected in an increase in the cost of living, it is usually assumed that about 20 per cent. is so reflected, so the Chancellor's devaluation by itself has added between 3 and 4 per cent. to the appalling increase in the cost of living in the last 12 months.

Mr. Bruce-Gardyne

Has not the right hon. Gentleman got himself into a circular position? He said earlier that the Government should not join the common float until they have cured inflation, and now he says that floating is contributing to inflation through raising import prices.

Mr. Healey

No, it is not a circular position. I believe that the hon. Gentleman takes some interest in these matters and I am surprised that he is not aware that in this unpleasant economic world in which Chancellors and even shadow Chancellors have to operate there are very often contradictory elements at work. We get some advantage from a fall in the rate in terms of foreign trade. We have no alternative to a fall in the rate when our balance of payments position is as bad as it was. But at the same time a fall in the rate brings great disadvantages in terms of inflation, and the central question, which I know the Chancellor is considering, is whether he can live through the down period in the J curve long enough to take advantage of the hoped-for upswing in the J curve when, as the Chief Secretary said, an increased volume of exports makes up for the increased price of imports.

Mr. Dennis Skinner (Bolsover)

The Chancellor could jump instead.

Mr. Healey

Of course, and one great danger in floating down rather than taking one jump is that the psychological change in the behaviour of exporters and importers from slow continual adjustments is tiny compared with the change which follows a jump, and the J curve may turn out to be a U curve or even, as has been suggested, an L curve. But in such circumstances one never finds any benefit sufficient because throughout the whole process the parity is falling.

What concerns the country as a whole far more than these technical details of how a change in parity affects the flow of trade is the impact of devaluation both on the cost of living and on the pattern of earnings. The real earnings of the population go down because of the effect on the increase in the cost of living but the earnings of industry go up because of the increased earnings from exports. What has emerged quite clearly in the past few months is the answer to a question we were all asking during the Budget debate—what is the hidden component in the Government's economic strategy, the key to the whole of their Budget?

It was put in a nutshell in a rather arcane way by the Permanent Under-Secretary to the Treasury, Sir Douglas Allen, who said that the Government were relying on what he called the spontaneous effect of the changing price-wage relationship. What does that mean in plain language? It means that the whole burden of paying for the Government's Budget deficit, of paying for the balance-of-payments gap and for the consequence of devaluation, is to be thrown on to the working man and his wife.

It is the deliberate policy of the Government to make room for investment and exports, which are desperately needed, by cutting the standard of living of the British people. The Government have been successful in this strategy this year. Since the freeze began last November prices have risen at the rate of over 9 per cent. a year. We had shocking news this week of new price rises on the way. The raw materials and fuels which we buy from abroad have already gone up 14 per cent. in the first half of this year. The price of manufactured goods is rising at the rate of 12 per cent. a year, the price of manufactured foodstuffs is rising at the rate of 24 per cent. a year.

We still have to accommodate the results of the further devaluation of the pound which has taken place in recent weeks. All this means that by the time phase 2 comes to an end in October the cost of living for men and women in Britain is certain to have risen by over 10 per cent. compared with when the freeze began in November last.

Yet the Government have made it certain, by the imposition of their wages policy, that wages cannot rise more than 8 per cent. During the whole of this period the nation's wealth has been rising by 5 per cent. and more a year while manufacturing productivity has been rising at a rate for which I believe there is no precedent in recent history.

Since the Chief Secretary put so many questions to me perhaps I might put one to him. In the Budget debate of 12th March he 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.] If words mean anything at all then those words mean that the Chief Secretary gave an undertaking in March that over the following 12 months real earnings or real personal consumption would rise at the rate of 5 per cent. Does he maintain that today?

Mr. Robert Sheldon (Ashton-under-Lyne)

Answer!

Mr. Patrick Jenkin

I was waiting for the right hon. Gentleman to answer my questions. In that part of my speech which the right hon. Gentleman quoted I was referring to the strictures of the Public Expenditure Committee about public expenditure. The hon. Member for Ashton-under-Lyne (Mr. Sheldon) is the chairman of the General Sub-Committee that made the report and he will know that that was the criticism which I was making. I stand by those words. He will know that I went on to say, in relation to public expenditure, that we would not hesitate to take action up or down if required. That is exactly what my right hon. Friend did.

Mr. Healey

The House will have an opportunity of reading again what was said then and it will note the wriggling of the right hon. Gentleman this afternoon. The conclusion to be drawn is that the Government have abandoned the undertaking which the Chief Secretary gave in March to maintain the increase in personal consumption at the same rate—or not significantly below it—as total output. The Chief Secretary knows as well as we do that there was no rise in earnings in real terms at the beginning of this year, although there was a small rise in personal consumption, financed entirely out of savings.

The Chancellor gave my hon. Friend the Member for Heywood and Royton (Mr. Joel Barnett) the answer to a very important question this afternoon when he said that real disposable income between the last quarter of last year and the first quarter of this year did not rise but fell by a fraction of 1 per cent. The amount of the increase includes all incomes—that is, also including dividends, as the Leader of the Opposition pointed out yesterday, and we all know that dividends have gone up substantially in this period. That means that earnings from employment fell at the beginning of the wages-prices policy although employment was increasing. That in turn means that for the vast majority of people already in employment last November there was actually a fall in real earnings during the first six months of the freeze.

Mr. Piers Dixon (Truro)

Many of my hon. Friends in the Conservative Party would agree that in recent months the standard of living has been on a slight plateau. Surely the Government's record should be taken in its entirety. Can the right hon. Gentleman say whether he would prefer to have the situation which existed under the administration of which he was a member, when the standard of living was going up at about 11 per cent. a year, or whether he would prefer the general record of the Conservative Party under whom the standard of living has been going up by 4½ per cent. a year?

Mr. Healey

I am glad that the hon. Member has asked me that because it enables me to comment on a claim which is increasingly made by Conservative Members at a time when standards of living are falling. They claim credit for a substantial increase in earnings during the first two years they were in power although they spent the whole of those two years trying to prevent that increase from taking place. They reversed the whole of their economic policy a year ago because their attempts to prevent the standards of life from rising had failed.

It is a bit thick for hon. Members to come along a year later and take credit for things that happened in the first two years of the Conservative Government when they happened in spite of every effort by the Government to prevent them. The question which the country wants answering—and I can assure the Chancellor that the TUC will ask him this when he meets it in a week or so—is, where is all the extra money going to?

If wage earners' living standards are falling and the nation's wealth is rising by 5 per cent., where is the money going to? Some, thank God, is going into exports, and I pay tribute to all those firms and workers who have contributed to the substantial increase in the volume of our exports. I pray that they are even more successful. A large part of the increase has gone into profits. There was a 36 per cent. increase in profits during the period since the freeze. I noticed this week—and it is typical of many companies—that G.E.C. profits went up 55 per cent. when its external sales went up by only 5 per cent. In fact, from November to May profits went up four times faster than earnings.

If all those profits were going into investment in increased productivity, many of us would not complain too loudly. But that is not happening. There has been some improvement in investment in the last few months, but, as the Financial Times pointed out the other day, it is little more improvement than the upturn which has occurred in the same phase of previous cycles. There has been a substantial increase in bank lending, but the great majority of it has gone to individuals and property and financial institutions. Well over £1,000 million of bank lending has gone to property and financial institutions since the freeze. Despite the fact that the Governor of the Bank of England, on the Government's instructions as far as I can tell, asked the banks not to lend money so freely to property companies, between August last year, when he issued the instruction, and May, bank lending to property companies increased by £500 million—by more than it had increased during the previous 12 months.

The Prime Minister's repeated complaints when talking privately to directors are justified. The plain fact is that the profitability of British industry is substantially higher than that of many of our competitors, but the profits are not going into increased output or increased productivity.

Mr. Christopher Tugendhat (Cities of London and Westminster)

The right hon. Gentleman has referred at some length to the subject of profits. I wonder whether he would clarify his point for the benefit of the House. What proportion of the increased profits to which he has referred was earned abroad? Many of the large companies have substantial earnings abroad. The right hon. Gentleman dwelt on what he regarded as the devaluation of the pound. He will know that a devalution tends to boost sterling profits. When he talks about profits, should he not break down the domestic element, the foreign element and the devaluation element?

Mr. Healey

The hon. Gentleman was not listening. I made precisely that point earlier. I said that one problem about devaluation was that it boosted profits at the expense of real wages. Some of the increase in profits must have come from exports, but I am no more able than is the hon. Gentleman to say precisely how much. What I am saying is that profits are not going into productive investment on anything like the scale at which our competitors are investing. That has been the central problem facing our economy for many years.

The whole of the Government's strategy depends on compelling working people to accept falling standards through an incomes policy in phase 3. It cannot work in the present situation, especially when the economy is overheating. The Chancellor of the Exchequer is putting on incomes policy a burden which it cannot possibly carry. Sir Frank Figgures has made this point again and again. When the nation's wealth is rising at 5 per cent. and the standard of living of working people is constant or falling, it is no good expecting any incomes policy, compulsory or voluntary, to carry the load which the right hon. Gentleman is trying to put on it.

The only hope for the Government is to redistribute income between rich and poor, between profits and wages, so that the economic system can be seen to be fair.

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

A moment or two ago the right hon. Gentleman said that the economy was overheating. That is not what he said earlier. May we know which of the two statements reflects the right hon. Gentleman's view?

Mr. Healey

The hon. Gentleman, who is extraordinarily alert when listening, could not have been listening when I was speaking earlier. I said that there was overheating in parts of the economy, and I took the South-East as an example.

But I predicted that if the Government failed to bridge the enormous borrowing requirement—and I also predicted that unless there was a substantial increase in interest rates they would fail to do so—the overheating could get a great deal worse. I said that at the beginning of my speech. That is why the attempt to impose falling living standards through an incomes policy is doomed to failure.

We shall be discussing next week the proposals which the Labour Party would wish to make to produce a more just society. But, since it figured largely in our debates on Report yesterday, I return to a point which we on this side of the House take very seriously. A great deal can be done by the Government to help the poor, although there is no sign that they will do it. A great deal can be done to help the average family, although there is no sign that the Government will do it. But even that will not be enough unless the Government can correct the flagrant injustice of a situation in which the living standards, behaviour and way of life of the rich is not affected in any way by their policies whereas the wages and living standards of ordinary people are steadily ground down.

The Government should have introduced in the Finance Bill penal taxes on property speculation. I find it shocking that the right hon. Member for Taunton (Mr. du Cann) should have been able to make £30 million the other day by selling property which he had bought for a smaller price only 15 months ago. I find it quite extraordinary that the Chancellor of the Exchequer should have refused last night to accept an amendment which would not have changed our system of taxing foreign earnings but would simply have given the Inland Revenue information about foreign earnings. As he proposed to refuse the amendment, I was not surprised that in the whole of his speech he made no attempt to refer to the terms of the amendment or to justify its rejection.

There is one absolute precondition of any escape from the tragic inflation in which the nation has been plunged by the Government's economic mismanagement, and that is to change utterly the social attitudes with which the Government took office three years ago and to seek to narrow rather than widen the gap between rich and poor. It is because the Bill moves in precisely the opposite direction that we shall divide against it on Third Reading.

Mr. Deputy Speaker (Sir Robert Grant-Ferris)

Before I call the next speaker, I am sure that it would be the wish of the House that I should welcome at the Table the Clerk of the Legislative Assembly of the State of Victoria, Australia, Mr. Campbell. We welcome him to the Mother of Parliaments which shows the world the universality of parliamentary practice of the British Commonwealth.

4.38 p.m.

Mr. J. Bruce-Gardyne (South Angus)

After your intervention, Mr. Deputy Speaker, I feel that we are in danger of becoming over-parochial, because I want to return to the more immediate domestic issues to which the right hon. Member for Leeds, East (Mr. Healey) addressed himself.

I was very interested in what little indication the right hon. Gentleman gave of the strategy which he would recommend the Government to follow. As I understand it, the kernel of the strategy was that there should be a substantial and presumably immediate diversion of resources to the lower-paid and worse-off members of the community. That involves two things: first, a substantial and presumably immediate increase in the Government's borrowing requirement about the size of which the right hon. Gentleman expressed, I believe quite rightly, considerable concern, without adding further to it; and, secondly, a substantial and presumably immediate increase in consumer expenditure, although he argued that it was apparent that consumer expenditure would not be able to rise as fast as it had been rising in the past year.

Mr. Healey

That is the Government's strategy.

Mr. Bruce-Gardyne

I believe that it is true that consumer expenditure will not be able to rise as it has risen in the past year. However, I found it quite impossible, not for the first time, to reconcile both ends of the right hon. Gentleman's speech.

Before I go into further detail about the comments of the right hon. Member for Leeds, East, I hope that it will not come amiss if, even in his absence, I say something about my right hon. Friend the Chief Secretary. I well understand why he has had to leave the debate. I am sure that hon. Members on both sides are delighted about the elevation which has happened to him between the Second and Third Readings of the Bill. I very much welcome his elevation since it is richly deserved. Since my right hon. Friend's prime responsiblity is for the control of public expenditure, I like to think that it may help to strengthen his arm in that direction.

