BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 13 November 1974 vol 881 cc432-549

4.16 p.m.

Mr. Robert Can (Carshalton)

May I, first, in the traditional but none the less sincere way, add my congratulations to the Chancellor of the Exchequer on a further Budget speech. He knows that I wished that he had not been on the Government side of the House to deliver it but, as he was, I warmly congratulate him on the manner in which he did it—although, equally, I know that it will be no surprise to him to find that I am not altogether satisfied with the substance of what was delivered.

I suppose that whatever else one may say about the Chancellor's characteristics, one could hardly claim—I do not know whether he would claim it for himself—that he is a steady driver of the economy. He has had three Budgets in just under eight months. In March he greatly increased the burden of value added tax. In July he reduced it. Yesterday he increased it again. In March he said that he must take away a lot of industry's cash. In November he gives it back again. In March he announced the tightening of the grip of price control. In November he relaxes it. In March the Government's borrowing requirement must be cut. This is of great urgency. In November it is more than doubled.

Whatever else the Chancellor is, he is certainly a zig-zag Chancellor. Some people may call this fine tuning of the economy. Others, less charitable, might suspect him of a little drunken driving.

This latest Budget is certainly better than the first one in March, but it is still not right and it still fails to fight inflation as it ought to be fought, as public enemy No. 1, or to protect jobs as it ought to protect jobs for the future. Indeed, running through the Chancellor's speech and the proposals there still seems to be a dangerous belief that unemployment and inflation are separate problems. They are not. As the Prime Minister said, in a rare flash of truth, in a speech at Huyton on 19th September: They are one and the same problem. Those were the Prime Minister's words.

It may have been true a few years ago, when inflation was running at a much lower rate than it is today, that we could then choose between having somewhat fuller employment and slightly higher inflation, on the one hand, somewhat more unemployment and slightly lower inflation, on the other. However, that choice is not open to us today. At its present high and intolerable rate, inflation itself, in our view, presents the most dangerous threat to full employment.

Do not let any of us under-estimaete how grave this threat of heavy unemployment during the next few years has become. We are on a tightrope for the next few years. If we fail to get on top of inflation, we fall off the tightrope on one side, suffering economic collapse and, as a result, unemployment on the most massive scale and of a kind most difficult to cure. If, on the other hand, we fall off the tightrope on the other side by trying to put the brakes on inflation in too crude and sudden a manner, we also will get a rapid rise of unemployment to very serious levels.

So what is needed is a firm, steady, stable, programme—I emphasise the need now for stability—for the next three years which is designed to move us away from the danger in progressive but gradual steps, using simultaneously all the anti-inflationary weapons in our armoury in moderation and none of them to extreme.

I want to outline what I believe are the main elements in such a programme and where I think the Chancellor meets the needs and where I think he fails. First, I must make a brief comment on the way the Chancellor dealt with inflation yesterday. As inflation is public enemy No. 1, and as inflation and unemployment are, as the Prime Minister has admitted, one and the same problem, it was a strange and serious omission for the Chancellor not to give any quantitative estimate yesterday about the rate of inflation which he expects his policies to produce next year. All he said was this: If settlements can be confined to what is needed to cover the increase in the cost of living, we can reasonably expect to see a decrease in the rate of inflation in the coming year."—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 249.] The question is: bow much of a decrease? The Chancellor was not shy in the election campaign. On 23rd September he announced with great confidence that inflation was currently running at 8.4 per cent. I could not help wondering at the time whether the right hon. Gentleman had not made one of the statistical malaprops for which he is famous and really meant 18.4 per cent., but it was clearly 8.4 per cent. at which he said inflation was running. The day after, on 24th September, he said in a speech at Witham: We can get inflation down close to 10 per cent. by the end of next year if the social contract is maintained. What does Mr. 8.4 per cent. say now'? What is the current rate of inflation? The Chancellor did not tell us yesterday. Is it still 8.4 per cent., or is it higher, and, if so, what? If it is more, why? What is more important, in view of the right hon. Gentleman's talk about the long-term strategy and the purpose of his Budget, whatever it is now, what is the Chancellor's forecast for the rate of inflation by the end of 1975 if, as he put it yesterday, pay settlements can be confined to what is needed to cover the cost of living? Is it still close to the 10 per cent. which he forecast in the election campaign, or is it higher, or is it lower? What will the rate of inflation be by the end of next year if pay settlements exceed what is needed to cover the cost of living by various amounts?

How can unions, employers, and the people generally know what is expected of them unless they are given targets and unless they understand what they have to do themselves if those targets are to be achieved? As I say, the Chancellor was not shy in spraying about these forecasts and targets during the election campaign. Let us have them now so that as the months go by not only we in the House but all the people in the county can know whether they are keeping on course towards the targets that he is setting.

That is why I say to the Chancellor that these questions really must be answered. I suggest to him that it is important not only for us at home that they be answered. It is also just as important, if we are to maintain international confidence, for us to be seen to be grappling effectively and progressively with our inflationary problem.

Coming back now to the strategy and programme for the next three to four years, I certainly support some of the main statements of intent that the Chancellor made yesterday—for example, the statement that we must now divert resources for consumption to investment and export, and the statement that we must move away from general subsidies towards prices based on true costs.

It seemed to me to be just as well for the Chancellor and his colleagues that we on this side do support those objectives, otherwise he would be in pretty grave trouble. As I shall show in more detail in a few moments, however, I do not believe that he has done the right things, or at any rate not enough of the right things, to achieve those objectives, although I support the objectives themselves.

I also agree with the Chancellor about the complexity and danger of the economic problems facing not just Britain but the whole world and agree with him that if, through lack of effective international action, the world fell into a slump, the consequences for Britain would be very serious no matter what any British Chancellor tried to do about it. I therefore wish the Chancellor well and assure him of our support in seeking effective international co-operation through the International Monetary Fund and other channels.

However, we must concentrate above all on putting our own house in order here in Britain. This is essential if we are to take advantage of the opportunities if world economic affairs go well and it is essential if we are to be able to defend ourselves as best we can if unfortunately they go badly.

Although the technical complexities are great, I think that it is clear that beneath the technical complexities the cause of Britain's own crisis is essentially pretty simple. It is, put in oversimplified but I believe basically true terms, that we are living beyond our means. We have got to stop doing so now, however hard that may be. Not of course all at once in a single year but over the next three or four years, in clear, measurable, progressive steps we have got to match our living to our means.

When I talk about our means I include in our means, as any responsible person or company or country does, a reasonably responsible use of our capacity to borrow. However, it is a matter of degree, and basically we have got to learn to live within our means. If we do not, we shall not beat inflation and we shall not avoid heavy and prolonged unemployment. We have got to set about this programme straight away.

If we are to tackle this essential problem of not living within our means, we have to attack both sides of it. We must set about increasing our means for the future. That is a positive, hopeful side of our task. At the same time, we have meanwhile to cut back our expectations and our present standards so as to live within whatever our means may be from year to year. That is the hard, the difficult, the unpopular part of our task which will require sacrifice, restraint and patience.

It seems to me that there are three essential elements in the necessary programme for the next few years. First, we must have a boost to cash and confidence in industry and to our farmers in order to stimulate home food production. We shall be debating agriculture next week and so I shall concentrate today on industry, as indeed the Chancellor did yesterday.

The only source of new wealth in this country, the only way of increasing our means for the future, is to increase the production and efficiency of our factories. That means above all, as the right hon. Gentleman said yesterday, increasing the quantity and quality of investment in new machinery and factories. This is where, as the right hon. Gentleman also said yesterday, we have been falling behind other countries. It is also the area in which the Chancellor and the Government have done terrible damage in the last eight months in destroying industry's cash and confidence.

The Chancellor has at least admitted his previous error and has now gone to some extent into reverse. But he still seems to treat these problems of industry with a certain amount of mirth and levity. I remember that, during the spring, the Government were assuring us that the Chancellor and the Secretary of State for Prices and Consumer Protection were looking at the financial situation of industry and that there was nothing to worry about. They were refusing to see the evidence before their eyes—they would not listen, not just to what we said or the CBI said but to what an increasing number of independent commentators of every kind were saying.

This attitude persisted throughout the whole of the summer, and as a result we have the present situation. Damage has been done which in many ways is irreversible. Certainly, had action been taken sooner, it would have had a much better chance of being really effective than it has now. We are thankful for what the right hon. Gentleman did yesterday, although we believe that he has not done enough in the right way.

I believe that the right hon. Gentleman's present package, if it had been introduced last March, might have prevented the present industrial crisis from arising. But the package is too little and too late either to mend the damage of the last eight months or to put industry on the road to real recovery. The right hon. Gentleman has put industry in what I might describe as an economic kidney machine and has therefore, he hopes, saved its life for this winter and next year. But all that he has done is to create a continuing kidney machine economy. Industry is not cured and will have to come back for repeated help and treatment, not because its disease is incurable but because the Chancellor is withholding the necessary remedies.

What does industry need? First, there is need for the life-saving operation. This, on the whole, it has been given, although we still believe that the advance corporation tax surcharge should and could have been abolished. The Chancellor's point about not doing this because these were the companies which paid dividends and therefore were in a strong position does not bear examination. Although, naturally, the weak companies—weak because of short-term difficulties and not because of long-term lack of efficiency or viability—may need the help most urgently, if we do not also give help to those which are a little stronger, despite the difficulties, we shall be greatly weakening our effort for the future. The ACT surcharge should have been abolished in this life-saving operation.

The second need of industry is a medium-term source of finance to bridge the gap between the present stage and the time when we have restored our level of real profitability with confidence such that industry can once again raise capital for new investment in the normal way. We welcome the initiative of the private sector in developing the FFI into a stronger and more effective instrument, but I must warn that this instrument will be stillborn and ineffective unless the third need is also met.

The third need of industry, and one which is absolutely essential beyond the immediate rescue period, is that industry must be put on the basis once again where it is allowed, first to make and then keep, an adequate level of profit in order to provide sufficient retention for reinvestment, and also to enable industry to be able to attract new money for investment in the future in relation to current long-term interest levels, whatever they may be. What we mean by "adequate profit" cannot be thought of out of relation to whatever may be the going long-term interest rates if money is to be attracted into industry for future investment.

The fourth need is to reactivate the capital markets, which requires the full restoration of profitability and also the deliberate encouragement of saving in every way possible.

It is in not meeting these third and fourth needs that the right hon. Gentleman has failed. He has failed to meet the need to reactivate the capital markets and the need to put industry back on an adequate level of profitability in the longer run. The revision of the Price Code does not provide a real profit incentive for the future. It applies for one year and there is no basis on which firms can plan ahead with confidence. It is still fiendishly complicated in its application, and it is deficient in various important details, a point upon which we shall enlarge later.

There is no real regime for industry for adequate profitability in the long run, and without that there will not be the reactivation of investment plans or of the capital markets. The Chancellor has not reduced the taxation of industry to allow it to keep more profit. He has merely deferred it by means of a stock depreciation formula. Although this may be important as part of a life saving rescue operation, it is not what is needed for the longer term re-establishment of profitability and confidence.

This formula will, I suspect, be found by industry to be very complicated and not immediately certain in its effect. Therefore, it will not restore confidence in the longer term, a process which is necessary for making future investment plans. Beyond one year, the position is wholly uncertain and—what is very serious—even for this one year the Chancellor has limited the benefit to incorporated enterprises with stocks of more than £25,000. This excludes from the benefit this coming year vast numbers of small businesses and, of course, most farms. This is a deplorable and very serious omission and is not made good by the Chancellor talking as he did about a company being able to go along to sources of finance and credit with this kind of bankable assurance.

He has done nothing to reactivate the capital markets. He has not provided for long-term profitability at a level commensurate with long-term interests rates. The action he has taken has been to discourage rather than to encourage savings by introducing a wholly new capital tax on top of all the other taxes already there, and by increasing income tax on savings income.

These are the main reasons why the right hon. Gentleman is failing to meet the first essential element in the fight for recovery. He has not done enough of the right things to create the vigorous, alert, and profitable private sector which the Government claim to be an essential part of their policy. They are still not doing the right things to implement that policy.

The second essential element in the programme of recovery is severe restraint in public spending and public borrowing, in the money supply and in pay increases as well as in price increases. This, again, is just as important to the maintenance of international confidence as it is to the control of our own inflation here. The Government make obeisance to these objectives but do not achieve them.

First, in this connection, I turn to public spending—by which I mean, as the right hon. Gentleman did yesterday, the total spending by both central and local government. In our view, there should be no real increase in demand terms in public spending over the next year or two. That is what we made clear in the election campaign. We know that this is very tough, but we believe that it is the only realistic view if we are to win the battle against inflation.

As we continually said during the election, if real increases are to be made in some areas as they should be, they must be covered by savings elsewhere. That will mean postponement of a most painful kind of many things we genuinely and urgently need. But postponement for a few years with inflation under control is better than never having them at all, which is their likely fate if we do not control inflation.

The Chancellor takes a more relaxed view. He has said that we can afford a real increase in public spending in demand terms of 2 ¾ per cent. a year. We do not think so. That is certainly greater than the real increase in national income which we can expect for some time to come. What is the increase to be used for? The Chancellor was very coy about both the cutbacks which he will impose in the expectations and about what this 2 ¾ per cent. will be used for. Will it be used for improving services such as schools and hospitals and all these things which we need and want, or will it be taken up by the annual cost of nationalisation?

Even an increase limited to 2 ¾ per cent. a year will mean a painful cutting back of our expenditure. Where will these cut-backs occur? The Chancellor keeps that a secret, but he must know what the answer is and he should tell us. Is he afraid to face the country all at once with the sacrifices being demanded or is it just that he is afraid of his own Left wing.

The same applies to the proposed increases in the prices of electricity, coal, gas and fares. In his March Budget the right hon. Gentleman told us at least in round terms what the increases would be and when. Why not now? Surely he must know. Surely he cannot be as ignorant about all the other things as he was about the effect of his proposals on the price of a gallon of petrol.

Surely—and this is not just a debating point—he should give the people of this country the truth at least about the broad areas and the magnitude of the cut-backs in the expected increase of public expenditure which will be involved in his new policy. Although the cut-back is not as severe as we believe necessary, it is severe nevertheless, and if we are to ask people to co-operate, they must be told—and they want to be told the truth in some detail. If they are not, the Chancellor can no longer expect unity and co-operation.

I come to public borrowing. Here the Chancellor's somersault is the most staggering of all. In March he said that one of the country's most urgent needs in the battle against inflation was to reduce the public borrowing requirement. He made great play of reducing it by £1,500 million a year from the 1973–74 level down to £2,700 million in this current year. He made great play of that and of the profligacy and irresponsibility. of having the figure as high as it had been. During the summer he maintained that it would be profligate and irresponsible to increase the borrowing requirement by some £300 million to help industry over its crisis, even though by doing so that would reduce it by the same amount the next year.

Now, far from reducing the borrowing requirement, he has all these months been allowing it to double. He has not reduced it to £2,700 million but has allowed it to double to £5,500 million, far above the 1973–74 level which he said was so wicked. Yesterday he proposed to increase it yet again to £6,300 million, and he has done so without any real expansion or argument. All he has done is blandly to assure us that this can be managed without risk of the money supply getting out of control or any other bad effects.

Why is it now safe to do what was apparently so dangerous only four months ago? We must be told. How will the gilt market be able to cope with this huge need, particularly with the Governmen's plans for nationalisation and the financial implications which flow from them? We must ask the Chancellor to give us hard arguments and explanation to justify this amazing somersault in his judgment. Unless and until he reconciles his judgment and policy about the borrowing requirement now with his vastly different judgment and policy in March, we must warn the country that inflation is likely to go unchecked and that the sacrifices the Chancellor is imposing upon it, although unpleasant, may well be in vain.

I come to pay increases. The Chancellor and other Ministers have repeatedly and rightly warned about the vital importance of pay restraint. They now rightly say what we have been saying all along, that the alternative to pay restraint is unemployment. How are they to achieve that restraint? We are told it will be through the social contract, and certainly we need a voluntary compact about restraint and the conditions in which to achieve it.

It must be, however, much more than the present vague and one-sided arrangement. It must be worked out with employers as well as with the unions and with other sectors of the community. I suggest that it should be worked out with Parliament and with parliamentary support and authority. It must be more definite and precise, so that employers and unions know whether they are keeping at least roughly within it in particular negotiations. The Chancellor must also provide some recognised universal machinery for examining and expressing a view about claims to be treated as a special case or there will be few, if any, ordinary cases.

The Chancellor yesterday blandly, although in most imprecise terms, talked about the rate of inflation next year being lower than this year if pay settlements do no more than cover the increase in prices. Does he think that that is what is happening now? If he does, we should like the evidence upon which that view is based. If not, does he believe that situation will suddenly happen, and if it does not suddenly happen, what does he propose to do? Will he simply, as he warned, compensate for excessive pay increases by tougher cuts in public spending and tougher increases in taxation, with the extra unemployment that will come from that? If so, who is deliberately trying to solve inflation by creating unemployment if not the right hon. Gentleman? On the other hand, will he make some new effort to keep pay increases in line with price increases?

Here, again, the House and the country ought to be taken into the Government's thinking and confidence. This is an important element of fairness, because in a free-for-all wage explosion such as we appear to be entering, the powerful and the ruthless forge ahead while the weak and the responsible go to the wall.

The third essential element in our three-to-four-year recovery programme is to protect the real incomes of those in our society who are in greatest need or who are least able to raise their incomes to keep pace with prices.

What is needed, as we have repeatedly said, is to increase pensions and other long-term benefits twice a year, to give benefits to special groups, such as the disabled and elderly, to provide more opportunities for inflation-proofed forms of saving, to put a limit on mortgage interest rates and to transfer a large proportion of local government revenue from the rates to more widely spread forms of taxation.

The Chancellor has acted in some but not all of these ways. We welcome what he has done, but we cannot help noting that it is strange that he is now introducing some measures which he had earlier refused to introduce, such as tax allowances for elderly people. He refused to consider such proposals favourably in the summer.

Now that he has taken action, we welcome it, but we wish that he had done more on the lines that I have mentioned. We stress again, as we stressed throughout the General Election campaign, that extra expenditure on these top human priorities must be offset elsewhere, however difficult that may be.

Here are the three structural elements in a three-or-four-year programme of national recovery—a boost to industry and agriculture, severe restraint in public spending and borrowing and in personal pay increases, and protection for those in need during what is bound to be a hard period in which most of us will have to show restraint and patience and make sacrifices.

This is not a recipe for an easy, quick or painless remedy. There is no such thing, and the real deception would be to pretend that there was. But it does offer, I believe, a viable programme which people could understand and support in a united way. It would edge us step by step in a measurable, visible way from the edge of the present crisis abyss.

The Budget does something to move in this direction but it does not match the needs. It is a half truth and halfway Budget. It is a half-truth Budget because it is not yet spelling out clearly the sacrifices and restraints required from the majority of our people and because it has not given the people of Britain the real warning that they must be given, if they are to respond—as they must, and as they will, if given a chance.

It is a half-way Budget because it is still waging only a phoney war against inflation, and because it will merely create a kidney machine economy in industry and will not restore full health to industry, which is the only section of our economy which can create the capacity for increasing our means in the future.

4.52 p.m.

The Secretary of State for Prices and Consumer Protection (Mrs. Shirley Williams)

Before replying to the right hon. Member for Carshalton (Mr. Carr) I wish to refer to two other contributions made by maiden speakers to yesterday's debate. I congratulate my hon. Friend the Member for Bolton, West (Mrs. Taylor), who made an eloquent plea for avoiding waste not only of resources, but of talent and energies of the less prosperous regions such as her own North-West. I say "Amen" to all she said, and I hope that we shall continue to hear from her in the future.

I also congratulate my hon. Friend the Member for Newcastle-upon-Tyne, East (Mr. Thomas) upon what he said in yesterday's debate. He was scornful about those who talk about slight increases in unemployment, for the good reason that he represents a Newcastle constituency. He also had worthwhile things to say about consumer affairs and consumer protection. I assure him, with regard to what he said about the independence of nationalised industries' consumer councils, that he has a sympathetic ear from this Minister.

I turn to what the right hon. Member for Carshalton has today said about the Budget. The Budget has its critics. Among them are the CBI, which predictably says that my right hon. Friend the Chancellor of the Exchequer has not done enough, and the Leader of the Opposition, and some of his hon. Friends, as well as some of my hon. Friends.

But the truth of the matter is that the Budget, which The Guardian described as one "that nobody loves" is a response to a crisis than nobody loves.

The common thought of the critics is that each one of them has said, "We want more"—but it may be that there is not more for each one of them to have.

My right hon. Friend has stressed time and again the crisis that we face. It is not a new crisis in this country; in many ways we have been weakened over the years to face a world-wide crisis.

The one aspect that was in no way reflected in the speech of the right hon. Member for Carshalton was the international nature of the crisis, yet we are debating a Budget which has taken place only a day after a representative of Bangladesh said at the World Food Conference that unless steps are taken to reverse what is presently happening in the world, 1 million people will starve in the coming year. The Budget is also a day after the White House admitted that the United States is moving sharply into recession. We are also debating the Budget in the light of news from France, Germany, the United States and Italy of growing industrial dispute and conflict.

Mr. Arthur Lewis (Newham, North-West)

We are also debating the Budget the day after Krugerrands have gone up another £7. My right hon. Friend the Chancellor could have saved millions of pounds in relation to this, and helped our balance of payments, but he has refused to do anything about it.

Mrs. Williams

I have no doubt that my hon. Friend will later try to develop his argument.

We are in the middle of a major international crisis, and my right hon. Friend has rightly tried to draw attention to international circumstances and to the inter national nature of the crisis. It would be a mistake to talk as if we were discussing a purely British crisis, as the right hon. Member for Carshalton did.

It is true that we in this country have special problems of a heavy balance-of-payments deficit because of our major dependence on imports of fuel, food and raw materials. However, this is not unique to any particular Government. We have had a slow rate of growth and low levels of investment over the years. We have in this country an archaic industrial relations structure in which it is still the case that most employees neither have information about, nor a voice in, the decisions that affect them.

All these long-term problems have to be tackled. But what confronted my right hon. Friend in the course of preparing the Budget was the immediate problem—here I accept what the right hon. Member for Carshalton said—of company liquidity, a problem of working capital, not least arising from the sudden increase in raw materials prices in the past 18 months and from high interest rates and problems of profitability.

My right hon. Friend's judgment in this situation had to be extremely delicate. He had to do something to stimulate investment, maintain employment, retain foreign confidence and avoid major consequences for prices, as well as to encourage exports. It was an almost impossible list of tasks.

It does not help if he is then attacked wholly unfairly and not on the basis of any facts at all, in this case, by the Leader of the Opposition.

Last night in his comments on the Budget the Leader of the Opposition made great play with the charge against my right hon. Friend that he had not mentioned during the General Election campaign that there would be a possibility of additional taxation. A substantial part of the right hon. Gentleman's speech was devoted to belittling my right hon. Friend on this account, but only four days before the election, on 6th October, in the programme "Weekend World", my right hon. Friend said: If private consumption rises more than I think it should, then I shall have to reduce it, either by taxation or by cutting public consumption, or public expenditure. That was a fair warning to give.

