HC Deb 07 March 1973 vol 852 cc437-557

4.21 p.m.

Mr. Denis Healey (Leeds, East)

I congratulate the Chancellor of the Exchequer on presenting the Budget with his usual crispness, clarity and good humour. I think we all agree that that is a remarkable feat when we recall his other preoccupations over the last few days. I hope he will forgive me for saying that I thought his high standard of clarity was a little lowered in the long passage in which he sought to reconcile his hon. Friends to the enormous borrowing requirement and to excuse the absence of any guidelines for the related increase in the money supply. Nevertheless it was an impressive performance, as we have come to expect from the right hon. Gentleman.

This is the first occasion on which I have had the honour of addressing the House on the Budget. Consulting precedent, I find that most Shadow Chancellors have tended to start by listing the miscalculations in the previous 12 months and the consequent reversals of Government policy. That would be supererogatory today, and in any case the situation this year is far too serious. My purpose will be to examine the new strategy which the Government have adopted over the past 12 months and to consider whether the measures which the Chancellor put forward yesterday will help it to succeed.

As we all agree, it is difficult for any Chancellor in any country to combine in satisfactory proportions his three major objectives, namely, a sustained rate of growth and full employment, the maintenance of stable prices, and a satisfactory international payments position. During the past 12 months the Government have adopted a new model policy to achieve each of these objectives.

In the Budget of nearly a year ago the Chancellor committed himself to a 5 per cent. growth rate and the reduction of unemployment. He sought to do this by stimulating consumer demand, even at the expense of incurring an enormous Government deficit. On the second objective—to meet the balance of payments position—the Chancellor decided to meet the consequences of the growth which he had chosen to achieve—his first objective—by letting the pound sink, and that policy was adopted nine months ago. On his third objective—to control the resulting inflation—he sought to take statutory powers for the Government to prevent the laws of supply and demand from determining wages, prices and profits. This element in his strategy he adopted four months ago.

I do not recall any occasion—certainly in the life of most hon. Members—when a Government have made so remarkable and unprecedented a change of front on so many issues of major economic policy in so short a period. Indeed, if there is any modern publication qualified to fall within the category of historic documents which the Chancellor will now accept in lieu of estate duty it must be the 1970 election manifesto of the Conservative Party.

The next question is to decide how far these three new strategies are working. On his first objective—to achieve a 5 per cent. growth rate and to produce a fall in unemployment—the Chancellor seems to be bang on target, and I congratulate him on that. There has been a substantial and welcome fall in unemployment, allied to an impressive rise in vacancies. I am sure that the whole House will wish to congratulate him on this success. I confess that the fall in unemployment has been bigger than I expected a year ago, although at that time—being new to my job—I was rather too influenced by the Chancellor's conclusion, expressed in his Budget speech, that unemployment could not fall if earnings continued to rise. It is most striking that the fall in unemployment coincided exactly with the biggest earnings explosion in our history. I hope that we shall have no more of that nonsense from the Government Front Bench in future.

As the Chancellor will agree, unemployment is still far too high, particularly in the regions.

Here I mention the first of the many dogs that did not bark yesterday afternoon. What does the Chancellor propose to do about the regional employment premium? He must by now be well aware—the CBI has reminded him—that employment in the regions will depend critically on the maintenance of the premium, and on employers knowing that the premium will be maintained beyond the date, a year ahead, when the Chancellor has decided to drop it. I was astonished that the Chancellor chose to ignore this topic and I hope that the Secretary of State for Trade and Industry will say something about it.

As the Chancellor said, the three major indicators of growth are contradictory and confusing, but I accept his conclusion that the underlying trend of growth has for several months been on or about the 5 per cent. target which he set himself. The Chancellor will be aware of the deep uncertainty, especially in the business community, whether this 5 per cent. growth rate is likely to be maintained or whether it is just a peak in the normal four-year business cycle. The Prime Minister and the Chancellor have both committed themselves in recent months—and the Chancellor did so again yesterday—to maintaining a 5 per cent. growth rate for at least another 18 months or two years, but so far unemployment has fallen because we have taken up the slack in the economy, and some bottlenecks, particularly shortages of skilled labour, are already beginning to appear. No one would dispute that once employment has fallen to a more normal level continued growth at 5 per cent. will depend on raising productivity growth above the 3 per cent. or 4 per cent. rate at which it now appears to be running. That, in turn, depends above all on business investing more in new plant and machinery.

It would be interesting if the right hon. Gentleman would tell us whether he shares the view of the Confederation of British Industry that investment should double as a percentage of the gross national product—namely, rise from about 9 per cent. to 19 per cent.—if we are to sustain over a prolonged period a growth rate of 5 per cent. There is no doubt that it is in this field that the Government's greatest failure in economic management lies. The country has suffered for the last two years from an investors' strike.

The Government have poured out incentives—tax giveaways, grants and allowances—but we had a fall of 8 per cent. in manufacturing investment in 1971 and a fall of 10 per cent. last year. This is confirmed in the Financial Statement. If ever there was a vote of no confidence in a businessman's Government by the business community—which this Government regard it as their purpose to serve—this investors' strike is that vote.

We would all agree that the low rate of productivity growth in Britain is our greatest economic problem, and that it has been ever since the end of the Second World War. Even our existing rate of price inflation would be tolerable if our productivity had been rising as fast as that in Japan, or even Western Germany. I was disappointed by the paucity and poverty of the Chancellor's speech on this topic.

A month or so ago the Department of Trade and Industry forecast that the increase in investment this year would be between only 2 per cent. and 5 per cent. In the Financial Statement the Government predict an overall increase in investment of 7 per cent. The Chancellor must know that the situation facing investors is in many respects more sombre today than when they replied to the Department's questionnaire. Rightly or wrongly, most businessmen regard the Government's proposals for control of prices and profits in the recently published code as a real disincentive to new investment.

Mr. J. Bruce-Gardyne (South Angus)

Do you?

Mr. Healey

I am saying that, rightly or wrongly. As the hon. Member knows, it is the view of business which on this issue will determine whether there is investment.

At present we face punitive interest rates. Some hon. Members do not fully recognise that with interest rates—particularly for some of the smaller companies—running at 12 per cent. to 14 per cent. and the normal rate of return on capital for quoted companies being only 13.6 per cent., it is impossible for a small company to borrow with any chance of repaying both its interest and capital as a result of its investment. The Chancellor made it clear yesterday that he expects interest rates to remain high and probably to go higher in the coming year, rather than to fall substantially.

In addition, the whole of business was deeply shaken last week by the threat of a joint Common Market float which would have compelled us to peg the pound at an unrealistic exchange rate and which might have led to its being dragged up further, along with the deutschemark and other European currencies. Business feared that if we were to go into such a joint float we would be compelled willy-nilly to meet any future attack on sterling by deflation rather than by dropping the rate.

I confess that I found some comfort in what the Chancellor had to say on these matters yesterday afternoon. The conditions that he has set for joining a joint float are so unrealistic as to be clearly unacceptable to any of our partners. What is he asking for? Here is the Chancellor, who yesterday announced that he plans that spending over the next 12 months should exceed revenue by over £4,000 million or 15 per cent., asking his business partners for an unlimited and unconditional credit. Does any hon. Member opposite really believe that borrowing is possible on these conditions?

The Chancellor made the whole thing an even greater nonsense by saying that although the purpose of this support from his Common Market partners would be to enable him to maintain sterling at whatever rate was fixed in the float, he nevertheless reserved the right to change his parity whenever he wished. I strongly applaud these conditions but I do not believe, and nor does anyone else in the House, that they could ever conceivably be met. This is one issue on which I agree with the right hon. Member for Wolverhampton, South-West (Mr. Powell) who said the other day that he did not mind the Government's being committed to European unity in principle provided they were clearly against it in practice.

If I may return a graceful compliment which the Chancellor paid me a few days ago, perhaps in more generous terms than he made it, I would like to congratulate him on choosing this of all times to expose the ambivalence of his views on European affairs. The Chancellor is asserting his right—we must all draw this conclusion from his remarks on the European currency crisis yesterday—to allow the pound to sink indefinitely. But he knows that if he actually allows this to happen it will have a disastrous impact on his whole strategy for countering inflation.

I want to say a few words about the Chancellor's second objective, so far met by sinking the pound—the maintenance of a satisfactory balance of payments position. I thought that Micawberism ran riot in what he had to say on the balance of payments and even more in the predictions made on this matter in the Financial Statement. What are the facts? Over the last three months our balance of payments deficit on current account has been running at the rate of £400 million a year.

Both the National Institute and the London and Cambridge Review estimate that by the end of the year the deficit will be running at about £1,000 million. Both expect it to get even greater in 1974. Yet the Chancellor told us yesterday that he expects the balance of payments to improve during the coming year rather than to get worse, which is the view of independent observers. He said he thought that exports would go up 7 per cent. in volume during the coming year. We cannot have very much confidence in him as a prophet on this matter, because last year he said that exports would rise in volume by 4.6 per cent. when they actually went up by only 0.7 per cent.

We learn from the Financial Statement that imports went up in volume by 10 per cent. last year. The Chancellor says he expects them to fall substantially in volume this year. Yet this is the very year when he also expects investment and stock-building to rise—when he expects to see the economy set fair on a sustained growth path at 5 per cent. I hope that the Secretary of State for Trade and Industry will explain why he thinks imports will fall in volume to this extent during the coming year.

The only explanation the Chancellor offered yesterday was that he thinks that during the year the country will have recovered from the classical blunder which he made last year when he produced an import-led boom by encouraging consumption in expensive consumer items at a time when British industry was incapable of meeting the demand. He had been warned of that by such people as Lord Stokes. As a result, last year we lost £200 million on the balance of trade in the automobile industry alone. Imports of colour television sets trebled.

It may be that the Chancellor believes that this was a once-for-all explosion and that the solid markets established by foreign exporters inside Britain will be lost in the coming year. I hope that the Secretary of State will tell us why this is so. The other day I was speaking at a conference in Munich attended by German businessmen and I heard the head of the British BMW organisation predict that he would increase imports into Britain of the most expensive BMW motor car from 1,000 last year to 10,000 this year.

There is no evidence—if there is I hope that we shall hear it—to suggest that the import boom which the Chancellor engineered last year will turn into an import slump in the current year. As he knows, if the balance of payments moves as unfavourably as most independent observers expect he can manage this only in one of three ways. He can have a big increase in borrowing from private and public sources abroad, pushing up interest rates in Britain even higher and running down our reserves. That is one option. If he does not succeed in borrowing enough, or if the reserves run out, his second option is to devalue yet again—to let the pound sink still further. That would be the coup de grâce to his counter-inflation policy. A third alternative is to adopt some form of artificial control of imports. My view is that import controls, although necessary in some situations—both we and the Americans have found them necessary at times in the past —do not help to solve the underlying problem. Indeed, they can make it worse.

Have the Government considered such an unconventional means of correcting our balance of payments as a payroll subsidy differentiated according to regions? I know that it would be unacceptable on the face of it, as every other means of meeting the balance of payments situation would be to many of our trading partners. However, in many respects it would be far preferable, particularly in its social and economic effects, to a continuing sinking of the £ sterling.

I may be wrong—of course, we can all be wrong and often are—about how the balance of payments will move.

Mr. Robert Redmond (Bolton, West)

I hope that the right hon. Gentleman is wrong.

Mr. Healey

I am sure the hon. Member does. If he thinks seriously about the problem he will try to put the same pressure on the Chancellor that I am trying to put.

Mr. Redmond

The right hon. Gentleman has been talking the pound down ever since he began speaking. He has been telling us about BMW cars which are selling so well in this country. Would it not be a good idea to tell the Jaguar workers to get back to work and to get on with the production of the XJ12 to compete with the BMW? Instead of putting forward such pessimism, cannot we have a boost for Britain?

Mr. Healey

If I were to identify one cause of our economic difficulties, I should say that it is the unwillingness of hon. Members to face unpalatable facts. If the hon. Gentleman's party shares his views, the country is doomed. Unless we can face the facts as I have put them forward—and if I have misinterpreted them it is open to Government Front Bench spokesmen to correct me—there is no chance of taking the measures needed to correct the situation.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)


Mr. Healey

No, I must get on. I shall give way from time to time. The Chancellor was interrupted only once in two hours. I do not propose to observe quite such an ungenerous ration. Equally, I do not propose to be thrown off the flow of my argument by continuous interventions, particularly of the nature of that made by the hon. Member for Bolton, West (Mr. Redmond) a short while ago.

Mr. Ridley


Mr. Healey

Whatever our predictions on the balance of payments, I think we can all agree that there is little hope of combining sustained growth and meeting our balance-of-payments problems without much better controls over inflation than we have had during the last few years. Inflation was a major theme of the Chancellor's Budget, in so far as it had a theme, and it is a major theme of the Government's economic policy at present. I shall devote the rest of my speech to discussing it.

Before I come to the prices and incomes policy by which the Government hope to control inflation, I shall look at the role of the Government's deficit in terms of the inflation from which it is now suffering. Hon. Members do not have to accept the Friedman doctrine, or even to understand it, to know that a continuing deficit on the present scale is bound to lead to inflation and to suck in excessive imports. That is beyond argument.

The £3 million tax give away, of which the Chancellor has boasted so frequently, was not met by cuts of a similar size in public expenditure. That has led to the cost of borrowing rising to quite unprecedented rates, and high interest rates hit the poor worst. Hire-purchase rates, for example, on which the poor depend critically for their purchases of so many goods, are not subject to tax reliefs like interest of over £35. Mortgages have become impossible for many young couples because of the high mortgage rates.

The proposal which the Chancellor made yesterday for meeting next year's unprecedented Budget deficit by borrowing will raise the high interest rates even higher. We shall shortly be in a position where the building societies will have no money to lend unless they can raise their rates to a level which ordinary people cannot pay. I hope that the right hon. Gentleman will say something about that. It is of critical importance to young people who have to try to get a mort- gage on a new house without having an old house to sell.

One of the new proposals for borrowing is share options for workers in industry. I regard that proposal as being a complete farce. First, it does not help the bulk of the low paid. All that they get is an extra 4p a week by way of a reduced contribution. Incidentally, they will pay much more tax than they would have been paying a year ago. It does not help those who are working in some of the industries which are most important for the country's survival—for example engineering, which has very low profit rates. I should like to know at what rates workers in the new Rolls-Royce concern will be sold shares over the next few years.

The most important thing is that public employees will not get a look in. There are no companies in which they can buy shares. The only people who can look at this proposal with any pleasure are bank clerks, because of the high rates of profit which the banks have been earning over the past few months owing to Government policy.

If there is to be any justice in share earnings there must be a generalised scheme so that everyone will enjoy part of the increase in the share values of any industry. There must be a scheme along the lines being discussed in Denmark, which is one of the Chancellor's partners in the Common Market.

In the long run, the only real answer is to bring public expenditure and taxation revenue closer together. I find it astonishing that the Chancellor had nothing substantial to say about cuts in public expenditure in the Budget. We all know how difficult it is to cut expenditure quickly. Equally, the Chancellor has learnt to his cost in recent months how difficult it is to raise public expenditure quickly.

Surely this was the time to announce a plan to bring down the percentage of our gross national product which we spend on defence to the level which our German competitors and partners are planning. This was the time to announce that we shall not go ahead with some of the expensive luxuries of public expenditure like the Maplin airport and the London motorway box to which the Government are committing themselves.

Mr. Bruce-Gardyne

Surely the right hon. Gentleman must appreciate—incidentally, I share his doubts about Maplin—that to abandon the Maplin airport project at this time would have no impact on public expenditure in 1973–74 or 1974–75, which are the years with which we are concerned. What proposal is he making for a reduction in public expenditure which would begin to have an impact during that period?

Mr. Healey

The Chancellor missed his great opportunity when he allowed defence expenditure to go up £500 million this year. After coming into office Lord Carrington boasted in his first defence White Paper that he would keep defence expenditure consistently below the level planned by the last Labour Government. Exactly the opposite has happened because the Chancellor has not exercised control over defence spending. Possibly the noble Lord chose not to do so either. In any event, we shall be discussing that next week.

Mr. Ridley


Mr. Healey

It is also necessary to increase taxation. First, the Chancellor could withdraw all the tax concessions which he has made to the rich over the last three years. He could withdraw the tax concessions which he made to companies which he now knows have had no effect on their investment plans, except possibly a negative effect.

The only new proposal that we had yesterday for new taxation was one for taxing oil profits in the North Sea. This, like the cancelling of the Maplin project, could produce no revenue in the immediate future. However, the Opposition are very dissatisfied with the limited nature of the proposals in the right hon. Gentleman's Budget. They go nowhere near as far as the Public Accounts Committee did in its recommendations. They would leave British revenues way below the revenues which Norway and OPEC are deriving from their oil. What is more they do nothing to correct the Government's many mistakes during the fourth round of licensing. I have no doubt that the Secretary of State for Trade and Industry will deal with this matter later. So will the House, because the Chancellor does not propose to do anything about it this year.

The right hon. Gentleman seems to have abdicated his personal departmental responsibility for bringing public expenditure and tax revenue into line. He made it clear yesterday that, instead, for controlling inflation he is relying wholly on his power to force working people to lower their living standards by limiting wage increases. Many of us who watched the right hon. Gentleman on television last night were disgusted by his attempt, as a responsible Minister, to pillory people for whom he is personally responsible, together with his colleagues in the Cabinet. I refer to people like civil servants, hospital ancillaries, gas workers and London teachers, whom the right hon. Gentleman described as extremists devoured by hate and envy. If ever anything was calculated to stiffen the resolve of those people to take industrial action to overcome the right hon. Gentleman's policies it was the attack that he made on television last night.

At the beginning of January, when we were told that the right hon. Gentleman intended to bring forward his Budget by a month, we were informed that his main reason for having an early Budget was to sweeten the pill of the Government's wages policy before phase 2 came into force. In this Budget the right hon. Gentleman had a unique opportunity to make his counter-inflationary policy more acceptable to ordinary people. He threw away that opportunity wantonly in the Budget that he put forward yesterday. All that he had to do was to show that he was seriously concerned to reduce the cost of living for ordinary people and introduce more equality of sacrifice in income restraint.

What has happened? The keys to the cost of living are food and housing. They account for between 40 and 50 per cent. of the average family budget, and they are elements which were rising much faster than any other element even before the freeze was imposed last November.

Let us consider the question of food. In the 17 weeks since the freeze came into force the price of food has risen two-and-a-half times as fast as it did in the comparable 17 weeks a year ago when there was no prices freeze in force. If it goes on this year at the same rate, £1 will buy only 80p worth of food next October. Its value will have fallen in food terms by 20 per cent. Yet the right hon. Gentleman still refuses to help to reduce the cost of essential foods. He still insists on cutting school milk and on raising the price of school meals. The only reductions that he offers are on peanuts, candy floss and the cheapest humbugs that we have had for 30 years.

The Chancellor of the Exchequer and the Minister for Trade and Consumer Affairs have used two arguments repeatedly purporting to demonstrate that food subsidies are impossible. First they say that they would mean rationing. That is absolute bunk. The Chancellor of the Exchequer knows as well as I do that he has been subsidising foods right up to the present time and is still subsidising some without rationing. He has been subsidising bacon until now at the rate of £11 million a year. As a result of the withdrawal of the subsidy we shall be paying an additional 3p a lb. by midsummer. He has been subsidising sugar to the tune of £38 million a year. That will go up 17 per cent. by midsummer as a result of the withdrawal of the subsidy. Incidentally the 17 per cent. increase in sugar prices will wipe out most of the effect of abolishing purchase tax on confectionery.

Mr. Ridley

The right hon. Gentleman has proposed a payroll subsidy to wages and food subsidies on an impressive scale. He has spent the remainder of his speech contending that the Government's deficit is too big. His proposals will make it even bigger. How does he propose to finance these subsidies?

Mr. Healey

That was to be my next point. If the hon. Gentleman had contained himself for a moment or two he would have sunk back satisfied—or otherwise, as the case may be.

The other argument of the Chancellor of the Exchequer against subsidies is that in the end it is the people who get the subsidised food who pay the cost of it, so that they are no better off. But he is giving up £110 million in tax to relieve ice cream, lollipops, candy floss and peanuts instead of concentrating the money on essential foods where it is most needed by ordinary families.

In the past 12 months the Government saved between £120 million and £130 million on deficiency payments which the right hon. Gentleman could have used to reduce the price of the beef and cereals to which they were previously attached. He chose not to do so—

Mr. Bruce-Gardyne

By reducing Government expenditure?

Mr. Healey

He could have used them as a direct subsidy—

Mr. Bruce-Gardyne

By reducing Government expenditure?

Mr. Healey

Much as I should like to carry on a private conversation with the hon. Member for South Angus (Mr. Bruce-Gardyne), I do not look quite as attractive in a recumbent position as he does. Perhaps I ought to continue addressing the whole House.

The Chancellor of the Exchequer has done nothing of consequence about food except about the least essential foods of which one could possibly think.

Then let us look at housing—at some of the other dogs which did not bark in the night yesterday. There is to be no suspension of the rent increases which are due to come into force just as the right hon. Gentleman's phase 2 policy comes into force. There is to be no action on tax reliefs on second houses, which would reduce the demand for houses. All that we have is the prospect, if not the certainty, of higher mortgages in the coming year.

I have no doubt that the right hon. Gentleman will boast of his £10 million in rate reliefs, but they affect only those increases which are due to revaluation alone—and only those increases above 10 per cent. That is a point which most news commentators did not get clear this morning. According to the Association of Municipal Corporations, in my own city of Leeds, for example, the rate bill will have to rise 38.6 per cent for an individual before he begins to get help from this source. In Liverpool 87½ per cent. of the population will get nothing from this proposal.

Next, I take building land. I do not believe that even the Chancellor of the Exchequer expected us to take seriously the one tiny little mouse that he pulled out of the hat on that. The only answer to speculation in building land is penal taxes on speculative profits, allied with the power of compulsory purchase if land is withheld from development. All that the right hon. Gentleman has done is to produce a tax on the failure to build on land which development has already been permitted. As the Financial Times housing correspondent pointed out this morning, this was simply a cosmetic political gimmick.

People who want to make money out of land for housing can buy land and not ask for development permission until they are satisfied that its price has gone up to the level that they want. If they have got development permission they can build a series of Centre Points on it and keep the buildings empty until they get the price on the land and the buildings that they want. The Chancellor and the Secretary of State know perfectly well that this will have almost no effect on the supply of building land, and certainly no effect on the terrifying and obscene speculative profits which some rich men are making out of the shortage of building land and housing.

On top of the Chancellor's failure to act in these areas, we have him deciding to increase the cost of living by at least 1 per cent. through the imposition of value added tax at 10 per cent. We have debated value added tax, and I will not repeat what so many of us have said, but the Chancellor had a wonderful opportunity at least to suspend the introduction of the tax—[An HON. MEMBER: "Why?"] I will tell the hon. Gentleman. Because at the present time at most two-thirds of those who should register have been registered. Thanks to the overtime ban by the Customs and Excise which the Chancellor has brought about, there is a three weeks' delay in registrations. My information is that it is unlikely that when the tax comes into force all those who have applied for registration will have been registered, and hundreds of thousands of people who should have registered will not even have applied. The Financial Secretary knows that I am speaking no more than the truth when I say that, because he is wearing the quizzical expression that he wears when he knows there is no answer rather than the eager and alert expression he wears when he is determined to leap to his feet to deny the foul imputation that I am levelling against him.

