BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 16 April 1975 vol 890 cc449-584

3.44 p.m.

Mr. J. Enoch Powell (Down, South)

On a point of order, Mr. Speaker. I have no wish to detain the House, but I should like to raise with you a point of order arising on the rubric on the Order Paper which appears for the first time today to the motion which is before the House.

The point is not a simple one, and I suggest that you, Sir, might think it right to consider it and perhaps give a ruling on it either today or at some convenient time.

The point is that the rubric states that the motion relative to procedure—I am selecting the words with which I am concerned— will be decided forthwith, pursuant to Standing Order No. 94. My submission is that terms of Standing Order No. 94 do not and are not intended to, cover type of motion which is headed "Procedure" on the Order Paper. That is a motion for waiving the normal procedure of the House an is not one of the Ways and Means Resolutions on which a Bill is to be brought in for imposing, renewing, varying or repealing a charge upon the people.

I am aware that there is a precedent for this rubric being attached to the motion. However, I submit that a rubric in itself not only has no authority but creates no precedent, Nor would a precedent be created by the mere fact that in a previous year no hon. Member had risen or been called to speak on this motion.

Therefore, my submission is that this motion is debatable, that the Standing Order does not, in fact, apply to it and, I should ad, that, where a question arises of the normal procedure of the House being waived or altered, if a motion to do so is not abatable, it requires a specific standing Order which clearly makes that type or motion not dabatable before the House would renounce its right to debate it.

I hope that I have made the point sufficiently clear. I respectfully ask you. Mr. Speaker, at a convenient time, to rule upon the point.

Mr. Speaker

I am obliged to the right hon. Gentleman. Knowledge that he was going to raise the point of order did not reach me until Question Time. Therefore, I have not had time to consider it properly. I will rule upon it at a later stage, probably tomorrow.

3.47 p.m.

Sir Geoffrey Howe (Surrey, East)

I should have liked to begin by following the example of my right hon. Friend the Member for Finchley (Mrs. Thatcher), had the Chancellor been present when I rose to my feet, by congratulating him at least on the manner of his presentation of his Budget Statement. But I confess that there is very little else on which I should find myself able to congratulate the right hon. Gentleman.

The House will have noticed that, according to Press reports, the Chancellor sustained himself as he presented his Budget Statement not with whisky or gin, nor even with orangeade, the liquid that sustained Sir Stafford Cripps in similar circumstances, the man from whom the Chancellor seems to have borrowed most of his austere and least agreeable ideas.

Mr. Patrick Cormack (Staffordshire, South-West)

The Chancellor has a sense of humour.

Sir G. Howe

I should not have been surprised if many people, after hearing yesterday's performance, had called out. "Come back, Stafford Cripps. All is forgiven."It is small wonder that the Chancellor needed to sustain himself, again according to the Press, on brandy, which is renowned not so much as a beverage as for its medicinal effects. The Chancellor may have appreciated the medicine which he consumed yesterday. The British people certainly do not.

I do not seek to conceal the gravity of Britain's economic condition. I only wish that the Chancellor and his friends had been one half as candid 14 months ago as he was yesterday.

Our economy is often said to be suffering from the English disease. That disease has many symptoms, to some of which the Chancellor referred: a very high temperature, inflation running at 20 per cent.; a disturbingly low blood pressure, unemployment rising to 1 million; with symptoms of mental derangement, known colloquially as "Bennery"; contained within a straitjacket of controls and restrictions imposed by Governments and by some elements in the trade union movement; suffering from chronic overweight in the form of bloated public expenditure; and supported by crutches in the form of loans from overseas, or, to borrow one of the many utterances of the Chancellor which he must later have come to regret, "begging baksheesh from the Arabs".

Of course, the conditions that I have described call for treatment which cannot be mild. The treatment must indeed be tough. But it must also be right. Indeed, the British people have to face up to the fact that changes in world conditions have cut our standard of living in real terms, as the Chancellor said, by 4 per cent. But if the British people have to face up to that fact, then so must their Government. It is that which this Government have entirely failed to do.

That is the case against the Chancellor. He presents himself, as I see him, as a Jekyll and Hyde Chancellor. His diagnosis yesterday showed much of the skill and courage which would have been deployed by Dr. Jekyll but the way in which he chose to administer his prescription showed a great deal of the brutality of Mr. Hyde.

I would ask the House for a moment to look at the Chancellor's competence in one important respect. He spoke about his bitter experience of the last year. I take only one example. On 24th September last year, he was reported as saying, If the social contract is observed, we can get inflation down to 10 per cent. by the end of next year. I leave on one side, to deal with later, his reference to 8–4 per cent., but in that respect we now hear from him that his best hope, again if everything goes right by the end of the year, is 12 per cent. to 16 per cent.

Let us look again at his assessment of the public sector borrowing requirement —a curious saga of forecasting. In March he set out to restrict the public sector borrowing requirement to £2¾ billion. In May, he was still telling the CBI, I have planned a drastic cut in the public sector borrowing requirement. But by November its estimated size had doubled to £5½ billion. By then, that was not apparently enough, because the Chancellor chose to increase it to £6.3 billion, as he estimated in November. The out-turn, as he told the House yesterday, is some £7½ billion.

The Chancellor's record as a forecaster in these two important respects is sadly unimpressive. When the day comes for him to join the dole queue—I hope that that will not be too long delayed—he should have a great future as a long-range weather forecaster at the Meteorological Office. That is why he is so unwise to take so sanguine a view of his prospective public sector borrowing requirement in this Budget.

The right hon. Gentleman makes now the estimate that it should be £9 billion. But he spelled out yesterday some of the assumptions on which his optimism in that respect is based—a prospective upturn in world trade, consequent increase in exports and domestic capacity and so a net improvement in his revenue position. It is my fear that his forecast will turn out to be at least as inaccurate as it has been throughout the last 12 months. On that basis I hesitate to make any prediction as to what his public sector borrowing requirement might turn out to be, but on the evidence of his performance thus far, public expenditure is virtually out of control. If that situation continues, Britiain could well be on the brink of hyper-inflation, the very last thing that any of us wants.

And why? Because the Chancellor has failed to face up to the problem which is said to have haunted the life of Errol Flynn. The Chancellor has shown himself unwilling to reconcile his net income with his gross habits. Like so many Socialist administrations, he decides first what he is going to spend and then how he will raise the money —precisely the wrong way of setting about it. As so often before, the profligacy of a Socialist Government has to be paid for and will have to be paid for out of the net incomes of the British people. That is the result—a result which we find absolutely deplorable.

Let me look for a moment at the performance of public expenditure over the last year. When the Chancellor came to office last March, he then faced cuts which had been made, and wisely made. by the last Conservative Government, of £1,200 million. Since that time and until January of this year, according to the Public Expenditure White Paper, this Government have announced increases in public expenditure of £1,800 million and carried through unannounced changes of £2,200 million.

It is plain from those figures, and apart from any others, that the gross overspending by Government—10 per cent. up in real terms—is a deliberate consequence of this Socialist administration. The responsibility for the long-to-be-delayed cuts announced yesterday—too little in substance and too late in their effectiveness—is also that of this Socialist Government alone. But the whole pattern is something for which they must now accept responsibility—the growth in public spending and the cuts which they now in consequence have to make.

The Government, for example, are responsible for the repeal of our fair rents legislation and for the huge prospective growth of indiscriminate housing subsidies. They are responsible for the introduction of food subsidies which, after further increases taking place this year—equally wasteful—are eventually to be phased out next year with such pain. They are responsible for the huge expansion of government which is involved in the programme of nationalisation to which they are committed and which will do nothing but harm to British industry. They are responsible for the proposed establishment of new and wholly irrelevant agencies such as the National Enterprise Board, and they are responsible for the continuing and virtually uncontrolled expansion of public sector payrolls and public sector pay.

These prospective increases in public expenditure can scarcely be regarded as offset, for example, by the saving of £17 million by the cancellation of the midterm census. It is not without significance, as others will have noticed, that yesterday was the anniversary of the sinking of the "Titanic"—as my right hon. Friend said, "Steady as she sinks." But it is not in the least surprising that. this Government should have abandoned the mid-term census, reluctant no doubt to discover the rate at which passengers are emigrating from the sinking ship.

The last item which I want to mention—there are many others that I could mention—of public expenditure for which the Government are responsible is the increased cost of administration of the new taxes which they have introduced. I refer now only to the administrative costs. I pause to tell the House of the letter which I received from the Chancellor yesterday about the capital transfer tax. The House will not need to be reminded of the many defects still existing in that tax, quite apart from its principle. I submitted a memorandum setting out 50 points which should be changed in it forthwith. I was surpassed by the Law Society, which submitted a document setting out more than 80 points.

I asked the Chancellor whether he would take steps to ensure that the Ways and Means Resolutions laid before the House were sufficiently widely drawn to enable the House in proceedings on this Bill to discuss the changes which should be made in the capital transfer tax. I heard from him only yesterday, in a letter in which he said that he could not go along with the expectation which I expressed, and rejected the idea that the CTT should be open to discussion in the next Finance Bill: I have therefore decided that I will not introduce, and will not accept, amendments to the Capital Transfer Tax legislation in the coming Finance Bill. That is an absolutely disgraceful decision. It shows a characteristic reluctance to face up to the consequences of the mistakes in his execution of his own tax.

The second increased cost of tax collection and administration concerns the multi-rate VAT. I see, not to my surprise, that the trade already asserts that many more shops will be affected by this change in the nature of VAT than the 50,000 to which the Chancellor referred yesterday. Although small businesses and the self-employed will be thankful for the extension of stock appreciation relief which the Chancellor announced yesterday, that will by no means make up for the added burden of capital transfer tax on that sector, for the added horror of a multi-rate VAT, for the higher national insurance contributions—still not offset against tax—which the self-employed will pay, and for the higher standard rate of income tax.

I do not know that the House or the country have yet appreciated just how sharp has been the increase in income tax for the 13 months during which we have had to endure this Government. The standard rate of 35p in the pound, seeming so seductively like 7s. in the pound, has to be considered with the fact that earned income relief is no longer available. By the time account is taken of that, the level of income tax imposed by the Government is already running at more than the standard rate of 8s. 3d. in the pound which we inherited from the last Socialist administration in 1970. That is a measure of how far they have taken us in that direction.

Of course, the Chancellor admitted that the effective rate is much higher this year than last year because of his failure sufficiently to alter personal and other allowances even to take account of the impact of inflation. So in all these ways all the people of this country, particularly the sector of small businesses and entre- preneurs, are having to face a greatly increased tax burden. They know now, if they did not know before, that what is good for a Socialist Government is far from good for the successful expansion of free enterprise to which the Chancellor sometimes pays lip service.

The Chancellor also proposes the introduction of a 25 per cent. rate on nonessentials. Like all those who have gone down this path before him, the Chancellor has a curious idea about what are non-essentials and what are essentials. Of course, he has exempted cookers from the new range of tax, but what about such things as washing machines and refrigerators? No doubt the Chancellor's milk and butter are always kept fresh in a refrigerator of some kind, perhaps provided and paid for at No. 11 by the taxpayers. No doubt, as we see for ourselves, his clothes are always well laundered.

But what about the ordinary young married couples just setting up home, facing the difficulties of getting a house in the first place, then facing the problems of furnishing and equipping it? Has it entirely escaped his attention that 15 per cent. of the new washing machines sold each year go to newly married couples, and that 20 per cent. of new refrigerators sold each year are bought by the same people? Two newly married couples out of every five buy a refrigerator in the quarter in which they get married. Along with all the other hardships which have been imposed by his Budget, therefore, the Chancellor has in this respect set out to batter brides as well. It is an illustration of the absurdity of trying to draw a line between essentials and non-essentials, quite apart from the folly in principle of introducing an additional rate of VAT.

I turn to a different aspect of the Chancellor's approach. I have already referred to his notorious statement last September that inflation was then running at a rate of 8.4 per cent. As the facts then showed, and is now abundantly clear, that was then an attempt to mislead and deceive the British people. Either he knew the figure was misleading or he was entirely reckless whether he was or was not misleading the people. Whatever the explanation—and it can do him no credit—the Chancellor's performance in that respect brought very grave discredit, not just on himself but on his high office. The important question in this debate is how he was able to find any foundation for that deception— [Interruption.] He says that it was true, and for the purposes of that argument I acknowledge that. For that period of three months he was able for that time to put forward that figure by paying out or giving away two things in his July measures. He was able to do it by making food subsidies payable from that time onwards, and by engineering the cut from 10 per cent. to 8 per cent. in VAT.

The cost of the two measures taken then amounted to not far short of £1,000 million, not very far short of the extra taxes the Chancellor is now seeking to take back. The people should take good note of this. They are now being called upon to pay the price of the Chancellor's pre-election deception. This Budget is in large part the price the British people have to pay for re-electing a Labour Government. Still we are stuck with inflation and it is at an accelerating rate.

The House might be interested to consider two aspects of the Chancellor's approach to the problem of inflation. The first concerns monetary policy. The Prime Minister and others are fond on occasion of using the word "monetarist" as some kind of term of abuse. However, it was interesting to see yesterday that the Chancellor made his own position clear. As reported at column 279, he said, and one does not complain of this, I have aimed to keep the rate of monetary expansion firmly under control. He came back to the point at column 287, at which he said, It is my intention that the growth of money supply should continue to be contained at a level which does not fuel inflation".—[Official Report, 15th April 1975; Vol 890, c. 279–287.] In other words, the Chancellor is a self-confessed monetarist. Of course, proper monetary policy is an essential but not by itself sufficient element of economic policy, but be it noted that we are all monetarists now. Let the Prime Minister who, when it is convenient, likes to take credit for the monetary fortitude of his Chancellor, cease from now on using the word "monetarist" as a term of abuse. The Prime Minister must stop trying to have it both ways on this issue.

The Chancellor of the Exchequer (Mr. Denis Healey)

I am immensely grateful for what the right hon. and learned Gentleman said. I hope that he will confirm the views expressed by the right hon. Member for Leeds, North-East (Sir K. Joseph), the hon. Member for St. Ives (Mr. Nott) and many other members on the Opposition Front Bench, that one major cause of the inflation from which we are currently suffering was the failure of the Government of which the right hon. and learned Gentleman was a member to control money supply.

Sir G. Howe

I can understand the Chancellor trying to start a diversionary exercise. What is now under scrutiny, however, is the disastrous record and performance of this administration and of the Chancellor in particular.

Mr. Healey

The right hon. and learned Gentleman is dodging the question.

Sir G. Howe

I come now to a further point which I wish to make about the Chancellor's approach, namely, his approach to unemployment. I judge that no single Member likes to see men and women idle if such a thing can sensibly be avoided. But let the House note two things in what the Chancellor said yesterday. He said, The higher rate of inflation … When it is as high as it has recently been in this country … leads to increased unemployment and short-time working.", and he went on to point out that Unless, however, the voluntary policy achieves stricter adherence to guide lines…the consequences can only be rising unemployment'.—[Official Report, 15th April 1975; Vol. 890, c. 281–2.] In other words—and this is most important—the real long-term threat to jobs and employment now comes from rising prices. The Chancellor and I are at one on this, but it is an important message to drive home. Unemployment is the consequence of the inflation over which the Chancellor and the Government of which he is a member continue to preside.

The second point I want to make about it is that the Chancellor is now relying on unemployment as an instrument of policy, as the National Institute Economic Review pointed out the other day. He spelled out in plain language for those who could not otherwise follow it the precise terms in which he is doing so. He said, the pressure of demand in the United Kingdom will continue easing and unemployment will continue to rise for the remainder of the year … The Budget measures will reduce demand…and may be responsible for about 20,000 out of the total unemployed…this is part of the price we have to pay for inflation at current levels."—[Official Report, 15th April 1975 Vol. 890, c. 320.] He also spelled out the situation—not the present situation but that which might arise in the future—in which he would be prepared to increase employment once our inflation rate had settled down to the international average. Therefore, let us have no more deception about this, whether from the Chancellor or from the Prime Minister.

I turn to the problem of inflation. The disastrous figures speak for themselves. The Chancellor made a most important statement and a plain admission about this towards the end of his speech yesterday afternoon, when he said, in this situation the key to our immediate success is the rate of inflation inside Britain, and it is our failure here which is responsible for the special severity of this Budget."—[Official Report, 15th April 1975; Vol. 890, c. 321.] There is a frank admission, which the British people should note—that it is the failure of this Government's policy and of the Government that is responsible for the special severity of this Budget.

The right hon. Gentleman had explained earlier why the policies had failed. He said, the general rate of pay increases has been well above the increase in the cost of living…rates of increase which ought to have been exceptional have been applied to others who have no such justification."—[Official Report, 15th April 1975; Vol. 890, c. 280–1.] He made plain the impact on public sector spending when he said. The main reason for this increase is that incomes financed by the public sector are rising faster than present rates of inflation ".—[Official Report, 15th April 1975;890, c. 285.] That is the reality, that inflation is being fed by wage inflation. The gross expansion of the public sector is being fed and brought about in the same way.

Mr. Frank Tomney (Hammersmith, North)

The speeches of the last two days have destroyed the Keynesian theory of expansion—the theory that one can spend one's way out of any situation. One cannot do so when one is the only customer. That has been proved conclusively. Every Chancellor in the past 15 years has been in difficulties because of the same kind of theory. From now on every Government had better look at precisely where we are going in regard to internal marketing and internal disposable incomes.

Sir G. Howe

The hon. Gentleman is absolutely right. I am grateful for his intervention. The message he underlines is that it is not possible for this Government, any more than for any other Government, to spend their way out of trouble and out of inflation. On the contrary, this Government's still-expanding expenditure policies have been feeding the growth of inflation. That is the important point that the hon. Gentleman makes.

That is why there are two things that seem to me to be urgently necessary. First, we must establish that which we do not have, machinery for the tighter control of local government expenditure. We need something that is much more effective in establishing clear cash limits to the growth of local government budgets. I have little confidence in the potency of the body to be set up under the Secretary of State for the Environment, a kind of soviet of mayors and mandarins. That will do no more than reproduce the existing machinery for the review of the rate support grant. We need a far more fundamental appraisal of how we are to keep a check on the growth of local government spending.

The second thing which follows with equal certainty is that the Government should now show a willingness to consider cash control of public sector budgets. We must all be beginning to realise that, in the management and measurement of central Government spending, "funny money" has just about had its day. Whitehall must be prepared in one way or another to consider accepting the same kind of cash disciplines and controls as any individual must accept over his ordinary budgets, and as any private enterprise organisation must accept over its budgets. Without that. we shall not find the means to secure effective control of Government expenditure.

What is necessary above all is for the whole Government to accept that the social contract, upon which they placed such high hopes, has already turned out to be what the Secretary of State for Education and Science forecast it could turn out to be. The social contract is a busted flush. As the Chancellor has made plain. it has been widely ignored. That has been the cause of the disastrous situation in which he finds himself.

What is more, even if the social contract had been complied with, it would have been inadequate for its purpose. The Chancellor is fond of dilating on the inflationary effect of threshold agreements, but the social contract, in the way in which it works, is a great deal worse. Len Murray spelled it out in what he said last night in comment on the Budget, and Alan Fisher said much the same on the radio this morning. I quote from a report of what Mr. Murray said, spelling out what the taxation increases would mean for wage bargaining. He said, If prices go up, then people are entitled to claim increased wages to that extent to protect their living standards…It would be more than could be expected for people not to say that if prices go up they should expect more money. On that analysis, the higher taxes that the Chancellor has imposed will not mop up inflation. They will just add fuel to the flames. Imposing higher taxes in that way is bound to have that destructive, counter-productive effect. The Chancellor should know that. He should have appreciated it, because he told the Labour Party Conference in October 1973, There are limits beyond which ordinary people will not accept increases in taxes without insisting on wage increases so that they maintain the living standards they think they are entitled to. The right hon. Gentleman is fond of talking about the social wage, and the TUC refers to it in its latest economic policy document. We know that the social wage has gone up by 12 per cent. in real terms, but I have heard of no pay claim that has been reduced or abated because of the size of the social wage that is incorporated in it. Talk of the social wage in this sense is no more than an attempt to camouflage the real growth of the public sector, the real burden of higher taxes that that involves. Therefore, if the social contract is to be reinstated—and, by Heaven, it needs reinstatement—as the keystone of the Government's economic policy, it must be fundamentally renegotiated at once. Then—and this is even more important—it must be observed.

The Chancellor closed with something that was presented as a lesson to us all. He pointed out in stern language, It requires only —mark the "only"— a sustained act of will to take it—"— a better road— an act of will from which no section of the community, on the shop floor, in the board room or in the home, can stand aside."—[Official Report, 15th April 1975; Vol. 890, c. 321.] The observance of good resolutions should start at home. If that act of will must be undertaken, those rules must be undertaken, those rules must be observed, first, in the places where trade union leaders meet to formulate their wage claims; secondly, in the boardrooms of the nationalised industries; and, most urgently of all, around the Cabinet table.

The Secretary of State for Education said the other day: Every member of the TUC General Council should stump the country in support of the social contract. Every individual trade unionist must accept his personal share of responsibility. The contract was agreed… in his name. The Government have kept their share of the bargain. The trade unions must not welsh on their part. When he was criticised for that, he said: I am amazed that one of my Cabinet colleagues should differ from me on this matter when it is his duty and mine to warn the country of the consequence of failure and to try to arouse people to some sense of urgency about the dangers of inflation. We all know the sad story, that of all people it was the Secretary of State for Employment who chose to repudiate his Cabinet colleagues and to say: It is economic illiteracy for anyone to talk as though the wage problem is the only problem and that other parts of the social contract are irrelevant. No one says that the wage problem is the only problem, but the Chancellor has made it crystal clear that it is the central problem, the most important one. I hope that the Chancellor, having rehearsed his stout words to the House and country, will go back to the Cabinet Room and make it crystal clear to every one of his colleagues that responsibility for compliance with the social contract, certainly in the form of the level at which public sector wages are decided, rests with them, with each departmental Minister. Let the Government, in this respect at least, accept collective responsibility for their policy.