The Leader of the Opposition also attacked my right hon. Friend for saying that inflation had eased in the period shortly before the General Election. But that was undoubtedly true. I do not ask the House to look at the dispute between leading figures in the General Election. I ask the House to look at what was said by the independent Price Commission. The Price Commission made clear in its recent report that there was an easing of inflationary pressures, from a group of price applications which in the period from December to February amounted to a 23 per cent. annual rate of increase to 9½ per cent. between June and August. Yet the right hon. Member for Penrith and The Border (Mr. Whitelaw) persisted during the election in implying that the number of applications for price increases was at a record level, and higher than ever before. Some of us who knew the facts, because we knew what the Price Commission report would say, were unable to refute or deny what he said. It was not factually correct. The evidence is that the rate of inflation slackened in the six months between March and August at an increasing rate of slackening, if I may put it in that strange way. We still retain a degree of advantage from that situation.

Mr. Michael Alison (Barkston Ash)

Does the right hon. Lady acknowledge that the Price Commission does not cover every price that goes into the Retail Price Index, such as household rates? It is unfair to take the Price Commission as evidence of the way the RPI is going.

Mrs. Williams

I should be happy to take issue with the hon. Gentleman, because the figures my right hon. Friend used were correct. The argument between the Opposition and the Government is simply about the correct period of time to take. I am taking a different set of figures from a different source to show that what my right hon. Friend said was based upon facts available to him.

Sir John Hall (Wycombe)

Can the right hon. Lady help the House further by telling hon. Members the present annual rate of inflation?

Mrs. Williams

On the basis of the past three months, it is 8.75 per cent., much below the rate in the last year in which the Conservative Party was in office.

My right hon. Friend was also attacked for what was described by the Leader of the Opposition as: increases in prices deliberately created by the Government".—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 282.] Yet only a little later in his speech the Leader of the Opposition also berated my right hon. Friend for not doing enough for industry. The right hon. Gentleman had better decide which argument he will advance, because it is not possible to square this circle. Either he believes that we have not done enough or he believes that we have done too much. He cannot believe both at the same time.

The truth is that, as my right hon. Friend told the House, the effect of the amended Price Code is expected to be under 1½ per cent. on the Retail Price Index compared with the continuation of the existing code, and the existing level of productivity deduction. The effects on the present levels of profitability are about 1 per cent. That is the best calculation we can make on the figures available to us.

However, the right hon. Member for Carshalton chides my right hon. Friend because he has not predicted the statistics of inflation for the coming year. I ask hon. Members to look at some of the factors my right hon. Friend would have to get right if he were to do that in an honourable way. First, the commodity market is very uncertain. The indications are very contradictory. Wheat, maize, soya beans, pulp, zinc, and aluminium have all been rising in the past six months. The outlook for cereals and feeding stuffs is much more depressing than it was three months ago. On the other hand, wool, cotton, copper, rubber and the beverages are among the commodities that are still falling. Therefore, neither my right hon. Friend nor I could begin to make a calculation about one of the major factors affecting the Retail Price Index over the coming year.

It is also true—the House must be aware of this, because the position is worrying—that in October the rise in the costs of raw materials bought in by industry was 3¾ per cent., the highest for over nine months. For the food manufacturing industry, the rise was 4¼ per cent. I hope, as does my right hon. Friend, that that will prove to be a sudden hiccup in what has been up to now a downward trend, but we cannot say. We should be extremely foolish, and should rightly be condemned by the country, if we tried to predict a trend, either upwards or downwards, on the basis of the figures of recent months.

A second major factor is labour costs. Settlements do affect prices, as my right hon. Friend made clear in his Budget speech. Whether we can control inflation depends on the level of settlements—none of us has made any bones about this—and on how far they stay within the TUC's guidelines. But it is also fair to say that some of those who do not regard themselves as necessarily being covered by the TUC guidelines, people in the professional and executive areas, such as banks and broadcasting, must see the guidelines as applying equally to them. No section of the community can opt out because it regards itself as salaried, self-employed or more highly paid.

Mr. Carr

Of course, I appreciate the difficulties and vaguenesses and the uncertainties of the future about forecasting a rate of inflation. But were not those difficulties and vaguenesses just as great on 24th September, when the Chancellor, in the period of the election, forecast a rate near 10 per cent., provided the social contract was kept?

The Chancellor of the Exchequer (Mr. Denis Healey)

And provided there was no increase in import prices.

Mr. Carr

Is the right hon. Gentleman still saying that? I do not think that he made that other qualification in his speech.

Mrs. Williams

What my right hon. Friend said was based closely on what I have already told the House about the statement of the Price Commission, which said: The fall in inflationary pressure which we as a Commission are seeing today"— the report was based upon the period up to the end of August— will be reflected in retail prices in the course of the next few months. But unless the increase in labour costs can be restrained, this will be a false dawn. That was exactly the point my right hon. Friend made. He indicated that there was an expectation, with those underlying figures, that the rate of inflation would fall markedly provided the social contract was maintained.

A third factor that is bound to affect the cost of living over the next year or so is nationalised industry prices, to which the right hon. Gentleman fairly referred. Any honest critic would have to admit that Government interference in the nationalised industries and nationalised industry prices led to a degree of distortion that has been one of the present Government's most unfortunate inheritances. The Times referred to it this morning in its leading article, saying: The original decision under the Conservative Government to hold down the prices charged by nationalised industries would have been unwise at the best of times and in the best of cases". We believed when we came to office that the size of the deficit of the nationalised industries was much lower than it was. We discovered that it was nearly three times as high as the official figures. As we all know now, it was running at the rate of £1,400 million a year at the time of the February election. Since then the cost of energy has rocketed. It was already beginning to do so before the February election.

I want to make two points about nationalised industry subsidies, because some hon. Members on the Opposition benches are trying to draw parallels between those subsidies and food subsidies. First, nationalised industry subsidies are prime subsidies—that is, they are not directed towards the domestic consumer alone. They cover all forms that the product takes, whatever the purchaser. Secondly, there is no discrimination between types of energy and between types of consumer in the structure of pricing of nationalised industries. For example, there is no discrimination in favour of small consumers or the less well-off. Indeed, energy is consumed more heavily by better-off households, where there is some advantage in the tariff to the large consumer over the small consumer. My right hon. Friend the Secretary of State for Energy is examining ways of helping small consumers.

The previous Government would have been in a much stronger position to attack what they sometimes describe as indiscriminate subsidies if they had made any attempt to make their subsidies of energy more discriminatory.

Mr. John Davies (Knutsford)

Is the right hon. Lady saying that within the electricity tariff there is an absolute impartiality in pricing between the industrial and the domestic consumer?

Mrs. Williams

The right hon. Gentleman has not understood my point. I was saying that the subsidy applied to industrial and domestic consumers alike. It is not in the same proportion, but it is across the board. There is no discrimination within the pricing structure towards the small or the poor consumer. On the contrary, the advantage is given to the large consumer of electricity. That is how I understand the position.

The Leader of the Opposition accused my right hon. Friend of not having done enough. To be fair, he said that it was an open question whether he had done enough. There is, as I have already said, incompatibility in what the Leader of the Opposition had to say.

The changes that we have made in the Price Code are clear. They have been directed especially towards investment and employment. Above all, we did not want to repeat what the Financial Times in a feature article yesterday described as the mindless chase after growth of 1972 and 1973. That is why we have endeavoured to make our help as discriminatory and selective as it can be granted the available machinery. I am well aware that some of my hon. Friends would have liked to have seen a yet more selective approach, but I think that they also recognise the immediacy of the current problems of investment and unemployment. Those problems do not permit us to wait for months until we have additional machinery. My Department and the Treasury have made the most careful inquiries to try to establish as clearly as possible the present position.

I want to make it clear that we have not relied merely on general claims from industry, or from any other quarter. We have not relied only on the CBI survey although that has been fairly accurate in the past. We have considered a great deal of detailed information that has been made available to us. It cannot be refuted, on the basis of that detailed information, that in some sectors of industry the investment and employment position would be serious if no action were taken and taken quickly.

Mr. Nigel Lawson (Blaby)

As the right hon. Lady and the Chancellor of the Exchequer have said that they are so concerned to avoid waste, why is it that the proposed changes in the Price Code are so directed that the firms which use labour most wastefully receive the biggest concession on the basis of productivity deduction?

Mrs. Williams

Perhaps the hon. Member will allow me to deal with that at a later stage.

I turn to the information that has been made available to us and on which I shall give one or two examples. We know of a large company in the metal-making and processing industry which is cutting back its investment by a quarter. We know of a large company employing many thousands of people in the food and packaging business with plants in development areas which is cutting investment to replacement requirements only. We know of an engineering firm which cannot finance more than a replacement level of investment. There is evidence, although it is not general evidence covering all sectors of industry, that immediate action is necessary. That includes the co-operative sector as well as the private sector.

I wish to make it clear to my hon. Friends that the steps that the Chancellor and I have taken are compatible with the development of planning agreements in the medium term. My right hon. Friend and I believe that a much greater flow of information is necessary for future economic plans. That should also cover medium-sized and small firms for which planning agreements are not intended but which are an important part of our economy.

As the House will know, industry asked for the abolition of price control or its replacement with profit control only. We have not been able to accept that. It was never the purpose of the review to get rid of price control altogether but rather to keep effective control. It is not my idea of effective control, although it may be the idea of some Conservative hon. Members, that all cost increases should pass directly into prices. I believe that that is a recipe for more inflation and not less. The Price Commission in its recent report warned of exactly that. There is evidence of what happened in the United States when price restraint was suddenly removed.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

Will the right hon. Lady say why it is that the only item which has rocketed down in price is housing, which is not subject to price control?

Mrs. Williams

The hon. Gentleman is doubtless aware that there are many other factors involved. I was not aware that crude oil was subject to the Price Code and yet the price of crude oil has rocketed up five times over. I think that the hon. Gentleman is making a false point.

I have been persuaded for the reasons that I have indicated that certain changes need to be made. We have concentrated the help that we are giving to industry on a new investment relief. Yesterday my hon. Friend the Member for Berwick and East Lothian (Mr. Mackintosh) argued that we should have concentrated on investment relief and that we should have done our best to ensure that investment took place. I hope to assure the House that that is exactly what we have done. Next year firms will be able to add to prices 17½ per cent. of the cost of selected kinds of investment. That is not the whole cost of the investment but 17½ per cent. of it.

The kind of investment which will attract relief is investment in plant and machinery and industrial buildings for the home market. Exports are already free from control and companies are more able to finance export investment than they are home investment. The relief on plant and machinery will extend to the distribution sector as well as to manufacturing firms. That has been urged strongly by the distribution little Neddy, by the co-operative movement, by the Retail Consortium and many others in the retail trade.

We have responded by accepting the extension of the investment relief to distribution. I hope that that will be welcomed in all informed sectors of the House. Some Conservative hon. Members seem to find it extremely funny for reasons that are beyond me. We have included industrial buildings but not commercial buildings because we are anxious to concentrate on productive investment. We do not wish to see the kind of across-the-board rush for growth that is condemned in the Financial Times article.

If firms do not carry out their programme the relief will be stopped. Firms will not be allowed to claim price increases based on other rises in allowable costs such as wages and raw materials until any excess investment relief has been absorbed. We are satisfied that the situation is closely controlled. The Price Commission will review the position at the end of each six months. We believe that firms will welcome being accountable in this way. That is the new element in the code. There has never previously been an element concerning itself with investment relief, save for paragraph 70 which gave such relief only in exceptional circumstances. I believe that all hon. Members who are familiar with the code will welcome the concept of giving some relief for the purposes of investment. The selective assistance under the Industry Act will remain, and the relief to which I have referred will be additional.

I turn to the productivity deduction. We think that it would not have been possible to maintain the deduction at 50 per cent. without serious risks to employment. When the previous Government fixed the rate of 50 per cent. the main source of inflation was from raw materials and there was a remedy in some increase in productivity. Those firms that could make increases in productivity have done so in the light of the tight effect of the productivity deduction over the past 18 months. It would be unfair to believe that the firms which have already moved on productivity can move on it time and again.

We have therefore accepted the case for a reduction in the productivity deduction because it bites harder than it did. I believe that if we did not reduce it to some extent we would not only encourage but conceivably even force firms to lay off everybody they could find to make redundant.

We must, however, keep a productivity deduction because we believe that it is the instrument which prevents firms from passing every labour cost increase into prices and that it offers some encouragement to efficiency. Finally, we believe that it does something to discourage excessive salary and wage settlements.

We have, however, decided to make the productivity deduction rather more sensitive. Had we not done this, the rate would have had to be higher than we are now proposing. We therefore suggest a tapering upwards which, at the maximum, for heavily capital-intensive processes will be 35 per cent. This still gives some relief on the previous figure, but it recognises the relatively small proportion of labour costs in the total costs of such industries. It sets a standard rate for the great bulk of firms at 20 per cent. and suggests a tapering down for labour-intensive processes.

To deal with the point made by the hon. Member for Blaby (Mr. Lawson), it is a false conclusion that those sections of industry which are more labour-intensive are necessarily less efficient. It is certainly a conclusion that I would not begin to accept for the food manufacturing industry, which is one of the more efficient industries and which for obvious reasons has a high labour content.

Mr. Lawson

But within any particular section of industry, is it not the case that, as between two firms—one which is wasteful and hoards labour and one which does not—under the right hon. Lady's scheme the one which is wasteful and hoards labour would get more generous treatment?

Mrs. Williams

First of all, I think that it would go out of business. If the hon. Gentleman looks at the way in which the proposal is drawn up he will see that it is highly unlikely that firms in the same sector of industry would have the kind of differences that I am talking about. These are differences which apply to processes and not as between firms.

There is clearly a limit to what we can accept on the price level, and the effect of the changes that I have mentioned is difficult to measure, but I have given the best estimate that I can make of what those effects will be. They are based on the continuing erosion of profits even as a result of the lower productivity deduction, which is, however, offset by the investment relief and the other safeguards to which I shall come later.

Before I come to those further safeguards, I want to say something further about the productivity deduction. There is a reference in the consultative document to the possibility of using the productivity deduction to impose a higher penalty on firms which make settlements outside the social contract. I am not talking about an elaborate apparatus for deciding what settlements are within or without the social contract, because the Government have had enough of pay boards and pay codes. What we are asking is whether it would be right for the code to impose an additional penalty—I choose the word deliberately—where the increase in salary or wage costs is very high.

I want to make it clear that this is for consultation. It is a matter for discussion, because the Government believe that this is a matter which should be discussed by all sides of industry and because we believe that the serious-minded elements in the trade unions and in the companies want to get this as near right as they can. We shall discuss this with both sides of industry. The Government are wholly uncommitted on the matter and simply wish to listen to opinions about it.

I must now say something about safeguards. I prefer to put the main emphasis on investment, rather than to provide safeguards which would directly enable companies to restore their profit margins to the higher figures of a year or two ago. I am maintaining the 10 per cent. cut in gross margins that I put on non-food distributors in May, following the similar action in respect of food distributors by the Price Commission, but I know that some distributors are below the safeguards that I then set. In the case of a distributor who is below the safeguard, I am allowing him to reach it, if necessary by going above the gross reference margin. The net reference margin remains the same, but we recognise that some distributors have exceptional costs which may mean that the relation between the gross reference margin and the net reference margin is distorted in their case.

The Leader of the Opposition asked yesterday whether the changes that I have outlined in the Price Code were so complicated as to be unworkable. The right hon. Member for Carshalton will recognise that, in order not to take up the time of the House, there are details concerning, for instance, exceptional treatment in the price code of shortages of materials, such matters as the inclusion for report of Category III companies, which I am not touching upon now because there will be further opportunities to debate them—[An HON. MEMBER: "When?"] The opportunities will arise on the Price Code amendments themselves, which have to come before the House on an affirmative resolution.

The Leader of the Opposition asked whether the changes made were so complicated as to be unworkable. We have had to make some changes simply to make the code workable at all. For instance, we have inherited a virtually unworkable safeguard with regard to profit erosion for manufacturing. The so-called 90 per cent. safeguard has been criticised by many sectors of industry and by the Chairman of the Price Commission himself, who recently told a Financial Times conference that a great deal of complaint and even protest had arisen about it.

These are theologies which we inherited, and we are now trying as far as we can to simplify them. What we are going for is simpler safeguards based upon products and not upon enterprises—something that the CBI asked for. We are setting the safeguard itself at a lower level—one-third below instead of 10 per cent.—but we are satisfied that it will now be accessible equally to firms who cannot afford sophisticated accountants as to those who can. I do not believe that one can defend distinctions in the Price Code that arise simply in terms of whether firms can understand it or not.

Turning to the coverage of nationalised industries under the code, we are treating the public sector and the private sector for the first time in an equivalent way. Many of my hon. Friends will recognise that that should have happened when the code was introduced. This means that nationalised industries will be treated on the same footing as private industries in respect of the safeguards which apply. But I must make it clear that Ministers retain their overall authority in respect of price increases and changes, as has been the case for many years.

I end by apologising for the length of what I have had to say, but I am afraid that this is a matter on which I believe that many hon. Members wish to have more information. We are now embarking upon a most intensive two weeks of consultations. The reason for the brevity of this period is that we have already engaged in full and lengthy consultations with virtually every section of industry, before presenting the White Paper. Powerful representations have been made to us on both sides of industry that the code must be urgently changed. The House will recognise that we have brought these proposals forward within one month of the General Election, and have thus kept to our original timetable, if one allows for the three weeks that the election took. There will be opportunity for further debate in the House and for representations from all sides of industry.

I stress at the end that what we have tried to do throughout is to balance the powerful claims, as the right hon. Member for Carshalton put it, of battling inflation against the claims of avoiding mass unemployment. This is a difficult judgment—almost a judgment of Solomon—but I believe that, by stressing investment and employment above all in the Price Code, we have got the balance about right.

5.29 p.m.

Mr. Jeremy Thorpe (Devon, North)

May I, first, say to the Secretary of State for Prices and Consumer Protection that she need have no feeling that she must apologise to the House for having spoken at length. She did not. If all Ministers could give us as much information in such a short period of time as she has done, the House of Commons would greatly benefit. We are grateful to the right hon. Lady for her brevity and clarity that might be a model for some Ministers present and not present to follow. It was a pleasure to listen to the right hon. Lady. as it always is, whether she is talking on prices, Europe, referenda or on any other subject which is close to her heart.

I have usually found the right hon. Lady's logic impeccable. I found her argument about the necessity for a realistic pricing policy for the nationalised industries impeccable. I felt that she was putting forward a better case for the free market economy than had been practised by the previous Conservative Government, but we are all free marketeers now.

Her logic went wrong when she did not apply to food subsidies her criticism of the blanket nature of subsidies to the nationalised industries. The subsidy coverage on food is just as much of a blanket nature as it is for the nationalised industries. For that reason my right hon. and hon. Friends and I have always preferred to see far more specialised help in the form of family allowances paid to the first child and extension of the credit income tax system to produce a guaranteed minimum income for every householder. I found the right hon. Lady's logic not so convincing as usual on that subject.

The right hon. Lady made one statement of profound significance when she said that the Government are to have discussions to see whether it is necessary to impose some form of "penalty"—a word she said she used advisedly—on those who receive an excessive wage or salary award. She said that the Government are uncommitted. They may well be uncommitted. They were not uncommitted during the recent General Election when they regarded it as a wicked and terrible idea put forward only by Liberals.

Mr. William Hamilton (Fife, Central)

Look what has happened to you.

Mr. Thorpe

Majorities are not always right, and minorities are not always wrong. The proof of that is the position we have taken on many issues, not least on the European Community, of which the hon. Member for Fife, Central (Mr. Hamilton) has been a consistent supporter, which is more than can be said of some of his colleagues.

What the right hon. Lady said is a highly significant reflection upon the present thinking of the Government on the social contract. Just as it was in 1966 as passionately opposed to any form of statutory intervention as were the Tories in 1970, so the Labour Party became converted in 1969, as did the Tories in 1973. It is perfectly true that the statutory attempts failed, but it is also true that every voluntary attempt has failed. So we are starting off all square. I believe that the concept of a tax on inflation, both on prices and incomes, is something that the Government will have to become committed to if they are to contain inflation.

The right hon. Member for Carshalton (Mr. Carr) said that he felt that industry was being placed on a kidney machine.—[Interruption.] I hope that I am not interrupting the hon. Member for Newham, North-West (Mr. Lewis).

Mr. Arthur Lewis

rose—

Mr. Thorpe

It is probably better to say—[Interruption.]

Mr. Deputy Speaker (Mr. Oscar Murton)

Order. The hon. Member for Newham, North-West (Mr. Lewis) must not keep on interrupting from a sedentary position. If the right hon. Member for Devon, North (Mr. Thorpe) does not wish to give way, he is perfectly within his rights not to do so.

Mr. Lewis

Yes, but I am talking about the right hon. Member's racketeering company charging exorbitant interest.

Mr. Thorpe

The analogy of the kidney machine is not perhaps strictly correct. Having knocked private industry round the shop during their first eight months, the Government have now tried to apply artificial respiration—which we hope will be successful.

I have a shrewd suspicion—and there is much in the Budget with which I am in agreement—that the Chancellor would be a much happier man if he had been able to introduce yesterday's Budget last July or even last March. He was prevented from doing that by the imminence of an election, and it has taken the normal postelection Budget for the right hon. Gentleman to do many of the things which he would have liked to do many months ago. He can afford to be much tougher on his Left wing because he has proof of what some of those ideological policies have achieved in terms of low investment and inflation. Therefore, he has happily reversed many of the trends of the last eight months, some of which were unwise and some disastrous.

The Chancellor's analysis of the economic situation was right as to its tone, as to the facts and as to the conclusions he drew. I was particularly impressed by the philosophy which he expressed in these words: The senseless accumulation of material goods of exactly the same type as the Western world has been producing since the war can no longer be regarded as the only guarantee of human happiness or the only measure of economic success."—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 255.] That is entirely right.

There has had to be some obeisance to the political pressures. There is the retrospective repayment of the £10 million, which we debated on 19th June last. My hon. Friends and I are opposed to the retrospective nature of the repayment and we do not accept the validity of the Chancellor's argument that there are no alternatives. There are alternatives—in hiving off those who did not register; and we shall say more about that later.

Again, it was a genuflection to party ideology that the investment income surcharge had to start at £1,000. When one considers that average industrial earnings are more than double that figure, that is a pretty low income for a non-pensioner who is disabled and has only his unearned income upon which to live. For some that will be a negative net income when one considers the change in the capital value of holdings. I believe that to be a particularly mean measure.

Mr. John Mendelson (Penistone)

The right hon. Gentleman, having said that the Chancellor has been tough on the Left wing of the Labour Party, is getting on to the tedious point that the moderate right of centre Cabinet has produced a Budget that pleases him greatly, yet at the same time he claims that it has all been done under pressure from the Left. If we have had little influence on the framing of the Budget we do not want to be blamed for what is in it.

Mr. Thorpe

I am not certain whether that is the voice of anguish from the hon. Gentleman. I do not know whether he is going through the turmoils of the oppressed and betrayed or whether he is reasonably satisfied.

I believe the Chancellor's economic analysis was correct, but it is a matter for consideration whether the political pressures upon him have caused him to go less far than he should have done and to do certain things that he should not have done. I have given two instances, the unearned income relief and the £10 million retrospective repayment, where the Chancellor has not been able to get the Left wing out of his system. I hope that he will continue to purge himself of these pressures.

