§ The Chancellor of the Exchequer (Mr. Denis Healey)I said in my Budget Statement in March that the action I was then taking must be provisional and that a further Budget would be necessary in the autumn. I have also made it clear that I would make fresh proposals at any time if they were required. I consider that the time has come to take some further action. I hope the House will feel it is convenient that I should summarise my proposals in a statement today in advance of the debate on the economic situation which starts tomorrow.
The first and main objective of the proposals I shall now describe is to attack inflation at its source. The General Council of the TUC has recently issued guidelines for collective bargaining which have been welcomed on both sides of the House. Those guidelines envisage that pay will rise in line with the cost of living. Threshold agreements already operate to this effect. So, by cutting the increase in the cost of living I can also reduce the rise in industrial costs, assist-both company liquidity and the competitiveness of our exports.
Retail prices have risen 16 to 17 per cent. in the past year. The threshold has now been triggered six times. The main 1049 reason has been the unprecedented increase in the price of commodities—above all oil. There now seems at last to be hope of relief from the upward pressure of import prices, perhaps by the end of this year. My aim is to steady the rate at which our cost of living increases before then and so to reduce the number of threshold payments, each of which produces further price increases within six months or so.
The threshold arrangements mean that price reductions now are likely to generate less extra demand in the short run than would otherwise be the case. Given the likely extent of threshold agreements I estimate that the demand effect of price reductions by the end of this year may be only three-quarters as high as is normal.
Now a word on the economic background to my proposals. In the four months since the Budget the balance of supply and demand in the economy as a whole has become a little clearer. The volume of exports has been higher than seemed likely early in the year and the latest estimate of industrial investment in the first quarter is also encouragingly high. Personal consumption seems to have been roughly in line with what I expected, a little higher in the first quarter and a little lower in the second. The rundown of stocks in the three-day week proved less than expected. Pressure in the economy as a whole is easing a little. Because there is less need to replenish stocks in the months ahead home demand will be lower and there will also be less demand for imports than seemed likely in March.
World-wide reactions to the oil crisis justify some concern that the prospect further ahead is for recession. Some recent domestic indicators must increase this concern. As I said in my Budget speech, if Britain were a closed economy my inclination would be to do more about domestic demand.
But Britain is part of the world economy, heavily dependent on the actions and attitudes of her partners in world trade. I must therefore ensure that action on prices does not upset the gratifying progress we are making on the balance of payments. The increased price of the oil we import has accounted for two-thirds of our total current account deficit so far this year. Apart from the extra cost of oil, our trade 1050 deficit was running in the second quarter of this year at a rate 40 per cent. lower than in the last quarter of 1973. Since the terms of trade seem to be steadying and the volume of our exports has been rising faster than the volume of imports, we can look for further improvement.
So far we have been able to finance our remaining deficit without having to maintain large interest rate differentials so as to attract funds to London. I want to keep interest rates as low as possible both for domestic reasons and to minimise the cost of servicing our debts. I do not expect difficulty in financing the deficit in the months ahead. I have not had to draw on the 2,500 million dollar loan, which was negotiated at the time of the Budget. And I am now able to tell the House of another welcome source of funds for public sector borrowers.
The Imperial Iranian Government has offered to provide the United Kindgom with a line of credit of 1,200 million dollars, to be drawn on in the form of three separate loans by public sector bodies within three years from now. We have reached agreement on this offer, and I hope that arrangements for the first loan will be made in the very near future.
I know that the willingness of the Iranian Government to enter into an arrangement of this kind reflects the concern of His Imperial Majesty the Shah of Iran over the difficulties facing the world economy and his constructive attitude to the problems at present facing the international monetary system. I believe that the House will join me in welcoming this development.
