BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 14 November 1974 vol 881 cc599-650

3.50 p.m.

The Chancellor of the Duchy of Lancaster (Mr. Harold Lever)

As my right hon. Friend the Chancellor of the Exchequer was opening his Budget, and drawing attention to the grave international background against which our discussions are being conducted, in the United States of America the American President was acknowledging for the first time that the United States is already in recession. When we consider my right hon. Friend's measures and analyse and appraise them, we should bear in mind the world as well as the domestic situation in which my right hon. Friend is operating.

Storm clouds of slump are gathering all over the advanced industrial nations of the world. The oil price crisis has aggravated world inflation, which again threatens us with economic and political dislocation. Britain herself faces as astronomical balance of payments deficit, not made any easier because it is accompanied by similarly astronomical deficits faced by her neighbours.

We can survive the period ahead only if we maintain our credit abroad strong enough to borrow the billions of pounds required to fuel our industries and to feed our people while we gird up our loins to get back into some more reasonable balance. I do not want to dwell again on the immense difficulties involved in the oil price explosion which has occurred this year. All I can say is that there is no hope of its solution and no hope in any of the measures we decide upon in the House if a world slump of massive proportions falls upon us.

Such a slump can be avoided only if the level of international co-operation is swiftly and massively improved. If this country is to play the notable part that she has played so far in such international co-operation, we must run our own affairs in ways which do not discredit us abroad. We must have influence in the councils of the world.

Here I can sincerely take pride in the efforts of my right hon. Friends the Prime Minister, the Foreign and Commonwealth Secretary and the Chancellor in plugging away against much folly and doctrinaire blindness which exist in the world and which have been unable to cope with the new, baffling problems which have been suddenly injected into the world situation. We are being perilously slow, in the advanced countries of the world in aggregate, in meeting these new problems. If those in whose hands the financial decisions of the world are placed show the same level of intelligence, zeal and swiftness of response in the next 12 months as they have shown in the past 12 months, we shall all be ruined. That is a safe bet.

Everything that we are playing for depends upon international co-operation. I am ready to contrast what the present Government have done with what was done by their predecessors. Most unfortunately, when the oil crisis first broke out the then Prime Minister, now Leader of the Opposition, seemed to take a sort of Gaullist lurch, which was in grave danger of wrecking our relations with the United States.

As a passionate European, who sometimes has some difficulty in expressing that passion from this Dispatch Box, I have always seen a strengthening of our European co-operation not as something to cause abrasiveness between us, Europe and the United States but as a means of achieving that better balance in the relationship which will lead to a more effective and truer partnership between Europe and the United States.

In the present fragile world situation, which causes me more anxiety than any world economic situation in the whole of my adult life, and which is certainly the gravest the world has seen since the war, what are the problems facing the Government in running the domestic economy so that their people perform as well as possible and their industry both public industry and the private enterprise sector is energised as much as possible? I shall not deal now with the public enterprise sector, which has been dealt with on other occasions. For the purpose of this discussion I want to concentrate, as the Budget inevitably does in its financial strategy, on the private enterprise sector.

We have three major problems in the private enterprise sector. The first is that price controls—introduced, let it be remembered, by the Conservative Party—have gradually worked with an increasing severity, not because that was intended by the Price Code but because inflation had the effect of turning the price controls into an ever-tightening noose. It is clear that unless we are to have industry performing well below its capacity, that situation must be remedied. I shall not go into details about this, because my right hon. Friend the Secretary of State for Prices and Consumer Protection explained the need and the relaxation yesterday.

The second problem is the way in which we tax profits, and the third is the atrophy of the financial institutions for providing industry with fixed-term finance for capital investment.

All these three problems are crucial to the success of our economy. If they are not dealt with, the private enterprise sector, which provides most of our exports and most of our employment, will be in a state of collapse within the not-too-distant future. It is right that we should direct our attention urgently to dealing with these three problems.

Our people have a great deal at stake here. Unemployment would rise to astronomical heights if we were to continue in the present way. Any startling decline in our own industry would produce immediate repercussions on our credit abroad, which would in turn worsen the calamity which would befall us.

I repeat that we have a great deal at stake: our employment level and the investment level of our industry, on which our future competitiveness and standard of life depend. Incidentally, with regard to investment, it is no asset to the people of this country that we are now dealing with a Stock Exchange whose level inhibits any prospect of a buoyant investment picture. Until is it remedied——

Mr. Peter Rost (Derbyshire, South-East)

The right hon. Gentleman should tell his colleagues.

Mr. Lever

I am telling my colleagues. They are perhaps less deaf to understanding than some Opposition Members. My colleagues also know not only that investment is of great urgency and importance to us but that the security of the savings of our people and our pension funds is of great importance to us.

We are playing for high stakes. Unlike the Conservative Government, we hold the view that it is the Government's responsibility to tackle the problems. When he was Prime Minister, the Leader of the Opposition reversed the usual concept. He thought that it was the people who had to please the Government, not the Government who had to please the people. He was always marking their performance, rather than looking to his own.

I wish to quote a piece written by the right hon. Gentleman, with that interesting conjunction of petulance and self-approval which he has made his hallmark, in which he addressed the business people of this country as follows: The curse of British industry is that it has never anticipated demand. When we came in we were told there weren't sufficient inducements to invest. So we provided the inducements. Then we were told people were scared of balance of payments difficulties leading to stop-go. So we floated the pound. Then we were told of fears of inflation: and now we are dealing with that. This was early in his career. In fairness to the right hon. Gentleman, I ought to say that he went on to deal with the situation energetically, if not with particular wisdom, and there was no doubt that he would have gone any length down the road in fighting inflation. The Lord decreed one compulsory rest day in seven, but in the right hon. Gentleman's battle against inflation he decreed four compulsory rest days. Had it not succeeded it was evident that he was prepared to go the whole hog and make it seven out of seven.

At this point the British people were consulted and, strangely enough, they did not take the view that it is for people to conform to policies: it is for the policies to be such as will win the assent and the effort of the people concerned. The present Government, whether dealing with our work people or employers and business, recognise their responsibilities in dealing with these three problems.

I have mentioned the price relaxations, which were timely and by no means excessive. I now turn to the question of our method of taxing profits. I know that this is a complex subject and I shall not weary the House with a display of Treasury expertise. But we have reached a point where the effect of tax on stock appreciation is raising acute difficulties for industry. Let us deal first with the cash problem and then with the tax problem.

In a rapid inflation, it is inevitable that any continuing business that wants to stay in business, even if it replaces the same volume of stock each year as it had before, is under financial pressure to provide more and more money to increase the same volume of stock. If in meeting that pressure—I do not want to give the figures but they have run into thousands of millions of pounds extra in the last three or four years—they are taxed on the basis that they have realised their profits when they have sold their first stock, their financial position is made even worse. Contrary to popular belief, we do not tax profits. We tax realised profits. The argument is not about some analytical semantics or any god-given understanding of the right measure of profit of any company in a given year. We are concerned with what is, in a valid commercial sense, the realised profits of a company in an inflationary situation.

Mr. Ian Lloyd (Havant and Waterloo)

The right hon. Gentleman touches on a most important and interesting point. He will be more aware than anybody that this is a subject of major national controversy between Professors Merrett and Sykes and Mr. Wynne Godley. I am sure that it would interest the House and the country to know which side of the controversy the Government come down.

Mr. Lever

I can only say that we have not yet come to a final conclusion on the correct way of permanently computing profits in the light of the different situation that now prevails. What is certain is that in a rising inflation, the existing method of computing realised profits imposes intolerable burdens on industry. For my own part I see merit in both arguments. If the hon. Gentleman wants an off-the-cuff answer from me, I think that in an analytical way the Cambridge school is right, and as a view of the practical consequences Messrs. Merrett and Sykes may be right.

The problem is best illustrated by the apocryphal story which arose from the German inflation of 1923. A rope merchant found in that time of fantastic inflation that within three months he had sold his entire stock at an astronomical profit and he was assured by his accountant that with the proceeds he should acquire one-eighth of the stock of which he had disposed. This process went on throughout the years. He was constantly reassured by his accountant, who was rather of the Cambridge school of thought, that he was getting richer and richer. He was assured that he only had to cease trading and realise his stock to realise how much money he had made. He continued to grow richer until he found himself with only one rope left. He took the appropriate action with that last piece of stock. He thereby achieved precisely the effect one gets from reading the articles—namely, the termination of the business and the realisation of the profit.

It could be argued that instead of reaching this unfortunate end, which resulted from diminishing stock, our rope merchant could have gone out, so say some of the academics, and borrowed at interest to keep on buying bigger and better stock. There is a problem there, too. First people have not got unlimited credit. Secondly, it seems an odd argument that one should promote a system, or even add to the difficulties of the existing system, by adopting a view by which a business can continue with the same volume of stock only on the basis of a rising mountain of debt, ever more precarious, ever more exposed. In those circumstances it is obvious that one cannot get good results unless one does something to ease that situation.

There are two ways to ease such a situation. One is a question of tax, and the other a question of finance. Of course there is a third way, namely, to bring inflation under better control.

Our present method of computing tax does not measure the realised profit so much as the rate of inflation. That will be obvious because one can easily see that the greater the inflation the greater the apparent profit. It is hard to know what is the exact remedy. But my right hon. Friend the Chancellor of the Exchequer has hit on a splendid immediately effective relief which he has put into operation.

It is very important to understand the damage done by the immense burden which stock-financing imposes on our industry. I know of innumerable firms which are forced to give late delivery because they cannot afford to finance normal stock levels. I do not want to mention names, but one famous firm which has been publicised as being in financial difficulties was in the happy position that it had enormous order books at profitable prices but was not able to afford to build up stock adequately to service those orders within a practical delivery time. The Chancellor has firmly begun to put the situation right, though we shall have to wait for his final solution until we have heard from the Sandi-lands Committee.

There is one point which I cannot for-bear to make, and I make this point particularly to many Conservative Members who always believe that it is the Labour side of the House that needs instruction in commercial matters. It seems odd that the present problem had been steadily mounting during four years of Tory Government and yet received apparently no attention or sympathy from the Conservatives at all. The Conservative Government were deaf to the needs of the situation and took no action. In the very difficult circumstances in which my right hon. Friend the Chancellor of the Exchequer has had to act, he has done so with a speed which puts to shame the idleness of the Conservative Government.