It is fair to say that the Government's policy yesterday—it changed somewhat today in the right hon. Lady's speech— was that the social contract and the Government's ability to control prices and incomes would be the central strategy in battling against inflation. The question we all ask is whether the social contract will in itself be sufficient. We all fervently hope that it will, but I passionately believe that that is unlikely. The revealing statement towards the end of the right hon. Lady's speech indicates that she, too, may harbour some doubts and so do the Government.

What the Chancellor was saying, in effect, as reported in column 249 of HANSARD yesterday, is that if wages rise beyond limits set by the TUC, the Government will be compelled to take offsetting steps to curtail demand, the effect of which is bound to lead to unemployment, as Mr. Jack Jones pointed out in his recent powerful speech. The Chancellor was saying yesterday that it must be the social contract or there will be unemployment. I do not believe that the alternatives are quite as stark as that.

I believe that I was right in 1967, if I may make a Prime Ministerial reference back to date, though I cannot give the exact time of day or the day on which I said—and I remember being howled down in the House by Labour and Conservative Members—that positive Government intervention on pay and productivity, backed by realistic sanctions, is the proper price to pay for full employment. That has been reversed by the Government. The strategy of encouraging industrial investment, of conserving energy, of having a realistic pricing policy in the nationalised industries and of protecting people at the bottom of the scale can succeed only if inflation can be controlled I do not believe that it can be controlled by the social contract that we now have. I hope that I shall be proved wrong, but I shall not labour the matter further because the Secretary of State for Prices and Consumer Protection has gone some way to admitting it.

On industrial investment, the right hon. Lady told the House that there was a clear need for action. Very few hon. Members on the Opposition benches needed to be told that. We have been aware of it for a very long time. The mere fact that the right hon. Gentleman has had to reverse the trend to the extent of £1,500 million to encourage invest ment is an admission of the devastating effect which lack of inflation accounting, and high rates of tax and lack of confidence have had on profitability and the investment pattern of industry. Has the Chancellor now come to the view that dividend and profit control is the worst way of taxing industry and that what is needed is a pay and price taxation system at plant level? I believe that this is the best way to give a return to the community while maintaining levels of employment.

I should like to say a few words about relaxation of price control. This will place inevitable pressures on the social contract. Len Murray is reported as saying that he approves of the Budget. That is a hopeful and welcome sign, but his view is that if prices go up then wages must go up.

I hope that we shall not be put back to the position illustrated by the PEP publication "Labour and Inequality"—namely, that between 1966 and 1970 the lower-paid wage earner got relatively worse off under a Labour Government while differentials increased between these wage earners and those at the top of the scale. I believe that it is desperately important to move towards guaranteed minimum earnings. If we cannot have that system, as some other countries have managed to achieve it, we should at least have a guaranteed minimum income for every family which could be used in a negative income tax system. That was one of the few good innovations introduced by Mr. Barber when he was Chancellor of the Exchequer. I hope that the Government will use negative income tax as a weapon in tackling poverty far more effectively than any other weapon available.

I should like to have seen ACT abolished, but I believe that the Chancellor has found an ingenious formula which saves his face, without a total volte face, on increased corporation tax and ACT. I welcome this.

On the subject of energy, the Chancellor had a choice of restricting consumption by rationing or by pricing. He chose the latter and the arguments are fairly evenly balanced. Just as the right hon. Lady in her statement said she would be talking with the Chancellor about the position of old-age pensioners and the disabled, I should like to refer briefly to the position of many people who have to travel long distances to work, particularly in rural areas where no public transport is available. Travel to work in these circumstances places a heavy burden on many people.

This is not the moment to suggest what could be done, but possibly the regional employment premium could be extended to allow a getting-to-work allowance to be paid to people who live, say, more than 12 miles away from their place of work. We may have to go to a two-tier pricing system, as happens in Italy, in respect of people who have no alternative but to use public transport. It may be that we should follow Germany and adopt some form of tax allowance. I only hope that this matter will be looked at carefully by the Government.

On the nationalised industries, I believe that the Government are wholly right to say that we should no longer subsidise people artificially to use scarce resources, but we must always remember that some of the lowest paid workers are employed in the nationalised industries, particularly in services. They are industries which, by and large, have low profitability margins, and the squeeze on labour will be great. This is another matter which the Government will have to watch carefully, and they will have to link it with retraining programmes. If the effect of having an economic price system in nationalised industries were immediately to produce unemployment, the Government might find that the balance would be seriously upset.

I believe it to be a logical step that sterling guarantees are to be discontinued, particularly at a time of floating exchange rates. The rate of the pound against the Smithsonian rate was running today at 19.9 per cent. I felt that the Chancellor was suggesting that he was prepared to see a further, although not a major, depreciation of the pound. That would not be a wrong decision provided that it would increase our competitiveness at a time when we hope to see raw material costs falling.

I should like to have seen some move towards index-linked bonds, which the Labour Government envisaged in regard to national savings. I should like to see that system extended. I am not convinced that the payment of family allowance for the first child need take as long as the Chancellor thinks. I also believe that the earnings rule should be abolished.

Let me turn to the subject of local government. It is right that there will have to be cuts in this area. The problem of local government is that the Conservative Government reorganised local government without reorganising local government finance. That is the problem we now face. There is no doubt that every reorganisation has meant more staff and higher rates of pay. Every local authority will have to look carefully at staffing problems, but there will be problems in low-rated areas. By and large they are ususally development areas, and perhaps they will need some form of rate support grant, geared to the situation in development areas—unless there are to be further cuts in road building and other building and consequent unemployment.

The message of the Budget is that the Chancellor is prepared to allow and encourage firms to make profits so that they will have liquidity with which to invest. That is a step in the right direction. In other words, employers will not be squeezed to keep down wages. That is not their job. We cannot insulate ourselves from the pressures of the world economy, we cannot go on having artificial prices in the nationalised industries, and the social contract, vital as it is, may need further sanctions, as we heard today from the right hon. Lady. More important than anything else is the climate created by the Government.

We have had three Budgets in one year and almost everything introduced in March has been reversed in October. I hope that we shall now have a period of stability. As Professor Sam Brittan said today in the Financial Times, The real measures to deal with inflation have yet to be seen, and those measures will emerge through the pressure of events and not necessarily through Government statements. That is right, and I hope the Government will create a climate in which investment will be encouraged. The extension of FFI is a good move. It will remain to be seen whether that body or the National Enterprise Board jostle in the row and whether the Secretary for Industry will or will not have his lollipop taken out of his mouth. We shall wait to see the Government's attitude on investment or where the FFI operates.

I think that this Government have realised the error of some of their ways. We must be grateful for small and even larger mercies.

5.50 p.m.

Mr. Guy Barnett (Greenwich)

At intervals in my speech, I shall want to be mildly critical of the Budget. Having listened to the right hon. Member for Devon, North (Mr. Thorpe), this fact gives me a little cause for concern. As I understood it, the right hon. Gentleman's speech was largely agreeing with the Government policy. I shall find myself at a greater distance from the position that the Government have taken in their financial policy than was the right hon. Gentleman.

However, I congratulate him on one feature of his speech. It was a constructive speech. I welcome that, especially having listened to the Leader of the official Opposition yesterday. His speech, I thought, was a thoroughly disgraceful performance. It was irresponsible. Today's opening speech from the Opposition Front Bench was something of an improvement on that of the right hon. Member for Sidcup (Mr. Heath) yesterday, for his speech was remarkable from one who fought an election campaign on the basis of the need for national unity and for honesty in politics.

To illustrate my point, I make only one quotation from what he said. Speaking about the CBI survey, the right hon. Gentleman said: Investment is now the worst in the 16 years since the survey has been carried out, except for the immediate period after the July measures of 1966. A 10 per cent. fall in 1975 is what is expected as a result of that survey, and 15 months ago the, forecasts were the highest ever on record. That is what the present Government have managed to do in 15 months to investment prospects in this country."—[OFFICIAL REPORT, 12th November 1974; Vol. 881. c. 285.] If the Leader of the Opposition were here, I know that he would recall that the Labour Government have not been in power for 15 months. We have had a Labour Government for barely nine months. The right hon. Gentleman will also be aware that, between the survey published by the CBI last year and the one this year, we have had a massive oil crisis. He failed, unfortunately, even to mention that yesterday. We have also had the three-day week and a period of confrontation. Both have a good deal to do with the situation which he attempted to describe.

What disturbs me is that the right hon. Gentleman chose the CBI survey to illustrate the case that he was attempting to make, instead of quoting the actual figures of the situation as they are published. I looked up those figures, and they make very interesting reading. They demonstrate that, since Labour came to power, and certainly during the first two quarters of this year, the investment rate in manufacturing industry has compared very favourably with the situation during the whole of 1973. If a graph were drawn, it would show that with Labour's return to power—although the Government do not pretend to accept full responsibility at this stage—investment in manufacturing industry was restored for the first time to roughly the level which obtaind when my right hon. and hon. Friends left office in 1970.

Mr. Peter Rees (Dover and Deal)

I am sure that the hon. Gentleman wishes to be fair to my right hon. Friend the Leader of the Opposition. He will see in column 281 of the OFFICIAL REPORT that my right hon. Friend referred to the challenge presented by the oil crisis.

Mr. Barnett

It may be that the right hon. Gentleman referred to it in passing. However, it is important to give full weight to the appalling situation which the Labour Government inherited as a result of the three-day week, and the right hon. Gentleman failed completely to do that.

The Leader of the Opposition then referred to the need for national unity, just as he did in the General Election campaign, without ever explaining how he believed that national unity could be achieved. In view of that, I wish to spend a little time talking about a subject which has been mentioned already but which is of crucial importance in this Budget and, to a degree, a criticism of it. I refer, of course, to the social contract.

In my view, the social contract must lie at the heart of the strategy which the Government should put into effect. It is not merely a matter of their individual policies. Their strategy as a whole must be formed on the basis of the social contract. The reason why the Opposition can never support the social contract or talk seriously in terms of national unity is that at the heart of the social contract is the need for a fundamental shift in the balance of wealth and power towards working people and their families. This is vital not merely because it is morally right and because we as Socialists believe that this is the way that society must move but because these are the very demands which are being made more and more stridently in the community at large.

Such a shift is essential because the demands are being made now by sections of the community which over the years have been prepared to accept exceptionally low standards of living. I have in mind such people as dustmen, teachers, nurses and other hospital workers, railway men and public servants generally. We recognise that over the years certain sections of the community have been wrongly and badly treated.

I echo what the right hon. Member for Devon, North said earlier. One encouraging feature of the trade union movement is its recognition of the need to help the lower paid. This is a much more efficient way of seeing a proper balance between one section of the working population and another than any talk of a guaranteed minimum wage.

We are discussing differentials as between one group of workers and another. We shall not achieve a permanent change in those differentials without the willing acceptance and understanding of those in the trade union movement who are bound to have their differentials affected.

That is the reason why we should judge this Budget in the light of the social contract. However, when we talk about the social contract we are talking not merely about the rewards in industry and about the pay packet that a man takes home. We are talking about rents, rates, and even the schools to which our children go. We are talking about pensions and about the environment in which individuals live. With the increasing demands being made for the involvement of people in decision making, more than ever we are talking about a decision on the balance of power as well as a decision on the balance of wealth.

There are one or two very important matters in this Budget. I welcomed a great deal of the statement today by my right hon. Friend the Secretary of State for Social Services because it went a long way to reassure me about some of the matters that I intended to raise in this debate. One of them concerned family allowances. I am delighted to hear that discussions are going ahead and that the Government are apprised of the need to ensure that in future the first child qualifies for the family allowance. One of the worst forms of 'poverty is that of the unmarried mother with one child, and this situation is not catered for without the family allowance that is so necessary.

I hope the Government will ensure that increased charges for gas, electricity and coal will not be introduced before the pension increase comes into force, otherwise many old people are bound to suffer. I expect the information to be given fairly soon, but we have no idea when these increases are likely to occur. I repeat my hope that the Government will ensure that there is no increase in the price of fuel, particularly as it affects old people, until pensions have been increased, which effectively means this winter.

I welcome the Chancellor's decision about tax relief for old people who work. This is a thoroughly good step. It will remove a grave sense of injustice which is felt by many old people—some of them my constituents—and which has been expressed to me, and which I have passed on to the Treasury. In addition, it will give old people the feeling that society in general appreciates the work that they do after the normal retirement age. This change will not only make it worth while for old people to work but will make them feel that society wants them to work. That is one of the most important aspects of the change.

I referred earlier to the social contract being wider than mere wages. I want to refer particularly to an area of the Budget that is rather shadowy, namely, the effect that the Government's financial policy will have upon the social services. If members of the Labour Party are serious about the need to shift the bal ance of wealth, we must wipe out such things as slum schools. These are often to be found in those parts of our towns and big cities where the poorer sections of the community live and where the need is greatest.

I was delighted earlier this year when my right hon. Friend the Secretary of State for Education and Science was able to announce that £10 million—a relatively small sum, I agree—was to be concentrated on these poorer areas. We accept that local authority expenditure will have to be cut, or at least that local authorities will not be allowed to increase their expenditure to any great extent, but if we are serious about wanting to redistribute wealth we, as a Government, must ensure that we direct our resources—and I mean more than £10 million—into those areas where there is the greatest need.

I am careful to stand up in the leafy suburbs of my constituency and proudly tell people that they will get nothing because such money as is available should go to areas where there is the greatest need. I hope the Government will take that point very much to heart because it is vitally important and relates to the social contract about which we have all been speaking.

I now want to refer briefly to the Government's plans for industry. I do not claim to be an expert, and there are others who can speak with greater authority on this matter than I can, but I must admit to feeling a little apprehensive. We need a lot more information about the Finance for Industry idea.

If I have got the right impression from the Press, it seems to me that this is very much an eleventh-hour solution to a problem. To judge from certain newspapers, that seems to be the position. I have a small investment in insurance funds, and so have thousands of other people. If money is invested in a medium-sized firm and that firm goes bust, will that money be safe? I should like an assurance from the Government that the Bank of England will ensure that my small contribution to my insurance fund will be safe.

If that is to be the case, and if the Bank of England will be prepared to step in and use public money to get me out of trouble, I should like to be certain that there will be public accountability, because it must be remembered that public funds are to be used.

This is of great importance and it relates to what I said earlier about the social contract, because many people work in the kind of firm to which I have referred. Back benchers cannot insist that every jot and tittle of Labour Party policy is carried out to the letter, but we can insist that the spirit of it is carried out in full, and one of the things that we said during the election was that we want accountability to the Government and to the trade union movement. Some of the things said this afternoon by my right hon. Friend about various concessions under the Price Code for firms that are prepared to invest will, I hope, mean that information will be available not only to the Government but to trade union representatives in the factory concerned, because that is implicit in the policies that we put before the country.

I said earlier that the FFI sounded very much like an eleventh-hour exercise. No doubt the Governor of the Bank of England has been successful in persuading a number of financial institutions and clearing banks to make money available for investment, but one or two banks in the City appear not to be as financially strong as they might be. Furthermore, there have been certain rumours, and I should like an assurance that this sum of £1,000 million, or whatever it is, can be delivered and that this is not just a vague promise. I should like an assurance that the banks have said they can put up the money and that the money is there. I do not detect from the Budget Statement that that is so, and the matter should be spelled out in greater detail than it has been so far.

I said that I should be critical of the Government and that I should be brief. I hope that the points I have made will be taken up by the Government because I am concerned about these matters. The point of a Budget debate is that we raise matters of concern. If I have been more critical of the Budget than the right hon. Gentleman the Leader of the Liberal Party was, I feel certain that my right hon. and hon. Friends will forgive me.

6.10 p.m.

Mr. Hugh Fraser (Stafford and Stone)

The hon. Member for Greenwich (Mr. Barnett) has cast doubt on the excellence, accuracy and probity of the Chancellor and the Governor of the Bank of England. That was an unfortunate thing to do this afternoon, faced as we are by an extremely dangerous crisis to which so far the level of debate has not perhaps risen. The state of the crisis can be seen more particularly if we look at today's trade figures and the position of sterling on the foreign exchange.

Before I address the House, I have a delicate question—a point of order—which I must raise with you, Mr. Speaker. It is that in column 264 of yesterday's proceedings in the OFFICIAL REPORT I am reported as having engaged in a brilliant piece of dialogue with the Chancellor. I happened to be asleep at the time. I hope that this can be corrected.

Mr. Speaker

Order. Does the right hon. Gentleman never talk in his sleep?

Mr. Fraser

It may not be in your recollection, Mr. Speaker, but it is within the historic recollection of the House that the great Lord Hartington, who was the thorn in the flesh of Mr. Gladstone, once rose at a public meeting and said, I dreamed I was addressing their Lordships and, my God, I was. That is an occasion which I do not propose to repeat today. I am very much alerted by the problems facing us.

It may be remembered that in July when the Chancellor produced his second Budget, 27 Members of the Tory Party and two Liberals voted against that Budget on the grounds that it was inflationary. Tonight I am prepared to give the Chancellor, in his third Budget, the benefit of the doubt. I hope that some of my right hon. and hon. Friends will ponder deeply whether they should vote against the Budget as a whole. I say this for two main reasons, if I can give two rather strangled and muted cheers for what the Chancellor is now endeavouring to do.

In spite of the "8¼ per cent." remarks during the election, in spite of the extreme pressure put on him by his own Left wing, the Chancellor has at least put forward a Budget which at this moment is not palpably inflationary. Secondly, he is moving, if very hesitantly, back towards a market economy. For these things there is due to him a certain amount of respect, if not praise. Of course, there are doubts, and this is the mystery of the Budget. Bits of it keep being unveiled, such as the statement we had from the Secretary of State for Social Services this afternoon.

We do not yet know what the real pricings will be for the nationalised industries. We have to give the Chancellor the benefit of the doubt. We do not know to what levels industry will be allowed to put up its prices. The right hon. Lady was by no means clear on this subject today. We do not know what will happen about public expenditure. The Budget, now that I have fully awakened to it and read it on several occasions, puts Members in rather the same situation as they were placed in the eighteenth century at the time of the South Sea Bubble debate—"Great enterprises which will later be revealed." Looking at some of the things the Chancellor said yesterday, perhaps we might call this the North Sea Bubble Budget.

Until we know the facts—and we shall not know them for some time—I ask some of my right hon and hon. Friends to suspend their judgment and not to vote against the Budget per se. Of course, there may be bits of it, like the £10 million being handed back to the unions and other resolutions, which should be voted against. But I believe that it would be wrong for the Conservative Party to vote tomorrow evening against what is a genuine attempt by the Government to overcome some of their electoral follies and some of the wilder views of their Left wing.

The most obvious danger lies with this question of the actual expenditure for next year which the Government refuse to announce. They talk about a 2.7 per cent. rate of increase in Government expenditure, put against a proposed or hoped-for 2 per cent. increase in gross domestic product. It is becoming clear that it is difficult to cut back on any Government spending. One thing Governments are always wrong about is the increase in GDP. If hon. Members saw the tape this afternoon they will have seen that the EEC forecast is now for nil growth.

If that is true, and if the Government come forward with a 2.75 per cent. in- crease in real terms in Government spending next year, what will lie before this country, to reverse a saying of Professor Galbraith, will be public affluence in a mass of private squalor. Those of us who have been behind the Iron Curtain know what that means—half finished buildings and people living at a miserable level of employment, or bogus employment near to unemployment.

Therefore, I say that we should give the Government the benefit of the doubt. Nevertheless, far beyond what has been said in the Budget, there are four areas which should worry the House and the country. First, I doubt whether the Budget is fierce enough to bring home to ordinary people the depth of the economic crisis. Secondly, I doubt whether it is fierce enough to reassure people abroad who are lending us money.

Perhaps there are two even more fundamental points. I doubt whether the Chancellor, the Treasury and the hon. Member for Greenwich have fully accepted the fact that taxation in all its senses at the present level of GDP, in spite of fiscal drag, has reached a point of no return. This is the most alarming fact facing us. I foresee that even at present rates companies will be unable to pay their tax next year. Individuals will find it difficult to pay their tax and those individuals who are self-employed will find it difficult to pay contributions to the insurance scheme for them, which is a form of taxation. Local authorities will find it extremely difficult to pay their bills and the ratepayers will find it almost impossible to pay the new imposts that will be put upon them.

And this is when right hon. and hon. Gentlemen on the Labour benches talk about more taxation and taxing the rich. Even the proposals put forward for the new gift tax will in the first critical years raise less money than the old form of death duty. I see that, in the red, or pink, paper it is hoped to get as much money next year out of capital gains as was obtained last year! The situation which the House should most seriously consider is that the means of raising revenue have become almost exhausted.

I turn to the most important question of all. I doubt whether the Chancellor yesterday, or any other finance Minister, has been bold enough in dealing with the oil and petro—dollar crisis which is at the root of nearly all of our troubles today. It is all very well quoting Dr. Witteveen of the IMF or quoting one of the French Finance Ministers. But this situation is becoming worse and is now a shadow over the whole face of the Western, and indeed, the poverty-stricken areas of the world. Even domestically the proposals put forward by the right hon. Gentleman and his Government are questionable, especially in the state of the economy. To suggest that 51 per cent of oil in the North Sea should be run by a British Government who have not got two farthings to rub together is absurd. If one owns 51 per cent. of the oil, one has the obligation of finding 51 per cent. of the money necessary to get it out. That seems to me to be an absurd proposal and one which I hope will be changed.

Next, although the Chancellor talked yesterday about saving and about waste, he failed altogether—so has his colleague at the Department of Energy—to put forward a massive programme of nuclear investment, which this country must have.

But quite apart from what we in our own parish may be feeling, far more important is the international problem which faces the Western manufacturing Powers and the oil producers. I believe that we must now, on both sides, start facing reality. Unless we do, it will not be just economic disaster that the world will face. It could face an era of commotion, acts of war, seizures and revolution. Five million people unemployed in the United States, between 5 million and 10 million unemployed in Europe and 800 million people in the world starving because of lack of fertilisers derived from oil will not stand idly by for ever.

Even the world's bankers and the central banks are now finding some slight problem in accepting the privilege of taking in billions in oil money at 11 per cent. or 12 per cent. for which they can find no possible use except in backing up their own tottering currencies.

These things must be now faced, and faced at the highest level. What is needed is not just a conference but, I hope, an amicable confrontation to see how the interests of not only ourselves but also the oil rulers, sheikhs, kings and others and the democratically elected rulers of the Western democracies can find a way of getting out of a predicament which can end only in disaster or war.

The time is long past for the special dealings and the sort of privileged positions certain Europeans are trying to seek, such as the French. I believe that the time has come for the rallying of this country behind the much bolder policy being advocated by the American Government. The time has come for a major Western plan regarding oil consumption, oil substitution, and the banking and question of how the petro-dollar is to be dealt with.

This is not a matter for finance Ministers or even Ministers of Power. There should be a major conference between the Prime Minister, leaders and heads of State of those nations concerned. Otherwise, the world could be now heading for irretrievable and irremediable disaster. There are forebodings plenty enough. One can read them in the latest EEC forecasts. One sees the threat of growing unemployment throughout the Western world. One sees how unstable is the Middle East today. It is not just in the bourses and the stock exchanges but in the factories, the farms and the paddy fields that the angel of death is abroad. Together, but only together, can the whole world stay his wings.

6.25 p.m.