The Chancellor had a wonderful opportunity to hold up and think again about a tax which is already sending small businessmen and shopkeepers wild with worry. I can give the Minister, who is smiling with glee at the thought of bankruptcies among the backbone of Conservative supporters, individual cases if he doubts the truth of what I am saying. Many small shopkeepers are selling up because of the administrative burdens they face through the imposition of VAT. Indeed, the consequence of bankruptcies in the coming year could be serious.

I turn now to the question of justice in the Government's incomes policy. I have demonstrated that the Government are not attempting to control the cost of living for ordinary people in terms of land and housing. Only one major category of the poor is to get help from the Budget—the old-age pensioners. I think that the whole House is grateful to the Chancellor for what he has made possible in this respect, even though those on this side of the House would have wished it to go further.

The Secretary of State for Social Services confirmed this afternoon that when the increase comes through, old-age pensioners will be getting about the percentage of average earnings which has been normal over the last 20 years, namely, 20 per cent. That is a little less than it sometimes was and a little more than it sometimes was. Many of us believe that that percentage, in a rich country—we are very much richer now than 20 years ago—is far too low. The old-age pensioner is allowed a much smaller increase than the £1 plus 4 per cent. allowed to the lowest-paid worker. We would certainly wish to see this substantially improved.

For the rest of the poor population, all that is offered is a small increase in the family income supplement, affecting about 70,000 families, because the take-up is even now only about 50 per cent., and a reduction of 4p on the national insurance stamp, which no doubt will be used to buy shares in profitable companies.

As against this—in my view this is the real crime of the Budget—the Chancellor has refused to raise the tax threshold after a year in which prices have risen more than in any year since the war. This was the one year that he chose not to raise the tax threshold. The result is that at least 1 million people who were taken out of the tax into which they had been plunged by inflation last year are now pulled back into tax, and another 1 million will be plunged into tax in the coming year because the Chancellor has chosen to do nothing at this time. Of course, the £1 a head about which the Chancellor boasted last year was wiped out long ago by the inflation over which he has presided. The Chancellor will collect about £600 million during the coming year from people who would not be paying tax at all but for inflation.

More brutal still is the Chancellor's refusal to raise family allowances, again in a year when prices have risen faster than in any year since the war and food prices much more than ordinary prices. For the Chancellor to pretend—as he did on television and radio last night—that he is showing concern in his Budget for the lower-paid worker is a cruel deception of millions of our people. The extraordinary thing is that he is choosing this year to refuse to raise the tax threshold and family allowances—the very year when he still insists on giving away £300 million, in the main to people living on investment income or on over £5,000 taxable earned income a year. The benefit to others from this £300 million relief is to be measured only in pennies.

Mr. Adam Butler (Bosworth)

I am sure that the right hon. Gentleman does not want to mislead the House or the country. Indeed, I know that he would not wish to exacerbate the present industrial unrest by misrepresenting the so-called surtax benefit. Is he aware that all surtax payers this year and for the next two years will be paying more in tax? For example, the surtax payer with an income of £10,000 will be paying £1 a week more in tax. At the £20,000 level he will be paying £1,000 more this year, and for the next two years. Surely this is not unfair.

Mr. Healey

I was well aware of that—[Interruption.] The hon. Gentleman must curb his impatience. He has been very patient so far. If he will be patient a little longer all will be made plain.

The tax reliefs on these high incomes are even more than appears from the Financial Statement. For these people to get the equivalent in earned income would require much higher wage increases than the tax reliefs show.

I have often quoted the case—I do not think the House will blame me for doing so—of an unmarried man earning £15,000 a year taxable income, like the Prime Minister. Starting on 1st April he will get an extra £6.20 a week in take-home pay. To get that amount extra in take-home pay from earned income his income increase would have to be £17. The Prime Minister insists that the maximum wage increase for any worker should be £5 and that the average wage increase should be £2.50. Yet he is getting benefit from the Chancellor equivalent to a £17 wage increase with no apparent improvement in productivity.

Let us consider some of these individuals, because we are told that they do not really exist. Let us consider first the Chairman of ICI. Last year he had his income increased from about £48,000 to about £66,000. That was an increase of £18,000 awarded by his shareholders. On top of that, from the Chancellor of the Exchequer he gets an increase of £1,000 in take-home pay by way of tax relief.

Let us consider next a less wealthy person, the Chairman of Guest Keen and Nettlefolds. He has a salary of £37,000 a year, and I guess that he probably has at least £1,000 by way of investment income as well. If he has not, no doubt he will write to me to say so. He gets £35 a week, or £700 a year, in take-home pay this year as a result of the Budget which the Chancellor says is the basis of justice on which he is appealing to the country. I am glad to inform the House that last year GKN gave £33,000 to the Conservative Party. I am sure that it will warm all our hearts to know that there is still some gratitude left in politics.

Mr. Christopher Tugendhat (Cities of London and Westminster)

Now tell us your salary.

Mr. Healey

My salary is the same as yours.

Mr. Deputy Speaker (Sir Robert Grant-Ferris)

The right hon. Gentleman is mistaken—mine is more.

Mr. Healey

I agree, Mr. Deputy Speaker, and I regret that I did not recognise that the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) was making a personal inquiry of Mr. Deputy Speaker rather than of me when he made his interjection.

The plain fact is that the whole of the Chancellor's tax policy belongs to what is now a bygone age in the history of the Conservative Government, the age of confrontation. The whole of the Chancellor's tax policy is pulling in the opposite direction from his new economic strategy. The imputation tax is intended to encourage the distribution of dividends while at the same time the counter-inflation policy is trying to discourage their distribution. VAT will increase the cost of living while the counter-inflation policy is trying to hold it down. The tax reliefs of the new unified system at current rates will create gross injustice at a time when the Chancellor must try to persuade people that his policy is fair.

I believe that the Government are right to abandon the market economy approach. I believe that they must protect the public and the State against the blind brutality of the so-called laws of supply and demand. But I warn the Government that if they decide to adopt Socialist methods for controlling the economy they will find that they cannot stop just where they would like to stop. A twentieth century economic machine cannot be run smoothly with Selsdon Man in the driving seat. That way lies not a Socialist society but the corporate state of Hitler and Mussolini.

If the Government want to get consent for their new policy, if they want to make their counter-inflation policy work without force, they must learn to understand the needs and aspirations of ordinary men and women, and this has been their great defect through all their tergiversations in the technical economic field. Consent will not be achieved by this or any other Government unless Socialist economic techniques are allied to Socialist moral values.

The Budget represents a reversal to the Neanderthal period in the history of the Government. The Chancellor is giving £300 million mainly to the rich, while the poor are being asked to pay £500 million to £600 million in tax which they should not have to pay. Relief is given on lollipops and candy floss, but school milk is cut—[interruption.] Hon. Gentlemen on the Government side should try to understand how ordinary people feel about this issue. If they cannot understand it, they should go down to a picket line at a hospital and see ordinary men and women who have a great sense of public duty goaded beyond endurance by the Government's failure to understand their problems.

While the Government are wrecking their economic strategy by sticking to a social attitude long outdated, the fundamental problems of the economy are being left over until they can make up their minds and pluck up the courage to do what is necessary. The last two days have made fairly obvious the Prime Minister's "game plan". He is treating this as a mini-Budget and plans to have the real Budget in the summer or in the autumn after a Cabinet reshuffle so that Ministers do not have to eat their own words.

By throwing away any chance of making his counter-inflation policy work—and that is what he has done—the Chancellor faces the risk of having to introduce a tough Budget perhaps in the middle of the new balance-of-payments crisis predicted by outside observers, and certainly at a moment when all his prices and incomes controls are breaking down and he is compelled, whether he likes it or not, to introduce a much looser phase 3 policy than the tough policy for phase 2.

The way that the Chancellor has handled his responsibilities in this Budget is more than a crime. It is a blunder of the first magnitude, and there will be very few in our land who will not have to pay the price for it.

5.16 p.m.

The Secretary of State for Trade and Industry (Mr. Peter Walker)

I suppose that as that was the first speech of the right hon. Member for Leeds, East (Mr. Healey) following a Budget, in the same way as he congratulated the Chancellor I should congratulate the right hon. Gentleman. There were moments when I thought that he was going to speak for rather longer than the Chancellor did yesterday.

The general tone of the right hon. Gentleman's remarks are a change from his pre-election utterances. For example, in one of those lively articles in Socialist Commentary before the last election he said: When I go into these Labour clubs in my constituency on Saturday night, four out of five complaints are that income tax is too high and that we should not pay out so much in family allowances. The right hon. Gentleman will have a pretty rough night this Saturday after his speech today.

It was rather remarkable that the right hon. Gentleman said that having studied the manner in which Shadow Chancellors had tackled this task in the past, and having found that normally they listed the inaccurate calculations of the Chancellor's previous Budget, he had decided not to do that on this occasion. I do not blame him, because many of the major calculations of the Chancellor were correct on this occasion.

I can understand the right hon. Gentleman's being hesitant about having an exchange on the predictions of the last Budget, because he took a hand in and made some predictions about how the last Budget would work out. The right hon. Gentleman said: we cannot look forward to any significant fall in unemployment over the coming year. That was his first prediction, and he was massively wrong, as he kindly conceded.

The right hon. Gentleman went on to say: There is no sign whatever of that sustained and faster growth which he confidently predicted as a result of his three previous Budgets. Why should there be any confidence in his prediction that we shall get faster growth as a result of this Budget? We were delighted to hear again his confession that there had been a faster growth.

The right hon. Gentleman then said that for large sections of the working class there must have been a fall…in living standards."—[OFFICIAL REPORT, 20th April 1972; Vol. 835, c. 797–800.] As we know, in real personal terms of disposable income there has been a bigger improvement in the standard of living in the last 12 months than in any year since the war.

As for the predictions and the accuracy of the forecasting of the Shadow Chancellor—of course, most people do not take much notice of the forecasts of Shadow Chancellors—he then started on a remarkable record of inaccurate forecasting of the effects of Budgets. One has some sympathy with the dilemma of the Shadow Chancellor and the Leader of the Opposition in tackling a Budget such as this. When the right hon. Gentleman started talking about an autumn Budget—a later Budget was also mentioned by the Leader of the Opposition yesterday—one or two former Chancellors present were seen to twitch and look slightly guilty as to their record in this pastime.

When they are representing a party that, in its six years, had 10 Budgets, in eight of which they raised taxation, one can understand their difficulty. To the right hon. Gentleman, this is not a real Budget, because the only real Budget that a Socialist Government understand is one that increases taxation. This one is certainly typical of Conservative Budgets in not doing that. Here we see an Opposition that in six years of office raised taxation by £3,000 million trying to oppose a Government who, in their three years, have reduced taxation by £3,000 million. We have an Opposition during whose period of office the rate of growth fell from 5.6 per cent. to 1.9 per cent. trying to oppose a Government who, in their period of office, have increased the rate from 1.9 per cent. to 5 per cent.

There are difficulties. The whole tenor of the Opposition's case, both yesterday and today, is roughly this, "We do not like growth, because that might adversely affect the balance of payments. We do not like savings because that might help to reduce taxation." One almost expected to hear them say, "We do not like these enormous increases which you have made in the old age pensions, because that is an increase in public expenditure." They did not do that.

As for the percentage earnings argument on old-age pensions, I expect the right hon. Gentleman felt a little twitch of guilt about that ridiculously selected statistics about some date in 1967. If, after six years of a Labour Government in which they raised pensions by £2.65, compared with three years of Tory Government in which we have raised them by £4.40, the real condemnation of us is that the percentage of earnings has varied, then in six years of Labour Government earnings must have had a pretty bad time if that is all they could do for the pensioner. It is interesting that they showed no regret for the remarkably bad record that they had towards the pensioners in six years.

As for the general forecasts of the coming year, the right hon. Gentleman—I thought surprisingly—went out of his way to give the gloomiest picture he could of our export prospects. It was remarkable that the Leader of the Opposition referred yesterday to the Chancellor's predictions of exports as being unusually complacent. The statistics that the Shadow Chancellor tried to use on exports, giving the impression that the forecast of 1972 had not been met, failed to convey to the House something which, presumably, as Shadow Chancellor he must know—the remarkable growth which has taken place in past months and is now taking place in exports.

In ridiculing the Chancellor's forecasts—I believe that there was an 0.7 per cent. growth in exports over the past year, instead of the 4 per cent. expected growth—the right hon. Gentleman did not tell the House that in the last quarter of 1972 exports—in volume, not price—were 12 per cent. higher than in the last quarter of 1971—a very real increase of substantial proportions. The figures since then are improving still faster. The January figures were about 22 per cent. up, in value, on the previoius year, and we expect the March figures to show a substantial improvement upon the same quarter of last year.

Turning to the position of world trade, the United States is certainly going in for a period of substantial growth during this coming year, which will present considerable benefits to our exporters. Last year our exports to America were 11 per cent. up. Our exports to Europe are rising faster, and last year were 15 per cent. up on the previous year. There is Ito doubt that there is an immense amount of activity by British business throughout the European market, which will result in substantial increases in exports there.

We are achieving considerable growth in a number of Far Eastern markets. I predict that the markets in the Far East and those in Africa and South America will be rising far faster in terms of export trade than anything that has been contemplated in the past. And Britain is taking an active part in these spheres. Later this month Britain is to put on probably the biggest outside trade fair which has ever taken place in Communist China. The activity of British businessmen throughout the Far East is accelerating our exports there. The same is true of Eastern Europe.

There are other factors which are important for our export prospects. First. we are achieving a substantial improvement in our services to exporters. The British Overseas Trade Board is far more active in promoting export trade than anything which has been seen in the past. Our commercial counsellors there are constantly being strengthened and they are far more active. The link-up with manufacturers is doing a great deal, too.

When one adds to this the fact that, in this country, with the Export Credits Guarantee Department, we have probably the best export credit services in the world, plus the positive incentive to exports of VAT and the fact that in phase 2 there is a considerable advantage to the exporter in the application of that policy, there is no doubt that the prospects for exports in the coming year are very good.

That is not just a view of the Department, or the Chancellor, or myself. For every businessman who expects a decline in his export orders during 1973 there are six who expect an increase. The latest survey shows that, for everyone who expects export orders in the coming four months to go down, 14 expect them to rise. In a range of commodities—farm equipment, aerospace products and wool textiles—our exports are expanding remarkably.

We should add to this the exciting way in which a number of our major retailing organisations are setting up retail organisations in Europe and the United States, taking with them large volumes of British goods. This all adds to the confidence that we have in the progress of exports during the coming year.

But that, of course, is only part of the picture. I want now to turn to the other pessimistic picture of Britain that the right hon. Gentleman tried to provide when he spoke of the depressing position of industrial investment and current industrial conditions. Let us examine what has happened. The Opposition do no good at all by trying to give the impression that the British economy is doing far worse than it is. They do positive harm both to business confidence and to our prospects abroad. Let us have a look at the current state of the service industries—

Mr. Healey

If the Secretary of State really takes that view, will he persuade the Chancellor to withdraw the Financial Statement 1973–74, because I based my statistics entirely on figures that the Government provide there?

Mr. Walker

The trouble with the right hon. Gentleman is that since he has taken on this job he has spent too much time reading books and figures; when he does that, the trouble is that he does not understand what he reads. That puts him at a grave disadvantage. Let me give the right hon. Gentleman some of the facts and figures which he might have looked up before making his depressing speech. He might, for example, have studied the machine tool industry's latest available figures, for the third quarter of last year. The figures show that orders for that industry were the best ever received in its history, for the third quarter of last year. The right hon. Gentleman might then have turned his attention to the engineering industry, where orders have been fast rising. The November figures, which are about to be published, show that export orders in November were 33 per cent. up, and they show a 37 per cent. rise in home orders.

Mr. Neville Sandelson (Hayes and Harlington)

But this is recovery from a low base.

Mr. Walker

The recovery from the low base has reached such a stage that these are all-time record figures. Engineering and machine tool orders are higher than those of any time in the six years of the Labour Government. In terms of recovery from a low base, this is a remarkable recovery.

Mr. Joel Barnett (Heywood and Royton)

I do not know whether the right hon. Gentleman is disagreeing with the Chancellor, but will he apply his mind to total manufacturing investment and not a single sector? The Chancellor has told us that after an 18 per cent. fall in manufacturing investment, it will rise, on his forecast, by from 2 per cent. to 5 per cent. But the Chancellor got last year's forecast rather badly wrong.

Mr. Walker

I am giving the facts of what is currently happening in British industry. I have mentioned machine tools and engineering. Let us now look at the shipbuilding industry. In the last quarter of last year the industry obtained more orders than it obtained in the previous nine months. In the first two months of this year it has obtained more orders than it obtained in the previous two years.

The commercial vehicle industry has the highest ever home orders. The steel industry is reaching record production.

Productivity in the coal industry is fast increasing. The North Sea is the fastest developing oilfield in the world when compared with oilfields in anything like similar conditions. It is bringing a great deal of investment activity in Britain. Therefore, considering the latest forecast of businessmen, one is not surprised that for every businessman who had lower orders in the last four months 37 had higher orders. The optimism of businessmen is shown in every survey.

What of the effect of this situation in relation to investment? First, the investment conditions provided by the present Government are better than those provided anywhere in Europe or in the United States. The effects of free depreciation will be considerable as the investment boom develops. Already the regional policies pursued by the present Government have resulted in substantial reductions in unemployment in the regions. The operation of the Industry Act as a further instrument in encouraging investment is beginning to have substantial effects on a number of industries. We shall be investing about £300 million a year in North Sea oil in the coming years. We have announced the steel industry modernisation programme, again with an investment of £300 million a year.

Mr. Tam Dalyell (West Lothian)

Does the Secretary of State consider it wise to bring to an end the regional employment premium? He was specifically asked about this by my right hon. Friend the Member for Leeds, East (Mr. Healey). Does not he agree that this is an important factor in any confidence that industry has, and that it is to be regretted that it has been brought to an end?

Mr. Walker

We have stated that we shall discuss the basis of phasing out regional employment premium with industry. These discussions are taking place at present. There is no doubt about the high rate of investment being achieved by the regional policy.

I am also pleased to tell the House that some of our major industries are announcing major increases in their investment programmes. Imperial Chemical Industries has just announced an investment programme for the next two years which is substantially higher than its programme has been for some years past. Courtaulds is investing about £90 million in the coming period, £60 million of which will go to assisted areas. Coming to British Leyland, seemingly the right hon. Gentleman was suggesting that Lord Stokes in some way did not want the increase in purchasing power for the motor industry to take place so quickly. All that I can say is that in view of what has happened in the consumer purchase of motor cars Lord Stokes has decided that although for some years now he has been investing £50 million a year in new factories and equipment, in the coming two years that sum will be doubled to £100 million a year.

Mr. Healey

The right hon. Gentleman does not want to be unfair to Lord Stokes. Lord Stokes' complaint did not relate to investment. Far from it. It related to the point—the right hon. Gentleman must know this—that at a time of a colossal increase in demand for motor vehicles, the industry did not have the capacity to meet it. As a result, it was able to export far less, as it was meeting home demand. Imports rose to a terrifying degree. Many foreign manufacturers were able for the first time to establish themselves firmly in the British market.

Mr. Walker

I do not remember British motor manufacturers ever saying, "Will you do less to increase demand than you are doing." What they said was, "We have had ghastly stop-go conditions under the previous Government which have done a great deal to undermine our confidence." I am glad that that confidence has now been resumed.

In all the major sectors of British industry not only are we now getting a strong push in exports; we are getting the very strong investment programmes that the economy needs. Perhaps the most important thing in my right hon. Friend's Budget yesterday was that he clearly committed the Government to continue upon a policy of growth in Britain. The one thing that would in any way have detracted from confidence was a Government that had decided immediately to start cutting back, when the present Government's policies are resulting in a considerable rise in exports and a great volume of sound investment and modernisation is about to take place.

Mr. Timothy Raison (Aylesbury)

Is it not relevant that the one area in which the Shadow Chancellor said that there should be big cuts in public expenditure was the defence programme—the right hon. Gentleman talked of £500 million—and that if those cuts took place this would have a very damaging effect on the industries which my right hon. Friend has been discussing?

Mr. Walker

Certainly this could well be a factor. But most people, certainly on this side of the House, and many people outside it, will agree that the right hon. Gentleman's record as Secretary of State for Defence does not warrant our paying much regard to what he says on defence matters.

The climate of British industry at present shows confidence. There is now the assurance given by the Budget that growth will continue, and at a considerable pace. That also applies to investment.

Many people in the business community are now taking much-needed action to meet these problems. They should be encouraged by the message of the Budget that consumer demand will continue, that the very high incentives for regional development will continue, and that the very high incentives for investment including free depreciation will continue—this in a period when world trade is expanding and when our export effort is doing very well. This is the first time for many years that the British economy is experiencing the effects of sustained growth. I hope that we shall have less of the moanings and uncertainties that tend to occur during such a period. There is always a tendency by certain sections of the Press and the business community to show more gloom in a boom than they show depression in a recession, and this at a time when we can, for the first time, break through with sustained growth in this country. It is vital that that tendency is quashed.

Mr. Bruce-Gardyne

Surely the recent comments of the CBI have not really been concerned with gloom in a boom but with the impact of the Government's counter-inflation policy, and on the ability of industry to earn profits to finance future investment. That cannot quite be dismissed as a question of gloom in a boom.

Mr. Walker

Whenever one meets members of the CBI at present and asks them individually how their order books, investment programmes and export prospects are going, the great majority answer with considerable confidence that they are looking very much better. This is shown by their present surveys, which show a more remarkable degree of optimism than anything one has seen from the CBI for a very long time.

As to fears about the investment programme, during our consultations about the Price and Pay Code we shall pay particular attention to the question of its possible effects on investment.

As the Government have repeatedly said, and as our policies have shown, we are anxious to encourage new investment to the maximum possible extent in the interests of sustaining growth. Although, therefore, we shall do everything to keep prices down in the next stage of the counter-inflation policy, we intend to do so in a way which does not harm investment. We shall be prepared to listen carefully to views of industry and the City on this important aspect of the code.

I wish to bring to the attention of the House the basic difference in philo- sophy towards economic growth that is developing between the two major parties. Not one passage in the speeches of the Leader of the Opposition and the Shadow Chancellor showed that the Opposition are in any way any longer committed to a policy of growth. As for the reference to historic documents, if an historic document on growth is required I recommend hon. Members to turn up the National Plan, published at the beginning of the last Labour Government. They can there see how completely the objectives expressed in every chapter failed and were not achieved by the Labour Government.

Judging by the remarks of the two right hon. Gentlemen about public expenditure and taxation they abandon the policy of growth. There was a remarkable absence from both speeches of any mention of the policy of nationalisation and the part it has to play. In a number of Press hand-outs and documents the Labour Party committed itself when in Government to nationalise no fewer than eight major industries, ranging from pharmaceuticals, the banks, motor insurance, North Sea oil, through a whole range of other industries.

I hope that at some time during the debate, when talking about the whole position of public expenditure and public borrowing, we shall hear how the philosophy of a substantial extension of nationalisation and public ownership will fit in with these plans.

As for the encouragement of investment, judging by the manner in which the threat of nationalisation and its final achievement completely destroyed for five years the investment programme in the steel industry, I hope that the Labour Party will be a little more careful when, for example, in its nationalisation package it includes industries such as shipbuilding, in view of the major damage it is likely to cause to the investment freedom of such industries.