The third point which becomes of growing importance is the handicap which has been imposed upon industry, because of inflation, by the atrophy of the financial mechanism for supplying medium-term finance to industry. Industry always requires some finance from outside, be it a big margin or a small margin. It needs equity finance and fixed-term finance for its capital investment in particular. It is an unsound way of financing long-term capital investment if the industrialist has to look over his shoulder at the immediate threat of a bank calling in the overdraft on which that investment is based.

In the past, one could go to the money market and get medium-term and long-term fixed interest money. I will not now deal with the equity supply, although it, too, has gone, or has practically gone, for the time being. The fixed-interest problem has been increasing for years. It has called for remedy for years, but again no action was taken by the Conservative Government. This supply of long-term money has now virtually dried up, and although British banks provide a service probably unparalleled in the world in the short-term provision of money, it is a specialised service and limited to the provision of short-term money.

This is not suitable for industrial investment. Technological change has made investment projects larger and longer to bear fruit, and they are, of course, riskier. A firm often has to choose between the risk of a major investment and the risk of making none. If it makes the wrong choice, it may well go bankrupt, but bankruptcy can be staved off longer if it does not invest. So, when short-term money is available, we tend to have less investment than we should have and not the quality of investment that we would have if the market were not distorted in this way. All we need is a new facility to provide longer-term finance for credit-worthy firms which used to be able to raise such finances on the money market but can no longer do so.

I have described such a facility as an "investment bank", because if one created such a body it could provide this facility. But I emphasise that it is not a new institution and that Ministers—least of all myself—are not going round with cheque books, as some of the more fanciful articles in the Press have suggested might be possible. It does not require Government money or subsidy. Nor have I envisaged it as a facility for propping up incompetent firms. The expansion of Finance For Industry announced by my right hon. Friend provides exactly the agency I was advocating long before the present Government took office.

Mr. Michael Heseltine (Henley)

There is a critical question. If the medium-term money market has dried up because the rates of interest were too high to attract money in that particular form of lending, how is recycling much the same sort of money through the institution of the FFI, at much the same interest rates, going to recreate that kind of facility?

Mr. Lever

If the hon. Gentleman had been a little more patient he would have realised that I was going on to deal exactly with that problem.

Great credit is due to the Governor of the Bank of England, the clearing banks and the institutions for their readiness to co-operate so quickly in response to the suggestion that industry might obtain help by an assured supply of longer-term finance for investment. It took a Labour Government to see the possibilities of harnessing the good sense of the City in the service of industry, investment and employment, and to achieve it on a voluntary basis.

I believe that the step we have taken will ultimately develop with a major impact on the future efficiency of British industry. Its operation will involve the banks much more closely in the investment decisions of industry, since the banks will necessarily take a closer interest in the customers to whom they provide longer-term finance. The banks will themselves add, through their financial expertise, to the commercial and industrial expertise in the firms they are supporting to a greater extent than in the past. That will be a beneficial feature of the new mechanism for providing longer-term investment finance which was lacking in the mechanism that it is replacing.

If my hopes are fulfilled, we shall be better off in the longer-term or in the medium-term future with this system operating than we would have been if we had a capital market in medium and longer-term interest loans.

Mr. Peter Hordern (Horsham and Crawley)

Does not the right hon. Gentleman realise that what industry requires is not expensive loans of whatever length of term but improved cash flow, which could be achieved by greater freedom in pricing? Does not he also recognise that, to the extent that the institutions will subscribe to his fund—£1,000 million—they will be less able to subscribe their part of the borrowing requirement upon which the Government are relying so much?

Mr. Lever

I thought that the hon. Gentleman had every semblance of being awake during my speech, when I was emphasising the crucial interest in improving cash flow and loan money in the form of relaxation of price control and adjustments of the tax system, both of which have been done. The hon. Gentleman seems to have ignored them. He wants even more. I agree that if Santa Clause could arrive very conveniently on the scene with cash in his sack we would be better placed, but we have to live in the real world of restricted resources.

Mr. William Clark (Croydon, South)

If one wants to give increased cash flow, rather than defer tax through manipulation of stocks, would it not be better to reduce corporation tax from 52 per cent. to, say, 45 per cent.?

Mr. Lever

That would affect firms which are not affected by the stock question and would correspondingly reduce the relief which we can focus on those most affected by the stock question. As a general argument, I do not think that it can be denied that industry would like more cash flow and lower taxation, but we have attended to the cash flow and profitability question and we have attended to a great improvement, even though necessarily an interim one, in the tax question.

Mr. Hordern

What about the borrowing requirement?

Mr. Lever

The hon. Gentleman seems to suppose that this affects the borrowing requirement. I must confess that the hon. Gentleman certainly deceived me in giving every appearance of being awake. I made it clear earlier that these funds were coming from within the banking system. They have nothing to do with Government borrowing. They are funds which otherwise would be available for short-term borrowing.

Mr. Hordern

indicated dissent.

Mr. Lever

If the hon. Gentleman wants a detailed dialectic with me, we must do it outside. I must make it clear to him that this is a shift of money over a period from the short-term lending which industry willingly agrees is unsuitable to finance its capital investment. It will over a period change into medium-term or longer-term lending, but lending in the form which encourages investment and the right kind of investment.

No doubt some of it will move away from the kind of investment which is less fundamentally necessary to us all and which could afford to take the risks of short-term borrowing. For example, if a man is going to open a night club he is more ready to finance it with short-term borrowing, whereas if a man plans to build a factory for export manufacture we are providing now a mechanism which will shift some of the money which might have gone to the night club into the direction of the factory, and we are achieving it without detailed or bureaucratic controls. It is a shift from one kind of lending to the more advantageous lending which traditionally existed but which exists no longer. If the hon. Gentleman cannot understand this from my speech, I shall be happy to have a seminar for him or any other hon. Member who needs more detailed instruction. It is a voluntary matter and not one to which the Government can direct or give detailed consideration.

I am confidently hopeful that this institution will meet the challenge which has now been recognised of providing a stable form of long-term and medium-term finance for industry for exports and for capital investment. I shall be disappointed if it does not perform for capital investment in industry the same kind of service that the building societies now provide on a far more massive scale for home-owner buyers. It is an odd situation——

Mr. Norman Atkinson (Tottenham)

rose——

Mr. Lever

Perhaps my hon. Friend will allow me to finish my sentence. Building societies collect short-term money and are able to lend it out because it is short-term money and because of the healthy organic structure of the good credit that they enjoy. They are able to lend out short-term money for periods as long as 20 years because they are able to pay the short-term rate and to gear the long-term rate to the short-term rate.

We have not had an institution of intermediation available for capital investment in industry. That has been the position. But now we have the beginnings of just such an institution. It will be able to intermediate short-term money as well as a mix of medium and long-term money. It will be able to draw on short-term funds and safely lend those funds long because of its undoubted credit and undoubted access to the short-term money markets. It will provide the same kind of service which is now provided by the building societies on the housing market.

Mr. Atkinson

If Finance for Industry and the new arrangements which have been voluntarily agreed will not adversely effect the yield the banks would normally expect to derive from their previously short-term loans, what has now happened to make the banks agree to the new arrangements? Why has the advent of a Labour Government suddenly made the banks conscious that British capitalism needs this new facility? Why was there something missing in the past whereby there was a starvation of medium-term loans that have now suddenly become available? What has happened, other than the charm of my right hon. Friend, to bring about this amazing conversion on the money market?

Mr. Lever

I do not wish to belittle the impact of the last item that my hon. Friend mentioned. I attribute the change to the growing gravity of a situation in which firms have been saying, "We shall borrow short term for the time being and we hope to fund it later by a long-term loan or with an equity issue". That has meant a mounting debt at the banks that has been added to by the impact of the increased cost of financing stocks even to maintain them at the same level. It is that situation that has brought matters to a crisis.

Although I have twitted the last Conservative Government on this matter, I think that they might have acted a lot earlier and have offered a similar suggestion. The matter becomes monthly more serious as the mounting burden of short-term debt tends to distort much to our disadvantage the pattern of investment and the pattern of industry's stock-keeping. The result of the institution which we have in mind will be a more effective deployment of private enterprise funds in the direction of sustained employment and investment. There will be a more effective deployment in a direction that my hon. Friend the Member for Tottenham (Mr. Atkinson) would wish to see. If he were familiar with the details of the matter—I am not being patronising but this is a complex matter which has been rather ill reported in the newspapers and ill explained and has confused others of my hon. Friends——

Mr. Atkinson

You can rest assured, brother, it has not confused me.

Mr. Lever

If my hon. Friend is not confused there are evident signs of confusion in some of the newspapers and from some of my colleagues. I have some responsibility for that because when I threw out this suggestion I was not able to go into all the details and to explain it. When dealing with it my lips were sealed although not completely sealed.

I am happy to explain in sum that we now have a new instrument of intermediation which will be able to cheapen medium and long-term lending because it will be in a position to process a mix of medium-term and short-term funds. In concept it will be an entirely voluntary institution. It will in no way prejudice any other proposals, such as the NEB, about which some people are very anxious. By removing the three handicaps to private industry my right hon. Friend has done more than anything else to protect employment and to promote investment.

We are safeguarding the present standard of life of our people and the present employment prospects of our people. As far as we can, in this dangerous and uncertain world, we shall safeguard the future prospects and standard of life of our people by these investment incentives. I have stressed the grim background against which my right hon. Friend is forced to act. There are also difficulties at home. However, that does not justify the utilising of the crisis, as has been done, to secure party political points or to arouse defeatism. I mention that not to excuse the Government from any of their failings. I dare say that we shall eventually be proven to have some. It is not in the interests of our people if the dangers under which we are operating are used in the facile party political way that we witnessed from the Leader of the Opposition in instant response to the Chancellor.

I realise that some of my hon. Friends do not find price control relaxation palatable. By the tax relaxations which I mentioned there is an undoubted influence on the cash flow to private industry. My hon. Friends must realise that we are necessarily pledged to a vigorous and successful private enterprise sector as well as to a successful public sector. It would be naive to believe that if for any reason our private enterprise sector were allowed to break down we would achieve strength through cataclysm. Nothing of the kind would happen. We would not achieve a sudden sprouting or flowering of a Socialist or public-ownership sector.