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

In a remarkable speech, the right hon. Member for Stafford and Stone (Mr. Fraser) has asked the House to set its discussion of the Budget Statement against the sombre background of world problems, an ill-fitted mechanism for food distribution and an equally ill-fitted financial mechanism for ordering nations' payments. He has reminded us of a rising temper on the part of the deprived peoples of the world and of an incipient conflict that we shall continue to ignore at our peril. The House may agree with me that he has uttered a timely warning. He has also displayed courage in commending the Budget Statement to his right hon. and hon. Friends.

The right hon. Gentleman might have reminded some of his hon. Friends, especially those who differed from the Chancellor in his first Budget in March, of the Chancellor's starting point yesterday—an enormous balance of payments deficit, which on current account is probably the highest in the Western world and certainly represents 5 per cent. of our gross domestic product. The Chancellor was quite right to give the highest priority to that and to urge us to devote increased resources to it. Yet the Chancellor knows that even if we do that for, say, the next two years, and if it is at a time when we experience normal growth, we could not expect at the same time any improvement in our living standards.

Although the right hon. Member for Stafford and Stone was right to utter those warnings to us, we also need to remind ourselves that there is little evidence in our society of preparedness to make sacrifices and to undertake self-denial on behalf of our own economy's solvency or even on behalf, perhaps, of our economic salvation. We may be fortunate enough to experience some relief in falling import prices during the forecast period if a recession takes place in the Western world, but most of the effort and, therefore, the sacrifice must come from inside our own country.

The Chancellor is therefore right, given the magnitude of the task that faces him, to set his sights on a fundamental reconstruction of our economy and on directing it towards an external equilibrium. Most of today's Press approves of this. It was significant that the headlines of the leading articles in The Times and the Financial Times expressed approval of the Chancellor's direction. His method, as he told us yesterday, is to undertake action which will increase exports and limit imports while keeping up domestic demand. I think we all know just how difficult a task he has set us, but we need to recall briefly the way in which he spelled out the steps he thinks we shall have to take in order to achieve those objectives.

The Chancellor is giving priority to investment and exports. That means some improvement of company liquidity and more realistic pricing policies in the public sector in order to release resources. He is giving priority to measures against any further renewal of inflation—through, for example, the excessive growth in money supply—and to a more rational distribution and use of labour resources in order to increase productivity.

The right hon. Gentleman said that all this can make for a change in the whole climate of our economy and create the confidence without which we cannot evoke a sense of common effort and certainly without which we cannot evoke a sense of unity. He recognises, as do many of my hon. Friends, that that means harnessing the private sector as well as the public sector. Indeed, there is a duty on the Government to ensure that the private sector is alert and vigorous. It is necessary for us to remind ourselves occasionally that the private sector is responsible for 80 per cent. of manufacturing industry and is, therefore, a high priority for any Chancellor.

If those are the Chancellor's economic priorities, he has not lost sight of his political conditions. He has had also to ensure that the burden that our enormous balance of payments deficit represents is shared more equitably—hence his redistributive measures. However, he accompanied those measures with two warnings: first that wage bargaining must be kept within the guidelines of the Trades Union Congress, and secondly that money supply growth must continue to be kept below the growth in the gross domestic product.

May I, having followed the right hon. Member for Stafford and Stone and commended the Chancellor's Budget Statement thus far to the House, make two or three observations? It is sensible now to undertake those changes to the Price Code which the Chancellor announced, because we have had sufficient experience now to know of their limitations in tackling inflation in the absence of other measures.

The Chancellor is also right to take the steps he announced towards energy conservation, but I hope he will bear in mind the warning of the Leader of the Liberal Party that such steps will almost certainly mean a shake-out of workers from the nationalised industries, and in the intermediate and development areas this will present problems of employment. Therefore, such steps must be associated with retraining programmes.

That is not the end of the difficulties. Such steps towards energy conservation, including for example a rise in petrol prices, will almost certainly bring about an increase in the index of retail prices that will put a strain on the social contract. Yet wage earners as well as consumers, and not only Jack Jones, must now be aware that they cannot escape the effects of the external developments on our national economy. I think that this explains why the TUC has already acknowledged the difficulties of the Chancellor and has given a welcome to his statement.

The Chancellor may therefore feel entitled to claim that he has— a sound foundation for that fundamental reconstruction of our economy …"—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 280.] I hope that he will not mind my expressing four or five reservations by way of conclusion.

First, the Chancellor may have been too optimistic about export-led expansion. Has not our country recently suffered a latent loss of export competitiveness? I know that the figures announced last Monday showed an improvement in our terms of trade, but how sustainable are those figures in view of the increase in our export prices, and how far will those export prices continue to rise and how far will our import prices continue to fall, and therefore how far will the terms of trade continue to move in our favour?

Secondly, has not the Chancellor been too optimistic about the balance of payments, relying on the inflow of capital and the expectations from North Sea oil? It will be a long time before I can rid my mind of the recollection of the right hon. Gentleman's reference to such expectations as perhaps amounting to a twentieth century equivalent of the South Sea Bubble when I hear even my right hon. Friend the Chancellor say that we can expect half the supply of our oil needs in three years. After so many false hopes that so many Members sitting here now have experienced in the last 10 years, I am tempted to make adjustments such as "A quarter of our oil supply in six years if we are lucky". How well would our balance of payments be standing up without those expectations, without that inflow of capital? How well would the exchange rate be standing up? How well will it continue to stand up once people think that there are grounds for discounting our North Sea oil expectations or once programmes begin to slip back?

Thirdly, has not the Chancellor been too optimistic in thinking that the public sector financial deficit can be borne and relieved without an even more dramatic shift of resources? Did he not lose a golden opportunity? Was not the nation buoyed up and even braced to see him get hold of all of us by the scruff of the neck? Were not the people prepared for a Crippsian-type Budget? Could he come back to the House in even a few weeks' time and capture that same mood again? Yet the next Budget is hardly more than a few weeks away.

Fourthly, has not the Chancellor been too vague in budgeting for a very large public sector borrowing requirement without setting targets for public expenditure, notably by local authorities and through financing the deficits of the nationalised industries? That does not mean that I want cuts across the board—not at all. The Chancellor knows that I have appealed to him for extra resources to be allocated to local authorities for their deprived areas. I would prefer that to have been earmarked. That does not mean that cuts cannot be made elsewhere.

In every one of the five wards in my constituency I have complete Labour representation and I have the closest contact with my councillors. The view that most of them hold is that there is tremendous scope for cutting back on local government spending. The Chancellor will probably say that we must await the White Paper on Public Expenditure later this year which will doubtless give us the information I seek. I wonder whether he did not neglect yesterday as an earlier opportunity on which to demonstrate that some spending plans have reached unsustainable levels.

Finally, whatever our view about the precise thrust of budgetary policy, I hope that the House will agree with the right hon. Gentleman, myself and The Times and the Financial Times of today that the Chancellor has taken the right direction. Whether he has gone far enough to bring expenditure capacity, commitments and resources into balance only time will tell.

However regrettable some of my hon. Friends may think is the Chancellor's failure to be more selective and to use instruments such as the National Enterprise Board, I hope they will accept that those instruments were not yet quite available to us, that, given the September fall in production, my right hon. Friend had a duty to seek the regeneration of industry and that, given what is happening throughout Europe, especially in Germany of all countries, where unemployment is rising, he had a duty to take urgent steps to keep unemployment to a sustainable minimum.

6.40 p.m.

Sir John Hall (Wycombe)

I am aware, Mr. Speaker, that many other hon. Members are waiting to catch your eye and I am also deeply conscious that I am a signatory of a motion, tabled by my hon. Friend the Member for Windsor and Maidenhead (Dr. Glyn), along with other hon. Members on both sides of the House, calling upon you, with the consent of the House, to limit back-bench speeches to 15 minutes. I will, therefore, attempt to curtail my speech and conclude it within 15 minutes. I am sure that the hon. Member for Sheffield, Attercliffe (Mr. Duffy) will, therefore, forgive me if I do not take up his remarks.

However I should like to pay tribute to my right hon. Friend the Member for Stafford and Stone (Mr. Fraser) for his thoughtful speech, which took us beyond the confines of this Chamber to the worldwide problems facing us and the rest of the civilised world—something that we must never dismiss from our thoughts in considering economic subjects.

My immediate reaction to the Budget Statement was summed up very well by the leader writer in The Times today, who expressed relief that the Chancellor of the Exchequer had turned from winning the election to a more realistic policy, but my relief was rather tempered by considerable alarm at the size of the public borrowing requirement. An increase from little more than £2,700 million to over £6,300 million in eight months is staggering and must be an all-time record for an increase in the public borrowing requirement.

This will create a number of problems for the gilt-edged market. In so far as the borrowing will be met by overseas borrowing, remembering also that we have had no forecast of what the borrowing requirement might be in the next financial year, it looks as if the potential income and output of North Sea oil has been mortgaged for many years to come, if and when it arises.

It worries me also that the borrowing is, in the main, designed to maintain our present standard of living—to be used, in other words, for current needs—whereas the situation probably calls for a real reduction in the standard of living of between 6 and 10 per cent. I appreciate the difficulties of doing it but that is the sense of the situation we face today.

We as a nation have been living beyond our means for many years. All Governments have been responsible for creating in the minds of the people an expectation that year by year the standard of living would go on increasing without any special or extra effort on their part. Now, I hope, we are beginning as a nation to realise that, if we are not prepared to make the necessary effort to maintain, much less expand, our standard of living, we just cannot expect overseas lenders to go on supporting us in the standard of living to which we have become accustomed as a nation.

The Chancellor said yesterday that he could see no reason why this increase in borrowing requirement, swingeing as it is, should cause a pressure on resources, a further deterioration in the balance of payments, and a disproportionate increase in money supply. I hope that he was right. If he was wrong, Heaven help us and the resulting unemployed.

I regret that the Chancellor, who has shown considerable courage in presenting a Budget not universally popular with his hon. Friends, should have thought it necessary to throw a bone to the Left wing by again reducing the level at which savings income—a more accurate term than "unearned income"—will bear surcharge. The idea that a savings income of £1,000-plus a year means that one is a wealthy person able to bear the surcharge is ridiculous and really not even worth consideration.

For example, one of my constituents is a divorcée living on an income of £2,000 a year, which is taxable on the surcharge under this proposal. She cannot go out to work. She has to meet the mortgage on her house and she will be left with a very small income out of which she is expected to pay the surcharge on this so-called "investment income".

The people receiving these sums of money on savings income are receiving less than the docker, the bummaree, the mineworker, the car worker, and certainly far less than the average industrial wage. I hope that the Chancellor will think again about this. If he does not, I hope that we shall oppose him strongly.

I want to refer to the tax treatment of woodlands—a small but not unimportant point. It would appear from the reaction of timber growers, and certainly of the Secretary of the Timber Growers' Association, that the capital transfer tax proposals in their present form would mean the end of private forestry in the United Kingdom. Yet we import timber to the extent of about £1,300 million a year, and one would have thought that the Chancellor, in his search for import substitution, would have done all possible to encourage people to grow more rather than less timber. I hope that he will reconsider this point.

I welcome the right hon. Gentleman's determination to eliminate wasteful subsidies. It was a joy to me to listen to that phrase. He applied it in particular to energy, but the principle applies equally to many other subsidies, including food subsidies, which, I trust, he will phase out in time. Subsidies distort the economy, they are invariably wasteful and they are an inefficient way of helping those in need. If we want to help those most in need we can do it better through the introduction of negative income tax or the tax credit scheme which Mr. Anthony Barber intended to introduce.

I hope that the Chancellor will also concentrate on his campaign for the prevention of waste and the recycling of all useful waste. He stressed the need to prevent waste of all kinds. It is one thing on which he himself might give a welcome lead.

I also welcome the partial relief given to industry. I say "partial" because most of industry regards it as being insufficient. Nevertheless, it will help to ease the cash flow problems which industry faces.

The House must not lose sight of the fact, however, that the device which the right hon. Gentleman has introduced of allowing companies to write down the value of their stock at the end of the year will still enable him to decide in any successive year to return to the old basis and, indeed, to tax the paper profit created by inflation. All he has done is to postpone or roll over a potential tax liability. I hope that when he looks at the matter again for next year's Budget—assuming we do not have another one before then—he will be prepared to make this provision rather more permanent.

The Chancellor's main concern has been to deal with inflation, with the very real difficulties facing industry constrained by Government-imposed restrictions and milked through higher taxation and enforced loans through advance corporation tax, and also with the related problems, without creating massive unemployment or causing widespread bankruptcies and complete, as opposed to partial, breakdown of the social contract.

One method he has not used is the weapon of indexation, except by implication through the social contract. Last June, the National Institute of Economic Affairs proposed a mild and partial indexation in relation to wages only. It was an improvement on the threshold agreements, but, to be effective, indexation should apply across the board. It should not be confined to union members who have the strength to look after themselves, but should cover all forms of income and tax scales and social service benefits.

Indexation, which is merely a means of increasing the number of units received to coincide approximately with the number of units one has to pay for goods and services, is not of itself a cure for inflation or a substitute for measures in this Budget and others which will have to be taken in the future, but it does take the fear out of inflation. It removes pressure for wage demands of the kind which are anticipating future inflation.

It creates two main problems. The first is in exports, because if one is inflating at a higher rate than overseas competitors it creates problems in export markets, but all the time we are using the floating exchange rate that can be self-adjusting. Secondly, it does not safeguard past savings—but these are rapidly being destroyed now by increasing inflation. It can, however, safeguard future savings.

We have already got some partially indexed savings, floated by the Conservative Government.

The Paymaster General (Mr. Edmund Dell)

When were they floated by the previous Government?

Sir John Hall

There are various Government loans which are repaid with a premium which is tax free, and that is a form of indexation.

It does not go anywhere near far enough and the Government are still being paid for the privilege of being loaned the money. I am sorry that the Chancellor did not see fit to introduce indexed savings schemes into the Budget. That would have helped a great deal. I do not want to go into the matter of indexation in detail because hon. Members here now know as much about it as I do, but it is one method the Chancellor should consider, especially when he has before him the report of the committee on inflation accounting. That system could be of great benefit and could even—who knows—preserve the social contract on which, I understand, the Government's whole strategy will depend.

6.51 p.m.

Mr. Terry Walker (Kingswood)

During the debate on the March Budget my right hon. Friend the Chancellor of the Exchequer was accused by the Tories of presenting a Budget which was anti-industry and which, far from encouraging investment, positively discouraged it. No Conservative could say that about the present Budget. The Chancellor has done many things that the CBI wanted, to give an immediate cash boost to industry in order to maintain full employment this winter.

We of the Labour Party have just fought an election campaign based on a manifesto which talked about taking a hand in industry. We said: We shall not confine the extension of the public sector to loss-making and subsidised industries. We shall set up a National Enterprise Board to administer publicly-owned share-holdings; to extend public ownership into profitable manufacturing industry by acquisitions, partly or wholly, of individual firms; to stimulate investment; to create employment in areas of high unemployment; to encourage industrial democracy; to promote industrial efficiency; to increase exports and reduce our dependence on imports; to combat private monopoly; and to prevent British industries from passing into unacceptable foreign control. It is time we made a start on that manifesto. We must not leave it until later when things could very easily go wrong.

The principle of the National Enterprise Board must not vanish. There must be public accountability where public money is used. My fear is that Finance For Industry, or the investment bank or whatever it is called, will not secure the aims of our manifesto.

We sincerely welcome the Chancellor's action on the proposed increase in pensions and family allowances and I pay particular tribute to him for the generous tax relief which was promised to the elderly and which will be well received by many.

The news that the Chancellor will be introducing measures aimed at eliminating subsidies for energy supplies produced by the nationalised industries is most alarming. That will seriously strain the social contract. It will mean dearer coal, gas and electricity. I hope that the Conservative Members who cheered wildly yesterday when the announcement was made will not complain when electricity prices increase, as they surely must. I can remember when increases were proposed last July and there were grumblings from the Conservatives as well as from my hon. Friends.

Mr. Tom Ellis (Wrexham)

Some of us who have been employed in the nationalised industries believe that their efficiency and well-being have been seriously affected by the artificial pricing policies of the last few years.

Mr. Walker

I hope that we will not go back on the manifesto promises concerning the nationalised industries. That is the point I was about to make. In the manifesto we said: We do not accept the negative policies adopted by the previous Tory Government towards the nationalised industries. We shall restore to our public enterprises the assets and licences which the Tory Government took away from them, and will encourage and help them diversify into new industries. That is what I hope will happen, but I was extremely concerned at the prospect of these subsidies being cut off just at the time when restraint is needed. If coal, gas and electricity prices are increased by exorbitant amounts this will not only lead to demands for pay increases but will make pensions and family allowances appear small and insignificant.

I think I probably misheard my right hon. Friend the Secretary of State for Prices and Consumer Protection when she was referring to penalties for wage settlements outside the social contract. If what I thought I heard was correct, there are a number of questions we want answered in the reply to the debate tonight. Who will pay such penalties? Will it be the employee or the employer? If we are talking of penalties, have they been considered in the case of the chief officers in local government who have already had their rises?

Many of us regret that there were no proposals in the Budget for a wealth tax. We realise that there are certain problems, but the Government must press ahead with this tax as quickly as possible. We must redistribute the wealth of the nation if we are to take advantage of the new spirit of co-operation which is now abroad in the country. Most people now believe that we must have government by consent rather than government by confrontation. At the heart of the matter lies the social contract, and that is no mere paper agreement approved by politicians and trade unions. It is not concerned solely or even primarily with wages. It covers the whole range of national policies. It is the agreed basis upon which the Labour Party and the trade unions define their common purpose. That was what we said in our manifesto.

Many of us also regret that it has not been possible to restore the savage cuts in public spending imposed about a year ago by the last Conservative Chancellor, Mr. Barber. That is why I found yesterday's speech by the Leader of the Opposition most incredible. He did not mention the terrible legacy and the appalling balance-of-payments deficit which the Government inherited last February. If by some mischance his party had been re-elected on 10th October, what would he have been saying to us now? Would he have repeated the proposition that was put about at the election concerning 9½ per cent. mortgages, the houses that would be built and so on?

Would the right hon. Gentleman have been in as flamboyant a mood as he seemed to be during most of the General Election campaign, particularly when he came to Kingswood? He did not talk about policies. He upset some local residents because he went to Downend, in the heart of my constituency, where there were two pigs' heads, one marked "Harold" and the other marked "Jeremy". I can only presume that one referred to my right hon. Friend the Prime Minister and the other to the Leader of the Liberal Party. The right hon. Gentleman inspected the two heads. That was clearly in bad taste. Now, his own head is on the platter—on the platter to the 1922 Committee. Most of the remarks he made in the Chamber yesterday were made to boost his own sagging fortunes within the Conservative Party. Perhaps he should have been turning to hon. Members behind him rather than addressing us on the Government benches.

The right hon. Gentleman talked yesterday about wanting to create a Socialist State. What kind of State would the Leader of the Opposition really want to create? Would it be a divided nation, divided between rich and poor, between those who live in council houses and those who live in private houses? This seemed to be a great thing to the last Conservative Government. Far from uniting the nation they sought to divide it, and we have been left with the legacy from that.

The policies of the minority Labour Government which preceded the present Government were intended to heal the wounds caused by the disastrous Industrial Relations Act and the disastrous Housing Finance Act, both of which sought to divide the nation. Indeed, the nation was seriously divided during the four years of the last Tory Government.

It is now essential that we go forward in a united fashion to what lies ahead. We must do this by means of the genuine policies outlined in the Gracious Speech and in the Budget.

With regard to investment in private industry, the money that is to be injected must be used on new plant and equipment and to protect the jobs of the workers over the long term. It must not be used by the whiz kids, the asset strippers and such who feather their own nests at the expense of the rest of the community.

If that were to happen, could we seriously expect working people to face sacrifices to save capitalism which has failed? That question must be answered if faith in the working of Britain's democracy is to be maintained in the years to come.

7.3 p.m.

Mr. David Lane (Cambridge)

I respect the hon. Member for Kingswood (Mr Walker) so much as a fellow member of the Lords and Commons Cricket Club that I resist the temptation of taking up now a number of the points he made. I do not want to detain the House too long.

We must ask whether the Budget measures up to the gravity of the national situation. Even allowing for the exceptional difficulty of the Chancellor's task, I fear that it does not. In its general effect it struck me as a business-as-usual Budget, but for Britain it cannot be business as usual now or indeed for some time ahead. People yesterday expected total frankness, but the Chancellor did not look the nation in the eye. People were ready for a clarion call, but they got a muffled mixture of sounds instead.

I am glad that the Chancellor has shed some of his General Election complacency; but yesterday there was still a lack of candour as he was evasive at certain key points, and this lessened his total credibility. Some of the things in the Budget were good and courageous. It is therefore all the more a pity that the whole was not better, due to mistakes of omission and commission.

I wish to look briefly at three of the Chancellor's own stated major objectives. The first concerns tackling inflation, which is the No. I worry of the public, as was clear on the doorsteps during the General Election. I do not quarrel with the Chancellor's realistic approach to nationalised industries' prices, but I wish it were accompanied by more realism over wages.

The Chancellor stated: The most important single factor in determining the rate of inflation will then be the rate at which earnings rise."—[OFFICIAL. REPORT, 12th November 1974; Vol 881, c. 249.] That has not been said often enough or loud enough by senior Ministers, and I hope that they have taken to heart the criticism in today's edition of The Guardian.

So far as the social contract is concerned, the Government's attitude is a mixture of pussy-footing and pious hope. The crucial decisions to be taken by the miners this week are in the minds of us all, yet there has been scarcely a word of leadership or persuasion directed to the miners by any Cabinet Minister. This is further proof that over a large area of economic management the Govern ment have abdicated to the TUC. If there is to be any chance of beating inflation, continuing price controls—which at present I support—must be matched by a fairer and more effective system of pay restraint than the social contract shows any sign of becoming.

The Chancellor also said yesterday: Our prime objective must be to make the best and fullest use of the human and material resources we have available."—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 253.] For human resources, I applaud the easing of tax burdens on elderly people. This was one of the two main grumbles which I heard on doorseps in Cambridge during the General Election. Many people said, "Tax bites too hard and it is not worth working"; this was particularly the complaint of widows.

I am delighted that the Chancellor has taken action to help these people, but I wish that at the same time he had shown some awareness of the other main grumble that I heard. There was a feeling that all through society—among people of all ages, including the young—there was not enough incentive to work and too much incentive to slack and to take advantage of social security. Last night the Chancellor said on television that there would have to be hard work. Fine—he can go on saying that, so can we all. But today's climate is not encouraging people to work.

We need a review of the whole structure of unemployment benefit and other social security benefits, because the present relativities are not right—

Mr. John Tomlinson (Meriden)

Does not the hon. Gentleman agree that what he has just said is far more a critique of low pay than it is of generous rates of social security benefits?

Mr. Lane

That comes into it, but the problem is wider.

The development of the Welfare State is something of which we are all proud. We have heard this afternoon from the Secretary of State for Social Services about further advances. Abuses of the Welfare State are not widespread, but they are sufficient to cause serious concern. They certainly cause concern to my constituents, and there is scope for further tightening up. We must make it more worth while for people to work rather than not work and here was a missed opportunity yesterday.

There was also a missed opportunity over material resources, notably agriculture. It is still the case that Fred fiddles while our farmers burn.

Thirdly, the Chancellor stated yesterday that we must mount a national campaign against waste wherever we can find it. I would say, "About time, too." We can no longer afford to be an extravagant, throw-away society. It is for the Government to give a lead, and so far their lead has been far too timid. We all look forward to what the Secretary of State for Energy is to say in a few weeks' time. It had better be bold, because the situation calls for boldness. Did the Government consider a 50 mph speed limit as well as an increase in the price of petrol? I hope that such a limit has not been ruled out as a possible additional way of saving imports if that proves necessary.