I wish to make a comment about one aspect of the Bill to which my right hon. Friend referred obliquely, namely its impact on the unquoted company sector. It brings into operation the imputation system of corporation tax. Last year and this year we urged the Government in Committee to take account of the serious effect of the changeover to the classical system of corporation tax on the unquoted company which is a small distributor. I do not want to elaborate further on the argument, but I wish to reiterate that these unquoted companies, which depend on their retained resources for future investment, are of vital importance in the economy—and most of all in the less central parts of the country such as the area which I represent.

I hope that in the provisions of next year's Finance Bill my right hon. Friend will be able to recognise the damage which the new system will do to those companies unless some alleviation can be arranged to mark the basic difference in nature between quoted and unquoted companies.

There is one further point in my right hon. Friend's speech to which I want to refer, and that is the introduction of VAT. I cannot pretend ever to have been a passionate devotee of this tax, for the reason that I do not like taxes which are extremely expensive to collect, and VAT is certainly that. However, I am sure my right hon. Friend is totally justified in what he said about the smoothness of the introduction of the tax and the tremendous co-operative effort in terms of the distribution system, particularly by the small shopkeepers. with the Customs and Excise. Both sides are to be con- gratulated on what they have done to facilitate the introduction of the tax.

It would have better become the right hon. Member for Leeds, East if he had been prepared to acknowledge that all the wild talk and scaremongering which we heard from the Opposition Front Bench before the tax was introduced has been proved to be totally and utterly unjustified. I hope that when the hon. Member for Heywood and Royton (Mr. Joel Barnett) sums up for the Opposition he will seek to redress that omission. It is the least we can expect of the Opposition.

I turn to the matters to which my right hon. Friend addressed himself in his concluding remarks—and this was a matter to which the right hon. Member for Leeds, East devoted the majority of his speech—namely, the question of economic strategy. The right hon. Gentleman said that he anticipated that we should have the real Budget in the autumn. Well, I am not so sure. When we had the Budget in March, I confess that I shared the prediction of a number of my hon. Friends that we would be hearing from my right hon. Friend again before the Summer Recess. In a sense it might be said that we have already seen this in the public expenditure statement, although I must confess—and we must occasionally admit our errors—that at the time of the Budget I thought that we would be hearing something more drastic than that statement.

What has happened since then—and this is where the situation has changed—o is that, largely for some of the reasons advanced by the right hon. Gentleman about the impact of the floating rate, we have seen coming very much to the fore the elegant phrase of Sir Douglas Allen's about the spontaneous effect of the price-wage relationship. We have seen the invisible hand propelled upwards from the floating rate begin to have a significant effect on consumer expenditure because of the relationship between the rise in wages and the rise in prices. If this pattern is to continue, the danger of overheating in the economy in the autumn which the right hon. Gentleman seemed to predict might somewhat recede. There may be no need for an autumn Budget or for a further attempt to regulate the economy later in the year or the beginning of next year.

I wonder about the activities of another eminent former Treasury knight, Sir William Armstrong. It is clear that Sir Douglas Allen, in the elegant phrase to which I referred, demonstrated what perhaps has been the Treasury's expectation, but Sir William Armstrong seems to have wider responsibilities. I wonder what will happen if we are not to go for objectives in pursuit of the tripartite talks by way perhaps of achieving some of the purposes of which the right hon. Gentleman spoke. They will have a direct effect on public expenditure calculated to offset the impact of the floating rate of private consumption—in other words, they would be aimed at giving a stimulus to private consumption.

Whether one acts by raising pensions further, or by increasing family incomes supplement or by the establishment of guaranteed wage increases to compensate for rises in the cost of living, or threshold agreements, or whatever the system may be, the purpose presumably would be to ensure that the consequences of the floating rate were not reflected in a gradual tailing-off of domestic consumption.

I intervened in my right hon. Friend's speech to ask him whether it was the expectation of the Treasury that in order to ensure that there was room for further expansion of exports and for continued growth of manufacturing investment, there was expected to be some calming down in the rate of growth of private consumption to avoid overheating. My right hon. Friend shrewdly sidestepped that question, but insisted that there would be room for a reasonable rate of increase in personal consumption in the months ahead. I take it that the word "reasonable" means somewhat less than the rate which we have had up to now. If that is a correct interpretation, I only hope that the Treasury will be successful in discouraging any excessive enthusiasms for consensus politics on the part of Sir William Armstrong.

I turn to the one other element in the equation, which is the future of floating. The right hon. Member for Leeds, East reiterated, not for the first time, the vital need for the Government to continue to adhere to a floating rate and to refuse to rejoin the snake. I know that any suggestion of a case for the United Kingdom to rejoin the snake is regarded as highly eccentric at present. I must confess that I harbour such eccentric views and that in recent weeks the thought has crossed my mind that the fashionable slogan "Carry on floating" might be in danger of becoming the title of the next Whitehall farce.

I welcome the Government's desire for an early return to the snake not only because I do not believe that we should underestimate the strains which the departure of Italy and the United Kingdom from the snake have placed on the coherence and solidarity of the Community but more fundamentally because I cannot help feeling that one of the ways in which we could help to abate not inflation but inflationary expectations would be to re-peg the pound in connection with the neighbouring currencies in Western Europe.

I know that at the present time that is a heretical thought. But when I heard my right hon. Friend the Chief Secretary saying that he had the expectation of a series of substantial visible trade deficits in the months ahead, I wondered anxiously how it was proposed that these should be financed. If it is proposed that they should be financed by drawing down on the reserves, well and good. But if it is proposed that they should be carried on the float, it seems to me that the domestic inflationary expectations must be expected to accelerate.

I also suggest that it is perhaps worth bearing in mind that as and when we return to the float, but only as and when we return to it, we can hope to benefit by the support funds which the Community has brought into being to sustain the float. I fully accept that these support funds are quite inadequate at the moment for the purpose. But in the spring my right hon. Friend the Chancellor of the Exchequer put forward far-reaching proposals for a real integration of the currency systems of the member countries. Even if it is not possible to go as far as this, a return by us to the snake combined with the provision of much more substantial support arrangements between the various members of the Community will leave us in a more comfortable position than we are likely to be in the months ahead if we continue to float.

I realise that this is a somewhat heterodox position to adopt. It amuses me sometimes to see how those who were the most fanatical opponents of floating before 1971 suddenly have become its most fanatical devotees. I doubt whether there is a complete solution either way. But I cannot help feeling that we are beginning to see that some of the unpleasant consequences of multilateral floating which were predicted in many quarters before the Nixon measures of the summer of 1971 are beginning to look as if they will be borne out. I hope that we shall not necessarily continue to believe that salvation lies infallibly in continuing to float the pound.

The Government face an embarrassing dilemma. If the rate of growth in domestic consumption is allowed to continue to contract because of the impact of higher prices, we could be in for a difficult autumn on the industrial relations front. On the other hand, if we take action, whether through threshhold agreements or through additions to our existing public expenditure programmes which are likely to stimulate consumer demand once again, it seems to me that the rate of domestic inflation will soon be uncontrollable.

4.55 p.m.

Mr. Roy Jenkins (Birmingham, Stechford)

I hope that the hon. Member for South Angus (Mr. Bruce-Gardyne) will not worry unduly about introducing a note of heresy into the debate. There is a good deal to be said for a few heretical points, and I propose to raise a few myself before ending what I have to say.

This Third Reading debate provides a traditional July occasion, sometimes welcomed by the Chancellor of the Exchequer of the day but more often not, I suspect, to look at the progress of the economy in the three months since the Budget and to look at our general economic position. Clearly one extremely important aspect of that at present—and one to which I propose to confine myself today—is the international monetary position as it has developed over the past few weeks and the position of sterling, which has already been touched on from both sides of the House.

The rate is a little better in the first half of this week than it was at the end of last week. It will become clear from what I shall say in due course that I hope that the improvement will be maintained and developed further. But clearly it is early days to predict. Certainly one would have expected some reaction in the way that it has taken place from the catastrophic events on Thursday and Friday of last week, and it would be rash to predict from what happened on Monday, Tuesday and the first half of Wednesday what the position will be in a week, in 10 days or in a month.

In any event, the degree of depreciation—this I suppose is the right word rather than "devaluation"—which has taken place is very substantial, even if we ignore last Friday's plunge. The present Chancellor of the Exchequer is the greatest depreciator of the currency, both internally and externally, that there has ever been in the history of the Treasury. There is no doubt that both those propositions are true. The right hon. Gentleman's record in this respect is peculiarly ironic in view of the remarks made by him to a lesser extent, by the Prime Minister to a great extent, and by the late Mr. lain Macleod in the period leading up to the last election.

I remember Mr. Macleod saying in one of our debates—I cannot recall whether it was a Third Reading debate on a Finance Bill—that one of the most invariable rules of political economy was that Labour Chancellors always devalued the pound and that Conservative Chancellors never did.

Even at that time that view was based on a somewhat selective interpretation of history, because it involved two slightly doubtful propositions. One was that Mr. Philip Snowden was still a Labour Chancellor of the Exchequer at the end of September 1931, and, secondly, the even more doubtful proposition that Sir John Simon in 1939 was, if not quite a Socialist Chancellor, at any rate a non-Conservative Chancellor, because he put through the great silent and forgotten devaluation of 17 per cent. a few days after we went into the war. That devaluation has always been omitted from all the calculations.

After that there was what was regarded as a massive devaluation, the Cripps devaluation of a nominal 30 per cent. in 1949, but coming ten years after the previous devaluation and having to make a vast readjustment for the effect of the war on the whole economic balance. However, it is undoubtedly true that even the Cripps devaluation of 30 per cent. against the dollar was a smaller depreciation of the real value of sterling than has taken place during the last year under the guidance and control—if that is the right word—of the right hon. Gentleman.

In 1949, rightly and inevitably, we went down drastically against the dollar. Nearly the whole of the Western World went down, that is the whole of sterling area, the Commonwealth and Western Europe. It is doubtful whether, in weighted average terms, the devaluation of 1949 which had to accommodate the whole change in the world economic balance that had taken place as a result of the war years was as much as 15 per cent. as against the 18 per cent. that we reached on Friday and the 15½ per cent. that I think that we are at today.

Then, 18 years later my right hon. Friend the Member for Cardiff, South-East (Mr. Callaghan), after massive inherited deficits, went down by 14.3 per cent. Relatively few people followed us down then so the proportion of real depreciation was higher, but clearly not as high as 14.3 per cent. I guess that it was 12 per cent. to 13 per cent. against the 18 per cent. figure which the right hon. Gentleman reached on Friday, and the 15½ per cent. figure that he is at now.

But what the Chancellor has succeeded in doing in three short years after taking over with an almost uniquely strong balance of payments position is effecting the biggest depreciation that we have ever had. I do not know what the future is in this respect. Clearly there are grave question marks over it. Bearing in mind that that is what has happened, it must, as a matter of objective fact, be noted that the right hon. Gentleman incurred relatively little criticism, and I think one has to ask why that is so.

The reason is that the right hon. Gentleman is what I think I can best describe as a rather dainty depreciator of the currency. He does it rather on tiptoe, but he has done it on a massive and damaging scale. Second, and perhaps more important, the right hon. Gentleman has been protected by an excessive and widespread enthusiasm for the virtues of floating which, even if it be a euphemism for sinking, has seized hon. Members on both sides of the House, most of the commentators outside and most of the financial experts over the last year or so. It has commanded a suspiciously wide degree of approval. Some have almost turned this highly capitalist mechanism of floating into the ark of the Socialist covenant because they think it has something to do with sovereignty—which is now also an ark of the Socialist covenant—and with independence of foreigners.

The same view is taken by the right hon. Member for Wolverhampton, South-West (Mr. Powell) because he thinks that it fits in with his highly arid and theoretical view of the world in which market forces play around freely. The Chancellor and the Prime Minister unite in agreeing with this proposition because it gives them a smokescreen behind which they can take damaging action without their having to erect one if that were done from a different point of view.

The reason for this is a delayed and perhaps natural reaction to the fact that up to 1967 we tried to defend a particular parity at too great a cost and for too long a period. That is undoubtedly so, and it is natural that one reacts against mistakes of that sort, but it is at the same time a mistake to over-react and that is what has been done in the general attitude towards floating. It has been prevalent in the country for a long time past. It may have been inevitable during the last year, and I am not sure that we can get out of it immediately, but the idea is nonsense that floating is a sort of philosopher's stone which one has only to possess in order to gain benefits without disadvantages, to free oneself from all economic crises, and to insulate oneself from most economic problems. Yet there has been a great deal of talk in this House and by commentators outside implying almost exactly that during the last year.