Mr. Dalyell

As the right hon. Gentleman is on the question of the borrowing requirement, may I ask whether he has any serious reflections on the effect of an increase of this size in the borrowing requirement on the rate of interest later in the year?

Mr. Walker

I believe that in terms both of borrowing requirement and public expenditure the Opposition completely fail to see the effects—the diminishing adverse effects—that such features had during a period of sustained growth.

Mr. Denis Howell (Birmingham, Small Heath)

Answer the question.

Mr. Walker

I am sorry that the hon. Gentleman does not understand that there is a close relationship between the success of growth and the impact of high interest charges at present, added to which I believe that one of the important aspects of bringing down interest rates is the effect it will have in helping to ensure the success of our policy of counter-inflation.

The Labour Party remains preaching now that it formerly practised. Opposition Members are advocates of higher taxation, far less growth, and more nationalisation. They ignore the reality of our present boom, the fall in unemployment, and the real improvement in people's standards.

This traditional choosing of people such as the Chairman of ICI and the Prime Minister is pointless. I am sorry that the right hon. Gentleman left out the Leader of the Opposition. I will tell the right hon. Gentleman, for his trip round Leeds on Saturday night, exactly what has happened to some of the people he mentioned as being the worst hit. This has happened to them as a result of our taxation policies and the growth of the economy which has taken place.

During the two years to October 1972, due to tax changes introduced by this Government and increased earnings, the take-home pay of Post Office workers—that is, the postal and telephone manual workers—rose by 36 per cent., which was double the rise in the cost of living, at 18 per cent., which took place during the same period. Can right hon. and hon. Members opposite point to any two years under the Labour Government when such a thing happened?

The right hon. Gentleman said that the health service ancillary workers were driven to terrible conditions. Let us consider how we drove them after we came to power. From October 1970 to October 1972, taking their take-home pay—

Mr. Denis Howell

Take their wages.

Mr. Walker

I shall be only too pleased to take both. Their take-home pay rose by 34 per cent. during that period.

Mr. Howell

From what?

Mr. Walker

From the position they were suffering under the Labour Government. It is a remarkable piece of hypocrisy on the part of Labour Members for them to say how sorry they are for these workers, when during six years of the Labour Government the biggest increase those workers received was 95p; yet they can have £2 next week.

The British people have benefited from the real growth that has taken place. The Labour Party, so long as it clings to the policies that failed in six years of a Labour Government and tries to create gloom in the time of the fastest economic expansion that we have enjoyed for years, the best export performance we have enjoyed for years, and a very considerable increase in investment, shows how completely out of touch it is with economic reality.

5.48 p.m.

Mr. Jeremy Thorpe (Devon, North)

The Shadow Chancellor congratulated the Chancellor of the Exchequer on the delivery of his Budget. With those congratulations I wish warmly to be associated. The Secretary of State for Trade and Industry congratulated the Shadow Chancellor on his first appearance at the Dispatch Box in this rôle. I wish to be associated with that too. As the right hon. Gentleman has made his first appearance in this rôle too, and as I have taken part in rather a lot of debates from this place, I feel that I am in a position to congratulate him. All of this is on the basis of Greek politics—you scratch my back and I will scratch yours or I will scratch your eyes. On that note at least we can all be fairly non-controversial.

The first point that I find rather difficult to understand is why we should have had an early Budget. It is true that it has enabled the Chancellor of the Exchequer to make certain decisions about VAT before 1st April. That is accepted, although that could have been done by a statement or by other measures without the full machinery of the Budget being introduced.

Most hon. Members—this is true of all parts of the House—believed that the Budget would be introduced early because it would be a psychological weapon in the Government's hands in dealing with phase 2 and would be a clear indication to the nation as to the signposts which the Government proposed to follow. If it be right that the Chancellor's own tests are that the Budget shall contain inflation and maintain growth, with those two objectives I am in wholehearted agreement. I think, therefore, that the strategy is right.

Where I criticise the Government is that I think their psychology is wrong. The Chancellor of the Exchequer kept saying that this is a neutral Budget. As far as I am aware, a neutral Budget is one in which the Government give back as much as they take. Table 16 shows that the total reduction of net receipts is about £120 million. Taking into account the fiscal drag whereby inflation causes the tax revenue to claw back, because it is progressive in nature, at a faster rate than the gross national product, it is fair to say that the fiscal drag will produce between £400 million and £500 million over and above what the Chancellor is at this moment estimating, as against his so-called giving away of £120 million.

It is therefore not, in my view, a neutral Budget. It is a deflationary Budget. It may well be that it is that very quality which will defeat the objective of the Chancellor to get 5 per cent. growth. I think it may knock as much as ½ per cent. off the growth rate in the coming year. I hope that is wrong, but I believe that to be the case. It is for that reason that the Economist on 3rd March, subject to the Government's accepting certain anti-inflationary measures with which I do not wholly agree, none the less took the view that in the present climate the Government could remit as much as £800 million in taxation in this fiscal year.

Where I believe the main criticism can be made of the Budget is as follows. My colleagues and I supported the Labour Government and voted for the Labour Government's attempts to introduce a prices and incomes policy. We did not think it was perfect but we felt that the discipline of some measure of restraint in prices and incomes was the price that one had to pay for full employment. Unfortunately the Tory Opposition at the time did not give such support, and predictably when the rôles were reversed a Tory Government tried precisely the same thing, albeit in a slightly different context, and the then Opposition opposed it. Predictably the Liberal Party, being consistent, voted for both attempts.

Despite the groans with which truth is sometimes received in this House, as a Liberal I feel that one is entitled to say to the present Government that as important as the mechanics of the Budget is the psychological impact of this Budget in convincing people that the present Government, who are asking for a measure of restraint, are running the economy in a way which is seen manifestly to be fair. If they can do that, it seems to me that this is a vital weapon in phase 2.

The first criticism that I would make is that I think this Budget does far too little to attack poverty. I naturally welcome the zero rating of VAT on childrens' clothes and on food. I hope the Chancellor will forgive us if we do not indulge in a wave of gratitude to him, because I do not believe one should congratulate and thank Chancellors for abolishing taxes which they have mistakenly introduced the year before. None-the less that is a move in the right direction, and we hope that the Chancellor will be able to solve the problem of ladies of advanced years who have the same measurements as children aged 12. I was pleased to learn that he is not prepared to refer that matter to the weights and measures inspectors.

Likewise I believe that the right hon. Gentleman has made a start towards dealing with those who hoard land, although I believe that he has adopted a very blunt instrument and I should like to suggest more effective ways of dealing with it, which I shall do presently.

One also welcomes the increase in pensions, although I happen to believe that the point made by the hon. Member for Oldham, West (Mr. Meacher) was perfectly correct: that one is entitled to see what is the linkage between pensions and overall industrial earnings. I believe that the percentage linkage ought to be very much higher. I shall say a word about that in a moment.

I welcome and give unqualified support to the wider share ownership proposals, which are long overdue and which, I hope, will be the beginning of a move in this country to make the free enterprise system something which is not the product of monopoly capitalism but is something in which many people have a share.

Mr. Dalyell

I should like to be clear about the nature of the shares proposed. They have no voting rights; there are no dividends; they produce a situation in which people are less mobile between firms. Perhaps these are not the shares which the right hon. Gentleman's party has advocated.

Mr. Thorpe

I am aware that there are certain defects, but one advantage is that it is not possible for people to put in their savings and lose them. I believe that we have to go very much further. That I accept. I should like to see the Companies Acts amended so that workers have precisely the same voting right as shareholders have. I should like to see a dual board system, as there is in West Germany, where workers have a real stake in the running of the firm. I should like it to be possible for workers' votes to sack directors as shareholders' votes can. I should like to see the French system adopted whereby a certain proportion of profits are free of corporation tax if they are paid into a savings account on behalf of the workers and are subsequently transferable. All of these things are long overdue.

I have been in favour of these things for many years. When one sees a Government going a little way in that direction it is churlish to refrain from welcoming not the repentance of a sinner so much as a total abstainer going in the right direction.

Where I believe that the present Government lack the human psychology which, if I may say so, has been conspicuous from time to time by its absence in this Government is that I do not believe, when we are asking for restraint in prices and incomes, that this is the moment to carry on with the £300 million worth of benefit which the unification of the unearned and surtax arrangements has designed for this year. If ever there was a time for postponing or for reducing the total sum if the Government want to win the battle of prices and incomes, it is this year.

When the right hon. Gentleman spoke, one might have thought that everything in the garden was perfect. But what we must realise is that, without going into the merits, we are faced with a situation of confrontation between the Government and organised labour. We are in the middle of a go-slow on the railways. We have the knowledge that the TUC has voted for a one-day general strike. I believe that unless we can get a new deal and a package between the Government and the trade unions—and both sides have got to give—despite the optimism which was apparent in the right hon. Gentleman's speech, on the basis of this confrontation the economic future of the country will be very bleak indeed.

Therefore, I believe that the Government should have attacked poverty by doing something about children's allowances for the first child. This would cost something of the order of £250 million and could be well afforded within the present context of the Budget. I do not believe that it would have been inflationary.

The Government could have said something about the need for guaranteed minimum earnings of, say, £20 a week which would increase the wages bill of the country by only 2½ per cent. Perhaps it could be slotted into the completion of equal pay for equal work when that Act becomes operative. If the Government could have done this, and if they could have indicated that they are waiting for the report of the Select Committee on credit income tax and that they believe that housing and rates should be brought within the purview of credit income tax, they could have begun to indicate that they are genuinely anxious to help the lower paid. If they had done that, their chances of getting an agreement would be considerably enhanced.

Let us remember that it is not the Labour Party which is interested in the plight of the lower-paid worker. The Labour Party does not care a damn for the lower-paid worker. It will back every claim for £15 and £20 a week or more for people earning £36 a week, but not for the 3½ million people earning less than £20 a week, not for changes in the differentials which would bring up the minimum earnings of the lower-paid worker. The Labour Party today is the party of the higher-paid trade unionist. That is why in my constituency average earnings are exactly half the average earnings of the gas workers in this country, and that is why I have less sympathy for the gas workers than I have for the lower-paid among my constituents.

Mr. Sydney Bidwell (Southall)

What authority has the right hon. Gentleman for that assertion, marring what I considered an otherwise excellent speech? He says that the Labour Party—these were his words—is opposed to higher earnings for lower-paid workers. What possible authority has he for saying that?

Mr. Thorpe

Si monumentum requiris circumspice. Every time there is a wage demand, however high, however unreasonable, however inflationary, automatically the Labour Front Bench, provided that it is in opposition, will back it. When in government, the Labour Party was pressed—[Interruption.] We had a superb example in the right hon. Member for Bristol, South-East (Mr. Benn)—Wedgwood was for the rule of law, and Benn for those who broke it. We had the case of the dockers. We now have the reaction of the Leader of the Opposition to the gas workers' case. [Interruption.] There has been no occasion when pressure put on the Labour Party to bring in guaranteed minimum earnings for the low paid has had any response whatever. I remember doing it time and again when there was a Labour Government.

For that reason, it will not be either the Labour Party or the trade union movement as at present constituted which will see any change in differentials, and only when there is a change in differentials will the position of the lower paid, which in many cases is pitiable, be brought up to a proper level.

The Liberal Party has just carried out a six-months' survey of the plight of the low-paid. For example, we found that secretaries in County Durham have £10 a week take-home pay. Men work five days a week in the catering trade in South-East England with £12 a week take-home pay. These people and their like, together with pensioners, are the present casualties of inflation. The Labour Party may express its concern for pensioners—I acknowledge it to be wholly genuine—but as regards the low paid all I can say is that one has to judge the Labour Party by what it has done and by its present example.

Mr. Joel Barnett

A few minutes ago the right hon. Gentleman said that the situation would be bleak unless the Government's counter-inflation policy worked. Does he think that it will help to settle the gas dispute, for example, if he simply tells the workers to go back without any increase?

Mr. Thorpe

I ask the hon. Gentleman to cast his mind back to the Labour Government's short-lived attempt when in power. He will realise that, if and when there is a freeze, exceptions cannot be made. If an exception is made for any particular category, exceptions have at once to be made for the lot. Having voted for phase 2, I accept that it permits no exceptions save—[Interruption.] I do not know whether the hon. Member for Heywood and Royton (Mr. Joel Barnett) wishes merely to shout or wishes to elicit information. I assume the latter. The Government have suggested certain increases as the norm in phase 2, with percentage increases in exceptional circumstances. Either one makes an exception in every case which comes up or one maintains a policy which will admit of no exceptions. I believe that the latter course is right and, having voted for phase 2, I believe that that position must be obtained.

Later, in phase 3, I hope that we shall move into the situation in which there are plant bargaining and productivity agreements. At that stage also I hope that it will be decided—I am sorry that the Government did not accept it at the Report stage of the Counter-Inflation Bill—that any profit-sharing in a company should be totally exempt from the provisions of the Bill.

The time has come—here I agree with the hon. Member for Oldham, West—to link pensions to average industrial earnings. My colleagues and I have long advocated that the pension for a married couple should be half of average national industrial earnings and for a single person it should be one-third. That would produce pensions at present of about £18 and £12, respectively. Those figures are not high in comparison with some of the social security benefits provided elsewhere in Europe today. The idea that we give an inflated, generous, philanthropic sum to pensioners in this country is totally without foundation.

The Government say that they want to convince the lower-paid workers that they are genuinely anxious to improve their lot. I do not believe that there will be a grateful march down Whitehall of men earning under £24 a week who are now to be saved 4p a week off their national insurance contribution. This is not the beginning of the millenium for them.

As regards land, we have not yet learned who is to be surcharged, the owner or the developer. If it is the owner, there is a grave risk—this is one of the defects—that applications for development will be discouraged. In my view, we shall not solve this problem until we have site value rating on all building land the minute it becomes available for development. I offer also to the Government the observation—it is one of the Liberal Party's policies which, I suppose, they will adopt in time; they usually do, though for the wrong reasons and rather late in the day—that again we shall not solve the problem until we have full rates on unoccupied office blocks and empty houses, and until councils are prodded to release land which in many cases they are hoarding. Very often councils hoard land just as much as private speculators do.

I agree with the Shadow Chancellor when he says that it is a great defect that we have not done more about regional incentives. The Secretary of State said that the Government were discussing the phasing out of the regional employment premium. Perhaps he was pressed by lack of time, but what lie said gave me the impression that he was seeking to imply that the regional employment premium would be phased out and there was no possibility of anything taking its place.

I hope I am wrong in that impression because I am convinced that regional incentives, and the REP in particular, are vital to growth in the regions. Again, one can make a comparison with what is done on the Continent. There was an interest- ing table published a few months ago in the Financial Times showing the incentives in Europe compared with the incentives here for development in the regions, and our incentives came out as low as any in Western Europe. If the REP is not to come back, I hope that the Government will consider the concept of a regionally varied payroll tax. In some way we must encourage growth in the regions.

I am delighted that the Government are tackling the North Sea oil question. If he catches the eye of the Chair during the next few days, my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) will develop this matter. At least, we have an admission that the Government—blame attaches here to both Governments—have made an appalling hash of the whole North Sea oil business, which, no doubt, has given great happiness in Texas.

Basically, I believe that the Budget's objectives are right. In their psychology, however, they have missed an opportunity to attack poverty as it should have been attacked. The Government could have gone much further to convince the trade union movement that they genuinely want to run the economy fairly, but by their decision regarding surtax and their failure to do more for the lower-paid they will make it very difficult for that concept to be accepted.

I am delighted that the Chancellor has come out as such a firm devotee of the floating pound. A fixed pound always used to be regarded by the Treasury as a sort of virility symbol. I am pleased that we have overcome that. I dread to think what would have happened to sterling if we had had a fixed pound during the last difficult economic crisis.

We should continue to float the pound unless and until we have a European reserve currency. I hope that that will come, but it will take time. I do not share the Shadow Chancellor's view of the five conditions which the Chancellor put to his colleagues in the Nine. I do not believe that they are impossible of achievement and I do not regard them as unreasonable. But progress will take time, and I look forward to the day when a European reserve currency comes about.

I hope we shall get growth. I hope we shall be able to defeat inflation. If the Government showed a little more of the right psychology in their approach, they would have rather greater chances of success—and that goes not least for the Prime Minister himself.

6.10 p.m.

Mr. Christopher Tugendhat (Cities of London and Westminster)

This is the second time I have had the privilege of following the Leader of the Liberal Party in a Budget debate and I feel therefore that I need not go through the round of compliments that have characterised previous speeches.

There were aspects of the right hon. Gentleman's speech with which I disagreed but I hope that he will take my remarks in the spirit in which they are meant when I say that his contribution provided a welcome contrast to that of the right hon. Member for Leeds, East (Mr. Healey). The right hon. Member for Devon, North (Mr. Thorpe) at least put forward a coherent strategy and he made a number of specific references to policies which he felt could be altered or changed or where he thought there had been omissions which he would have liked corrected.

The most depressing feature of the speech of the right hon. Member for Leeds, East was the total lack of a counter-strategy. He attacked, for instance, the Government's high level of public expenditure. Some of my right hon. and hon. Friends tend to do that too but one would have expected that the right hon. Gentleman would have told us where the cuts would come this year—not on futureistic things like Maplin. The only point in his speech when he was explicit was when he was talking about the various chairmen of private enterprise concerns and their salaries. I refer particularly to the Chairman of Guest Keen when the right hon. Gentleman based his argument on unverifiable assumptions about whether that gentleman had an investment income and, if so, how much.

When he was talking about value added tax the right hon. Gentleman produced a figure which he alleged would represent the increase in the cost of living caused by VAT. He did not, however, take into account that the National Institute which produced that figure later brought it down slightly. The figure of 1 per cent. takes no account of the changes made by the Chancellor by extra exemptions and so on yesterday. The Labour Party might wonder why it is not deriving more support mid-term and why it is losing support to the Liberals. Perhaps by comparing the speeches of the right hon. Member for Devon, North and the right hon. Member for Leeds, East it will find some explanation why people do not wish to vote for the Labour Party and why people choose the Liberals rather than Labour.

Mr. Ridley

Should we not then have the Budget of the hon. and learned Member for Lincoln (Mr. Taverne), and then we really would know what to do?

Mr. Tugendhat

The hon. and learned Member's Budget would, I am sure, be very interesting. We were all much more impressed by his contributions to economic debates than those of the right hon. Member for Leeds, East, though we are fortunate that the hon. Member for Heywood and Royton (Mr. Joel Barnett) is still with us.

It is important at the outset of any discussion on the Budget to recognise the real achievements which the Government have made over the last year. As my right hon. Friend the Secretary of State for Trade and Industry said, one is always particularly concerned with the difficulties and troubles but no one who is in the least degree objective could possibly doubt that the present rate of growth is a remarkable achievement by post-war British standards. It is not one that many people believed could be achieved when the Chancellor announced it last year. It has been achieved and it is a remarkable phenomenon in view of the record of the growth rate of the economy under successive British Governments since the war. The decline in unemployment is also something which many people believed the Government would not be able to secure and also something of which we can be proud.

The trouble with so many of our economic debates and with the economic debate in the country as a whole is that it tends to seem so esoteric. The objective of economic policy is so often forgotten. It is simply to make people more prosperous and to enable them to have a better standard of living. The fact that the Government have brought about a situation in which the real standard of living is 10 per cent. higher than in June 1970 should be an object of pride and it would serve the cause of economic debate better if the realities of the achievements were recognised as well as the difficulties and frustrations that the Government are facing. The danger and drawback of the present situation is due to inflation which, as the Chancellor said, embitters society, endangers the rate of growth and makes it difficult if not impossible for people to recognise the real gains which have been achieved.

When one looks at the Budget strategy there can be no doubt that the Chancellor is taking enormous risks. One has only to look at three examples to realise the magnitude of the risks he is taking, although there are others. For example, on the balance of payments I hope that my right hon. Friend is correct when he paints his encouraging picture of the future for British exports for the coming year. Certainly the record of British exporters in the past will suggest that if he is right it will be as much an achievement as the reduction in unemployment or the 5 per cent. growth rate.

The borrowing requirement, which I imagine a number of my right hon. and hon. Friends will wish to discuss, is another example of the real dangers of which we are running the risk. The prospect of ever-higher rates of interest is something which must fill us with alarm. It not only makes life extremely difficult for ordinary people—the house-buyer about whom we hear so much—but it is also a deterrent to investment when an investor can get 11 per cent. Merely by doing nothing at all. The rate of growth also implies great risks where the margin of spare capacity in the economy is concerned. I hope that my right hon. Friend is right when he assumes that there is sufficient margin in the economy and that we will avoid the bottlenecks which have characterised past periods of expansion. But here again we have to recognise the great risks that are being taken.

I say that I recognise these risks because I feel that the Chancellor is right to take them. I recognise the nature of the gamble that this entails. If we are to break out of our present economic difficulties the gamble is justified. Confidence is still brittle. It is true that a number of large companies—and most recently ICI—have announced substantial investment plans. The surveys of business opinion which have been carried out by impartial outside organisations are encouraging. The outlook for business is certainly good at the moment but we must accept that confidence, as I said, is brittle.

The record of this country since the war is such that many industrialists do not believe that the sort of growth targets we are talking about can be achieved. If the Government were to show hesitation at this stage, if they were to say that they were already beginning to draw back from the implications of what they were doing, that would have a harmful effect on the confidence which is only now beginning to blossom. This is not a time when the Government can afford to take half-measures. If the policy which they are pursuing fails to deliver its fruits, we all know that we shall be facing a crisis. A policy of half-measures would only be certain not to achieve the desired results. The policy that the Chancellor is pursuing carries with it a reasonable prospect of success. That prospect depends entirely on the Government's counter-inflation strategy.

If the Government can avoid major disruption to production, investment and exports, during the remainder of the year, if they can hold to the phase 2 targets for prices and wages, the odds on this country achieving a rapid rate of growth, coupled with rapidly increasing prosperity, will be extremely good. If the counter-inflation policy fails in the sense that we cannot achieve our investment and export targets, and if inflation accelerates rather than decelerates, the outlook for all people in Britain, regardless of the party they support, will be extremely dismal.

I come to my final point. The Chancellor said in his Budget speech that he would be prepared to keep his policy under review and pointed to various aspects of it on which he might think again as the year progressed. I feel that the jibes by the right hon. Member for Leeds, East about the fact that another major economic statement might be given later in the year were not relevant to our discussion. We have learned that one Budget every 12 months is not a suitable way of handling our economic affairs. Our economic affairs move rapidly. They are subject to many outside influences. If we can demote the importance of the Budget and perhaps rely more, as it were, on less important but more frequent economic statements, this would I think be a desirable development and not a cause for attacking the Chancellor in any way at all.

I agree with those points on which my right hon. Friend said he would keep an open mind. I was glad to hear him talk in that way, but I hope he will keep an open mind on one or two other points which he did not mention in his Budget speech.

The first of those points is food prices. It was probably right not to introduce subsidies at this stage. I say that because we are at a time of year when seasonal factors will lead to a secular decline in food prices during the coming months and, moreover, we do not know what the outcome of the harvests will be in countries where we buy most of our food. If it emerges as the year progresses that the prices of imported food continue to rise at anything like the rate at which they have been rising, I think that the Government ought to look very seriously at the prospect of taking additional action on food prices. I am well aware of the disadvantages of subsidies, and I do not regard them as an inherently desirable policy, but I would regard the continuation of food prices rising at the rate at which they have been as something infinitely more undesirable than the disadvantages of subsidies.