In matters other than energy, too, it is the Government's job to give a lead and not to be satisfied until the energies of the whole nation are engaged in a new war against waste.

I wish to touch on three other matters of particular constituency interest. First, concerning industry, what was announced by the Chancellor yesterday was courageous up to a point, but I echo the doubts expressed earlier this afternoon by my right hon. Friend the Member for Carshalton (Mr. Carr). In my constituency, employment is largely in small businesses, including shops. I doubt whether the relief will prove enough for them, and whether the Chancellor has yet shown enough evidence to remove the suspicion that this Government are biased against the small man.

The Chancellor's measures will be of some help to bigger businesses, but will they sufficiently restore confidence? It is a great pity that the Chancellor did not take to its logical conclusion the Government's proclaimed aim of a vigorous and profitable private sector of industry by persuading his colleagues to drop some of their most irrelevant schemes. I have in mind particularly the proposals for North Sea oil and the extension of the frontiers of public ownership, on which the Secretary of State for Industry and others have set their hearts. Because of this continuing obsession with nationalisation, the Government are still failing to carry conviction in their industrial policy as a whole.

Secondly, the rates. Feeling in my constituency and the surroundinig area is very strong. That feeling is heightened by the indication in yesterday's speech that the ratepayer will be left to sink or swim, with no sign of a lifebelt from the Government. Of course, local authorities must be ruthless in economising and in postponing schemes, but, however successful they are, the prospective rises in rates under the present arrangements will be penal.

I hope that Ministers will consider the special case of East Anglia and some other rural areas, and that this time they will correct the bias they showed earlier this year against those areas. Secondly, will they consider, as an ad hoc relief for this year, shifting on to the Exchequer more of the local expenditure, as we undertook in the General Election campaign that we should do? That must of course be a rough and ready measure until the new committee has reported.

It may be asked how we are to find the extra revenue, as I think the hon. Member for Fife. Central (Mr. Hamilton) tried to ask at Question Time. For this purpose I should be willing if necessary, in order to relieve some of the acute burden on the ratepayers, to accept increases in taxation over and above those announced yesterday. I am no ascetic, but I should be content to see higher taxes on, for example, alcohol, tobacco and gambling. At this time, the psychological effect would be good; and one of the disappointments of the Budget will prove to be its inadequate total psychological effect.

My third local point, which looks ahead to the Finance Bill, is an example of the wrong priorities that I fear we shall see yet again in the Bill. In this Session I must continue my running campaign with Treasury Ministers about the need to review the disincentive effect of the capital gains tax on landlords and landladies who let one or two rooms to students and others. The Treasury is being obstinate in this matter.

It is more and more necessary that it should devise a common-sense amendment, but I expect that there will be no sign of it when we debate the Bill. Instead, we shall devote time and energy to the proposed £10 million refund to the trade unions. Here, again, the Chancellor's TUC slip is showing. It is another example of bias. If the Government persist in that proposal, the Bill will leave a bad taste and all the Chancellor's calls for national unity will have a hollow ring.

Although the Budget is good in parts, it is also a Budget of too many missed opportunities. The nation's full return to reality is being postponed, and it will be all the more painful when it happens. For the immediate future, there must be two watchwords more than any others—efficiency and economy. Not enough has been done by the Government so far to encourage either. I hope they will begin to put that right in 1975.

Compared with the developing countries, we in Britain have much to be thankful for. Our problems are manageable. As Lord Robens said recently in a courageous speech, their solution lies entirely in our own hands, but it will require challenging leadership and absolute frankness. I fear that we shall have neither from the present Government.

7.16 p.m.

Mr. Denzil Davies (Llanelli)

In the time available to me it is not possible to deal with all the major items of policy announced by my right hon. Friend the Chancellor in his Budget Statement. I hope, therefore, that my right hon. and hon. Friends on the Treasury Bench will not consider that I am being unduly critical when I confine my speech to two major reservations I have about the Budget.

Apart from those reservations, I welcome my right hon. Friend's measures. I welcome the increase in old-age pensions and the increased family allowances, although I regret that it was not possible to extend them to the first child. I also welcome the Chancellor's help for industry, which he had to give, and the way in which he did it. I do not share the mistrust of some of my hon. Friends, because I believe that in the present situation he could not have provided this much-needed assistance in any other way.

Some Conservative Members said yesterday that my right hon. Friend had not gone far enough, and that he should have given more than £1,500 million in assist ance to industry. There is a duty on Opposition Members to tell the House where they would find the money to provide that extra amount. Would it come from increased taxation, from increased prices, from printing more money or from King Faisal?

My first reservation concerns the Government's borrowing requirement. My right hon. Friend the Chancellor told us that as a consequence of his measures, mainly to help industry, it would rise by £800 million from £5,500 million to £6,300 million, an increase of almost 15 per cent. One does not have to be a stern and masochistic disciple of Adam Smith to be frightened by borrowings of that order.

I fully appreciate that it might not have been possible to do anything about the £5,500 million. Sums in respect of that expenditure had already been committed. The decisions had been made. With the greatest respect to the Treasury Bench, however, I suggest that it should have been possible, if no more than as a gesture, to try to raise the extra £800 million by means of taxation even in the middle of a tax year rather than by increasing the borrowing requirement. [HON. MEMBERS: "Hear, hear."] Possibly—Conservative Members may not cheer at this—a surcharge on incomes in excess of £3,000 would have gone some way towards raising the £800 million. It would not have affected the PAYE codings in any way. With perhaps a few exceptions a higher rate of VAT on luxury goods, such as the top rates of purchase tax which fell on certain goods, would not have been administratively complicated.

Mr. John Biffen (Oswestry)

If there must be an increase in taxation there are a number of voices within the Tory Party who suggest as a temporary measure that equity demands that the increase should fall on direct rather than on indirect taxes. However, I am alarmed that the hon. Gentleman should now be considering whether we should adopt the nauseating Western European system of having a multi-rate value added tax.

Mr. Davies

I agree that equity demands that most increased taxation should fall on direct taxes. It might be asking too much to impose the whole £800 million on direct taxation. I was not suggesting that we should have a multi-rate value added tax of the kind that some people have been advocating. I was saying that it should be possible to isolate those goods which used to fall within the top rate of purchase tax. I appreciate that there may be some exceptions, but we could impose upon certain goods a greater percentage of VAT than the present 8 per cent.

Mr. Peter Rees (Dover and Deal)

At the risk of sounding a little apart from my hon. Friend the Member for Oswestry (Mr. Biffen), may I ask whether, with the advantage of hindsight, the hon. Member for Llanelli (Mr. Davies) agrees that it was wrong to cut the rate of VAT from 10 per cent. to 8 per cent.?

Mr. Davies

No, I would disagree with that. I do not think it was wrong. As I said at the time, I think my right hon. Friend should have recognised that some luxury goods should bear a higher rate of VAT than the 8 per cent. which has been established. Some of the £800 million could come from taxes and from consumer expenditure such as wines, spirits and tobacco. It would have been better to attempt to finance the extra 15 per cent. in that way rather than by increasing the borrowing requirement. Apart from anything else, that course would emphasise to people at home—and, possibly more important, to people abroad—the Government's determination to restore our finances to a sound and stable level.

My other major reservation relates to the balance of payments. The right hon. Member for Stafford and Stone (Mr. Fraser) in a powerful speech dealt with this problem. The right hon. Member for Devon, North (Mr. Thorpe), the Leader of the Liberal Party, said that we had a floating exchange rate. I do not know how much of these matters the right hon. Gentleman understands. It seems to me that we do not have a floating exchange rate. We may have one in theory, but in practice one of the major constraints upon my right hon. Friend in taking action to avoid a serious recession is the need to defend the exchange rate of the pound—namely, to prevent it from falling too low so that our import prices become even higher.

We are concerned with all sorts of minutia but the central problem is the balance of payments deficit and the need to protect the level of the pound against any policy that may reduce its value. The balance of payments deficit this year will be approximately £3,500 million. Most of that will be made up by the cost of imported oil. It seems that we cannot continue to accumulate balance of payments deficits of that magnitude and expect British industry, even with the incentives for export which have been given, to be able to close the gap. To expect it to do so is unreasonable and unrealistic. It cannot and will not be done.

My right hon. Friend has taken a decision, following the policy of his predecessor, to attempt to deal with the balance of payments deficit by borrowing heavily abroad. The fashionable phrase is "recycling petrol dollars". In plain language, all that that means is borrowing from the OPEC countries. The figures are enormous. It is suggested by some that by 1977 we might have accumulated a total balance of payments debt of approximately £14,000 million. If we suppose that we can borrow to cover that amount and that we pay an interest rate of 15 per cent., by 1977 we shall be paying out more than £2,000 million in interest on the borrowing of our accumulated debt. The £2,000 million will come to two-thirds of our present bill for petroleum imports.

Yesterday the Chancellor said that by 1977 one-half of our oil needs will be supplied by the North Sea and that by 1980 we shall be exporting oil. That is a very attractive vision, but if our interest bill by 1977 comes to £2,000 million most of the benefit from our oil will disappear in interest payments. We shall be none the better off. The beneficiaries will be not the British people but the OPEC countries. We shall be substituting an oil debt for an interest debt. At the end of the day the money will still find its way into the coffers of the oil-exporting nations.

It seems that we shall never solve our present problems until we take direct action on our petroleum imports. There is no other way of casting off the shackles imposed upon us by an international oil cartel. We must impose strict control on the import of petroleum. I have advocated import controls in general, but I accept that there are arguments against taking such a course. Those arguments do not apply to imports of petroleum products. The only way that we shall put right our balance of payments is by strictly controlling such imports. In the short term that may be a painful course to take. Such control would inevitably mean rationing not only for the private motorist but on a priority and selectivity basis for industry.

I do not make that suggestion in a cavalier fashion or without appreciating the bureaucratic difficulties which may arise as the result of such a policy. In my view there is no alternative which is less painful. If we try to ration by price we shall not be successful. I suppose there is the possibility of being marginally successful. In taking that course we should impose burdens on those least able to carry them.

Faced with import controls on petroleum products, the OPEC countries might think again. We are faced with an oil cartel. What are we doing? We are supinely paying its prices and borrowing money from it to enable us to do so. It is an extraordinary situation. If we were to impose import controls, why should not other Western European countries follow our example? International action would force a wedge into the OPEC countries and might reduce the price of petroleum.

We are now borrowing money and talking about recycling. It is a selfish policy. We are now able to pay high rates of interest, but India and the developing countries cannot afford to do so. There is no point in their trying to borrow money as they cannot pay the interest rates demanded. To join together and impose a policy of import controls would be the best way of reducing the price of petroleum and breaking what is now an international cartel.

I urge the Government to be radical and to grasp this nettle. It will be a difficult policy to enforce and courage will be needed but, unless we tackle this central problem, whatever other measures are taken will not be effective. If we do not do this, my right hon. Friend will come to the Dispatch Box next April facing the same problems, and the options and the weapons with which to deal with them will be even more limited.

We must restrict imports of petroleum, otherwise we shall not be able to take the action which is necessary to avoid the recession which may soon be confronting the whole Western world I hope that the Treasury Bench will not be afraid to take this action so that we can avoid even more painful decisions in future.

7.30 p.m.

Mr. Julian Amery (Brighton, Pavilion)

The whole House should be grateful to the hon. Member for Llanelli (Mr. Davies) for directing our attention to the balance of payments problem and to the horrendous borrowing requirement with which we are faced. The Chancellor began his speech yesterday with comments on the external deficit. He claimed, and I do not object to his claiming, that it had been reduced from £240 million a month to £90 million a month. It is only fair to add that Treasury estimates in the summer of 1973 indicated a similar figure in its forecasts and that Mr. Anthony Barber was not, perhaps, so far wrong as some of his critics have since suggested.

The Chancellor told us a good deal of what he thought we should not do in dealing with the oil deficit, quoting at some length the views of Dr. Witteveen, but he did not have much to tell us about what he thought we should do. I am not sure that I agree with the hon. Member for Llanelli about the wisdom of import controls or rationing or anything of that sort at this stage. The essence of the problem is this. I am not sure that we shall be able to secure an early reduction in petroleum prices. What we have to seek to do is persuade the oil producers to channel a large part of their surplus earnings not into short-term money as they do today but into medium-or long-term money.

There are various ways of approaching the problem. If the consumer countries could agree together to bring down interest rates proportionately, that would not only help liquidity problems of companies at home but would also encourage the oil producers to take greater risks. No one will invest in equities yielding a low rate of interest if he can get a high rate of interest with the security of a Government loan.

Another possibility would be to try to set up a proper European monetary system. The Foreign Secretary has said that he does not understand what is meant by European monetary union. I am not sure whether he is being naïve or whether this is a ploy—I rather think the latter—but the elements of a European monetary system are there. If we could put together the hard currency reserves of Germany and Holland, the gold in public and private hands, assuming revaluation of gold, which exists in Italy and France, and our own oil prospects, we could put together a monetary system which would be at least as strong as the dollar.

In the spring of 1973 the Leader of the Opposition and the then German Chancellor came near to agreeing a pooling of reserves. The need for this seems even greater today; but the Chancellor has seriously restricted his room for manœuvre in any operation to deal with the surplus earnings of the oil producers by the enormous borrowing requirement which he has incurred. It may not greatly or directly affect the money supply, but we are putting ourselves in the hands of our creditors on a scale unprecedented in Britain and only comparable to what the Empress Dowager of China or the Khedive of Egypt did in the last century.

The other day, walking down the street, I saw some men hanging in a cradle suspended by ropes from the roof, painting a house. I thought "This is exactly the position that we are in today." We are doing our work, carrying on business as usual, but the other end of the rope is in the hands of our creditors, the oil producers, and if they let go, whether from panic or from malevolence, the crash could be very uncomfortable.

I thought that the Chancellor showed some complacency in telling us that we should not worry too much about this increase in the borrowing requirement. It seems to me very serious indeed. My right hon. Friend the Member for Stafford and Stone (Mr. Fraser) underlined some of the consequences which could flow from it.

I think that the country expected the Budget to produce some answers to the twin dangers of inflation and recession that face us. When I watched the Chancellor on the BBC last night the impres sion that I had formed during our debate yesterday was only reinforced because the whole emphasis in his speech on the television was on unemployment and the danger of unemployment. In so far as he referred to inflation, it was only as a possible cause of unemployment.

Unemployment and inflation are two terrible social scourges. We went through unemployment in a big way between the wars. I believe that we may be going to suffer a scourge of inflation far worse in the next year or two than we have so far experienced. They are both scourges with a material and a psychological impact. There is the agony of not having work to do, there is equally the uncertainty that follows from the inability to make ends meet. The psychological cost is difficult to measure—the cost of the fear of unemployment and the bewilderment of people who cannot make plans because they do not know what their earnings, their pensions, their rents or any other of the financial factors on which they base themselves will be tomorrow.

Of course it is easier to identify unemployment, because it can be seen whether someone is in work or out of work. The number concerned, even at the height of the depression between the wars is, when we are talking in millions, relatively limited. Inflation, on the other hand, is all-pervading. It is like tobacco or alcohol—it affects all those who are touched by it: a little does not do one much harm, a bit more does, according to one's constitution, and too much kills. It hurts some more than others.

It would be a conservative estimate to say that there are 10 million people suffering acutely from the evils of inflation today—retired people, people on fixed incomes, self-employed people who have found it impossible to maintain their standard of living of a year or two ago, and a great many more who are finding it very difficult to maintain even minimal standards.

Although I do not blame the Chancellor for this—Lord Hailsham was right the other day to say that politicians must not be judged entirely on the way in which they express themselves—I wish that he had shown a clearer recognition of the evils of inflation as well as of those of unemployment. He seemed to concentrate his remarks on television on an effort to reassure what I might call the "new rich", those trade unionists who, by virtue of their strong organisation, have got themselves good wages, which could only be imperilled by unemployment. He was forgetting the "new poor", people whose living standards have been fearfully cut into by the inflation that we have suffered so far.

In this context, while I would not wish, having said what I have about inflation, to be thought to be advocating additional Government expenditure, I, too, am sorry that it was not possible to include the first child in the increase in family allowances. Perhaps I will be allowed a word of filial piety here. My father was one of Eleanor Rathbone's chief supporters in introducing family allowances, and it is a matter of historical fact that they were then bitterly opposed by the trade union movement and the Labour Party.

I agree with my right hon. Friend the Member for Stafford and Stone that the Chancellor has not given a major twist to the inflationary spiral, but he has not produced a counter-inflationary policy either. He is relying, on the one hand, on stable prices—that is a gamble—and, on the other hand, on the social contract. The events of the last few weeks have shown that the rats have got at the parchment of the social contract to a considerable extent. There is not a choice between inflation and unemployment. Beyond a certain point inflation begets unemployment.

We had a blinding flash of recognition of this in what the Chancellor said yesterday: … if wages rise beyond the limits set by the TUC, the Government will be compelled to take offsetting steps to curtail demand. And the effects on the financial position of the company sector are bound to lead to unemployment."—[OFFICIAL. REPORT, 12th November 1974; Vol. 881, c. 249.] That is pure "Joseph". Indeed, it goes beyond the Preston speech made by my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph). It is a Damascene conversion. One might almost call it a Benni-Yusuf antithesis. It is saying to the trade unions, "We will give you Benn—and nationalisation if you keep the social contract. If not we give you Joseph and my right hon. Friend's Preston speech."

The tragedy is that the Chancellor is denying himself the middle way, which is to adopt an incomes policy which would match the prices policy in which he persists. By that I mean an incomes policy that is mild and flexible, on the basis of indexation. This would be close to the guidelines of the TUC and is also recommended by Professor Milton Friedman, the high priest of the monetary school. The right hon. Gentleman has limited his freedom for manoeuvre in the fight against inflation and as an alternative to the social contract.

The other issue on which the public want reassurance is what the Government intend to do about the growing recession which threatens to become as important as, though it is partly a by-product of, the inflationary crisis. Here, there is at last a recognition in the mind of the Government, though perhaps not yet in the mind of all their supporters, of the vital importance of the private sector. The private sector is the wealth-creating element on which everything—the Government machine, the social services and the nationalised industries—depends. That has been recognised in words by the Chancellor but not yet in deeds.

It is one thing to help companies with their liquidity problems, but that does not, in itself, make the private sector vigorous or profitable. It is a palliative, it keeps the private sector's head above water, but it will not be a great encouragement to new investment. Capital is a timid creature. I do not think that there will be any new investment to speak of in the 12 months ahead. People forget that such new investment as there was this year was the direct result of the enormous increase in the investment intention recorded in the last quarter of 1973, most of which was cancelled, but some of which went on. With present policy guidelines, we shall not get that investment in 1975 or after. We shall not get much new investment till we have a new approach from the Labour Party to the problem of profit.

We have to recognise, as the Swedish Social Democrats have recognised, that we want to aim at the highest possible pre-tax profits. Only profits can produce a dividend that will attract fresh capital from the market. Only high profits will produce new machinery. Only high profits will pay high wages and produce the revenue out of which social services are financed. Of course, today, in the inflationary crisis, there has to be restraint all round, including restraint on profits. That would be accepted by the private sector if it could see the light at the end of the tunnel, and if it felt that the Chancellor was committed to a high profit and high wage policy when the situation becomes steadier.

But the Budget is overhung by the Labour Party Manifesto and the Queen's Speech. High taxation, yes. There would be an acceptance of high taxation as a means of fighting inflation, but not as a deliberate means of exploiting the crisis to redistribute wealth.

Whatever else we may think about it, whatever we may like to do in easier times, the capital transfer tax proposed and the wealth tax foreshadowed cannot possibly encourage investment. Of course there is a good side to it. Able men, like all of us in the House, have down the centuries been encouraged to slave away to build up estates or businesses for our descendants—to work hard, to be abstemious so as to be efficient and to be chaste so as to be respectable and so creditworthy; and a damned bore it has been, but we felt that we had an obligation to do it. Now, the Chancellor of the Exchequer comes along as a liberator and produces a taxation system which makes it impossible to build up an estate or a business. No doubt hedonists and epicureans everywhere will say "What a splendid man", but it does not help investment, and it does not encourage anyone to work for the future.

My hon. Friend the Member for Wycombe (Sir J. Hall) talked about woodlands. That is an extreme example. To put an 80 per cent. capital transfer tax on woodlands is misummer madness. It takes a generation or more to grow trees. No one grows trees for himself. A man is tempted to grow trees only for a future generation. The Chancellor of the Exchequer and the Foreign and Commonwealth Secretary, who both farm fairly broad acres in Sussex, might do well to consult their neighbouring woodsmen to see whether the tax is right.

While deliberate steps to redistribute wealth in the present crisis will deter investment, the nationalisation programme will prevent it.

I will say a word first on direct nationalisation. Already more than 30 per cent. of the economy is under Government control. Nationalisation of oil, development land, the aircraft industry and shipbuilding will increase the proportion considerably. It is not the specific increase of particular sectors that matters most. What matters is that as we get from 30 per cent. towards 40 per cent. and 50 per cent. the whole climate of the economy changes. There is a multiplier effect in nationalisation and, as Government influence increases, so private enterprise is inhibited.

The aircraft industry, which is perhaps the one I know most about, is a clear example of that. The great aircraft firms that are to be taken over place hundreds of sub-contracts with small firms all over the country, particularly in the Midlands. Those small firms are completely private. Up to now the aircraft industry has been much under the influence of Government, who are its main customers. Now if the nationalisation programme goes through, sub-contractors will find that they are to a large extent dependent on government.

At least, where the direct nationalisation programme is concerned the public know its exact limit—namely aircraft, shipbuilding and so on, but the National Enterprise Board is quite another story.

Wisely, the Chancellor of the Exchequer did not stress the NEB, but he renewed his commitment to it on at least three occasions in his speech. The NEB hangs like a cloud over the whole private sector. Are declining firms which are doing badly liable to be taken over? If so, nobody will come in and lend a helping or rescuing hand. Private enterprise will keep well clear of them. Are prosperous firms likely to be taken over, as the Secretary of State for Industry has suggested? If so, people will be chary of putting capital into them.

There will be no renewal of confidence unless the Government are prepared to abandon, or at least postpone, nationalisation both direct and indirect. They have to learn, as the Swedish Social Democrats learned, to separate economic and social policy—to let private enterprise maximise profits, and then to argue about how those profits should be distributed.

This brings me to a political conclusion. I cannot help feeling that the Chancellor's room for manoeuvre was narrowly restricted because our present party alignment and the economic system on which the country is based are on a collision course. The Times on Monday wrote: At the political level Mr. Healey is fundamentally up against a central question of contemporary political economy. Are the minimum conditions on which capital is able to participate in the economic process compatible with the minimum conditions on which labour is willing to participate? There are two views about what labour is willing to do—Mr. Gormley's and Mr. McGahey's view, but it is fair to say that the wealth-creating sector of the country, the private sector, will not play its part if full-blooded Socialist policies, including nationalisation and the NEB, are pursued.

There are two courses open to the Government. They could try, as the New Statesman and the Tribune propose, to take over the investors' role—to take over the banks and the institutions. This would lead to a British version of what happens behind the Iron Curtain. In effect we should be joining COMECON but without a referendum and certainly "without the wholehearted consent of the British people". The Government would not get that consent.