The Chancellor sought to justify his higher taxes by saying that the nation had been breaking the so-called rules and so he set about laying a counter-inflation tax upon us all. Nothing could be more unjust. The truth is that many people have seen and will now see their real living standards being savagely cut. Many people have complied with the rules and have not pressed for higher wage settlements outside the so-called rules, about which, incidentally, they have never been consulted.

The truth is that for the most part the rule breakers are one and the same people as the rule makers. Yet all of us have to suffer, innocent along with the guilty. Where is the justice of that? Collective punishment may be a feature of the classroom. "Some of you", the Chancellor observes to the citizens of this country, "have been breaking the rules. You will all write out 1,000 lines' I will observe the social contract, when I can find it.'".

Collective punishment is certainly a feature of totalitarian Socialist societies but collective punishment of the kind embodied in this Budget has no place whatever in our free society. That is the last of the many reasons why I call on the House to condemn this bad Budget, along with the blustering Chancellor who introduced it.

4.23 p.m.

The Chief Secretary to the Treasury (Mr. Joel Barnett)

In an article in the Daily Telegraph on Monday the Shadow Chancellor the right hon. and learned Member for Surrey, East (Sir G. Howe) told us that a Conservative Budget today could not hope to work an economic miracle". After listening to him today, the House will know what he meant.

We also heard from the right hon. Lady the Leader of the Opposition yesterday the full extent of Conservative economic policy—reduce income tax to help the higher-paid, and offset it by reducing subsidies further to hurt the lower-paid most.

However, in fairness to the right hon. and learned Gentleman, whatever economic policy was adopted today, a Conservative economic policy—if ever they find one—or an economic policy along the lines that I know some of my honourable Friends would like, a Budget similar to the one before us would still be required today. We have lived beyond our means for too long. The Budget shows the way forward to what could he a brighter economic future.

The Government's economic objectives are clear. It is essential that we bring the rate of inflation down. It is equally crucial that our balance of payments should show speedy and significant improvement. But, as the world recession bottoms out and world trade again becomes buoyant, our main purpose is to make sure that the labour is available in the right places, and that bottlenecks in the capital structure of the vital exporting industries are removed. There would be a high price for failure. Inflation would bring its own harvest of social division and tension. With the already uncomfortably large external deficit, further borrowing under imposed conditions would mean Budgets much harsher than this one.

I should like to turn immediately to the area for which I have particular responsibility and about which the right hon. and learned Gentleman had a great deal to say—public expenditure. Because of the pressure of the parliamentary timetable we have not, unfortunately, had an opportunity to debate public expenditure since the White Paper was published.

Since then we have had two reports from the Expenditure Committee—its 9th Report, "Public Expenditure, Inflation and the Balance of Payments" and the 3rd Report, on the Public Expenditure White Paper. The Committee queried how far the public will tolerate reductions in real capital expenditure upon, for example, hospitals and schools. It is pointing to the real dilemma which faces the Government, which is one of priorities in the face of limited resources.

This is what Part 1 of the White Paper on Public Expenditure sets out frankly and in detail. Resources must be made available to meet the balance of payments and for investment, to ensure the economic growth which enables us to devote resources to the public sector. In determining public expenditure priorities within the resources which remain it is inevitable that increases in one area must result in reductions elsewhere.

We therefore have to make a choice whether to give more money to social benefits or schools or hospitals. Indeed, in the very act of giving nurses, teachers and others the pay increases that most of us would consider to be both essential and long overdue, we inevitably added to the demand for funds which might otherwise be spent on improving the services concerned.

As one of my predecessors said a few years ago, we constantly face the dilemma between, on the one hand, the desire to spend more on projects and programmes close to the hearts of our supporters—and, on the other hand, the need to ensure that the totality remains at acceptable levels. He then went on to say: No one can be more conscious than those who hold my office of the perennial schizophrenia of those who always want more spending in particular, but more economy in general."—[Official Report, 7th February 1973; Vol. 850, c. 474.] I do not think I need to say more.

The 9th Report by the Expenditure Committee was published after evidence was taken from many academics and officials, all of them experts. Some of their conclusions, summarised in paragraph 19 of the report, are relevant to the circumstances of this present debate. The Committee recommended that, in managing the economy, changes in the level of public expenditure should be used only as a tool of last resort and, that the short-term demand management of the economy by fiscal means should primarily be carried out by changes in taxation. It went on to say that changes in public expenditure on a planned long-term basis were acceptable.

I am encouraged to think that the measures announced in the Budget Statement yesterday meet the criteria of the Select Committee. The package represents a judgment about the proper balance to be sought in the economy. The "right" level of public expenditure must take account of economic realities, and it would be even more disrupting for the future to ignore these by maintaining levels of public expenditure that we cannot afford to pursue our aim of stable programmes.

The White Paper on Public Expenditure gave clear warning that any worsening of the economic prospect might require us to reappraise all the programmes. That necessity has now arisen.

To put the whole of the adjustment on to private consumption—that is, taxation—would require such large increases in tax as to generate further inflationary pressures.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

The right hon. Gentleman is talking about increases in public expenditure. Is he aware that the estimates for public expenditure in the Budget in March a year ago were £l4.5 billion less than the estimates which the Chancellor presented yesterday? Does he call that long-term growth, or is it out of control?

Mr. Barnett

I shall be coming to that, but may I at this stage say that I am delighted to see the hon. Gentleman back on the Opposition Front Bench.

Mr. John Nott (St. Ives)

Can the right hon. Gentleman explain why the public expenditure reductions which were announced yesterday by the Chancellor of the Exchequer should be left until the time when unemployment is even higher than it is now? If public expenditure is to be used in the counter-cyclical way which the Chief Secretary described it, one assumes that the public expenditure cuts would be used when unemployment was lower rather than higher.

Mr. Barnett

I am surprised at the hon. Gentleman. He knows that I hold him in high regard, and I should have thought he had heard and read what the Chancellor said. Most of world opinion believes that in 1976 there will be an upturn in world trade. That will be the time when the availability will be there to take advantage of it.

Sir Geoffrey Howe

The Minister has missed the point. On the Chancellor's own analysis, by the end of this year unemployment should be touching 1 million. What we are asking is whether it is credible that at that point the Government will carry through their deferred commitment to cut public spending.

Mr. Barnett

The right hon. and learned Gentleman is making a remarkable point. I do not know whether he is suggesting that we should increase public expenditure in 1976–77. It would be interesting to hear precisely what he wants, but perhaps that is asking too much, as I am sure my hon. Friends appreciate. I made the point in answer to an earlier question, and I shall return to it.

The right hon. and learned Gentleman and many of his right hon. and hon. Friends have argued that we should have started expenditure reductions in the present year, but they constantly ask for substantial increases in expenditure on everything from agriculture to defence, and the latter in particular.

Yesterday the right hon. Lady the Member for Finchley (Mrs. Thatcher), the Leader of the Opposition, criticised the Government and said that last year public expenditure had increased by 10 per cent. I assume that she took that from the table in the White Paper which shows an increase in cost terms, including the relative price effect, of 9½ per cent. What she and the right hon. and learned Member for Surrey, East have overlooked is that the increase in the previous year, on the same basis, when she was a spending Minister, was rather higher—9.9 per cent.

The fact is that when we came to office public expenditure was already rising rapidly, even after the December 1973 cuts, as a result of decisions by the previous Government—such as the decision to subsidise nationalised industry prices, which could not quickly be reversed.

At the same time, we had our own immediate objectives which we were pledged to carry out. For example, there was the immediate increase in retirement pensions to £10 for a single person and £16 for a married couple. I hope the right hon. Lady is not suggesting that we should not have done that. We know that she would have spent even more. She would have spent an additional £300 million by making increases twice a year, which most of us would very much like to do. It was inevitable, therefore, that in our first year in office there would be a big increase in expenditure. What we have done in the White Paper, and yesterday, is to adjust public expenditure to reflect our own priorities as a Government. This inevitably means that there will need to be a strict restraint on further growth of expenditure so as to keep the total within what the country can afford.

Mr. Douglas Crawford (Perth and East Perthshire)

In view of the report published on Monday by the Department of the Environment showing that the greatest area of deprivation and poverty in the United Kingdom is West Scotland, will the right hon. Gentleman relax the restraint on public expenditure in that part of the country?

Mr. Barnett

With respect, that is precisely what I mean. I should love to increase public expenditure in the hon. Gentleman's area, and in many other parts of the country, and not least in my own area, to try to improve the situation, but I have been trying to explain, and I intend to go on saying, why it is not possible.

The demands for immediate cuts ignore the disruption which can be caused by very short-term reductions in expenditure, and, while such reductions may sometimes be necessary, they ought to be avoided wherever possible. The Expenditure Committee drew attention to precisely that point in its Third Report published last Friday. It was for that reason that we decided to take action in the present year by using taxation and looking to expenditure reductions to make a contribution in the following year.

Mr. Nott

During the course of the last year public expenditure has risen by £2,797 million. I am referring to Table 3.13 in the Public Expenditure White Paper. That is after taking into account Lord Barber's cuts. Will the right hon. Gentleman please tell us why it is that the restraints which the Chancellor told us about yesterday will not come in until, in the Chancellor's words, unemployment has risen to 1 million? Why do we have to wait for public expenditure cuts until unemployment has risen to that figure? That is what we want to know.

Mr. Barnett

I am surprised at the hon. Gentleman. Does he really think it is possible to cut local government expenditure in 1975–76? The programmes have already been fixed and one can do nothing about them. There will be similar problems in other areas. It is absurd to suggest anything like this. As the Select Committee said, it would be disruptive to do it in the way suggested by the hon. Gentleman.

Mr. Michael Morris (Northampton, South)

Will the right hon. Gentleman allow local government to fix the levels of council rents as it would wish, without interference from the Government? After all, that would save a considerable amount of money.

Mr. Barnett

I find that intervention cheeky, coming as it does from a Conservative Member. I shall come to the questions of rent, subsidies, local government expenditure, and so on.

A large amount of the reductions will have to be found by local authorities cutting back the increases in their current expenditure, which in real terms has been far outstripping growth in national resources. This cannot continue, but I am only too well aware—and I hope that Conservative Members are—that it is easier said than done.

The right hon. and learned Member for Surrey, East poured scorn on the new consultative council. As my right hon. Friend said, it will provide a valuable new forum in which the Government and local authorities can consult on the development of local authority policies and expenditure and the constraints under which they will have to operate. But I am under no illusion as to what we are asking local authorities to do. The right hon. and learned Gentleman sneers at the new forum. If he knows a better way of dealing with the problem, whilst retaining local democracy, I am sure that the House will be delighted to hear it.

I hope the right hon. and learned Gentleman does not think that cash limits are an easy option. My right hon. Friend said yesterday that that is worth looking at, but that was the only alternative offered to the House by the right hon. and learned Gentleman. I hear a Conservative Member suggesting the Housing Finance Act as a means of dealing with the problem. If that is the view of the Opposition Front Bench I shall be interested to hear it.

Sir Geoffrey Howe

It is.

Mr. Barnett

I am glad to hear the right hon. and learned Gentleman say so. At least we are aware of some of the policy of the Opposition.

It will be very difficult to bring about reductions in local government expenditure, given that ratepayers want better services and lower rates. They are not so different in this respect from hon. Members. As one hon. Member put it a short while ago, Members of this House want more public expenditure in particular areas and lower taxes, and that is precisely what the right hon. and learned Gentleman and his hon. Friends seem to want.

In the next few years many demands on resources will not be able to be met. Our achievements in the social field and what we still intend to achieve show that our priorities have been right and that it is reasonable for us to ask for restraint now. We have increased pensions and family allowances. We shall be extending family allowances to the first children of one-parent families in April 1976. In April 1977 we shall be introducing our child benefits scheme. We are introducing a number of new benefits in support of the disabled.

In the fiscal field considerable progress is also being made. Inequalities in income and wealth lie at the root of our many economic and social problems. I note that in a speech made at the weekend the right hon. and learned Member for Surrey, East made the case for inequality. My hon. Friends and any one else who is worried about that speech should not be too concerned because the right hon. and learned Gentleman assured us that he accepts that all men are equal in the sight of God. That is generous of the right hon. and learned Gentleman.

Mr. Powell

Is it true?

Mr. Barnett

Of course it is true. I am glad that the right hon. Member for Down, South (Mr. Powell), the right hon. and learned Member for Surrey, East and I are all agreed at least on something. It is helpful and I am obliged.

Mr. Powell

I disagree.

Mr. Barnett

I shall leave the right hon. Gentleman to make his speech in his own way. I know that he does not agree with many of the views held by the right hon. and learned Gentleman. However, I thought that he would have agreed with that little innocent statement.

By removing the more glaring inequalities, we are entitled to ask for voluntary restraint from the community as a whole. It is more than can be said for an Opposition that seek to perpetuate the inequalities.

We have used the tax system to provide help for the blind and for single-parent families. The capital transfer tax and later the wealth tax will make a major contribution to reducing inequality. It has become reasonably clear that the Opposition do not like the capital transfer tax. However, the great majority of people in this country will see that our priorities are right. Despite the cuts in public expenditure the priorities have been preserved. These fall into two main groups. One is social security and housing, on which expenditure is already running at a much higher level than it was two or three years ago.

The other main priority area is expenditure designed to increase efficiency and output—whether through the productive investment of the nationalised industries, regional and industrial support, or manpower and training policies aimed at improving the industrial base and better use of labour in the economy—and so bring about the future growth which is needed to provide the resources on which our social and other policies must ultimately depend.

The worsening in the economic prospects means that there has to be a general scaling-down of the rate at which the various services can be developed and improved. The reductions will mean some delay in improvements which we had previously planned, particularly in new building, other than housing. But for most services, including education and health, there will still be some modest room for current expenditure to rise between this year and 1976–77.

We are making good progress in phasing out the price restraint subsidies in the nationalised industries. I am glad to note that the Expenditure Committee has endorsed this objective. We hope that these subsidies will be brought to an end by this time next year.

Given the imperative need to contain the public sector borrowing requirement, it is, however, necessary to make some reductions in the planned level of other subsidies. The largest reduction must fall on the food subsidies. [HON. MEMBERS: "Hear, hear"] I do not know why hon. Gentlemen cheer when cuts are made that will inevitably hurt ordinary people but complain when taxes are increased that will hurt those with the most.

The food subsidies programme will continue through this year at broadly its present level of about £550 million in cash terms. We have already announced our intention to start a progressive rundown of the programme in real terms, but this process will be accelerated next year. The subsidy on milk will be one of those mainly affected. We have considered the effect on the poorest families and on those to whom milk is especially important. That is why none of the reductions which we are making in public expenditure will affect the provision of free welfare milk or school milk, which is provided free for children up to the age of seven and to all children in special schools and in some other special cases.

Other families on whom reduction of food subsidies might have borne relatively heavily include many pensioners and others receiving social security benefits, especially those on supplementary benefit. But 1975 will have seen two upratings of pensions and supplementary benefits and the first increase in family allowances since 1968. In this way we shall protect most those who would otherwise have been hurt the most.

Rents have been frozen for a year, and a special subsidy is being given to moderate rent increases between now and March next year. It seems reasonable, therefore, to look to rents to make a modest real contribution to housing costs in 1976–77, and the Housing Ministers will be discussing with local authorities how this might be achieved.

Along with a small reduction in transport expenditure, the total reduction in the planned level of subsidies is £225 million at 1974 survey prices.

I hope that I have shown the care we have taken to tailor our plans to meet our essential priorities.

Mr. John Biffen (Oswestry)

The right hon. Gentleman has mentioned a number of figures which will be of considerable interest to hon. Members. May we take it that they will be included in the table which the Chancellor promised yesterday to circulate in the Official Report as reported at column 296? Can the right hon. Gentleman indicate when that is likely to be circulated, because so far it has not appeared in the Official Report?

Mr. Barnett

I am sorry about this. There are 500 copies on the table in the Library. It should have been published in the Official Report, but I gather that there was a misunderstanding in the editorial office, and I am told that arangements are being made to publish it in the Official Report tomorrow.

Mr. David Marquand (Ashfield)

My right hon. Friend is saying that the White Paper on Public Expenditure, which was produced earlier this year, is totally out of date and irrelevant. That White Paper was never debated by this House, although a firm decision was taken some years ago that when White Papers on public expenditure were produced they would always be debated in a two-day debate. Can my right hon. Friend give an assurance that this revised public expenditure plan, which he is now presenting to us piecemeal, will be debated separately from this general Budget debate?

Mr. Barnett

I would not mind being both Leader of the House and Chief Secretary, but I am not. I cannot give my hon. Friend the assurance he seeks. However, I am sure his comments will be noted in the appropriate places.

Mr. Biffen

Can the right hon. Gentleman confirm that of the £900 million expenditure reductions at 1974 survey prices, about £450 million are either current expenditure on goods and services or other transfer payments and that, therefore, there are no administrative reasons whatever, other than political will, why those expenditure cuts should not be made now rather than later when there will be 1 million unemployed?

Mr. Barnett

When the hon. Gentleman has an opportunity to see the list he will realise that it will be extremely difficult to make those cuts in 1975–76.

It is still true that the reductions will result in deferment of many projects of real value. But it would be dangerous for this reason simply to go on as we are and let the demands on our resources build up to an unmanageable level. If we did not take action now to scale down our expenditure plans in an orderly way, we would be confronted later with just the kind of need for crash action which the Expenditure Committee condemned as undesirable. This could damage the public services in a way in which our proposals do not. It is much better to take timely action now than to be driven to worse measures later.

Regretfully, I must also give a clear warning that looking beyond 1976–77 there will at best be only very restricted room, if any, for overall growth in public expenditure. It would be pleasant to be optimistic and to plan for a faster growth of expenditure after this year. But, given the record since the end of the war, it would be folly to plan to spend more before we see that we have actually earned it. In any event, much of our future growth is already preempted for a reduction in our balance of payments deficit, industrial investment and essential social expenditure. One of the problems to which my right hon. Friend drew attention yesterday is that at present rates of inflation public expenditure is growing faster than public sector receipts; and this, in turn, inflates the borrowing requirement to unacceptable levels. That is why we have set ourselves the target of a reduction of over £1 billion this year and about £3 billion next.

As ever, economists differ in their analysis and their solutions. There are some who argue that the public sector deficit—or surplus—and the public sector borrowing requirement are both fairly artificial balances, and that what matters is whether the tax and expenditure decisions incorporated in a Budget are right in terms of their intended effects on output, prices and external balance. But these economists would certainly agree that, in present circumstances, the desired switch in the allocation of resources must have its financial counterpart in a reduction in the public sector deficit.

Exponents of the "New Cambridge" doctrine contend that the size of the public sector deficit is the key variable in economic management, since it determines the size of the external deficit, which in turn has far reaching implications for growth and employment. But again, economists of this school willingly accept that the object of the exercise is to produce a desired pattern of resource allocation, not just the pursuit of arcane financial shibboleths.

Monetarists see the main danger as a big public sector borrowing requirement because of its implications for the rate of growth of the money supply.

For the politician it is probably as well to assume that there is something in each of these policies. Certainly it is not usually given to a Chancellor to please them all, but today all three approaches—Keynesian, Neo-Cambridge and monetarist—point to the kind of Budget judgment and measures which my right hon. Friend outlined yesterday.

Mr. Barnett

I am always glad to please the right hon. Gentleman. However, let me hasten to add that I do not delude myself that we have satisfied everyone. Indeed, satisfying the right hon. Member for Down, South has eluded everyone—indeed, I imagine most people in Northern Ireland as well.

Mr. Powell

We all enjoyed that.

To those who feel that we have not gone far enough towards reducing the imbalance, I would say that the public sector deficit we are expecting for this year and next is not a true reflection of the underlying state of our finances. The public sector deficit when we get back to full employment on the back of the export boom which we have good reason to expect next year, will be several billions of pounds smaller than the figures we are now envisaging. The attack on our underlying financial problems made by the Chancellor yesterday represented therefore, a very substantial step forward.

Mr. David Howell (Guildford)

The Chief Secretary has just mentioned the effects of a rise in employment and a rise in exports on the public sector deficit. On that basis, will he say—I think the Chancellor made some comments on this matter yesterday—what the public sector borrowing requirement would be on a full-employment basis now? Is he able to give an estimate of that?

Mr. Barnett

Not today. If the hon. Gentleman will table a Question about it, I shall see whether I can deal with it.

On the other hand, I know that some of my hon. Friends—[An HON. MEMBER: "Where are they?"] They can rely on me to deal with the matter. They agree with it all, absolutely.

On the other hand, some of my hon. Friends would like to increase the borrowing requirement by, say, £1,000 million or more on new investment in selected industries. We are doing some of that, and I would very much like to do more. But I am bound to ask my hon. Friends—with whose money? To do this would increase not only our borrowing requirement but also our overseas deficit and our overseas borrowing requirement. When one has been borrowing nearly £4,000 million a year from someone and living beyond one's means on it, it is not easy to say "Just let me continue to borrow on this scale; this time I will use it for investment and growth". Why should they believe one? [Interruption.] I am bound to say to Opposition Members that they supported a Government who were doing precisely that.

Mr. Powell

indicated dissent.

Mr. Barnett

I excuse the right hon. Member for Down, South—from everything. But certainly that does not apply to any other right hon. or hon. Member of the Opposition. One is bound to ask: why will they not believe that this time, as in the past, one will simply consume the proceeds of the extra growth? Indeed, I know that some of my hon. Friends would do just that, for excellent social objectives. But then we should never be in a position to repay the old loans. let alone the new ones.

If we want the resources for new industrial investment—and I desperately want them—we have to make room for them by restraining our expenditure on something else. I find it rather sad, because I am a firm believer in high gearing, in substantial borrowing, and I would not have complained, nor would our creditors, if we had used the money to build up our industrial base. Tragically, that simply has not happened. We have just used it to live beyond our means. [Interruption.] The hon. Member for Lancaster (Mrs. Kellett-Bowman) should have been saying that in the last four years to her right hon. and hon. Friends.