I believe that as a result of recent events we may be beginning to learn a little about the disadvantages that are involved. Clearly, there are great dangers and disadvantages in defending a parity that has become too high. That was the pre-1967 position. It was also the post-Smithsonian position. Clearly, the right hon. Gentleman fixed it at too high a level at the end of 1971. I do not for a moment think that he would dissent from that now. It was too high for the sake of the balance of payments. It was again too high for the sake of the health of the economy at home. But the fact that one can and, indeed, did fairly recently have too high a level, does not mean that one can never go too low and I think that as a result of recent events we have gone too low from the point of view of both the external and internal health of the economy.

My right hon. Friend the Member for Leeds, East (Mr. Healey) mentioned the old business about the effects of devaluation being J-shaped. I am not sure how completely my right hon. Friend carried the House with him in that important exposition. It has nothing to do with my right hon. Friend the Member for Battersea, North (Mr. Jay) or with his configuration in any way. It is a simple proposition that if we devalue, things get worse before they get better, but the immediate effect is a worsening of the balance of payments position. One then hopes to round the corner and one hopes that the improvement will be longer and will take one further out of the worsening.

The essential point about floating is not that it has turned into an L-shaped curve. The real danger is that what is more likely to happen is that one gets J after J superimposed on the first J, rather like a series of still shots making up a moving picture, so that one never has the chance to get to the corner, let alone get to the upswing, because the moment one is coming to the end of the down swing of one J, because of the float, one gets another J and one starts another downward curve. This can go on almost indefinitely, so that one does not improve even one's balance of payments because one is always in the downward part of the J curve and one pays more for imports and gets less for exports. One therefore loses resources, and loses them without purpose.

One also clearly produces considerable uncertainty for those engaged in international trade and—perhaps most important of all—one adds substantially to the inflationary pressures at home. No one can doubt that the behaviour of sterling has led to this happening, and happening recently on a substantial scale.

It is no good the Government blaming import prices for all their inflationary troubles here at home, when their policy in relation to the management of foreign exchange has made this substantial contribution—not the whole contribution, clearly, but a substantial one—to turning import prices against us.

These are the direct effects upon us, but there are also the indirect dangers of a series of floats leading to a rather unplanned system, running around, as I ventured to say in a previous debate, not as a system but as a chicken with its head cut off. This is what we have in the international monetary world at the moment. We could, I believe, be nearer than some of us realise to international monetary chaos on a scale that we have certainly not seen in the post-war world with very severe effects on world trade.

It is certainly the case that floating does not insulate us, does not make us wholly independent—nothing can—of what happens outside this country. We were pretty frightened by our brief experience of being part of the snake in the tunnel. Leaving aside the snake for a moment, I believe that the tunnel is too narrow and too rigid for the present stage of European monetary development, but by recoiling from it as we have done we have not achieved real monetary or other independence.

By recoiling from the snake in the tunnel—I would not be in favour of going into the tunnel in present circumstances; on the whole, the tunnel is rather unrealistic, even for those countries which are in it—what we have inevitably done is to move ourselves into the wake of the dollar at a particularly unfortunate moment. We have become a small floating object attached to the dollar. When it goes down, we on the whole go down—not necessarily by exactly the same amount, but by approximately the same amount. When it comes up, as it has done for a couple of days this week, there is some relief for the pound, but the freedom that we have achieved is the freedom to be sluiced down by the backwash of Watergate.

This does not seem to me to be a considerable achievement from the point of view of the position of sterling or the independence of the British economy. This is not a moment when I want to be too close to President Nixon's dollar, but this is precisely what we are achieving by the policy that the Government have pursued and the excessive protection from criticism which the over-enthusiastic acceptance of floating has given them.

Let us remember that floating down out of control is far more damaging for us than it is for the United States. The United States are still dependent upon imports for only 4 per cent. of their national income. The impact on their internal economy is incomparably less. They have veered on the whole, so far as they are in a position to take governmental decisions at present, between a policy of benign neglect and a neglect which is somewhat less benign so far as the dollar and its effect outside are concerned. We should be foolish to think that, in this position, caught in the backwash of the dollar, we are not more exposed than they.

For the moment, I believe, we probably have to continue to float. It is unclear exactly to what we could or should peg or at what rate, but it should, in my view, be the long- and not too long-term objective that we should go back to some system of fixed rates. In the meantime, floating should also be far more managed than has been the case in the past few weeks and months. In the jargon which has come to be accepted on this subject, I do not merely want the floating to be dirty. I want it to be filthy. If we are to go on floating, I want a great degree of intervention.

If one looks back over what has happened over the calendar month of June, one sees that it is an extraordinary criticism of the management of our affairs. In that calendar month, we added to our reserves by £106 million. They stood at the end at, I think, £2,716 million—an extremely high figure for the reserves. In itself, that is a very good thing, but during that same calendar month, the pound depreciated on a weighted average basis by over 3 per cent.—in one month alone—and we moved by the end of it to a devaluation of 14.1 per cent. since the Smithsonian Agreement—and we have, of course, moved a good deal further since.

There is a substantial chance that when one looks back from the perspective of a few months or years ahead, June 1973 will stand out clearly as the month in which this Government lost the prices battle, as the month in which the Government, who were seen to be becoming near—nearer perhaps than seemed possible six months ago—to a real dialogue with the TUC, fell away from it and the hope disappeared.

It is a ludicrous mismanagement of our affairs, at a time when it is so crucially important to get some effective arrangement on the inflationary front, to have allowed depreciation of the pound by what is happening externally to the extent of a quarter of the 1967 devaluation—with all the arguments that we had about that—to take place quietly and almost accidentally, while at the same time, so far from using our massive resources in order to prevent that happening excessively, we were actually taking in reserves during that period. I do not think that anyone since King Midas has shown such misplaced attachment to gold—if it were the case that the reserves were primarily composed of gold, which they are not.

As the Chancellor said on Monday, we want some long-term reform of the system. I do not think that we really have a system at present. None of us has got used to living in a world in which the hegemony of the dollar, which persisted, on the whole so beneficially for all of us from 1944 onwards, has come to an end. But I do not think that one will effectively reform the system merely by what one could call technical studies such as have been conducted within the Group of 20 very slowly over the last year or so.

If the British Government wished to make an imaginative contribution towards dealing with what is becoming an increasingly menacing position, from both a monetary and a trading point of view, and because of the impact of this upon general political relationships in a wider political sense, they would be unwise to believe that we can merely seek our own salvation and find it through floating. I do not believe that we can find salvation on our own or that uncontrolled floating is the route to that.

We are almost exactly, now, at the 25th anniversary of the beginning of the Marshall Plan, when America to a very large extent put Western Europe on its feet and created a period of considerable prosperity for the whole Western world. Twenty-five years later, we have a very strong Western Europe monetarily and a weak, battered, rather unself-confident and suspicious United States.

It would clearly be ludicrous to suggest a Marshall Plan directly in reverse by which we offered to support the standard of living of the American people. They do not need that. Their standard of living in absolute terms—in contrast with their general world performance and self-confidence—is still significantly higher than that of Western Europe. But the equivalent challenge today, compared with that of 25 years ago, is what the West as a whole—just as America helped battered Europe—can do for the developing and the poor world.

There is here a possibility by which some of the difficulties of the monetary and trading relationships between Europe and America could be subsumed and overcome and a great deal of help could be given to the developing world and world trade for the future could be effectively lubricated. That is if the excessive reserves accumulating in the hands of many Western banks were, by the development of the SDR system, to be turned into a large special allocation of SDRs going to the developing and the poor countries so we should consciously envisage a situation in which these countries could operate at a deficit, which is very desirable from their point of view. This would in turn mean that the majority of the developing countries, taken en masse, could have a surplus without beggaring each other's position, in which both the United States and Western Europe could have a surplus, because the countries which most need the help were running planned deficits financed out of a massive channelling of reserves on this scale.

This would help both in easing the future problem and by being a constructive and imaginative gesture on a scale comparable with the Marshall Plan 25 years ago.

5.22 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I had intended to say a few words about the Finance Bill. I hope that the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) will forgive me if instead I talk about the eloquent and moving speech to which we have just listened from him.

The right hon. Gentleman finds himself in curious company this afternoon, with my hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) and Mr. C. Gordon Tether of the Financial Times, who are leading the van for a return to fixed exchange rates. Admittedly, floating has become popular—perhaps unnaturally popular. For better or for worse, I am one who has always believed in floating, and I still do. I still believe that it is absolutely right that we should continue to float for as long as possible.

The right hon. Gentleman described the Rake's Progress of the pound over the last decades and the many devaluations along the road which have brought us to our present parity. What he did not say is why these devaluations happened, why the pound has floated down over the centuries. The reason is partly that, as Governments always do, Governments have created too much money and inflated their domestic currencies, and partly that the production, investment, ingenuity and effort of the people has not been as great and as successful as those of some other competitors. While these factors continue to exist, we are bound to have to adjust the parity in relation to countries where the practice is different.

What this argument is about—this is where I begin to disagree with the right hon. Gentleman—is whether the discipline of having a fixed rate will impress upon Governments and upon people the necessity for so behaving that they make the rate for their currency justified. The right hon. Gentleman—we should all pay tribute to him for this—was the only Chancellor for many years who attempted to bring the Government's expenditure and revenue into something like equality.

Mr. Bruce-Gardyne

Because of the external disciplines.

Mr. Ridley

My hon. Friend says "Because of the external disciplines." But what happened to the right hon. Gentleman? He lost the election and he was upbraided by all his right hon. Friends for not having a give-away Budget in 1968 and 1969 upon which they might have won the election.

The general opinion is that unless one is prepared to be profligate and extravagant with Government expenditure, one will not be popular. But the inevitable conclusion is that if one is to be popular by being extravagant one will have inflation, and if one has inflation the value of the pound will go down.

I believe that discipline can come only from within. It will come only when a set of men are elected and take their seats on the Treasury Bench who have the support of the people and who put first the prevention of the dilution of the currency by creating money. Only then will this endless increase in prices and decrease in the value of money stop. Meanwhile, while we find it correct and expedient to continue to inflate—as so many people seem to find, though not myself; I believe inflation to be the greater evil of the two—so long as that happens, it seems better that we should allow the currency to take the strain.

We must not be surprised. There is nothing surprising about the 16½ per cent. devaluation since last June. It follows naturally upon the events, not only of the last few years—there is no point in making party points—but also from the tremendous pressure from hon. Members of the Opposition after the General Election to reflate, to do something about the regions, and to spend more money to increase the pace of the economy. The Government did that. The result is a 16½ per cent. drop in the value of the pound. Now hon. Members of the Opposition have the audacity to attack the Government for having done it.

We must realise that it is no good blaming other people for inflation, for the decline in the value of money. We all are to blame. Over the last decade I have heard the Gnomes of Zurich blamed, the speculators blamed and the trade unions blamed. Now I am told that it is the fault of the foreign farmers, of the harvests in Patagonia and Moscow. It is beyond me how this diverse group of people, of but moderate economic importance, can all successively have been at fault for the decline in the value of our money, but not us. Apparently we have done nothing wrong at all; we have simply sat here and taken it with a stiff upper lip.

It is such an obvious conclusion to draw that if we want to stop inflation the remedy is in our own hands. We must be supported by the people in taking the measures necessary to do it.

Mr. Bruce-Gardyne

I take entirely the arguments of my hon. Friend, and I share his dubiety. Would not he agree that at present, certainly, the way in which the pound is floating freely down, while not causing inflation, contributes to inflationary expectations and that, therefore, the anxiety of Sir William Armstrong and people like him to take action is justified?

Mr. Ridley

That is certainly true. I do not know which is the chicken and which is the egg. It is the expectation of inflation by foreigners which tends to make them mark the pound down. On the other hand, it is the fact that the pound is marked down by foreigners which causes inflation to be manifested by rising import prices. Perhaps the two are just two sides of the same coin. Until we persuade those who deal in our currency that we intend to make it a stronger currency, through our domestic and internal actions, they will continue to hold it speculatively.

I think that the right hon. Gentleman was on to a major fallacy in saying that the pound had been dragged down in the wake of the dollar. I do not see how. I do not see why. I do not see that there can be any connection between the value of the pound and the value of the dollar now that they are floating the one against the other. I will admit the coincidence that the movements have been roughly the same, but I suspect the connection, if there is one, is because the pound and the dollar are regarded as the weak currencies and the franc, the yen and the mark are regarded as the strong currencies. So in hunting to find the right parities people tend to move large sums of money against both the pound and the dollar at the same time. They may well be right. If that is what they think the pound is worth, who are we to tell them that they are wrong?

Who are these people who move these large sums? They are mostly the oil rich sheikhs and the Middle East oil countries. The right hon. Gentleman talked about underdeveloped countries and ways in which we can help them. I wonder whether some of these underdeveloped Middle East countries with 80 billion dollars at their disposal could not help us a little. We are becoming the underdeveloped of the world and they are becoming the magnets which have the money.