Against this background, I am introducing the following measures. First, a reduction of the rate of VAT from 10 per cent. to 8 per cent. with effect from next Monday, 29th July. An order will be laid later today under the VAT regulator powers contained in Section 9 of the 1972 Finance Act. A further order will be laid by my right hon. Friend the Secretary of State for Energy to reduce the maximum retail price of road fuel in line with the VAT reduction. This reduction in VAT will enable manufacturers and retailers to reduce prices of a very wide range of goods and services. It should initially cut the cost of living by about 1 per cent., and because of its effect on threshold agreements, by perhaps a further½per 1051 cent. in 1975. The direct reduction in revenue this year is estimated at about £140 million, though the full-year revenue effect would be £510 million.
Second, we shall introduce an immediate relief for those domestic ratepayers whose rates go up by more than 20 per cent. this year—a relief equivalent to 60 per cent. of the excess over 20 per cent. My right hon. Friend the Secretary of State for the Environment will publish details, and the necessary Supplementary Estimates will be presented to the House tomorrow. The estimated gross cost of this measure will be of the order of £150 million, but there will be some small offsetting savings on rate rebates.
In addition to this special measure of domestic rate relief from the beginning of October, there will be an increase in the needs allowance which is used for calculating rent and rate rebates and rent allowances. The details of this measure are being placed in the Vote Office by my right hon. Friend and the necessary regulations will be laid. The normal full-year cost of this measure would be £60 million.
The part-year cost in the present year is further reduced by the fact that special arrangements have already been made for pensioners, and is thus no more than £15 million. The effect of these measure on rate relief and the needs allowance will be further to reduce the retail price index by a little under½per cent.
Third, a further amount will be made available from the £500 million provided in my March Budget for food subsidies but not so far committed in full. This amount will be £50 million in a full year. The details of this measure, which includes the proposed subsidy for household flour, will be announced by my right hon. Friend the Secretary of State for Prices and Consumer Protection as soon as possible. This does not, of course, add to the public sector borrowing requirements since it was included in the Budget Statement. Indeed, there will still be something over £100:pillion of that provision still availabe for further subsidies to food.
These immediate actions on VAT, on rates and on food subsidies taken together should have a direct impact on retail prices of over 1½ per cent. within 1052 the next three months with more to come as the rest of the food subsidies are allocated. They will certainly avoid one threshold payment, and possibly two, by the end of October. This will bring substantial advantage both to private companies and to public sector employers, including the nationalised industries and local authorities. The eventual effect, bringing in all indirect savings on labour costs, should reduce the retail price index by about 2½ per cent.
My fourth measure is aimed not primarily at domestic prices, where it is helpful, but only marginally and in the longer term, but at the effective use of resources in the regions. The regional employment premium, which has remained unchanged at £1.50 per week for a male employee since it was introduced in September 1967, will be doubled as from 5th August. A draft order to this effect will be presented later today.
This step, which I know will be welcomed by both sides of industry, will have long-run beneficial effects both on regional employment and—through export prices—on the trade balance. It will also assist company liquidity. The expenditure cost in a full year will be roughly £118 million, but the cost this year is estimated at only about £60 million, and a Supplementary Estimate to provide for this will be laid tomorrow. Its eventual cost in resource terms will be much less than its money cost, since it brings into use unemployed resources.
The measures I have announced so far will not only help to cut the cost of living and to increase employment. They will also help industry both in their effect on demand and by reducing labour costs through their effect on thresholds, and through the REP.
In addition, I want to help industry to raise funds in the market to finance the new investment which is essential to preserve future employment and the competitiveness of our exports. For this reason, and in the light of the inflation since the last Government imposed the 5 per cent. limit early in 1973, I am modifying the dividend control to raise the limit on increases in distribution to 12½per cent. An order in this sense will be laid this evening. The rule permitting higher distribution where there is a ease 1053 for special treatment on investment grounds will be applied flexibly.
I should add that it is my intention to review the existing control comprehensively next year, and to seek assistance from the Royal Commission on Income Distribution in assembling some of the factual information for this review. This relaxation in dividend control will also help many retired people and assist the life insurance and pension funds which look after the savings of millions of people of modest means.