That situation cannot go on indefinitely. To allow that to go on would be a recipe for disaster, and the Government are determined to avoid it. We cannot borrow our way out of trouble, so pay increases must be paid for by the community as a whole. In the manufacturing companies, higher wages without higher productivity will mean higher prices, fewer sales and fewer jobs. In the nationalised industries this can mean higher prices or a reduction in services. In the case of local authorities it can mean higher rates or reduction in services. In central Government it can mean higher taxation or cuts in public expenditure, or —as in the Budget we are now debating —a combination of the two.

When we are faced with such consequences, it must be obvious that the better course is moderation in pay settlements. I am only too well aware that public expenditure cuts will cause much pain. The simple truth is, of course, that there is no painless expedient available to the Government, facing as we do a rate of inflation twice the OECD average, a balance of payments deficit worth £68 a head last year for each man, woman and child in the country, a declining labour force in manufacturing, rising inflation, growing unemployment and a threatened near 10 per cent. fall in manufacturing investment. These are realities with which the whole nation must come to terms.

I felt it right to spell out our problems, but, of course. it is not all gloom. The balance of payments, for example, should show substantial improvement. Over the next year, despite difficult world trading conditions, export volumes should grow faster than imports, and real resources will continue to move into the trade balance, as they did last year. In terms of value, the £3.8 billion deficit of 1974 will come down; a fall of at least £1 billion is very likely, and the non-oil deficit will have turned into a definite surplus.

The public sector borrowing requirement amounted to about 10 per cent. of GDP last year. In 1975–76, rather than be driven upwards still further, it should maintain its percentage level, and the following year, 1976–77, the percentage should come down appreciably, on any reasonable view of the prospect. The long-term improvement of the trade balance and the related improvement of confidence abroad clearly require this action to be taken, and the action should be self-reinforcing. The stronger our economy, the better use we may make of our opportunities when the revival in world trade comes.

Investment, too, will benefit from the measures. In the period 1960–72 Britain invested on average 3.8 per cent. of GDP in manufacturing, compared to 4.9 per cent. for West Germany, 6.4 per cent. for Italy, 6.9 per cent. for France and 8–9 per cent. for Japan. The record speaks for itself. The Budget measures are part of a general strategy of moving resources into investment in vital areas of industry and also into the balance of payments. As the revival of world trade comes through, these Budget measures, and the expenditure cuts in the public sector, will ensure that the full fruits of that revival will be gained. Job prospects will be strengthened, the balance of payments will improve and the public sector borrowing requirement itself will stand to benefit as activity increases.

Unless we follow this course, it is difficult to see how our objectives can be met and how we may raise ourselves up on to a higher growth path, generating resources for the furtherance of a fairer and better society in Britain. There might be those who think that another 1972–73 style dash for reflation would serve some purpose. Few abroad will believe this, and fewer hon. Members can really think that such a policy could even be contemplated, for it would be a flight from hard reality. Even so, the Budget measures can only set the framework within which we can proceed to overcome our problems. The Budget does not absolve the nation from the vital necessity to curb inflation.

The opportunity afforded by the slackening of growth in import prices has largely been offset by rapid rises in domestic costs. The rate of price increases can still come down, as the once-for-all factors are absorbed, but only if acceleration in pay increases in avoided.

There is one lesson which must be learnt from our present besetting dilemmas. The Government cannot keep to their strategy, cannot satisfy their hopes and aspirations, keep their priorities and further the causes set out in the manifesto unless the threat of inflation is laid to rest. The country cannot afford to exhaust itself in the futile, self-defeating chase which is inflation. We have better things to do.

Perhaps I may conclude on a personal note. The Chief Secretary's job is always difficult—I do not know whether any of my predecessors are here—but when plans for improving the public service have to be postponed, it is heartbreaking. It is, indeed, sheer misery constantly to have to say "No" to expenditure that as a Socialist I desperately want. But we cannot pretend that the money is there when it clearly is not. That is the way to national bankruptcy and disaster!

I do not apologise for public expenditure. For me it means decent homes for those who will never be able to afford to buy them; it means a decent education for all our children, not just for a few whose parents can afford to buy it for them; it means a decent health service, better pensions, a better environment—a better society. For the moment the resources are just not there. This Budget is the only way to ensure they will be in the future.

5.5 p.m.

Mr. Jeremy Thorpe (Devon, North)

It is always a great pleasure to listen to the Chief Secretary. I regret that only about five backbenchers from his side and a couple of PPSs are here to listen to his speech. I do not know whether the absence of so many hon. Members is due to lack of opposition or lack of enthusiasm. In either case the absentees missed a valuable experience.

The right hon. Gentleman told us how much he is saddened. He need not be too worried if the ultimate is to be seen in the recovery of our economy. He is saying that it is a terrible thing to cut back our public sector borrowing requirement from £10,000 million to £9,000 million, but I consider it to be a great advance.

Yesterday the Chancellor of the Exchequer was brutally frank about our position as a nation, and for that the House has cause to be grateful. In considering the appalling economic position of the country there are two factors to which I shall draw attention.

First, whatever Government were in power would have had to deal with the oil deficit. The Chancellor properly called attention to the fact that in 1974 we were paying just under £3,000 million more for our oil requirements than we were in 1973. He also said that the petrodollar surplus in 1980 was likely to be $250 billion. The attempts to recycle the petrodollar surplus which have already been made in the IMF and the OECD will probably be as critical to the stability of the Western world and the oil-producing countries, as well as the oil-exporting countries, as almost any other factors in restructuring the international monetary situation. I know that the Chief Secretary is not able to listen to this part of my speech, but I think that I carry him with me. It is essential that the Chancellor should continue to take the initiative in trying to recycle the petrodollar surplus. We have made a reasonably good start but there is a long way still to go.

I wish, secondly, to refer to public sector borrowing, the process initiated by the previous Conservative administration. In the last year of the Labour Government of 1969–70 there was a surplus of income over expenditure of about £577 million. During the four years of Conservative Government public expenditure was increased, insufficient taxation was raised to pay for it and the Government had to borrow to meet the difference. In 1970–71 the borrowing requirement of the Tory Government was £840 million. In the next year it rose to £1.024 million, the year after to £2,525 million and in the final year to £4,461 million, without a whiff of oil increases.

The two greatest spenders were the right hon. Member for Finchley (Mrs. Thatcher) and the right hon. Member for Leeds, North-East (Sir K. Joseph)talk about the Rake's Progress—and the Rakess's Progress! Their departmental spending was jointly up in 1971–72 and 1972–73—both crucial years—by £2,900 million out of a total increase of £5,582 million.

We must remember that this reckless form of public sector borrowing is self-generating and goes on from year to year. Once the economy has become addicted to this drug it is difficult to wean it. It is difficult to break out of the pattern. For the right hon. and learned Member for Surrey, East (Sir G. Howe) to complain about public sector borrowing levels is Satan rebuking sin. When he was in office he would not have recognised sin if he had seen it.

Mr. David Crouch (Canterbury)

The right hon. Gentleman has referred to the expenditure incurred by Conservative Secretaries of State on education and the social services. Is the right hon. Gentleman saying, as Leader of the Liberal Party, that it was his view at the time and that it is still his view that expenditure on education and social services should be cut?

Mr. Thorpe

It will not surprise the hon. Gentleman to hear that my answer is "No" to the question which he carefully poses and puts into my mouth, but if we are to have that kind of expenditure we should not lower taxes and a party should not say "Look how splendidly we have done. We have gone on cutting taxes year after year" It is to do that and at the same time quietly step up the public sector borrowing requirement.

We reached the stage where it would have been £10,000 million this coming year if something had not been done. The purposes may have been perfectly all right. Indeed, I would have supported the majority of them—with one or two exceptions which I considered wasteful. It is the method whereby they were funded and the total dishonesty of the Tory Party to which I object. The Tories said "You see, we have cut taxes is not this marvellous?", but, whilst saying that, they were quietly continuing with interest charges for which generations to come will have to pay. The Chancellor has not been able to get anything out of hock. He is still treading the well-worn path to the pawnbroker but he has said that he will do so with a little less frequency than might otherwise have been expected.

The right hon. and learned Member for Surrey, East put forward a rather depressing speech on Tory economic policy. There was a reference to the social contract but there was no suggestion as to how a Tory Government would tackle the problem of rising prices. There was not a whiff of a suggestion about that. There was no suggestion of whether they approve of the cuts being made, and the right hon. and learned Gentleman put forward no alternatives. What is the Tory Party's view on the money supply? It is obvious that the Tory Opposition are totally without an economic policy. Perhaps in fairness to the Tory Party I should say that it seems that it has two or three economic policies and that it cannot decide which one it wants.

Mr. Nott

What would you do?

Mr. Thorpe

I shall be delighted to say what I would do about a prices and incomes policy and what I prophesy the Chancellor will do within the first six months of the Budget.

First, I turn to the Chancellor's estimate of the amount by which he will cut the public sector borrowing requirement and whether that cut will be obtainable. I hope that the right hon. Gentleman is right. As the right hon. and learned Gentleman pointed out, the Chancellor made three different estimates in 1974, and all of them have been proved wrong. It is true to say that the November figure was considerably higher than the March figure because the Chancellor had the expense that is involved in preparing for and fighting a General Election.

The point that the Chancellor made, which is one that he should continue to make to his hon. Friends below the Gangway, is that if we continue borrowing the time will come, as he shrewdly said, when conditions will have to be attached to the loans. That would mean an undermining of sovereignty far more serious than anything that happened as a result of entry into the Common Market or the signing of the Treaty of Rome. That is the way in which those who say that we can borrow our way out of economic difficulties are threatening the sovereignty of Parliament.

Yesterday the Chancellor said: So for the last six months or so the main cause of rising prices in Britain has been the scale of wage and salary increases …".— [Official Report, 15th April 1975; Vol. 890, c. 274.] We have price inflation of 20 per cent. a year and wage inflation of 25 per cent. a year, roughly double that of our neighbours. If we take the past three months of price increases and we employ what might be called the Healey Multiplier, which is not a very accurate or intellectually honest method of proceeding, to translate that three-month period into one of 12 months we have price inflation of 25.5 per cent. Further, we are seeing wage settlements very often over-topping the 30 per cent. limit. The Chancellor quite rightly said that price and wage inflation and wage and salary increases were the major threat to full employment. We must also take carefully the Prime Minister's Cardiff advice that we should not knock the social contract. I believe it fair to say that the Chancellor indicated that the contract was not operating to his total satisfaction.

Yesterday, when the Chancellor reached a certain part of the Statement, many of us felt that the promised land was in sight. The Chancellor said: The increase I am about to announce can be regarded as an anti-inflation surcharge."— [Official Report, 15th April 1975; Vol. 890, c. 317.] In fact, as I shall seek to show, it is an inflation incentive scheme. It is a 2 per cent. increase in income tax. There is no reason for it to have a more glorified name than that. It hits everyone. It hits those who have settled within the social contract. It hits those who are on low incomes and fixed incomes who pay tax. It hits those who have played no part in causing inflation, and it inflicts no greater penalties on those who have settled or will settle outside the social contract.

Why do I think it is an incentive to inflation? I believe that it is an incentive for the simple reason that the Chancellor has directed his tax proposals to put up the RPI by 2¾ per cent. When we consider the £600 million that is involved in food, housing and the nationalised industries it is clear that the proposals will add between 1.5 per cent. and 1.75 per cent. to the RPI. The real increase in the RPI is likely, in my view, to be between 4½ per cent. and 5 per cent. and not 2¾ per cent. The Chief Secretary shakes his head. I hope that he is right and that I am proved wrong.

Mr. Joel Barnett

I think that the right hon. Gentleman overlooked the fact that the public expenditure cuts will come in 1976–77.

Mr. Thorpe

Certainly, but 2¾ per cent. is the minimum likely effect when the tax changes bite. I agree that the major cuts will be deferred, but they will start and they are bound to have an effect over and above the 2¾ per cent. We can argue whether it will be 5 per cent. or 4 per cent., but it will be something appreciable. At the moment we have a rate of inflation of 20 per cent., and it is likely to increase to 22 per cent., 23 per cent. or even 25 per cent. I believe that the surcharge is a recipe for inflation in that under the terms of the social contract increased costs are specifically allowable for reclaiming by way of wage increases.

Perhaps I might give some friendly advice to Mr. Hugh Scanlon. He was totally wrong when he said on BBC 2 yesterday that wage claims outside the terms of the social contract to preserve their members' standard of living might be forced upon the trade unions. That is quite unnecessary. Any increases in the RPI can be claimed through the social contract by means of increased wages. Mr. Scanlon has nothing to worry about.

I believe that the Chancellor would be the first to agree that if the rate of inflation is between 20 per cent. and 22 per cent. and that if wage awards are between 25 per cent. and 30 per cent. and continue to overtop price inflation, a disastrous threat is posed to our competitive position. I think that the Chancellor will agree with that proposition. On that basis I ask him this question. First, how will he prevent the excessive wage increases which he has admitted have taken place in the first six months of this year and which have been a major factor in internally generated inflation? He has given us a stark warning that the unemployment figures may reach 1 million by Christmas. For all I know he may or may not agree with the TUC Economic Review that the figure could be as high as 1,250,000 in the spring. That is the view of the TUC unless, as it suggests, there is an adequate or partial degree of reflation.

Surely it is not suggested that a Labour Chancellor is using the spectre of unemployment to dissuade people from putting in massive wage increases. I cannot believe that that would be part of the philosophy of a Labour Government. But, even if it were, I do not think that it would he very effective. As the Economist pointed out on 14th December last year, to put up income tax, for example, would do nothing to reduce costs. It would put more people out of work, but not those who are getting the inflationary wage settlements, who are for the most part involved in the public sector and so feel safe. Therefore, that will not do. What will be the figure which will terrorise people so that they will moderate wage claims? To have unemployment reaching 1½ million or 2 million would be completely contrary to the Chancellor's proper ideas about retraining schemes, expanding and waiting for the upturn in world trade. Surely that is not a weapon that he would use to secure enforceability of the social contract. When we consider the number of firms which would go out of business as a result of such a policy, that surely would be economic nonsense.

What is the other weapon the Chancellor possesses? He says that he believes there will be real hopes of improvement in trade next year, and this also is the view of the Chief Secretary. One hopes that they are both right. If that happens, British industry, to be competitive, must be in a better shape than it is at the moment. It is a tenuous basis on which to set our whole economic future to say that there might be an improvement in terms of trade in the coming year. That suggestion comes at an interesting moment—a moment when a third of the Chancellor's colleagues in Cabinet are advocating a course which could lead to tariffs being put up against this country for a market in which we undertake 35 per cent. of our business, or 50 per cent. if we take into account the EFTA countries incorporated in arrangements within the Community. I do not believe that is the way forward. I believe that if there is to be an anti-inflation surcharge, it must bite—and it must not hit everybody. It has to bite those who cause inflation.

At the last election I was immoderate enough to make two prophecies. I said that the major party which lost the election would have a new leader within six months. [An HON. MEMBER: "What about yourself?"] I am an exception to many rules. Fortunately, 10th April has now passed. The second prophecy was that the Government—whatever Government were returned to office—would within six months have to introduce a prices and incomes policy, backed by statute, which in my view should be a fiscal clawback. We are moving in that direction. The Chancellor has recognised wage inflation and he has attempted to obtain a clawback through the tax system. However, what he has done is to impose a tax which hits everybody rather than the people who specifically cause inflation for the rest of the community. [An HON. MEMBER: "What's the difference?"] There is a considerable difference. Tory Members are beginning to grasp some of the basic economic principles. We shall soon see their economic principles coming to the fore.

I believe that there should be an inflation tax for those who go beyond the norm and that these matters should be tested before a relativities board. That is the only way in which excessive wage increases can be moderated. If that does not happen, the wage-price spiral will continue. I prophesy that the Chancellor will have to take such a step by the autumn. I hope that he will have the courage to do so. He will have to batter his Left wing to the ground. That is not unknown. It sometimes succeeds, as it has done on the question of Europe.

Mr. Ridley

Would the right hon. Gentleman have advocated very high national insurance contributions for the miners in February 1974, or any other group of workers who have exceeded the social contract? Does he believe that that would solve the problem?

Mr. Thorne

I do not wish to go over what happened in February 1974. [HON. MEMBERS: "Why not?] If the House wishes me to detain it on that score, I shall do so. On the day when the election date was announced by the right hon. Member for Sidcup (Mr. Heath), I spent the morning with members of the National Union of Mineworkers. I believe that the Government were involved in a totally unnecessary confrontation. It could have been referred to a relativities board without the necessity for an election, and money could have been put on the table rather on the lines of money being paid into court. If that had been done, I believe that the miners would have returned to work. However, I believe that the course then adopted was a most disastrous way of tackling that strike. In retrospect that must be the view of the Tory Party and is surely one of the reasons why it changed its leader.

If the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) is asking whether I believe that those who go beyond what the nation can afford should be surcharged through national insurance contributions, my answer is "yes".[An HON. MEMBER: "Including the miners?"] Yes, including the miners. I say that subject to two things. First, there must be a social package which looks after the low paid and which uses the credit income tax system to guarantee a minimum income in every household. That would be much more effective and a fairer way of giving social benefits. I believe that it would be the beginning of the creation of a fairer society. There is a limit to what the nation can pay itself in wage increases in any one year.

I believe that there will have to be a norm, and, in particular cases, a relativities board—a proposal which is not new to the Conservative Party because the Tories set up such a body under phase 3. Special cases could be determined by such a board. The miners in February 1974 were a special case, and, in my view, there are other key workers who are special cases. But these matters would have to be put to that board and those who go beyond the norm and who are not special cases would be surcharged on national insurance contributions.

I believe that the unions would accept such a situation provided that the Government showed that they were ruling fairly. The trade unions felt that the Conservative Government did not hold the balance fairly between both sides. I believe that if the Government ensure that they are ruling fairly, they will be entitled to support and respect. If the basis is to be that we shall introduce only conditions which the TUC or the CBI can stand and are likely to support, we might as well pack up this place and hand over the running of the country to the CBI or Transport House. I do not happen to take the same cynical view of some on the Opposition Benches. Needless to say, I am not referring to members of the Liberal Party.

There are two other matters in the Budget Statement to which I wish to refer. I believe that the Chancellor was wrong in thinking that he should be careful to avoid increases in taxation on goods save for those which were essential. He must realise that cars are essential in rural areas where there are no alternative forms of transport and where people have to use their cars for travel to work. These are often areas where the take-home pay is low, and certainly in my area there is very heavy unemployment. It is extraordinary that there should be the same flat licence on a Mini and for a Rolls-Royce. If the duty were £25 on a Mini and £75, or even £90, for a Rolls-Royce, that would discourage people from using petrol. They would have an incentive to obtain small cars, and there would be much more equity in the system. If the Chancellor had gone for a two-tier system of petrol pricing and if he had looked at the flat-rate increase, I believe that he could be said to have brought about more radicalism.

I welcome what the right hon. Gentleman did about training schemes. but I am sure the Government will agree that one problem is that there are not enough places and not enough centres. That matter will require further examination.

I am delighted about the dropping of the Census. It is good government that in one month the administration says that it is essential and in the following month it forgoes the idea. That is government at a stroke. We shall want to look at capital gains to see whether help needs to be given to small businesses, farmers and owners of historic homes. I am sorry that there is to be no amendment to capital transfer tax. There are problems in such a tax for organisations such as the United Nations, the cne-parent group, and the family disablement group, since they are not charities but since 1881 have been regarded as being in a particular category. Giving to those bodies will be greatly inhibited. I hope the Government will think again on those matters.

On the question of subsidies, the Government Front Bench may wonder why we are so enthusiastic about food subsidies being phased out. We believe that they are wasteful since they go to the rich as well as to the poor. I object to paying my taxes in order to subsidise Mr. Harry Hyams' bread. If they are to exist, I should like to see subsidies being more selective. Preferably I should like to see the system phased out and a credit income tax system phased in. This would be one of the most civilised ways of bringing in a guaranteed minimum income and of giving help to those who most need it.

I was interested in the proposals about a local authority consultative council. However, I am not over-brimming with confidence that this will change the face of local government. What is required in local government is a totally new psychology about the use of public money. The Chief Secretary told the House that if anybody had any better suggestions to make he would like to hear them. I will give him one suggestion. Let the right hon. Gentleman and his colleagues go to Liverpool and see how it is possible—without cutting standards and services but by improving the quality of expenditure and by using public money with the aid of new accounting procedures—for Liverpool's Liberal Council to come up with the idea of knocking a penny off the rates. Liverpool is the object exercise. It would also be useful since the right hon. Gentleman could see how difficult it is to introduce such reforms when there is a Labour Opposition. I think that would he useful, and I recommend it.

Mr. Crawford

Does not the right hon. Gentleman agree that the Government should go to Cumbernauld and see that its council has done exactly the same?

Mr. Thorpe

I am not my brother's keeper. I cannot say, since I have no knowledge of how the Scottish National Party is doing up there. No doubt we shall hear that.

The Chancellor says that our competitiveness as a nation depends on bringing wage and price inflation under control. That is the strategy of the Budget. However, the only measure introduced by the Chancellor is the surcharge, which hits everyone. He has virtually written off the social contract but has provided no other fiscal weapons to moderate wage increases.

I believe that one inflationary matter which we could do without is four Budgets a year and a referendum. That is too much. I do not think there will be many more referenda. However I am prepared for a second Budget provided that it enables the Chancellor to introduce a proper inflation tax to penalise those in whichever quarter who cause inflation. Otherwise the price wage spiral will continue. It will get out of control. There will be hyper-inflation, as a result of which the "banana republic" will have arrived. That is the prospect. That is why the Chancellor has our sympathy, since he has pitiably ineffective weapons with which to deal with that problem.