The only way we can defend ourselves against them in the long term will be for us so to devalue the currencies which we have that their reserves become worth less. The only way for them to defend themselves against that is for them to buy up our real property and our equities so that they effectively earn our currencies. This is a big problem facing us.

The second fallacy of the right hon. Gentleman was that the fact that our currency is low—he seemed to think it was undervalued, as did my right hon. Friend the Chancellor—is in some way disastrous or bad. I do not see why. Surely it was the fact that the yen was undervalued for so long that led to the great Japanese export victory which distorted the Japanese economy to the point where it made it possible for the Japanese to undercut most of the civilised industrial nations with their exports.

If there is a disadvantage to be found in currency parities, it surely lies in having an overvalued currency, as the right hon Gentleman's predecessor, the right hon. Member for Cardiff, South-East (Mr. Callaghan), would testify after his long battle to defend the overvalued pound against the balance of payments crises which he suffered.

My belief is that if the pound is undervalued—it may well be that it is—the buyers and sellers of the pound may have got the value of the pound temporarily wrong themselves. The right hon. Gentleman seemed to suggest that the simple imposition of J curves one upon another led to everything going downwards. As the down strokes are stored up so are the upstrokes stored up. The one problem we do not face is a balance of payments crisis. I think we cannot have one. The problem we face remains inflation.

I have been diverted, Mr. Speaker, by the fascinating topic which the right hon. Gentleman introduced into our debate.

Would it be in order for me now to say a few words about the Finance Bill and then to sit down?

I thank the Treasury team for all the care and consideration they gave to the amendments both in Committee and on Report and for their very great readiness to listen and to accept arguments. We were a happy team both upstairs and downstairs. The only regret was that the Shadow Chancellor of the Exchequer has appeared so fleetingly to grace our debates. He is rather like the Duke of Plaza Toro; he leads his army from behind. He appears and makes a vituperative attack, leaves the Chamber, and takes no part in the reorganisation.

I want to leave two points in my right hon. Friend's mind about next year's Finance Bill. First, the near confrontation which occurred in Committee over the question of corporation tax for unquoted companies and for small companies is not yet properly resolved. I am not even sure after our debates what is the right answer. I know only that we have not yet arrived at the right answer. I hope that more thought can be given to that.

The second point which is lodged in my mind is that we have now got a first-class system of direct personal taxation of income. Hon. Members may argue about whether the rates are too high or too low, but I believe the system to be absolutely first class.

We have not got yet a first-class system of taxation of capital. I refer to the share incentive schemes. A worker can take an option on a share at 70 per cent. of the market value and perhaps sell it seven years later for 150 per cent., but he will he required to pay 30 per cent. capital gains tax on that increase when he comes to sell his share. This might well involve him in paying more tax than if he had taken the money in wages. Indeed, he may well find that he has not a gain at all because of the ravages of inflation.

Although I see the case for taxing windfall gains made by rich people, at the same time we are taxing the savings of small people which may be dwindling in real value due to inflation, as the Page Report has shown, and of any gain they can make to restore that real value we are taking 30 per cent. for the Exchequer.

This is the reverse of a fair taxation system, which should not be regressive. The better-off should pay more. In the case of capital gains, coupled with a 10 per cent. annual rate of inflation at which we are running, we have ended up in a situation which is not fair and which is not equitable. Those who are suffering are those who perhaps do not know and who perhaps are too old to take too much trouble to find out and perhaps are not at all well-off, yet their savings are being decimated by a mixture of inflation and capital gains tax.

I want my right hon. Friend to admit that inflation exists and to think deeply for his next Budget about the reform of the taxes on capital. They need not be thinking about estate duty now. Heaven knows that that was ripe for reform. There is a problem which can no longer be brushed under the carpet, because we all now know that inflation is taking place. We cannot pretend that it is not. It is a major abuse that the capital value of savings—I am not talking about the rich; that is a different problem; redistribution comes into that; I am talking about the savings of the less well off—is being decimated by this mixture of capital gains tax and inflation. I believe that that is the area on which the Government should concentrate in future.

I welcome the Bill. I thank my right hon. Friend for his courtesy in Committee and I hope that the Bill will contribute as another major building block in the massive and impressive tax reforms which this Government have carried out.

5.39 p.m.

Mr. J. Grimond (Orkney and Shetland)

With some part of the theme of the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) I find myself in considerable agreement. However, at least two points the hon. Gentleman made are liable to misunderstanding, to say the least of it.

First, the hon. Gentleman seemed to imply that the Government, by spending large amounts of money in the regions, had thereby contributed to a successful regional policy. I do not want to pursue this, but it is becoming more and more obvious that far too much Government expenditure is spent in the south- east of England—we need think only of Maplin and Concorde—and does not go to the regions.

Secondly, the hon. Gentleman seemed to be saying that inflation is not the responsibility of Government: it is the responsibility of all of us. This is a very fine Christian sentiment. Something which is everyone's responsibility is no one's responsibility. I do not deny that it might be much better if the Government and other political parties adopted a different attitude from that which they have adopted, but hon. Members opposite, after all, have been elected as the Government and they must take the prime responsibility. It seems to me odd to say that the Government are totally free of blame for our condition when one looks back to what they said at the General Election, when they promised us all sorts of good things and in particular the containment of inflation and a stop to the rise in prices.

I think the main, and appalling, danger which faces the country is inflation. It is with that that the Finance Bill should be dealing, but unfortunately it does not deal with it. What we have to ask the Government is whether their policy is basically to contain inflation if they cannot stop it, or to catch up with it. I suspect that their policy is the latter because again and again when they are challenged from this side of the House about higher prices their argument is, "But incomes have risen faster". This means that they are content to see the pound constantly fall in value, and to my mind that is the way in which disaster will ultimately lie if it continues.

The pound has been losing value by over 7 per cent. per year, prices are going up by 9 per cent. on the average, and in some cases by 25 per cent., per year, and the rate may well accelerate this autumn. Such a rate, if it continues, will undermine any kind of free economy. More than that, it will destroy the pound as a store of value and it will therefore destroy all personal freely-made savings. Ultimately, by making inevitable all sorts of restrictions, of which we have already had some, it will undermine our free political society.

It is no comfort to me to be told that this is happening all over Europe. I accept that the chaotic state of European currencies is a contribution to our present difficulties, but it is no solace to be told that the French and the Germans are suffering from the same disease. On the contrary, it makes it worse. If the economic crisis in Europe gets worse and becomes a political crisis, we shall be in a sorry state throughout the free world.

The Government have said again and again that their aim is to maintain a 5 per cent. growth rate plus the containment of inflation. I have no doubt that when these two objects clash, as they do, they abandon the containment of inflation. I have said again and again that I find the whole concept of growth rate somewhat suspicious. Any growth worth having must be growth in things which we think valuable. Statistics of things which go to make up the growth rate include alcohol, thalidomide drugs, weapons, packaging—anything which is made—but not women's work at home.

Further, it is the constant habit of the Government to ignore or play down the rôle of the supply of money in creating inflation. We have not heard a word about it today. Their view is that it is not the supply of money and credit, or deficits, which make for inflation, but it is the wicked people who use this money. It is like saying that if you are examining the shooting of someone, the gun is irrelevant because if the man had not pulled the trigger the gun would not have killed his victim. But equally, if he had not had a gun he would not have killed his victim either. I fail to see how we can contain inflation without taking a stronger grip on money supply and upon this £4,000 million borrowing requirement. There are other important steps which are necessary, too, but to evade the issue of the supply of money and credit totally cannot be right.

I am also amazed at the complacency of the Government. During Question Time the other day they said that they were proud of their economic record. It has been a disaster. The disaster started, not in June as the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) implied, but when the Government were forced to abandon the whole of the policy upon which they fought the election. I am not at present saying whether the policy is right or wrong, but it was shattered and, with it, so was their con- fidence. Since then, they have never had any policy.

The danger about inflation is that it feeds on itself and it becomes a way of life. Furthermore, it has become a way of life with Government approval. It is now statutory. There is to be a minimum inflation of 4 per cent. per year, and that means that it will rapidly rise to 10 per cent., and unless it is checked very soon it will be impossible to stop it.

The Government have abdicated from their responsibilities, and this is where I think the sentiments of the hon. Member for Cirencester and Tewkesbury are somewhat dangerous. I do not believe that an economic policy can be handed over to two Treasury knights, however eminent. It seems to me almost at the root of the political process to reconcile interests and to control the supply of money to the economy.

Mr. Ridley

I hope the right hon. Gentleman will not mistake what I hope was polite irony for an expression of my views. He should acknowledge that there has been no one more consistent in denouncing the high rate of creation of money.

Mr. Grimond

I do indeed acknowledge that. I said, though, that it is possible for him to be misunderstood, if not by his friends, possibly by his enemies.

There is this question of the floating pound upon which the right hon. Member for Stechford made an important and interesting speech with an interesting conclusion about the underdeveloped countries. I think the hon. Member for Cirencester and Tewkesbury had a point about some underdeveloped countries, but not all underdeveloped countries are enormously rich. Europe was potentially rich at the time of the Marshall Plan to which the right hon. Member for Stechford referred. I do not think floating the pound cures anything. It certainly relieves one of the traumatic experiences of devaluation, since they are becoming more and more frequent, but if we are gradually floating down a river and sinking, it may be of some value to have an occasional weir at which we have to pull ourselves together. As it is, we are gently disappearing out to sea—in a sort of maelstrom of wreckage from all over Europe. I cannot believe that this is necessarily a superior form of hara-kiri though it may be more comfortable. But this may not be the moment to tie ourselves to such logs as are available because they do not seem to me very safe either. So for the time being we must continue to float.

In the Finance Bill there is nothing which contributes to the containment of inflation, or, indeed, to a more justifiable form of society in this country. It is a serious matter that, in spite of 5 per cent. growth rate, the standard of living for many people is not rising. I am profoundly suspicious of the statistics upon which the Treasury works. It tells us that there is still room in the economy for expansion. It may be so, but it is difficult to find. It is extremely difficult to get building done in parts of the country. It is difficult to fill all the vacancies which exist. I do not believe there is as much elbow room in the economy as the Government say there is. Therefore, there is a danger that with all the other contributory causes of inflation we shall have some definite overheating because we shall soon be up against the limit of our resources.

If the Government do not attach great importance to monetary policy, presumably their Finance Bill is the main instrument for controlling the economy. Yet I should have thought that they were only too right in saying, as they do, that its effects will be neutral—indeed, negative. It will make no contribution to solving the main problems which face us.

There are certain things in it of which my party and I approve. We are very glad to see the share incentive system. But I doubt whether incentives to invest are now great enough to make it possible to recommend to people to save large amounts of money or to invest them in the way suggested.

The Government must be condemned therefore not only for their measures but for their extraordinary complacency in their long and short-term outlook here and abroad. It is no consolation to be told that we are caught up in some sort of worldwide movement. The hon. Member for Cirencester and Tewkesbury referred to Mr. Tether's argument that the Government seem to be pretending as their excuse that there is an inevitable disaster coming over the world. They have contributed to a great extent to the rising cost of imports. That is one of the inevitable effects of the constant devaluation of the pound. We are now part of Europe and we have our opportunities and responsibilities for trying to put the EEC into better order.

A great deal of the inflation in this country has been contributed to directly by the policies that the Government have avowedly pursued and when it comes to a clash between maintaining a hypothetical growth rate and maintaining the value of the pound it is the pound so far that has gone to the wall.

5.51 p.m.

Mr. Piers Dixon (Truro)

I am glad to have the opportunity of following the right hon. Member for Orkney and Shetland (Mr. Grimond). It gives me an opportunity of addressing not only the House but also the right hon. Gentleman's distinguished colleagues who are on the bench with him. For one moment I thought that my neighbour the hon. Member for Cornwall, North (Mr. Pardoe) was about to desert us.

The right hon. Gentleman bewailed the fact that the Conservative Party had abandoned the principles which it had entertained at least in economic matters in 1970. They were economic principles with which he was no doubt then in broad agreement. On that occasion we believed in the free market economy and in 1973 we have largely abandoned it. It was abandoned because a free market economy works only if everyone obeys the rules. Unfortunately there are too many people who are not prepared to obey the rules and in such circumstances any Government, Conservative, Labour, or, indeed, even Liberal, must abandon such a profound belief.

Mr. Grimond

I thank the hon. Member for the compliments that he has so rightly paid to me and my party. I was saying that after abandoning their policy the Government have found no other. I did not particularly approve of their policy, but it was at least a policy. Now they have none. As for the free market economy, anyone who has been in politics for any length of time knows that in its nineteenth century sense it will not work and that in this country whatever economic policy is employed there will be opposition to it. That is what politics is all about. To say that the whole nation will stand up and cheer about what is done would not be true even of a Liberal Government.

Mr. Dixon

It is a great pity that we have not had occasion to see precisely how a Liberal Government might operate in this country——

Mr. John Pardoe (Cornwall, North)

Hear, hear.