The total economic effect of all these measures reflects a careful balance of the considerations I set out at the beginning of this statement, and I will be reviewing the position again in the autumn. They will have an immediate and beneficial effect in slowing the rate of price increases and thus lessen the pay increases needed to maintain real earnings. The level of prices next year will for both reasons be significantly lower than would otherwise have been possible. This will help our exports to remain competitive.
The measures will help industry and employment by taking up some slack, especially in the development areas, without putting any strain on the economy as a whole, and their demand effect is likely to be under £200 million by the end of 1974. They will add only a relatively small amount—some £340 million—to the estimated public sector borrowing requirement in 1974–75. I am satisfied that this can be achieved without in any way jeopardising my objective of keeping the rate of growth of the money supply under control. Part of this sum will accrue to the corporate sector and thus improve the overall financial position of companies. But above all, these measures will help us to face the difficulties arising from the massive wave of imported inflation which has not yet spent its force. By emphasising and strengthening the social contract between the Government and the unions, I believe they will help to reinforce our overall economic position, both at home and abroad.
§ Mr. R. CarrI am sure that the whole House will welcome the fact that the Chancellor of the Exchequer has made his statement today in advance of the economic debate. May I thank the right hon. Gentleman for doing so. I am sure that the House will realise that we need 1054 time to consider what he has said before making our final judgment both in total and in detail. That applies all the more since, it being a Budget Statement—of course I do not make any complaint about this—we had no knowledge beforehand of anything that he was going to say.
Perhaps I shall be allowed to make a few preliminary comments and to combine those comments with a few questions. First, it is quite clear that there is a big contrast between what I might call the 21-day model Healey and the 21-week model Healey. The right hon. Gentleman has gone into direct reverse on many of the things that he told us were necessary for the country less than four months ago. Whatever one may say about his economic forecasting, it seems that what he has said today gives a pretty good forecast of the date of the General Election. That shows how right my right hon. Friend the Leader of the Opposition was to warn the country this morning about the need to fear politicians bringing gifts.
I believe that the first question that the majority of people will want to apply to the measures that the Chancellor has announced—these measures combined with those that he announced in March—is whether they reduce Britain's inflationary expectation and trends. Therefore my first question, which I hope the Chancellor will answer specifically, is what will be the net effect of both his Budgets on the cost of living index this year? He now talks about the need to restrain the triggering of threshold agreements. It is a pity that he did not think about that in March. It was the direct effect of his Budget that caused threshold agreements to be triggered three times in one month. The effect of his previous Budget was undoubtedly to put up the cost of living index this year by nearer 3 per cent. than 2 per cent. What we need to know is the overall effect of both Budgets.
Secondly, I ask the right hon. Gentleman to be fairly specific about the effect of these new measures on the public sector borrowing requirement. He will recall that in March he laid great stress on the need, if we were to contain inflation, to reduce the borrowing requirement and therefore to cover extra Government expenditure with taxation. As we understand it, that was his main reason 1055 for introducing increases in direct taxation. He has now announced, on the one hand, a considerable increase in Government expenditure since the Budget both today and previously, and, on the other hand, a substantial decrease in the revenue that he will collect from taxation. I ask the right hon. Gentleman to give us some information about the effect on the borrowing requirement.
Next, I ask the right hon. Gentleman to say something about the effect that these measures are expected to have on the reduction of our non-oil balance of payments deficit. We note the new borrowing requirement and we note that we now have to look after the gnomes of Teheran as well as the gnomes of Zurich. Once again we note that under a Labour Government this country is building up an increasing overseas loan debt. Would the right hon. Gentleman please tell the House about the terms of the loan? He did not mention the terms in his statement.