5.33 p.m.

Mr. Stan Thorne (Preston, South)

I do not intend to deal with what the right hon. Member for Devon, North (Mr. Thorpe) said, although I should like to answer one of his questions.

The Liberal camp in Liverpool was able to hold down rates because of the grant given by a Labour Government to a city in considerable difficulties.

Mr. Thorpe

There was a grant. An increased grant is helpful. However, other councils which have received similar grants have seen their rates go up by 20 per cent., 30 per cent. and sometimes by 50 per cent.

Mr. Thorne

I do not wish to continue with that argument. Since I live in Liverpool I have experienced the services provided there during the past 12 months. Those services are abysmally lower than they were prior to the advent of Liberal control. That is the price we have paid in Liverpool.

We are concerned with the Budget. As a backbencher with none of the expertise or prerogatives of Front Bench Members, I shall look at it in terms of past elections and the promises which we made to the electorate in the Labour Party manifesto. [Interruption.] I request the Chief Secretary not to leave, since I have something to say to him. You made a reference in your speech to—

Mr. Deputy Speaker (Mr. George Thomas)

Order. I only wish that I had made a speech, but I have not done so.

Mr. Thorne

I was referring to the Chief Secretary to the Treasury. He said that we lived beyond our means. He must admit that we did not say that to the electorate during two election campaigns when the Labour Party searched for votes. On the contrary, we made a number of policy promises to the people about how we would improve their means to enjoy life. Many of those whom I represent do not have the means to live the life which he implied they were living.

The manifesto referred to a dangerous crisis. We have heard much about that recently. It also said: We want to be frank with you. The manifesto was not frank, if we are to believe what is now said to us only a few months after the election. We were told that the heart of the manifesto was the social contract. I do not understand the social contract. I have tried to understand it and to define it. I assume that it is an agreement which exists between the two sides of industry and that there is an unwritten contract between the Government and the trade union movement. That concept is no longer valid. It is a myth. It is doubtful whether the social contract ever existed.

I suggest, probably to the annoyance of the Front Bench, that the unions did not break the social contract. Rather, it was the Government who did that.

The manifesto spoke of improving the standard of living and of preventing price increases in a range of areas. It spoke of increasing the demand in the economy to help with our employment problems and of increasing our pensions. It seems to me that that is part of the social contract. The Budget will kick a lot of that out of the window.

The Labour Party manifesto said that we would renegotiate the common agricultural policy. We have done no such thing. It said that that policy would be renegotiated to ensure that shoppers obtained supplies of food at fair prices. Front Bench Members know that we could buy cheaper food outside the Common Market. However, we have not done that. That reinforces the point which I made about the broken contract.

The manifesto, speaking of employment, refers to an extension of the public sector where it is most needed. Public expenditure will be reduced in 1976, yet we know that there are tremendous shortages of hospitals, houses and other establishments, the construction of which would provide employment opportunities for construction workers in many areas. On Merseyside, for example, there are many unemployed workers.

My hon. Friend the Member for Preston, North (Mr. Atkins) and I are pleased that according to the programme of capital spending on health services, which was revealed yesterday in response to a Question. Preston will be able to start phase one of its new hospital. However, it is clear from the details of funds to be allocated to area health authorities that many other areas must do without hospitals until some time in the future in consequence of the fact that the Preston hospital is to be built.

The story goes on. Throughout our society some chickens are coming home to roost, whilst others wait in the queue.

In the manifesto we talked about attacking family poverty and extending family allowances. We made some comment about one-parent families. Some of us remember a debate in the House not many months ago on one-parent families. The Opposition tabled an amendment to the motion, and a number of Government supporters were anxious to support that amendment because it meant that one-parent families would get an immediate increase in their incomes. We were persuaded not to do soon the basis of a firm assurance from the Treasury Bench that early action would be taken to fulfil this promise. Apparently early action" means 1st April 1976. It means, in other words, another year of poverty for many people. About 50 per cent. of all one-parent families in Britain are in the lower income bracket and have not the sort of incomes which are subject to taxation. They will be hit hardest by this decision.

Apparently, the Government find it impossible to increase corporation tax and administratively difficult to introduce a wealth tax. Now they use administration as the reason for not bringing in earlier this additional income needed by one-parent families.

The Government have also found it administratively possible to increase the annual motor tax to £40. It has been suggested that that should be changed for a lower rate of tax for smaller cars. However, it has been pointed out elsewhere that that would really mean giving opportunities to the manufacturers of Fiat cars to flood Britain with smaller cars at the expense of the British motor car industry. It seems to me that this would be a very dangerous line to take.

I am much more concerned to see to it that we use public expenditure to improve our public transport system. It is long overdue. In most areas, especially large urban areas, there is a public transport problem. It seems to me that we should be directing resources to those areas in order to prevent the continued growth in the use of private motor cars. I accept that in certain areas the motor car is vital. But it seems to me that increased taxation in this respect is not the way to bring much needed resources into the Exchequer.

The only real contribution that the Government are anxious to make at this stage seems to be by slashing food subsidies, by putting up taxes, by lifting prices and by forcing up unemployment. Time prevents my going into these matters in depth, but I feel that it is imperative to say that this is not what I fought two elections about and it is not a policy which I can commend to the people of Preston as a remedy for our present situation.

I make one last reference to the Labour manifesto. It has been mentioned in this House several times since February and October 1974. We used some grandiose words in that manifesto. We spoke of bringing about …a fundamental and irreversible shift in the balance of wealth and power in favour of working people and their families. In what way is what is proposed now by the Chancellor of the Exchequer likely to achieve that aim? In my view, it will not achieve it. The only real way to grapple with our economic problems is to get a firm grip on the multinational companies which have such a tremendous effect on our economic resources. British firms outside Britain produce more than firms in Britain export. That is the role of multinational firms. It is only when we get to grips with them, begin to control them and plan our economy on the basis of those controls that we shall make any real inroads into the problems that we face.

Socialist solutions have again been rejected by yet another Labour Chancellor of the Exchequer I suggest that already the Labour Government are on the 1964–70 road with, I predict, many of the same consequences. Unemployment will rise. It will rise among Government supporters who represent marginal constituencies. Certainly I shall take the opportunity to read The Times Educational Supplement a little more closely in the future than I have done over the past 12 months. Unemployment is not what my constituents voted for, and it is not what I can vote for on Monday when the House divides.

5.45 p.m.

Miss Harvie Anderson (Renfrewshire, East)

I shall not seek to follow the hon. Member for Preston, South (Mr. Thorne) along the tortuous path of his party's manifesto. However, there must be a good many Government supporters who share his disillusionment.

I wish to make a brief contribution to emphasise a theme which will run through a good many speeches in the coming days. This Budget will not mend our broken fortunes, because it fails to reduce our expenditure quickly enough to match our resources. Until that is done, we shall make very little headway.

The Chancellor of the Exchequer is concerned lest a wholly unacceptable level of unemployment is reached, and no Government can claim any degree of success or good government when forced to forecast 1 million unemployed.

I have a great deal of sympathy for the right hon. Gentleman in this dilemma. There is no Glaswegian of my generation who can fail to understand the tragedy of mass unemployment. Having lived through such times, it is a situation which I for one am determined to avoid to the extent of my abilities.

I recognise an effort in this Budget which will not in my view avoid the unemployment which I fear so much. It is not just the immediately obvious social consequences which I fear. It is the searing of the souls of human beings from which often there is no recovery in that generation. This Budget will not insure against that. It allows us to go on spending more than we have to spend, with the awful possibility, to which the right hon. Member for Devon, North (Mr. Thorpe) referred, that such sources of revenue as we still have may dry up or at least will have strings tied to them which may not be in the interests of the country and which will mean the loss of far more sovereignty than any membership of the EEC could ever do.

A great many people have been clobbered by this Budget, but none more so than the self-employed and those living on savings and on small fixed incomes. They are the self-sufficient. They rely on their hard work. They are a section of the community who work or who have worked a good deal harder than most other people. Already they have to contend with the burden of rates, with the vastly increased cost of transport and travel and with the general level of bureaucracy which bears heavily upon them, especially those who run their own small businesses. They also have to contend with the loss in the value of money and with much else.

These people include the wicked businessmen to whom the Treasury points one day as such and says to them the next day "Why do you not make more?". So we have self-sufficient people who cost the country very little squeezed, and in thousands of cases literally squeezed out of existence. But such people are not only self-sufficient. They are also investors—or they should be. But neither that person nor his business can invest because the Chancellor takes that which should be left for investment. Therefore, the traditional investor, whether he be an individual or a company, has neither the money nor, under this Government, the confidence to invest.

It is fashionable to say, as we have been told in the production of recent Bills, that, that being the case, the State must take the place of the private investor. Who is the State? Surely that means the taxpayer. Where does his money come from? It comes from wages, salaries and, whatever some of those below the Gangway may say, from profits. This Government have been obliged to borrow because all along, as in this Budget, they have failed to encourage industry and individuals alike who can be self-sufficient, cost the country very little and provide the badly needed sources of wealth. We should be looking to the creation of wealth, not to its destruction.

Another factor to which I wish to refer is the question of differentials. These have gone in far too many cases. They have gone largely because the social contract simply does not work. It has been broken more often than not. Yet, some of those who have remained within the social contract and lost their differentials have been penalised. There are important groups in our society today showing signs of militancy alien to their vocation. No wonder the university teachers ask the Chancellor why, when the social contract guidelines state that in general no increases should be given within 12 months of a previous main settlement, have the Government turned this into a rigid rule for university teachers when others have not been so treated? What is the Chancellor's reply to them?

As I see it, this Budget will solve nothing, though it will provide added anxiety to many. The punishment simply does not fit the crime in the sense that the crime is a dramatic and unwarranted rise in public expenditure to a point which we cannot afford.

Any housewife in the land must keep her family within the limits of what she has to spend. The Chancellor—or, to be fair to him, perhaps I should say this Government—still has that simple lesson to learn.

5.53 p.m.

Mr. David Marquand (Ashfield)

The right hon. Member for Renfrewshire, East (Miss Harvie Anderson) made some points with which I strongly agreed and others with which I strongly disagreed. However, I do not want to concentrate on what she said, if she will forgive me.

I want to return to the centre piece of the strategy outlined to us yesterday by the Chancellor of the Exchequer. I found yesterday one of the most dismal experiences I have had since I entered this House. My hon. Friend the Member for Preston, South (Mr. Thorne) said that this Budget reminded him of the mistakes made by the Labour Government between 1964 and 1970. I came into this House in 1966 full of enthusiasm for the programme on which the Labour Party fought the 1966 election. I saw those hopes destroyed in the July measures of that year. I watched with growing dismay while the Government failed to face the inevitability of devaluation between July 1966 and November 1967, and the hopes of this party ran into the sand.

I am afraid that the same kind of mistake is being made this time, only in a different area. Just as the previous Labour Government refused to face the fact that the objectives of the Labour Party could not be carried out while sticking to the dogma of the fixed parity, so this Government have failed to face the fact that the objectives of the Labour Party cannot be carried out without an effective incomes policy. Just as it was regarded as somehow wicked and unthinkable to discuss devaluation between July 1966 and November 1967. so now we are told that it is somehow wicked and unthinkable to discuss the bringing in of an effective incomes policy. I agree with the Leader of the Liberal Party that sooner or later we shall have to face that question if we are to deal with the problems facing this country—and particularly if we are to do so in a way which is acceptable to the Labour Party.

I applaud a great deal of what the Chancellor said and did yesterday. It is obviously right that, as a nation, we cannot continue to consume 5 per cent. more than we produce. It is obviously right that resources must be shifted, and shifted fast, into the balance of payments and that we must face the unpopularity and difficulty entailed by doing that.

I also applaud the fact that the Chancellor has now recognised explicitly, in a way that he did not recognise it earlier, that overwhelmingly the major cause of our balance of payments problem and the major obstacle to achieving sensible economic policy is the rate of domestically-generated inflation. I said that, if I may say so, a year ago in the debate after my right hon. Friend's first Budget. Some of us said it in other Budget debates later. I wish that the Chancellor had said it earlier. However, there is more joy in Heaven over one sinner who repenteth than over 99 just men. Therefore, I applaud the fact that my right hon. Friend is now firmly saying, it and facing some of the difficulties involved.

But although I applaud the fact that the Chancellor has now admitted that inflation is at the heart of our problems and that we cannot have any kind of sensible economic policy unless the monster of inflation is combated and defeated, I cannot accept the strategy that he seems to have adopted, or has perhaps been forced into by his colleagues, as a way of overcoming inflation.

What is the Chancellor's strategy? It consists of two elements. First, he is relying on deflation to hold the balance of payments deficit at a tolerable level until world trade improves in 1976. Secondly, he is hoping to moderate inflation in this country by relying on rising unemployment to hold down the rate of wage increases in the private sector.

I believe that this strategy has a number of serious defects, even from the point of view of whether it is likely to work.

First, what happens when world trade starts to revive, which the Chancellor expects to happen in 1976? My right hon. Friend told us that commodity prices are falling. Indeed, he hopes to reduce the rate of inflation in this country partly because world commodity prices are falling. But why are they falling? World commodity prices are falling because of the recession all over the world.

When world trade revives, if it does, and we go back to the old familiar merry-go-round, world commodity prices will start to shoot up again. On the Chancellor's own logic, we shall be faced at some time—perhaps in 1976, perhaps in 1977—with another explosion in our import costs. The Chancellor's strategy contains no answer to that dilemma.

In the second place, it is extremely dubious that rising unemployment will in fact hold down wage increases in the private sector. I have discussed this with many employers in my constituency, with the CBI, and, so far as I can, with employers in other areas. The picture that I get is very confused. In some parts of the private sector, admittedly, the rate of wage increases is being moderated by rising unemployment, but in other parts it is not. It is very dubious, to say the least, to assume that the private sector can be insulated totally from the rates of increase that we have been having recently in the public sector by means of the increase in unemployment which the Chancellor's strategy involves.

More important than that, I believe that my right hon. Friend's strategy as unfolded yesterday cannot be sustained politically. It is not very different from the strategy initiated by Lord Barber when he became Chancellor after the death of the late Iain Macleod. Lord Barber held to that strategy for a time, but when unemployment did reach the million mark, when it was no longer a question of talking about unemployment but a question of Ministers and Members having to meet deputations of unemployed workers from their constituencies and having to discuss redundancies and bankruptcies with local employers' the heat was put on that strategy. Lord Barber's nerve broke, and I believe that, in similar circumstances, my right hon. Friend's nerve will break too. I do not believe that this sort of strategy can ever be politically viable in our sort of democracy.

My next criticism of the Budget strategy is that this reliance on rising unemployment to hold down inflation holds out no hope whatever for the revival of investment, which, as my right hon. Friend rightly said, must be the key to our long-term prosperity. The most depressing and terrifying prediction in the Red Book which gives the forecasts for 1975–76 is that manufacturing investment is scheduled to fall by 10 per cent. while consumption will be held static. That is not a recipe for overcoming our long-term difficulties. Reliance on unemployment as the way of combating inflation can do nothing to solve that crucial problem.

But, lastly, I object to a reliance on unemployment most of all because I believe it to be fundamentally wasteful and irrational. What are the Government saying? They are saying, in effect, that we are so short-sighted as a nation—so selfish, so encumbered by institutional rigidities of our own making—that we cannot combine reasonably stable prices with full output. They are saying that we are forced to keep men out of work who would otherwise be employed, to keep resources unproductive which could otherwise be used, because we cannot combat inflation in a more humane, civilised and rational way. It is intolerable that we should be forced into such a position, and I do not believe that we have to be. If we have the courage and the will, there is another way of dealing with wage-induced inflation.

I accept, of course, that the situation has now reached such a point that it would be irresponsible and dishonest to pretend that harsh measures of the sort which my right hon. Friend proposed yesterday could be avoided completely. Of course they cannot. Whatever Government were in power and whatever other policies were adopted, there would have to be, as the Chief Secretary said, stringent cuts in public expenditure. We could not possibly tolerate a public sector borrowing requirement of the sort which would have happened without those cuts. I am not pretending that there is any other way out of that problem. I do, however, believe that the full rigours of my right hon. Friend's strategy could be avoided—at least to a degree—if, we were prepared to grasp the nettle of wage inflation instead of merely talking about it.

I do not say that we necessarily have to have a statutory policy—although I would infinitely prefer a statutory policy, with all its disadvantages, to the policy outlined by my right hon. Friend—but I do say that we have a policy. At the moment, we have none.

There has been a good deal of talk about breaches of the social contract. The assumption has somehow got around that it is a form of incomes policy which is being broken by wicked trade unions. But the social contract is not an incomes policy. It consists of a set of extremely fuzzy guidelines, formulated by one party only, which can be interpreted in many different ways, the execution of which depends on the negotiators themselves. It is inconceivable that such a system could effectively counter the massive pressures towards wage inflation which are to be found in our economy at present. But that is not a criticism of the unions. No one should attack them. They could not be expected to behave any differently in such a framework.

So the first thing that we have to do is redefine—or rather, to define—appropriate guidelines for future wage increases, unambiguously so that everyone can see what they are supposed to mean. We have to say what the cake is which is to be divided and say it in a way that everyone can understand. We have to do that by agreement among the employers, the unions and the Government. We cannot rely on the TUC to act as a sort of Shadow Government and do this job all by itself.

Second, there must be some impartial body to police the arrangement and to say whether a given claim is or is not within the norm which has been decided. That is the absolute minimum if we are to have an effective attack on wage inflation and yet avoid the harsh, cruel and wasteful method of high unemployment outlined by my right hon. Friend.

Mr. Norman Buchan (Renfrewshire, West)

To amplify the point, could we come back to this impartial body? In what way would my hon. Friend see this arrangement as different from previous attempts at policing through prices and incomes boards? How would it be based? Would he envisage pulling in trade unionists to help make these decisions, so that they can have an effect, on their own side, on wages and so on?

Mr. Marquand

I would be led into a very long digression if I were to answer that question in detail. I believe that the Lord George-Brown Prices and Incomes Board and the Mark I Lord George-Brown incomes policy back in 1965 and the early part of 1966 represented the best incomes policy that this country has ever had. If we had built on that, we should now be very much better off. But it would be better if I were not led into a long digression. because I do not want to speak so long as to prevent other hon. Members from speaking.

Mr. Nigel Lawson (Blaby)

What would be the sanction in the hon. Member's model if this independent body were to find a breach of the code or the norm?

Mr. Marquand

If we are to have a voluntary incomes policy, which I would prefer, and which has not been tried seriously since the July 1966 freeze, the sanction would simply be one of public opinion. At the moment there is no such sanction because no one knows whether a given claim is outside the guidelines or not. It may be that that sanction would not be effective, and perhaps such a voluntary policy would break down. In that case we would have to rely on some form of statutory sanction. I would regret that, but it might be necessary, and I would prefer it to the sort of alternative put forward by my right hon. Friend yesterday.

We have as a nation reached a very ugly crossroads in our economic history. We have, I believe, three choices before us. We can adopt the course of a full-blown siege economy, which some in the Labour movement, even if not on these benches might like. I believe that that course would spell the end of personal freedom in this country. It would ultimately lead to some form of totalitarian regime. An alternative to that which is often put forward and which finds some favour on the Opposition benches is to accept that the objective of full employment which has been propounded by every major party since the Second World War can no longer be achieved and must now be abandoned. The Keynesian revolution would have to be undone and we should have to accept that if we were to maintain reasonably stable prices there would have to be a very much higher level of unemployment than we have been used to since the war. I believe that that alternative is also unacceptable and, in the long run, incompatible with democracy and personal freedom.

The third course is to make a voluntary or statutory incomes policy—it does not really matter which—work. It is easy to say that it cannot work, that it cannot be done, and I recognise only too well that recent history shows that there are great difficulties. The alternatives, however, are intolerable, and unless this party is prepared to take that road we face disaster.

6.13 p.m.

Mr. A. G. F. Hall-Davis (Morecambe and Lonsdale)

I was very interested by the remarks of the hon. Member for Ashfield (Mr. Marquand). Like the hon. Member for Preston, South (Mr. Thorne), he struck a sombre note. I wish to comment on what he said and touch on one or two of his remarks later in the course of my speech. I believe that he was saying what we are all trying to say—many hon. Members are agreed at least on that—that we now need the one quality on which we have always prided ourselves—moderation. It is extraordinary that the British who are so moderate in their attitudes on many aspects of their personal and national life seem to have lost the ability to exercise moderation in the conduct of their collective economic affairs.

As politicians, we do not set an example in moderation. No doubt my later remarks will be held by Labour Members to illustrate just that point. One of our problems is that we politicians are more divided and more divisive than those who elect us, and that we. far from seeing it as our rôle to moderate the differences in British political life, deliberately or sometimes unintentionally have the very opposite effect, with serious consequences for the country.

Two things shone out like harbour lights on a stormy night from the Chancellor's speech yesterday. The first was that for the tax increases which we must now shoulder the country clearly has to thank the minority—and I emphasise that it is a minority—of trade union leaders who have regarded the social contract as a licence to plunder those who are over working age and as a licence to put on the dole some hundreds of thousands of wage earners—we do not know, and shall not before the end of this year, what the precise number is.

My right hon. Friend the Member for Renfrewshire, East (Miss Harvie Anderson) referred to the days when she grew up in Glasgow. I grew up in the heart of industrial Lancashire in the thirties. I never thought that I would see such indifference as now exists among a minority of trade union members towards their fellow wage earners. That indifference is a cause of very deep regret to many of us because on this occasion, whatever else has happened, the politicians of all parties have spelled out very clearly what the effect of immoderate wage settlements would be.

The Chancellor showed quite clearly in his remarks at cols. 280–281 of the Official Report yesterday that he knows what has caused his and the country's difficulties. What did not come from his speech or from the speech by the Chief Secretary this afternoon was how the Government see themselves breaking out of this cycle of high wage settlements and higher taxation.