If the private sector broke its back all possibilities of success would be undermined in extending and invigorating the public sector. I beg some of my hon. Friends who have been too ready to criticise my right hon. Friend to bear in mind that he has been fighting to defend the high level of employment that they are most anxious should be preserved. He is fighting to defend our investment, our future standard of life and future competitiveness. He is fighting to protect from the danger of literal destitution and disaster next year, for the reasons that I have mentioned arising out of the international situation, the weakest and poorest people in our land. Had he sat back and not courageously and with intelligence fought to revive and invigorate our private sector in these difficult circumstances——

Mr. Wyn Roberts (Conway)

Does the right hon. Gentleman envisage that something similar to the FFI may now be necessary for agriculture?

Mr. Lever

We have an Agriculture Mortgage Corporation. I should need to consider the situation so as to determine what might be done. Something similar to the FFI might improve the financial facilities for agriculture. I must confess that I had not thought that long-term fixed-interest finance was one of the afflictions of agriculture.

I now want to bring this speech to a conclusion. The Chancellor has met the needs of our time this time. He has courageously and with confidence applied himself—[Hon. Members: "Oh."] I think that some of those who are ready to criticise him might bear in mind that he can afford with a good conscience the increased profitability necessary from a thriving private sector with high employment investment levels, because in every Budget he has been increasing his control over personal incomes and their taxation and management.

Perhaps some of those, who may include hon. Members on this side of the House, who do not immediately respond with enthusiasm to some of the Chancellor's more severe measures on private income will bear in mind that some of those severe measures have made possible these concessions to the company sector precisely because the other measures ensure that the funds thereby conceded cannot result in an undue or unfair advantage to individuals who are in a position to bear heavy rates of tax.

I therefore have no difficulty whatever in pledging full support to the Chancellor in these measures. I am sure they are the right ones. I am sure that when the House has had time fairly to consider them. hon. Members will join in supporting the Chancellor in the fundamental proposals which he has made in these three important respects to bring aid to British industry.

4.32 p.m.

Mrs. Margaret Thatcher (Finchley)

It is a pleasure to be opposite the right hon. Gentleman the Chancellor of the Duchy of Lancaster once again. It happened first about seven years ago when we were both in similar positions. I remember his great enthusiasm then for international co-operation. It took the form of being one of the first to tap the Eurodollar market for financing the nationalised industries in Britain.

The right hon. Gentleman used to take me to corners in the House to give me a little financial homily—believe it, or not, on the wisdom of not borrowing short to lend long and on the great wisdom of borrowing longer from Europe to lend shorter on some of the IMF commitments.

Mr. Lever

The right hon. Lady has benefited imperfectly from the instruction. What I said to her was that for overseas borrowing we ought to borrow long and not short because we would thereby shield ourselves from runs on the currency. I have never said that borrowing short and lending long is in itself undesirable within the domestic system. That would mean the end of the building societies. The FFI would never have started. I have never had any such view as the right hon. Lady attributes to me.

Mrs. Thatcher

Clearly I shall have to have another lesson. I was rather alarmed when the right hon. Gentleman compared the FFI to building societies, in view of my problem with building societies while in my last Shadow job.

One thing that I remember from my previous experience with the right hon. Gentleman is that he always had a borrowing answer to every single problem. I always felt that I could never rival him at the Treasury because there are four ways of acquiring money, to make it, to earn it, to marry it and to borrow it. He seems to have experience of all four.

The right hon. Gentleman spoke warmly about private enterprise. I only wish that some of his colleagues would speak as warmly about it as he does. I think the right hon. Gentleman probably has more battles with his back-bench colleagues than he does with hon. Members on the Front and back benches on this side of the House. He showed his great skill when discussing the Merrett and Sykes and Wood and Godley theories, in coming down on both sides of the argument. It is a skill which must stand him in very good stead at Cabinet meetings. Some of us feel that just as I have been a statutory woman in the Cabinet, he is perhaps a statutory moderate in the Cabinet now.

The right hon. Gentleman spoke in a clear way about the problems of taxation on stocks during times of inflation and said that we had not really got down to inflation accounting. When I first came into the tax business I considered the Report of the Royal Commission on the Taxation of Profits and Income in which Lord Radcliffe came down against having inflation accounting because the figure of inflation was comparatively small, although they thought it comparatively large. The right hon. Gentleman is wrong to say that we did nothing about it. We appointed the Sandilands Committee from which we shall shortly receive a report, although I understand from the Press that the report will take longer in coming than we hoped.

The right hon. Gentleman will also know from his tax experience that companies are taxed on profits computed according to the current commercial method of accounting. That principle has recently been affirmed, but the problem is that there is no agreed method of commercial accounting in periods of inflation, and until we have that agreed method it is not easy to alter the basis of the tax otherwise than on an ad hoc principle. The right hon. Gentleman enlarged upon the ad hoc principle and wisely gave the example of a continuing business, unlike the Cambridge school which gave an example of one which was not likely to continue very long.

May I refer to the "bankable assurance", about what will happen to taxation on stocks next year, and point out that a bankable assurance may be all right for a continuing business but that it is not all right for a liquidator if the business goes bust in the meantime. This is a detailed point that we might consider on the Finance Bill.

Before going on to what I wanted to say, may I say that I was a little concerned about one or two things which the right hon. Gentleman said about the FFI. Most of us agree that we would rather have this sort of facility in private hands, and it is a good idea to set it up, but I do not think there is a good parallel with building societies. One thing which concerns some of us, particularly those who have ever been connected with some of the institutions which are expected to put up some of the finance—for example, insurance—is that the duty of insurance companies is first to look after their beneficiaries. To do this they need to match their liabilities with their investments, and I hope that by investing in this kind of institution there will be no question whatsoever of their having to put the interests of their beneficiaries second. I think they would be in considerable difficulty if they had to do that.

Mr. Atkinson

That is an important point. It slots into this debate very acutely indeed. If the right hon. Lady is philosophising on the basis that insurance companies and other financial institutions should put the interests of the beneficiaries first, would she not also say that that was a correct posture for the trade unions to take? The Conservative Party seemed to be accusing the trade unions of ignoring the national interest, and now the right hon. Lady says that the interest of the beneficiaries comes before the national interest.

Mrs. Thatcher

With respect, I was speaking on the basis of a legal contract, not a social contract. The two are quite different things as the hon. Gentleman knows.

Mr. Atkinson

If there is morality in law, then surely these things must equate one with the other, because this is what the argument is about.

Mrs. Thatcher

Perhaps the hon. Gentleman could equate them by making his contract legal as well.

In 15 years of listening to Budget speeches, and that is a lot more than 15 Budget speeches, I have never known a Chancellor take so long to communicate so little to the general public. Not even the price increase in petrol came from him. Instead it came from one of his colleagues. It was a very long speech to say not a great deal. I appreciate that he was in some difficulty. It was not the difficulty of steering a course between the objectives of curbing inflation and providing jobs. We all know about that difficulty.

It was not even the difficulty that he could not do exactly as he wished because of external constraints. We all know and appreciate those difficulties and how they might mature next year. The difficulty he was really in was of trying not to reveal that if he was right now he was wrong in his March Budget. It seems to us that part of the task of this Budget is to put right some of the wrong decisions in the March Budget which my right hon. and hon. Friends were continually pointing out at the time of that Budget and also during the passage of the second Budget, when they once again referred to the liquidity problems affecting companies.

I want to follow the Chancellor of the Exchequer in some of the questions which he raised and left unanswered. The Chancellor of the Duchy started with the private sector. I want to begin with the nationalised sector. The Chancellor of the Exchequer put a lot of his strategy on raising prices in the nationalised sector but did not begin to tell us by how much. Can we contrast his attitude in March with his attitude in November? On 26th March he called the deficit of £800 million deficits on an appalling scale". He said: We could not allow the existing state of affairs to go on … the situation had gone too far to be rectified completely by a single round of price increases."—[OFFICIAL REPORT, 26th March 1974; Vol. 871, c. 300.] He then went on to announce the actual increases, electricity 30 per cent., rail 12½ per cent. to 15 per cent., and increases for the Post Office.

It was interesting that when the Chancellor had been in office for only three weeks he had grasped the problem and quantified the solution. Now contrast what happened in November. The deficit of the nationalised industries was now running at £1,000 million a year. Again it was the same story: it is impossible to achieve a realistic level all at once". I accept that. I know it is. I have been in Government trying to eliminate deficits. The objective was: to phase out these subsidies completely as fast as possible ".—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 268.] The interesting thing was that although he had been in Government for eight months he could not then quantify the necessary increases. Either he could not or he would not. I do not know why. He knows that the deficit of the nationalised industries, the six main ones, according to a Written Answer of 5th November, was £650 million. He knows that to eliminate even that, let alone the deficits on some of the others, could involve a substantial increase in prices.

I do not understand why he has refused to give those increases when he made that the cornerstone of his strategy. We therefore have to rely upon the Press because it appears to have done some work on price increases. It says that gas will go up by about 15 per cent. and electricity by about 25 per cent. In the Price Code the right hon. Gentleman not only wants the industry to break even, he wants it to make a modest surplus, again for obvious reasons. My right hon. and hon. Friends know of the years we spent, when previously in Opposition, trying to get yardsticks for the efficiency of nationalised industries. The normal yardstick is competition but it is not there with a nationalised industry.

It is difficult to substitute another except by fixing certain targets. The Chancellor has fixed certain targets—that prices should secure "a modest surplus" in 1975–76. But he knows that he will be in political difficulty and may not be able to achieve his objective. We saw that at Question Time this afternoon. Already the complaints are coming in that these deficits should not be eliminated. How does he propose to make his aims clear to those who are responsible for putting forward wage claims in the nationalised industries?

If the right hon. Gentleman's objective is to eliminate the deficit then surely what he is saying is that any wage claim that is granted in the nationalised industries will automatically be passed on to the consumer. It is not a confrontation between those who work in the industries and Government. If there is a confrontation it is between those who work in such industries and those who will ultimately pay consumer prices. Will he attempt, in any way through the directive mechanism or other mechanisms, to make that clear to those responsible for putting forward wage claims in the nationalised industries?

In his broadcast the Chancellor of the Exchequer said: If you're on the shop floor you can force young company into bankruptcy by asking for wages you know it can't afford. There is no such limit on the nationalised industries. We noted yesterday that it was suggested, for the first time to the knowledge of most of us, that there should be a penalty on companies which went beyond the social contract. But there could be no similar penalty on the nationalised industries. How does the Chancellor propose to deal with this?