The other point on which I hope the Chancellor will keep an open mind is the whole question of credit rationing or, if not credit rationing, the directing of credit. The level of interest rates is now such as to pose a serious threat to the Government's counter-inflation policy, and this too is an element in the overall picture which the Chancellor may, I think, have to look at again.

To conclude, the emphasis of this Budget has been on expansion and on counter-inflation, and with that we can all agree. The emphasis is certainly one which will provide the country with a more encouraging economic future than its past. As long as the Government can bear in mind the main points of their programme—expansion and counterinflation—and put those above any dedication to particular policies or particular theories for managing the economy, so long as they can remember that it is the end which is important and not the means, I think that the gamble the Chancellor is taking has a reasonable chance of success.

6.22 p.m.

Mr. Alex Eadie (Midlothian)

I do not take any exception to the way the hon. Member for Cities of London and Westminster (Mr. Tugendhat) has tried to argue his case, but if I may make a comment it is that, as has been shown in the whole debate, there is a mood of complacency among the Government's supporters in the face of the reality which we have today in political and economic affairs.

I do not know how the Government can find any great satisfaction from the fact that in three by-elections they polled a total of 23,000 votes. That would certainly not inspire confidence in the present Government in anyone examining the reaction of the electors. Although I do not dispute with the hon. Gentleman I think he should be worried and that the Government should be worried as well.

I mention this complacency because yesterday an hon. Member opposite talked about our not having unemployment. He said that what we were having was a sort of spin-off, or a shake out in industry; but it was not unemployment. When we have over 120,000 unemployed in Scotland I take great exception to that and to hon. Members talking about unemployment as a shake-out. Unemployment is real—real and positive. My hon. Friend the Member for West Lothian (Mr. Dalyell) will have a colliery closed in his constituency this year. That is real to those people. It was announced in Scotland today that another colliery is to close. That is not a shake out.

My reaction today to the Budget is the same as it was yesterday. It does not spell out a great deal of hope for people in my constituency. The costs of trying to build homes still remain frightening if not impossible for many. I listened with a great deal of interest to the Government's proposition that people who hoard land after getting planning permission will be taxed, but that will not solve the problem. Vast fortunes are still being made and still will be made in the housing market. It is, for example, an indictment of the Government that it has been calculated that 18 new millionaires have been created during the last two-and-half years as a result of the Government's policy in housing.

I find it difficult to understand the Government's statement on housing. Having had some experience in local government I can understand our talking about planning permission being given to build homes or houses, or to undertake housing development, but I cannot understand how the Government expect their statement to be very helpful to people about to purchase homes. What we generally do is to zone land according to planning for housing development. Land is zoned for housing development, but that does not necessarily mean that planning permission has been given to build the houses. I assume that we shall still have the same problems with building development even if land is sold for building. I am flabbergasted that the right hon. Gentleman had the temerity to put forward the proposition he did and then assert that this would be of great assistance in solving housing development problems in my constituency—problems which many other hon. Members will have in their constituencies.

I welcome the Government's statement on North Sea oil and taxation. This matter was drawn to the Government's attention in the Scottish Grand Committee. I did it myself in a speech, when I said that some oil companies arranged their prices so that a profit was made in countries with a very low tax rate. In 1970 Texaco lost £2.8 million. Petrofina UK lost £2.5 million, and Mobil Oil lost £1.4 million. I could give other examples. These figures are before payment of interest, so the tax loss is even greater. Unless the Government take a firm control of pricing policies it is unlikely that oil companies will ever pay 40 per cent. tax on the profits from North Sea oil."—[OFFICIAL REPORT, Scottish Grand Committee, 5th December 1972; c. 30.] I make that point for two reasons. I have never quoted a speech of my own before, but there was a mix-up in the reportage and it was not clear whether I made the speech of the right hon. Member for Orkney and Shetland (Mr. Grimond), or whether he made the speech I made. There was a great deal of confusion.

I also mention it because the Chancellor will require to spell out in much greater detail what he proposes to do about oil taxation à la the Report of the Public Accounts Committee. I believe that the House will not be prepared to accept the Chancellor's statement as it is, and it really is of paramount importance, in my view, that the Public Accounts Committee's Report should be debated in the House. I hope that the Chancellor was not giving us a sop for not having one or putting it off. There are other issues as well as taxation which the House requires to debate arising from that report. Although the Chancellor intends to do something about taxation, I hope that we shall have an assurance that there will be an opportunity to debate the Public Accounts Committee report.

United Kingdom private investment abroad has risen from £744 million to £1,350 million. Is the Chancellor happy about the size of the investment abroad? At the same time, private firm investment in the United Kingdom fell from £932 million to £645 million. How does this arise, when there is all this North Sea oil investment? Is the North Sea oil investment included in the figures? Is the Chancellor happy about this downward trend, or is there an explanation for it?

May we be given information about how the rating relief to which the Chancellor referred will apply in Scotland? There is confusion about the quinquennial review and the difference in the way in which the assessors work in Scotland and the Inland Revenue in England. Discussions are going on in Scotland about central heating installations being exempt from any rating burden. There are differences between England and Scotland in the rate burdens imposed. Ratepayers will look upon the Chancellor's statement about rating relief with a great deal of interest and will want to know how it will apply in Scotland.

All hon. and right hon. Members will welcome the VAT zero rating of children's clothes and shoes. Many people will claim that they are responsible for this change of policy. Some will say that the Chancellor had a late conversion, but all I say is that I am glad he did it. It will be of great assistance to many families in my constituency.

I find it perplexing that confectionery, crisps, ice-cream and so on should be zero rated at a cost of about £110 million, while nothing is being done for dad, the breadwinner. Dad has to provide the shoes, the clothes, the ice-cream, crisps and sweets, but if he works in a pit or on a building site he has to buy a helmet, on which he will have to pay tax. He wears it to save his head getting smashed in on a building site. If he is a miner he will not be able to go down the mine unless he is wearing a helmet. The miner is encouraged to buy spine pads to minimise the risk of his getting a broken back, but spine pads are taxed. The miner needs knee pads to prevent his getting what is commonly called housewife's knee.

Joe Corrie, the miners' poet described what the miner does, by writing: Crawling about like a snail in the mud Covered with clammy clae, Who made me in the image of God Jingo but its laughable tae. The miner needs knee pads when he is climbing about in the coal seams. He is encouraged not to lose his safety equipment, and not to buy inferior equipment. My right hon. Friend the Leader of the Opposition spoke about the psychology of the Government. I shall be cruder and call it the total ignorance of the Government. But the House must consider the psychology of the Government.

Children's boots are to be zero rated, but dad's protective boots that save him from a broken foot at work are taxable. Dad will be tempted to buy a cheaper boot because the proper safety boots are much more expensive. That is an absurd situation. It shows that the Government are as divorced from reality in the planning of a Budget as they are in provoking confrontation between themselves and industrial workers. No wonder ordinary working people ask whether the Government know where they are and what they are doing.

Worse is to come. At his work place dad will be encouraged by management to become safety conscious. He may get an invitation to join a safety committee. Accidents and deaths at work not only cause great sorrow but cost the nation millions of pounds. Dad, inveigled by management, may enter safety competitions, perhaps with rival firms. I can speak with some authority about the mining industry. Some of the stretcher training done by our first-aid teams would not disgrace a commando unit in the British Army. The teams have to go underground and crawl about in extremely difficult conditions.

Prizes are sometimes offered as an encouragement to the men. If dad wins a cash prize in a safety competition he is liable to pay tax on it. If it is a prize of a certain value he must include it in his income tax return. The Government say that they are "with it". The Government tell us that they understand what the people are thinking. It is an insult to our intelligence for the Government to talk of lollies and ice-cream and yet to make workers put up with this nonsense. I cannot condemn the Government too strongly.

Dr. M. S. Miller (Glasgow, Kelvingrove)

Before my hon. Friend leaves the question of safety measures and protective clothing may I ask him whether he would not agree that it is ridiculous for the country to spend millions of pounds on scientific research into new forms of safety clothing when the Government are positively discouraging workers from wearing it?

Mr. Eadie

I could not agree more. The Government's policy acts as a disincentive to people to wear this safety clothing. Their policy is a disincentive to people to participate with management in being safety conscious. I cannot indict the Government too strongly for forgetting about this in the Budget.

Mr. Dalyell

I thank my hon. Friend for helping me about a West Lothian pit for many years, both before he became a Member and afterwards, but I put it to him that in the light of the closure of that pit he and I know that it is totally frivolous of the Government to withdraw regional employment premium. The Minister of State represents part of North Cornwall which, in a different way, has similar problems. He must know that the withdrawal of REP, given closures of this kind, is extremely damaging and unwise.

Mr. Eadie

My hon. Friend has a good point. There are many other aspects of the Budget with which I would have liked to deal, but I have spoken for long enough. The Minister has to understand that in Scotland we still have about the second highest unemployment figure in the United Kingdom. In 1963 it was 134,000; now it is 120,000. That is not a great achievement. If REP goes it will have a very damaging effect upon job opportunities in Scotland. It will place firms in a difficult position.

The psychology of the Government is all wrong. More days have been lost through industrial disputes in one year under this Government than were lost in the last five years of the Labour Government. The Chancellor's concluding statement yesterday showed that the Government have not learned that their policy of confrontation with workers is a failure. The Government's policies have eroded the wealth of the nation. We could have been much richer. This can be remedied not by a change of Chancellor but only by a change of Government. Pensioners, civil servants and many other workpeople, once they have had time to examine the Budget, will come to the same conclusion as me—that the Government have tackled our economic problems with no understanding of how ordinary people try to live.

6.43 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I hope that the hon. Member for Midlothian (Mr. Eadie) will forgive me if I do not follow him over the subjects of North Sea oil, safety and the Scottish economy which he has been traversing. I want to direct my remarks to the central economic issues contained in my right hon. Friend's Budget. First I congratulate him, not only on the manner of presentation and his excellent speech yesterday but upon the great trouble to which he always goes to iron out anomalies, to meet the points put by hon. Members individually or in groups, on both sides of the House, and the great amount of care he takes to meet all reasonable requests.

I am particularly pleased with my right hon. Friend's action over North Sea oil and the hoarding tax on land. The temptation to go too far is probably more dangerous than the temptation not to go far enough. He has got it just about right. I would have preferred an increase in family allowances to help through VAT with children's clothes and food. It would have achieved the same object but perhaps arrived at its beneficiaries more accurately if it had been done through an increase in family allowances. All of those adjustments which my right hon. Friend has made will, I am sure, be warmly appreciated by people throughout the country.

The borrowing requirement has risen from the out-turn of £2,855 million to an expected £4,423 million in the coming financial year. That latter figure is a major one. Last year's borrowing was met partly by a large reduction in the investment of nationalised industries, which was greatly down. That is to be regretted in a sense. Although it helps Government finances it is not a good thing to buy solvency at the expense of investment in the public sector. It was also met, as to £1,200 million, by borrowing from the non-bank public which is exemplary and which I hope will continue.

Thirdly, it was met by the influx of £1,600 million due to the June crisis about which the Chancellor told us yesterday. There must have been a considerable amount of bank finance in addition or the money supply would not have been growing so quickly last year. Looking to the future, it is unlikely that the Government will be able to get very much more from the non-bank public by way of borrowing. Even if my right hon. Friend's most elaborate and ingenious schemes for extra borrowing produce a good deal more money than the £1,200 million of last year, I cannot see but that that money must come from other forms of savings and investment.

If it comes out of building societies, the building societies will have to raise their rates to attract it back again. There will be an interest war between the Government and the institutions to attract what money there is. If it comes out of equities the consequences could be even more serious because if equities fall much lower, to the point where their yield becomes comparable with the gilt-edged yield rate, the share values will be so low that companies will find it extremely difficult to raise extra finance on the market. There will be serious industrial investment problems.

I would regret a honing-up of the interest rate war which could be the result of trying to finance too much of the deficit by borrowing. This is not in any sense because I have departed from my views that monetary policy is vital but is because I do not believe that we can close a revenue deficit as big as this one entirely by seeking to borrow.

The third factor is the question of what will happen overseas. This is a fascinating and complicated subject. The first thing which I always find it difficult to get my mind round is that when we have to buy our own currency as "hot" money leaves London, this is meeting the Government's deficit and is therefore deflationary. If our currency is being pushed upwards, which has not happened for some time, that is inflationary because money is available to be consumed by people within the country.

We had a windfall of a deflationary £1,600 million last year. It would only be if we had a run against the pound again in the coming year that we could look forward to a similar bonus for the Government's financing efforts. That would require, first, the fixing of the pound and, secondly, fixing it at too high a level. Both of those things may well happen but I hope very much that they do not. If we finance our deficits in that way we will use up our reserves and we shall come to the end of our reserves before very long.

The Government's decision about how to conclude the negotiations in Europe about the fixing of the pound is of the utmost importance. My right hon. Friend would have found it extremely difficult to take account of next year's activity in his Budget without knowing of the conclusion which is likely to be arrived at by the end of the week in Europe.

If we do not fix, we can continue to inflate in the way that we are doing at the moment but we can look to no benefit to the borrowing requirement. If we fix at too high a rate we can expect a run on the pound which will be good for financing the Government's deficit but will soon eat into our reserves and cause us to borrow heavily from France and Germany, which will be required to support the pound. That will in some senses be a safeguard to the Government's policy, but in the end it puts such pressure upon the currency that a further devalua- tion might be necessary. Therefore, that is not desirable.

If we fix at too low a rate, hot money will come into London and push up the value of the pound, which will be highly inflationary. The alternatives of fixing too high and too low are highly undesirable and not at all beneficial to the Government's financial policy.

The third alternative of letting the pound float, which is highly desirable in every other aspect, makes no contribution to financing the borrowing requirement. The Chancellor made a remarkable job of what is an extremely difficult situation. I understand why he has not been able to reduce the deficit. That is because of these dilemmas and because of inflation. It would be difficult for him now to put up taxation, which he probably should have done under normal circumstances, because we have just had a counter-inflation policy which declares that certain levels of remuneration for everybody are "fair". Therefore, to take some of that money away from them would, by definition, be "unfair". He cannot very easily increase taxation.

Many right hon. and hon. Members have been saying for some time that public expenditure should be reduced. The most obvious category which I personally favour for reduction is the subsidies to the nationalised industries, which run at £500 million a year. They go to every man, woman and child, rich and poor. They go to those who travel by air and who use the airports as well as those who are poor who rely on gas and electricity to keep warm in the winter.

I should prefer an increase in benefits to help the less-well-off and total abolition of the subsidies so that we do not subsidise all indiscriminately. But to do that would put up the costs of those whose incomes have been fixed at "fair" levels. In all I say the word "fair" is in inverted commas. I cannot be a judge of what is fair and what is not. That is why it is difficult to reduce expenditure.

There are some programmes which could be reduced, although they would make little difference to the accounts for the coming year. Every hon. Member who has mentioned Maplin has said that it should be postponed. We must look at the area of high technology which costs us so dear—for example the RB211, Concorde and International Computers Limited. The amount of money which is being spent on these projects is getting very big—it is getting bigger and not smaller, even when the returns should be coming in.

My right hon. Friend the Secretary of State for Trade and Industry seems to have an appetite for expenditure which perhaps could be kept a little under control in the months to come. He talked this afternoon with great optimism about the boom. He said that we have a high level of export orders and he spoke of the great boom which is taking place. Surely, in a boom we should apply our counter-cyclic policy. That means not spending more but spending less. When my right hon. Friend was challenged by the hon. Member for West Lothian (Mr. Dalyell), he said that the remedy for a boom was to have a bigger deficit because that did not matter when there was a boom. But we should have a smaller deficit in a boom, or even plan for a surplus.

We cannot do much about controlling the deficit in the short run because the counter-inflation policy makes it difficult, if not impossible, to adjust the level of demand. It could be argued that the counter-inflation policy has become counter-productive in the pursuit of reducing the level of inflation. It has shackled my right hon. Friend so that it is difficult for him to reduce expenditure. It is also difficult for him to increase taxation. Therefore, he is forced to rely upon a huge borrowing requirement at a time when the uncertainties and risks which attend us overseas are very great indeed. That is why I suspect that, in the time honoured words, other measures will be laid before you".

6.58 p.m.

Mr. Kenneth Lomas (Huddersfield, West)

I think that the House will agree that what we have heard from the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) is a typical Conservative speech in every sense of the word. He poses the questions but does not give the answers.

We heard from the hon. Gentleman that it is undesirable for the pound to be pegged at a fixed rate and that a floating rate makes no difference. We understand that. However, I totally disagree with his view about subsidies to nationalised industries. British Rail, for example, must be treated as a social service for those who live in rural areas. They must be so treated in my constituency, where the link lines are required. They are vital and necessary to the people who work and commute in the area. We cannot say that nationalised industries should be an essential service on the one hand and then say on the other that they must be commercially viable. The two do not go together.

When the hon. Gentleman says that cuts should be made in public expenditure, I remind him that one matter which has not been mentioned is the fantastic amount of money that is spent on defence. We are now spending on defence approximately £70 every second; that is over £4,000 a minute. In the course of the hon. Gentleman's speech and my speech we shall have spent between us £100,000 on defence. I should have thought that this was an area where we could see whether it was possible to reduce the amount that we spend on weapons, armoury and defence of all kinds.

Mr. Hugh Dykes (Harrow, East)

The hon. Gentleman will bear in mind, I hope, that the great preponderance of defence spending is on wages and salaries.

Mr. Lomas

Of course, I accept that. Nevertheless, the logistics ought to be looked at. Having served in the North Atlantic Assembly, I speak with some experience when I say that I do not believe that our defences should be run down. It is essential that we have an adequate defence. However, certain economies could be made when expenditure is running at the fantastically high figure that it is at present.

Whatever our differences may be, we must all be agreed that this Budget was introduced against the very sombre backcloth of an international monetary crisis and increasing industrial unrest at home. It may be that the Chancellor could not avoid the first, though that is being charitable because the right hon. Gentleman inherited a surplus of about £600 million or £800 million and in the course of two and a half years has turned it into a £1,000 million deficit. However, the right hon. Gentleman could have avoided the industrial unrest that we see at the moment.

There are some items in the Budget which are to be welcomed. When I spoke in the course of one of the debates on last year's Finance Bill I made strong representations to the Chancellor of the Exchequer that soft drinks should be relieved of VAT. A firm in my constituency, Ben Shaw Limited, was extremely concerned about this. I am glad to know that the right hon. Gentleman has taken my suggestion on board. I know, too, that my hon. Friend the Member for Widnes (Mr. Oakes) fought the same battle in respect of crisps and that he will be delighted that the right hon. Gentleman has taken the line that he has.

Having said that, it is worth asking whether it was necessary, in view of our current problems, for the right hon. Gentleman to introduce VAT at 10 per cent. Would not it have been better to have brought it in at a lower rate, say, 7½ per cent., or even to have decided on a tier system with rates of 7½ per cent., 10 per cent. and possibly 12½ per cent.? This is a matter which I believe the Chancellor should reconsider, because people at the bottom end of the wage scale will feel the effect of VAT more than anyone else.

At a time when the right hon. Gentleman is appealing for wage restraint or imposing a freeze, it is totally wrong for him to be giving tax concessions to the wealthier sections of the community. We should remember that one man's tax relief is that same man's pay rise. It is no use telling people at the bottom end of the income bracket that they cannot have pay increases when, as from 1st April, those in receipt of a fair amount of money will get increases in the form of having to pay less tax.

I welcome the step taken by the Chancellor against land speculation, timid though it is. It has not gone far enough. There is no doubt that the house prices that newly-married couples have to pay today are largely determined by the price of land. This is forcing up house prices to a tremendous extent. This is not just a matter requiring certain taxes to be levied. It is essential for the State to take over the land and then lease it to people who wish to build houses. It was once said that God left the land to the people but that he made very bad arrangements for its management. That is even more true today.

I regret that no action was taken on family allowances. Here was an area where the lower-paid worker with family responsibilities could have been helped. Apparently the Chancellor has turned his back on them.

The Opposition have been urging the need for food subsidies in order to keep down and control the price of food. The Chancellor said nothing on this subject. It is obvious that he is not interested in trying to keep down the price of food.

The right hon. Gentleman could have said that the Housing Finance Act, which will push up rents once again on 1st April, was to be held in abeyance.

A part of the right hon. Gentleman's speech was devoted to rates. He said that in the event of an increase of more than 10 per cent. the Government would give half. This is not good enough. If rates are allowed to go up 10 per cent. or more it will be one more imposition upon the responsibilities of the lower-paid worker.

I hope that this Government or a future Labour Government will look at the system of rating, recognising how ancient it is, and come to some conclusions on the lines that there should be some form of local income tax instead.

I welcome the concessions on children's shoes and clothing. But one is entitled to ask why they were not announced before. In the past 12 months the point was made again and again that it was essential that these were relieved of VAT. The right hon. Gentleman set his face resolutely against making any change. Yesterday he repented. He said that he was a sinner and that he had been wrong. If he were wrong about that, on how many other occasions has he been wrong and thereby affected the country's economy?

I welcome the increase in pensions, but again it is too little and too late. It is all very well saying that this is a sizeable increase. It is. But it has to be, in order to keep up with the ever-increasing cost of living. What is more, by the time that pensioners get the increase, for which they have to wait another six or seven months, it will already have been partly eroded by the increase in prices. Since the General Election, food prices have gone up by more than 25 per cent., rents by over 30 per cent. and rates by a similar amount.

If the Government want the support of ordinary people and trade unionists, they must earn that support by acting in a very positive way. The Chancellor of the Exchequer spoke of the increasing amount of industrial unrest and the present round of strikes. I wish to declare my interest as a Member sponsored by the National Union of Public Employees. I can assure the Government that the ancillary workers in the National Health Service are on strike not because they want to be but because of the blatant, gross and totally inflexible behaviour of this Government in operating their so-called "fair" prices and incomes policy.

I have always been and always will be an unrepentant believer in a prices and incomes policy. I say that because, as a Socialist, I believe in a planned economy, and if we are to plan the economy, we must plan growth rates, investment rates, income rates, and of course prices.

Since this Government came to office they have adopted a policy of taking on the public sector. It is the public sector which has suffered most in every instance. The Government have shown that they are not concerned about a just and fair incomes policy, no matter what the Secretary of State for Trade and Industry may have said today. It is a fact of life that the vast majority of ancillary workers in the NHS earn less than £20 a week. No one can deny that that is a very low rate of pay. It is obvious that they have a very special case—more special perhaps than that of gas workers and others. Yet these very people who are on extremely low rates of pay are suffering all the injustice that goes with it.

What is more, many of them are caught in the poverty trap. A married man with two children who is earning less than £22 a week, which scores of thousands are, qualifies at the moment for family income supplement, free dental treatment, free milk and free school meals. If the increase offered by the Government were taken, many of these families would be worse off because it would just about take them over the threshold and they would lose many of the social benefits that they receive at present.

The strike by the ancillary workers is not wanted by anyone—the union, the members, the hospital authorities, and, I am sure, the Government—so we must find an answer to it.

The first point to be borne in mind is that under phase 2 the £1 plus 4 per cent. is manifestly unfair. A man earning £50 a week would get £1 plus £2, a total increase of £3 in his pay packet, whereas a man earning £20 a week would get £1 plus about 80p. This is not narrowing the gap; it is widening it. I have always thought that we should try, if possible, to narrow the gap between those who have and those who have not, between the rich and the poor, rather than widen and make greater that gap. This is what is wrong.