The part of the Chancellor's speech which struck a chill into me was early in his remarks when he confirmed with all the authority of his position and the advice available to him that we have now reached the stage in the level of inflation when, far from the Chancellor being able to reduce the levels of taxation in order to ease the impact of inflation, it was now inevitable that taxes should be increased each year because of inflation. That is a double pincer movement on the living standards of many people.

There is every indication that we are now launched into a cycle not only of hyper-inflation but of rapidly escalating taxation, too. I am sure that many of my hon. Friends better qualified to pursue that theme will do so, and I do not intend to take it further.

Another point that was clear from the Chancellor's speech was that his economic strategy was based on Britain achieving a substantial increase in exports with the upsurge of world trade that the right hon. Gentleman envisages in 1976. Who are to be the architects of this export-led recovery, and what should be the attitude of the Government to them? The Chancellor is clearly relying upon private enterprise manufacturing firms. That is a fact of life and one has only to look at the composition of our exports to realise that they come overwhelmingly from the private sector. The Chancellor said yesterday at col. 287: In our present situation the most important single object of economic policy must be to improve the performance of our manufacturing industry."—[Official Report, 15th April 1975; Vol. 890, c. 287.] As the right hon. Gentleman did not attribute any reasons for this lack of performance, I would go along with those remarks.

I found the heading in Hansard significant. Perhaps someone can tell me who puts the headings in Hansard. Is it the Chancellor of the Exchequer's Parliamentary Private Secretary or the Hansard editors, or is it the result of a happy selection of suitable sub-headings for the Chancellor's speech, pinned up on a wall somewhere in the Hansard offices? The relevant sub-heading was: Government Support for the Private Sector. The Chancellor said: As regards the private sector, our general approach must be to establish an economic framework within which companies themselves have both the ability and the will to mobilise the resources available for investment. I hope this Budget will help in securing that framework."— [Official Report, 15th April 1975; Vol. 890, c. 291.] With one important amendment, I could not have said it better myself. The amendment is a word of great importance missing from the Chancellor's statement, namely, "political". I believe that, as Chancellor, the right hon. Gentleman should aim to establish a political and economic framework which will encourage private enterprise firms to have a total commitment to investment expansion and the capturing of export markets.

I have been a Member of this House for a comparatively short time. Hon. Members like myself get rather weary of stating what, in their view, is something obvious and worth while, if they think that it has little chance of convincing their colleagues, especially those on the opposite side of the House. I do not believe that the fact that one is unlikely to secure immediate success is any reason for failing to state what one believes to be important truths about the position of the country.

The country needs a non-aggression pact between the Government and the private sector—especially between the Labour Party and the private sector. What is more, the initiative must come from the Government. The best thing that the Chancellor could do to get the economy on the path of sound, export-led expansion, would be to declare, with his considerable authority—to which I pay full tribute—that, in his view, if and when the Government and the Labour Party completed the nationalisation programme which was set out in their manifesto—other aspects of which were discussed earlier—they would regard that as marking a permanent frontier between the nationalised sector and the private enterprise sector of the economy.

I risk being slightly controversial now, and am doing what I said we should avoid. I hope that this policy would manage to stop the Secretary of State for Industry padding along after private enterprise firms, rather like a wolf following a traveller along a weary and dangerous road.

Dr. Colin Phipps (Dudley, West)

Would the hon. Gentleman include in his list British Leyland and companies which found themselves in a similar position in the future?

Mr. Hall-Davis

I am happy to respond to that question. I believe that there are circumstances in which an empirical judgment must be made. I do not believe that it would have been sensible for the Conservative Government to let Rolls-Royce cease to exist as an entity as the only alternative to its being preserved by nationalisation. There will be certain situations which are outside the deliberate decisions of the Government of the day.

It is important that there should be a recognition on the part of the general public that those issues will be decided generally on their merit and not on the grounds that there is an opportunity for the party in power to forward a controversial but undeclared policy. Government would be easy if one never had to make decisions which one could not foresee and which might breach the policies on which one had obtained office. It was a fair question, and I hope that I have given a fair answer.

It is not taxation on profits which is stopping the private sector surging ahead. I hope that I shall not be blazoned in the Chief Secretary's election address at the next election for saying that. It is not taxation on profits that is stopping the private sector seizing the export opportunities which EEC membership provides.

Free depreciation, regional building grants, VAT drawback, and export credit guarantees are all favourable to investment and to exports. I believe that corporation tax is too high, but a cut of 7 per cent. or 10 per cent. in the rate would put that right. That should not be beyond the powers of a Chancellor in future years, when he is less circumscribed than he is in the present economic situation.

What restrains the private sector is uncertainty and fear of the Government's —and more particularly the broad mass of the Labour Party's—basic political attitude to private enterprise. It is the fear of death by a thousand cuts that impedes an all-out effort by the private sector, which is the exporting sector of our economy. It is the fear of a creeping extension of nationalization Labour Members may say that is remark of a dinosaur exaggeration their attitude.

Mr. Buchan

Yes.

Mr. Hall-Davies

I have listened to the hon. Gentleman's speeches on many occasions, and I am glad to see him here.

Unless politicians possess imagination, they cannot assess the image of the fine, noble intentions of their party in the minds of supporters of the other parties. There are many actions of my own party which I know were well-intentioned. The incomes policy of my right hon. Friend the Member for Sidcup (Mr. Heath) was deliberately aimed at avoiding the increase in unemployment which is now coming upon us. It was an alternative. His intention was not appreciated by his political opponents. If, as a country, we are to progress together, we must show some sensitiveness to the reactions of those who do not share our political views. We must not cause unnecessary damage because we fail to appreciate the impact of our actions.

I had planned to comment on capital transfer tax and capital gains tax, and I shall do so very shortly. Flowing from what I said earlier about giving one's political opponents at least the right to hold a philosophy different from one's own, I can well understand the reasons that have led to the Labour Party's introduction of capital transfer tax and the proposal to introduce a wealth tax. When the Government are armed—as they probably will be before the termination of this Parliament—with the three taxes, namely, a wealth tax, capital transfer tax and capital gains tax, in combination, surely they can then have sufficient confidence in their powers to reach their ultimate objectives. Surely they will not find it necessary to levy these taxes on frozen assets which are locked into small businesses and which cannot be turned into cash and enjoyed by their proprietors. At least the Chief Secretary understands what I am saying, even if he does not agree with me. If the Government arm themselves with the most potent armoury of taxation of any country in the world, they must show some forbearance in how they use it, so as not to damage the economy of the country.

I sum up by saying that I believe that the time has come for a political settlement between the Government and the private sector. We hear in great detail about détente between nations. Hon. Members will have realised that much of the tenor of my speech is that we need a national détente here in Britain. There will be no British economic miracle until the present Government and the Labour Party come to terms with the private sector. We are all looking for the reason why our economic performance has been so bad since the war. I think that one reason is that we have been unable to reach that detente, to achieve a settlement. How much better it would have been if we had had one major General Election in the period 1945–50, with all the cards on the table, and had settled this matter there and then for 25 years. Hon. Members may laugh, but is not the experience of the steel industry an object lesson to us all?

If the Government fail to establish an acceptable political agreement with the private sector, if, besides the Chancellor's economic framework, we do not have a political framework, our prospects of coming safely through the economic difficulties that we now confront will be imperilled. Strangely enough—although this is a matter that Labour Members are no doubt much better able to judge—failure to reach that settlement will imperil the future existence of the Labour Party as it is today.

Mr. Deputy Speaker

The last two speeches have taken 38 minutes. If we continue in that way, many hon. Members will be disappointed.

6.32 p.m.

Mr. John Tomlinson (Meriden)

I do not propose to spend long on the speech of the hon. Member for Morecambe and Lonsdale (Mr. Hall-Davis). It is nonsensical to pretend that difficulties in the private sector suddenly began with the advent of a Labour Government 14 months ago and that the record of private sector investment and the associated problems are connected merely with the Labour Party's alleged failure to come to an accommodation or understanding with the private sector. It is such nonsense that the matter does not need to be pursued further.

I congratulate my right hon. Friend the Chancellor of the Exchequer on a Budget which was courageous, realistic and fair. The courage of the Budget was self-evident. Nobody could ever accuse my right hon. Friend of seeking, in a Budget such as he introduced yesterday, to court political popularity.

The Budget must be viewed against the deepest economic crisis that we have seen since the war—a crisis which must be spelt out time and time again so that the understanding of it is not limited to hon. Members, and so that it is fully appreciated by those whom we represent.

Wage rates, which I believe are a major part of the economic crisis, rose over the past 12 months by 28.9 per cent. Despite the more recent drop of 1½ per cent. in the levels of earnings, earnings during the year to February 1975 rose by 33.6 per cent. It is clear from those figures that, whatever the historical causes of our inflation, a major factor—certainly not the only one—which is forcing our inflation to higher and higher levels, is the self-induced inflation coming from wages within our own economy. It is not something to blame on external factors to any significant degree.

Many of my hon. Friends are worried about the unemployment consequences about the Budget. They are right to be concerned, but our level of unemployment is running far below that of many of our competitors.

Mr. Crawford

Not in Scotland.

Mr. Dafydd Wigley (Caernarvon)

Or Wales.

Mr. Tomlinson

It is running far below that of many of our competitors—certainly those in the European Economic Community and the United States.

The only way to control unemployment is by controlling the level of inflation. In response to a question I asked him a couple of weeks ago, my right hon. Friend the Secretary of State for Employment confirmed his view that there was an inexorable increase in unemployment—something that we could not avoid if we did not get our present levels of inflation under control. I think that all hon. Members would subscribe to that view.

Therefore, my right hon. Friend the Chancellor did not have much choice in relation to unemployment. It would have happened irrespective of the measures he took in the Budget. If we had not been able to get the present self-induced inflation under control, the increase in unemployment would have happened as naturally as night follows day. I do not believe that the Budget will have a major effect on employment. I believe that the forecast levels of unemployment that my right hon. Friend produced would largely have occurred anyway. Our present level of inflation is accepted by all the economic commentators as being on average double that of our competitors.

When we examine our economic crisis, we see that the effect of inflation on our competitiveness is clear. Despite the 1974 improvement in our balance of payments, we enjoyed a standard of living 5 per cent. higher than we collectively earned. We still try to kid ourselves that we are doing better than we are. We try to hide our balance of payments deficit by splitting it up into oil and non-oil deficits, saying "Look how well we are doing on the non-oil deficit". The whole philosophy behind that approach is dangerous, because it assumes that the oil crisis is temporary, that we can ignore it and overcome it, that we have only to deal with our trading position in commodities other than oil. It is a dangerous and self-deluding process when we try to persuade ourselves that because our non-oil deficit is improving the situation is intrinsically better. The oil situation is still fraught with difficulties. I shall be convinced that it is better when oil is flowing, and at a price competitive with the rest of the oil world.

The consequences of failure to deal with the kind of problems with which my right hon. Friend has to deal would be far more disastrous for employment than the actions he has taken. If he had not dealt with the worsening balance of payments situation and the increase in the borrowing requirement—although I do not believe that he has dealt with that adequately—the loss of confidence that would have resulted would have created a tremendous vulnerability for our currency, a vulnerability which would have had consequences on employment far more dramatic than anything anyone has so far visualised in the postwar years.

I criticised my right hon. Friend's autumn Budget for not increasing taxation sufficiently and for not taking action to deal with the borrowing requirement. I acknowledge that he has taken certain steps on those matters this year, but we should not ignore the fact that the borrowing requirement is still substantially higher than the level that so many hon. Members on both sides of the House criticised in October. Further steps could have been taken to reduce it, particularly on the public sector side. I should have liked to see a devastating attack on expenditure on motorways, where there could have been vast money savings without too dramatic a consequence on employment, because the redirection of labour into other areas of construction would not have been all that difficult.

I am astounded not only by the motorway programme, with the extravagance in public expenditure that that involves, but by the number of local authorities, allegedly starved of funds to do their work, which are going through expensive programmes of minor road improvements and nonsensical jobs, such as replacing paving stones and kerb stones—jobs which to the casual observer seem to be totally unnecessary. In these areas of specific programme activity there could have been far greater savings in public expenditure.

Despite that, and despite the action my right hon. Friend has taken, I still think that Labour Members, and, I am sure, Conservative Members, will be pressing my right hon. Friend and watching him carefully in relation to the borrowing requirement, which I consider still to be at a dangerous level. When compared with many of the things that could have been done and many of the things right hon. Members have suggested should have been done, this Budget is not Draconian in its total effect. Against the scale of our problems it is not being "flip" to say that the total effect of the Budget is almost neutral.

It does not in any way solve our problems but no Budget can do that. What the Budget does is to create an atmosphere of understanding of the depth of the crisis by the effect it has on people through their personal consumption. As far as it does that it buys time. I do not believe that this House, with any Budget structure, will ever solve the economic problem. All we can do is to change the parameters within which there is a discussion of our economic problems and a collective attempt to solve them. It will be the reaction of 55 million people within the country that will decide whether we solve our economic problems.

It is in this sense, bearing in mind your remarks about the length of speeches, Mr. Deputy Speaker, that I turn briefly to what I consider is still the root of our economic situation. That is the problem of producing goods and services of a quality and at a cost over a time-scale that our people want and that people overseas are prepared to buy in sufficient quantities to pay for our essential imports. The root of our problem lies in productivity and the use we make of our investment resources, capital and human. At the moment we can criticise the detail of the Budget for not stimulating more investment but the problem starts with our inability to make efficient and effective use of existing investment. I do not think that Governments, of themselves, should be concerned with producing new investment in industry. To do that in the present situation would be achieved by increasing taxation, diverting expenditure from another area of the programme, or by a further increase in the borrowing requirement.

What we should be doing is creating an atmosphere of understanding in industrial relations so that we can get far more effective use of our existing investment in industry so that we get a profitable industrial basis and from that profitability generate the resources for new investment. That is the only way we can get the basis of industrial investment at anything like an adequate level in the private sector, for which we are alleged to have no sympathy. That is an allegation I totally reject.

I believe in the mixed economy. That means that the private sector of industry must be a profitable sector and must regenerate its future investment from profitability. At the moment we have a problem about the use of our existing investment. My hon. Friend the Member for Ashfield (Mr. Marquand) suggests we might do something by resort to an incomes policy, voluntary or statutory. The evidence of history is too much weighted against him to lead us to return to that point of view. The evidence of other incomes policies, particularly the one my hon. Friend referred to—Lord George-Brown's noble attempt back in 1964—is such that I would not urge hon. Members to be beguiled into trying to find a quick solution in something we call an incomes policy.

The problems we face today as a result of the failure of the social contract often arise from past incomes policies. The high level of public sector settlements, for example, is a reflection of the discriminatory effects of previous incomes policies against the public sector. Today's settlements are now set to work their way into the private sector and exacerbate problems that need not have arisen. We can go through each of the attempted incomes policies.

The social contract is failing and will soon be judged by many people to have failed unless there is a reversal of the trend it is following. In essence, when we come to levels of wage settlements where the vast majority of the trades unions of their own free choice decide that they want a system of free collective bargaining, we must point out to them that the consequences of that freedom, if it is exercised without due regard to all the other factors, is that the Chancellor will be forced to take the kind of budgetary decisions that were announced yesterday. The consequence of the exercise of that freedom by the trade unions may be that the Chancellor has to take counterbalancing measures.

The only alternative is to reach an agreed incomes policy. But such an incomes policy is beset with so many problems, particularly the problem of differentials at the beginning of it. Voluntarism in our industrial relations must still be the key word. We shall not get a statutory incomes policy, and an incomes policy that has no statutory basis to enforce it is no incomes policy, because it can be avoided without any difficulty. We return to free collective bargaining.

What this Budget has done is to point out to those who, rightly in their opinion. exercise their rights to free collective bargaining and decide to ask for large pay increases, that they are now faced with the consequence of their decision. Theirs will be the decision during the next 12 months—or sooner, if we have another Budget before then—collectively through their institutions to decide whether they seek to continue the present levels of wage-induced inflation, which will, of necessity, force measures upon the Chancellor unless the increases are accompanied by increases in productivity, or whether to moderate their claims voluntarily knowing that the consequence of their failure to do so may be increases in unemployment far in excess of anything my right hon. Friend visualised in his Budget.

Mr. Wyn Roberts (Conway)

What is to prevent the trade unions from taking the opposite view and saying that since the Chancellor has increased prices by 2¾per cent. and so on they should have an increase in their wages?

Mr. Tomlinson

It is that kind of view which, if put to them, will encourage them to do so. The unions have to be made to understand the contrary view, which is that they, like everyone else, have collectively enjoyed over the past 12 months a standard of living 5 per cent. in excess of that which we have collectively earned. There can be no escape from that.

The other argument which has to be developed at much greater length is how, within those cuts, we distribute the suffering that will have to come. That is why I look forward to the report of the Select Committee which is considering the wealth tax, and to other measures promised in our manifesto. More immediately, the trade unions will have to make their choice knowing full well that the continued consequence of failure to match wage increases with productivity increases will be that my right hon. Friend has no alternative but to take steps such as he took yesterday. In that sense I welcome the Budget, not as one that solves the problem but as one that brings home quite clearly to the British people the nature of the problem and the consequence of their failure collectively to solve it.

6.49 p.m.

Mr. Douglas Crawford (Perth and East Perthshire)

Last night the hon. Member for Halesowen and Stourbridge (Mr. Stokes) spoke about "this nation, England". He said that England could not survive as she was going. He talked of England's economy. Today the right hon. and learned Member for Surrey, East (Sir G. Howe) referred to the "English disease". England may or may not have a disease, but Scotland certainly does not suffer from the English disease. What the Chancellor has failed to recognise is that there is more than one economy in the United Kingdom.

I want to refer briefly to the Scottish economy. This swingeing Budget has done nothing to help the Scottish economy, which can sustain growth without overheating. However, we in Scotland will be forced willy-nilly, as we have been in the past, to pay for the profligacy of those parts of the United Kingdom that are living beyond their means.

That the Scottish economy is different from the English economy is easy to illustrate. We have higher unemployment. We have 4.7 per cent. unemployed compared to 2.2 per cent. in South-East England. The hon. Member for Meriden (Mr. Tomlinson) referred to our competitors. On looking at the OECD figures I see that in Austria unemployment is 2.2 per cent., in the Netherlands it is 3.8 per cent., in Sweden it is 1.5 per cent., and in Norway it is 0.8 per cent. We in Scotland will be happy when we get our unemployment down to those levels.

That we are different is also shown by the fact that we have lower wages. The average per capita wage in South-East England in 1972–73 was £18.94. In Scotland it was £14.28, a difference of £4–66 or 32.6 per cent. We have higher unemployment and lower wages.

Mr. Buchan

Why does the hon. Gentleman insist on comparing the situation in Scotland with that in South-East England? Why not compare Kilmacolm in my constituency with South-East England? If he does that he will get a higher figure. If he compares that with Fort Glasgow he will get a lower figure. Why not compare like with like within the regions of Scotland?

Mr. Crawford

I take the hon. Gentleman's point, but South-East England is responsible for more overheating of the economy than is Kilmacolm.

We in Scotland have a basic balance in terms of food production. It has been calculated by the National Food Survey that we have a net balance in terms of food to the value of £3 million. It is not a large amount, but at least we are in balance. England, on the other hand, has to depend upon imports for almost half her food supplies, amounting to £1,000 million per annum.

We in Scotland start from a different economic standpoint. There has been some recognition of this by the Chancellor of the Exchequer and, presumably, by the Bank of England, in permitting the Bank of Scotland to remove the provision on lending whereby Scottish banks were forbidden to lend at more than 1½per cent. up on the previous month—an increase that did not keep pace with inflation—but there has been little recognition of the Scottish problem. The cost of a bottle of whisky is up by 64p. Thousands of people are employed in the whisky industry and that will not help.

The Chancellor talks about 1 million unemployed in the United Kingdom, which is 5 per cent. to 6 per cent. The chances are that this will mean 150,000 to 170,000 in Scotland, which will be about 8 per cent. of the insured population, and in Fort Glasgow, Glasgow and the West of Scotland it will be 10 per cent. to 12 per cent.

We in the SNP do not want this and I ask Scottish Members of the two main Unionist parties, Labour and Conservative, whether they are happy with this deflationary Budget for Scotland. Are they happy with the further disincentives to invest? Are they happy that there will be fewer jobs, more unemployment and fewer incentives to invest in Scotland? Do they agree that Scotland stands on the threshold of potential fast economic growth without the risk of overheating which such fast economic growth would bring to England in general and South-East England in particular?

We can make the breakthrough, but it is England that is holding us back. We have to take medicine for an illness that we do not have. We in Scotland have been given a dose of depressive drugs when what we need is a tonic. The divergence of economic interests between England and Scotland—

Mr. Walter Clegg (North Fylde)

Which Scottish genius put the oil where it is?

Mr. Crawford

The Lord God Almighty put it there, and for that we are grateful. I note that in a recent debate the hon. Member for Ross and Cromarty (Mr. Gray) agreed that the oil was not Scottish, but British. We say that the oil is Scottish, and if the hon. Gentleman looks at the continental shelf jurisdiction order that was passed by the House in 1968 he will see that it provided that the whole area north of a certain parellel was to be administered under Scottish law.

As I was saying, the divergence of economic interests between England and Scotland is growing daily, yet with all her potential Scotland is being forced deeper and deeper into depression. We should have liked to see an end to the levy on the self-employed. The Conservative Government introduced this in 1973, but it has now been raised by the Labour Government. We should have liked to see the threshold at which CTT is levied at the lower end of the scale raised, in order to help small businesses, farms and fishermen in Scotland.

We should have liked to see a raising of the threshold at which VAT is imposed from £5,000 to £10,000, and no multi-rate VAT. Chemists, small businessmen and others in my constituency spend an inordinate amount of time calculating weekly, monthly and quarterly VAT returns.