If there is one thing I fear more than nationalisation it is the backlash that will be stirred up among the 60 per cent. of the anti-Socialist voters if they wake up to the fact that there is an attempt to lead them to that kind of Socialism by the back door. I urge the Government not to underrate the potenial resistance of that 60 per cent. They will have been much encouraged to resist by the £10 million refund to the trade unions and the treatment of the Clay Cross disqualified councillors.

Most of us in this House—and, I believe, a majority of Labour Members—believe in a mixed economy. It has worked well. It can be made to work well again. It is clear to most of us, as we come closer to the problem, that a policy of nationalisation will divide the country at home and wreck confidence abroad. The only hope lies in rallying all who believe in a mixed economy to support policies of national unity.

This means in the first place the postponement of nationalisation and then being prepared if necessary to match a prices policy with some kind of wages policy, be it only indexation. This will call for some realignment of forces in this House. It will mean that this Government or any other Government will have to act as a Government of national unity. What is more important is that it will have to be supported by a majority for national unity in this House. I am not one to venture a forecast, but I should not be surprised if we were to be near to that moment by the time the Chancellor opens his next Budget.

Several Hon. Members

rose—

Mr. Deputy Speaker (Mr. George Thomas)

Before I call the next speaker, may I remind the House that the time that remains for back bench contributions is one hour and five minutes. There are nine hon. Members who have indicated their desire to speak. I hope that some self-discipline will be exercised.

7.56 p.m.

Mr. John Tomlinson (Meriden)

I shall try to confine myself to within the time limit observed by the right hon. Member for Brighton, Pavilion (Mr. Amery), and I hope he will understand if I do not take up the points which he sought to emphasise.

I wish to associate myself with the remarks made by my hon. Friend the Member for Llanelli (Mr. Davies) on the public borrowing requirement. I am disappointed in this Budget that we have not tried to raise the extra £800 million public borrowing requirement by taxation. There are two reasons for making this point. First, we are in grave danger of mortgaging even more of our future than we have already done. My second reason for regretting the way in which the position has been handled is that we have not fully brought home to the majority of people the exact nature of the economic crisis.

We have heard a great deal about the balance of payments. I regret the somewhat complacent use of the words "non-oil deficit". It seems to indicate that somehow, because we have a non-oil deficit, we need not bother about the oil deficit. The fact remains that we have a balance of payments deficit of £4,000 million. That is the important figure to remember whether it relates to an oil deficit or a non-oil deficit. The fact is that we shall have to meet the consequence of the two portions of the deficit and we must look at the total situation which the nation faces.

I am not happy when there is constant reference to the reduction of our non-oil deficit. The non-oil deficit reduction has been a major consequence of the reduction in the value of our currency. Secondly, we must also remember the importance of the increasing value of export prices and the reduction of import prices. This has nothing to do with any staggering improvement in our manufacturing efficiency or capacity. By trying to differentiate between the two and suggesting that the non-oil deficit is an improvement when that improvement is largely due to external factors minimises the importance of the nation's situation.

In the Budget we are also in danger of over-stating the claims of what political judgments can do. On the most charitable interpretation, what we are doing in the Budget is creating a programme in which 635 Members of Parliament are having to resolve our problems. We must not claim too much for budgetary measures. We are in danger of overstating their effect. We are seeking to create parameters by which the people outside the House will have to face the present situation

That leads me to the major problem. The Government have rightly taken major steps to improve investment in industry, but that does not alter what is at present the major fact of the inadequacy of the use of existing investment in British industry. It is not just a matter of finding more and more investment but involves the use we make of investment. The major problem is under-utilisation of investment, which in turn is largely responsible for the reluctance of people to invest further. It is not merely a question of the Government producing money.

One can take all kinds of examples, but what concerns me principally is the industrial relations aspect of the present situation. It is nonsense to talk about our need for increased productivity and to say that without it we shall not get the incentive for more investment if at the same time we build structures of low pay into our industrial organisation. Low pay of itself is one of the greatest inhibiting factors to improvements in productivity, and the consequences of low pay in employment have to be overcome. That is why I disagree with the hon. Member for Cambridge (Mr. Lane) when he talks about the disincentive effects of the levels of social security benefits. It is a criticism of the levels of pay in employment, not of the over-generous attitude of the State in relation to social security benefits.

It is for that reason that I criticise Opposition Members who talk about the indexation of wages. All that this process does is to freeze existing inequalities in direct relationship to others, and the relative nature of poverty remains unchanged. For that reason we must have major discrimination in our approach to wages and employment in favour of the low-income groups.

The reality of the social contract means that the £30-a-week minimum wage has to be achieved, and achieved in such a way as to avoid a general push upwards to maintain existing levels of differentials. Until we get out of this cycle of low pay creating a situation in industry where people are forced, because of their low rate of pay for 40 hours, to restrict output and so create overtime in order to get a living wage, we shall not make effective use of our existing industrial investment let alone any further industrial investment which will be coming. The need is there, and it must be accepted as a major challenge when we look at industrial relations problems. I look forward to our discussions on the Employment Protection Bill and other measures which are to be introduced by this Government.

In the brief time available to me I wish to refer to two or three other relatively minor matters. In this Budget we have an increase in the rate of VAT on petrol. This is logical only if it has the effect of reducing the consumption of petrol. If it has that effect, I urge my right hon. and hon. Friends to look at a number of consequential decisions in relation to other aspects of public expenditure.

There is no point in trying to ration the consumption of petrol and at the same time to allow predetermined patterns of public expenditure to continue. If we try to cut down the consumption of petrol, it is nonsense to allow the interurban motorway programme to continue. We talk about restraining energy consumption generally. We have our priorities upside down if we spend £2 million a mile building new motorways which encourage people to consume fuel when we deny public resources to rural railway lines which are the most energy-conserving form of public transport. Another consideration is that in building inter-urban motorways we are ripping out agricultural land which could assist the import-saving process of which agriculture should be a vital part.

I turn next to the £10 million which is to be repaid to the trade unions. I support my right hon. Friend the Chancellor of the Exchequer in bringing back this matter before the House. In the debate on the last Finance Bill, the right hon. Member for Carshalton (Mr. Carr) said that it was never his intention to penalise the benevolent fund activities of trade unions and that he had gone out of his way to try to create mechanisms by which the £10 million would not be taken. The trade unions should not be penalised for the right hon. Gentleman's incompetent drafting. What he wanted to do was not done. We should not attempt to regard that as a reason for penalising the benevolent funds of trade unions. I hope that the House will accept the repayment of the £10 million which it was never the intention of the then Secretary of State to take into the Exchequer. The right hon. Gentleman should have the courtesy to admit that his mechanism was wrong, and I hope that he will support the present Government in remedying the deficiency for which he is responsible.

I want finally to refer to the nationalised industry pricing policy and to energy conservation. I am a little distressed to see that a major item in the Budget which could create a clear impression of the gravity of the crisis we face is not quantified properly. The announcement of the effect of the pricing policy is deferred to some time next year. I should have preferred to know the effect of the policy now. However, I appreciate the reason why there must be delay.

We have to consider where the consequences of my right hon. Friend's statement will fall. I hope that, before the exact effect is announced, an opportunity will be taken to consider a pricing policy in reverse of the pricing policy of the nationalised industries today. We are trying to conserve energy. We have everyone demanding of us that efforts are made to do so. I hope that, between now and the announcement next year, there will be some attempt to discriminate in favour of small users, to make the marginal costs of electricity more expensive rather than cheaper, and to provide a clear incentive to save coal, gas and electricity. I hope to see the Government make the marginal costs more expensive rather than encouraging the profligate use of these fuels, as the present pricing structure does.

I welcome the measures in the Budget. There are a number of areas where there is no difference between my thinking and that of my right hon. and hon. Friends. I hope they will accept that it is only in the interest of conserving time that I do not refer to such matters as pensions and family allowances.

My main regret is that the Budget has not brought home to the people the detailed nature of the economic crisis that we face. I should have preferred to see a more immediate impact on the individual member of society. I should have preferred to see measures which he would feel more personally in terms of the price he was expected to pay as his contribution to the solution of the economic crisis, even acknowledging that it would lower his living standards.

As I said in my opening remarks, I should have preferred to see the increased borrowing requirement financed directly by taxation. The effect of that would have brought home the gravity of the crisis more effectively to the individual member of society.

8.8 p.m.

Mr. Nigel Lawson (Blaby)

I wish that I had time to deal with a number of the speeches to which we have listened so far. In view of your request for brevity, Mr. Deputy Speaker, I say only that I am happy to find myself in agreement with a great deal of what the hon. Member for Meriden (Mr. Tomlinson) said, although he may not be as pleased to find me agreeing with him.

This has been a somewhat sombre debate—more sombre even than an out-of-season Budget normally warrants. I am reminded of some lines of Thomas Hood: No warmth, no cheerfulness, no healthful ease, No comfortable feel in any member— No shade, no shine, no butterflies, no bees, No fruits, no flowers, no leaves, no birds— November! I do not blame the Chancellor of the Exchequer for the absence of butterflies and bees. But he is not a man who, by his record in high office, inspires a great deal of confidence on either side of this House.

I make no complaint about the fact that yesterday's Budget amounted to a total repudiation of the economic measures introduced in July. Those measures were, as many of us realised, a cynical inflationary pre-election bribe, and they needed to be repudiated. I am glad that they have been and that a number of us, at least, voted against those measures at the time.

But it is impossible to draw a veil over the stark contrast between yesterday's Budget Statement and the Chancellor's Statement last March. At that time the right hon. Gentleman prefaced his measures with these words: This does not mean that we can afford a public sector borrowing requirement at anything like the level of last year. The vast deficit of the public sector was then an important factor in the excessive monetary expansion. So I am aiming at a massive reduction in the public sector's borrowing requirement of about £1,500 million compared with 1973–74. The right hon. Gentleman then announced his proposed measures, and concluded by saying: Thus the effect of my proposals is to reduce the public sector borrowing requirement by £700 million and to bring it down to a little over £2,700 million this year. I have thus achieved —and the House will note the complacent use of the past tense— the target I set myself—a reduction of £1,500 million on the figure of over £4,250 million for 1973–74."—[OFFICIAL REPORT, 26th March 1974; Vol. 870, c. 295–327.] In fact, as was revealed in yesterday's Budget Statement, this year's borrowing requirement, so far from having been reduced to £2,700 million, has, on the Chancellor's own admission, been increased to the horrendous level of £6,300 million, a considerably larger increase than the £800 million to which the hon. Member for Meriden referred, although I know the figure that he had in mind when he said that. This is not merely far and away the largest borrowing requirement that this country has ever known, but an increase of more than £2,000 million is the largest therefore that we have ever known in any one year.

As recently as last July—a mere four months ago—the Chancellor of the Exchequer accused his predecessor, Mr. Barber, of "profligate irresponsibility" in allowing the borrowing requirement to reach £4,250 million. If that was profligate irresponsibility, £6,300 million is sheer Weimarism, and there is no running away from that.

What unexpected event, what unforeseen turn of fate, can have been responsible for so vast a discrepancy between the borrowing requirement which the Chancellor forecast and said he had achieved for 1974–75, and what is now admitted to be the reality? The simple fact is that at a time of rapid inflation, particularly of wages, the effect on the public sector—where prices have been held down or no prices are levied—has been to push it further and further into deficit. What a surprise. Who could possibly have thought, and how could the Chancellor have imagined that this would happen? After all, it does not say anything about it in the social contract.

We are now told by the Chancellor that the size of the borrowing requirement is not important. The right hon. Gentleman's predecessor's smaller borrowing requirement was highly inflationary, but now a much larger one will not, so we are led to believe, lead to any inflation, since it will not be financed by any undue increase in the money supply.

I want to be fair to the Chancellor of the Exchequer. I always try to be fair to the right hon. Gentleman. It is true that the sudden emergence of a vast oil deficit on the balance of payments—and I accept the point about the danger of distinguishing between the oil and the non-oil deficit—poses special problems and imposes a special strain not only on the balance of payments but on the borrowing requirement, and it is reasonable to aim, in the short run, at meeting this oil deficit by borrowing the bulk of the money from the oil producers themselves.

But the total amount of the oil deficit—even assuming that the distinction is valid—is £2,500 million, and even if all of this is borrowed abroad long term, on a cast-iron basis—which is a big assumption indeed, and we have heard well-founded fears about being pawns in the hands of the oil producing countries—there remains the best part of £4,000 million of the borrowing requirement to be financed.

How can we assume that the bulk of this can be met by genuine borrowing—above all, given the totally demoralised state of the gilt-edged market and the threat, as my right hon. Friend the Member for Carshalton (Mr. Carr) said, that the huge flood of Government paper required to finance the Labour Party's nationalisation proposals will be landed on the gilt-edged market? The answer is that we have no reason for any confidence that the vast borrowing requirement which the Chancellor has presented can be financed in a non-inflationary way—I wish that it could, but we can have no confidence that it will be—and every reason to believe that it will prove highly inflationary, as large borrowing requirements have in the past.

If the Chancellor wishes to set those fears at rest, let him announce in this debate—and stick to it—a clear and unequivocal target for the expansion of the money supply. The right hon. Gentleman's solitary promise in his Budget Statement that the money supply will not increase faster than the rate of inflation, whatever that may rise to, is worse than useless.

The Chancellor told the House that he intends to get the borrowing requirement down in future, by a tighter control of public spending in general—although not tight enough if 2¾ per cent. per annum in real terms over the next four years is to be stuck to—and by the elimination of subsidies to the nationalised industries in particular. I make no complaint that all that will mean a lower standard of services than we would like and higher prices all round in the nationalised industries. If we want to conquer inflation, and if we are serious about it, there is no other way. I welcome the Chancellor's conversion to the fundamental truth that we cannot conquer inflation by artificially holding down prices. I wish that the right hon. Gentleman would draw the attention of his colleagues to that important discovery.

My complaint is quite different. It is that we have heard all these good intentions before. Let us consider the nationalised industries' deficits. In his March Budget Statement, the Chancellor thundered on about how appalling it was that his predecessor had allowed the subsidies of the nationalised industries to rise to £800 million and that he intended, as a first step, to bring them down to £500 million. We could not"— —the right hon. Gentleman said— allow the existing state of affairs to go on. Costs had to be reflected more closely in prices. There is no other way of avoiding a heavy excess of demand for the products concerned, the uneconomic use of resources, the collapse of all financial disciplines, and an unacceptable level of support by the Government."—[OFFICIAL REPORT, 26th March 1974; Vol. 570, c. 300.] To that I say "Hear, hear".

Yet what has actually happened? With his tail between his legs, the Chancellor was forced to come to the House yesterday and confess that, so far from having brought the deficit in the nationalised industries down to £500 million this year, he has allowed it to rise to more than £1,000 million. What credence can the House place on the right hon. Gentleman's promise made yesterday?

Nor is it merely the Chancellor's track record that inspires nothing but the deepest scepticism. The plain fact of the matter is that, of all the proposals announced yesterday, far and away the most important were his intentions for public spending in general and the nationalised industries in particular. Yet in the whole of his speech, lasting for more than an hour and a half, there was not one reference to the size of the spending cuts to be made, when they would be made, or how they would be allocated. Nor was there even one reference to the amount by which subsidies in the nationalised industries are to be reduced, by how much prices are to be allowed to rise, and when this will happen.

After the débâcle, and it was a débâcle, of last March we shall believe that the Chancellor has trodden the path, of virtue when we find him at the other end of it. So far all he has done is surreptitiously to point to the signpost. I said that I want to be fair to the right hon. Gentleman. Let me conclude by singling out the two unequivocally good features of this Budget.

Mr. Brian Sedgemore (Luton, West)

I am fascinated by the hon. Gentleman's discourse. Perhaps he will tell me whether I am right or wrong, but listening to him it seemed that he was saying that he wants this large deficit reduced and that the only way that the Chancellor can do it is by running the economy with more spare capacity than it has at the moment. Would he be prepared to say how much spare capacity he would like to allow and perhaps express that in terms of unemployment?

Mr. Lawson

I hope that the hon. Member for Meriden (Mr. Tomlinson) can explain to his hon. Friend the Memmer for Luton, West (Mr. Sedgemore) the fallacies in that intervention. The way to deal with the deficit of the public sector is either by increasing taxation or cutting public spending. It has nothing to do with spare capacity in the economy. But fear not, I shall come to the point about the amount of spare capacity or otherwise in the economy in a moment.

Let me first mention the two unequivocally good features in the Budget. The first is that in its conception, its vocabulary and in its approach to the economy, yesterday's Budget bore no resemblance whatever to the speech made by the Secretary of State for Industry in the debate on the Address last week. This is certainly a strong point in its favour. There appears to be something of a regeneration gap yawning on the Labour benches. The wider the gap gets the better as far as I am concerned.

The second encouraging feature of the Budget speech was something which has already been referred to by the Leader of the Liberal Party and my right hon. Friend the Member for Brighton, Pavilion (Mr. Amery). This is the Chancellor's warning which is worth quoting once again that: if wages rise beyond the limits set by the TUC, the Government will be compelled to take offsetting steps to curtail demand. And the effects on the financial position of the com- pany sector are bound to lead to unemployment, as Mr. Jack Jones pointed out in a powerful speech the other day."—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 249–250.] Many commentators apart from the Leader of the Liberal Party and my right hon. Friend have singled this out as the most important passage in the entire speech. I sincerely hope for my part that they are right although it must be added that elsewhere in the Budget speech, and notably in other pronouncements made by the Prime Minister, the creation of unemployment is treated as the unmentionable, ominously like devaluation was treated during the period of the previous Labour Government.

Also on the plus side there was the rather coy statement to much the same effect, which we heard in the debate today from the Secretary of State for Prices and Consumer Protection, when she suggested that there might be tighter price control on those firms that allowed very large wage increases—which would lead to lay-offs and unemployment. I do not think that this is the right way to do it, but it is an interesting and important change in the Government's thinking.

This is the crux of the matter. If it is the case, as I believe it to be, that, in the Prime Minister's words, fighting inflation is a matter of national survival, then it follows not merely that every other objective of economic policy must be subordinated to this one end but also that we must be prepared to accept that there will be casualties before the battle is won.

We cannot fight any war without casualties, however much we may seek to keep the casualties to a minimum. To accuse those who point out the dangers of this of actually wanting to see increased unemployment is as contemptible as accusing those who point out the dangers inherent in waging war of actually wanting to see casualties on the field of battle. This goes to the heart of the so-called social contract.

The chances of the social contract succeeding in helping to beat inflation are scarcely encouraging, as recent events have abundantly demonstrated, in Scotland as well as in England. There are a number of powerful reasons why this should be so. For one thing, the concessions which the Government make under the contract are to the trade union movement as a whole whereas the mechanism of wage inflation is the competitive struggle between autonomous unions. There is, thus, a fundamental flaw running through the whole concept of the social contract.

Mr. Tomlinson

Would the hon. Gentleman not agree that the social contract has far more chance of working if people like him use their undoubted abilities to promote the ideas in it rather than continually knocking it in the hope that it will fail?

Mr. Lawson

If the hon. Member will be patient he will see that as I come to the end of my remarks I intend to say how the social contract can be helped to succeed. I hope that he will agree with me when I come to that point.

Again, the Government are constantly being urged, as their part of the bargain, to undertake policies or commitments which would make the curbing of inflation utterly impossible. Let us not forget that it was in an explicit attempt to win the support of the TUC that the previous Conservative Government embarked on the excessively expansionist economic policy which led to their downfall. There is only one social contract, I believe, that can possibly make sense or meet the needs of the economic situation in which as a nation we find ourselves. This is understanding with the trade unions that the maintenance of full employment, which we all want, must necessarily be conditional on moderate and responsible trade union behaviour.

In other words, full employment cannot be an absolute commitment. It must be an objective, but an absolute commitment, come hell or high water, it cannot be. What is the alternative? The alternative implied in the proposition that in the short term full employment will be maintained come hell or high water, irrespective of trade union behaviour, is the handing over to the trade unions of effective control of the monetary printing press. It is to condemn the people of this country to ever-accelerating inflation, with all that that implies in social and political as well as purely economic terms.

The social contract can work only on the basis of fear—fear that if the trade unions do not carry out their side of the bargain the Government will still follow the path of economic rectitude and, as a consequence, be obliged to permit unemployment to rise. This is what I believe the Chancellor was saying in that key passage in his speech yesterday. There is, morever, a further point. For this to work the fear in the minds of trade union leaders at all levels, not just national, has to be greater than the fear in the minds of Ministers about the political consequences for the Government of allowing unemployment to rise.

It is because in the past the balance of fear has been tilted the other way, because the fear in the minds of successive Governments of unemployment has been greater than the fear of unemployment in the minds of the trade unions—and for no other reason—that sound anti-inflationary economic policies have been abandoned time and again. I recognise that this may seem a tactless, harsh, even unfeeling doctrine to be putting forward. But the time for comfortable wishful thinking is long past. I merely ask Labour Members to ask themselves not just which is worse, unemployment or inflation—because at the end of the day if we go on as we are we shall get both—but also which is worse, the fear of unemployment or unemployment itself—which will assuredly come on a massive scale if nothing is done to check the current inflation.

The more the present Government seek to assure the unions and the people of the country as a whole that they will in no circumstances tolerate any significant increase in unemployment, the more certain it will become that the social contract, on which the Government are pinning all their hopes, will fail. By contrast, the more explicit the Government become in warning—as the Chancellor did in that key passage, the importance of which I hope that we shall hear underlined by the Minister tonight—that breaching of the social contract will inexorably lead to measures which in turn will result in higher unemployment, the greater is the chance of the social contract succeeding and of inflation abating.

To put it with brutal frankness, fear is our only hope. The sooner the Government collectively and explicitly recognise that and spell it out, the better it will be for us all.

Mr. Deputy Speaker (Sir Myer Galpern)

Order. I understand that an appeal has already been made to right hon. and hon. Members for brevity in speeches. I shall reinforce that appeal, particularly as the closing speeches will probably start at about nine o'clock.

8.30 p.m.

Mr. Tom Ellis (Wrexham)

In response to your appeal, Mr. Deputy Speaker, I shall be very brief. Because of that, what I have to say will be very generalised. I should have liked to follow up the remarks made by the hon. Member for Blaby (Mr. Lawson) about the absolute importance of unemployment as some kind of mandate on the people of this country and to go into the application of that kind of policy and philosophy in relation to our present system of parliamentary democracy. However, I shall resist the temptation.

I want to make only one main point. It is a platitude to say that we are in an economic crisis. We have all said it umpteen times. Despite what the Leader of the Opposition said in his accusations against hon. Members on the Government side of the House about not making the point clear, we have repeatedly spoken about living above our means, tightening our belts and so on. The trouble is that that kind of thing is only words. They are easy to say and we can keep on saying them until the crash finally comes. The great danger is that we shall stop saying those words only when the crash has come and when it is too late.

The time-span for us could be very short indeed before we reach the crash. Therefore, it seems that the Budget must be judged primarily on psychological grounds, on its impact on the people of this country and not on the 635 hon. Members of this House, about whom my hon. Friend the Member for Meriden (Mr. Tomlinson) spoke.