I point out in passing that it seems odd to some of us that employers are not parties to the social contract yet they are the people who suffer the penalty if the social contract fails. Those who are parties to the social contract seem to suffer no penalties at all, if it fails. I hope that the Chancellor will deal with this later.

I turn to the corporate sector with which the Chancellor of the Duchy dealt. It always seems rather interesting that with incomes policy the cry is that co-operation is the only way but when it comes to the other side of the equation, prices, somehow control is the only way, and pretty detailed control too.

Mr. Lever

The Conservatives had controls on prices, too.

Mrs. Thatcher

We had controls on both sides, as the Chancellor of the Duchy knows. There were the two sides of the equation. The right hon. Gentleman's party has taken away one side of the equation and left the other. On Tuesday another layer of detailed control was added, a whole new set of complicated rules about allowable labour cost increases and investment increases.

The danger of taking any control policy too far, and this was always inherent in incomes and prices control, is that we create a paradise for bureaucrats. We also build into the system a great deal of delay at both ends. A firm I visited the other day told me—I got it to check the numbers—that it had to fill in 750 forms for Government Departments annually. Over 500 were statutory and 250 were voluntary. However the firm felt that it had to comply. It also had great difficulty in getting answers, sometimes, out of the Prices Commission. It would find that there would be a refusal after 27 days so that it had to start all over again. Every new built-in detail makes the job of private enterprise in responding to the immediate situation that much more difficult. We should be extremely wary of this.

I know that the CBI and traders wanted the Government ultimately either to abandon price control or to substitute a general control of profits which would have been much easier for everyone to operate. But the answer was, "No, we are not going to do this", without a reason being given. I hope that the Chancellor will not keep detailed control for too long, because this is a serious problem.

On the prices side, the Chancellor says that he believes that the relief on prices will bring in about £800 million extra to the corporate sector. He gave no breakdown of that estimate. Some people think that it is on the high side for two reasons. First, a number of companies will not be able to take advantage of the maximum relief because competition will keep prices down, and, secondly, in some spheres there is a good deal of consumer resistance to increased prices.

The other problem that will arise is how far and how quickly will the price increases be passed on in wage increases, bearing in mind the structure of the social contract. One can foresee what will happen. The Chancellor's intention is to transfer money from the personal sector to the corporate sector. That can be the only meaning behind his strategy. When price increases are allowed automatically, the cost-of-living clause in the social contract will come into effect, so the price increase will not go into profits for long but will once again go into wage increases. That will mean that the price increase will give little relief to profits, and there will be a spiral.

The only two ways of relieving that, are either by inflation, which ultimately reduces the standard of living, or by unemployment, and that is exactly what the Chancellor of the Exchequer has been warning us about. I hope that he will give us a breakdown of the £800 million. and tell us how he proposes to prevent the relief from spilling over into wage increases under the social contract, thereby defeating his Budget strategy, which is to take money from one sector and put it into another.

I turn to stock relief for tax purposes and make a plea that the Chancellor will reconsider the position of small traders. At present the relief is not available for individual traders, partnerships and companies whose closing stock is less than £25,000. Administrative reasons are pleaded. I do not fully understand that. Every person who is liable to tax has to fill in a tax return. He has to show his opening and closing stock and his trading income on that return. All the figures will be there on the return, and the return will qualify the person for a number of reliefs. Why in the world cannot the return be used to qualify that person for this extra relief? The Government did not shy away from providing extra bureaucrats for the detailed control of prices. Why do they shy away from providing extra people, if necessary, for allowing detailed reliefs. I hope that the Chancellor will reconsider that.

Mr. Tom King (Bridgwater)

Does my right hon. Friend agree that if the relief were at a lower level it could give tremendous help in agriculture? Tax bills will be coming in for the farmers, and stock is one of their problems.

Mrs. Thatcher

Yes, and it will also help many shop keepers who would otherwise be adversely affected. It will have two very good immediate effects.

Mr. Geoffrey Finsberg (Hampstead)

Would not that also be achieved by the Inland Revenue doing what it frequently does and making a provisional assessment, and in the following year putting it right by tax overpaid or tax underpaid?

Mrs. Thatcher

Clearly, my hon. Friends are not short of ideas. I am concerned that some relief should be given because, as both Chancellors—of varying hierarchical levels—realise, small businesses have suffered for various reasons, particularly on rates, for which both parties are guilty, so let us both agree to give them some relief.

Mr. Leslie Huckfield (Nuneaton)

That is an interesting admission.

Mrs. Thatcher

I never flinch from accepting responsibility for my part in any situation. The hon. Member for Nuneaton (Mr. Huckfield) should come to some of our debates on rates.

Mr. Huckfield

I am sure that I should find far more interesting some of the debates in the 1922 Committee.

Mrs. Thatcher

I am sorry that I gave way. The hon. Gentleman did not do himself justice.

The White Paper, "Capital Transfer Tax", suggested that there would be relief both for farmers and small businesses. Relief from capital transfer tax has been provided to a limited extent for farmers, but there is no relief forthcoming for the small business. If none is forthcoming the life of the small family business will end. No family business will be passed on to a son or daughter of the next generation. They would become one-generation family businesses. We think that that would be a great pity and would rob the nation of one of the most creative sources of new wealth provided by people who have one of the main incentives in life—to see that their children do better than they have done and to direct their efforts to benefiting their children. I hope that the Chancellor will look at this again.

The Chancellor said something about corporation tax which disturbed my hon. Friend the Member for Croydon, South (Mr. Clark). He said that one reason why he would not give relief on advance corporation tax was that it would benefit companies who had paid out most dividends, and he thought that they were not the companies with the greatest need. The Chancellor ignored completely that some companies have to finance their operations through preference shares. Those companies are already in some difficulty because dividends on preference shares are not allowed for tax, whereas if they had a higher gearing the interest would be allowed for tax. Those companies have no option but to pay the dividends, and they deserve some relief on advance corporation tax.

The Chancellor's reaction shows how shallow is his conversion to profitability and a vigorous private sector. I have previously heard him say that he likes profits, but only if they go to social purposes of which he approves. He cannot bear them going out in dividends. How he expects to get investment if people do not get a reasonable return for their investment is a mystery. We cannot and will not get investment in industry unless those who invest, whether they be trade unions, insurance companies, pension funds or individual people, get a reasonable return. I know that the Chancellor put up the dividend limit from 5 per cent. to 12 per cent., but that is not enough in today's circumstances.

The Chancellor's attitude to private savings is in general not very favourable. He never hesitates to penalise those who save. He had to have one vindictive bit in the Budget—the surcharge on savings income. Some of the people with savings income have already suffered a capital loss on the investment. They are having to take a return which does not even compensate for the fall in the value of the investment in capital terms. This time he chooses to put an extra tax on those people. He gave us a nice little sermon: The senseless accumulation of material goods … 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 perhaps ties up with the fact that after the previous election he said: I never save. If I get any money I go out and buy something for the house.

The Chancellor of the Exchequer (Mr. Denis Healey)

I wonder if the right hon. Lady would quote the origin of that canard. I cannot recall having ever said that in my life.

Mrs. Thatcher

The Sunday Telegraph for 24th March 1974.

Mr. Healey

I read that report, but it was attributed to a conversation that I was said to have held with somebody who did not write the piece in question. I ask the right hon. Lady again to give some evidence that I ever made such a preposterous remark.

Mrs. Thatcher

It is taken from the Sunday Telegraph, but if he did not say it I am delighted. The right hon. Gentleman had better take lessons on how to invest from the Chancellor of the Duchy of Lancaster.

We seem to have got that nicely out of the way. I am delighted that we have got on record the fact that the Chancellor is a jolly good saver. I know that he believes in buying houses in good Tory areas.

I turn to another aspect affecting——

Mr. William Clark

With regard to the investment surcharge, does my right hon. Friend agree that there are many cases in which disabled people will be hit because of the surcharge? A person who suffers an industrial injury and is paid damages receives those damages for loss of earning capacity, and they must be invested. Now a disabled person getting more than £20 a week investment income will be hammered.

Mrs. Thatcher

I have heard my hon. Friend make that point cogently in the past and I hope that we can deal with it in the Finance Bill.

An interesting point which is buried in the Chancellor's Budget speech was the following: Wage increases and other cost increases have increased public expenditure as outlined in the March Budget in current price terms …. by over £1,000 million more than the additional yield from taxation which results from inflation."—[OFFCIAL REPORT, 12th November 1974; Vol. 881, c. 250.] I noticed that point because we have always thought that fiscal drag was positive and that the effect of inflation was to raise the revenue more than was needed to meet the extra expenditure. But that appears to be no longer true.

I saw an analysis on this by an economist some time ago, and he came to the conclusion that fiscal drag was negative. I was therefore interested to see this £1,000 million referred to. At current levels of public expenditure and current levels of inflation on income it will be necessary progressively to tax more to satisfy the demands of public expenditure.

Two points arise from this. First, we have to turn our minds to inflation accounting on Government accounts, which does not appear to have been done, although there were some thoughts about it when we were in office. Secondly, we have to turn attention to getting not only income taxes buoyant but getting more of the expenditure taxes buoyant as well. I gather that one of the reasons for this comparatively new phenomenon is that less than half of the tax revenue is buoyant and the other half is made up of specific taxes. The only increase from specific taxes is in the volume sold.

The Chancellor did something about buoyancy on indirect taxes by adding 25 per cent. VAT on petrol, so that becomes a buoyant tax. But it would be most alarming if it became necessary steadily to impose more taxation to finance existing current Government expenditure. It would be far better to build some buoyancy into indirect taxes. What would be even better would be to reduce the volume of public expenditure.

If this relationship goes on it means that Governments will taken an increasing proportion of the national income into the public sector, not to finance expenditure on new projects, but to service existing projects. I hope that I have made this point clear. It was buried deeply in the Chancellor's speech and I wanted to discuss it.

The Chancellor's other strategy was that he hoped we would make a determined effort towards cuts in public expenditure. But again he did not say where those cuts should be made. I believe that the cuts he is suggesting are not reflected in his target. I am sorry if that is a bit Irish, but the right hon. Gentleman will see what I mean in a moment. He gave us his target that public sector programmes as a whole should not increase in demand terms by more than 2¾ per cent. a year on average over the next four years. But I look back to what we provided in our last Public Expenditure White Paper. I have tried to take the same figure, which is not always easy. On page 7, paragraph 6 of the White Paper it was stated that we hoped to put the 'increase in real terms at less than 2¾ per cent. We put it at 2½ per cent.