Mr. Dixon

I was speaking only in an academic sense and——

Mr. Speaker

Order. This is a Third Reading debate. It is a narrow debate and I do not think that a Liberal Government should be brought into it.

Mr. Dixon

You are right to rebuke me, Mr. Speaker. There have been enough militant trade unionists effectively to make it impossible to operate a free market economy and that is why in 1973 the Conservative Party has abandoned its traditional policies. The right hon. Member for Orkney and Shetland accused the Government of not producing an alternative policy, but my right hon. Friends have produced an alternative which I suspect will be the economic view of the Conservative Party for many years to come, and that is one of limited State intervention.

The year 1973, the Budget and this Finance Bill have marked yet another watershed in the economy of this country and of the world. It is a watershed to which the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) referred. For 25 years the United States and, to a certain extent, Great Britain have been the leading forces in the economy of the world. That position has now been reversed. There is a certain smug satisfaction particularly among the Germans and the French who almost relish that the United States and, to a certain extent, Great Britain, have come upon evil days economically. They should not forget that it was the United States and, to a lesser extent, Great Britain, who rescued the European economy immediately after the war in the same way that they rescued Europe politically and militarily.

This would be a good moment for everyone in this country to remind some of our new friends in Europe that they have obligations to us in the same way that we had obligations to them a generation ago.

There are certain respects in which a Conservative Government still possess firmly-held views and where there has been no shifting of ground. I refer particularly to the belief in economic growth. The right hon. Member for Orkney and Shetland said that he disputed some of the statistics but there can be no doubt that while the economy of this country has not grown as rapidly as the economies of some other countries in recent years it has grown more rapidly than it was growing five or 10 years ago.

I was interested in the remarks made by the right hon. Member for Leeds, East (Mr. Healey). According to him, it seems, if the Government do not attain a growth rate of 5 per cent. that is a point for criticism. On the other hand, he says, if they do attain a 5 per cent. growth rate, that is something for which they must also be blamed. Having been perhaps discourteous about our new French allies it might be appropriate for me to say "Cet animal est très méchant. Quand on l'attaque, it se défend." The English translation is more or less "You cannot win." The English is briefer than the French, which is one of the factors which distinguishes the English language from the French.

The Opposition want higher pensions, more hospitals and all the sorts of thing which the Chancellor of the day can produce, but he can produce them only if the national cake increases in size. It may be that in the last few months the standard of living of the average person in this country has been on a plateau. The right hon. Member for Leeds, East was eager to underline this fact. He was complaining about how monstrous it was that the national cake was increasing at 5 per cent. a year but that the average man did not see his real earnings increasing by a comparable amount. But we cannot take the figures for a few months. We must take the broad sweep of a whole Parliament during which a single party may have its effect on the economy.

Whatever the statistics show—I realise that statistics can be adjusted and made to show different results—the standard of living of the British people under this Budget and the previous two Budgets of this Government has increased significantly faster than under the Labour Government.

Some of the remarks that I heard both yesterday and today lead me to wonder whether some of our beliefs in the standards of good behaviour in public life, particularly between right hon. and hon. Members in the House, have been as high as we might expect. There have been references of a personal nature to some of my right hon. Friends. There has been a lot of talk about tax avoidance. As I listened to some speeches—particularly the speech by the right hon. Member for Leeds, East—I wondered whether some right hon. Gentlemen opposite had ever looked into their hearts and considered their personal positions.

A lot of money is made by politicians and others from writing their memoirs. There are many ways in which politicians and others may have their tax liabilities minimised by judicious arrangement—of course, within the law. I should like to know whether right hon. and hon. Gentlemen opposite consider that it is proper for Members on both sides of the House so to arrange their affairs that they limit their tax liabilities.

6.3 p.m.

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

The debate on Third Reading of the Finance Bill, as on Second Reading, has turned less on its content and structure than on its underlying strategy—a strategy that has been not merely national, but global. I want to concern myself with strategy and to take up the two doubts that I aired at the beginning of the Committee stage of the Bill when I asked whether the Chancellor was taking gambles, first, on growth and therefore on productive capacity, secondly, on our balance of payments, and, thirdly, on phase 3 of the Government's counter-inflation policy which seems now to be the basis for their major hopes of economic salvation.

Despite the Chief Secretary's seemingly complacent disclaimer today about overheating, I am sure that many lion. Members must have mounting evidence that corresponds to my own about increasing shortages of both labour and raw materials and, indeed, of components and finished products.

A most incredible transformation has taken place in Sheffield, which is an important engineering centre. It seems no time since there was serious unemployment and idleness of local resources. Now 500 men are needed in the steel industry and 400 in engineering. Small tools, cutlery and silverware have 350 jobs, and building sites are short of 250 men, which ties in with what the right hon. Member for Orkney and Shetland (Mr. Grimond) said. There is also an unsatisfied demand for unskilled workers, which is making it difficult to persuade unskilled men to enter Government training centres, which have been all-too-slowly expanding to meet this type of situation if not this time, certainly the next time that it occurs.

The evidence that we have suggests that productive capacity has been growing earlier this year by 3½ per cent. a year, and in the first quarter of this year output was growing at 6 per cent. Thus, the economy has been growing at 2½ per cent. a year faster than the underlying trend in the growth of capacity. This obviously raises the all-important question: how long will it be before Britain's spare labour capacity is exhausted?

I turn now to the second doubt that I aired during the progress of the Bill—the effect of this and of kindred matters on our balance of payments. I want to take up what I thought was the all-too complacent attitude of the Chief Secretary when he referred to imports. It is no consolation to be told, as we were told by the right hon. Gentleman, that in volume terms imports have been rising less rapidly than exports. They include, moreover, not only higher-priced food and raw materials but finished manufactures which British firms have not been able to supply.

I want to refer to my own experience in Sheffield, but in doing so I am raising a point that must not only strike all hon. Members as relevant but arise from their immediate experience. For example, why has a major industry like the British Steel Corporation not had sufficient capacity to meet the upturn in demand? How often have we heard this in the post-war period? How far has the Government's initial attitude towards the Corporation in 1970 been responsible?

The world currency situation is giving rise to further instability and making even more difficult our payments deficit, which is running at a rate of £800 million.

My right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins), in a striking speech, told us of the increasing stresses on the world trading system imposed by the current practice of dirtily floating rates and the increasing disinclination to hold dollars and pounds. We all know that the pound and the dollar are undervalued. But that merely serves to remind us of how little confidence there is now not merely in Washington but seemingly in London. My right hon. Friend also brought home to us that we are now beginning to experience the real costs of floating rates.

The supreme threat to the Government's economic policy and election prospects, in view of the recent Manchester by-election result and the treatment of the Minister for Trade and Consumer Affairs a fortnight ago in Birmingham, are rising prices and the containment of inflation. It is no consolation, as the right hon. Member for Orkney and Shetland reminded us, to be told that inflation is a European or, indeed, a world problem. Clearly the Government are pinning their hopes on a further phase of their counter-inflation policy, but they have not yet got that phase. I express the hope that phase 3 will provide for threshold agreements, a more humane pay code, and a tougher price code.

I should like to refer briefly to the second and third of those items. In doing so, I will cite as an illustration my local experience in Sheffield. I am not being parochial in referring to the major industrial organisation in Sheffield of Firth Brown. I shall raise a matter which may well already have affected many such organisations and which may well come within the experience of some hon. Members. The workers' representatives at Firth Brown negotiated last year a holiday entitlement with the management which was caught in the pipeline by the freeze. The management and the men were agreed that it was a no-cost settlement because the workers would have to take the extra days because the works would be shut down. In spite of that the Pay Board ruled that the extra holiday should be offset at its full cost because of the limit of £1 plus 4 per cent.

The shop stewards have written to me to say that all their members are terribly embittered. How far does the Financial Secretary consider that the Pay Board's attitude is contributing to that atmosphere? How does he think that that atmosphere will be conducive to a basis of consent, without which he must know that phase 3 is unlikely to come about?

I am asking for a more humane pay code. Further, I want a tougher price code. Many hon. Members must be aware by now of some of the experiences of the Price Commission. It is an open secret that some of the Commission's members as well as the public are generally fed up with the price code and are convinced that it must be modified before phase 3. There is a growing feeling that a good many industrialists have been trying to exploit the code in a thoroughly anti-social way. I shall quote from an article in the Sunday Telegraph which I brought to the attention of the Prime Minister yesterday afternoon. The article, which appeared on 8th July 1973, quoted a commission member as saying about businessmen: They were obviously determined to squeeze every last thing out of the concept of allowable costs when their profit levels were already verging on immorality. That is believed to be the expressed view of a member of the Price Commission. Another commission member is reported in the article to have said: In other words, some industrialists have been trying to con us and the code has been working for them. He is referring to the industrialists. He continued Some of us simply didn't realise how cunning and ruthless some businessmen can be. Does the Financial Secretary believe that a tougher price code is called for if phase 3 is to be negotiated? Of course, without that negotiation the Government's economic policy is unlikely to survive.

6.14 p.m.

Mr. Christopher Tugendhat (Cities of London and Westminster)

We have ranged quite far in this debate although it is a Third Reading debate. We have dealt with many aspects of the Government's economic policy apart from the Budget. However, it is fair to remind the House of the basis on which my right hon. Friend the Chancellor of the Exchequer based his Budget when he introduced it. He said at the time that his overwhelming objective was to go for growth. The success which he has achieved should be given the credit which is its due.

I do not begrudge hon. Members for drawing attention to the difficulties of the moment. Nor do I blame them for drawing attention to problems which did not seem to loom as large on the horizon at the time of the Budget as they do now. But it is reasonable to give the Government credit it deserves. It is right to remember that the target which my right hon. Friend announced of a 5 per cent. growth rate has been achieved.

It is all very well for hon. Members to speculate about how long the economy will be able to maintain its present rate of growth. It is all very well for them to speculate about the extent of the slowdown which may or may not occur. But if they are fair they will recognise that the achievement to date has been much greater than that which the right hon. Member for Leeds, East (Mr. Healey) suggested would be possible when he was speaking the day after the Budget debate.

We have also seen a staggering fall in the level of unemployment. That has been a desirable fall but something which we do not hear much about. In view of the attention given to the high level of unemployment last year it is only reasonable to draw attention to that success, too.

Opposition hon. Members have not been entirely fair in their references to exports. I am as aware as they are of the balance of payments problems which the country faces. However, it is a truly staggering phenomenon in British postwar history to see exports rising at twice the rate of imports in volume terms. That is an indication that the underlying performance of the economy is perhaps a great deal more impressive than the constant emphasis on the problems of inflation might lead us to suppose.

I know that there is at least one other hon. Member who wishes to speak and I do not intend to keep the House for long. Apart from the internal inhibitions on growth there are external inhibitions—namely, the balance of payments and the international currency situation.

The right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins) blamed the situation entirely on floating. I listened with great interest to what he said. I find myself in agreement with much of it, but the balance of what he said was not entirely right. It is not right to put so much blame on floating. The right hon. Gentleman should have put more blame on the position of the dollar. It is a fact that the dollar is the numeraire on which our system is based. There is now a total lack of confidence in the dollar. That is the principal cause of the difficulties which we face in the international monetary sphere.

If the Government are to make an important contribution to its solution they must devote their best efforts to producing ideas and suggestions which will enable the international community to operate on the basis of a new numeraire which does not suffer from the total lack of confidence which at present afflicts the dollar.

6.17 p.m.

Mr. Tam Dalyell (West Lothian)

I thank the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) for being so generous with his time. We are told that exports are growing stronger. How does the Treasury reconcile that with the answer given to my right hon. Friend the Member for Battersea, North (Mr. Jay) on Monday that during the first five months of 1972 and 1973 the respective figures of the differential of export-import between ourselves and the EEC were 39 per cent. and 29 per cent.? I think that those figures deserve some comment.

Mr. Higgins

Will the hon. Gentleman repeat the beginning of his question?

Mr. Dalyell

I shall hand the Financial Secretary the HANSARD reference. My second point concerns VAT offices. Here we are in harmony. The offices have done a great deal to be helpful. Like many Scottish hon. Members I owe a great deal to the constant helpfulness of Centre 1 at East Kilbride. Centre 1 and other offices have come in for a great deal of criticism, much of it ill founded, but I have found them to be helpful.

I found it strange that the right hon. Gentleman the Chief Secretary could not answer a perfectly reasonable question about the collection costs of SET and VAT. If he is to crow in his opening speech about such statistics he should have the figures readily available.

I reiterate what has been said frequently about the regional employment premium. I hope that before October the Government will take on board that in the regions, because of the expectations of investment, it is an important matter.