The Leader of the Liberal Party said that we in the Labour Party were not concerned about the lower-paid workers. Yet he and the rest of his party voted for phase 2 of the Counter-Inflation Bill which perpetrated this injustice on the lower-paid workers.

Just as I suggest that the Government must act, so must the Trades Union Congress. There must be some kind of voluntary restraint. It is totally wrong that those with the highest wages or salaries in industry should get the largest increases and those with the lowest wages and salaries should get the lowest increases. The whole policy on which the Counter-Inflation Bill and the whole Budget judgment is based—that groups of workers should work out between themselves what the wage bill is and what the employers can afford and then get the £1 plus 4 per cent.—simply means that a man already in a group of lower-paid workers will always be lower paid. There is something fundamentally wrong with that.

The trade union movement, the Government, and some of my hon. Friends must recognise that if a large industry—be it, for example, the Ford Motor Company—makes a fantastic profit, it is wrong that those profits should simply go to the people in that industry. They should be spread across the board so that all can benefit. The public service and the hospitals service cannot make profits. I do not know how productivity is measured in the hospital service. It cannot be measured by the number of bed pans carried in the course of a day. Hospital workers are performing an essential service to the community.

In the context of the Chancellor's speech I should like to offer a word of advice to some trade unionists. I recall reading a play by John Osborne in which one of the characters said, "There are people who spend their time looking forward to the past." This is a fair criticism of some people in the Government and in the trade union movement. This is not 1926. There is no need, no call, no necessity, as far as I can see, for a general strike. It would not achieve anything, except perhaps to turn the average individual against the possibility of returning a different Government from that which we have who are introducing a measure such as we had yesterday.

By all means let us be militant, but let us think where our militancy will lead us. The militants must think things through. We must think again on many issues. Of course I want the Labour Party to win the next election, but to do that, as we are doing, we must be able to present a good alternative policy.

I reject the free-for-all policies of the Conservative Government. I do not want that kind of society. I think that the Chancellor or another Minister in the course of this debate should come forward with some proposal which could get the Government off the hook and would help to solve the problems with which the nation is faced.

We have been told that those who consider that they have a special case can refer it to the Pay Board which can look at it and that something may be done in the autumn. But the Pay Board is an agent of Government policy. Therefore it will not work. That is why there will not be co-operation by the trade union movement. The Pay Board should be totally independent of the Government. If, looking at the cases submitted to it, in its judgment it decided that there was a special case, then it should be given authority to make an interim payment immediately or at least in the autumn in a retrospective manner.

I believe that what we heard yesterday was a mini-Budget. I believe that we shall have another Budget in two, three or four months. Inevitably we shall have another Budget. That is why I agree with the hon. Member for the Cities of London and Westminster (Mr. Tugendhat) who said that it was wrong on this, the occasion of the annual Budget—I agree that it is an archaic system—to look forward to something dramatic happening in either March or April. We must change our attitude. Therefore, I accept the Budget knowing that it will be changed drastically during the next few months.

I sincerely believe that the Government are taking this country and the average individual down the path of disaster. We want a different form of Government. But if we are truly democratic we must accept the laws of the country, however bad they might be. The only way to change the law is to change the Government. I am convinced that the feeling of the people of this country will create a situation where the Government will be compelled to fight on their miserable record and I am sure that they will be defeated and that a Labour Government will take their place to the benefit of all.

7.17 p.m.

Mr. David Knox (Leek)

Whatever view we may take about the importance of the Budget in any financial year, it is and should be an occasion for an important debate. I am not making a party political point, but attendance throughout the proceedings today has been disgraceful. It appears that only a handful of hon. Members are interested in one of the most important of the events that take place in this House in the course of the year. It is not the first time, nor, I expect, will it be the last, that this has happened in this Session. It may be that both the major political parties should learn the lessons from certain by-elections last week.

I should like to take the hon. Member for Huddersfield, West (Mr. Lomas) to task on one point only in his interesting speech. At one stage he said that if the Government wanted the support of the trade unions they must earn it. I should point out that by any standards this Government have earned that support more than the Labour Government did between 1964 and 1970.

The TUC and the trade union movement asked for economic growth. They have had it from this Government. They did not have it from the Labour Government. The unions asked for rising living standards. They are having this from this Government in real terms. They did not get them from the Labour Government. The trade unions asked for increased social public expenditure. They are getting it from this Government on a greater scale than they had it from the Labour Government.

The trade unions asked for measures to reduce the level of unemployment. These were introduced and are now beginning to take effect. Unemployment is falling. Unemployment rose, on and off, but continuously from 1966 to 1970. Much of the early increase in unemployment under this Government came about because of the time lag between the introduction of measures to reduce unemployment and the time that they started to take effect. Therefore, by any of these standards, I believe that any independent person would be bound to concede that this Government have earned the support of the trade union movement.

All Budgets should be examined from two standpoints. First, the individual changes which the Chancellor intends to effect should be considered. Secondly, the Budget should be considered from the point of view of the effect on demand management. I have no doubt that the second of those two things, demand management, is very much more important than the former, but that is not to underestimate or in any way to deride the importance of some of the measures which my right hon. Friend announced yesterday, all of which I welcome and support. It is merely to say that the general direction in which the economy moves in response to the management of demand is of much greater and more profound importance to, and of greater influence on, the well-being of the British people.

I should like to concentrate on the demand management aspect of the Budget. First, I welcome the commitment which my right hon. Friend gave again to 5 per cent. growth. I believe that that is right, and that economic growth should enjoy the highest priority in the economic management of the economy. That after all, is what an economic system is about. That, after all, is what people want, and it enables us to improve the material well-being of the people of this country.

For those of my hon. Friends—and perhaps one should include here the editor of The Times—who question the importance that I give to economic growth perhaps I may remind them that according to Disraeli one of the three great principles of the Conservative Party is to elevate the condition of the people. That is more than can be said for the control of the money supply or for the operation of a market economy in inappropriate circumstances.

I congratulate my right hon. Friend on keeping his nerve about the rate of growth. He was subjected to a certain amount of pressure from the Press and from other sources to ease up on this but I hope that he will continue to keep his nerve and not succumb to the Jeremiahs who, as always, are forecasting doom and who seem to regret it whenever Britain seems to be doing well. My only regret about my right hon. Friend's reaffirmation of his support for this faster rate of growth is that he did not commit himself for a rather longer time, but perhaps I may return to that.

There has been considerable public discussion during the last 12 months about the nature of our inflationary problem. This obviously has a strong bearing on demand management as related to the Budget. Some people, including a number of my hon. Friends, believe that there is only one kind of inflation and that the Chancellor should have taken certain action to deflate the economy to deal with it.

I believe—and I think that this is the logic of the Budget—that that is not the case. I think that there are two kinds of inflation—demand inflation and cost inflation; and that an understanding of those two concepts is of much greater importance in understanding how a modern economy works than all this talk of money supply, and so on. I may have got it wrong, but I thought that the late Lord Keynes debunked the money supply theory about 35 years ago, and I find myself siding with those who regret that this piece of nonsense has been resurrected in recent years.

Let us go back to demand inflation and cost inflation. What is demand inflation? It is that situation where the total demand for goods and services in the economy as a whole exceeds the capacity of the economy to supply and meet that demand. It seems to me absurd to suggest that we are anywhere near that situation in Britain today. Total effective demand is nowhere near supply potential, and I am fortified in that view because it has been supported recently by none other than Professor Paish in his article in Lloyd's Bank Review for January.

This is a case of a sinner coming to redemption, because for a long time I have taken a different view from Professor Paish on this issue. Of course he is right. We still have substantial unused capacity in the economy. There are more than 700,000 unemployed, which is still by any standard a big figure, and far too high. In addition, there are a large number of people who are not registered as unemployed but who, nevertheless, are available for work. This always happens when demand is slack, and it has happened in recent years.

If one looks at the figures for 1966, one sees that more than 23 million people were in employment at that time, while the figure for 1972 was just under 22 million. There was, therefore, between 1966 and 1972, a drop of 1¼ million in the number of employed. During this period unemployment rose by about 600,000, which was half the fall in employment. But the National Plan estimated that the work force available today would show an increase over 1966. I do not want to get bogged down in detailed figures, because there is a danger in so doing. Calculations of this sort are, inevitably, imprecise, but it is reasonable to assume that there are about 1 million people in Britain today not in employment, but not registered as unemployed, who would he willing to work if work were available.

If on top of that, one assumes that the irreducible minimum unemployment figure at any time is between 300,000 and 400,000, it is then reasonable to assume that about 1¼ million people who are available for work are not in employment. If one adds to that the fact that there is still considerable underemployment in British industry and commerce of people at work, for reasons of inadequate demand, that hardly suggests a situation of labour shortage or of pressure of demand on the labour market. There may be exceptions in particular places here and there but, in general, there is a shortage of jobs.

The same is true in terms of plant capacity. There is plenty of spare capacity in British industry today in terms of plant and equipment. There is no pressure of demand, except in very small areas. Indeed, surely the failure of investment to rise during the last year or so has largely been because plant and equipment installed in the past is not yet fully utilised.

I think it follows from all this that there is no great pressure of demand in the economy today. There is no danger of the economy overheating, and it is therefore nonsense to suggest that we are living in times of demand inflation.

This also makes nonsensical the money supply theory of inflation as applied to our present conditions, because if the theory has any meaning it is that the increase in the money supply has created demand or has given latent demand the means of becoming effective which has resulted in a total effective demand in the economy as a whole being in excess of supply potential. But the total effective demand is substantially below supply potential, so clearly the money supply explanation of our present inflation is nonsense.

I am one of those who have grave doubts about whether it is possible to control the money supply anyway, because it seems to me that the velocity of circulation, non-banking sources of money, and so on, render it impossible for the Government to control it anyway. But whether my doubts are correct or not, whether they are justified or not, it seems to me that an increase in the money supply can be inflationary only if total effective demand is already equal to or in excess of supply potential.

Since that is not the case today it seems that one has to look elsewhere for the cause of our present inflation. One comes back to the fact that it is a cost inflationary problem. Putting it simply, one cannot have an increase in income of 15 per cent. and an increase in output of 5 per cent. without something giving, and that something is clearly the price level. We have a cost inflationary situation today.

To some extent this is due to a rise in import prices. I do not want to waste time on that now because there is not much that we can do about it. But the situation is due mainly to the rise in incomes in excess of output.

About this, there is something that we can do. Income-cost inflation arises because of the effect of monopolistic influences in the labour market and the general sluggishness of that market. The monopolistic forces are, of course, well known. They are trade unions, not just of wage earners but of salary earners—and professional bodies—as well. There is a third factor which has the effect of a monopolistic force, and that is public opinion. In recent years, public opinion has tended to support every wage claim, fair or unfair. Public opinion has become important in influencing a settlement, so it has the effect of a monopolistic force.

In the '50s and early '60s, so long as we had fairly fast growth and accelerating growth and accelerating increases in living standards, the monopolistic forces in the labour market tended to act with considerable restraint, but in recent years, from the mid-60s until 12 months ago, there has been little or no growth in the British economy.

As a consequence, in an effort to opt out of the consequences of little or no growth, these monopolist powers have been used. Unions have flexed their muscles. Exorbitant wage and salary claims have been demanded and granted. The fact that these are very soon eaten away by the consequent inflationary price rises is of course irrelevant. The unions have used the monopoly power that they have had for a long time to try to enable their members—again I am talking about salary earners as well as wage earners—to opt out of the consequences of little or no growth.

I am not trying to pass any moral judgment on them. They are entitled to do as they have done. But, equally, this does not and should not stop the Government trying to do something about it. The Government have a duty to try to stop it and this is why I supported the freeze, why I support phase 2 and why I support an incomes policy. Of course I would prefer a voluntary policy, but since that does not seem to be possible at present or in the foreseeable future, we must have a statutory policy.

We are now on the path of growth again. I would hope that, over a period, as people get used to growth again, some of the pressures of the monopolistic forces in the labour market will lessen, but whether that happens or not does not matter. At present, we have this cost-inflationary situation and the only way to deal with it is to have a statutory policy but at the same time to pursue a growth policy come what may, since in the long term the only conceivable way of lessening these pressures is to ensure that people are getting wealthier and wealthier as each year goes by. I can see no hope at all of ending cost inflation unless we can succeed to do that.

I said earlier that I was sorry that my right hon. Friend did not commit himself to growth for a longer period. He committed himself to 5 per cent. growth for just over a year. He could have gone much further. On a very conservative estimate, we have about 10 per cent. spare capacity in the British economy. I understand, although I am subject to correction, that the Treasury estimate is that the underlying increase in the capacity of the economy is 3 per cent. each year. This means that, with no increase in the underlying increase in the capacity of the economy, we could have 5 per cent. growth for five years.

But surely, if the Government were to pledge themselves to 5 per cent. growth for a long period, and if they were to make it clear beyond the slightest doubt that, come what may, they were going to stick to this, and if they showed that they would go about it with some determination, I should have thought that investment in new plant and machinery would increase. Thus the underlying increase in the capacity of the economy would increase, too. Then, we might even be able to have 5 per cent. growth indefinitely.

But if we are to achieve this, there has to be an absolute pledge that stop-go is out for all time. We have to convince businessmen that this is the case and that they have reason to have confidence in the future. People do not invest for fun or create more capital capacity for the sake of doing so. Many of those who invested in the early and mid-60s on the basis of promises of 4 per cent. growth got their fingers badly burned. Some of the capacity that they created then is still not being used now.

This time, if we are to succeed, we have to convince them that growth will go on and that it will be worth investing on a long-term basis. There is no other way to go about this, and I would despair of the future of this country if we could not do it.

Over the past 20 years, we have lost out far too much with stop-go policies and all the associated evils. We have lost out against all our international competitors. The time has come to say, "Enough of this", and to go for growth as our principal economic aim. I hope that, if my hon. Friend cannot say so tonight, my right hon. Friend will be able to go a little further when he winds up the debate on Monday by affirming his belief in 5 per cent. economic growth, not just for a year or 18 months but for five years ahead, to give this country the environment in which it can begin to compete not only in the Common Market but in the world at large.

7.26 p.m.

Mr. John Fraser (Norwood)

I think that everyone on this side of the House would agree with the hon. Member for Leek (Mr. Knox) that we would like to see a period of sustained growth. The difficulty in the past, as it no doubt will be in the future, is that it is easier to state the proposition than to succeed with it. But I think that we all echo the hon. Member's sentiments.

I am as concerned as my hon. Friend the Member for Huddersfield, West (Mr. Lomas) about the pay of public service workers. I do not want to devote much of my speech to that, but we must get to the point at which we try to have a settlement of public service workers' pay in one go at the beginning of each year. Time and time again it is predictable that, if local government employees receive an increase, it will be reflected in increases to nurses, hospital workers, probation officers, policemen, social workers and a whole series of pay claims which will follow.

What we must try to aim at is a series of discussions about public service workers' pay, probably before the Budget each year, which will do a number of things. First it should achieve, as one tries to do with the Civil Service and to some extent with teachers' allowances, a comparison between the pay of a public service worker and the pay of his counterpart in private industry.

Secondly, those negotiations should take into account the demand for certain kinds of employee. It is monstrous that we should all worry about the increase in crime yet not pay enough money to produce an adequate supply of policemen, or pay so little that experienced officers leave the force and go elsewhere. That demand for workers must be taken into account.

Thirdly, and perhaps most important, one needs a round of negotiations with public service employees which takes account of the relationships between one set of workers and another. It is impossible to reach a pay settlement with probation officers without at the same time affecting the pay of social workers and other people doing similar jobs. Until we get around to that kind of discussion—for instance, a discussion about pay in the gas industry which takes place at the same time as a discussion about pay in the electricity industry, linked together each year—we will have very little success.

An overall settlement would do two things. First, the Chancellor would know before presenting his Budget in March or April the kind of demands for pay that had already been settled in a very large sector of employment. Secondly, it would also set the tone for the pay discussion which often takes place in private industry rather later in the year.

There would have to be a compact between the two sides that pay in private industry would not race ahead of that for public service employees; one would have to try to achieve that compact. I believe that it could be done very much by voluntary means. The trouble at the moment is that many Governments try a policy of divide and rule and find that they are utterly unsuccessful. Unless these discussions are linked together it is impossible to have a special case, because one man's special case becomes the next man's special case and the whole point of a special settlement is lost.

I now wish to turn to a subject in the Chancellor's speech which very much disturbed me. It relates to interest rates. What the Chancellor seems to have chosen to do, in pushing interest rates up to about 9 or 10 per cent. on gilt-edged securities and public savings, is to produce an inflation which helps the moneylender in order to fight an inflation which might help the worker. The Chancellor had a choice between the two, and he has chosen the form of inflation which will assist people who have money and who lend it. There is no doubt that high rates of interest are inflationary in themselves.

On 25th February an interesting article appeared in the Sunday Times on this subject. It said: Rising interest rates, which have accelerated in recent weeks because of the Bank of England's efforts to curb the money supply, have now become a major inflationary element in their own right. Increases already made over the past 12 months could lead to a staggering £1-a-week rise on the cost of living for British families and there could be worse to follow. It is clear that even the Government's Green Paper allows interest as an essential element in the inflationary spiral.

On page 5 of the Price and Pay Code we are told that Increases in interest charges payable by an enterprise are allowable cost increases. That means that if that element in the increased costs of a producer is money which is paid in interest, unless he is on the fiddle—that is briefly summarising the exceptions—he can pass on that cost to the consumer.

It is impossible to separate inflation in interest rates from other forms of inflation. The Government have got away with it fairly well by abolishing Bank Rate. They hope that no one will know what is going on. In the past, when Bank Rate rose from 6 per cent. to 8 per cent., the fact was spread across the evening newspapers, with headlines such as "Home loans will cost more" and "More unemployment." A rise in Bank Rate was always regarded as a very bad sign. The ordinary man on the Northern Line does not understand Treasury bill rates quite as well.

I must admire the Government for devaluing and not calling it a devaluation but a floating; and for putting up interest rates not by abolishing Bank Rate but by calling it something else. Between 12th October last year and the present day the Government have engineered an increase in interest rates of 50 per cent. I was amazed to learn this morning that a finance house, on first-class security of building land which is in demand, is lending money at the rate of 6 per cent. above the finance houses' base rate. That means a rate of interest for building, on a first-class security—not on second or third mortgage—of 16 per cent. That money eventually is added to the price of houses.

How does that appear to the man in the street? The worker receiving £30 a week qualifies for a rise under the £1 plus 4 per cent. formula of £2.20 a week. The worker earning £60 a week qualifies on the same basis for a rise of £3.40 a week. Consider, however, the man whose income is £60 a week derived from interest on money which is lent, who has £50,000 invested at, for example, 6 per cent. last October and, therefore, an income of £60 a week in interest. With the rise in interest rates from 6 per cent. to 9 per cent., taking the very lowest base rates, he receives a rise in income of £30 a week.

If a worker works for 30, 40 or 50 hours a week and earns £60 a week, he gets £3.40. But if a man sits on his bottom waiting for the bank to send him interest quarterly for doing nothing he gets a rise in income, thereby adding to inflation, of £30 a week. It is no £1 plus 4 per cent. for him. What is more, as from 1st April such a man will have the additional benefit that out of his £3,000 per annum unearned income, for sitting on his bottom, he will receive a considerable saving because the first £2,000 of that income is to be taxed at the basic rate of 30 per cent. and he will also have personal allowances.

There is gross unfairness as between the worker and the person who does not work. The rises in interest rates add to inflation. Let us take more concrete examples. Let us assume that the £30-a-week man has a mortgage of £5,000. It is absolutely certain, as certain as we can ever be, that mortgage interest rates will rise by about ½ per cent. very soon. They are bound to rise. As a result of what the Chancellor has said, people will be taking their money out of building societies. Perhaps they would be unwise to put it into premium bonds, but they will put it into some of the more attractive options that are now open.

If the building societies want to retain money to lend to house purchasers, they will have to increase their rate of interest. The banner headline across the back pages of the evening newspapers tonight is Building society interest rate to go up to 9 per cent. Whether that is an official announcement is neither here nor there because we all know that that is what will happen. So the man earning £30 a week and with a £5,000 mortgage, even assuming that the rise in interest rates is only ½ per cent., will have to pay an extra 50p per week on the cost of buying his house.

Let us look at the situation of such a man. His permitted rise under the Green Paper is £2.20. After he has paid income tax it will be even less—£1.54 a week. Then he pays, allowing for tax allowances, an extra 35p per week on his mortgage. That reduces his real income increase to £1.19 per week. On a £30-a-week wage that is a net increase in income of 4 per cent. Can the Chancellor or any hon. Member on the Treasury Bench assure such a worker that the cost of living will not rise by 4 per cent. in the coming year? What is more important, can the Chancellor assure that worker that the man who derives unearned income from interest payments will be restrained in the same way as he is? There is no justice in this

I turn to the effect of the rises in interest rates on investment. These must affect investment because 9 per cent. is about the basic, gilt-edged rate, the base rate. But one can approach banks and finance houses, and for first-class security the interest rate will often be 14 per cent. to 16 per cent. We are told that the Government's strategy is that profit margins are to be reduced. But if profit margins are to be reduced, people will not be prepared to borrow money at high rates of interest in order to invest. No one will borrow money at between 10 per cent. and 15 per cent. unless he can make a greater profit on it by selling goods to the public. Therefore, the effect of the rise in interest rates must be to reduce the amount of investment.

I conclude by dealing with house purchase. One answer we could have is that the rise in building society interest rates will mean a fall in the price of houses. Provided that the supply of houses remains constant, a reduced amount of money available for house purchase will mean a drop in price because fewer people will be able to buy. I do not regard that as a satisfactory answer, least of all to many of my constituents who are living in the most appalling housing.

The other answer might be that the Government are to make more land available for development by means of the hoarding tax. But even the most favourably inclined commentators have recognised the hoarding tax to be a mere gimmick which may well have the reverse effect and may even cause people not to apply for planning permission in order to avoid paying the tax. Therefore, that looks like being a gimmick as well. Thus, the result may be that we have even fewer houses built than the appalling total which the Government give us at present, the lowest total for about nine years, even in the private sector.

I shall make a number of suggestions. First, there should be public ownership of land or development and redevelopment. We have tried gimmicks such as the betterment levy. Either local authorities or a development authority must be empowered to acquire land needed for development and make it available to the market quickly, particularly for house building. Only in that way can the supply of houses for sale be increased and their price kept down.

Secondly, just as we have no market in land because it is a monopoly situation, so we have no market in interest rates because they are essentially controlled by the Government. The Government fix the rate at which money is lent. The result is that the profits of banks soar enormously. Nobody can be complacent about the amount of profit that banks have made out of Government operations. The banks should be in public ownership.

Thirdly, we know that the banks do not accord the right degree of priority to people who want to borrow. Many people who want to buy the freehold of their house or want to add a bathroom to it or buy an essential addition cannot borrow the necessary money from the bank. Most of us know that anyone with reasonable credit status can still borrow the money to acquire an XJ6 or some luxury. During the period of the Labour Government, time and time again money was not made available according to the right priorities. We need the land in public ownership, because that is an essential element in getting the country's problems sorted out. We need the banks in public ownership. We should not have to resort to gimmicks when the power to control the economy could be considerably increased if the banks were in public ownership and were accountable to the public. The right priorities in lending could be established for social lending purposes. We could control interest rates to a much better extent, and if necessary we would be able to control the money supply.