So the Chancellor is apparently increasing his target at a time when the growth of the economy is running at a much smaller rate than during our period in office. The right hon. Gentleman knows full well that with his forecasts growth will not be moving at all, or at least very little, in the future. If he takes an increasing proportion into the public sector very little will be left for the personal sector. That would not suit us.

I hope that the Chancellor will tell us more about the cuts he is proposing. He pointed out that defence expenditure was under consideration, but he knows that cuts in defence expenditure would be of a long-term nature and would not have any effect next year. He said that local authority expenditure accounts for 30 per cent. of public expenditure as a whole. But I have reason to know that what it is possible to do in, for instance, education, in terms of cuts in local auhority expenditure which would bite quickly, amounts to very little. What could be done on both the capital side and the procurement side was done. The only scope that the Chancellor has left is to increase charges if he wants anything to bite quickly under this heading.

I saw a headline in the Daily Telegraph saying that the price of school meals would have to go up. This was attributed to something said by the Secretary of State for Education and Science at an education conference in Birmingham.

As the Chancellor has made public expenditure cuts another part of his strategy, we should have more details on this. We cannot judge the Budget as a whole without having more of the figures which are involved in it.

I realise that a number of my right hon. and hon. Friends wish to speak, but I could not sit down without saying at least a few words about the borrowing requirement. The Chancellor now realises, having listened to many speeches on this topic, what a great shock it was to everyone that the borrowing requirement has gone up to over £6,000 million, particularly in view of the attitude that he took about it in March, when his every effort was to get it down, for two reasons. He wanted to have an effect on the money supply—and, secondly, he said: Our aim will be to bring about a reduction in interest rates. … It will depend on our ability to restrict public sector borrowing requirement here at home. …—[OFFICIAL REPORT, 26th March 1974; Vol. 871, c. 284.] If getting interest rates down depends on our ability to restrict the public sector borrowing requirement, that has now gone through the roof and we hope that interest rates will not go up accordingly.

Mr. F. A. Burden (Gillingham)

Is my right hon. Friend aware that, during the period when we had no parliamentary papers, a Written Answer was given to me by the Paymaster-General in which he admitted that there was an in-built offset against inflation in the loan from Iran, that it would have to be repaid in five years, that he could not give me the exact interest rates, but that it would be repaid in American dollars? It will be interesting to know the basis of Government borrowing, how much has to be repaid in foreign currency and what inbuilt provisions there are against inflation.

Mrs. Thatcher

As my hon. Friend knows, the financing of the public sector borrowing requirement is very difficult. He is asking for information about it, as I would be.

There were one or two woolly bits in the Chancellor's Budget speech on this point—[HON. MEMBERS: "Oh."] They were not specific enough to give full details. I know that the right hon. Gentleman has done the financing already to the tune of £5,500 million. What worries some of us that the need for the loan will outlast the willingness of some of the present lenders to leave their money here. In these circumstances, the right hon. Gentleman might have to resort to inflationary borrowing to cover the debt. I hope, therefore, that he will tell us a little more about how he proposes to finance the borrowing requirement, especially the part between the £4,000 million and the £6,000 million to which he referred in the closing passages of his speech.

Mr. Atkinson

In terms of the right hon. Lady's own statistics, if the private sector finds it very difficult to raise £3,500 million, taking the CBI's analysis of the situation, how can she say that it is inflationary to have a borrowing requirement of this kind in the public sector? Surely it must be looked at as a whole. If there is a deficit on one side, it follows that there is a surplus on the other—if the basis of the Government's policy is full employment and not excessive imports.

Mrs. Thatcher

Whether it is inflationary depends not only on its amount but on how it is financed and whether it can continue to be financed in a non-inflationary way. Apparently at the moment it is being financed in a non-inflationary way. Many of us wonder what long-term or medium-term commitments to that effect the right hon. Gentleman has.

We believe that the Chancellor of the Exchequer will be in difficulty with some of his current forecasts. He places great hopes on exports at a time when world trade is falling and, unfortunately, our own exports are falling, I hope temporarily. We feel that, instead of warning the people in clear terms of what lies ahead, he has chosen to try to blind the journalists—and hon. Members—with complications and statistics. He has opted for sacrifice by instalments. The first instalment is the petrol increases. The next instalment will be the nationalised industry price increases. The third instalment will be the increases or deductions arising from public expenditure cuts, and then we shall get increases in taxa- tion and rates in April arising from the increased public sector expenditure. It will be sacrifice by instalments.

The right hon. Gentleman did nothing to prepare the nation for that on Tuesday. He had a highly technical Budget. Press man after Press man appeared to take the Press releases. We got what sometimes happens in Budget speeches. There was a reaction the first day which was quite different from the reactions on the following days as people began to understand the Budget. It would have been better if he had prepared the people for what lay ahead. The people were ready. The Chancellor was not. He and they will regret it.

Several Hon. Members

rose——

Mr. Deputy Speaker (Mr. George Thomas)

Order. There is a very long list of right hon. and hon. Members who wish to speak. I hope that right hon. and hon. Members who are called will bear that fact in mind.

5.15 p.m.

Mr. Ifor Davies (Gower)

I shall comply with your appeal, Mr. Deputy Speaker.

This debate has already revealed the complexity of our financial institutions, and the questions and interventions of right hon. and hon. Members have demonstrated the confusion in the minds of many of us.

The right hon. Member for Finchley (Mrs. Thatcher) covered many essential points and dealt cogently with the social contract, which I shall come to in a moment. She also pointed out very movingly that the biggest achievement was for us to see to it that our children did better than we had done. It is because many of us believe that that we are sitting on these benches.

Budget debates are always wide ranging, and I have no doubt that this debate is no exception. Many right hon. and hon. Members have already listed their own priorities.

My right hon. Friend the Chancellor of the Duchy of Lancaster dealt with the expansion of Finance for Industry and gave us a great deal of detail. The right hon. Member for Finchley gave that proposition her full support.

In his Budget speech, my right hon. Friend the Chancellor of the Exchequer also made clear that his proposals had one clear achievement in mind, which was to reconcile the objective of full employment with economic growth, social justice, stable prices and external equilibrium. But at the heart of the Budget there is a recognition that this objective depends to a great extent upon the success of the social contract, referred to by the right hon. Lady.

Yesterday, the Shadow Chancellor of the Exchequer said that the only source of new wealth and, indeed, the only way of increasing our means in the future was to increase the production and efficiency of our factories. It follows that, in addition to the important financial considerations put before us by my right hon. Friends the Chancellor of the Exchequer and the Chancellor of the Duchy of Lancaster, Britain's greatest need in order to overcome our economic difficulties is for industrial peace and co-operation. For that reason alone it is right for this Budget to place great emphasis on the social contract.

There is an urgent need to make it clear that a major priority of the social contract is to create a greater measure of industrial justice through the strengthening of the machinery of collective bargaining, conciliation and voluntary arbitration. It is a determined attempt to restore confidence in the collective bargaining and conciliation processes.

This is a difficult task. It is a tremendous problem. The achievement of a social contract is a supreme task of a democratic process. The Opposition, in their own interests, should be giving the concept of a social contract, with all its difficulties, every possible encouragement instead of deriding it and in some cases rejoicing in any possible failure or shortcoming. Perhaps the Shadow Chancellor of the Exchequer can be omitted from that criticism since he spoke recently on the radio of the need for a social contract and said that he was in agreement with it.

I want to draw attention to the difference between the destructive criticisms of a number of Opposition Members and the attitude of some of our leading trade unionists. In particular, I refer to the speech of the General Secretary of the Transport and General Workers' Union at Motherwell on 18th October. I think the House will be fair enough to recognise that it was a courageous, forthright and significant speech and one that is relevant to our debate today. The General Secretary said, during his speech, The main objective in the fight against inflation should be to increase the value of the pay packet, not necessarily the amount of paper in it. The Government's overall strategy on inflation, taking into account rents, rates and prices, was as important as wage claims, and the chief objective of negotiators should be to increase the value of the pay packet by co-operating with the social contract. That was a fair and courageous statement to make against the background of the present industrial scene, and I commend those words to the House as being both constructive and realistic.

Amidst all the criticism of the social contract, I remind the House that it is often argued by hon. Members that the strength of the British constitution lies in the fact that it is unwritten, and that its strength lies in its flexibility; so, too, I put it to the House, the social contract. In this context, the spirit of the agreement is more important than the written word.

It was Sir Stafford Cripps who said: The causes of industrial discord lie in the minds of men and it is in the minds of men that the defences for industrial peace must be constructed. I submit that the social contract, embodying as it does a new conciliation and arbitration service, is an important step towards the construction of the industrial peace that we all so earnestly desire, and the House must realise the dangers facing the country if the social contract fails.

I have no doubt that the social contract is an appeal to the best instincts of our people, as set out in the TUC's statement of policy, which says in one paragraph: The General Council are confident that the further development of the social contract"— the council at least recognises that there is in being some understanding at best about the further development of this contract, and we should therefore not laugh at it but encourage it— set out in this report will commend itself to unions … and so enable the Government to proceed with progressive policies in the industrial, economic and social fields. There has been some criticism—and we have heard it again today—that the social contract is exclusively an understanding between the Labour Party and the trade unions, and that management and industry have no part in it. But the Budget has destroyed that argument. One major object of the Chancellor is to raise the level of investment, and to help to do that he has eased the cash position of industry by £800 million. Surely that deserves a favourable response and cooperation from industry itself.

I remind the House that the Budget has made two main contributions to further the success of the social contract, especially in the sphere of public expenditure. First, there is the provision of help for those who are least able to withstand the impact of inflation—above all, pensioners and families with young children. These measures will bring relief to three of the largest groups living in poverty—the old, the low paid and the one-parent families.

Secondly, I welcome the other main contribution to further the success of the social contract in the sphere of public expenditure, such as housing, which the Chancellor indicated would be given top priority to making up the ground lost between 1970 and 1974".—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 272.] That is a declaration of the greatest importance in the eyes not only of some of my constituents but also the 50,000 people in Wales who are on waiting lists for rented accommodation. Every family that is inadequately housed is a standing rebuke to a civilised society, and local authority housing lists get longer and more intractable to deal with. I am sure that every hon. Member during his constituency interviews has to listen to pitiful tales about housing conditions, and I am certain nobody will deny it is a heartbreaking experience.