Finally, I shall dwell on an issue which I hoped would be raised by the right hon. Member for Orkney and Shetland (Mr. Grimond). It will be within the recollection of the Minister of State that I met him and talked in particular about oil and land speculation. Since then we know that the Shetland Bill, which was privately promoted, is likely to be turned down because of the decision of a Committee of this House. The Government themselves said that this was essential to their strategy. They said so in April and May. Now it has been overturned by changes in the Shetland County Council and perhaps by a challenged decision of this House, when two hon. Members voted for and two against and the matter was decided on the casting vote of a Conservative chairman.

In this situation, what is the Government's strategy? I did not agree but I thought that it was sensible to say, as the Government did, that each local authority must promote its own private Bill. Shetland on its own initiative did so. Now we find, to the chagrin of the Government and many of my hon. Friends, that the Shetland Bill is no longer with us. This matter is urgent and I hope that before the Summer Recess we shall be told what is the Government's strategy on land speculation in those areas contiguous to oil resources.

6.21 p.m.

Mr. Joel Barnett (Heywood and Royton)

I do not think that any Finance Bill debate would be quite right without my hon. Friend the Member for West Lothian (Mr. Dalyell) having the final speech from the back benches.

I am sure that the Chancellor of the Exchequer will regret this Bill. It is irrelevant, and the Chief Secretary to the Treasury proved that by the way he spoke of it. The Chancellor will need a lot of support and he will be sorry that in a succession of Budgets he dealt so unfairly in his tax measures. I have no doubt that he will have to reverse those measures, just as the Government have reversed so many others in the last three years. I am sure that no one will dispute—the hon. Member for Cities of London and Westminster (Mr. Tugendhat) would not do so, despite his friendly remarks towards the Government—that the Chancellor is in terrible trouble economically, and it was ridiculous of the Chief Secretary to make such a complacent speech.

But perhaps at this point I may break off and offer the Chief Secretary to the Treasury our belated congratulations on his appointment to the Privy Council. I must now revert to my more usual approach to him and tell him that, with the Chancellor in terrible trouble, it was wrong and foolish of him to be so complacent in moving the Third Reading to-day.

The Chancellor wants sustained economic growth. In that we go all the way with him. But what have we got? What we have got is not sustained economic growth but a promise that it will be sustained until the beginning of 1974. It must be the Chancellor's wish, indeed, that it will subsidise as quickly as possible, because, from the way he is going at the moment, no one can imagine that he will be able to sustain growth at the present level. No one is sorrier about that than I am.

The Chief Secretary spoke about the capacity now available, although my hon. Friend the Member for Sheffield, Attercliffe (Mr. Duffy) gave rather more facts as to why such capacity may well not be available. The Chief Secretary merely said that he "believed" this and "believed" that. He gave us no facts as to why capacity would be available. Nevertheless, let us assume that it will be available.

No one doubts that we are coming up against a serious balance of payments situation, floating or no floating. One recognises and is delighted that exports are rising very well, but it is foolish to look at one side only and ignore the fact that imports are rising rather faster. The situation must get worse, as every objective person looking at the figures must agree.

My right hon. Friend the Member for Leeds, East (Mr. Healey) referred to the figures. For example, the average prices to manufacturing industry for materials and fuel went up in the last month alone by 3 per cent., and in the last year by 27 per cent. No one will dispute that if, as we hope, the expectations of increased manufacturing investment materials are fulfilled, much of those materials will come from increased imports. In this situation no one can expect anything other than a floating downwards of the pound or, as my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins) put it so delightfully, a daintily depreciating pound.

The only way that the Chancellor can hope to avoid further depreciation of the pound is to spend some of the not-so-massive reserves of which Conservative Members have boasted so often. As my right hon. Friend rightly said, it was absurd last week, when we saw the pound floating down as much as it was, to increase the reserves instead of having what he described as a "filthy float".

My right hon. Friend made a devastating attack on the so-called merits of floating, and few hon. Members would be in favour of floating unnecessarily long, I know that my right hon. Friend is not in favour of floating any longer than is necessary. No one will argue that floatation downwards will not add to import costs and subsequently to a worsening of inflation.

When we recall how the pound depreciated in value last weekend, it is foolish to assume that the financial directors of multinational companies, who to some extent would have been responsible, were so terribly wrong. At least they were prepared to put their money where their mouths were. It may be that they were, in effect, discounting what they thought was likely to happen to the economy as it is being managed at present.

We know that the inflationary spiral must be causing the Chancellor great concern. Despite his condemnation of food subsidies, I should not be surprised if, in the near future—as has been the case with so many other Government statements—we were to find him reversing his view and introducing some new food subsidies.

Again, few will deny that there must inevitably be very many more price increases in the pipeline. The cost of raw material and fuel for the food industry rose over 4 per cent. in June alone and by 31 per cent. in the past year. Much of that must still remain to come through to retail prices. In these circumstances, the price inflation which over the past year has been running at 9.5 per cent. will run almost certainly at over 10 per cent. in the very near future, if it is not doing so now.

There is little doubt that at the moment prices are rising faster than earnings. As my right hon. Friend the Member for Leeds, East pointed out, the first quarter of 1973 shows, at constant prices, a fall of 0.1 per cent. in earnings as against the fourth quarter of 1972. This comparison applies to average earnings and totally disregards the large numbers of workers who receive less than average earnings and who are obviously being hurt considerably more by these colossal price increases.

It must be clear that in these circumstances it is impossible to make any prices and incomes policy effective, whether that policy is voluntary or statutory. We have seen in the past how ordinary workers have reacted to prices and incomes policies. My right hon. Friend the Member for Stechford experienced this when he tried to reduce personal consumption. Ordinary workers will do their utmost to ensure that their living standards will not fall. They will use their savings and do almost anything—they will even borrow—but they will not, if they can help it, reduce their living standards. This, however, is what the Chancellor now wants, if one accepts what he has been trying to do.

In the first two years of the Government, the Chancellor was complaining that wages were rising too rapidly. Now he is boasting that personal consumption has risen so well. He knows that it has risen faster than he wanted it to rise. He must now be seeking to cut it. I should be delighted to be told that this is not the case.

The Chancellor is in an appalling dilemma, much of it of his own making. If he wants a united country with which to fight this important battle, he has gone about the task in the strangest possible way. What is worrying to most people are prices, food prices in particular and house prices. What has this or any other Finance Bill done about these problems? Land prices have risen to astronomical heights, forcing house prices higher and higher. The Chancellor introduced a land hoarding charge in his Budget, but no one will be surprised that there has not been a squeak from land and property speculators, for the very good reason that they know it will not have the slightest effect on them. I suspect that only the Chancellor will think that this is effective. Perhaps the Chief Secretary will think so to.

We all know from constituency experience that there are longer and longer waiting lists for council houses, because people who might otherwise move from council houses to new homes of their own simply cannot afford to do so. On top of that there is the mortgage interest rate, at present at 9½ per cent. It has been kept down from 10 per cent. only by the strong-arm tactics of the Chancellor. He has provided an across-the-board subsidy of £15 million despite all he has said about across-the-board food subsidies. The Chancellor has managed to keep the mortgage interest rate at 9½ per cent. for the moment.

Mr. Arthur Lewis (West Ham, North)

Wait and see what will happen after the by-elections. The interest rate will then go up.

Mr. Barnett

I am grateful to my hon. Friend for that observation. He is absolutely right. The Chancellor managed to keep the rate at 9½ per cent. only by the use of the composite rate of tax, at present 23.5 per cent. That rate of tax means that many old-age pensioners and others who are not liable to income tax are wrongly investing with building societies, and in so doing they are enabling the societies to have a composite rate of tax of 23.5 per cent. Bearing in mind these people who are wrongly investing in building societies, I suggest that the societies' advertisements inviting deposits should carry a warning similar to that printed on cigarette packets, stating: This interest rate is harmful to old-age pensioners and others not liable to tax. That is the situation, and it is against that background that we are bound to ask what are the Chancellor's policies on interest rates. Does he want interest rates to go up or down? What kind of policy does he want? We heard nothing from the Chief Secretary. Perhaps we will hear something from the Financial Secretary. The Chancellor's only contribution to prices has been to push them up, using value added tax. I do not regret anything I have said about VAT. The Chief Secretary should speak to some of the small traders who are struggling with their quarterly returns for submission to the Customs and Excise. Let him have a word with some of those people. I have met them and talked to them. If he thinks that there is no problem with VAT, he is much mistaken.

I note that the Chief Secretary did not use the argument that prices were not pushed up considerably by VAT. All that the Chancellor arranged for was that the weights and measures inspectors should keep a close eye on them. A law should be introduced to prevent the Chancellor inflicting such cruelty on a body of men whose task this should not have been.

There is no doubt that we are facing a crisis of large proportions. The Chancellor must be awaiting with dread tomorrow's trade figures, if he has not already seen them. In the light of the imports and import costs, further shocking figures must be inevitable even if, as I hope, they are rather better tomorrow. I can only imagine that they must be better tomorrow in the light of the incredible speech by the Chief Secretary. There can be no other reason.

Mr. Patrick Jenkin

In case there should be any misunderstanding, let me make it abundantly clear that I have not seen tomorrow's trade figures.

Mr. Barnett

I am obliged for that information. I am sure that that will be helpful to the economy.

No one will be surprised that in this context the Chancellor must regret the background to this debate, namely, this Bill and its predecessors. He must know that he has forfeited the right to the cooperation of the TUC and that without that co-operation any agreement will be virtually impossible. Such an agreement would be difficult to achieve even with the co-operation of the TUC.

What contribution does the right hon. Gentleman consider that this Finance Bill or its predecessors have made to obtaining any kind of success in the battle against inflation? What happened to the surtax payers who were to achieve miracles once taxes were reduced? How can the Chancellor justify the increases in real income he gave them if they have not, as indeed they have not, produced the goods? He should feel bitter about the fact that he did not get the miracles we and, presumably, he thought he would get. He did not get these despite the fact that he has given those people enormous tax-free bonanzas and every opportunity to reduce their tax levels.

We have had all that from this Finance Bill and its predecessors—loan interest allowable for tax disaggregation, share options, and more and more given to the people who were supposed to be delivering the goods. That has not been the result. For these reasons among all the others—because of the state which he has produced in our economy—we condemn the Chancellor and his succession of Finance Bills. I advise my right hon. and hon. Friends to vote against the Bill tonight.

6.39 p.m.

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

It would be appropriate to take up the argument at the point at which the hon. Member for Heywood and Royton (Mr. Joel Barnett) left it. He referred to a succession of Finance Bills. It is right that we should consider not only this one but its two Conservative predecessors also. The debate we have had on this occasion has gone even wider than on former occasions, and this may well reflect the fact that we have had three Finance Bills which have implemented the promises we made in our election manifesto and which have transformed personal direct taxation, corporation tax and, with the abolition of SET and purchase tax and the introduction of VAT, our indirect tax system as well. This Bill completes a reforming programme of vast magnitude. As a result we have a far better fiscal basis for the economic life of the country than we had when we came into office.

I should like to comment on some of the fiscal changes we have made and place them in the proper economic context against the background of the past three years. To deal first with corporation tax, we now have a system more neutral in effect which is designed to result in a better allocation of the nation's resources. The unification of income tax and surtax has simplified personal direct taxation and made it easier to understand. The relief given to the first £2,000 tranche of investment income—what Labour Members still refer to as unearned income—will encourage savings and be of help, particularly to those retired on small fixed incomes.

As regards indirect taxation, we have abolished SET with its absurd distinction between manufacturing and service industries. We have, further, abolished purchase tax with its multiple rates and detailed discriminatory provisions. In their place and as part of the Finance Bill, because it completes the process, we have a value added tax at a single positive rate of 10 per cent., the lowest in Europe. This changeover has broadened the base of our indirect taxation.

At the same time we have designed the system in such a way that the main items of importance in the budgets of pensioners and others on low incomes and those with large families attract relief. Relief is given to food in the shops, fuel, housing, bus and train fares and children's clothing and footwear. The items included in this list account for about two-thirds of the expenditure of pensioners.

It is important to note that, following our reform of indirect taxation, the burden of taxation upon food has been reduced by about £225 million. That is less than it was under the old system. I mention this because there is still some misunderstanding in the shops. People believe that VAT has caused food prices to rise. That is not true because food has been zero rated. Despite what the right hon. Member for Leeds, East (Mr. Healey) says about the "lollipop Budget", the items which we relieved are important in the budgets of low-income families. We have also helped by abolishing SET which entered into the price of food.

If we take the overall picture and include also the question of wrapping—because some uninformed commentators have thought that this would affect food prices, overlooking the fact that the input tax of VAT is deductible for packaging—it is work emphasising that VAT is not imposed upon food whereas the previous Labour Government imposed indirect taxation upon food.

My next point is one raised by the hon. Member for Heywood and Royton about the impact on prices arising from the introduction of VAT and the abolition of SET and purchase tax. The point which is worth repeating is that VAT will be collecting, with the car tax, roughly the same revenue as would have been collected through purchase tax and SET, if they had remained at the rates current during the last financial year. Of course there were bound to be some changes in prices as a result of the changeover. Some went up, some went down and some remained the same.