Mr. Peter Viggers (Gosport)

Is the hon. Gentleman aware that if the Chancellor of the Exchequer had not fudged the inflation rate by reducing VAT from 10 per cent. to 8 per cent. he could not have that multi-rate VAT and he would have produced £400 million in a year extra for the economy?

Mr. Crawford

I am grateful to the hon. Gentleman for his intervention, but I am not the Chancellor of the Exchequer's keeper.

Finally, I refer to a report by the Department of the Environment showing that there was greater deprivation and poverty in the West of Scotland than anywhere else in the United Kingdom. Yet the Chancellor yesterday and the Chief Secretary today said that they could not depart from the blanket depressive drugs which have been administered to the United Kingdom economy. There is this deprivation and poverty in the West of Scotland and there is a crying need to do something about it, yet the Government have done nothing for Scotland in this Budget and I fail to see what is the policy of the major opposition party.

Mr. Tam Dalyell (West Lothian)

There is the sum of £100 million for the foundry industry, a great proportion of which is likely to come to Scotland. I do not think that the hon. Gentleman can make a blanket condemnation of Government policy.

Mr. Crawford

Is the hon. Gentleman happy with the situation in the West of Scotland? I can tell him that we in the SNP are not.

Having said that the Government had done nothing for Scotland in the Budget I went on to say that the major Opposition parties in Scotland do not seem to have any policies. It was suggested that they had several policies but could not make up their minds which one to propose. What we are doing is offering cogent reasons to show why we can have an expansionary economy without any overheating. If Scottish Labour and Conservative Members disagree, the people of Scotland will note that they are in favour of deflation, higher unemployment and lower wages.

6.58 p.m.

Mr. David Knox (Leek)

I agree with the hon. Member for Perth and East Perthshire (Mr. Crawford) that Scotland has special economic problems and has had for a number of years. But, in the same way as a healthy European and world economy is a prerequisite for a healthy British economy, so also is a healthy British economy a prerequisite for a healthy Scottish economy. There is no chance of a small country such as Scotland having a strong and healthy economy if the major country alongside her is not in a similar state.

Mr. Crawford

Is the hon. Gentleman suggesting that Norway is too small and depends on Sweden or that Sweden is too small and depends on Norway? The fact is that they are both prosperous countries.

Mr. Knox

The difference is that Scotland has been bound up with England for a long time. The Act of Union took place 250 years ago, if SNP Members did not realise that. They never listen to the debate but continue to make a lot of noise. The Act of Union took place, as I said, 250 years ago, and the effect is that the Scottish economy is to a large extent dependent on the English economy. Any idea that somehow we can divide the two and that Scotland will boom and England will not is an absurd fantasy that only people with a narrow nationalistic outlook could ever hope to believe.

I want to comment on the fact that this debate is taking place. It is generally accepted in this House and in the country at large that the British economy is in its most serious state for about 45 years, since the early 1930s. Yet, unless my memory is at fault, this is the first debate that has taken place on the general management of the economy since the November Budget last year. Therefore, it is five months since we had a major economic debate, which strikes me as being quite extraordinary. I wonder about our priorities when we plan and consider our business. I am not making a party point because both sides of the House are responsible for this situation. We cannot take a great deal of credit from it.

The Budget which the Chancellor introduced yesterday was his fourth in thirteen-and-a-half months. Four Budgets during thirteen-and-a-half months is not, by definition, wrong. Events move at a fast pace. Circumstances change dramatically and without warning. As the Chancellor mentioned yesterday, there is a considerable time lag between introducing measures in the economic sphere and these measures becoming effective. In circumstances such as these, adjustments in the management of the economy cannot, and should not, be confined to an annual spring Budget. If we miss out, we have to wait until the next one comes along, 12 months later. Adjustments should take place as and when they are necessary.

I have, however, certain doubts about the four Budgets introduced by the Chancellor, for his second, his third and yesterday his fourth Budget were not introduced to deal with unanticipated changes in the economy over which he had no control, but were introduced to remedy the errors made in his previous Budgets.

I may be wrong, but I suspect that in a few months' time the Chancellor will be introducing his fifth Budget to try to remedy some of the mistakes he made yesterday. It would be surprising if he has not made some mistakes when he chose not to make a Budget judgment, which involves estimating the amount of demand which the Government should put into the economy or take out of it to achieve the optimum use of resources.

This marked a major change in the conduct of a Chancellor of the Exchequer. The House is entitled to a fuller explanation of this departure from recent convention than it has received. On the point of the omission of the Budget judgment, all the Chancellor said was: For many reasons I do not propose to adopt that approach today."—[Official Report, 15th April 1975; Vol. 890, c. 282.] The House is entitled to have these reasons spelt out. Does the omission of a Budget judgment mean that the Government have rejected the Keynesian approach to demand management? Does it mean that the Government have rejected the commitment, previously accepted by all parties, to full employment? Does it mean that the Government believe teat financial considerations, such as the size of the borrowing requirement, should come before considerations of the utilisation of resources? I hope that the House will get full answers to these questions, if not in the reply tonight, at least on Monday when the Chancellor concludes the debate.

I shall refer to unemployment later, but at this stage I should like to mention a strange inconsistency in the Chancellor's speech yesterday afternoon. He said: The effect of the Budget measures on employment has given me great concern, since I absolutely reject the use of mass unemployment as an instrument of policy.…I must warn the House that it "— that is, unemployment— could be touching a million, or 4 per cent. by the end of the year."—[Official Report, 15th April 1975; Vol. 890, c. 320.] Some hon. Members of both parties consider a million people out of work to be mass unemployment. If it is the Chancellor's intention not to use mass unemployment as an instrument of economic policy, we must ask why unemployment will rise to this level which is very high by modern standards.

I mentioned at the beginning of my remarks the desperately serious economic situation in which we find ourselves. Other lion. Members have mentioned the balance of payments position, which certainly is serious. Inflation is running at a rate of just over 20 per cent. Unemployment is already at the 800,000 level, and it is likely to become an increasingly important issue later this year. At present most people regard inflation as our main economic problem. However, I suspect that when unemployment reaches the million mark, if not before, things will change and unemployment will replace inflation in most people's minds as the main economic problem facing us. Some people believe that unemployment and inflation are opposites, that to overcome inflation we need more unemployment and that to overcome unemployment we need some inflation. I accept that there is a relationship between demand inflation and the level of unemployment, but this relationship exists at a much lower level of unemployment than the 800,000 that obtains today.

Today there is no case for saying that we have demand inflation. There is no pressure of demand on the supply potential of the economy at present, nor has there been for some considerable time. For the past three years and longer we have been troubled by a cost inflation problem unrelated to the level of unemployment. Up to 12 months ago, for the previous two years, cost inflation in Britain had been caused mainly, but not exclusively, by the escalation of world prices, especially the increase in the price of oil. I do not want to argue the case at present, but if we are realistic we cannot do much about a substantial increase in import prices. The amount of disruption that would be caused to the economy by doing anything would he more than would be politically acceptable. Rising world prices are bound to affect a country such as ours with the necessity to import a large amount of goods from overseas, it seems that this is one of the many areas where we have to accept limitations on our sovereignty.

Today and for the past year we have had serious wage and salary cost inflation, which is escalating. Wages and salaries have been rising much faster than output. This is not a new problem, it has been with us for many years. There is little or no evidence that the level of unemployment affects it. This has certainly been true in the past few years. A million people out of work in 1972 did not slow down wage and salary cost inflation. I am doubtful if any level of unemployment will stop wage and salary cost inflation. It would certainly not do so at a level that would be politically acceptable, because in a democracy in this modern world people will not accept the high level of unemployment that they accepted in the 1930's and the level of unemployment that might have any effect on this problem.

People today know, and their trade unions and professional bodies know that it need not happen. People know that Governments can pump extra demand into the system to increase the number of jobs, and they know that they can force Governments to do this. They know that the monopoly power of trade unions and professional bodies can get increased incomes and that Government demand management policies can ensure that they will not price their labour out of the market. They know that capital intensive industries—in which labour costs are a small proportion of total costs—will, in conditions of cash shortage, concede wage and salary claims more quickly than in conditions of freer monetary policy. Furthermore, where none of these things work, people know that today they have the power of the "sit-in", as successive Governments have found. The previous Conservative Government were no exception in that respect.

It seems to me, therefore, naive to believe that a tight monetary policy, with a reduction in demand and higher unemployment, can cure the inflation that plagues us. In the final analysis, public abhorrence of unemployment will undermine any such policy because, as we have seen so often, no Government in Britain are able to pursue such policies to their logical conclusion. The fact is that the monetarists' theories cannot succeed because the people will not allow them to do so. Other means must, therefore, be found if income cost inflation is to be tackled seriously.

This means—as the 1964–70 Labour Government found out and as the 1970–74 Conservative Government found out, however much both of them disliked it —the introduction of an incomes policy. I am bound to say that I found myself in a very broad measure of agreement with the hon. Member for Ashfield (Mr. Marquand) on this score. It is the absence of a realistic incomes policy that is the missing ingredient in the Chancellor's Budget yesterday and in his economic strategy.

That is the main reason why I expect another Budget later this year. I am not sure whether the right hon. Gentleman the Leader of the Liberal Party will be proved right and that a statutory incomes policy will be introduced then. But I am sure that before another year has passed, the present Government will be forced to introduce a statutory incomes policy. The real choice that faces us today is not a choice between inflation and unemployment. The real choice is between inflation and an incomes policy.

I am not trying to pretend that an incomes policy is an easy option. We all know—both major parties know from bitter experience in Government—that an incomes policy is not an easy option at all. Whether an incomes policy is statutory or voluntary, it must be accepted by the great majority of the people, and to achieve that is no easy task. But of course, that is true of any sort of economic policy. One cannot avoid the difficulties involved in getting the acceptance of the great majority of people merely by not having an incomes policy. Some will argue, of course, that the outcome of the February election last year was a serious setback and a reverse for the concept of an incomes policy. To some extent it was. On the other hand, it must be remembered that phases 1 and 2 of the previous Conservative Government's policies were accepted by the people of this country and that phase 3 was accepted by the great majority. It must also be accepted, even on the basis of the figures for the February election last year, that over 60 per cent. of the electorate voted for candidates who were members of parties standing for a statutory incomes policy, because the Conservative Party and the Liberal Party between them received over 60 per cent. of the total vote.

Nevertheless, it is very difficult to get an incomes policy, especially a statutory policy, accepted and to get it to work. On the other hand, I believe that the great majority of the British people would prefer an incomes policy—preferably a voluntary policy, but a statutory policy if necessary—with all its inequities and rigidities, to the present galloping inflation. I do not wish to underestimate the difficulties, which are serious. It would require of the Government a great effort to get acceptance. They would have to seek the agreement of the CBI and the TUC. That would be no easy task. I believe, too, that they should consult Opposition parties because I am sure that the failure of the incomes policy of the Labour Government from 1966 to 1970 was in part due to the actions of the Conservative Party at that time, in the same way as the failure of our incomes policy was due in part to the activities of Labour Members.

Therefore, if such a policy is to work it is important to get the widest possible agreement of all sections of the community. It will require to some extent a conscious effort by all of us to submerge some of our own political prejudices for the common good and the good of the country at large.

It is because I do not believe that high unemployment will stop the present cost inflation and because I believe that the present inflation cannot be allowed to continue that I consider the introduction of an incomes policy—an incomes policy that has teeth—as soon as possible as absolutely vital to the future of the British economy. So far the present Government have wasted a year in this respect. I believe that if they started now they would find considerable resources of good will throughout the country among men of all parties and of no party. It has become apparent that this is Britain's last chance really to come to grips with inflation. Despite all they have said in the last year, I hope that the Government will think yet again about the question of an incomes policy. I cannot give them many assurances, but I can assure them that I at least would listen to any proposals they might put forward with an open mind.

7.16 p.m.

Mr. Norman Buchan (Renfrewshire, West)

I entered the Chamber a couple of hours ago merely to make, as I thought, a brief point in relation to the motor vehicle tax. However, I found myself listening to a variety of comments, all on the same theme. This was brought out by the hon. Member for Leek (Mr. Knox). He took a long time to say it, but what he was saying was that we must have an incomes policy and that the whole weight of our present economic problems should be borne entirely on the shoulders of the wage earners of this country. That is what hon. Members mean when they talk about an incomes policy. They do not mean an incomes policy in the sense of bringing about a redistribution of wealth. They do not mean an incomes policy in relation to an ongoing planned growth of incomes—to use an old phrase of Frank Cousins. They mean that when the country is in a difficult economic situation, this is the method of solving the difficulties. That is what they mean and that is what they have been talking about.

I agree with one of my hon. Friends who ended his speech by reminding us of our manifesto commitment. I happen to think that manifestos are an important part of politics and that Governments should try to carry them out. There was talk of an irreversible change in the balance of wealth in this country, in the redistribution of wealth. I accept that. I have always thought that the function of a Budget from a Labour Government—a Socialist Government—was precisely the redistribution of wealth. However, I must confess that I see very little of it in this Budget. I understand the enormous difficulties of the Chancellor, but in this Budget we have seen very little of that element—the redistribution of wealth—which is almost a sine qua non of Socialist Budgets. It has been buttressed by the arguments that we have heard today. Even more, on top of the deflationary proposals is coming the argument: incomes policy; incomes policy; incomes policy—from both sides of the House.

This is rather disturbing, because we have had 10 years' examination of this. We have had 10 years of attempts at achieving an incomes policy and we are still apparently in the kind of economic crisis talked about by those who say that an incomes policy is the only econo- mic solution they can find. What good has it done?

Mr. Ian Lloyd (Havant and Waterloo)

As the United Kingdom has had, effectively, a Socialist Government—in one sense of the word "Socialist"—for 10 years, and as this country is regarded throughout the advanced industrial nations as having the most egalitarian society in the modern world, what scope is there for a further redistribution of wealth in the United Kingdom?

Mr. Buchan

Do not tempt me. I am reminded, by the previous Scots accents we have heard, that there is a theatre company operating in Scotland which calls itself "Seven Eighty-Four". That is because 84 per cent. of the wealth of this country is in the hands of 7 per cent. of its people. There is the opportunity of a shift in wealth. The hon. Gentleman should not tempt me on that one.

I want to deal with the contribution made by the hon. Member for Perth and East Perthshire (Mr. Crawford), in which he said that we are dealing with an English and not a Scottish malaise. I warn the House to take his judgment with a good deal of salt. A few months ago, I think in his maiden speech, he said that there was a balance of payments surplus in Scotland. He said that he had that on the authority of the Scottish Council for Industry and Development. I thought that I would follow up that remark, so I wrote to the council. I was told that the council had checked its records back to 1952 and that there was no authority for that statement. The council suggested that the hon. Gentleman might provide it.

Mr. Crawford

I refer the hon. Gentleman to the 1968 Scottish Council export survey.

Mr. Buchan

The hon. Gentleman claimed that the council had asserted this balance of payments surplus, but the council denied ever having done so. Perhaps the hon. Gentleman should have a word with the council. After all, he was formerly employed by it. He may even have done the survey.

There is something fundamentally antihuman in the hon. Gentleman's approach. He is saying that he is concerned with the well-being of working people only if they happen to be Scottish. It does not matter whether there are poorer people, or as poor people, in the north and north-east of England, Wales and Merseyside. That is the purpose of the comparison he made with South-East England. He compares the wealthiest part of England with the whole of Scotland. What he says is just not true.

The hon. Gentleman referred to wages in South-West Scotland. Wages in South-West Scotland; indeed, wages in all Scotland, in five out of the six main categories—all male, male skilled, male unskilled, all female, female skilled, female unskilled—are higher than they are in the rest of England, excluding London and the South-East. [Interruption.] The hon. Gentleman is sneering at 40 million people. That comparison shows that the hon. Gentleman's attitude is anti-human. I am sometimes ashamed of my own nation when I hear what is said by people who claim to speak for it.

The reason why wages are higher in South-East England is that London is the money capital. It has a large middle class and professional population—Members of Parliament, civil servants, international finance houses, the kind of concerns with which the hon. Gentleman is connected. The hon. Gentleman who talks about the working people of Scotland is a Tory. I understand that he does not pay his dues, but he is still a Tory. He has no solutions for the people of Scotland.

If one considers Edinburgh, one gets the same comparison. The reason why Scotland is better off than the rest of England is Edinburgh. Just as London, in the South-East, pushes up English wage levels, so Edinburgh, with its professional and middle-class population, pushes up the Scottish figures. His comparison of wage levels is quite untrue. So is his claim of a balance of payments surplus. I will deal with other flaws and fallacies in a moment.

Mr. Crawford

I am sure that many Conservative Members will be amazed to hear me described as a Tory. Leaving that and the question of wages aside, has not the hon. Member for Renfrewshire, West (Mr. Buchan) read the report of the Department of the Environment published on Monday which says that West Scotland is much better off than Merseyside, the West Midlands and the North-East?

Mr. Buchan

I have read it, and all my life I have been fighting against those conditions—before the SNP crawled out of the woodwork. The hon. Gentleman is insulting the trade unionists who struggled—

Mr. Hamish Watt (Banff)

rose—

Mr. Buchan

I will deal with all members of the SNP if Mr. Deputy Speaker will allow me. I like taking a seminar with them.

The hon. Member for Perth and East Perthshire insults the Scottish trade unionists. Wages have reached that level because Scottish trade unionists have fought for them, not because Scottish businessmen have been generous. The people who ran the coal mines in the last century were Scottish, and much good did that do to the working people. I am concerned with the ordinary working people, whether they are English, Welsh or Pakistani, and that is what the Budget is concerned with.

The Scottish National Party is the last example of imperialism. It claims that the North Sea oil is Scottish. At the same time, the party claims that Orkney and Shetland should have autonomy, yet nine-tenths of the oil is around Orkney and Shetland. The SNP wants to give the islands freedom but take away their oil.

We have had enough of the SNP. I will deal now with some of the other reactionaries on both sides of the House. There is one important omission from the Budget debate. In 1975—the year of the referendum, the year of final entry or otherwise into Europe—in the Budget speech, which lasted two hours, there was no mention of Europe, not one reference to the effect that Europe will have on the Budget assumptions or the economic future. Europe was supposed to provide the green pastures into which we were moving. One factor which has led to our critical economic situation is our entry into the Common Market. What has happened to investment? Twice as much British capital is going into industry in Europe as is coming from Europe into Britain. The latest figures I have show that £800 million plus of British capital went into Europe and £400 million of European capital came into British industry. So there is an investment ratio against us of 2:1.

Our balance of payments problem has been sharpened by entry into Europe. Our balance of payments deficit with Europe alone is more than £2,000 million. When we first started on the path of incomes policies following the 1964 deficit, the great crisis which blew us off course, our balance of payments deficit was £700 million. Now our deficit with Europe alone is three times as much. To take one country, our deficit with West Germany is running at about £900 million.

Mr. Wigley

A few moments ago the hon. Gentleman gave us a lecture about the international character of working people. Does his internationalism extend to the workers of Europe, or is he just a nasty little British nationalist?

Mr. Buchan

My objection to going into the Common Market is not because it is populated by Frenchmen, Germans and Italians. My second country is Italy. I am sometimes more at home in Italy than I am in London. That has nothing to do with being a little Scotsman, a little Welshman or a little Englander. I am with the working people of Europe, not with the capitalists who have carved out this bureaucratic structure called the Common Market. Give me the "Socialist States of Europe", brother, and we will march together into it.

The hon. Member for Caernarvon (Mr. Wigley) is another nationalist who is a Tory in his inclinations. The hon. Member for Merioneth (Mr. Thomas) is a Socialist in his inclinations. I suspect that it was the one with Tory inclinations who abstained on the Europe issue. Let us have no more of this rubbish.

My reason for being concerned about Europe and the great mystery of Europe's being missing from this debate is that it seems that we are trying to get yet another cocoon to protect us from facing sharp decisions in tackling our problems. Of course, we once had the Empire, and the people who are missing most the cushioning of the Empire now want to absorb our difficulties inside Europe. Instead, Europe has sharpened our difficulties and made them more acute.

I now turn to the Budget itself. Perhaps I should have referred to it earlier. It might have been a useful point. As my right hon. Friend the Chief Secretary knows, we never refer to it in these debates. Of course, the Budget is deflationary. It is telling the working people that they will have to pay higher prices irrespective of whether there is an incomes policy.

At this stage I must take up a constituency point. The West of Scotland is facing a difficult situation as regards the motor vehicle industry. In Scotland, between 1957 and 1967, we spent many hundreds of millions of pounds by way of private investment, and hundreds of millions of pounds in public investment, on infrastructure and on other matters in building up a motor vehicle industry to employ about 19,000 people. In the same 10 years, in two traditional industries, namely, mining and shipbuilding, we lost 76,000 jobs, a ratio of 4:1 against us. In those terms the motor vehicle industry plays an important part in our attempts to revise and regenerate the Scottish economy. The same is true in various other parts of the country. In the Midlands and in Merseyside, for example, the motor vehicle industry plays an important rôle.

The Budget has increased the cost of motor vehicle licences, and although I do not want to see a society that is based on luxury commodities I believe it is true to say that in our present situation the motor vehicle industry should have been used as a trigger for the economy. That should have been done, rather than attempting to introduce a prices policy. If we do not trigger off the economy by means of the motor vehicle industry the rest of industry will suffer. We have not triggered off anything by the introduction of a 60 per cent. increase in the cost of motor vehicle licences. One way to get a quick response from the triggering off of the economy is, to some extent, by means of the motor car industry. Germany has had a similar experience. I have in mind in particular the Volkswagen troubles.

We have introduced a 60 per cent. increase in the cost of motor vehicle licences but I believe that instead we should have considered a petrol tax. We should have introduced such a tax in place of the present licensing system. An alternative would have been to keep the licence at the same price and to add an extra 1 p or 2p to the tax that is placed on petrol. In that way we would not have acted so as to produce a disincentive to purchasing new motor cars and we would have encouraged the production of small cars.