Mr. John Gorst (Hendon, North)

I understand the hon. Gentleman's point about the contribution that the Budget will make to those who are dependent upon the State for provision, and I agree with what he said, but can he tell the House in what way either the Budget or the social contract will help self-employed and professional people in the middle income groups?

Mr. Davies

Increased welfare benefits will make a contribution, especially to those people to whom the hon. Gentle- man refers. The Budget is planned to fight the big issue of inflation. That is the biggest difficulty facing the people whom the hon. Gentleman has in mind.

Mr. Gorst

The Budget will increase prices.

Mr. Davies

The whole object of parts of the Budget is to cope with increased prices, and all people will benefit from its provisions.

To conclude, I welcome also the recent announcement on housing by my right hon. Friend the Secretary of State that he is investigating the possibility of an emergency programme. This is a new feature of our policy, and I hope that my right hon. Friend will be successful with it.

I am pleased therefore to applaud a Budget that gives a clear commitment that, in the sphere of public expenditure, housing will be given top priority, not only to sustain the social contract but because the provision of homes for our people is the greatest of all our social services.

5.27 p.m.

Mr. Maurice Macmillan (Farnham)

I hope the hon. Member for Gower (Mr. Davies) will forgive me if, in the cause of brevity, I do not seek to follow his extremely interesting line of argument.

In common with most hon. Members on this side of the House, I have listened with slightly astonished gratification to a number of right hon. and hon. Gentlemen making the same kind of points as we made when we were in Government and on which they poured such scorn. They are now using the arguments that we put forward at the election but which they were so careful to avoid until afterwards.

One was not surprised to find oneself in a fair measure of agreement with a great deal of what was said by the Chancellor of the Duchy of Lancaster, except when he sought to distract the attention of the House from the divisions in the Labour Party by trying to pretend that the fault lay in the sins of omission of a previous Tory Chancellor rather than in the sins of commission of the present Chancellor of the Exchequer in his March Budget.

I confess that I am not so alarmed as are some of my purist colleagues on this side of the House at the extension of the Finance for Industry organisation. Indeed, I went so far as to suggest some such thing in my election address so I cannot altogether blame the Chancellor of the Exchequer for taking it up, though I have not had the privilege of conferring with him in corners, as my right hon. Friend has.

We heard the Chancellor of the Duchy of Lancaster talking about reliance on capitalism. It represents a welcome change of emphasis by the Government as a whole, although I fear that the change may be but skin-deep.

It was Hamlet who said: Conscience doth make cowards of us all", but I do not think that it was either conscience or cowardice that led the Chancellor of the Exchequer to talk so blithely of our prospects as a country before and during the election, although it may have had something to do with his reluctance to be more explicit in his Budget speech and to leave so much to be spelled out later by his colleagues, either in different parts of this debate or in successive debates later.

I should like at some stage answers to two points. First, the Chancellor must in his Budget be deliberately planning for a margin of slack—unemployment, that is—in the economy at a time when he says that recession is imminent throughout the Western world. This must be so if he is planning for a growth output of 2 per cent. I think that it is likely to be much lower than that—when the underlying growth in our capacity to produce is considerably more—and by at least 1 per cent. So will he be more explicit? This is the implication that I see and I should like to know whether it is accepted by the Treasury Bench.

Second, the Budget is once again—I am not necessarily saying that this is wrong, but the Chancellor should explain it to the people more clearly—adding directly to prices, about 1½ per cent. to retail prices directly, with perhaps another 1½ per cent. to come when the price adjustments of the nationalised industries have worked through. I am not necessarily criticising him for that. I am criticising him for not making it clearer. If I am wrong, I shall be grateful if hon. Members would put me right.

But even in his attempts to be explicit in his Budget speech, the right hon. Gentleman has told us only half the truth. He refrained, as my right hon. Friend the Member for Finchley (Mrs. Thatcher) said, from giving any idea of where and how the public expenditure reductions would fall. He told us that he was assuming an annual rate of growth in public expenditure of 2¾ per cent. That seems wholly inconsistent with his planned rate of growth of the economy as a whole of 2 per cent. and indeed with the other measures that he has put forward.

He has, it is true, laid considerable burdens on the personal section of the private sector, but those burdens have been on the productive part of the personal section and they have been matched by reliefs through pension increases and other social security benefits for the unproductive side of the personal section. That is fine, and it may be perfectly adequate, but it means that the whole personal section is in no way contributing to slackening the squeeze on the corporate sector.

This balance in the personal sector should require a considerable decrease in the growth in public expenditure, so that it is less, not more, than the planned output of 2 per cent. per year. The right hon. Gentleman has fudged the issue here. He has not made it clear from which of the three sectors the flow of funds will come to enable us to have more liquidity and more investment in industry.

There is an older saying than Hamlet's about conscience. It is that a guilty conscience never feels secure. I hope that the Chancellor of the Exchequer and the Paymaster-General both feel insecure, because they both should have a guilty conscience about the extent to which the problems that they are seeking to resolve in the Budget have been brought upon us by the previous policies of the Government, and particularly by the March Budget, which did so much to damage profitability and conscience in industry and to produce such grave problems in company liquidity.

These present measures seek to restore the situation, but, as my right hon. Friend said today, they show a lamentable lack of foresight by the Government, because at the time they were warned in some detail. They were told that the measures in the March Budget would in 1974 reduce company liquidity by between £1,000 million and £1,200 million. I made that point myself at a Financial Times conference, at which the Chief Secretary took a far more blithe view.

Last night, the Paymaster-General, referring to the £1,600 million which was being added to liquidity, said that it was completely out of scale with any ideas of the measures which were taken last March. That is not so. On 21st May, in an intervention, I said at the time: If the flow of funds to the public and overseas sectors together is as the Government say it is, that will produce a flow of funds away from the third sector of the economy, the private sector, which could result in a deficit of £1,300 million to £1,500 million for industrial and commercial companies."—[OFFICIAL REPORT, 21st May 1974; Vol. 874, c. 234.] So he has no excuse for not knowing that about£1,600 million—I was £100 million short of his figure—was likely to be the result of the March measures, because we told him so.

As for the productivity deduction, the right hon. Gentleman called it the Doomsday machine which was the source of all our evils. But he could have done something about it in March. It was there then. Indeed, in the same Financial Times conference, I pointed out that an extra £200 million-odd was likely to be taken off company liquidity, and not only by the operation of the threshold agreements but by the sort of doubling effect upon the productivity deduction when the threshold agreements were triggered, and suggested that this was something that the Government should consider.

So the right hon. Gentleman has no reason to blame Mr. Barber or any of the then Treasury Bench. The circumstances are different now, it is true, but they were, as we said then, different in March. There is no cause for him to seek to blame us for the sins of omission and commission of his right hon. Friend the Chancellor in his March Budget.

It is the Chancellor's failure and that of the Government to recognise this which has led them to relieve the pressure on private employers in this curiously oblique way which so many of my hon. Friends have criticised and not to give help where it is perhaps needed more than anywhere to the small businesses which are affected by the cash squeeze. If the capital transfer tax goes through in its present form without the exemption of small businesses, then they can seek much the same piece of rope as that quoted by the Chancellor of the Duchy. There will be nothing left for them to do except to hang themselves in despair.

I turn to the immense borrowing requirement which is contained in the Budget.

Mr. Lever

It is so long since I have been in the Treasury that I may have forgotten, but will the right hon. Gentleman say why the rope will now be required for small businesses in the transfer tax, as there is a big concession in the passing of shares from husband to wife, which will take place now? Why have circumstances become worse because of the transfer tax compared with what they were previously concerning estate duty?

Mr. Macmillan

There is no relief, as there was with estate duty. There is an alternative, I agree. Those who are wishing to start small businesses can take a new decision. They can say "We can do what the Government want. We shall not have thrift or foresight and we shall not seek to build for the future. We shall be content to get up to whatever activity we can, to get as rich as quick as we can and to spend our money as fast as we can." If the right hon. Gentleman is trying to create a spiv's paradise for small enterprises, I can think of nothing better than this, which will discourage continuing thrift.

Mr. Lever

Surely the right hon. Gentleman will try to answer my point and not just declaim. Will he assist me in the way that I asked? How has the position deteriorated for the small business transfer on death compared with what it used to be? I should have thought that it was improved, but I may have forgotten the details.

Mr. Macmillan

This is partly a question of transfer inter vivos and partly the savage effect of capital gains tax, particularly in a highly inflationary situation. It is also partly because of mounting increases in the tax and the penal rates of marginal tax on savings income. All these have combined together, and the new provision of the capital transfer tax will not take any account of any of these other measures. That is a point which no doubt we shall argue at great length and in considerable detail in the next few weeks.

Mr. John Tomlinson (Meriden)

Will the right hon. Gentleman give way?

Mr. Macmillan

No. We shall have plenty of opportunity for discussing this matter later.

I want to turn to the borrowing requirement. This is financed from the overseas sector. I accept that that does not increase the money supply. The Government have said that it is not inflationary. Unless my sums have gone very wrong, if it is not inflationary it must be leading to more unemployment, as I said it is at the beginning of my speech. If it is not leading to unemployment, financing it in this way must surely be inflationary. Perhaps those more expert in these matters will take up this point later in the debate. My hon. Friend the Member for Blaby (Mr. Lawson) put the point about the fear of and, indeed, the possibilities of unemployment as part of the anti-inflationary package with a great deal more clarity and courage than right hon. and hon. Members on the Government side of the House. However, I want to look briefly at the effect of this overseas borrowing.

This November there was nearly £3,000 million extra over the March estimate of the financial deficit of the public sector. The Budget adds another £725 million to this financial deficit, making an increase since the March estimate of £3,666 million. That is a total of £4,826 million. Of this, about £2,500 million comes from the greater cost of energy to industry. In so far as it goes to financing the public sector deficit, it is therefore, almost as though industry were being taxed to the extent of £2,500 million to finance a public sector deficit. For the rest, and for that, the Chancellor is relying on £5,000 million of borrowing from what he called the petro-dollars from the oil countries. As far as I can see, that means something over £1,000 million being apparently put to hot, short-term money in the City.

What are the safeguards that the Chancellor has got? What are the arrangements he has made, particularly now that the sterling guarantees have been removed, to ensure that in the future we are not at risk? As far as I can see, the risk in financing the public sector deficit in this way over the longer term is very considerable.