Mr. Arthur Lewis

How many remained the same?

Mr. Higgins

A large number. If the hon. Member does not believe it, I would refer him to something that I think he would not regard as being in any way partisan, namely Which? Looking at the overall situation, I do not believe that the tax has had a significant impact on prices. I believe that the advertising campaign which we engaged in and the measures taken by the weights and measures inspectors were effective. The inspectors dealt with about 40,000 complaints and found that in the overwhelming majority of cases where there had been a mistake there was a voluntary reduction. In other cases they examined whether the change was justified. That has been effective. It is wrong of the hon. Member for Heywood and Royton to suggest that that has not been the case. Impartial observers realise that that is the situation.

I wish to say a few words on the question of the technical side of the changeover. My hon. Friend the Member for South Angus (Mr. Bruce-Gardyne) congratulated those responsible for the smoothness of the changeover from SET and purchase tax to VAT. He also paid tribute to the way in which the distributive trade had carried out the changeover. I endorse what he said. Customs and Excise has greatly benefited, as I think everyone has, from the use of the Green Paper approach to VAT and, as a result of the discussions which took place, the changeover has been much smoother than it would otherwise have been. Customs and Excise has done a magnificent job.

It is also worth saying, in contrast to the constant scaremongering of the hon. Member for Heywood and Royton, that the administrative burden will be nowhere near as great as he has said it will be. As a result of new Clause 39, to which we agreed yesterday, the use of VAT data for statistical purposes will mean that the burden of form-filling on small traders will be significantly reduced. That is not an unimportant factor.

I turn to consider some of the more remarkable speeches which have been made in this debate. I said in my opening remarks that the debate had been wide ranging. In contrast with the Third Reading stage on any former Finance Bill, the international monetary situation has figured rather prominently in our discussions.

The interesting feature of the speeches made from the Opposition benches was the contrast between the speech of the right hon. Member for Leeds, East and that of the right hon. Member for Birmingham, Stechford (Mr. Roy Jenkins). One of the dangers of the right hon. Member for Leeds, East making the same speech several times is that the figures he uses get out of date. He referred to the position of sterling at the end of last week, whereas the right hon. Member for Stechford was more up to date and referred to the position of sterling, which has improved, this week.

Mr. Healey

If the hon. Member looks at HANSARD tomorrow, he will find that I referred to the improvement which had taken place in sterling since last Monday. I said that one could not be sure that it was not due to intervention by the central banks following the decision of the bank of International Settlements meeting. The hon. Gentleman must have been asleep at that time. He has made a distinction without a difference.

Mr. Higgins

Despite the temptation, I was not asleep during the right hon. Gentleman's speech.

I should like to take up a more technical point which the right hon. Member for Leeds, East raised. It shows just how out of date he is. He was still referring to the question of the J curve. The matter was explained concisely by the right hon. Member for Stechford, who said that, if the exchange rate of a currency depreciates, things get worse before they get better. The right hon. Member for Leeds, East was still talking about the J curves and said they were perhaps U curves or L curves. This is a question of looking at a moment of time with a single step change. That is not what has been happening with floating.

The right hon. Member for Stechford rightly argued that that was not the situation but that what one had was a whole family of J curves.

Mr. Healey

I said that.

Mr. Higgins

The right hon. Gentleman did not say that. He adopted a very out-of-date and simplistic view.

Mr. Healey

The hon. Gentleman must not misrepresent me. Again, if he reads HANSARD, he will see that I referred to the fact that we do not have a J curve; we have a U curve, and probably a succession of U curves. During the debate in January I said that we were all suffering from a double U curve for that reason. I made exactly the same point as my right hon. Friend the Member for Birmingham, Stechford (Mr. Roy Jenkins).

Mr. Higgins

The right hon. Gentleman frequently debates on the basis of making outrageous statements and then withdrawing them when challenged. If someone challenges his statements, he says that he is being misrepresented.

I wish to take up the technical point referred to by the right hon. Member for Stechford. He adduced the interesting argument that this succession of J curves created an unstable equilibrium. He said that it must always go down. If he looks at the figures for the increase in the volume of exports, he will see that that would not seem to be so. I do not believe it to be so. It is probably true, however, that we shall, as a result of this, so to speak, family effect, get a series of very erratic figures which may not fully reflect the underlying trend.

The right hon. Member for Stechford was right when he said that it is very important that we should press ahead urgently with the reform of the international monetary system. The Government, and particularly the Chancellor of the Exchequer, may reasonably claim that they have played a major role in seeking to further that aim. In the present circumstances the matter is even more urgent than it was before. However, this is entirely common ground between both sides of the House and I hope that, on the basis which my right hon. Friend put forward at the International Monetary Fund meeting some time ago, and the work done subsequently, we shall be able to achieve a reasonable reform.

The great danger clearly is cost inflation. Our counter-inflationary policy is designed, in marked contrast with the previous Government's legislation, to protect growth and not to reinforce deflation and stagnation. That is a very important difference. The standstill and phase 2 have enabled us, in the face of rising world prices, which are increasing faster than at any time since the Korean boom in 1950, to do better than our competitors in combating inflation.

It is worth drawing the attention of the House and of those interested in the relative position of sterling to the OECD figures which show how the United Kingdom compares with other advanced countries in respect of the annual percentage rise in wholesale and consumer prices between, say, October 1972 and March 1973. The current issue of the Economic Progress Report shows that the United Kingdom is less than half way up the consumer price list and almost lowest on the wholesale price list. That is an important factor to be taken into account in relation to our international competitive position.

The relationship between costs and prices and the exchange rate is important. There is evidence that, over the past three years or so, there has been a fundamental change in the British economy. [HON. MEMBERS: "Hear, hear."] It has been a change for the better in many ways, as I shall seek to demonstrate. When we came to office in 1970 there was a faster rise in unemployment than would have been expected by past relationships in regard to the level of output. At that time the rapid rise in unemployment complicated the difficulties of demand management. We witnessed an unprecedented shake out of labour, reflecting perhaps a changing attitude by employers to maintaining their work forces largely intact in a period of slow growth. [HON. MEMBERS: "Who caused it?"] Hon. Members opposite.

That reflected the poor financial position which was caused by the rapid rise in wages immediately before the 1970 election. It was far from clear when we came to office that the right course was immediately to take reflationary measures. However, contrary to what might previously have been thought, we decided in July 1971 that it would be right to act to increase the level of demand, which would have a favourable effect on unemployment, and the increase in output would have a favourable effect on the question of costs. No one today would deny, I think, that that was the right thing to do. [Interruption.] It is historical, but there is an important point to be made and I want to make it.

One of the aims of our policy was to increase the growth of output, and manufacturing production has been rising strongly for about 18 months. Unlike the situation in the previous period of economic growth, the outlook ahead for manufacturing industry is that it will continue to rise at a very fast rate. The latest figure shows that the output per head in manufacturing is 14 per cent. higher than it was a year ago. This is an important point to be considered. With the faster growth of demand and activity there was a danger of strains emerging in 1974, and the danger of overheating is recognised We do not want to go from demand inflation to cost-pull inflation.

It was for that reason, and to avoid taking crisis measures, that my right hon. Friend the Chancellor introduced the expenditure cuts announced in May. Unlike what happened when the right hon. Member for Cardiff, South-East (Mr. Callaghan) was Chancellor of the Exchequer and seemed to think that public expenditure could be reined back, we took the view that we must make a long-term appraisal of the situation. We felt that it was right to act in time to ensure that the rapid rate of economic growth could be sustained.

This is the whole purpose of the Government's policy to ensure a rapid sustainable rate of economic growth, and I believe that the measures taken by my right hon. Friend in May are designed to that end and that they will be succesful. This is the point I wish to make in reply to the points made by the hon. Member for Sheffield, Attercliffe (Mr. Duffy) about overheating of the economy.

The important feature to be considered is that of real disposable income. It is true that such income shows considerable quarterly variation, but we need to take a longer-term comparison. On this basis real disposable income in the first quarter of the year was 7½ per cent. higher than it was a year ago. That again is a very important consideration in appraising the Government's management of the economy and in judging the relevance of this Finance Bill.

My right hon. Friend said in his Budget speech that this Finance Bill would complete the three major areas of tax reform. Indeed, the function of this Finance Bill is to put the finishing touches to those reforms. These reforms are now complete in that respect and our fiscal system is the better for it.

We have said that we would not only reform the tax system but would reduce taxation. Reductions have been made in direct taxation, notably in income tax and corporation tax, and in indirect taxation where VAT at the single positive rate of 10 per cent. has replaced both SET and the full rate of purchase tax. Between 1969–70 and 1972–73 indirect taxes have been reduced as a proportion of gross national product from 19.9 per cent. to 17.2 per cent. I repeat, from 19.9 per cent to 17.2 per cent. Taxes on personal income, as a percentage of total wages and salaries, have fallen from 22 per cent. in 1969–70 to 20.9 per cent. in 1972–73. [Interruption.] Labour Members cannot take it. Overall, as my right hon. Friend the Chief Secretary said, the British people this year will pay well over £4.000 million less tax than if the rates of tax in force at the date of the last General Election were still operative today.

Other indicators confirm, if confirmation is needed, that this reduction in taxation has been a real reduction. For example, taxation as a percentage of gross national product has fallen from 38.3 per cent. since 1969–70 to 33.5 per cent. last year—that is to say, in 1972–73.

Mr. Brian Walden (Birmingham, All Saints)

Bogus.

Mr. Higgins

There is nothing bogus about the figures. The fact is that these have been substantial reductions.

The Finance Bill to which we are now asking the House to give a Third Read-

ing completes the reform in the structure of taxation and also reflects our policy of reducing taxation. If we take the three Finance Bills together, I believe that the Government are right to say that they have made a major improvement in the system and that the total burden of taxation has changed in such a way that we can reasonably feel that the pledges we made in our manifesto have been implemented. On that basis, I ask the House to give the Bill a Third Reading.

Question put, That the Bill be now read the Third time:—

The House divided: Ayes 245, Noes 230.