If the banks were in public ownership we could control the money which was lent. Instead of the Government having to pay people 9 per cent. to put their money into public funds, the money could remain dead in the banks if the banks were publicly controlled. For far too long the public have allowed themselves to be controlled by factors in the financial set-up which have not been accountable. If the banks were publicly controlled, the people would be better able to control their own affairs and they would be able to accord to themselves the priorities which are socially right.

7.54 p.m.

Mr. Hugh Dykes (Harrow, East)

The hon. Member for Norwood (Mr. John Fraser) has one endearing quality which stands out from his other qualities. He is always carried away and succeeds in going too far. It is bad enough considering the logical economic effects—there is none—arising from the nationalisation of the steel industry. It is worse to consider the logical economic effects—there is none—arising from the nationalisation of the motor industry.

It would be impossible, disastrous, and inconceivable to consider what possible benefit could accrue from nationalising the banking system so that we could, in some curiously artificial way, fix the going rate of interest. That does not stand up to any analysis that is within the parameters of our society, unless we go right away from society to the Marxist form of society where presumably these things are possible, because that sort of society ends up by banishing the rate of interest in the real sense.

Mr. John Fraser

Will the hon. Gentleman concede that fixing the rate of interest is precisely what the Government are doing at present?

Mr. Dykes

Not in the institutional sense on a continuing basis, which is what I think the hon. Gentleman was referring to. The Government, in so far as they are the ultimate determinant of the money supply, fix the rate of interest at any one time through the Treasury bill system as the prime source of credit. Then the whole thing permeates through the banking system, and various rates of interest are established at different levels.

That is different from saying that the Government can, in a concerted way, in our mixed economy—despite the counter-inflation proposals, it is still very much a mixed economy and a mixed society—impinge on the interest rate in a physical way, as the hon. Gentleman was suggesting. However, I do not want to prolong the discussion on this point. This is a matter that the hon. Gentleman and I can discuss outside the Chamber.

That does not gainsay the overwhelming priority now for the Government to be within the perspective of seeing a reduction in interest rates. I am as anxious as is the hon. Member for Norwood about the prevailing level of interest rates and its effect on private consumers as well as on the totality of the credit system, on building, on building society mortgages, and so on. There is common ground as to that. It is means rather than ends which are perhaps at issue.

None the less, my impression about interest rates is that we are probably approaching the peak of interest rates. They may be at or very near their peak now. Undoubtedly the prospect over the coming months and into 1974 will be much better.

As to the Budget and its overall impact, I add my congratulations to those which have been expressed from this side—there was even a grudging indication of some admiration from one or two hon. Members opposite; it was perhaps trying for one or two hon. Members opposite to admit such admiration—not only on the way in which my right hon. Friend handled the modalities of his proposals, but also on his sticking to a clear-cut strategy for the year ahead. This is not a Budget which is full of measures, but it impinges upon several key priority areas in terms of economic management and in terms of one or two important and outstanding social and economic proposals which have been made and which should be accorded a universal welcome in the House.

I therefore think that my right hon. Friend the Secretary of State for Trade and Industry went too far when he became angry with the Opposition. It is not necessary to become angry with the Opposition. I am sorry for the Opposition at present as they try to respond to what my right hon. Friend the Chancellor of the Exchequer has been saying and doing and proposing in the Budget statement. It will be welcomed outside. Clearly there are a number of things that for social and economic reasons remain to be done, but all of these things cannot be done at the same time.

The one pillar of the Budget statement—namely, management of the economy—by and large, and subject to detail, the Chancellor will have got right. His priority of the 5 per cent. growth rate is welcome. There were commentators outside who may have imagined last year that this commitment was weakened by the Government because of the difficulties facing them on other fronts. I am very glad that that is not so.

I believe that all hon. Members will welcome heartily the increase in pensions, which I calculate at just over 14 per cent., in comparison with a 12½ per cent. increase last time. As regards special assistance for the elderly, through one fiscal device or another, it is worth remembering that age exemption relief against income tax has been increased three times in three successive principal spring Budgets since the Government came to power. This is therefore a considerable step forward and I hope that it is only the beginning of a longer-term process to accord much more generous treatment to the retired, either by way of direct payments from the community through the pension system or through fiscal reliefs and other inducements. Therefore, one is extremely encouraged by the overall tone and theme of the Budget Statement. But since the Minister is here I should like to put one or two points about various aspects, and I would welcome answers later.

It is a little like talking when the water has long since flowed under the bridge, but I have never been an enthusiast for the imputation tax system. In a long scenario of many things that the Government have done since June 1970 which I applaud, I have always been sceptical about the tax system. None the less, it is now a decision of the Government and I only hope that they will be prepared to look closely at its effects. When we see the taxation changes in Britain over the years, through one Government or another, it seems to me more and more difficult and increasingly problematical even to draw any meaningful conclusions of one kind or another about the effects of a particular tax structure on companies so far as distributions are concerned, or so far as retentions are concerned, depending upon one's political philsophy.

I think the disadvantage and the complexity of the imputation tax system will not be outweighed by any potential and possibly imagined benefits from a greater distribution as and when the counter-inflation policy allows a normal distribution process to resume. If one wanted to encourage that, the one thing that one should have done would be to continue to lower the central rate of corporation tax, and although it was introduced by the Labour Party it was to my mind a far more logical system than those in Europe now or the imputation tax system.

None the less, that is a minor criticism in so far as it is possible to judge the effects of a particular tax policy on the net cash flow and gross cash flow in a company. It is also difficult to be dogmatic about it one way or the other. I hope the Treasury will be able to give assistance and advice to many individual companies which are still in a genuine confusion about the effects of the imputation tax system on themselves, especially if they derive any earnings from overseas.

I turn to the motor car tax, which was confirmed by my right hon. Friend at 10 per cent. The combination of the car tax at 10 per cent. and VAT at 10 per cent. is a considerable reduction on the rate of purchase tax at 25 per cent., following a reduction last year—if I am right in my recollection—and a considerable improvement on the rate of purchase tax prevailing on motor cars when the Labour Party was in power. None the less, I am one of those excessive optimists who hope that the car tax itself will eventually disappear, either in steps or in one go.

I think I am right in saying that in Table 9 of the Financial Statement, relating to tax receipts, the estimates for 1973–74 net on a partial year basis are about £120 million, and presumably somewhat more than that on a full-year basis. That is not a large amount of money emanating from this tax. Taking the totality of the Budget and the totality of the net borrowing, it would be possible to see the practicality of suppressing this tax. I hope that it will be a temporary measure—not that the Government have indicated that it will be, but clearly if one wants a logical system it should apply to all goods and services with the exceptions, which so far Parliament has welcomed, of particular categories, and I do not see any logical reason for the car tax to persist.

Despite the administrative burden of so doing and despite the fact that Treasury officials, the Inland Revenue and Customs and Excise have all been over working and are therefore reluctant to take on more, I hope the fact that interest relief on credit and credit-sale transactions is not available for under £35 of interest will eventually lapse because, despite the administrative burden of covering all the tiny transactions, it is inequitable that we should have this kind of provision. That is a minor point but a necessary one.

I now wish to refer to the remarks of my hon. Friend the Member for Leek (Mr. Knox), who is not in the Chamber at the moment. By now it is well known that my hon. Friend the Member for Leek is not only merely keen on economic growth; he is a fanatic about economic growth. We on this side of the House should pay tribute to him for what was an outstanding economic analysis of the problems facing us. One of the things which have always concerned many people outside the House—perhaps more outside the House pro rata than inside—and have worried me over the years is that we do not seem to have established in our minds as a psychological factor the acceptance of the overriding priority of economic growth. On this occasion I believe that my hon. Friend uncharacteristically was rather modest and cautious.

I should like to see as a target a higher rate of growth than the 5 per cent. commitment which apparently exists—not that I believe that it can be higher than the 5 per cent. level now or in the foreseeable future. There are too many alternative problems facing the Government's economic policy for that. But in the future the country must face up to the daunting, sobering but none the less unavoidable challenge of trying in one way or another over the long term to resume a rate of economic progression which will once again narrow the gap between ourselves and principally our European competitors and friends and other advanced industrial societies.

I very much fear for the future of this country, even in purely sociological terms, if we do not express the growth philosophy with the frank zeal which my hon. Friend the Member for Leek shows on these occasions. If not, we shall be in trouble over the long term. It is easy to say that a combined collection of short terms means only a long term and that we should face only those factors which will arise in the immediate future. That would be fatal, and the Government are aware of that. The economy is not only capable of a 5 per cent. rate of growth this year but is capable of doing that and more next year.

There are already some indicators that the rate of growth in the economy could at this time be in excess of 5 per cent. That is encouraging, and I only hope that the Government will continue this commitment. I hope the Government will be bold about the balance of payments. I know that it is difficult to talk about these matters now and it is impossible to talk about currency matters whilst this week's discussions are going on.

If I may refer to my right hon. Friend's statement yesterday, reported in column 246 of the OFFICIAL REPORT, when he mentioned the tremendously encouraging surplus on invisibles now running at £700 million per annum, he refrained from giving any figure for any estimate of the visible trade deficit which he mentioned as likely to persist throughout the year. That is the normal pattern and it is difficult to quarrel with it. There are fairly obvious reasons why no specific figures are given because they can cause difficulties. They can have an effect on confidence.

Perhaps I am too ambitious. None the less, I would be glad if the Minister would be bold about this and give an indication of the figures which he and his right hon. Friend have in mind. So far as I can recall from the ensuing comments last night, nothing was said, and nothing so far has been said today. I say this not because I wish to be mischievous, and not because I do not wish to acknowledge the importance of being cautious about the balance of trade estimates bearing in mind the overall repercussions. I say it for precisely the opposite reason—because I believe that the obsession with the balance of payments is in danger of growing once again, although the currency is now on a different basis.

To my mind, far from being dangerous in the traditionally accepted sense, it is very sensible to talk about these figures and in that way to defuse the danger. I say it, above all, because I believe that the figures of current visible deficit which have appeared from one source or another—£850 million from one quarter recently, and the original alarmist forecast of £1,000 million in the London and Cambridge Economic Bulletin—should be defused and neutralised so that they do not create an overall alarmist effect.

It seems to me that we should now be sophisticated enough to say that the character, structure and style of the United Kingdom economy, its overseas trading obligations and the position of its currency—subject to what emanates from any discussions this week—are such that, by and large, this country will incur a fairly sizeable trading deficit, and the main thing to ensure is that we have a healthy progression of exports. There are now encouraging signs in this latter respect, and I consider that we ought not to be excessively concerned about the level of the trading deficit itself, so long as it does not get out of hand. Taking one year with another over the long term, if this country is able to trade with a small visible deficit, the position is satisfactory.

We have made many mistakes over the years, disastrous and easily avoidable mistakes, by being obsessed with the idea of behaving, as it were, as a proper creditor in local bank manager terms. But this is not the rôle and function of a sophisticated society with its many obligations.

8.12 p.m.

Mr. Tam Dalyell (West Lothian)

The hon. Member for Harrow, East (Mr. Dykes) extended his sympathy to the Opposition in having to reply to such an excellent Budget, as he saw it. I always remember the late Iain Macleod telling my right hon. Friend the Member for Cardiff, South-East (Mr. Callaghan), the then Chancellor, that a Budget which looked good in the spring almost invariably looked bad by July. I will make a bet with the hon. Member for Harrow, East. When he and I are sitting in that hot and sticky Committee Room 10 at the beginning of June, he will not be nearly so happy with this Budget. I believe that, far from being neutral, the Budget is reckless to the point of irresponsibility, and a gamble which should not have been taken.

I recall—this is the only vituperative comment I shall make—that last year's Budget was cheered to the echo. But let us not misunderstand the situation. It was the effect of that Budget and the measures within it—the give-away to a whole sector of society which could afford to do without it—which led to the present situation, with the civil servants striking for the first time in their history and the hospital workers in a critical situation in West Lothian and many other places tonight. If the Budget looks good to the hon. Gentleman today, that may well not be as good an omen as he thinks it is.

I turn now to the question of the public sector borrowing requirement, which has risen from £2,855 million to £4,423 million. Some of us doubt whether selling to the non-bank public is more than tinkering with the problem, and we believe that the various ingenious ways of selling to the non-bank public are almost certain to fail. Is there any evidence that these eight measures are attractive enough to the non-bank sector to implement the policy which the Government desire?

I put to the Secretary of State in an intervention that there will be a sharp increase in interest rates, after allowing for the expectation of rising prices. It was clear that the right hon. Gentleman could not answer the question which I put about the effect on interest rates in the summer and autumn of this enormous borrowing requirement. Perhaps the Financial Secretary can do better when he winds up the debate?

As it was clear that the right hon. Member for Worcester (Mr. Peter Walker) could not answer the question, I ask again now what the effect on interest rates will be, because I thought that the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) was more right than most of us would care to admit when he talked in terms of an interest rate war. Will that not be the situation if there is a failure to do something about the borrowing requirement?

In the same context, is it not fair to say that in all that the Government have said about their Budget so far there has been an absence of money supply targets? I find this worrying. Anyone who is concerned about these matters, whether Friedmanite or not, must be concerned about the money supply, and we detect in the Budget no definite guidelines as to what the policy is.

The truth is that the Government are in a frightful fix, because, as the Financial Secretary knows, the Chancellor knows, and many others know, the frank answer in this situation would be to increase taxation. Here lies the difficulty. If one increases taxation, how can one operate a counter-inflation policy? The dilemma is real.

I hasten to say that I am not one who has ever said that there is an easy way out by somehow getting the money which is needed from the very wealthy. I put a slightly different argument. Last year, the tax changes benefited people with large incomes, and in this Budget the Chancellor has refused to withdraw those concessions. We have the contrast between no increase in family allowances and the continuance of disaggregated income for rich children, the money given away in stock options, and so on.

It is not sufficient of itself, it is no panacea, to say that the Chancellor should have gone back on his give-away to the rich last year. But it is a prerequisite for any increase of taxation which some of us must frankly say is necessary. We cannot have an increase in taxation on those, say, above £40 a week without going back on all the giveaway to the really wealthy last year. Cancellation of the give-away, therefore, is a precondition for the policy which I believe has the best chance of success, namely, some rise, though not a dramatic rise, in personal taxation.

I emphasise once again, less it be misunderstood, that in the context of the basic economics with which the Treasury has to deal I am not saying that the cancellation of last year's give-away is sufficient of itself. It is not. But unless it is done any increase in taxation such as I suspect may be necessary in June or July cannot be carried out. That is the argument, and I leave it at that.

I wish now to put a specific point to the Treasury about public sector borrowing. I do not propose to go into Concorde, post-Apollo or many of the other projects, but I must say that I think it high time that the Treasury interested itself in the lending to International Computers Limited. I have it on the authority of people I trust in the computer industry that what at the moment is a figure of £14 million, and is generally increasing, will over a decade rise to £100 million or more. I repeat the figure—£100 million plus. I have it on the judgment of people in the computer industry not connected with IBM whom I trust in these matters. We have to think very early of the price we are prepared to pay for a British computer industry. At least, it should be discussed. It would make a very good debate or a very good investigation by a Select Committee again. Here a valued judgment must be made: are we sure we are prepared to Day that amount of money over 10 years for a British computer industry, rather than put our eggs in the IBM basket. It may be that we are prepared to pay for a British computer industry.

The Financial Secretary is here and it would be churlish of me not to say that I am glad about the arrangement for children's shoes after all those questions I asked and all the speeches I made in Committee. I am glad that it has been done. I do not know whether the Financial Secretary can claim virtue for not doing something which was ill-conceived in the first place. Nevertheless, I give him the benefit of the doubt and I say. "Thank you".

There is one matter about which I wish to be churlish and it concerns the share savings scheme. It is quite true that in Committee last year I asked many questions at some length to, I think, the Chief Secretary to the Treasury, about whether the share option scheme could be extended to everybody working in a particular industry. At the same time I expressed grave doubts about the whole concept. I should like to return to those doubts. The Government say that there should be a chance to buy shares on specially favourable terms for as little as 70 per cent. of the normal price ruling when a man joins the scheme, and that he could still retain the option at a later date either to take up his shares at a profit or to keep his savings in cash, which would provide a system of save-as-you-earn payments.

All this in a package looks good but on further examination it is highly suspect. First, though it is true that there will be protection against a fall in the value of the shares during the saving period because there will be a right to opt out of the share purchase when the SAYE contract matures and instead to keep the cash proceeds, nevertheless, there is no protection—nor can there be—once the shares have been acquired in full by the employee. Those of us who have something to do with Rolls-Royce shares know of the very grave problems involved.

All right, it has been successful in the United States perhaps, in a different context, or has it? The Americans have doubts about their own experiences. But given our set-up, I have considerable doubts about the scheme, partly because it is a drag on mobility. When a man of 30 or 40 finds suddenly that his face does not fit in the firm to which he has been attached for 10 or 20 years, I am not sure that he should be bound to that company. I ask the Treasury therefore, to say that it can make real provision for transfer rights. I am unhappy about shares which have no dividend or voting powers and I am unhappy about the question of transfer rights.

Even supposing that it is a good scheme, that it will create a greater sense of loyalty and hard work, I cannot think in the present situation that it is unobjectionable to do this in private industry and not to make similar advantages available, if they are advantages, to hospital workers, post office workers, teachers, and those who by the very nature of their employment, cannot benefit, if it is a benefit. It is for these reasons that I pour a good deal of cold water on the proposition.

My right hon. Friend the Member for Norwood (Mr. John Fraser) raised the question of public service workers and the civil servants, and I agree that some serious thought has to be given, along the lines that he suggested, perhaps in a debate or in some other kind of investigation, to each occasion when various promises which we had thought were biparty are broken. Once one goes back on Priestley and that kind of idea, either there must be a debate in the House or we must return to the original promises.

I regret very much a Budget that not only does not make proper provision for payment to those who are in immediate crisis but does not make a proper provision for the long term for those who by the very nature of their employment cannot benefit from the kind of scheme that the Chancellor has put forward. We must be serious about Priestley because the Government's answers have been wholly unsatisfactory.

I turn to the regional question. The Chancellor said …specific additions to programmes contrated on the regions, and those additions run down rapidly after the coming financial year to 1973–74."—[OFFICIAL REPORT, 6th March 1973; Vol. 852, c. 249.] I wonder whether the Financial Secretary will expand on the answer that the Secretary of State for Trade and Industry gave me this afternoon when he said that discussions were going on on the phasing out of REP. I refer, as did my right hon. Friend the Member for Leeds, East (Mr. Healey), to the discussions which he and I and a number of our colleagues had with Lord Stokes, George Turnbull, Ron Ellis, John Barber and other senior members of Leylands. I am surprised that the Secretary of State should say that the motor industry had never complained to the Government, because Leylands said to us, and it is public and can be quoted, "All right, let us expand but we want a Government which is a bit more cosy for us in that it gives us a warning".

As the Financial Secretary knows the big truck and tractor factory is in my constituency which is Bathgate. A warning of Government measures must be given to the motor industry so that its investment plans can be adjusted so that it will not be faced with a situation which means an influx of a great many foreign vehicles. If Leylands, like others, wishes to return to REP—it was stated publicly that it is an extremely important part of its investment programme—and if the talks are going on at the eleventh hour, I shall not turn round and say that we shall have a great victory if the Government agree to continue the scheme. I just plead on behalf of the areas like Scotland that the REP, which has worked well and has brought some sense of continuity into investment programmes, be looked at favourably and also that there should be some consideration given to warning the motor industry of changes in policy.

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

The hon. Member will appreciate that one of the main problems under the previous Government was the rapid fluctuation—generally in an upward direction—of purchase tax. He will understand that the change to VAT and the car tax—for the reasons I explained last year, that if there is any need to change the level of tax on cars it is likely to result in smaller fluctuations than on previous occasions—will mean that the industry can therefore invest with more confidence than before.

Mr. Dalyell

In candour I must say—or is it hindsight?—

Mr. Higgins


Mr. Dalyell

—in candour and in hindsight I think that there was too much mucking around and changing under my own Government. I think this is what happened in the 60's and we should learn our lessons. All I am saying is that for heaven's sake let us pay the motor in- dustry the compliment of warning it of changes in good time so that it can be in a competitive position, because with the upturn in the number of vehicles coming into this country we ought to be prepared so that we can at least compete on equal terms not only with our continental friends but also with the very formidable Japanese competition.

I should like to ask the Financial Secretary why the Chancellor in his Budget judgment did not decide to put up the tax threshold. I am baffled by this, because it seems that this Budget will hit many of the poorest members of the community by not helping them with allowances against inflation. A good deal has been said about fiscal drag. The fact is that tax-free allowances set off some of the cost of inflation. It is the poorest members of the community who benefit less than before. So I ask this as a question. Why was it that it was decided not to raise the tax threshold? I would have thought there would be some administrative advantages to the Revenue in raising the tax threshold.

Incidentally, while talking about the Revenue, I should like—and I make no apology for doing so—to pay a considerable tribute to the work of the East Kilbride tax centre. It gets many brickbats, especially from the Press. I should like to say that I have found the uttermost co-operation, quick, well-informed and helpful, at East Kilbride and I would like the Financial Secretary to let it be known to the East Kilbride staff, who, incidentally, are not my constituents and do not vote for or against me, how helpful they are.

I ask a question on VAT. Why is it that small companies seem to have been left out of the transitional arrangements? This is the complaint they have been making. They say that they are left out of the transitional arrangements, and that those arrangements work to their disadvantage. Perhaps the Financial Secretary would comment on that.

Mr. Higgins

I wonder whether the hon. Member would spell out what he means. I am afraid I have not quite caught it.

Mr. Dalyell

The representations we have had are that small companies under the VAT transitional arrangements are not at the same advantage as major firms. They say those transitional arrangements operate to the disadvantage of the small companies.

Mr. Higgins

Does the hon. Member mean the companies with taxable turnover of less than £5,000 a year?

Mr. Dalyell

Yes—the CBI.

Mr. Higgins

If so, the answer is that they will not be paying VAT on output tax thereafter.

Mr. Dalyell

I am not clear what the turnover is of the people who have made representations to me. I will find out more about it and write to the Treasury. This may be an ill-conceived complaint. I put it only as a question.

I come to North Sea oil. As a former member of the Public Accounts Committee I can only pay tribute to what our parliamentary colleagues have done on that Committee. I would like to raise an issue which, to my knowledge, has not been raised before. This concerns land speculators. It is associated with the finding of oil in the North Sea. The fact is that one particular firm seems to have acquired a considerable part of Shetland, which is valuable for North Sea operations, and also extensive land holdings in the Cromarty Firth area, and is now trying to acquire areas in West Scotland which would be a good springboard for the Celtic Sea for getting any oil which is found in the Western Approaches. This may be all very well, but after all that has been said about oil companies, I should like to ask whether the buying up of land by a particular firm is right, whether it is right that it should put pressure on the oil companies to pay exorbitant prices for land once it is acquired.