The Chancellor showed a deplorable lack of urgency in considering this matter and the whole of the petro-dollar problem. He said in his speech that he had spent a lot of time discussing it with his colleagues from other countries and that until collectively we come to terms with the challenge it presents, there is grave risk that we shall once again be plunged into a depression on a scale as great as we encountered over 40 years ago."—[OFFICIAL REPORT, 12th November 1974; Vol. 881, c. 245] But it does not seem that the Chancellor is dealing with this problem with the sense of urgency that the risk requires. That was the point made by my right hon. Friend the Member for Stafford and Stone (Mr. Fraser) when he pointed out that it did not require just a conference but rather what he called "an amicable confrontation."

As far as I can see, little has been done since the action taken by my right hon. Friend the Leader of the Opposition when he was Prime Minister. Despite the words of the Chancellor of the Duchy when he opened the debate, it was he who took the lead in trying to get a European response to the Kissinger initiative on these matters and the work initiated by Mr. Barber when he was Chancellor of the Exchequer. There seems to be little that has been done either to reach some agreement or to try to use the position of the United Kingdom as a present oil consumer and future oil producer to get a degree of stability into not only energy matters but also commodity prices and supply.

When I was Paymaster-General some time ago we had taken discussions a long way. That was nearly a year ago. But where have they gone since then? Where have we gone in discussing with the oil producers and our European partners the question of investment in their own countries and development in the Arab countries, which now cannot consume goods because of shortages of population, lack of irrigation and so on? Where have we gone in discussing the development there of a broader industrial base and the development of agriculture in the Third World, which must rely almost wholly on Arab money?

At Question Time today I heard that we are to have a debate on aid. But aid has no reality because we do not have the money to give aid. All that we can do is to join with our European partners in trying to channel some of the Arab surpluses to help some of the developing countries. What are we doing to channel these petro-dollars into these purposes and for longer-term investment, perhaps by a European institution?

There is a great lack of urgency here. In the whole of the Chancellor's Budget speech, and the speeches made by his colleagues, there has been no real attempt to bring home in the United Kingdom a sense of the dangers which confront us. There is the danger of depending on Arab money to keep control of our money supply—control which was initiated in the measures of 17th December 1973 by Mr. Barber. There are the dangers inherent in the enormous debt which is likely to arise overseas if we do succeed in keeping control of our money supply by keeping the Arab money, as my hon. Friend the Member for Cirencester and Tewkesbury (Mr. Ridley) pointed out last night.

I do not think that we have had any sense of urgency as to what is required from the people of this country and of this Parliament. We do not contemplate enough the dangers of devaluation and the value of the pound. The Chancellor of the Duchy referred to the coming recession—the admitted recession—in the United States. The dollar premium is still at over 50 per cent. so that those who can get them would rather hold dollars in the United States in a recession than they would hold pounds in the United Kingdom now.

We cannot expect the Budget to solve these problems. We can, however, as one hon. Member said, expect it to state the parameters and to give the fullest possible detail of the actions the Government are likely to take. The Chancellor has failed to do that. His March Budget was a wholly political instrument. This one is perhaps half political, full of half truths with half his policies still concealed. My right hon. and hon. Friends and I may have to accept that this half a loaf is better than no bread at all, but I believe that the Chancellor stands condemned not only for what he has done in the past but for that which he has left unsaid and undone in this Budget.

5.51 p.m.

Mr. Robin Corbett (Hemel Hempstead)

Thank you for enabling me to make my maiden speech on a busy and important day, Mr. Speaker.

I hope that the right hon. Member for Farnham (Mr. Macmillan) will forgive me if I do not take up the points he was making. My predecessor served the House and the constituency for 15 years and it is right that I should pay tribute to that. There is a tradition in the constituency of long serving Members of Parliament, and that is one I hope I shall continue.

The constituency of Hemel Hempstead is 25 miles north of London and takes its name from the new town, but it includes the towns of Berkhampstead and Tring and several large villages. These have a tradition of independence that one quickly learns to respect, and it is right that this should be so. The new town is pleasant, well-planned and thriving, but it is one of the few remaining areas which yet retains a latter-day feudal baron in the shape of the Commission for the New Towns. The development corporation and, from 1962, the commission did a good job in developing Hemel Hempstead and expanding the town, especially in the provision of good quality housing and schools, but it has outstayed its welcome.

It is a feudal body because it is unelected and undemocratic, and it is unresponsive to local opinion as expressed in local elections. Councils come and go but the commission seemingly goes on for ever. It surely cannot be right 27 years after development first began that the Commission for the New Towns should still sit as unelected landlord of 10,000 homes, about 3,000 more than are owned by the local authority.

This is surely a travesty of local democracy, and my right hon. Friends with responsibilities for these matters should know that I have been sent here to help to untie these chains as speedily as possible, with housing and housing allocation handed over to the elected local council as a first step.

It was, indeed, the intention of the New Towns Act 1946 that this should happen. The commision admit that it now owns no major areas of land which are available for housing, and therefore there can be no reasonable remaining arguments to justify the continued occupancy by the commission of an area of responsibility which rightly belongs to the elected local authority.

There is much talk in this House of devolution to Cardiff and Edinburgh. My constituents in the new town are more concerned about devolution from the Commission for the New Towns to the Dacorum District Council because democracy begins on people's front doorsteps. I can give two instances of the lack of responsiveness by the commission. Earlier this year the Dacorum District Council decided to put all its tenancies into the joint names of husband and wife. When the commission was invited to do this it dithered and dallied and when pressed in effect said "I will have to ask my dad in London".

Last year, behind the back of the locally-elected council, the commission, seemingly on instructions from London, put up for auction older homes which it said it no longer required. It did so without any consultation with the local authority and with apparently little thought for the 4,000 people in the local authority's waiting list.

These are some of the reasons why the transfer of housing and housing allocation is so important, and why it should contain adequate safeguards for the existing staff of the commission. This transfer would let in democracy and would help to streamline administration. It might reduce costs by avoiding duplication between the commission and the council.

There is one other local matter to which I must refer. We urgently need a new district hospital. It has been talked about for 10 years and it is now time the talking stopped and the bricks and mortar were laid. Our existing hospital is inadequate and out of date for a new town, especially in its facilities for elderly patients who are housed in so-called temporary buildings which were put up 30 years ago. No amount of care, concern or compassion from staff at all levels—and these are provided—can make up for the had conditions in which patients are ex- pected to get well and staff to work. There is an urgency about this.

I now turn to the debate. My right hon. Friend the Chancellor of his statement called us to a war on waste. I applaud that, but many of my constituents are already engaged in a war on waste because they are in low-paid jobs, because they are widows, single parents, pensioners or disabled. They have long been experts in the war on waste and out of sheer necessity. It is we here and others like us who are the lucky ones because we have a standard of living which gives us some choice about what we would like to cut. Our concern must must be with those families who have no such choice. It is on how we collectively attend to these needs in a crisis that all of us deserve to be judged.

For this reason I hope that my right hon. Friend will consider extending family allowances to the first child of single-parent families as a first step along this road by no later than next April.

For this reason I hope that the Chancellor will find ways of putting urgently needed extra money into public transport as a means of reducing oil imports, because in large parts of my constituency the bus service is non-existent. The only way to get to work and to shop is by car.

The disabled, too, need special help. I was this morning with a man who is a polio victim, living through a respirator and the help of a caring and devoted wife. His concern is that his small income, now regarded for tax purposes as unearned, although he cannot work, will be taxed under the Chancellor's proposals. Surely our crisis is not of a size which means that we must pick the pockets of the disabled. I hope, too, that thought will urgently be given to what this man, and others like him, will have to pay for the petrol that is needed for his wife to drive a specially converted van to take him out and about, and for the petrol he needs to fuel such things as his life-giving respirator.

In a big crisis it is small issues of that kind that give a Government the hall mark of compassion. In all our debates this week on the big issues of investment and resources we must not overlook the most important resource of all—people. One of our problems is that we allow an enormous waste of the human resource, by too seldom encouraging or enabling people at work to play a full part in what is going on. We must assert our belief that we shall overcome our crisis not mainly via institutions—and not for people—but with and through people.

6.0 p.m.

Mr. John Pardoe (Cornwall, North)

It is a great pleasure for me to congratulate the hon. Member for Hemel Hempstead (Mr. Corbett) on his splendidly robust and compassionate speech. His description of the Commission for the New Towns put me in mind of the Duchy of Cornwall. It seems almost exactly the same as that feudal authority under which some of my constituents labour. On the basis of the hon. Gentleman's speech, we look forward to further contributions of a similarly robust nature.

The Chancellor of the Duchy of Lancaster did not pull his punches in his description of the economic crisis facing us and the world as a whole. He looked to the dangers of world slump, and spoke again of the need for international co-operation. We have heard him on the subject before, and we all support his endeavours to get far more international co-operation to deal with the international nature of the crisis. In view of the right hon. Gentleman's remarks and my own feelings about the nature of the world economic crisis, I think that this is no time for any of us to consider leaving that one international organisation, the EEC, which can perhaps develop some kind of cohesion to deal with the problems we face. We are certainly not likely to deal with them on our own. Nevertheless, some of the problems we face can be solved here in our island by our own action, and it is at some of these problems that I want to look briefly.

I accept that the Government's domestic inheritance was appalling. When we look at the borrowing requirement, the public sector deficit, the subsidies for nationalised industries, the rate of inflation, or what happened to social unity under the Conservative Government, we see that that Government made matters worse. None of the long-term problems of Britain's economy, of which the Leader of the Opposition was certainly aware before he came to power, were made any better by that Government.

I was amazed by the speech of the right hon. Member for Finchley (Mrs. Thatcher). One would never think from that speech that the Conservative Government had had any borrowing requirement. One would think that they had balanced the books completely on the domestic scene and on the international front. In fact, they increased the borrowing requirement recklessly and dangerously, and they were warned at every stage that they were doing so.

Listening to the right hon. Lady's speech, one might have been forgiven for wondering whether the Conservative Government had ever subsidised nationalised industries. They did so to a ruinous extent. Conservative Members, including the right hon. Lady, might read the OFFICIAL REPORT Of our debate on Second Reading of the Statutory Corporations (Financial Provisions) Bill on 21st November last year. Not one Conservative Member, not even a single rebel, could be found to join my right hon. and hon. Friends and me in the Lobby to oppose the ruinous nature of that Bill, which contained provisions not only to pay for the past subsidies to nationalised industries but to allow them to continue to make massive losses.