Mr. Watt

rose—

Mr. Buchan

I have given way an enormous number of times. I hope that the hon. Gentleman does not wish to discuss agriculture in the Highlands.

Mr. Watt

Does the hon. Gentleman not agree that the increase in the cost of a motor car licence is the wrong way in which to proceed, as it militates against the people about whom he has been talking, namely, those who need a car to get to work? It militates against the man who is thinking of buying his first car, which would obviously be a secondhand car.

Mr. Buchan

I thought that that was what I had been saying for the past five minutes. The hon. Gentleman suggests that we are causing hardship not only in terms of the economy but for those who need cars for use in rural areas. That is what I had been saying. I cannot take any more of these interruptions from the nationals. They should learn a bit and then come and try to be big in the House.

I have covered most of the points that I wanted to make but I shall ruminate on the point made by my hon. Friend the Member for Ashfield (Mr. Marquand) in an interesting speech. My hon. Friend considered the question of an incomes policy and he seemed to be seeking some kind of new body. My objection to the incomes policy is that it has been used as a method of wage restraint. It has been used to try to lug the economy out of difficulty and not as an element of social change for the planned growth of income.

As a Socialist I accept that wages become a factor as we extend economic planning, but not until we get a Socialist grip on the economy can we envisage getting that response. It is no use talking about détente between capital and labour if we do not have the circumstances to produce it.

The attacks made today on the extension of public investment into industry have been wrong-headed. That exten- sion is the only way forward. We are facing an important crux in industrial relations. We are now getting to the stage where it is possible for a small group of men to stop an entire industry. We all know that this has happened and we have all seen it happen. What do we do in that situation? Supposing they asked for £10,000 a week? Of course we should not pay it.

There is only one way of solving the problem. We cannot retreat to authoritarianism as that would produce disaster. The only thing that we can do is to enhance the position of those with such power in the economy. We must bring them in in terms of ownership and control. We must bring them into the heart of decision making. When we do that the decisions that they make about their economy and their industry will also involve decisions that they are making about their wages. When we do that we shall begin to get the planning of income in terms of the individual worker along with the economy.

If we adopt that approach the dreadful word "Socialism" must be introduced. I am glad to see that the hon. Member for Caernarvon is nodding his head. His hon. Friend the Member for Merioneth must have been teaching him something over the last year or so. In the same context, I turn to the attacks that have been made on my right hon. Friend the Secretary of State for Industry and the metaphors that have been employed in those attacks. My right hon. Friend has been described as a wolf chasing travellers in order to gobble up the pieces. That is a myth about wolves and a myth about my right hon. Friend. If we do not extend in the way that I have postulated we shall be in trouble. If we do extend in that way I believe that we shall go forward not only in industrial relations but in the regeneration of the economy. In doing so we shall contribute a great deal more to Britain than either the illusions of the Common Market or the attempts to foist an incomes policy on an unwilling working class.

Mr. Deputy Speaker (Sir Myer Galpern)

I renew the appeal that was made by my immediate predecessor in the Chair. There are still 17 Members who are anxious to take part in this important debate. There is only one way in which the Chair can help them, and that is obvious to everyone. It can be done only by making speeches as brief as possible.

7.38 p.m.

Mr. Peter Fry (Wellingborough)

I promise not to take up the points made by the hon. Member for Renfrewshire, West (Mr. Buchan), and particularly his comments about wolves and the Secretary of State for Industry. I promise not to report the hon. Gentleman to the RSPCA.

In his Budget Statement the Chancellor used the word "fairness". I wish to test the Budget and the strategy, such as it is, that has been revealed by the Chancellor's actions in determining whether the Budget really is fair and whether the Government are being fair.

I am deterred considerably because I think that the Government do not realise that their own actions and inactions are causing greater difficulties and divisions, and a greater feeling of unfairness, than any previous Government have engendered. It is not true that all have paid themselves a lot more in recent years than they have earned. It may well be that many of us are living at 5 per cent. above what we have earned, but there are millions of people who have found themselves being left further and further behind because they do not belong to a power bloc that can gain them an increase in their incomes above the increases in prices.

My answer to those more Left-wing Members on the Government benches is that they do not realise that there has already been a great transfer in relative purchasing power just as there has been a transfer in absolute power. When I am considering those people who consider themselves unfairly treated I am not talking only about those who have retired or about those who live on fixed incomes, although those categories are included. There are many who have not been able to obtain large increases This applies to the self-employed, and particularly to the small shopkeeper. There are employees who are reaching the end of their working lives and find that they have little option but to stay put and accept whatever wage or salary increase their employers, be they State or private, decide to give them. Many employees are much younger people who are desperately trying to bring up a young family, to meet their mortgage commitments and to maintain a reasonable standard of living. Many people in that sector traditionally have tried to be thrifty. Many have been encouraged to buy their own homes and to put in central heating and the electrical gadgets which the nationalised industries in recent years have suggested they should buy. Those people at present view with absolute horror the fact that their income no longer matches price increases. They watch their expenses, rates, fuel bills, motoring costs rise to higher and higher levels, while they see other people, who they consider have fared better through the current set of wage negotiations, obtaining higher purchasing power.

I am referring to a section of our population who have been, and are being, hard hit by inflation and who are being squeezed to the last degree. They watch other workers in the new aristocracy, the trade unions, imposing their will on employers and on the Government of the day. That section of the community watches while lawlessness and violence too often appears to pay off in terms of a higher standard of living. They see savings which have been accumulated over many years being devalued. Their sense of moderation is going out of the window because that attitude was based on a feeling of stability. When that feeling goes they will cease to be moderate and will start to despair, and they themselves will look to more violent action. We need a degree of fairness, not just for economic reasons but to bring about political stability in future.

I should like to turn to some of the concrete proposals—or the lack of them—in the Budget Statement. How does the small or medium business man view the Budget in terms of fairness? How will he react to the demand for greater investment, to be ready for the boom which is supposed miraculously to appear some time in 1976? In listening to the Chancellor's speech yesterday, one might almost believe that the Government were trying to help private industry, particularly the firm that wants to get ahead and expand. But if in listening to those remarks we had reflected for a moment, we would immediately take the view that this was the same right hon. Gentleman as had imposed capital transfer tax and as will bring in the wealth tax. This was also the representative of a Labour Government who are pledged to protection of employment legislation which will put many firms out of business much quicker than will the CTT. This is why so many medium-sized businesses lack confidence. Those businesses are not ready to invest because they see no reason to invest money because the tax collector will take it from them in the not too distant future.

Their second worry relates to their feeling that the Chancellor is not being fair. Their view is that if inflation is not brought under control quickly, whatever the Chancellor says, they will not be ready even if the boom takes place next year to compete with rivals abroad who are experiencing a much lower rate of inflation. Employer after employer in my constituency has told me, "If inflation goes on at this rate, I cannot compete with the prices charged by Japanese. German and even American competitors." This is why the Chancellor's anti-inflation proposals will not satisfy many small and medium businesses.

The reason why I have stressed the situation of the small and medium business is that I believe that too often it is assumed that the life blood, and indeed the future, of the nation depends on the large concern. But that is not the situation. Our future depends on more people being willing to invest their own incomes in their own enterprises and their own businesses. That is the sector which has been most hard hit financially and in terms of the economy as a whole.

I never thought that I should agree with the hon. Member for Renfrewshire, West, but I agree with his view about the effect of the increase in the road fund licence. I thought that the motorist had had a pretty rough deal, and I half hoped when listening to the Budget Statement that the motorist would escape the Chancellor's proposals. However, the Government are continually extracting more and more money from the motorist, not realising that the people who are hardest hit are often those who can least bear the cost. It is estimated that 40 per cent. of private cars are completely privately owned and their owners have no kind of business connection or mileage allowance. They are the people who will be severely hit by the increase in the licence. Perhaps the Chancellor should look at some other way of raising money rather than by hitting the motorist every time.

It must by now be realised that the motor car has become an increasingly essential part in our lives. As we see the deterioration or collapse of public transport services, particularly in rural areas, we realise that many people cannot get to work or obtain the necessities of life unless they have a car of their own. The people who make fierce speeches criticising money spent on roads and who believe that this is the wrong area in which to direct public expenditure obviously do not fully appreciate the problems facing many parts of the nation. This is a problem that will not just go away. The Government's Transport and Road Research Laboratory's forecast of vehicle traffic in Great Britain was revised as recently as the end of 1974, and that, of course, was after the oil crisis and the increase in petrol prices. That document shows that by 1985 the number of vehicles is likely to rise by 30 per cent., and that the number of miles per vehicle run in the year will increase by 25 to 30 per cent. This means that 10 years from now our roads will be carrying 50 per cent. more traffic than they are carrying today.

The hon. Member for Meriden (Mr. Tomlinson) was quite wrong in one part of his remarks. Of course public expenditure has to be cut back—but nobody is suggesting that there should be no public expenditure. If we are considering cuts we should examine the areas in which they are being made and the use to which public money is being put. I have no hesitation in saying that we have devoted too little of the revenue extracted from the motorist and road user—a total of £2,500 million this year—to road construction and maintenance. I do not make this plea because I have any financial interest in the road construction industry, because I certainly have not. I make this comment because I believe that for far too long there has been an under-investment in transport as a whole, and particularly in the building of roads. I believe that we sadly need a much better road structure and a far better transport system.

The sums of money which are being expended should give a far better return. If the Chancellor believes that our economic revival depends on investment in the future, it is true to say that the efficient functioning of our industry and our export drive also depends on correct investment in transport. If anybody thinks that I am merely putting forward this point of view without having considered my remarks, I should like to inform the House that I have examined the situation in the great ports of Europe. If we examine the situation in the ports of Antwerp and Rotterdam and examine the road systems which back up those ports, we can appreciate the sort of competition which our exporters are facing, and will face in the years ahead.

Next year, when we shall remain in Europe as a result of a favourable outcome of the referendum, the eight-hour rule will be applied to our drivers. We must compare the time taken by a driver from the constituency of the hon. Member for Meriden (Mr. Tomlinson) to reach the East Coast ports with that taken by a person driving from the Ruhr to the ports of Western Europe. That is the competition which we face in transport. However, we are not meeting it.

Due to the cutback in the plans for 1973, it will be 1980 before we reach the same level of expenditure. Next year there will be a further cut-back of £91 million on all roads and £74 million in capital expenditure, out of a total road building programme of £319 million for trunk roads and £277 million for local roads. Far from being ready for the boom in 1976, we shall be lucky if we are ready for the boom of 1985. That is how far the country has fallen behind.

I make one criticism of the priority and fairness of the Government. I agree that public expenditure must be cut back and that there must be severe restrictions on local government expansion. This week I learnt from the Secretary of State for Employment of the scheme to double, or more than double, the size of the largest town in my constituency. Such a development is unnecessary. It is an encouragement to the local authority to expand and spend more of the ratepayers' money. Such decisions make nonsense of what the Chancellor said yesterday. If the Chancellor meant what he said, he will have to control his colleagues more firmly as regards local government.

In the long run this Budget will not be regarded as fair. I do not believe that the Chancellor thinks it is fair. I have the impression that he is waiting with crossed fingers. He is so nervous about the future that he is sitting with his legs crossed. If he sits for too long he will discover that it is difficult to move from that position. If he tries to get up he will probably fall flat on his face.

7.53 p.m.

Mr. George Rodgers (Chorley)

The justification for the harsh measures introduced yesterday by the Chancellor was based largely on the theory that wages and salaries had advanced at a much greater rate than inflation. We should examine that crude conclusion, since there are several factors within the situation which warrant close examination.

One of the reasons for a general improvement in wages is the legislation to bring about equality of pay for women. This carries the approval of the Government and is within the terms of the social contract.

The Government inherited a situation in which many workers, especially those in the public sector, had had their wage rates held down by the deliberate policy of the previous Tory Government. We had the ludicrous situation whereby the prices and incomes policy applied only in the public sector. That led to great injustices, and the situation had to be remedied before the Government could move forward on that front.

Wage rates are always quoted as a gross figure. However, a substantial proportion of any increase is inevitably deducted for tax purposes. Only the remainder is available to combat inflation. The Chancellor has delivered retribution on a grand scale. Not only those who defy the terms of the social contract are to be punished. A range of people will be affected—even those who settled well within the terms of the social contract. That is a great hazard, since those who obeyed the rules in the past may think it prudent to raise their sights higher in the next round of negotiations.

It would be churlish if I did not congratulate the Chancellor or his recognition of the plight of one-parent families. The proposed improvements are remote and modest. They will apply only to those who earn sufficient to pay income tax. I appreciate that that is a recognition of the first step on a long journey before we are able to meet the problems of those who are in desperate need of our support.

The decision to concentrate the activity of the Inland Revenue on the collection of indirect taxation is a depressing feature of the Budget. The VAT formula is a poll tax which must hit the lower income groups much harder than the more prosperous. I am not impressed with the plea that we have reached the saturation point of direct taxation. This is the only just form of taxation, since it is at least related to family incomes and family circumstances. It is only at the lofty heights of personal income that a massive contribution is made by the wealthy, since only a modest proportion of their income finds its way into the community purse.

I agree with my right hon. Friend's anxiety to generate efficiency by greater investment in the private and public sectors of industry. However, I consider it a fallacy to relate employment so closely to investment, since they are entirely separate issues. I accept that capital investment in manufacturing industry is essential for the future prosperity of our nation. However, I cannot see that investment and modernisation will lead to a greater number of people being employed in manufacturing industry. The reverse is true. The purpose and consequence of investment is to reduce the labour intensity of industry. All the evidence since the war demonstrates that. In manufacturing industry, including engineering and textiles, we find that the greater the investment and the greater the modernisation. the smaller the eventual labour force. I do not resent that situation. We should embrace it and plan accordingly. There are areas where we need to employ more people, such as the hospital services, public transport and the social services. Efficient industry must create the wealth to enable the people to secure well-paid employment in areas where they are most needed. We must plan to increase our spending in the public sector. I am depressed to find that the Chancellor intends to frustrate this development by restricting expenditure in the area in which we need to spend and to create alternative employment. We devote a smaller proportion of our GNP to the National Health Service than do most of the advanced nations.

I am ashamed that we have reduced our assistance to the developing nations in real terms, though not in cash terms. The saving is paltry and comes at a time when the emergent nations have no natural reserves of energy and are stricken by increased oil costs.

Many people were utterly revolted by the recent exposure on television, which showed the conditions on British-owned tea plantations, and I think that it would surprise many hon. Members who consider that our society is greedy and self-centred to learn that there is a deep and growing understanding of the ill-fortune of those who live in less prosperous parts of the world.

If my comments seem unduly critical, it is not that I do not understand or that I underestimate the formidable task that my right hon. Friend faces. However, I believe that he has utilised the old worn weapons and the old failed formulae. It was a Labour Government who introduced the National Health Service, family allowances, and so many other reforms during periods of economic gloom and uncertainty. I wish that the same vision had been displayed yesterday.

Several Hon. Members

rose—

Mr. Deputy Speaker (Sir Myer Galpern)

The hon. Member for Chorley (Mr. Rodgers) took only eight minutes. In that time, the hon. Gentleman said all that he wanted to say. During the remainder of the debate, may we have eight-minute speeches?

8.1 p.m.

Mr. John MacGregor (Norfolk, South)

I agreed very much with what the hon. Member for Chorley (Mr. Rodgers) said about the single-parent family. I make two points about his other remarks. First, it seems to me that the Chancellor of the Exchequer is right in his analysis of the facts about the increases in wages and salaries and average earnings. It is these which have been a key factor in bringing us to our present plight. And when the hon. Gentleman says that a gross increase in a wage does not lead to the same gross increase in the family income since tax is deducted, this may be true. However, the gross increase in the total wage bill affects industrial costs and affects the costs of our exports.

Second, although I understand that the hon. Gentleman would like to see public expenditure increased, there is no question that it has been the rapid growth in public expenditure which has also led us to our present difficulties. Therefore we have to face the inevitable fact that concentration has to be put on improving output, productivity and profit in manufacturing industry and commerce to bring about the increased production to provide the additional public expenditure programmes which the hon. Gentleman seeks.

The most revealing phrase in the Budget Statement yesterday came when the Chancellor of the Exchequer said: Moreover a Rake's Progress of this nature could not last for long."—[Official Report, 15th April 1975; Vol. 890, c. 283.] The right hon. Gentleman was talking to his Left wing about the dangers of a continuously expanding programme of the kind that we have had in the past year. However, this was an apt description of what he himself had been about during the past year.

In this Budget we have seen that we are paying the price for the approach of the Labour Party at the February General Election in putting forward an unrealistic programme in relation to the problems and prospects that we faced as a result of the oil crisis, and its approach which said: "Vote for us, and we shall get you back to work without considering the costs."

Even more, we are paying the price for what the Labour Party did in the succeeding months to win the October General Election, when it engaged in a massive programme of bribes and deceits, and we only see now in the figures given us for the public sector borrowing requirement and the increase in public expenditure just how great that was. Even after winning the October election, the Labour Government went on with that programme.

I listened to the first half of the right hon. Gentleman's statement and found it a devastating indictment of his economic management in the past year. It could not have been better put by those critics on the Opposition benches and outside this House who warned him of the con- sequences of his actions precisely along these lines at the time that he was engaged in them.

I blame the right hon. Gentleman for the lack of control over public expenditure, but I have some sympathy for him in other areas. He has been let down by guilty men elsewhere. He has been let down by the Secretary of State for Employment, who has allowed wage inflation to rip ahead without so much as lifting a finger to tackle it at the right stages of a negotiation. He has been let down by the Secretary of State for Industry and the devastating effects of his policies on industrial confidence. He has been let down by the Department of the Environment, which has set in train the huge rise in subsidies on the housing front, which will now be very frequently directed to those who do not need them, and which will be one of his most difficult tasks to tackle in bringing down public expenditure. Finally, he has been let down by the Department of Energy for the way in which it set out on its energy programme but which, happily, it has now reversed. The Chancellor of the Exchequer referred to the delay in the expected flow of oil as being "a not insignificant factor" in his increasing difficulties. The right hon. Gentleman has his colleague the Secretary of State for Energy to thank for bringing that about.

There are a number of aspects about the present Budget which worry me. I wish to refer briefly to a few of them.

First, I refer again to the public sector borrowing requirement. I listened to the analysis made by the Chancellor of the Exchequer and I assumed that, knowing that the borrowing requirement was about £7.6 billion for the year now past, we should see some reduction. Yet I then learned, to my astonishment, that it is about to rise again by another £.1.4 billion at an extraordinarily vulnerable time for our economy.

I ask two questions. First, how are we to meet this public sector borrowing requirement if we cannot borrow abroad to the extent that we have been able in the past year? The right hon. Gentleman said that it might be difficult but, with the possible rising strength of the dollar, it could become even more difficult. There is a dangerous problem there already.

Secondly, if the borrowing requirement is to be met mainly by internal borrowing, what effect will this have on the money supply? The Chancellor of the Exchequer boasted of his control over the money supply in the past year. Quite a large part of that has been due to the fact that he was able to borrow from overseas.

I have been looking at the projected level of the public sector borrowing requirement. The Chancellor of the Exchequer should have acted more on public expenditure in this year, especially in current spending areas, and started to tackle the rising cost of housing subsidies and to bring down this year the level of food subsidies.

But worse, I suspect that this £9 billion will not be the true figure. Looking at the situation between last November and now, the Chancellor of the Exchequer confessed yesterday that £1.000 million extra in the borrowing requirement had been the result of increases in wages and salaries in the public sector not anticipated at the time, and there is as yet no sign that the right hon. Gentleman is able to get to grips with problems of that kind. So we face the possibility of a further increase in that area in the coming year. It is essential that he keeps to his target. It should have been much lower. But it worries me that he will not be able to do so on present policies.

I come, then, to the wages situation. It is patently obvious to all and has been admitted by many hon. Members in this debate that in the past year the social contract has not succeeded. I listened with interest to the excellent speech of the hon. Member for Meriden (Mr. Tomlinson), and even in those parts where I disagreed with him he put forward some convincing arguments about an incomes policy.

I am aware of the difficulties, but we have to admit that there are equal difficulties in the policy which has been pursued in the past year. If the attempts which the right hon. Gentleman is now making to bring down the level of wage inflation do not succeed it is obvious that he will have to take other action, and the announcement that the General Secretary of the National Union of Railwaymen has said that he intends to seek an additional 11 per cent. in his coming negotiations as a result of the Budget does not give one much cause for hope.

How long can we wait for the leapfrogging to stop? We may be forced to a stronger wage policy, and it is necessary to discuss it now. Especially in this situation, we need firmer Government control over the public sector. At the moment, it looks as if there will be no end to the claims from this sector, whereas the evidence is that, because of the economic climate the policies are already beginning to act in a voluntary form in the private sector. It was the OECD which warned that there must be firmer restraint over wages in the coming year. It is clear from the right hon. Gentleman's many analyses of our position vis-à-vis other countries that he understands what that means.

In this peculiar and difficult situation, we ought to ask ourselves whether it would have been any worse this year if we had had firmer restraints on wages than the policy which has been followed of letting them rip and then taxing them back. The consequences of that policy compared with firmer control over wages have been—and will continue to be—higher unemployment than necessary, pricing ourselves out of markets because of our comparative increases in costs only as a result of the wages factor compared with our major competitors, and a savage effect on industrial confidence and hence on investment.

It will also mean a reduction in investment in this country from overseas because of the fears of multinational companies that, until we get our wages situation under control, this is a dangerous area in which to engage in further investment.

Finally, on this front, we must look carefully at the effects of what has happened in the past year on different groups. It is always argued, and I agree, that an incomes policy has an unfair incidence between different groups. But can we say that that has been missing from the situation that we have seen in the past year? The penalty for the social contract which everyone is now paying as a result of the Budget is being paid for more by those who were never party to it and by those who have tried to observe it. That seems an unfair incidence of the wages policy which the social contract is supposed to be.