Finally, I ask the right hon. Gentleman to tell us about the effect that he believes these measures will have on business confidence and the level of industrial investment. It is our view that while the change in dividend restraint will have a healthy effect on the market and the opportunity to raise capital, he has done nothing to replace the £1,100 million that he took out of industry's cash flow this year. Does he not realise that investment plans for the future depend on cash and confidence, that he has taken away the cash and that his right hon. Friend has destroyed the confidence?
§ Mr. HealeyI forgive the right hon. Member for Carshalton (Mr. Carr) for his rapidly improvised comments on my proposals. I forgive him also for the chagrin which was so evident in his earlier remarks that I have produced a package which is likely to help the future of Britain's economy and to prove popular with those whom it will affect. I cannot help reflecting on the fact that during our discussions on the Finance Bill in recent weeks he and his hon. Friends tabled, and sometimes carried, amendments which would have added £500 million to the public sector borrowing requirement. They would have done so 1056 by methods calculated to help only landowners, land speculators, pools promoters, the wealthy and company directors.
I shall deal with some of the specific points that the right hon. Gentleman raised. The first is the net effect of all my measures on the cost of living this year. The increase in the cost of living flowing from the measures that I announced in March depended wholly on the 2 per cent. increase in the prices of the products of nationalised industry. That is the increase which the previous Chancellor undertook to introduce and which Opposition Front Bench spokesmen did not contest in the House although they have increasingly made capital of it in the country. Nevertheless, the number of thresholds triggered since March until now is six, precisely the number forecast in the Treasury estimates which I inherited on taking office at the beginning of March and which were presumably also available to the Conservative Government.
The measures I have announced today will eliminate all but 0.14 per cent. of the increase in the cost of living arising from the March measures, an increase which was wholly due to the increase in nationalised industry prices.
The next question which the right hon. Gentleman asked me—[Interruption.]—I think that the Leader of the Opposition, if he could contain himself, might hear something to his advantage in a moment—was about the increase in public expenditure since the Budget. There have been a number of increases due to increases in pay. All these were taken into account in the Budget estimates of the public sector borrowing requirement this year. There have been well under £100 million of increases, due to other causes like, for example, agricultural subsidies, which the Opposition strongly supported. There has been a cut in public expenditure of £17 million due to the decision not to proceed with the Maplin project, announced last week.
§ Mr. GoodhewOn a point of order, Mr. Speaker. Is it not customary for Ministers to address the Chair and not members of the Tribune group who are only a limited number of Members of this House?
§ Mr. SpeakerThat is a matter I leave to individual Ministers.
§ Mr. HealeyMany of us will regard that intervention by the hon. Member for St. Albans (Mr. Goodhew) as characterising the bankruptcy of the Opposition.
The last question put to me by the right hon. Member for Carshalton concerned the terms of the Iranian loan. He should know that the right hon. Member for Altrincham and Sale (Mr. Barber) was seeking to arrange a number of loans before he left office, and the whole world knows that it would be impossible for this country to bridge the whole of the balance of payments gap caused by oil and the inherited non-oil deficit without attempting by some means to finance the residual amount. In the context of the Iranian loan, the terms of each of the three loans will be negotiated individually, but it has been settled that the first loan will be for just under five years with the terms in line with those in the markets.
§ Mr. PardoeIs the Chancellor aware that the overall impact of his package may well be rather too little than too much, since he has one arm tied behind his back by his paymasters, with no control over incomes? Is he further aware that we welcome his measures on the regional employment premium, which we have urged upon him? We also welcome his conversion to parliamentary democracy in his acceptance of the rate relief. Can the right hon. Gentleman say what level of unemployment he thinks will result by the end of this year from his measures? Does he now think that wage inflation is running at a higher rate than price inflation?
§ Mr. HealeyI am delighted that one consequence of my measures has been to destroy the possibility of a coalition of the Liberal Party with either of the major parties after the next General Election. The measures I have announced will increase employment by about 20,000 by the end of next year.