Division No. 196.]	AYES	[7.0 p.m.
Adley, Robert	Edwards, Nicholas (Pembroke)	Kershaw, Anthony
Allason, James (Hemel Hempstead)	Elliot, Capt. Walter (Carshalton)	Kimball, Marcus
Archer, Jeffrey (Louth)	Elliott, R. W. (N'c'tle-upon-Tyne, N.)	King, Evelyn (Dorset, S.)
Astor, John	Emery, Peter	King, Tom (Bridgwater)
Atkins, Humphrey	Eyre, Reginald	Kinsey, J. R.
Awdry, Daniel	Fenner, Mrs. Peggy	Kirk, Peter
Baker, Kenneth (St. Marylebone)	Finsberg, Geoffrey (Hampstead)	Kitson, Timothy
Baker, W. H. K. (Banff)	Fisher, Nigel (Surbiton)	Knight, Mrs. Jill
Bell, Ronald	Fookes, Miss Janet	Knox, David
Bennett, Sir Frederic (Torquay)	Fortescue, Tim	Lamont, Norman
Bennett, Dr. Reginald (Gosport)	Foster, Sir John	Lane, David
Benyon, W.	Fowler, Norman	Langford-Holt, Sir John
Berry, Hn. Anthony	Fox, Marcus	Le Merchant, Spencer
Bitten, John	Fraser, Rt. Hn. Hugh (St'fford & Stone)	Lewis, Kenneth (Rutland)
Biggs-Davison, John	Galbraith, Hn. T. G. D.	Lloyd, Ian (P'tsm'th, Langstone)
Blaker, Peter	Gibson-Watt, David	Longden, Sir Gilbert
Boscawen, Hn. Robert	Gilmour, Sir John (Fife, E.)	Luce, R. N.
Bossom, Sir Clive	Glyn, Dr. Alan	McAdden, Sir Stephen
Bowden, Andrew	Godber, Rt. Hn. J. B.	MacArthur, Ian
Braine, Sir Bernard	Goodhart, Philip	McLaren, Martin
Bray, Ronald	Gorst, John	McMaster, Stanley
Brinton, Sir Tatton	Gower, Raymond	McNair-Wilson, Michael
Brocklebank-Fowler, Christopher	Grant, Anthony (Harrow, C.)	McNair-Wilson, Patrick (New Forest)
Brown, Sir Edward (Bath)	Green, Alan	Maddan, Martin
Bruce-Gardyne, J.	Grieve, Percy	Madel, David
Bryan, Sir Paul	Grylls, Michael	Marten, Neil
Buchanan-Smith, Alick (Angus, N & M)	Gummer, J. Selwyn	Mather, Carol
Buck, Antony	Gurden, Harold	Maudling, Rt. Hn. Reginald
Burden, F. A.	Hall, Sir John (Wycombe)	Mawby, Ray
Butler, Adam (Bosworth)	Hall-Davis, A. G. F.	Maxwell-Hyslop, R. J.
Carlisle, Mark	Hamilton, Michael (Salisbury)	Meyer, Sir Anthony
Carr, Rt. Hn. Robert	Hannam, John (Exeter)	Miscampbell, Norman
Channon, Paul	Harrison, Brian (Maldon)	Mitchell, Lt.-Col. C.(Aberdeenshire, W)
Chapman, Sydney	Harrison, Col. Sir Harwood (Eye)	Mitchell, David (Basingstoke)
Churchill, W. S.	Haselhurst, Alan	Moate, Roger
Clark, William (Surrey, E.)	Hastings, Stephen	Money, Ernie
Clarke, Kenneth (Rushcliffe)	Havers, Sir Michael	Monks, Mrs. Connie
Clegg, Walter	Hawkins, Paul	Monro, Hector
Cockeram, Eric	Hicks, Robert	Montgomery, Fergus
Cooke, Robert	Higgins, Terence L.	More, Jasper
Coombs, Derek	Hiley, Joseph	Morgan, Geraint (Denbigh)
Cooper, A. E.	Hill, S. James A.(Southampton, Test)	Mudd, David
Cordle, John	Holt, Miss Mary	Nabarro, Sir Gerald
Corfield, Rt. Hn. Sir Frederick	Hornby, Richard	Neave, Airey
Cormack, Patrick	Hornsby-Smith, Rt. Hn. Dame Patricia	Nicholls, Sir Harmar
Critchley, Julian	Howe, Rt. Hn. Sir Geoffrey	Noble, Rt. Hn. Michael
Crouch, David	Howell, David (Guildford)	Normanton, Tom
Crowder, F. P.	Howell, Ralph (Norfolk, N.)	Nott, John
Davies, Rt. Hn. John (Knutstord)	Hunt, John	Onslow, Cranley
d'Avigdor-Goldsmid, Maj.-Gen. Jack	Hutchison, Michael Clark	Osborn, John
Dean, Paul	Iremonger, T. L.	Owen, Idris (Stockport, N.)
Deedes, Rt. Hn. W. F.	James, David	Page, Rt. Hn. Graham (Crosby)
Digby, Simon Wingfield	Jenkin, Patrick (Woodford)	Page, John (Harrow, W.)
Dixon, Piers	Jessel, Toby	Parkinson, Cecil
Dodds-Parker, Sir Douglas	Johnson Smith, G. (E. Grinstead)	Percival, Ian
Dykes, Hugh	Jones, Arthur (Northants, S.)	Pike, Miss Mervyn
Eden, Rt. Hn. Sir John	Jopling, Michael	Pink, R. Bonner
	Kellett-Bowman, Mrs. Elaine	Pounder, Rafton
		Powell, Rt. Hn. J. Enoch
Price, David (Eastlelgh)	Shelton, William (Clapham)	Tugendhat, Christopher
Proudfoot, Wilfred	Shersby, Michael	Turton, Rt. Hn. Sir Robin
Pym, Rt. Hn. Francis	Skeet, T. H. H.	Vaughan, Dr. Gerard
Quennell, Miss J. M.	Smith, Dudley (W'wick & L'mington)	Vickers, Dame Joan
Raison, Timothy	Soref, Harold	Waddington, David
Ramsden, Rt. Hn. James	Speed, Keith	Welder, David (Clitheroe)
Rawlinson, Rt. Hn. Sir Peter	Spence, John	Walker, Rt. Hn. Peter (Worcester)
Redmond, Robert	Sproat, Iain	Wall, Patrick
Reed, Laurance (Bolton, E.)	Stainton, Keith	Walters, Dennis
Rees, Peter (Dover)	Stanbrook, Ivor	Ward, Dame Irene
Rees-Davies, W. R.	Stewart-Smith, Geoffrey (Belper)	Warren, Kenneth
Renton, Rt. Hn. Sir David	Stodart, Anthony (Edinburgh, W.)	Weatherill, Bernard
Rhys Williams, Sir Brandon	Stokes, John	White, Roger (Gravesend)
Ridley, Hn. Nicholas	Stuttaford, Dr. Tom	Whitelaw, Rt. Hn. William
Ridsdale, Julian	Sutcliffe, John	Wilkinson, John
Roberts Wyn (Conway)	Tapsell, Peter	Winterton, Nicholas
Rodgers, Sir John (Sevenoaks)	Taylor, Frank (Moss Side)	Wolrige-Gordon, Patrick
Rossi, Hugh (Hornsey)	Tebbit, Norman	Wood, Rt. Hn. Richard
Rost, Peter	Temple, John M.	Woodnutt, Mark
Royle, Anthony	Thatcher, Rt. Hn. Mrs. Margaret	Worsley, Marcus
St. John-Stevas, Norman	Thomas, John Stradling (Monmouth)	Younger, Hn. George
Sandys, Rt. Hn. D.	Thompson, Sir Richard (Croydon, S.)
Scott, Nicholas	Tilney, Sir John	TELLERS FOR THE AYES:
Scott-Hopkins, James	Trafford, Dr. Anthony	Mr. Oscar Murton and
Shaw, Michael (Sc'b'gh & Whitby)	Trew, Peter	Mr. Hamish Gray.
NOES
Allaun, Frank (Salford, E.)	Duffy, A. E. P.	Kelley, Richard
Allen, Scholefield	Dunn, James A.	Kerr, Russell
Archer, Peter (Rowley Regis)	Dunnett, Jack	Kinnock, Neil
Armstrong, Ernest	Eadie, Alex	Lambie, David
Ashton, Joe	Edelman, Maurice	Lamborn, Harry
Atkinson, Norman	English, Michael	Lamond, James
Bagier, Gordon A. T.	Evans, Fred	Lawson, George
Barnett, Guy (Greenwich)	Ewing, Harry	Leadbitter, Ted
Barnett, Joel (Heywood and Royton)	Faulds, Andrew	Leonard, Dick
Baxter, William	Fernyhough, Rt. Hn. E.	Lestor, Miss Joan
Benn, Rt. Hn. Anthony Wedgwood	Fisher, Mrs. Doris (B'ham, Ladywood)	Lewis, Arthur (W. Ham, N.)
Bennett, James (Glasgow, Bridgeton)	Fitch, Alan (Wigan)	Lewis, Ron (Carlisle)
Bidwell, Sydney	Fletcher, Raymond (Ilkeston)	Lipton, Marcus
Bishop, E. S.	Fletcher, Ted (Darlington)	Lomas, Kenneth
Blenkinsop, Arthur	Foot, Michael	Loughlin, Charles
Booth, Albert	Forrester, John	Lyon, Alexander W. (York)
Bottomley, Rt. Hn. Arthur	Fraser, John (Norwood)	Lyons, Edward (Bradford, E.)
Bradley, Tom	Galpern, Sir Myer	Mabon, Dr. J. Dickson
Broughton, Sir Alfred	Gilbert, Dr. John	McBride, Neil
Brown, Robert C. (N'c'lle-u-Tyne, W.)	Ginsburg, David (Dewsbury)	McElhorne, Frank
Brown, Hugh D. (G'gow, Provan)	Gourlay, Harry	McGuire, Michael
Brown, Ronald (Shoreditch & F'bury)	Grant, George (Morpeth)	Machin, George
Buchan, Norman	Grant, John D. (Islington, E.)	Mackenzie, Gregor
Buchanan, Richard (G'gow, Sp'burn)	Grimond, Rt. Hn. J.	Mackie, John
Butler, Mrs. Joyce (Wood Green)	Hamilton, James (Bothwell)	Maclennan, Robert
Callaghan, Rt. Hn. James	Hamilton, William (Fife, W.)	McMillan, Tom (Glasgow, C.)
Campbell, I. (Dunbartonshire, W.)	Hamling, William	McNamara, J. Kevin
Carmichael, Neil	Hannan, William (G'gow, Maryhill)	Mallalieu, J. P. W. (Huddersfield, E.)
Carter, Ray (Birmingh'm, Northfield)	Harrison, Walter (Wakefield)	Marks, Kenneth
Carter-Jones, Lewis (Eccles)	Hart, Rt. Hn. Judith	Marquand, David
Castle, Rt. Hn. Barbara	Hatton, F.	Marsden, F.
Clark, David (Coine Valley)	Healey, Rt. Hn. Denis	Marshall, Dr. Edmund
Cohen, Stanley	Heffer, Eric S.	Mason, Rt. Hn. Roy
Concannon, J. D.	Hooson, Emlyn	Meacher, Michael
Conlan, Bernard	Horam, John	Mellish, Rt. Hn. Robert
Corbet, Mrs. Freda	Howell, Denis (Small Heath)	Mendelson, John
Cox, Thomas (Wandsworth, C.)	Hughes, Rt. Hn. Cledwyn (Anglesey)	Millan, Bruce
Cronin, John	Hughes, Mark (Durham)	Miller, Dr. M. S.
Crossman, Rt. Hn. Richard	Hughes, Robert (Aberdeen, N.)	Milne, Edward
Cunningham, G. (Islington, S.W.)	Hughes, Roy (Newport)	Mitchell, R. C. (S'hampton, Itchen)
Cunningham, Dr. J. A. (Whitehaven)	Hunter, Adam	Morgan, Elystan (Cardiganshire)
Dalyell, Tam	Irvine, Rt. Hn. Sir Arthur (Edge Hill)	Morris, Charles R. (Openshaw)
Darling, Rt. Hn. George	Jay, Rt. Hn. Douglas	Mulley, Rt. Hn. Frederick
Davidson, Arthur	Jeger, Mrs. Lena	Murray, Ronald King
Davies, Denzil (Llanelly)	Jenkins, Hugh (Putney)	Oakes, Gordon
Davies, G. Elfed (Rhondda, E.)	Jenkins, Rt. Hn. Roy (Stechford)	Ogden, Eric
Davis, Clinton (Hackney, C.)	John, Brynmor	O'Malley, Brian
Davis, Terry (Bromsgrove)	Johnson, James (K'ston-on-Hull, W.)	Oram, Bert
Deakins, Eric	Johnson, Walter (Derby, S.)	Orbach, Maurice
Delargy, Hugh	Johnston, Russell (Inverness)	Oswald, Thomas
Dell, Rt. Hn. Edmund	Jones, Barry (Flint, E.)	Owen, Dr. David (Plymouth, Sutton)
Dempsey, James	Jones, Dan (Burnley)	Padley, Walter
Dormand, J. D.	Jones, T. Alec (Rhondda, W.)	Paget, R. T.
Douglas, Dick (Stirlingshire, E.)	Judd, Frank	Palmer, Arthur
Douglas-Mann, Bruce	Kaufman, Gerald	Pannell, Rt. Hn. Charles
		Pardoe, John

Parry, Robert (Liverpool, Exchange)	Short, Mrs. Renée (W'hampton, N.E.)	Tope, Graham
Peart, Rt. Hn. Fred	Silkin, Rt. He. John (Deplford)	Tuck, Raphael
Pendry, Tom	Silkin, Hn. S.C. (Dulwich)	Urwin, T. W.
Perry, Ernest G.	Sillars, James	Varley, Eric G.
Prentice, Rt. Hn. Reg	Silverman, Julius	Wainwright, Edwin
Prescott, John	Skinner, Dennis	Walden, Brian (B'm'ham, All Saints)
Frobert, Arthur	Small, William	Walker, Harold (Doncaster)
Radice, Giles	Smith, Cyril (Rochdale)	Wallace, George
Reed, D. (Sedgefield)	Spearing, Nigel	Weitzman, David
Rees, Merlyn (Leeds, S.)	Spriggs, Leslie	Wellbeloved, James
Rhodes, Geoffrey	Stallard, A. W	Wells, William (Walsall, N.)
Richard, Ivor	Steel, David	While, James (Glasgow, Pollok)
Roberts, Albert (Normanton)	Stewart, Donald (Western Isles)	Whitehead, Phillip
Roberts, Rt. Hn. Goronwy (Caernarvon)	Stoddart, David (Swindon)	Williams, Alan (Swansea, W.)
Robertson, John (Paisley)	Stonehouse, Rt. Hn. John	Wilson, Alexander (Hamilton)
Rodgers, William (Stockton-on-Tees)	Stott, Roger (Westhoughton)	Wilson, Rt. Hn. Harold (Huyton)
Roper, John	Strang, Gavin	Wilson, William (Coventry, S.)
Rose, Paul B.	Summerskill, Hn. Dr. Shirley	Woof, Robert
Rowlands, Ted	Swain, Thomas
Sandelson, Neville	Taverne, Dick	TELLERS FOR THE NOES:
Sheldon, Robert (Ashton-under-Lyne)	Thorpe, Rt. He. Jeremy	Mr. Donald Coleman and
Shore, Rt. Hn. Peter (Stepney)	Tins, James	Mr. John Golding.
Short, Rt. Hn. Edward (N'c'tle-u-Tyne)	Tomney, Frank

Bill read the Third time and passed.

Question accordingly agreed to.