It might have been thought from the right hon. Lady's speech that at the last election the Conservative Party stood firm for a statutory incomes policy. It did no such thing. What penalties is the right hon. Lady talking of imposing on nationalised industries that break the social contract guidelines? I did not know that any such penalties were threatened by the Conservative Party at the last election. They were certainly not in its manifesto. And who set up the price controls and the attendant bureaucracy if it was not the Conservative Government?

Before I deal with the Chancellor's Budget strategy, I want to speak about three of the motions on which there are likely to be votes. The first is No. 15, concerning the repayment of tax to trade unions. I shall not rehearse the arguments on the matter, because they have been rehearsed ad nauseam. We regard the motion as retrospective legislation, to which we are opposed in principle. It will be said that it is retrospective legislation in favour of the taxpayer. But it is also to the disadvantage of large numbers of other taxpayers, who will foot the bill. Therefore, there is a balance of advantage to be drawn up as between one group of taxpayers—quite a small group—and the much larger majority of taxpayers. Are we entitled to use public money to put right a problem that the trade union leaders could have avoided? I believe that we are not. We shall continue to oppose the Government on this measure.

The second motion with which I wish to deal is that concerning the investment income surcharge. The figure of £2,000 was fixed by the House on the basis of an amendment in the names of myself and my right hon. and hon. Friends which I moved on 16th July this year. I shall not repeat the arguments set out in HANSARD of that date, beginning at col. 39. I believe that they are still valid. The Government should be considering the motion in the light of what they propose for the taxation of wealth as a whole, because the wealth tax affects the issue.

I welcome the fact that there is to be a Select Committee on the wealth tax. I hope that I may be called upon to be a member. We are favourably disposed towards the idea of a wealth tax. We do not throw it out root and branch, but if it is effective it can replace almost all other forms of capital taxation. If it is an efficient revenue-raiser, an efficient distributor of wealth, it can incorporate the income surcharge. If we can do it efficiently, it is far better to tax wealth, particularly second-generation wealth, than to tax income.

The third motion with which I want to deal concerns the increase in VAT on petrol. I welcome the Chancellor's energy conservation proposals. He and I had something of an up-and-downer on television during the election campaign on the Government's failure to conserve energy and the enormous sums they were having to borrow to finance our energy imports. Last month's trade deficit of £440 million included £330 million for petroleum and petroleum products. Oil is clearly an immensly important factor in our whole balance of payments situation.

My first question to the Government is this: will the petrol tax cut consumption? The Government have not argued that it will, and they did not argue it the last time the tax was increased, but that is certainly the aim I want to see first and foremost in their mind. Has the tax cut consumption? Immediately after the energy crisis in October 1973, when the price of petrol increased significantly—four-star petrol cost about 36p a gallon in those halcyon days—petrol consumption in this country fell by between 5 per cent. and 6 per cent. Despite the fact that prices continued to rise at various stages, either by tax or other factors, the actual level of consumption is now about 2 per cent. below what it was before the energy crisis. That is not a substantial saving.

What studies have the Government undertaken? The Rand Corporation undertook, on behalf of the United States Government, some detailed calculations as to how an increase in the price of petrol might cut consumption. I do not suggest that the American scene is similar to that in Britain for there is far greater waste of petrol in the United States than there is here largely because of their general use of much larger motor cars.

How much of our oil imports is taken up by petrol? I believe the figure is only 8 per cent. Therefore, even if we could cut it by half, we would cut our total oil imports by only 4 per cent.—not a great deal. If the tax rise will not cut consumption, is it for other reasons acceptable? I do not believe that it is.

The Government are saying that the price rise for four-star petrol will amount to 8½p per gallon. I have searched, but I have been unable to find any Government statement of what they expect other forces to do to the price of petrol in the next few months. It seems likely that when the November crude oil increase is taken into account, the oil companies will have made a case for at least 2p a gallon, and possibly as much as 4p a gallon. If the Government then want to put the whole crude oil increase on to petrol rather than 'on to industrial oils, we could face an increase in the price of petrol, over and above the price of 8½p, of between 7p and 10p before Christmas. That would be a substantial increase if the two are to be joined together and the Government must convince us that it will cut total consumption of petrol.

In the rural areas the problem is considerable because there is no rural transport. The great majority of my constituents have less public transport connections between villages and towns than their fathers and grandfathers enjoyed one hundred years ago. We know that local authorities still face a tight squeeze on their expenditure programmes. They can only squeeze in those parts of the programmes which they are not statutorily obliged to carry out. The subsidy to rural buses is one of those parts. It is highly likely that for that reason rural buses will be cut. Therefore, in the rural areas we can look forward to fewer bus services rather than more in the next few years.

As for incentives to work, the gap between take-home pay and supplementary benefit in Cornwall, Wales and Scotland and some regions of England is already very narrow and will be narrowed even further by reason of the tax and the increase in petrol prices which is to come.

How are Members of Parliament to answer questions put to them on this topic by constituents? Only last week one of my constituents told me that when he worked out the cost of driving 20 miles to the place to which he had to travel to obtain work he was virtually no better off than if he were not working at all. It is a difficult question for one to answer. I know what answer I should give to such a person in mathematical and accountancy terms, but it is hardly the sort of moral advice I want to give. We should certainly take into account the disincentive effect of the tax for such people.

If the increase in petrol prices will not cut the consumption of petrol very much there are perhaps other ways to cut consumption. We might subsume the road fund tax in a petrol tax but bring in an extra tax on cars with larger engines. This would have to be done over a three or four-year period so as not to wreck the whole pattern of production in the British motor industry. I am thinking of a figure of about £200 on cars with larger engines.

In the developing areas the Government, if they want to go ahead with the petrol tax, could do one of two things. They could either allow firms to pass on at least part of the regional employment premium to their employees as a getting-to-work grant tax free, or alternatively they could allow those employees to claim the cost of getting to work as a tax-free allowance, which they would then have to justify to the Inland Revenue. Although the people in industrial areas have to drive to work, as do people in rural areas, it is in the rural areas where they have no alternative. Furthermore, it is in the rural areas, and particularly in the development areas, where the gap between take-home pay and supplementary benefit is narrow enough to have to worry about the effect of petrol price on the work incentive.

The Chancellor's strategy can be summed up in words he himself uttered in his speech. He said: Moreover, 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, as Mr. Jack Jones pointed out in a powerful speech the other day."—[OFFICIAL REPORT, 12th November 1974: Vol. 881, c. 249.] This is the second time in ten years that a Labour Government have espoused unemployment as an instrument of economic policy. On this basis the Government have no alternative to higher unemployment because they reject the only alternative strategy—namely, direct action effectively to curb excessive income increases.

I believe the alternative strategy which the Government should adopt is as follows: first, we must change the wage determination basis. We do not do that by putting trade union leaders in gaol. The incredible thing is that the 1966–70 Labour Government and the 1970–74 Conservative Government decided that they wanted to change the wage determination basis and reform the trade unions and industrial relations. They said to themselves, "Where can we find a country whose industrial relations are worse than ours and which loses more working days per 1,000 employees than we do?" Their answer was the United States, so they said, "Let us go to the United States and import their legislation here." And that is what they did.

My hon. Friends and I, however, have asked a rather different question: "Where can we find a country that does not suffer from these appalling industrial relations and from this extraordinary monopoly power which rigs the whole wage determination process? "The answer is West Germany. Therefore, let us import some of the German industrial democratic legislation here. That is the basis of our industrial partnership. It includes co-ownership and profit sharing because it will make profits desirable and will persuade people to forgo present earnings to create investment to enable profits to be made in future. They will do that only if they know they will have a share in those future profits.

We do not accept the Labour Government's extraordinary version of industrial democracy which is to extend the power of the trade unions—some of the least democratic bodies of all—by means of industrial partnership.

The second part of the strategy is the programme of indexation. I do not believe that we can fight inflation without it, and here I am in agreement with Professor Friedman. We have to take the pain out of reducing the rate of inflation by monetary correction. This was one of the reasons that we tabled an amendment to the last Finance Bill on the question of inflation accounting. I am glad that the Government have gone some way in that direction, but they have gone nothing like as far as we would like.

Thirdly, we have to bring in a programme of protection for the lower paid. I wish to take up the line of argument followed by the hon. Member for Hemel Hempstead. He and I share views on family allowances. Over the years we have been arguing from the Liberal benches that we should combine the money which is now spent on child tax allowances and that spent on family allowances and pay it all out in family allowances including the first child. It is utterly ludicrous that the money I obtain for each of my three children from the tax allowance is far greater than the money many of my constituents, who are paid well below national average earnings, get for the second or third or subsequent child through the family allowance. That is a disgrace.

I hope that the Government will look again at the whole question of a tax credit scheme because it would be a development of this rather simple reform and would enable us to do it on a much more comprehensive scale.

The Government want an effective prices and incomes policy. We want it. We believe that an effective prices and incomes policy is the price we have to pay for full employment. The Government now accept that to make the social contract effective sanctions are required, so they are proposing to use price controls to enforce pay controls. This is a similar system to the "Serisette" suggested in France and similar to the Liberal Party's proposal for a tax on inflation.

The purpose is to stiffen the resistance of employers to pay claims. But is it possible to do so? Many employers cannot have their resistance stiffened because they cannot afford to resist. They are so capital-intensive that they simply have to keep their equipment working and therefore will pay their employees almost anything they ask.

The only way to deal with this problem is, in our view, to impose a tax on those who cause inflation—a tax on those who beat the social contract and are, as the Secretary of State for Education and Science said in a telling phrase the other day, "cheats". What do we do about the cheats? We should tax them. The tax would be a deterrent and would work completely only if it resulted in no revenue.

I do not condemn the social contract. I hope that it will work. Nothing would please me better if it did. But I believe, as the Government now really believe, that some enforcement will be required. What if the social contract does not work? We shall have rising unemployment on a massive scale, and we had better prepare for it.

For that reason, I join the Chancellor of the Exchequer in being somewhat puzzled by the present unemployment figures. We need to know how much of it really is unemployment—how many people are in the queue for work—and remove the rest from our calculations of demand management. We should not remove them from our compassion or social care, but for the better management of the economy we need an investigation to solve the puzzle of unemployment which the Chancellor spelled out.