The Shetland islanders, whom I like very much indeed, are very secretive people about their own business. For anybody who knows the Shetlands the truth is that Shetland people are a very secretive lot. On the whole one does not tell one's neighbour in Shetland what one is up to, and, lo and behold, they have now awakened to the fact that this single company has purchased a substantial part of the land—one neighbour not knowing what another neighbour was doing. It might be a comic opera situation, but it is not at all so funny, because what is at stake is not only the future life of the Shetland islanders but whether it is right that those who operate in land, however shrewd, able and hardworking they may be, should make excessive profits at the expense, in this case, both of the oil companies, and, indeed, of the people of Britain as a whole

I should like the Treasury to interest itself, in the formidable way that Great George Street can in the land speculation that is associated with Scottish oil and to ask the Scottish Office, the Department of the Environment, the Department of Trade and Industry to join in a co-ordinated departmental inquiry into the ethics and the legal aspects of what has happened about the acquisition of land which would serve as a springboard for finds near the Shetlands, in the Cromarty Firth and off the Western Approaches. I echo what my right hon. Friend the Member for Birkenhead (Mr. Dell) and others have said about the fourth round licences.

We are told by the Sunday Telegraph that the Government have decided to order three through-deck cruisers. As they cost at least £60 million a time, I question whether that is wise public expenditure.

If the Secretary of State for Trade and Industry thinks that our Far East markets will expand dramatically, he should disabuse himself of the idea that we can extend o r trade with China to a great extent. As the Financial Secretary knows, I had the good fortune to go with the Scottish trade delegation to Peking. There is no more ardent supporter of British trade with China than I, and I wish the trade fair in Peking well, but the Secretary of State should not think that trade with the Chinese is the panacea answer to our overseas trade problems.

When the Finance Bill goes to Committee Room 10 I shall pursue in detail and at length the ways in which pollution legislation call be geared to the fiscal system. The Financial Secretary and his advisers helpfully wrote many letters to me last year, so I am stocked up with a great deal of information. I warn the Financial Secretary that this weekend I shall be going to the Anglo-American conference on pollution at Ditchley Park which will be attended by American congressmen—McClosky, Mosher, Professor Paul Doty and others, full of admiration for Senator Muskie's Bill and Mr. Ribicoff's legislation.

I hope that my hon. Friend for Heywood and Royton (Mr. Joel Barnett) will not keep me off the Finance Bill Committee for saying this, but I shall come with bundles of information accumulated from Ditchley and elsewhere on ways in which the fiscal system can be geared to more effective anti-pollution measures for the protection of the environment. The Treasury has been warned, and I hope it will give some thought to it—it might even introduce a clause into the Finance Bill.

8.40 p.m.

Mr. David Crouch (Canterbury)

I was interested to hear that the hon. Member for West Lothian (Mr. Dalyell) is going to Ditchley this weekend. I am sorry that I shall not be with him. I was invited but I have other engagements. I would have liked to have been there to confirm that the hon. Gentleman is not really so gloomy about our prospects as he sometimes sounds in this Chamber. It has been said of my hon. Friend the Member for Leek (Mr. Knox)—a fellow Scot—that he is a fanatic who lives up to his name. I think he is a fanatic. But sometimes in our debates, particularly on the economy, the hon. Member for West Lothian fills me with an air of depression if not gloom.

For example, in referring to the Chancellor's share savings scheme the hon. Member used the phrase, already used by others, that it might create a lack of mobility of labour. I cannot see how this can be so because it is so easy for a person in a share savings scheme who chooses to move to get out of the scheme by taking his savings in cash. That is how I understand my right hon. Friend's proposal.

We must try to see most of the proposals put forward by any Chancellor in at least two ways. First there has to he a conservative approach, and secondly a more generous approach. In this case I agree with the right hon. Member for Devon, North (Mr. Thorpe) who said today that it was an important step in the right direction.

I am pleased about three elements in the Budget. I am glad about the Chancellor's determination to continue with a high rate of growth. This was the most important and overriding element in his statement yesterday. I was concerned beforehand that he might have felt that he should not continue with the rate of growth which we have now achieved. It is remarkable, with all the vicissitudes on the industrial scene and the world monetary scene, that we have been able to gear ourselves up, thanks to the Chancellor's measures, to a growth rate of 5 per cent. I am glad that he has given such a clear indication that he is determined to keep that up for a long time.

It pleases me too that the Chancellor did not have cold feet about VAT. If ever a new tax has been given the wrong publicity by the Press and by many other spokesmen it is this one. This is an across-the-board tax and we now know that the Chancellor has fixed it at 10 per cent. I am glad that we have one rate and not two rates, as is the case on the Continent, and that it is not 12½ per cent. or 7½ per cent. The Chancellor has stuck to his guns and has not deferred this tax. I could not understand the right hon. Member for Leads, East (Mr. Healey) suggesting—and this was the only constructive thing he said—that the Chancellor should defer the introduction of the tax. He did not say what other form of taxation he would have continued. He did not say whether he would have continued with a half-rate SET or a half-rate purchase tax. All that he could offer us was that he would not have done anything because he had cold feet.

The hon. Member for West Lothian spoke of the North Sea oil and gas revenues and the failure of the Government in recent years to take a sufficient share from those facilities on the North Sea shelf. I accept the Chancellor's decision and the recommendation of the Public Accounts Committee. The Government were not entirely wrong to be so generous in deciding not to recover more taxation. At least the exploration was done rapidly. There has never before been such rapid industrial exploration and development. I have had close briefings from some of the oil companies and the Gas Corporation about this and I feel that when the public know what is happening in the North Sea, especially the northern part, they will realise that the work done in the last five years has laid the foundations for an entirely new future for Great Britain. By 1985 the North Sea will be producing enough oil to make us self-sufficient. In three years from now in the gas industry we shall be using only North Sea gas. The Government were not altogether wrong in having a rather less tight tax arrangement, thus encouraging such rapid development.

About a week ago I recorded with a certain Mr. William Hardcastle a speech on the Budget of about one minute in length which, I understand, was put out yesterday while the public were waiting to hear what the Chancellor was saying. A number of us had been asked what we hoped for from the Budget. My present speech will last rather longer, but in that one minute I expressed the hope that the Chancellor would do two things. I was rather schizophrenic because I wanted him to spend more in one direction while curtailing expenditure in another. My disappointments are that he has done neither. Perhaps it was a pity that he did not hear my one-minute speech before making his Budget speech yesterday.

I wanted my right hon. Friend to spend more of the taxpayer's money on those who today are finding it very difficult to meet the sudden rise in the cost of living which has occurred in the last year, particularly in food prices. I had hoped to see an additional sum allocated to family allowances. This to me was the most readily available mechanism for meeting a real problem which everyone of us faces today.

Only the other day in a radio broadcast I heard the Prime Minister's housekeeper saying that she had to ask for an increased allowance from the Prime Minister himself. The same has happened in my family. The same happens in every family. To every retirement pensioner, every young family and every family with children this is a problem of real magnitude and I am sorry that my right hon. Friend did not see fit to do as I suggest.

Mr. William Baxter (West Stirlingshire)

I am interested in the hon. Gentleman's line of argument. He welcomes VAT which replaces a tax which made the more or less wealthy pay a higher rate on such things as jewellery and furs. That burden is now being spread to the poorest of the poor, who, when they need household linen and other goods, have to pay their proportion of VAT. The hon. Gentleman weeps crocodile tears about the great burden which is being placed on those people. Does he not recognise that the greatest burden is being placed on the poorest of the poor by VAT?

Mr. Crouch

I will leave my hon. Friend the Financial Secretary, who is perhaps the greatest expert in the House on this question, to deal with the hon. Gentleman's interjection. I believe in VAT, because I believe in a type of indirect taxation which involves an element of choice in payment. What is excellent about our version is that we are not putting it on the essential requirements that we buy each week, such as food, as distinct from the practice in some of the Common Market countries.

My second disappointment is that I had hoped that the Chancellor would announce a reduction in public expenditure. I must confess that I am one of those who for a long time have felt that the annual rate of public expenditure is too high for our economy to bear. Towards the end of his speech the right hon. Member for Leeds, East hinted that perhaps the Chancellor would bring forward another Budget at the end of the year. My right hon Friend said very strongly that he did not intend to do so but hinted that he was not overlooking the problems, of which expenditure was one, and would not hesitate to take the necessary action if he felt that expenditure was running at too high a rate.

Expenditure is something that we must consider. If the Chancellor is satisfied with it now, I hope he will institute considerable studies in depth to assure himself that we are not overheating and causing an inflationary pressure on the economy by the large sums of public expenditure on which we are now embarked.

Mr. Baxter


Mr. Crouch

My hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) referred to the subsidies given to the nationalised industries which, he said, were running at £500 million a year. That distresses me very much. We cannot go on in that way. We cannot subsidise nationalised industries and produce a service to the public at below the correct price. We must move towards the time when the nationalised industries sell their services at the proper price. We are getting further away from the real price of the service which they sell. Gas is no longer a viable industry, and electricity is being sold at less than its cost and the industry is running up debts all the time.

We must introduce a new discipline into the management of our nationalised industries to avoid getting into a position when the Government must ultimately pick up the tab of excessive deficits into which we are running. I know the difficulty which the Chancellor faces. He must say "I cannot do it now because under phase 2 it would immediately raise the price of essential services." I agree. All I am asking the Chancellor to do is to reconsider subsidies to the nationalised industries in future. We must try to catch up with the problem and bring the nationalised industries back into economic reality.

The hon. Member for Huddersfield, West (Mr. Lomas) said that the nationalised industries should not attempt to be economically viable. That is a fallacious argument. It is true that a large sector of the services they provide is a social obligation. The House has accepted that. However, a large sector of the goods and services which the nationalised industries supply—in fact, the largest part—should not be subsidised and could be separated and sold at the economic price.

We have a massive expenditure programme still in hand for the nationalised industries sector which we have debated. I have spoken in favour of the massive support for the British Steel Corporation by means of a £300 million a year investment programme. I have supported the £1,000 million for the coal industry. Together those two programmes over 10 years total £4,000 million.

We are thinking today of very large figures. We let them trip off the tongue very easily. I am afraid that there is sometimes not the same restraint on expenditure that there used to be. It is having its effect on the nationalised industries. They are no longer so concerned about their costings or estimates. I meet them a lot as a member of the Select Committee on Nationalised Industries.

There is no doubt that there is a considerable change. The nationalised industries tend to think that the Government are a generous supplier of finance.

We are also spending a lot of money in high technology areas—for example, nuclear energy and reactor systems. I understand that the Atomic Energy Authority has been spending nearly £1,000 million on the development of reactor systems. This is the new and exciting technology in which we must engage. We share an expenditure of another £1,000 million on Concorde. As we all know, there is a risk element in Concorde. A great amount of money has gone behind another risk venture—namely, the RB211 engine. The catalogue is there and the sum mounts up.

I am concerned above all with one area in which the Government contemplate a very large expenditure on a project which is not even adventurous. On the contrary in my view, it is foolhardy. I refer of course to the Maplin project. It was said earlier that a project costing £1,000 million as seen today is not one with which we shall be concerned in 1973–74. However, we are concerned about it in the medium and the long term and to spend £1,000 million on Maplin will buy us nothing. It is not even a high adventure, like the Concorde.

I believe and have said many times that it is a wrong project; it is wrongly conceived. I am glad that it is to be examined in depth by a Select Committee of this House which, I hope, will study every possible aspect of it, hear all the petitions against it and report back to this House eventually so that we may know exactly what the Select Committee's deliberations arc. I hope too that the Government will think about this. I ask the Treasury and my right hon. Friend the Chancellor of the Exchequer to think about Maplin. I want to see my right hon. Friend exercising a restraining hand on these vast expenditures. That is what I expect of a Chancellor of the Exchequer. It may be that my right hon. Friend's hand has not been sufficiently strong in the past in this way.

I know that there is about Maplin more than an airport. A seaport will be attached to it. It may be that a seaport there would be viable. The Port of London Authority believes sincerely that a seaport is an essential development of its whole complex. It wants to move down the estuary and build at Maplin a seaport which is comparable to Rotterdam. It is prepared to finance it. It is not looking to the Government for money. But it will depend on the Government to provide the infrastructure, and it is that which is so expensive for the Maplin complex. It will cost £500 million, before an airport is built, to construct the necessary road and rail links, and it is that £500 million worth of expenditure which the Port of London Authority will enjoy. However, my real criticism does not concern the seaport so much as the airport. I criticise the vast expenditure proposed against a very indifferent prospectus of return.

There is another area on which I am concerned to see that the Government do not embark and which they should not accept readily if the proposition is put to them. I refer of course to the Channel Tunnel. We have heard it said all along that the French railways want it. British Railways have said that they want it. The French Government have said that they want it, and I believe that the British Government are about to say that they want it—

Mr. Baxter

On a point of order, Mr. Deputy Speaker. Are those two propositions included in the Budget?

Mr. Deputy Speaker (Mr. E. L. Mallalieu)

It is a very wide motion and these are very large expenditures.

Mr. Crouch

Thank you for your protection, Mr. Deputy Speaker. All that I ask the Government is, in their consideration of announced expenditure programmes and possible future programmes, to consider very seriously whether we can afford such additional expenditure programmes as the Channel Tunnel. I believe that it will be yet another candidate for the White Elephant Club.

I hope it will not be thought that when my right hon. Friend the Chancellor of the Exchequer gives a nod on these matters it is as good as a wink. I hope he will begin to use his iron hand on these matters concerning public money. I want the chairmen of the nationalised industries to feel that the Chancellor has an iron hand. I want my right hon. Friend the Secretary of State to feel the iron hand of the Chancellor. I want my right hon. Friend the Secretary of State for Trade and Industry also to recognise that the Chancellor has an iron hand upon some of the areas of expenditure where his Department might be perhaps over-enthusiastic. Above all, I want the economy to feel the result of my right hon. Friend's restraining hand on any expenditure which may look like a risk which we should not be taking.

We must consider this Budget along with phase 2 and phase 3 of the prices and incomes policy. I believe, as my right hon. Friend said this afternoon, that if we can get over the hump of our present difficulties in the next six months with so much going well for us—we have a good rate of growth; expansion and investment have really got under way again—and with recognition of this by the CBI, both private and public sector employees and the TUC and its members, there is a chance for Great Britain thanks to this Budget and the prices and incomes policy.

9.0 p.m.

Mr. Denis Howell (Birmingham, Small Heath)

No doubt the House will be surprised to find me winding up today's debate on the Budget—no more surprised than myself—but there are two matters of considerable importance to which I wish to refer—first, the new land hoarding tax and, secondly, the Government's proposals about rating revaluation.

I find it odd that both these matters should find their way into this Budget. It is a measure of the lack of substance in the Budget that these two matters, which are causing concern throughout the country, had to be planted in the Budget to give it any semblance of relevance to our social problems.

The Secretary of State for Trade and Industry made a typically rumbustious speech today. We always enjoy his speeches. However, I was extremely sad that he should think it right to lecture hospital orderlies and cleaners about their wage demands in terms which were inaccurate and may be bitterly resented by a class of workers to whom the nation as a whole owes a great deal and who are being driven to the point of absolute distraction.

The right hon. Gentleman is usually fair-minded. If he thinks, for example, of the male domestic workers in our hospitals earning £17.65, of the people running hospital kitchens earning £18.10, and of the male porters working a 40-hour week earning £18.56, whose take-home pay, after deductions for superannuation, tax, and so on, is only a little over £14 a week, he will realise what a disgrace that is to the country as a whole.

It is true that these matters should have been dealt with years ago. I think that we are all in favour of giving increases to nurses, doctors, teachers and hospital orderlies, but generally against providing the taxation out of which our public servants can be properly recompensed. The right hon. Gentleman's reference to these workers was extremely unfortunate.

We heard a remarkable speech by the Leader of the Liberal Party, who cannot be here this evening. I make no complaint about that, though I think that he might have spared one of his colleagues to attend. I understand that the right hon. Gentleman cannot be here because he has gone to the Central Hall to launch the local government policy of the Liberal Party. I thought that was what he was doing this afternoon. I can only hope that what he is doing at Central Hall is more relevant than what he did in Parliament this afternoon. No doubt as he had a good turn out on the Liberal Benches then, that explains why they have gone to hear him a second time.

The right hon. Gentleman made some astonishing assertions. He complained about the Labour Party's attitude to what he called "workers on high pay", whom he said we continually support.

When asked to give an example, he referred to the gas men. They are the workers on high pay whom the Leader of the Liberal Party is attacking the Labour Party for supporting. I do not think that the right hon. Gentleman was saying that last week when he was going round Chester-le-Street trying to get votes for his candidate.

Another of the right hon. Gentleman's statements which caused me to lift my eyebrows considerably was that the Liberal Party had been doing a survey on the low paid and had found a secretary in Durham who was earning £10 a week. I have to declare an interest. I happen to be president of the Association of Professional, Executive, Clerical and Computer Staff which organises the employment of secretaries throughout the country. As the right hon. Gentleman referred to this case, I rang Newcastle to find out the current rate of pay in Durham and to ascertain the accuracy of the right hon. Gentleman's statement. I am glad to be able to report to the House that the going rate at Newcastle and in the North-East generally is £18.60 at the age of 18 for a properly qualified secretary. For adult secretaries, the rate is between £21 and £23.

I had intended asking the Leader of the Liberal Party what he intended to do with his survey now that he had it. Either he is incapable of interpreting it, or, if it is a fact that he has discovered a secretary earning £10 a week, he has an obligation to advise that lady to join my trade union. I hope that I may be forgiven that commercial. If this is an authentic case, it must be one of the worst examples of exploitation to be drawn to the attention of the House for a long time. It may be that like so many of the utterances of the Leader of the Labour Party—[Laughter.]—the Liberal Party. That was not a Freudian slip. No doubt the right hon. Member for Devon, North (Mr. Thorpe) would like to be the Leader of the Labour Party. We ought not to pay too much attention to him on this matter.

I know that the Financial Secretary expects me to say something about the imposition of VAT on sport. The hon. Gentleman has represented his country on the sports field with great distinction, but he has disappointed all his friends in the sporting world. There is a strong feeling of resentment in British sport that all the pleadings of the sporting bodies have been rejected by the Government and that VAT is to be imposed on sport. It will mean a considerable handicap to professional sport—soccer, cricket, and so on—but it might be an absolute knockout blow for most of our amateur sports and semi-professional sports such as rugby league which my hon. Friend the Member for Pontefract (Mr. Harper) cherishes and always refers to when we discuss sporting matters.

I am sure that everyone was sad to read in the papers this week about the women's cross-country team that is taking part in the world championships. What has happened is a national disgrace. Not having the financial resources to enable them to get to the venue in time to rest properly before taking part in the championships, the members of the team have had a whip round and put in money themselves in order to be able to travel overland in a Land Rover. This is a shocking state of affairs.

The 10 per cent. tax on sport makes nonsense when it comes to taking the money at the gate. I ask the House to imagine 60,000 people trying to find 1 p or 2p in order to get into the Arsenal football ground. It will be a physical impracticability for this tax to work well where large numbers of people are going in to watch sport. But the main complaint against it from all the sporting bodies is that sport is an essential part of the national environment and it has been treated badly. For the first time for many years, it is to be taxed, and there is considerable resentment about it.

I want to turn now to the two provisions in the Budget that affect local government. The first is the land hoarding tax. The most that any of us can do about that tax is to welcome it as a gesture in the right direction. It is nothing more than that—it is not a tax with any substance—but at least the Government are acknowledging the position. Indeed, when one considers the problem of people who hoard land or the failure of builders to get land in the right place to build houses for young married couples or of local authorities in our crowded urban areas to get land to build houses for people who are homeless or overcrowded, one wonders what is the relevance of the tax.

The Government specifically ruled out this tax only a few months ago on 9th August, when the right hon. Member for Brighton, Pavilion (Mr. Amery), speaking as the Minister for Housing and Construction, referred to a question about hoarding land and said: I doubt whether there is a great deal of serviced land hoarded at present. So, as the Minister responsible, he was denying the problem. He went on: The problem is not so much about land being hoarded and how to get it into circulation."—[OFFICIAL REPORT, 9th August, 1972: Vol. 842, c. 1811.] He specifically ruled out the prospect of a tax. One is bound to ask what has changed since the right hon. Gentleman made that speech.

The second point about this tax is that it completely lets the speculators off the hook. The real speculators are the people who get hold of land, parcel it up, get planning permission and then flog it at extravagant prices to local authorities and others who must have it. This tax is totally irrelevant to that problem. Indeed, in August 1972, acknowledging the problem—I am glad he did—the Chancellor used the word "offensive", about the "gross profits" being made by speculators. If those gross profits are offensive, why have the Government done nothing in the Budget to deal with them? This tax will have nothing to do with the offensive profits that the Chancellor admits have been made.

The Financial Times on 23rd February this year reported that there had in one year been an increase of 52 per cent, in the profits of property companies. No wonder that these profits were grotesquely offensive. Again, that is the measure of the failure of the Budget to deal with one of the greatest social evils of our time.

Mr. Eadie

I think that my hon. Friend is on to an important point. Would he bring out the difference between land zoned for housing purposes on the development plan and the proposition by the Chancellor which is entirely different, since zoned land will not be affected by the Budget proposals?

Mr. Howell

I am grateful to my hon. Friend. I shall touch on that point among the other things I want to say about this tax, although not quite in that direct way.

What all the pundits seem to believe about this tax is that it will be totally unworkable and will solve no problems. First, anyone can apply for planning permission. One does not have to own land to apply for planning permission. Let us just think of the situation which will be created when someone else can apply for planning permission on one's land and, having got it, if one does not develop that land one will be taxed on it. The Chief Secretary shakes his head, but that is the situation as I see it. I hope that that sort of matter will be dealt with. The hon. Gentleman may shake his head, but certainly we ought to have had a much more adequate statement about the way in which this tax is to be interpreted. It only proves my point that it is just a political gimmick and that that is why it has found its way into the Budget.

I come to another matter. A man may own a piece of land somewhere, probably next door to his house, and may want to test the market price of his house. The way to do it is to apply for planning permission and to find out what is offered for it. That is a perfectly honourable practice. If a man does that under these proposals he will be taxed for just finding out the value of his land and whether he could have development permission for that land from the local authority.

Builders need a land bank. If a successful builder wants continuity of employment for his work people, he has to have land. If he wants to build about 10 houses a year—most of our building industry is comprised of small concerns—he will be taxed if he is proven to have enough land to keep his employees in work for seven or eight years. That is a piece of nonsense.

Many builders who have planning permission cannot get ahead because there are no sewers. Perhaps the local authority has not provided drainage or, perhaps, there is no access road to the land for which the builder has planning permission. How do the Government intend to deal with that sort of situation? Will they impose this tax on a builder who has planning permission but who cannot build through no fault of his own but probably through a failure of the local authority or because the owner of access land is trying to force up prices when the builder is trying to do a public service by keeping them down? It is a ridiculous situation.

Most important, this proposal totally ignores the capacity of the building industry. It also fails to deal with the most essential question of what we should do about the land speculator who is not applying for planning permission. That is the essence of the matter—the man who has a lot of land, who parcels it up and sits on it hoping that inflation will push up the price. He will not apply for planning permission to build. A hoarding tax which applies only when planning permission has been given is totally irrelevant to that central question. As my hon Friend the Member for Norwood (Mr. John Fraser) said, the only relevant way of dealing with a shortage of building land is to take into public ownership all land needed for development purposes. That is the only practical possibility, and the House will have to face that sooner or later.

My final objection to this tax is that it will be passed on. It is not a tax which will be paid by the speculator. It will be passed on to house buyers. It will he counter-productive. It will force up the price of houses, as we all know. That is why it is totally irrelevant to the problem that faces us.

This tax could be relevant to the problem facing the Government only if it were accompanied by the control of house prices. If house prices were controlled it might be relevant, but it is quite impracticable to control house prices. Anyone who has been in the industry or knows anything about it will know that that is so. If we are not controlling house prices, there is nothing to stop the builder or whoever is paying the tax from passing it on immediately to the house buyer.