How much does the Budget contribute towards making us in reality live within our means as a nation? The problem can be approached in two ways. One can set out to increase one's means or one can set out to lower one's standard of living. The prospect of the first way has become perilously near impossible, and certainly impracticable in any meaningful sense in the short term. We have not got much time. For example, the whole question of increasing our investment has become a perennial problem. It has been with us certainly since the war and we are a long way from solving it. I do not see how we shall very quickly solve it in the near future.

The Budget can be regarded in some ways as almost a rescue action. The cash flow problem, for example, is so acute in many industries that many firms are in serious danger of collapse. I visited two factories at the weekend, in different businesses. In both of them I was shocked to see how far below capacity they were working. One was working for a fortnight in every three weeks. Although that is not typical, it is certainly symptomatic of a desperately serious position. Therefore, to that extent the Budget is somewhat of a rescue action. Yet some of my hon. Friends are criticising, for example, the attempts to provide funds to ease this cash flow problem.

In principle I, too, am against the particular proposal because it is an artificial sort of thing with which to approach the problem. I should have thought that it would be applicable only in the case of an emergency, such as that which faces us at present. In the short term, however, we must accept it. I am all for the National Enterprise Board—and not simply as a slogan but as something with which we can develop the whole structure of our publicly-owned industries. In the meantime, whatever our ideological beliefs, we must realise that we are trying to mount a desperate rescue action within the existing system of a mixed economy. Therefore the only practicable way, if it is practicable, is to hold down our standards of living.

It is here that the Budget judgment will be tested by time. How far should the Budget have attempted to drive home to us that words simply are not enough and that we are facing a desperately dangerous situation? We in Britain are peculiarly vulnerable, psychologically as well as in material terms. Our tradition is not particularly helpful at present. Our tradition is that of being the workshop of the world, of being the great imperial Power, of being one of the richest nations. All those things have gone. We cannot get used to it.

Speaking as a Welshman I am rather surprised occasionally to see the great nation of England, a nation which over the centuries has gone out conquering and colonishing the world, venturing and innovating, suddenly become almost frightened simply to venture into an association with our friends in Europe. The tremendous psychological trauma that has happened to the nation astounds me as a Welshman.

I believe that we—speaking now as a Briton—need a salutary shock. This is the psychological moment for it. I agree with my hon. Friend the Member for Meriden in being disappointed in that the Budget did not provide that salutary shock. I know that the Chancellor tried to balance the pressures from the ordinary people for an ever-increasing standard of living—pressures which are summed up in the phrase "trade union pressures" against the pressures of the economic realities of the world and of the system in which we live. It could be argued that the Budget is a question of how far my right hon. Friend could chance his arm without wrecking that delicate plant, the social contract.

I think that at this psychological moment the Chancellor could have gone much further than he has gone. In The Times this morning Peter Jay used a rather apt metaphor when he said that we were marvelling at the Chancellor on the high wire act which he was treading so carefully and were all wondering how far he could go along it. Peter Jay asked what—perish the thought—if there were no high wire and what if it were a myth—that is, what if the Chancellor were trying to reconcile the irreconcilable? If that is so, we are in a frightful situation because it would mean that we are out of control.

I cannot believe that. I shall continue not to believe it only if the Chancellor in the Budget sets out to shock us into realising that it is self-discipline in a comparatively laterally-structured society—and not the authoritarianism, of which the hon. Member for Blaby spoke, that unemployment would bring upon us—that will see us through. It is in that context that I am very disappointed.

The public borrowing requirement has been spoken about, particularly the pricing policies of our public industries. For many years I worked in a nationalised industry. Over the years I have been very saddened to see how that industry was done serious harm and rendered less and less efficient because of the political influence in respect of wages and prices, very often by unsympathetic Governments.

This is bringing us in a sense almost full circle back to the old last century sliding scale when the miners' wage was tied to the selling price of coal and, therefore, when one considered costs one thought only of lowering wages rather than of increasing efficiency and productivity. It is in that sense that the interventionism practised by successive Governments on the pricing structure of my industry and of other nationalised industries worked seriously to the detriment of the industry concerned.

That kind of policy is not only working its way through one or two industries but is having a considerable effect in producing a lack of economic discipline in the whole of our economic life and wellbeing. It is in that sense that I am sorry that my right hon. Friend has not made use of this psychological moment to impose a shock great enough to bring us to a realisation of the situation facing the country.

8.40 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I much agree with most of what the hon. Member for Wrexham (Mr. Ellis) said. The hon. Gentleman asked why it was that the English had apparently lost their verve. Could it conceivably be because Scotland and Wales have made it extremely likely that we will from time to time have Labour Governments? If the Scots and the Welsh would like to leave us to our own devices we might be free of the threats of nationalisation and Socialism which have so inhibited the economy of the country in past decades.

I welcome the income tax allowance for the aged. I believe that it is a possible way forward in modifying our tax structure that we should look at the allowance side of income tax and make sure that such allowances really fit the bill of those who need them in the future.

Secondly, the Secretary of State for Prices and Consumer Protection really cannot be such a nanny, such a fussy busybody with her Price Code. What she is doing is totally incomprehensible and pointless economically. She would do better to scrap the code. It would save the time of many civil servants, a lot of taxpayers money, and might even help to restore the liquidity of industry. The nannying bureaucracy that it represents just does harm.

Thirdly, there is the question of inflation and the effect of the Budget upon it. The right hon. Lady claimed that inflation was now running at 8.75 per cent. annually. I do not know if that is true, but I think that she is right in the sense that it has come down considerably from the end of last year, when it was in the high 'teens. It is curious that during this period, the price of oil has risen astronomically, as have the prices of many raw materials and many wages. Just at the time when our costs overseas and our wages at home have been going up fastest, so we have had a deceleration of inflation.

When the right hon. Lady was asked to forecast the future rate of inflation she talked about whether the price of oil, and the prices of other commodities or wages were to go up in future, but from the right hon. Lady's own claim that inflation is now at 8.75 per cent. it must be clear that it has nothing to do with the price of oil, nor with the cost of wages, nor anything else. Inflation has diminished because of the measures of 17th December 1973, when money supply was stamped on by Mr. Anthony Barber and reduced to zero growth. That is the reason why inflation is reducing, if it is reducing.

What of the future? The future will depend on whether this Budget increases the money supply in due time or not, and the money supply has already started to go up. I suspect that the effects of the Budget will in a year or less be greatly to increase the money supply.

We have to borrow £6.3 billion, a sum so astronomical as to make the debates in the 1960s about the £800 million deficit seem child's play. In so far as the whole of this debt is taken up by the Arabs, the oil producers, there will be no increase in money supply, but if I were an Arab I would prefer to invest in equities or North Sea oil or buy up property companies. It is clear that in times of inflation such as lie ahead these will be the better investments for Arab money, and if the Arabs invest in that way it will cause further inflation because it will not be taking up the Government's debt but will be going straight into the private sector.

I heard at Question Time today that we have a gipsy advisory officer. I am tempted to think of the Paymaster-General as a sheik advisory officer. He has gone round trying to persuade them to buy all these gilts, but an American has been doing the same thing, and the probability is that the vast bulk of the money will go into American Government debt. To the extent that we fail to borrow this money we shall cause massive increased inflation.

Let us assume that we succeed in borrowing it all from the oil States. This year the amount is £6.3 billion and that is in a Budget which is far from reflationary. Perhaps the next Budget in December, if that is when it will be, will be reflationary and it will be up to a higher rate. Within four years we might be running a deficit of £10 billion or £12 billion. That could mean that we would owe about 100 billion dollars before the oil ever began to nay off, because we would have borrowed mostly in dollars and we should have to repay with our own depreciated currency against the dollar. That is something so terrifying that I invite the House seriously to consider whether we should risk it.

I can make my next remark because I do not think there is a representative of the Scottish National Party in the Chamber—

Mr. Gordon Wilson (Dundee, East)

On a point of order, Mr. Deputy Speaker.

Mr. Deputy Speaker (Sir Myer Galpern)

Order. The hon. Member is, strictly speaking, outside the House.

Mr. Ridley

If the hon. Member for Dundee, East (Mr. Wilson) hears what I say I am sure that he will not do anything about it, but suppose that he and his colleagues demand the golden egg even though they have not laid it. Suppose they were to take it so that we were left with the mortgage and they with the oil. Alternatively, suppose everyone round the world were to find oil and that the price, were to fall dramatically. We should have mortgaged an asset which turned out to be worth a great deal less than was first thought. Suppose that at some stage the oil-producing countries wished to see how their enormous investment was being managed, and suppose they decided to put a manager in Britain and start doing the Budget themselves, creating the unemployment which the Chancellor so dreads. Do we want to run the risks of being managed by outsiders? To those who have strong feelings about handing our sovereignty over to Brussels I would say that the risk of handing it over to Abu Dhabi is infinitely greater and is infinitely more to be feared. I am sorry that my hon. Friend the Member for Oswestry (Mr. Biffen) is shaking his head in disagreement with me, but perhaps it is just as well that we are not all seen to be together in this belief.

We cannot continue to bank on a gamble as reckless as this. If the Arabs do not buy the gilts we have inflation, and if they do we have the risks I have outlined. The effect will be cumulative and will worsen. For the cost of abandoning food subsidies, electricity subsidies, council house subsidies and putting an extra bit on cigarettes, spirits and wine we could begin to get back out of this position. Some hon. Members on the Government side have said that they expected higher tax of one form or another. Certainly people expected higher taxes, as was evidenced by queues, some of a hundred yards long, outside wine shops yesterday morning. I am suggesting extra taxation—not something Draconian or severe—even it it does cause unemployment.

That would, perhaps, be a smaller price to pay than would be the ghastly alternatives. If it is said by the Labour Party that it is politically impossible to cut the deficit, the £6.3 million, which will grow and accumulate in the years ahead, it is saying that we cannot as a nation accept any reduction in our standard of living, no matter how grave the crisis facing us.

It seems that we are saying as a House of Commons, as a Parliament, that we have not the courage and the ability to communicate to the people both the gravity of the crisis facing us and the necessity to take measures which might result in high taxation and lower Government spending, as well as some increase in unemployment. We have not the courage to tell the people that, and so we are going to let them go on over the brink.

If I come to a criticism of the Budget, it is that although the Government have resisted temptations tog o in the wrong directions in certain respects, and I congratulate them on that they have failed to take that little extra bit from the standard of living—the only way that we shall convince the people that the situation is as serious as it is. They have failed to convince the people of the risk of either domination by foreign capital or inflation of a sort that is horrible to contemplate. Such fates must be a hundred times worse than the cure that has been put forward frequently by my hon. Friends and myself, and which must now be recognised as deserving of serious attention from all quarters of the House.

Mr. Deputy Speaker

The right hon. Gentleman who is to make the concluding speech for the Government this evening has kindly agreed to postpone the start of his speech by five minutes in order to accommodate as many back benchers as possible. In my view, we could squeeze in another two speakers in the meantime, and I hope that I shall have the co-operation of all hon. Members towards achieving that end.

8.54 p.m.

Mr. Edwin Wainwright (Dearne Valley)

I am greatly surprised at the despondency shown by a number of hon. Members in the debate. One would think that this great nation of ours was on its beam ends. We are suffering difficulties, but there are many difficulties that we can overcome as long as we first of all appreciate what those difficulties are. We appear to be criticising one another's policies regardless of both the present situation and the future.

This is a rather moderate Budget. Indeed, it is far too moderate to achieve what the nation deserves. Why? In the first place my right hon. Friend the Chancellor of the Exchequer was looking behind, realising that whatever he did there would be some criticism of his action, and he was also looking in front, realising that he would be criticised for not doing enough. Although my right hon. Friend has done more than hon. Members expected, there is still criticism that he is not doing enough. We do not realise that we have the capacity and ingenuity to overcome the present difficulties. We are not willing to utilise sufficiently the tremendous capacity of our people.

Those who want more return from their investments think that the Government are not doing enough. People behind the Government think that the Government are not doing enough. Ultimately we must regenerate our people's determination to produce the wealth that they are capable of producing.

When I see many of my constituents living at a very low standard, people whose home life is deplorable, I compare it with the high standard of living of people on a higher income scale, who are greedy and selfish and determined to have more. The hon. Member for Barkston Ash (Mr. Alison) is smiling. He knows that people whom he tried to help attain a better standard of life are still living at a low standard.

What is the matter with our nation? Are we afraid to use our ingenuity? Do we not realise that we have to compete with other nations and that investment is very important? Do we not understand the importance of education? Do we think only about profits and wages? We do not take advantage of means of increasing our production. Why do we not use more automation and introduce sophisticated machinery? Do we instead sit back and think about what we should have because we are making certain investments?

Do we take into account the lack of efficiency on our managerial side? When we create redundancy, we do not think enough about training the people concerned for other jobs. Our redundancy benefits are far below those of our continental competitors.

Who is to blame for the present situation—the trade unions or management? I think that it is management, although I do not always support the trade unions, because there are many things they fail to do. Why does not management do more about the situation? It is because it does not realise what it means for the nation to produce more per individual.

Our rate of production is lagging behind that of the Continent and the United States. The United States uses two and a half times the horse-power per individual that is used in this country. On the Continent, one and a half times more horse-power per individual is detection novel. New bits of evidence used. Who is to blame for that? Is the trade union movement to blame? Of course not. The people who are to blame are those who have run British industry for decades. Of course, we must take into account the occasional interruptions caused by a Labour Government.

Unless we produce more wealth, we cannot give our people the things we wish to give them. In my constituency I see people who are housebound. We cannot afford, for example, to put a ramp in the home of a person who has had his legs removed and who is 75 years of age. For six weeks the person I have in mind has been sitting on a settee, yet we cannot afford to put in a ramp so that a disabled person's chair can be taken into his home. Who is to blame? Is that the responsibility of the trade union movement or management? Is it the fault of Government or of society as a whole?

The Budget has not faced the issues. It has merely tried to appease. It should have gone further. What worries me more than anything else is that we never give consideration to retraining. We never take fully into account what will happen when redundancy occurs. We never take full advantage of technology and science. We let other nations set the pace. This country still has a tremendous ability to create wealth yet it allows other nations to take advantage of its ingenuity, its science and its technology.

It is no good blaming previous Governments. It is time that the trade union movement, together with management, woke up to the difficult problem with which we are faced. We can produce the wealth and create the benefits for our people. Those are the objectives that we should have uppermost in mind. In spite of the Budget's weaknesses I believe that it is a tremendous march forward. I hope that it will be accepted. I hope that we can go forward with it and perhaps improve upon it.

9.3 p.m.

Mr. David Howell (Guildford)

In a very fine speech my right hon. Friend the Member for Stafford and Stone (Mr. Fraser) rightly reminded us of the turbulent international background against which our domestic discussions take place. He referred to the Budget as a mystery Budget. He rightly said that new clues kept on turning up rather as in a crime and new pieces of the jigsaw turn up day after day. They often cast an entirely new light on what has gone before and, indeed, on what was said on day one, which was yesterday.

We have had from the Secretary of State for Prices and Consumer Protection, with her consultative document, some interesting new lines and shades on what was said yesterday. The biggest piece of the jigsaw is still missing. In that sense my right hon. Friend was right in calling this a half-way and half-truth Budget. The whole area of public expenditure remains a vague and obscure fog of generalities. It is apparent that we shall have to wait for a projection on expenditure, and to that extent we cannot see the complete Budget in the literal sense of the word. Perhaps we too easily fall into the traditional habit of regarding the Budget as only a revenue matter.

In a sense, the Chancellor has gone along with that. We have had the revenue part of it, plus lots of bits and pieces thrown in. But the expenditure side remains obscure, except for one thing. We know that we have hanging over us the most colossal borrowing requirement of £6,300 million, sitting there like a great potential avalanche of snow at the top of a mountain over our community, creaking and groaning and ready to come down if, as my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) reminded us, we fail to flog enough Government debt to the Arabs.

This is an uncomfortable and uncertain situation, and the House is right to demand that we are given a fuller picture day by day of the real situation, the other half of the Budget, so that we know what danger we are really in. We have a right to be worried at the bland assurances of the Chancellor that this can all somehow be managed with a turn of the hand, without an undue increase in the money supply, and to demand more fact and more detail to underpin his bravado.

A related aspect on which there has been a good deal of study by the Chancellor and the Secretary of State for Prices and Consumer Protection is that of nationalised industry prices. I wholly welcome the trenchant terms in which the Chancellor referred to this subject. He said some remarkable things, and it is worth going over them again. He said: In general we must reduce and eventually remove subsidies of all kinds which distort the relative cost of different forms of energy, and which stimulate wasteful consumption. Excellent. He also said that his aim was … to adjust prices to reflect real costs and: … I have set it as my objective to phase out these subsidies completely as fast as possible."—[OFFICIAL REPORT, 12th November 1974; Vol. 881, cc. 255, 256, 268.]

Mr. Edwin Wainwright

Will the hon. Gentleman bear in mind the fact that in the 1950s and early 1960s the price of coal was kept well below what it was on the Continent to ensure that this country's industries could have cheap fuel, and that if this had not been done the Coal Board would be in a better financial situation than it is at present?

Mr. Howell

I will bear that piece of history in mind, although I am not sure that it relates to the subject. Perhaps it does—perhaps that is where the seeds of the present difficulties were planted. But we are now talking about a situation which the Chancellor has said forthrightly that he intends to correct as soon as possible.

My hon. Friend the Member for Blaby (Mr. Lawson) is right to issue the warning that these are fine words whose like we have heard before—not perhaps quite so often or so definitely from a Socialist Chancellor, but we have heard such views before. Even as he spoke, however, we noticed that these were the words of yesterday, and today the right hon. Lady has come along with her document and today it has all become a little more genteel, a little more a case of "not in front of the children".

Today, we read in paragraph 19 of the consultative document that In deciding what price increases should be made"— by the nationalised industries— it will be necessary for Ministers to strike a balance between restoration of the industries to profitability and the need to keep down the rate of increase in prices to the consumer. There, of course, are the weasel words. There is the loophole through which one can double back to the place we started from. That is how the Chancellor's trenchant words can dissolve away into meaningless generalities and we can end up no further forward.

But this is not the time, nationally or in this House, for being churlish and I welcome at least the indication. I believe that the Chancellor is right, and I believe also—I say this as much to my hon. Friends as to hon. Members opposite—that this time we must bite the bullet. This time we must face the fact that it means considerable rises in prices and we must not back-track. We must not fall into that classic habit of the politician of stating a generality, a fine aim, hand on heart, and then, when the details come along, cavilling at it and back-tracking and saying that it cannot be done. This time the Chancellor of the Exchequer, in this area, is right.

The question naturally followed—it was raised by several of my hon. Friends—that if that is the new regime for artificial subsidies for nationalised industries, particularly energy, why not for food subsidies? The right hon. Lady tried to meet that argument, but in doing so she became a little confused.

First, the right hon. Lady tried in an endearing way to help the Chancellor get off the 8.4 per cent. hook, and I admired her for it, but she did not succeed and he remains firmly impaled on it. The right hon. Lady went on to deal with food subsidies. She argued that nationalised industry subsidies should be phased out, but food subsidies were different. She said that the nationalised industry subsidies were prime subsidies, whatever that means. I suppose that phrase comes out of an economics textbook. It means little to me.

The right hon. Lady said, for instance, that the electricity subsidy applied to everyone equally. Everyone knows that domestic electricity users get a far bigger dollop of subsidy than do industrial and commercial users. Furthermore, the argument of equality applies equally to food subsidies. The right hon. Lady went on to say that richer people are bigger consumers of electricity and get more benefit from the subsidy, but that is also true of food subsidies.

I do not follow the right hon. Lady's arguments. No such arguments exist, except the argument that for the time being various requirements of the internal politics of the Labour Party demand that she takes this line while the Chancellor is allowed his tougher noises on nationalised industry prices. As my hon. Friend the Member for Blaby warned us, we shall see when the actions take place, and then we shall believe. In the meantime, at least the sounds are striking the right note.

The second aspect on which I should like to avoid being churlish and critical is that part of the Chancellor's speech which was concerned with the financial sector and financial mechanisms. It is worth pausing to ponder on the remarkable change. It is unusual for the Labour Party and Labour politicians to be concerned with that part of economic life. Usually these matters are dismissed as not being a useful aspect of the economy. References to them are usually greeted with ritual noises and with hissing and bristling about whiz-kids and wonder boys. Little good is said about this aspect from the Labour Front Bench. It is something to be thankful for—a small mercy—that suddenly an intelligent interest is being taken by the Labour Front Bench in the need to reform, improve and strengthen the financial sector and financial mechanisms.

It was remarkable to hear the Chancellor say last night on television that we had the most efficient and reliable banking system in the world. He should have some praise for going that far. The Labour Party has for far too long been unprepared to understand the financial sector and for far too long has been ready at even a mention of the Stock Exchange or the capital market to make grunts that would have delighted the late Professor Pavlov.

We have come a little way. Now that we have gone this far and the Chancellor has moved in this direction, I shall spend my last few minutes leading the Chancellor a few steps further into the world of financial reality in talking about the financial facts of life in suitably delicate phrases.

Before doing that, there is one more myth that we must overcome, the myth that there is a difference between making money and earning money. It is the cliché of the hour, the Prime Minister uses it three times a day and it is utterly meaningless. In the early days of the 1964 Labour Government there was a cliché about the candy-floss economy. It was candy-floss versus steam engines in those days.

The concept now appears to be "making money" versus "earning money", as though there were some difference between the two. Yet in the Chancellor's mind, if not in the minds of his colleagues, there is a dawning realisation that the raising of savings and the channelling to industry of those savings and investing them intelligently is a crucial part of the mixed economy. It is as essential a part and as useful for productive purposes as are all the other matters which trill off Labour Ministers' tongues. It is as crucial to the work of a mixed economy, with or without a large State sector, as are all the heroic Socialist ideas of productive industry and useful employment. It is an essential aspect and is ignored at the Government's peril and the peril of the banking system.

A great deal of attention is focused on the financial sector. We hear people say that there are too many able brains in the financial sector in the business of making money. It is worth the Labour Front Bench asking why? They should apply their minds to the question: why has so much talent and ability been attracted into that sector and not enough into the industrial and manufacturing sector? I believe the answer is that industrial executives and young management executives cannot build up savings. If that concept is changed and it is made possible to accumulate and build up savings in the industrial sector and in manufacturing industries, one will increase powerfully the incentive for people of ability to go into manufacturing. The first myth to be broken is the one which has been so frequently paraded—namely, that the making of money is bad and is a part of the economy with which the Government will have nothing to do, and that the earning of money is fine and that it is a pity there is not more.

Secondly, I should like to turn to finance, about which there has been a great deal of talk. There is a widespread belief that we now have a bottleneck in finance for investment and the CBI industrial survey, showing the rapid increase in the number of firms concerned in credit and finance, to some extent confirms this view. The Chancellor believes this, as presumably does the Secretary of State for Trade.

There is a view on the Labour back-benches—[HON. MEMBERS: "Where are they?"] We have rather more troops on our side than does the Chancellor. There is a view among Labour Members that the State can step in and write the cheques. It is not simply a matter of ungumming one particular channel of finance for industry, for there are three main sources of finance for industry, all of which are to some extent blocked. There is long-term finance, the equities and the retained profits; there is medium-term funded loans, the bond market; and there are revolving bank facilities.

I plead with the Chancellor and his colleagues to get away from the facile idea that one can deal with only one of these sources. That is not so. The truth is that all three sources of finance must be flowing freely. They are not interchangeable. It is no good unblocking only one source. It is no good expecting the banks to be cajoled into intense long-term investment. There is no need to import institutional gadgetry from overseas to meet the problems in the three separate sources of finance.