§ Mr. DuffyI congratulate my right hon. Friend on reflating demand, on easing the strain on companies, on slowing the rise in prices, on boosting employment in development areas and on generally rejecting the advice of monetarists. Is my right hon. Friend sure that his demand-reflationary measures can counter the demand-deflationary con- 1058 sequences of continued cost-inflation combined with fiscal drag, and prevent our economy from sliding into that recession which he said was now feared on the international scene?
§ Mr. HealeyI appreciate the concerns which my hon. Friend has mentioned, and I share them to some extent. But the central problem with which we are faced and which the House must recognise—it is not a party issue—is the risk that too many countries will seek to achieve too fast a balance in their trade at a time when we know that there will be a currency surplus owed to the oil exporting countries this year of 70 billion or 80 billion dollars. I believe that it is right for me to wait a little longer to see whether the arguments I am now having with some of my friends and colleagues abroad have effect before deciding on a larger package to deal with this specific problem.
§ Mr. HordernWill the right hon. Gentleman confirm that the overall borrowing requirement has increased by £440 million since his Budget—that is to say, as a result of those measures and the £100 million extra carried out since the Budget? Will he also say exactly what the net effect is in the cost-of-living index as a result of his proposals, bearing in mind that there were no proposals under the Conservative Government for food subsidies? Does the right hon. Gentleman recognise that the one element that industry required was an easing on profit margins and that there are no such measures in his announcement today?
§ Mr. HealeyThe hon. Gentleman must not simultaneously ask for bigger reductions in the cost of living and an easing of profit controls, which would inevitably be based on an increase in prices. He cannot have it both ways.
The hon. Member asked about the increase in the borrowing requirement. I made it clear that my measures today will increase in themselves the borrowing requirement this year by some £340 million. How the borrowing requirement will look by the end of the year will depend on innumerable other factors—for example, the extent to which tax revenues are increased by fiscal drag, and the speed with which authorities carry out the expenditure proposals announced in the Budget. I remind the hon. Gentleman 1059 that last December, two-thirds of the way through the last financial year, the aggregate error in the Conservative Government's estimates of the public sector borrowing requirement was £2,400 million, although a great deal of this cancelled out because in some respects they underestimated and in others over-estimated. It is not possible to make an estimate of the whole effect on the public sector borrowing requirement until the whole year is at an end.
§ Mr. Arthur LewisIs my right hon. Friend aware that we on this side of the House pay tribute to him for both the content of his measures and the fact that they will assist the poorer sections of the population, who are those in whom we are most interested? My right hon. Friend says that his measures will mean a reduction in prices of 1½ per cent. Will he explain how he intends to ensure that this reduction will be passed on to the consumer? Previous Governments have claimed that that would be done but have never actually seen that it was done. Will my right hon. Friend give an assurance that he will take action to see that price reductions are passed on to the consumer?
§ Mr. HealeyYes, Sir. My right hon. Friend the Secretary of State for Prices and Consumer Protection will be making a statement on these matters. I must point out that to take direct action to deal with inflation in this way depends on having effective price controls, and the strengthening of price controls, particularly at the retail end of the chain of distribution, is absolutely indispensable if these measures are to have their full effect.
§ Mr. TugendhatWill the right hon. Gentleman accept that it is impossible to make forecasts so precise as an increase in employment of 20,000? Does he not also agree that the emphasis of his measures, giving, as they do, a consumption bias, leads one to believe that, although there will be a short-term improvement in the cost-of-living index, there will be a substantial long-term deterioration in employment?
§ Mr. HealeyThe hon. Gentleman has raised two quite separate matters. First, I would be the first to admit—and every 1060 former Treasury Minister from either side of the House would agree with me—that absolute precision in these matters is impossible. But it is my duty to give the House the best estimate that can be made, and that is what I have done.
Secondly, I am deeply concerned about the long-term prospects for employment in the economy, but I regard it as my job in my autumn Budget to make any major corrections that may be required in the light of developments in the world situation in the interval.
§ Mr. SpeakerWe are to have a two-day debate on these matters tomorrow and Wednesday.