There are no proposals in the Budget to deal with mortgages. It is a scandal that so many young married couples are being prevented from buying a house. To be able to borrow money to buy a house it is necessary to have an income way above the national average.

Another notable absence is that there is no mention of action to deal with properties such as Centre Point which stand empty. It is now months since the then Secretary of State for the Environment, in a purple passage, said that the scandal must stop—specifically, Centre Point—and that, if they did not get on and use the building, he would take action.

I turn finally to the question of revaluation. The Government propose to try to help those hit by revaluation. Some of us were present at the Guildhall on 13th December and heard the Prime Minister say: …it would be totally unreasonable for revaluation to be used as an excuse for increasing the total of the demands on the ratepayer. The Prime Minister could not have put the matter more simply or more pungently.

However, it would be impossible to find a solution to the problem of revaluation which was more hamfisted, more ineffective, more costly to operate and more irrelevant to ratepayers' needs than the one that the Government have produced after months of dithering. They propose that ratepayers shall carry, not only any burdens due to inflation and the expansion of the social services, but also the first 10 per cent. of any further burden due to revaluation, and then the Government will help as to only half of the remainder. No wonder it will cost the Treasury only £10 million.

Liverpool tells us today that 87½ per cent. of its domestic ratepayers will get nothing from this solution. Leeds tells us today that a 38.6 per cent. increase for the domestic ratepayer in Leeds is the minimum which will be required if there is to be any help under this solution. Birmingham tells me that a 25 per cent. increase will be necessary there before the Government proposal produces any relief or, to put Birmingham's case in another way, there will have to be an increase up to 2.91 times the present rateable value before help is granted under this proposal.

To illustrate the point, I will give some examples which I have been able to obtain in the short time we have had at our disposal. Consider, under the revaluation proposals, a house in Birmingham which at present has a rateable value of £63 and carries rates of £59.53. The rateable value will rise to £192. On a rate of 40.5p which Birmingham is likely to levy, the ratepayer will pay not £59.53, but £77.76, and all he will get under this proposal to assist him to meet that tremendous extra burden is £1.68—less than £1 per half year. What a ridiculous proposition to put to the House.

A pre-war council house in Bristol with a rateable value of £55 is to rise to a rateable value of £144. This will mean an increase of rates for this council house tenant of £22, in addition to the increased rent he will pay. Under this proposal he will get the magnificent relief of 67p a year on that fantastic increase. A prewar council flat in Bristol with a rateable value of £50 will rise to £146, which means an increase of £27 in rates to be paid by the tenant. He will get relief of £4.

Let us see how totally inept these proposals are from the point of view not only of revaluation but of the general question of rates. There is nothing in the Budget statement which helps ratepayers. I am not surprised that the Association of Municipal Corporations put out a statement today expressing its dismay that all the things which the association told the Government have been neglected. I am not surprised to find that the association made clear to the Government as long ago as last November that in the current wages policy a 10 per cent. increase in rates was the maximum considered reasonable to impose on anybody. The association expressed its dismay at the Government's refusal to do anything to meet the situation.

It is well to remind ourselves that local government is about housing the people. It is about educating their children, providing for the sick and elderly and caring for the deprived. This is not a luxury service. It is part of the essential fabric of our society. When the Government refuse, as they are doing, for one reason or another, to give help where it is most needed, they are strikiing a blow at the fabric of society. I know that the Government say they are giving 60 per cent. this year, but they are giving it mostly in the wrong places.

Mr. Higgins

Do not be silly.

Mr. Howell

The Minister says, "Do not be silly". Birmingham is not getting 60 per cent. It is getting 51 per cent. Many other of our large cities which told the Prime Minister four weeks ago about their problems are not getting anything like 60 per cent. The present rate formula is totally inadequate to meet the needs and social requirements of our cities. The Government recognise that. They say that they will try to deal with the problem next year. But it is not next year when the ratepayers will have a stop imposed on their wage increases. It is this year. Therefore, it is this year when the Government should face the situation and produce better solutions to the problem.

In Birmingham and other places the Government's policy has placed additional burdens on the ratepayers. It costs Birmingham £1 million to operate the Housing Finance Act. Then there are interest charges in Birmingham alone. These amount to an additional £3 million this year, and they are likely to go up again. That is a direct result of Government policy.

One is entitled to express dismay at the treatment which the local authorities have received. The local authorities, in particular the six large cities, have put their problems to the Prime Minister, but they have not been listened to. They have waited week after week. Rate demands are going out. Local treasurers are in a devil of a mess. They get this mouse of a solution, a solution of revaluation, which will cost more to administer than the relief itself. It is ironic that local authorities, which are complaining about revaluation, are to be given £10 million. That is because they sell housing, education and welfare. If they were selling ice cream and lollipops the relief would have been £110 million. That is the best commentary that one can make on the social values of the Government.

The Budget proposals for dealing with land speculators acknowledge the problem but fail to meet it. Nobody in this country, either in the building industry or outside it, believes that these proposals will work. We await the further announcements of the Secretary of State for the Environment. We hope those announcements will be much more realistic because we want the Government to measure up to the size and importance of land shortage and land speculation. As to rates, we very much regret that the Chancellor has let this opportunity pass by. In the middle of a wage restraint, he is allowing a vital factor, rates, to get out of control in the way that I have described. He has failed to do anything to help the cities. He has no word of comfort or encouragement for the owner-occupier. Mortgage rates will continue to soar, and will probably take another leap this week. It is our judgment, therefore, that on these matters the budgetary policy will not help the Government in their economic policy, and it will certainly fail to meet the nation's social needs.

9.30 p.m.

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

Although we listened with interest to the hon. Member for Birmingham, Small Heath (Mr. Denis Howell), we do not accept what he said on the subject of rates and I have no doubt that on a later occasion others of my hon. Friends will take up some of the matters he raised. On the question of land, as the hon. Gentleman said, my right hon. Friend the Chancellor stated yesterday that the Secretary of State for the Environment will make a full announcement before the end of the month. I think it appropriate that we should listen to what he has to say on that occasion. We are familiar with the points which the hon. Gentleman made with regard to planning permissions and so forth.

I intervene at this stage in the debate to comment on the two main threads of the Government's fiscal and economic policy. In taxation our objective has been to reduce taxation and to reform our tax structure. In economic management our objective is to maintain economic growth and the improvement in living standards which goes with it and to win the battle against inflation.

I take first the question of taxation and in particular our reform of indirect taxation, the abolition of SET and purchase tax and the introduction of VAT. It is worth stressing at the outset that the Government are happy to stand on their record in relation to the general burden of taxation as compared with that of the Labour Government. In appraising the Opposition's complaints about the distribution of the tax cuts, it is well to remember that such complaints were hardly relevant in the years 1964 to 1970, when the annual tax burden was massively increased. Apart from the Budget shortly before the 1970 election and the only other Labour Budget in which there was a massive decrease of taxation—of £5 million—Budget after Budget introduced by the previous Government resulted in enormous tax increases. Given that history, I could not help but think in the debate on children's clothing a few months ago that it was a trifle curious that tax cuts equivalent to £55 million were then dismissed as trivial by the Opposition.

On this occasion the Budget reduces revenue by about £120 million in 1973–74, but its effect is broadly neutral. The case for a neutral Budget has been generally recognised and I think that those who, like the hon. Member for West Lothian (Mr. Dalyell), have advocated tax increases and the others who have advocated reductions have roughly balanced out.

Given the scope for change this year, my right hon. Friend has been right to concentrate help on pensioners and those with large families. He announced in his Budget speech that young children's clothing and footwear are to be zero rated under VAT, and this concession has been generally welcomed. It may be helpful if I say a word or two about the proposed relief.

As my right hon. Friend said yesterday, we had reluctantly to reject relief in this sector last year, principally because of the serious abuse of the concession through sales to adults of children's clothing. But the scheme which the Customs has now devised will, I hope, substantially reduce the scope for avoidance. The new relief applies to young children's "clothing" and "footwear", not "garments and footwear", so that VAT will not apply, as purchase tax did under the previous Government at a rate of 13¾ per cent., to young children's ties, braces, belts and school caps. Another change from the purchase tax is that the law specifically excludes from VAT relief clothing suitable for wear by older persons.

The Customs and Excise is to issue a notice, No. 714, setting out in more detail the relief and how it is to be implemented. I may say that this notice is eight pages long as against the previous purchase tax notice which was 32 pages long. This notice will be posted to all those who are registered in the relevant groups and will be available in local value added tax offices.

There are two points which I should add in this connection. The maximum measurements in respect of certain garments will be deliberately reduced below the limits used for the purchase tax, and in particular the design tolerances, which had I think been excessive, will be reduced. On the other hand, we are taking care to safeguard the position of clothes genuinely made for young children. With a multi-stage tax like VAT it will be possible for us to control matters in a way which was not possible under purchase tax by way of reference to the manner in which the articles are sold to the final consumer.

I turn now to the question of charities. I know that although the concessions for goods sold in charity shops will be generally welcomed by the House as they have been by the charities, some people felt last year that local branches of charities should be treated as separate entities instead of as part of their parent body so that, in the jargon which we developed in Committee last year, they should be disaggregated. After talking to a number of charities concerned, however, we found that there had been second thoughts on the suggestion and attention was concentreated on a better solution—the zero-rating of the sale of goods donated to charities such as Oxfam, War on Want and Help the Aged.

That means that not only will these charities be able to sell the goods without paying tax on them but that they will also be able to reclaim tax on business expenditure such as telephone bills and stationery. No tax will be payable on sales of donated goods even if they individual turnover of a shop exceeds £5,000 a year. A shop approaching that level will not have to worry about being penalised for being more successful by taking itself into the sphere of VAT, as would happen if it were simply disaggregated.

Last year we asserted from the Treasury Bench that the changeover from purchase tax and SET to VAT should not result in any significant increase in prices and that there was no reason to suppose that the changeover would be regressive. This was true then and it would still be true now even if my right hon. Friend the Chancellor had not announced the changes in the cover of VAT yesterday. Obviously, however, the changes he announced with regard to children's clothing and purchase tax foods in particular will be of particular help to those with larger families.

Since coming into office we have made substantial reductions in indirect taxation. If we had not made such reductions it would have been necessary to introduce VAT not at 10 per cent. but at 15 per cent. But, understandably, some members of the public are apprehensive, particularly those who feel that the changeover from purchase tax and SET to VAT will resemble decimalisation.

It is therefore worth pointing out two important differences between the changeover to VAT and the changeover to decimalisation. First, unlike the changeover to decimalisation there will be no new techniques for the housewife to learn. She will not be concerned with the mechanics of VAT but she will need to know on which items the tax burden will go up, remain about the same or go down, so that she can know what price changes to expect. That is why we have undertaken to publish details of the changes so that shoppers will have a clear guide. We shall therefore be beginning a major campaign in newspaper and television advertising, starting next week, to inform the public about changes in prices which people can expect as a result of the introduction of VAT and the abolition of purchase tax and SET.

The first advertisement showing what goes up in price, what stays the same and what comes down will appear in the Press and will cover a list of more than 150 items. This will appear next Tuesday and the first television advertisements will appear the same day. By 26th March a shoppers' guide leaflet will be available in post offices throughout the country.

The second point, which is a vital difference between decimalisation and the present changeover, is that we have proposed powers in the counter-inflation legislation to ensure that no price increases are greater than are justified and that price reductions take place when they should.

Perhaps at this point I might take up one question which was asked by the right hon. Member for Leeds, East (Mr. Healey). He has asked it I think on two occasions, one of them yesterday during my right hon. Friend's speech. He asked whether the fixing of the appropriate rate for prices affected by VAT will enable retailers to maintain a constant percentage margin rather than a constant cash margin. Someone referred earlier today to the fact that the right hon. Gentleman tends to read too many facts and figures. Alas, he does not appear on this occasion to have read the Green Paper. "The Price and Pay Code." If he had done so he would have found his answer in paragraph 56. We are taking steps to ensure that the retailers change their prices in such a way as fully reflects the change in tax burden. It means that we are asking them to keep their gross cash margins constant, except in so far as the abolition of SET calls for reductions. This is consistent with the definition of gross percentage margin as a tax-exclusive basis in the code.

Mr. Peter Rost (Derbyshire, South-East)

On the question of the Government's advertising, will it include also a campaign to cover all prices and reductions for services, particularly where there should be a marginal reduction. perhaps less than 10 per cent.?

Mr. Higgins

I will certainly bear in mind the point my hon. Friend makes. He will appreciate that this is a shoppers' guide and that, therefore, the items will be largely those which can be purchased in the shops or are likely to be purchased in the shops, but I will bear in mind the point he has raised.

There is one other point I should make about the transition. Unlike our original proposal for a tax holiday there will be no transitional period. The change in the system will be instantaneous because of the arrangements made for the refund of purchase tax on stocks.

In this connection I stress that the purchase tax rebate scheme will apply also to purchase taxed foods, so that along with many other items VAT will be less than purchase tax and SET, and the price reduction for confectionery, fruit squashes, ice cream and so on should be made with immediate effect from the introduction of VAT.

Mr. Baxter


Mr. Higgins

I am coming to the hon. Member's point in just a moment.

Mr. Baxter

But I have another rather important point. The Minister, quite rightly, is directing our attention to the simplified method of applying the tax in the shops, but how does he apply the tax to repairs in houses? Suppose that someone calls in a plumber to put in a new hand basin and the plumber, while he is there, repairs a pipe. How does the tax apply in a case like that?

Mr. Higgins

I would like to answer the other point the hon. Member made earlier. As for the second point I will gladly send him a detailed answer on it. I do not want to interrupt the main stream of my argument because I have a considerable amount to cover. I will come to his earlier intervention in just a moment.

As for the change in the tax rate on purchase-taxed foods, I believe that hon. Members opposite, who have been inclined to describe the change as trivial or even flippant, have grossly underestimated the extent to which these items are of importance in the budgets of large families or, indeed, the budgets of all those who have families with small children. To them it is an important item. They will cover, for example, items such as Ribena, and ice cream, of which children eat a great deal.

It is also worth making this point. Last night in the debate the question was raised about sweets and their effect on children's teeth. Clearly, this is a matter about which parents themselves will be concerned. The fact is that if tax on these items is reduced they may give priority to that and will buy more of these items. Alternatively, they will buy the same amount as before and have a saving to spend on other foods. This is a matter we can reasonably leave to them. It is quite irresponsible of hon. Members opposite not to realise that this is an important concession. It is one which will be regarded as such by those who have small children. To say what the right hon. Member for Leeds, East said this afternoon shows that he is out of touch on these matters if he does not believe that this is so. I know from my own experience and in discussions with those who are expert in this field that this is a valuable concession.

I come to the final point which was made by the hon. Member for West Stirlingshire (Mr. Baxter) in an intervention about half an hour ago. He asked how this tax will affect people on low incomes. He completely misunderstood the posi- tion. Following my right hon. Friend's further concessions in his Budget speech yesterday, we are giving relief to the most important items in the budget of low-income families. We are giving relief on all food, fuel, fares, housing and children's clothing and shoes. The tax, therefore, is specifically designed, as we intended, with the interests of low-income families in mind. The tax on a number of items which enter into the budgets of low-income families will be less than the tax imposed by the Labour Government, and that is an important matter.

I turn to a particular VAT proposal in the context of our counter-inflationary policy. It is not a proposal put forward by the Government but by others, including the National Institute of Economic and Social Research. I refer to the proposal for a "Negative rate of VAT on food".

In my view, it is not so much a proposal as a slogan and those who have been using the slogan have not taken the trouble to understand how VAT works. Indeed, most if not all of those who use the slogan have not even attempted to suggest whether such a negative rate should apply all the way down the credit mechanism chain, or whether it should, like zero-rating, apply only at the final stage. At all events, the House will appreciate that the difference is important. Unlike the National Institute of Economic and Social Research, which dismisses the technical problems in a single sentence— Such a system might not be all that difficult administratively inasmuch as most enterprises will already be required to fill in VAT forms. the House will appreciate after the debates of the last two years that such a system involving negative rates of VAT would be vastly different from the simple, single, positive rate system which the Government have devised.

Moreover those who use the slogan have not thought out some of the economic effects. Personally, I have some reservations about a form of subsidy which automatically gets bigger if the basic price gets higher, for one is effectively subsidising the inefficient more than the efficient. One of the advantages of VAT at present, in contrast with purchase tax, is that if a price is cut the tax is cut. With a negative rate of VAT if the price is raised the subsidy is raised. Is this what those using the slogan want?

When the TUC advocated a negative rate of VAT, was it in favour of a system which would give far more subsidy to someone buying, say, expensive cuts of meat than to someone buying cheap cuts?

However, clearly the argument about food subsidies—leaving the slogan on one side—is important and I would like to deal with it. The fact of the matter is that if the price of food in the world market goes up, then we as a country have to pay more. There is nothing which the Government or anyone else in this country can do about that. None the less it is sometimes argued "Well, none the less you ought to subsidise food". Now one can do that in such a way that the burden which is imposed on us by the higher food prices in the world market is redistributed between one group and another—

Mr. Dan Jones (Burnley)


Mr. Higgins

This is a complex argument and I should like to get to the end of the paragraph. Unlike the right hon. Leeds, East (Mr. Healey), who thinks that even if he has only one interruption he is being continually interrupted, I have given way several times. I want to develop my argument.

One can do that in such a way that the burden which is imposed on us by the higher food prices in the world market is redistributed between one group and another, but one must be absolutely clear what the consequences will be. First, across-the-board subsidies going to everyone, whether in need or not, would he immensely expensive. Moreover, because the elasticity of supply in many of these cases is likely to be very low, most of the subsidy would go, not to the consumer in the form of lower prices, but to the supplier. There would probably be some increase in the total quantity consumed and some reduction in prices below the level prevailing before the subsidy, but much of the subsidy would not go to the consumer.

If that is so, the essential point arises that the money must come from somewhere. Either we would have to put up direct taxes, such as income tax—but this would reduce take-home pay and as a result there would be pressure for bigger wage claims and we would be back on the old vicious spiral—or we would have to put up indirect taxes, which would raise prices in the shops and which again would be self-defeating. There is no panacea to be found there either.

What we can do is to ensure that the position of those most in need—for example, pensioners and people on supplementary benefits—is protected. We have said that we shall do that by raising pensions on an annual basis rather than on the previous two-year basis, and the effect of increased food prices will be taken into account in deciding the amount by which the pensions should be increased. That is a more sensible and rational method of dealing with this problem than that advocated by a number of hon Members opposite.

I turn to the question of the relationship between the Budget and our counter-inflation legislation. I start by stressing one very important political point about objectives and one of analysis. The point about objectives is this. The previous Government consistently adopted throughout their period of office a policy of deflation with a prices and incomes policy backing up their deflationary fiscal measures. The result was a period of prolonged stagnation. Real personal disposable incomes per head rose very slowly—on average, by 1.6 per cent. a year. I have no doubt that that stagnation in the growth of real incomes has been responsible, to a very large extent, for the growing militancy with which wage demands have subsequently been promoted.

In contrast, the Government have pursued a policy of expansion backed up by policies to tackle cost-push inflation, and as a result real personal disposable income per head over the last 12 months for which we have figures has risen by 7.7 per cent., or more than all the four previous years taken together. That is an important point.

Mr. Joel Barnett

Is the hon. Gentleman arguing that real growth had nothing whatever to do with the deficit which the Chancellor of the Exchequer spoke about yesterday?

Mr. Higgins

It was important that we should expand and put the economy on a sound basis, which is what we have done. But, as we made clear yesterday, as we proceeded with expansion we would expect there to be a growth in imports. My right hon. Friend the Chancellor analysed this question at great length yesterday.

I stress that the purpose of this Budget is to ensure that economic growth continues at a fast rate, but the threat of cost-push inflation is manifest. That is why the question of analysis is important. The House listened with great interest to the speech of my hon. Friend the Member for Leek (Mr. Knox). It is vital to distinguish cost-push inflation from demand-pull inflation. I do not think I have ever heard the two so badly confused as they were in the immensely witty speech of my right hon. Friend the Member for Wolverhampton, South-West (Mr. Powell) on 29th January. He said in terms: It has been the policy of…the Chancellor for the past 18 months or more to reflate. Now, if inflation is proceeding as it was when he initiated this policy, at the rate of 5 per cent. to 6 per cent. per annum, then reflation can only have one natural meaning, more and faster inflation."—[OFFICIAL REPORT, 29th January 1972; Vol. 849, c. 982.] No doubt hon. Members have considered what the level of unemployment and real income per head would have been if the Chancellor of the Exchequer had taken no reflationary measures in 1971 and 1972 which, if I understand his argument correctly is what my right hon. Friend the Member for Wolverhampton, South-West would have liked.

But in any event it is absolutely essential to recognise that an increase in level of demand is not necessarily inflationary. Certainly it cannot be taken as axiomatic as the quotation I have just made would seem to suggest. It depends on the relationship between the total demand in the economy and the total capacity which is available for producing things in the economy. Given the level of unemployed resources which we had a year or more ago, I am sure that it was quite right for us to increase in the last Budget, by fiscal means and by monetary means, the level of the demand in the economy in order to get us going at a faster rate and to mop up unemploy- ment. We have been very successful in both those respects, and this is important in terms of the real standard of living.

But the question then arises whether one can in some mystical way stop inflation simply by controlling the money supply. Here I think that the question one has to ask oneself is whether there is a legitimate distinction between monetary and fiscal policy. In fact, they are two sides of the same coin. A deflationary monetary policy and a reflationary fiscal policy would be sheer economic schizophrenia. If one were to try now to control monetary policy in such a way that total demand were reduced in a situation where there is still much unused capacity, of course one would stultify growth and increase unemployment.

It has been argued that it is far more difficult for a prices and incomes policy to succeed if there is excess demand in the economy than if there is not. I can agree with that. But the question remains, and was best put by my hon. Friend the Member for the Cities of London and Westminster (Mr. Tugendhat) this afternoon, whether there is now excess demand in the economy. To that question, given the level of unemployment and excess capacity which exists, I believe that the answer is "No".

A deflationary Budget is therefore neither necessary nor appropriate at the present time. That there is a danger of creating demand inflation we must recognise. Indeed, that is why the Budget is broadly neutral and why, after full boost at take-off to get the economy going, my right hon. Friend has already taken stringent measures to reduce the rate of growth in the money supply and encouraged the financing of the borrowing requirement from the non-bank public.

None the less, the danger of cost push inflation remains and despite the naive suggestion, if it was naive, of the right hon. Member for East Ham, North (Mr. Prentice) on Monday that inflationary wage claims were not really all that important, it is essential for our counter-inflationary legislation to succeed. This legislation and the Budget together provide the basis for a sustained fast rate of economic growth and for victory in the battle against inflation. In his speech yesterday my right hon. Friend laid the foundations, I believe, for the rate of economic growth which we in this country have the right to expect, but it depends on the success of our counter-inflationary policies which we are determined to pursue.

In Labour's last full year of office—that is in 1969—living standards in terms of personal disposable income per head at constant prices did not rise at all: Labour was committed to stagnation. In the last two years living standards have risen by 10 per cent. in real terms. We are committed to the expansion of the economy and the improvementof real liv- ing standards. Towards that objective I believe that the Budget makes an important contribution and I commend it to the House.

Debate adjourned.—[Mr. Murton.]

Debate to be resumed tomorrow.

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