There is a view that somehow the banks are less forthcoming and more cautious than are the banks in Tokyo or New York in helping industry to get going and to finance venture capital. There is not very much evidence of that.

As for the bond market, it is flat on its face and obviously should be revived. It may be that the Finance for Industry mechanism can do this, but again it is important to realise that the funds will not come from thin air. Nor will they come from the taxpayer. The only way in which funds can be mobilised without appalling inflationary risks is from savers and investors, not from taxpayers. That is why the Chancellor of the Exchequer has to give far more attention than he has in his Budget to another missing element in the jigsaw, and that is the revival of savings.

The right hon. Gentleman must overcome his apparent aversion to savings and give more attention to reviving the process of savings. If he does not, all the setting up of new sources of finance through FFI will come to nothing. That is why my right hon. and hon. Friends are right to deplore the lack of interest in the Budget in the saver and in reviving savings. The only item really affecting savings is the rather mean lowering of the savings income surcharge—I prefer to call it that rather than the investment surcharge—which the Chancellor of the Exchequer regards as being so important. In his Budget statement, the right hon. Gentleman made a judgment on the matter which I found rather distasteful. His implication was that it was generally agreed that investment or savings income should bear a much higher level of tax than earned income. He said that as though it was generally to be assumed. I think that the time is coming when it may not be so generally assumed and when people may feel that income from savings, especially those of the smaller saver, deserves equal treatment with income from earnings.

As for the equity capital flow, obviously we require a healthy capital market. The FFI plan cannot help here. The essence is profits and profitability. Profits mean jobs, and that is the central point which the Chancellor of the Exchequer has to get over to his colleagues.

Again and again today, my right hon. and hon. Friends, like people outside this House, have pointed out that even if the right hon. Gentleman's measures—the new valuation for stocks and the changes in the Price Code—bring more funds back into industry they cannot by their nature change the longer-term situation, which is one where profitability is virtually impossible.

We are talking about a situation in which for the past 12 months inflation has been running at the rate of 17.1 per cent.—the right hon. Lady had a lower figure—and in which interest on borrowed capital is about 16 per cent. In these circumstances, changes in the Price Code which say that anyone with a return on capital lower than 10 per cent. is free of the Price Code restrictions do not come within points of the minimum amount needed to make investment which will have a serious return.

The provision in paragraph 16 of the right hon. Lady's consultative document falls so far short of the basic needs to make a profitable investment that we wonder where the right hon. Lady got the anecdotes which she described today about the position of industry and how it would be helped by these measures.

The crucial long-term need is to restore profitability. For years now, profitability has been declining. Inflation-blind taxation and appallingly high interest rates have made it not worth proceeding with project after project. Unless the Chancellor of the Exchequer can meet this need, unless he can restore profits and so recreate a healthy capital market, his exercise in trying to rescue British industry will not succeed. As my right hon. Friend said, it will be only a kidney machine operation.

We shall want a full debate on the changes in the Price Code. The right hon. Lady said, a little airily I thought, that we should have a debate on the affirmative resolutions needed for the various changes to be made under the code. That will not be enough. We shall want a full debate on the Price Code.

It has taken a long time for the Labour Party to come even as far as it appears to have done and for the Chancellor to have come as far as his statements suggest, and we await the actions that will follow the Budget. It has taken a long time for Labour Members to comprehend that strong industry demands a strong financial sector. I am not sure that all of them even now begin to recognise that or begin to recognise that these mechanisms are an essential part of a healthy economy.

There is still too much emphasis on dealing with big business, and my hon. Friend the Member for Cambridge (Mr. Lane) was right to point to the indication in so much of the phraseology and vocabulary of the Government Front Bench that they do not remember, and have to keep on being reminded of, the position of small businesses and their financial needs.

Government Members have to learn that savings have to be mobilised to support a particular level of industrial expansion, that it is not done out of thin air, that it cannot be done by saying that the taxpayer will foot the bill, and that it cannot, in the medium and long run, be done by running a colossal borrowing requirement and hoping that in one way or another, excellent banking system or not, the Paymaster-General going round persuading the Arabs or not, a sufficient amount of that debt will be taken up to see that we get through without the money supply exploding.

The Chancellor of the Exchequer has shown some boldness. He said that, rather like Soames Forsyte, he will not be loved, and I suspect he is right about that. [Interruption.] The Chancellor remembers the desire somehow to win support, and perhaps he is feeling that he will not make it. But the right hon. Gentleman appears to be amazingly confident. He said on television last night that he has made sure—not that he will try to make sure—that industry will be vital, vigorous, alert and profitable. He says he has done that. That is the confidence that he appears to feel. Some of us wonder whether it is confidence or bravado. We wonder whether his was a smile of confidence or a grin of pure nervous fear.

I hope that over-confidence will not be the Chancellor's epitaph—for the country's sake, not for his own because he can look after himself. But the right hon. Gentleman will need far more of the courage that he has begun to show—one or two of my hon. Friends have quite fairly referred to this—and far more support and understanding from the Tribune group than it has shown so, far or is likely to show on present form. Without that courage the right hon. Gentleman will fail and the price that we shall all have to pay will be not the level of unemployment which he called regrettably likely, but far higher.

The price we shall pay will not be in terms of a level of inflation which a year ago seemed regrettable but will be appallingly higher. It will be a price that we shall all have to pay in jobs, in the stability of our currency and in the stability of our institutions. If that is the right hon. Gentleman's failure, it will be the failure of our country and of our system.

9.30 p.m.

The Paymaster-General (Mr. Edmund Dell)

The hon. Member for Guildford (Mr. Howell) was a little patronising, if I may say so, in suggesting that the Labour Government are only just learning that a strong industry needs a strong financial sector. We know that. The trouble is and always has been—and this was the experience of the Leader of the Opposition when he was Prime Minister—that the performance of industry has been unsatisfactory. It is this above all which has led to questioning by many people, particularly by my hon. Friends, as to what can be done to improve the performance of industry.

The hon. Gentleman also mentioned the problem of small businesses. I say at once that I regret, as does my right hon. Friend, that for administrative reasons we are not able right away to provide the same facilities in respect of stock appreciation as we can do for firms with final stocks of a value of above £25,000. My right hon. Friend has given an assurance that he will take account of that fact when he is deciding what to do in respect of the next financial year. At any rate, it is fair to point out that such firms will benefit from the relaxation in the Price Code and from the greater liquidity which my right hon. Friend's Budget will enable large firms to keep.

There are a number of matters about which I have to inform the House. I want to tell the House about the Oil Taxation Bill. There are some other matters to which I shall refer. The first relates to the aggregation of children's investment income. The House will remember that in his Budget speech last March my right hon. Friend said that it was his intention to legislate for the aggregation of children's investment income with effect from April 1975. That remains the Government's firm intention but as there is very heavy pressure on this autumn's Finance Bill this legislation will have to wait until spring 1975.

To avoid any possible misunderstanding I repeat the assurance that aggregation will not affect the income received by the thalidomide children from damages and from the charitable trust funds. Other hard cases will be helped by an exemption for modest amounts of income.

For the same reason my right hon. Friend has decided, with regret, that he must postpone until next spring the package of measures which he foreshadowed in his March Budget to permit payment of interest on delayed repayments of tax by the Revenue and to encourage the more prompt payment of tax to the Revenue.

There are two points arising out of the Budget Resolutions to which I wish to refer. The first concerns Resolution 4. This will restore the regulator mechanism which was used last July. I can tell the House that there is no intention to have a regulator power in respect of the 25 per cent. rate.

Then there is Resolution 7 which deals with refunds to persons constructing dwellings otherwise than in the course of business. My right hon. Friend has decided to take action on an irritating VAT anomaly which affects a small but deserving part of housing. New houses built by commercial builders or housing associations have been eligible for zero-rating since the inception of the tax. But people who had the initiative to build their own houses have had to pay VAT on the materials they purchase and have been unable to obtain any relief from this tax. It is proposed that tax payments made from today on purchases of materials for a "do-it-yourself" house-building project should be repayable by Customs and Excise after the house is completed.

May I now inform the House of the timetable for the two Bills which arise out of this Budget Statement. I will deal first with the Finance Bill and then with the Oil Taxation Bill. The Finance Bill, which is sizeable and complicated, especially the part dealing with capital transfer tax, will be published not later than 10th December. We propose to allow plenty of time for hon. Members to study it before Committee and we therefore propose that Committee stage of the Bill should not begin until after the Christmas Recess.

As to the Oil Taxation Bill, we hope to publish this next Tuesday, 19th November, and to have the Second Reading and the Committee stage before the Christmas Recess. I hope that hon. Members of all parties will be sufficiently satisfied with the Bill to make that possible, but it is important that it should be enacted without too much delay.

My right hon. Friend said yesterday that I would give further information about the Oil Taxation Bill to the House. Before describing the Bill, however, I should like to refer to something that was said about North Sea oil by the right hon. Member for Stafford and Stone (Mr. Fraser). There was also a similar implication in some of the remarks made by my hon. Friend the Member for Llanelli (Mr. Davies). Both of them warned against treating North Sea oil as a panacea for the problems of this country and they warned against illusions based on North Sea oil.

I would agree with everything that lion. Members say on that score. Certainly it is a boost to our economy, and certainly it will give us the important advantage of security of supply. Given the present cost of oil, it will be a great aid to our balance of payments. But it has not come to us as a result of any particular merit on our part. It does not increase directly our industrial competitiveness. Indeed, as the last nine months have shown, it is perfectly possible to have North Sea oil and a non-oil deficit on the balance of payments unless we improve our industrial competitiveness. That is the great point to which successive Governments have directed themselves and in which we must succeed.

North Sea oil will certainly add to the resources available to this country. On the basis of a cautious estimate of reserves, it might rise to an additional one-third of 1 per cent. added to the growth of gross domestic product if no controls were placed on the rate of depletion. That is to be compared with the hope of a long-term growth of productive potential of about 3 per cent. But I emphasise that no one in the Government believes that it represents a solution to the basic economic problems of this country, though it is obviously an important and invaluable aid in tackling them.

However that may be, it is essential that we get the structure of oil taxation in this country right. I want, therefore, to tell the House about the Oil Taxation Bill. The Bill is intended to achieve two main purposes. First, it makes certain amendments to the corporation tax treatment of the profits of oil companies. Second, it introduces a new tax on North Sea profits—the petroleum revenue tax. I discuss the corporation tax amendments first.

The corporation tax amendments are again of two kinds. There are those primarily concerned with the profits of the oil companies in their trade outside the North Sea and there are those concerned directly with North Sea profits. Both kinds of amendments follow directly from the report of the Public Accounts Committee on North Sea Oil and Gas.

I deal first with those primarily concerned with the profits of the oil companies in their trade outside the North Sea.

The Finance Bill will amend the general transfer pricing legislation in Section 485 of the Income and Corporation Taxes Act 1970 so as to increase its effectiveness. Experience has shown that it is not difficult for a group to construct arrangements under which buying and selling companies, though not in fact at arm's length, are not "controlled" for the purpose of the section. A broader definition of "control" will therefore be introduced, together with adequate information powers for the operation and enforcement of the rules. That will be in the Finance Bill.

The Oil Taxation Bill will extend the scope of the transfer pricing legislation in relation to the petroleum industry to cover transactions between a United Kingdom resident company and an associate company wherever resident. At the moment Section 485 specifically does not apply to sales between two associates both resident in the United Kingdom and liable to tax on the profits from dealing in the property sold. It does not. therefore, apply to the situation where Middle East oil is sold at posted prices by a production company to a marketing company both of which are resident in the United Kingdom, and subject to tax on their profits.

Under the new legislation, if any such transactions take place at artificial transfer prices a realistic arms length price will be substituted. The concept of arms length price will also be clarified to meet the special circumstances of the oil industry. Following an announcement to that effect in the Budget introduced in March 1973 by the then Chancellor, the oil companies are expecting that strengthened transfer price provisions will apply from 1st January 1973, and this will be the effective date of the legislation that will be introduced.

A former Chancellor of the Exchequer—Mr. Anthony Barber—made proposals for dealing with this problem in his Budget in March 1973, but the House will observe that it is not those proposals that he then made that we have adopted, though the proposals we have adopted are directed to the same problem.

The White Paper of 11th July introduced by the Secretary of State for Energy referred to the artificial losses which the oil companies had accumulated up to 31st December 1972 when the new transfer pricing rules take effect. It was proposed that these losses should be cancelled and that corresponding limitations should be imposed on the use of capital allowances for expenditure already incurred outside the Continental Shelf. This proposal raises particularly complex technical questions and we have decided to postpone the legislation until the spring Finance Bill so as to allow time to consider the problems further and to produce a workable solution.

I turn now to the Corporation Tax amendments concerned with profits from North Sea oil. It has already been announced that there will be a ring fence for corporation tax purposes round the profits from the United Kingdom, territorial waters and the Continental Shelf, so that they will not be reduced by allowances and losses from extraneous activities. These measures will apply to group relief and to similar set-offs within a single company and a company with losses or excess allowances will not be able to use them to claim payment of the imputation tax credit on dividends received from a company within its group and paid out of North Sea profits. The ring fence will apply to accounting periods ending after 11th July 1974.

I hope that it will generally be agreed that the corporation tax yield from the North Sea, which will be substantial in amount, should not be at risk of companies bringing all sorts of activities and expenditure into the United Kingdom tax net merely so as to get relief against North Sea profits. However, the ring fence will face only one-way: losses and allowances resulting from activities on the Continental Shelf will still be able to be set against profits from activities elsewhere.

The then Financial Secretary to the Treasury, the hon. Member for Worthing (Mr. Higgins), in reply to a debate on a report from the Public Accounts Committee in December 1973, said that it was not the intention of the then Government to take the action that I have just described, but we intend to take it.

I now turn to the petroleum revenue tax. It has been clear for some time, perhaps since the Public Accounts Committee Report, that the oil companies themselves, for the most part, accept the need for an additional tax on North Sea profits if the United Kingdom is to secure a fairer share of the benefits from the Continental Shelf and to maximise the gain to the balance of payments. I do not think anyone will have any difficulty in agreeing with this view. It is indeed necessary. The rules and structure of the tax will be set out in the Bill. As the Bill will be published next week, I think it is reasonable to ask the House to wait for publication for the details of this tax, but I will now set out the general scheme.

The tax will apply to the winning of hydrocarbons under licence in the United Kingdom and under the United Kingdom territorial waters and Continental Shelf. It will not apply to refining or other processing of oil and gas. For the purpose of the tax, allowable expenditure in a field will be availabe to be set against receipts from that field when it is incurred, subject to the procedures for claiming relief, and there will be relief for abortive expenditure. Certain capital expenditure, including capital expenditure on production and transportation will qualify for an uplift of 50 per cent., but no allowance will be made for interest. This allowance of 150 per cent. of capital expenditure is a substantial benefit to company cash flows. The tax will be a taxation prior charge on the profits—in other words, it will stand in front of corporation tax and will be deductible in computing profits for corporation tax purposes.

The tax will apply to oil and gas, but there will be special provisions for fields already in production, including the Southern Basin gas fields. Allowance will be made for past costs, but no account will be taken of pre-Budget day receipts from oil or gas.

The oil companies may have objections to aspects or details of the structure of the tax. The Government will certainly listen to and consider anything that they have to say. But I must make clear that the prior charge aspect and the field-by-field basis are fundamental elements in the conception of the tax.

The Bill will not state the rate of tax. The House will be asked to approve the rate in the Finance Bill next spring. But that does not mean that the announcement of the rate will necessarily have to wait till then. On the contrary, from the point of view of the oil companies, the sooner the uncertainties about the new tax can be resolved, the better. But this is new ground for all of us. Here we have an important new tax on profits, of which we have as yet no experience to guide us. It is designed to ensure that a proper share of the profits comes to the community as a whole, and also that the balance of payments benefits fully from the development of the major national resource represented by North Sea oil.

However, it is a tax which does not exist in isolation. The Government "take" from the revenues of the oil companies will now have four components: the existing royalties; corporation tax, computed in the normal way, but modified by the changes which I have indicated; the new petroleum revenue tax; and where applicable, the proceeds of direct State participation in oil licences, to be freely negotiated with the oil companies in the next few months.

Clearly, the oil companies are concerned as soon as possible to know their net position after all these different factors have been taken into account. The Government have already made their own calculations. We therefore have our own ideas about the appropriate rate. But there are still uncertainties in the picture. These arise, not from the nature of the tax system or of the other related changes, but from the physical facts of exploration in the North Sea and from the nature of the oil business.

There has been a good deal of comment recently, in the Press and elsewhere, about the increasing costs of North Sea development. Some of this simply reflects the increase in the level of prices generally. Some of it may represent an increase in real or constant price terms, due to previous over-optimism about the sheer technical difficulty of winning oil in such inhospitable waters.

We need to take into account the likely range of the various estimates in fixing the initial rate for the new tax. So, before the rate is finally settled, I intend to have further early and detailed discussions with the oil companies about their present and future level of costs, and about the effect of the tax proposals on the future profitability of North Sea operations.

Mr. Patrick Jenkin (Wanstead and Woodford)

Is the right hon. Gentleman prepared at this stage to recognise that, in the case of some of the smaller, marginal fields, the increase in costs has been such that, on any likely outcome, there will be no room for any additional tax on top of corporation tax without making the whole thing uneconomic?

Mr. Dell

I shall come to the question of marginal fields.

Mr. Tam Dalyell (West Lothian)

On the narrow point of the allowance for historic costs—past costs—may we take it that there will be a fairly generous interpretation, because this is a matter of considerable concern to those on the Scottish East coast?

Mr. Dell

We shall have to examine the Bill in terms of the particular requirements put to us by the oil companies, and we can discuss that question further.

Mr. Christopher Tugendhat (City of London and Westminster, South)

As the right hon. Gentleman has emphasised the field-by-field nature of the tax, can he tell us whether the rate of tax will be varied from field to field or what kind of provision he is making to take account of the varying profitability of fields, including the bringing into production of small fields which the oil companies themselves might be reluctant to develop?

Mr. Dell

There will be a single rate of tax. Perhaps the hon. Member will await my brief remarks on the problem of marginal and small fields, of which we are well aware.

I was saying that I shall be inviting the oil companies to provide information about their current costs and their estimates of future costs so that we can come to a final decision on the appropriate rate of tax. I hope that the oil companies will co-operate fully and frankly in this consultation. It is in their interests as well as that of the Government that they should do so.

Thereafter—and as I have emphasised I hope reasonably soon—the Government will decide the rate of tax. In doing so we shall have fully in mind that while we are determined to achieve our objectives, we fully recognise that the tax must leave the oil companies with an adequate return on their capital and sufficient incentive to continue with the difficult and hazardous work in the North Sea, which they have been undertaking with determination and skill. In particular, we are conscious of the need not to deter investment in the marginal field. We shall certainly arrange things so that the combined effect of the fiscal measures and of other measures in contemplation makes allowance for this problem.

My right hon. Friend the Secretary of State for Energy yesterday wrote to the companies inviting them to begin negotiations on the question of Government participation. These negotiations will be undertaken by my right hon. Friend the Chancellor of the Duchy of Lancaster, assisted by my noble Friend the Minister of State, Department of Energy and myself. The consultations about the tax and the negotiations about participation are two separate but related processes, involving two separate sets of discussions, but of course my right hon. Friend and I and the Minister of State will be working very closely together. The important point is that the petroleum revenue tax stands as a tax in its own right and that its enactment is not dependent on progress with the participation negotiations.

Mr. Dalyell

Can the Treasury take on board that the real and urgent problem of secondary fields is that it should be made worth while for BP to develop the Andrew field, as well as the Forties field, rather than come back to it in 20 years' time?

Mr. Dell

That is a matter for my right hon. Friend the Secretary of State for Energy. Obviously the tax aspects are important in their effect on the marginal fields. We are aware of their importance, and the impact of the tax will be discussed when the full text of the Bill is available together with the other measures in contemplation.

I regret that it has taken me so long to deal with that point. I shall now reply to some of the questions which have been asked in today's debate. My hon. Friend the Member for Kingswood (Mr. Walker) was a little concerned about remarks by my right hon. Friend the Secretary of State for Prices and Consumer Protection concerning the productivity deduction. Certainly right hon. and hon. Members on the Opposition benches pricked up their ears when she came to that part of her speech, and they read into it implications which perhaps it did not deserve. Perhaps my hon. Friend also read into it more than there is there.

My hon. Friend was fearful of penalties being demanded of people who break the TUC guidelines. I refer my hon. Friend to paragraph 13 of the review of the Price Code consultative document. That paragraph shows exactly what is proposed and shows also that this is a matter which would have to be considered with both sides of industry to determine whether there was a practical way of fulfilling the objectives stated there.

There has been some discussion during the debate about how far the Budget is a reversal of what my right hon. Friend did last March. A number of hon. Members, including the Leader of the Opposition, have made something of that point. I am always interested when the Leader of the Opposition talks about reversal of policies. Such talk is a little inappropriate from him. Indeed, such an accusation does not wear well with him.

The House must appreciate the scale of the problem that my right hon. Friend has been dealing with in his Budget. The idea that the placing of corporation tax in March 2 per cent. higher than was intended by the Conservative Government, or that the introduction of the ACT surcharge are causes of the liquidity crisis, is absurd.

My right hon. Friend has found it right to rectify the situation, both through the Price Code, with my right hon. Friend the Secretary of State for Prices and Consumer Protection, and through the taking into account of stock appreciation in the calculation of corporation tax, to the extent of £1,600 million, a figure far out of scale with the measures that he took last March.

What has made it a Doomsday machine has been the operation of the productivity deduction at 50 per cent. What has made up the Doomsday machine has been the rate of inflation and the slow rate of growth in the domestic market. That has made it impossible for the productivity deduction of 50 per cent. to operate without depriving industry of liquidity. The rate of inflation and the slow rate of growth in the domestic market did not begin on 4th March 1974. They were already operating at the end of 1973.

If hon. Members thought that modification was needed in the Doomsday machine they should have taken account of the situation I have described, of how industry was being deprived of its liquidity. When we came into office we found that the previous Conservative Government had not prepared in any way to provide themselves with information about company liquidity. The information upon which they depended was not derived directly from companies. It was derived from information from banks and financial institutions. They did not know about the problem and that, presumably, is the reason that they did not take action.

We have now decided to improve the quality of statistics on this point. I think that in future Governments will be better prepared with information about company liquidity than we were in March, and certainly better prepared than were the previous Government at the time they departed from office.

It has been generally agreed on all sides—in the Press, and to a great extent in the House—that the main characteristic of the Budget is realism. The realism lies in what it rejects as well as in what it says. We no longer need to reject the Leader of the Opposition's illusion of deficit-led growth, because nobody could think of that as a policy in the circumstances.

The realism in the Budget is based on an appreciation of the fact that during the next four years living standards in this country will, for the most part, not be increased and that energy prices must be brought up to the level of cost because we cannot continue to subsidise them. Further, public expenditure must be kept under control and the balance of payments position must be rectified as soon as possible, because we cannot go on operating at these high levels of deficit indefinitely. Unless the social contract works, there will be an inevitable effect on the level of unemployment which no manner of demand management can prevent. We have four years in which to fight for the future of this nation, and in this Budget lies a proper beginning.

Debate adjourned.—[Mr. John Ellis.]

Debate to be resumed tomorrow.

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