Would it not have been better to work for greater wage restraint, more control over public expenditure and, with it, ultimately a reduction in direct taxes so that we could have the opposite of the effects to which I have referred? Indeed, it is worth reminding ourselves that the OECD argued that we could have achieved the same effect in real incomes in the past year for the community as a whole by wage rises of 12 per cent., which would have produced a price rise situation of 9 per cent., and not suffered the competitive disadvantages that I have just described.

That leads me to the double impact of inflation and unadjusted tax rates, which is a strong argument again, in this highly inflationary period, for indexation—not indexation over the board but purely on the thresholds of tax allowances and the higher rates.

Looking at Table 8 of the Red Book, we see that the yield from direct taxation in one year has risen from £10,000 million this past year to over £14,000 million projected for the next year. That extraordinary rise results from the combination of inflation and increased taxation.

Looking at individual figures, it is not correct, as the Chancellor is trying to put about, that most people will be paying less tax next year. Taking gross incomes and allowing for inflation in incomes at only 20 per cent. over the past year—not even the true level of increases—a married man with two children who a year ago was earning £1,500 will find his tax up from £68 to £145. Admittedly, real earnings have increased, but the tax bill is up. Moving to the other extreme, a married man with two children on £10,000 a year will find that his tax bill has gone up from £3,525 to £4,876. It is this effect on incomes—particularly as we start to move into the slightly higher income areas—and the non-indexing of the tax thresholds combined with inflation, which is leading to one of the great unfairnesses of inflation.

I ask the Financial Secretary to supply me, in a letter—because he could not do so in a Written Answer—with figures of the necessary gross salary that would need to be achieved by a man to have the same net income as in 1964. At the £2,000 level in 1964, the corresponding amount is £4,148. That was last year, so we must add more now. At the £8,000 level the figure now is well over £21,000. It is this sort of effect which leads to the ludicrous situation today that a man earning £10,000 a year needs a salary rise each year of 35 per cent. to 45 per per cent. to maintain his standard of living.

I know that many hon. Gentlemen opposite and people at these income levels are not concerned about the situation. However this double impost is worrying, because at all income levels it is likely to increase wage demands. It will also have serious effects on management, the professions and those with special skills. Recently I met a number of doctors who, because of this, are contemplating going to appointments overseas. One cannot blame them. If they feel that their living standards are being savagely eroded each year, as they are, it is right for them to try to protect themselves and their families and to get some return for the substantial investment in training and skills that they have acquired over many years. There will also be a serious effect on long-term savings.

I should like to conclude with some remarks on the capital transfer tax. It is disgraceful that there is to be no opportunity to discuss the many elements of capital transfer tax which should still be dealt with, some of which the Financial Secretary has ready to be done before 1st April 1976. I hope that we shall have an assurance that before next year£we shall no doubt have another Budget in the year£there will be an opportunity to put those matters right. I must put on record that I do not believe that the changes in the capital gains tax are adequate to protect farms and small businesses.

We have in this Budget the first signs of realism, though I must agree with an economic commentator today who said that it is not primarily an economic management exercise, but a method of meeting a fraction—I emphasise "fraction"—of the cost of the transfer of resources from private to public pockets.

We all know of the difficulties that faced the Chancellor. It is not a conspiracy of the Left wing, but a total outright and ever-enlarging attack. The right hon. Gentleman has put up the first resistance. However, I fear that he will have to strengthen his defences even more before long. It will be essential if he is to match his actions to the analysis he outlined yesterday and the objectives he set himself.

Mr. Mike Noble (Rossendale)

rose—

Mr. Deputy Speaker

Order. I am sorry for intervening so often, but I am anxious that as many hon. Members as possible should get in before the winding-up speeches. If subsequent speakers take as long as the hon. Member for Norfolk, South (Mr. MacGregor), exactly four hon. Members will be able to speak before the winding-up speeches.

8.17 p.m.

Mr. Mike Noble (Rossendale)

The Chancellor has performed the usual balancing act that Chancellors in successive Governments seem to perform in trying to deal with unemployment, investment, inflation and the balance of payments. Unfortunately, from my point of view anyway, my right hon. Friend has used the same methods as previous Chancellors have used over the last few years.

As a Socialist, I find it depressing that the Chancellor, in his Budget Statement, should forecast that unemployment will rise as a direct result of his strategy.

As a Member representing one of the regions, I ask: what effect will it have on my area? We in the North-West have for many years talked about the affluent coffin—the area stretching from Birmingham, in the Midlands, south-east to London and the Kent area. We have looked with envy—I make no apology for saying this—at both the degree of public expenditure which has been pumped into those areas and the fact that their unemployment levels have consistently been below the national average.

Where can the strategy which will lead to a fairer overall balance of both private and public resources come from, so that the North-West and other areas can enjoy a fair crack of the whip? Regretfully, I come to the conclusion that it is certainly not within the confines of this Budget.

I welcome the proposed increase in allocation to the Manpower Services Com- mission for more training places, but what kind of an increase is it? In Sweden, 3 per cent. of the labour force at any one time is being retrained for new jobs. Yet we find the Chancellor talking about only 80,000 out of roughly 25 million people in employment who will be undergoing retraining. That figure is far too low for a sophisticated, technologically advanced economy, and it is clearly too low when we consider the problems of the North-West.

There is a direct link, as things are at the moment, between our balance of payments difficulties and the unemployment and short-time working figures which the Chancellor quoted yesterday. I think that my right hon. Friend said that about 225,000 people were on short time. About 55,000 of those are concentrated in one industry, cotton textiles, in the North-West.

I make no apology for using the textile industry as an example of the Budget's effect. This industry, certainly on the cotton side, has been restructured and modernised and its employment has declined from 250,000 in 1959 to 80,000 now. Yet over 75 per cent. of the labour force face unemployment or short time, and there is nothing in the Budget for them.

Over 50 per cent. of my constituents are employed in cotton textiles or in the footwear industry, and the Budget does nothing for them. They will be standing in the dole queue next week or the week after, seeing that their miserable pleasures of beer, cigarettes, or bingo have been reduced and they have received nothing in return. That is how many people in the North-West will view this Budget.

Those who work in textiles work in a modem industry; yet since 1st January this year 3,000 of them, out of 80,000, have been made redundant—and 55,000 have faced short-time working. What are the reasons for this? Of course there is the general recession which we all face. The people of Lancashire are prepared to face the overall difficulties which affect everyone else. Second, there is the loss of export markets to low-cost competition. No community in this country has faced the situation of the textile industry, which, over 150 years, has built up its export markets and then seen them fade away. These people will note that the Chancellor said that there would be some reduction in overseas aid. They will wonder whether that means that they will replace the Exchequer as the source of aid for under-developed countries.

The third reason is the tremendous amount of low-cost imports which are now totally disrupting the woollen, the cotton and the made-up sectors of our textile industry, and which now account for 60 per cent. of home sales. Soon we shall be at the mercy of the world with textiles as we have been with oil.

The effect has been devastating on the incomes of my constituents. There is a concentration in my constituency in two industries, textiles and footwear, which are being harmed equally at the moment. Many families have not just one but two or even three people working in one or other of those industries. Often, the women pay only the industrial injuries stamp, so if they lose employment they cannot go on the dole. Sometimes two or more incomes in a household go and the women get no dole. In some families in my constituency, the income has fallen by more than 50 per cent. because of the current recession.

Alternative employment is lacking and the labour force in these industries is aging. Few employers are prepared to take on some of the older people who are being made unemployed by the persistent refusal to take action by a Labour Government who gained office through the election of Labour Members in 16 North-West textile seats. If the Chancellor and his colleagues look forward to a long term of office, I must tell them that, without action on this matter, they will have to look for gains in places other than the textile seats in the North-West, because these people are being totally neglected.

There is a further effect of this situation which I hope all hon. Members will acknowledge. In the cotton sector of the textile industry—I do not know the figures for the woollen sector—25 per cent. of the labour force are immigrants, regrettably in the lowest-paid jobs, working night shifts in the worst areas of the industry. These are the first to be affected by short-time working and unemployment.

The community could not stand the strains currently imposed on the textile industry. In the last six months, repeated representations about this situation have been made in the House, and I make no apology for repeating them. We have pressed the Government to pursue a "Buy British" campaign. The Under-Secretary of State for Industry recently made an appeal in the House along these lines. The hon. and learned Member for Darwen (Mr. Fletcher-Cooke) has said that if it is good business to buy abroad, no one can blame an employer, a manufacturer or a merchant for doing so. But that does not help jobs in the North-West.

We have pressed the Government on the question of marks of origin. The situation at the moment is a sham. Sheets can be stamped "Made in England" or "Made in the United Kingdom" but all it means is that the thing has been hemmed here after being made up overseas. Someone wrote to me recently suggesting that a red rose should be put on cotton goods and a white rose on woollen goods which had been totally manufactured in this country. At the moment, marks of origin are lies to the consumer.

We have suggested changes in the dumping regulations and have said that when a claim about dumping is made, goods should be retained on the quayside until it has been disproved. As things stand, goods are allowed in until the person making the claim can prove that dumping has taken place, by which time another two mills have been closed and 1,500 more workers are out of a job.

We have argued repeatedly about import quotas. The Chancellor has done nothing in the Budget to protect the workers of Lancashire. We maintain—I speak for my colleagues from textile seats—that unless import quotas are introduced urgently the Lancashire industry will collapse. The same will apply to footwear.

Therefore, in considering his economic strategy and his concern about unemployment, the Chancellor should consider the situation facing these industries. He should use selective import quotas to defend the jobs of those who have not exceeded the social contract, who have a first-class labour relations record and who work in modern industries. In that way, he will reduce unemployment and the balance of payments deficit at the same time.

8.27 p.m.

Mr. David Madel (Bedfordshire, South)

I would like to take up the question of short-time working in another industry, but we have been asked to be brief and I shall try to be so.

The hon. Member for Rossendale (Mr. Noble) did not show much sympathy for the Chancellor, and I have noticed that there has been hardly any sympathy for him from the Labour Benches throughout the debate. The Chancellor was compared by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) with Sir Stafford Cripps. The reason Sir Stafford's incomes policy broke down in 1950 was the colossal increase in world commodity prices. The Chancellor is facing not an increase but a decrease in those prices, and, therefore, does not face the same sort of battle as existed in 1950.

However, the Chancellor is up against a very different trade union movement, and he is also up against a situation in which big increases in wages and salaries have been the norm for many years. As was said in the leading article in The Times this morning, further inflation now will threaten existing employment in this country. Therefore, the sombre background is the danger to existing employment, and that is what the Chancellor must consider.

I think the Chancellor might have underlined a little more what the Government have done on their side of the social contract. Yesterday he said In fact the social wage now amounts to about £1,000 a year for every member of the working population. That is a 12 per cent. increase in real terms in 1974 on 1973. But in 1974 there was also the freezing of rents, and that was a considerable advantage to people in rented accommodation compared to those who were buying their own homes. My hon. Friend the Member for Norfolk, South (Mr. MacGregor) referred to the fact that those who had abided by the social contract or had not been part of it had suffered considerably because of those who had breached it. Having read more of the Chancellor's speech at columns 280–281 yesterday I should like to know what he means when he talks, not yesterday but on other occasions, about a more formal wages policy should the social contract collapse. He did not use those words in his Budget speech, but he has used them in speeches outside this House, and I hope that as the debate goes on we shall get a hint as to what more formal wages policy the Government have in mind.

I should like to deal now with the manpower and training proposals that the Chancellor put forward at columns 289 and 290. This is a useful contribution. I take the point that we are slow in retraining and that we have lagged behind our major competitors. However, I believe that there should be a closer link between the Manpower Services Commission, the education authorities and those who compile apprenticeship courses. If we want people to be retrained quickly we could start by altering the apprenticeship courses. The Chancellor said yesterday: The Manpower Services Commission includes representatives of industry, and in recent months my right hon. Friend the Secretary of State for Employment and I have had many discussions. I feel that we should consider the representations from education authorities and those involved with apprenticeships, and that there should be contact with the commission, because these bodies have an important part to play.

We should not underestimate the difficulty of persuading people to move from one part of the country to another. Referring to the extra money that is to be allocated in this direction the Chancellor spoke yesterday of providing additional incentives for job mobility". I assume that he has considered giving grants for people moving from one part of the country to another. The deterrent to moving into my area when industry expands, or of moving from any area, is considerable, and one hopes that this part of the training proposals will take account of job mobility.

On public expenditure there was an interesting exchange earlier about when the Chancellor expects unemployment to fall. Perhaps this point can be dealt with by the Minister when he winds up tonight. As I understand it, the Government calculate that unemployment will touch a million next winter. However, they have postponed public expenditure cuts until the beginning of the next financial year because, I think the Chief Secretary said, unemployment will then be dropping and it will be safe to make the cuts. What will happen if we have a bad winter? Unemployment would rise steeply in January, February and March of next year. We should have more clarification on the Government's thinking about likely unemployment rates next winter and in the early part of the spring.

It has been pointed out that the Government are unlikely to cut public expenditure when unemployment is rising fast. I do not foresee unemployment miraculously starting to dip once we get into 1976. That depends on world trade, but surely it also depends on the sort of winter we have because of the sensitive nature of employment in the construction industry. No cut is planned on council housing, but the Chancellor said that a saving of £50 million will be found from other capital expenditure in the housing programme."—[Official Report, 15th April 1975; Vol. 890, c. 280–95.] Does that include improvement grants and general work to improve older properties? We should have more information on that.

I agree with an earlier speaker who said that the cut in overseas aid was regrettable and disappointing. Surely it would have been better to make further cuts in local authority spending. God knows we have enough problems in this country, but in view of the overseas problems which have come to light in the last six months the cut in aid could have been avoided.

On rates, the Chancellor referred to the new magic consultative committee which is to deal with this whole question and with cutting local authority expenditure. He later gave a firm warning about what the rate support grant will be next year. I hope that the new consultative committee will not be just another body of bureaucrats. Because of rate increases there are a lot of people who, in the past two years, have done a lot of research in their counties as to how rates should be reduced. If we are to have this committee, I hope that the Government will take account of the research that has been done. I am not referring to the activities of noisy, publicity-seeking pressure groups, although they play their part. I am referring to people who have set aside quite a bit of their spare time to monitor the whole question of rates and rate expenditure, and have developed good ideas on the subject.

There never was a more apt time to transfer teachers' salaries from local authorities to the central Government. We talk about the social wage. There is another type of social wage; namely a rate social wage, to use an ugly expression. Counties which are expanding rapidly through overspill now have the additional burden on the rates of the recommendations of the Houghton Report. I believe that the Government could have looked more carefully at people's salaries and the burden on the rates this year.

I turn to increased value added tax. I agree with my right hon. and learned Friend the Member for Surrey, East that fridges should have been left out. It cannot be held that they are a luxury. I am grateful that the Chancellor has left petrol alone, although I share the anxiety that was expressed earlier about the increase in the car road fund licence.

In column 308 the Chancellor referred to the problems of the car industry. Surely, he could have eased the credit restrictions, which would not have added to the Government's deficit? The Government will have to think carefully about retraining for people in the car industry. We are likely to have a reduced labour force in that industry. For years it has been assumed that there will always be extra jobs provided by the car industry when expansion gets under way. The combination of world recession and world energy alterations goes against that thinking. Therefore, the questions of retraining and the numbers required in this industry need looking at carefully. In my view, that is one of the first tasks of the expanded Manpower Services Commission.

I turn to income tax. The Chancellor said: I must warn the House that similar measures may be necessary in future unless the increase in wages and salaries is kept under better control."—[Official Report, 15th April 1975; Vol. 890, c. 317.] He is referring to his anti-inflationary surcharge. We cannot go flopping along like this every year, with incomes roaring ahead, and then a large increase in income tax.

Mention has been made of the incomes policies and what has happened in the past. The tragedy of incomes policies which do not involve total freezes is that once they get going a General Election comes along and the whole thing is blown up. It is as if an aircraft is going down the runway, about to take off and then hands go up and we are told "Sorry, there is a General Election". We need a monitoring unit to look at the nature of the job, the hours of work and the working conditions. In an answer given on Monday we were told that if the current offer to the electricity supply workers was accepted it would not lead to an increase in the price of electricity. One would assume that there is nothing inflationary about that. In other industries an increase in wages immediately reflects itself in prices. We need a sophisticated unit which can look carefully at the growth of incomes. In my view, just to go along on the basis of what is said in col. 317—the anti-inflationary surcharge every year—is completely unacceptable and is bound to increase unemployment.

Surely, the Government, with their expertise and with their links with industry, should now consider, in the Chancellor's own words, a more formal wages policy. That means a form of incomes unit which will gradually educate the public about what is at stake when incomes and salaries go up. It will need time and it will take time to educate the public and get support in this matter. I am certain that we cannot go flopping along as we are doing at present, damaging savings, damaging incomes and making everybody suffer because the social contract guidelines have been broken.

8.40 p.m.

Mr. Dafydd Wigley (Caernarvon)

I shall not take up the detailed comments of the hon. Member for Bedfordshire, South (Mr. Madel), save to say that I entirely agreed with his suggestion about transferring the cost of teachers' pay to the central Exchequer.

The Government Front Bench should take notice of the heartfelt plea by the hon. Member for Rossendale (Mr. Noble) for his area and industry which he has made on several occasions I believe that his experience of unemployment is similar to ours in Wales.

It gives me no pleasure to note the collapse of the Government's policy. It is sad to see the social contract so much in tatters, something that was drawn to the Government's attention by the hon. Member for Preston, South (Mr. Thorne).

There will be grave disillusion in many parts not only of the Chamber but of these islands as a result of the Government's cynical change in policy. It is clear that the Treasury, the Bank of England and the City of London have gained control of the Government Front Bench on finance. Sadly, this is having an effect on Wales. We can appreciate the Government's problems over the balance of payments, inflation, the public borrowing requirement and unemployment. But the policies they are pursuing are not the policies dictated by the situation in Wales. We have a personal income level 15 per cent. below the United Kingdom average. If the whole of the United Kingdom had the same level of economic activity as we have in Wales, we should not have the situation of overheating, causing inflation and the measures taken in the Budget.

We are having to pay the price, although we do not have the benefit, for the increased level of wages and remuneration. Wales, with 70 per cent. of the per capita wealth, is once again clobbered in the Budget, a deflationary Budget because of the wage levels in London and South-East England, and because of the illusions of grandeur of successive Governments, which have spent more money on prestige projects and defence than they can afford.

Wales has to bear the brunt of this deflationary policy. The standard of living in Wales is well below the United Kingdom average, yet we have to suffer because the standard of living exceeds by 5 per cent. that which we can generate in these islands as a whole.

I wish to comment on three items in the Budget in particular, beginning with the additional rates of VAT. How can it be suggested that things such as washing machines and refrigerators are in the same luxury class as jewellery and fur coats? Young married couples buying such items for the first time are being hit.Unemployment will be created in Wales as a result of the change in the rate, because we manufacture more washing machines per head of the population than any other country in the world.

I suspect that in the Welsh economy there is much latent unemployment already. Many companies have held back on redundancies thinking that there would be a glimmer of hope in the Budget. That hope has not come, and there will be redundancies in factories throughout Wales.

At the last General Election six or seven Ministers came to my constituency to boast of the merits of the Government's economic policy. Let them return in a few weeks' time and tell the workers in my constituency who have been made redundant that their redundancies are a direct result of the Budget.

The increased road fund tax will also hit people in my constituency and other parts of rural Wales where there is no alternative transport to the motor car. The buses and trains have been cut out by successive Governments. In addition, the motor industry will be crippled. Many factories in all parts of Wales, including my constituency, will feel the ripples resulting from that.

Male unemployment in Wales is already more than 6 per cent. I suspect that in the next nine months to a year we shall see it nearer 8 per cent. to 10 per cent., with 80,000 to 100,000 people out of work. Heavy unemployment will return to the valleys of South Wales, the industrial areas of North-West Wales and the Wrexham area, as a result of the deliberate policy of a Government who are supposed to have a sense of social responsibility towards the people of these islands. How will the Government explain to the people of Ebbw Vale when they close the steel works that there will be no alternative employment because of their policies?

The Budget package, which will create unemployment, is inequitable and regressive. If there had to be additional taxation, I should have welcomed an increase in income tax, so that the burden would be fairly shared. Instead, the burden is being put on many people who cannot bear it.

The Budget, from the point of view of Wales, is totally unacceptable. I see this Government following the pattern of the Labour Government of 1964–70. We shall have another dose of "pink Tories" on the Government Front Bench. The people of Wales have been saddled with unemployment in the past and will suffer from it again in the future. I hope that the next time Ministers come to Wales they will tell the people there that they will be £150 or £200 per head more in debt at the end of this year than they were at the beginning of the year because of Government policies.

This is something that has been landed on the people of Wales, who have no control over the matter. The truth is that Britain is bankrupt. We are a "banana republic" but, sadly, we do not even have the bananas. We have to import those. I have no hesitation in recommending the people of Wales to get out of this United Kingdom which is so rapidly going on to the rocks. We have only one solution to our problems, and that is to get full self-government. We need that so that we may operate the economic and financial policies that answer the circumstances of our country.

8.47 p.m.

Mr. Donald Anderson (Swansea, East)

The speech of the hon. Member for Caernarvon (Mr. Wigley) was a deliberate attempt at scaremongering. It was an attempt to frighten the people of Wales by drawing comparisons between Wales and the whole of the United Kingdom instead of between Wales and other relevant regions which share the same problems of economic under-activity. The hon. Member tried to put Wales alongside London and the South-East in an attempt to delude our people. It would be of no benefit to the workers in the constituency of the hon. Member or those in my constituency, any more than it would benefit workers in any part of this country, if the United Kingdom were to continue its inflationary process to the point when we could no longer borrow abroad, and suffered a mammoth industrial crash. It would be the constituents of the hon. Member and myself who would feel the first brunt of that.

In his Budget the Chancellor has made a brave and courageous attack on inflation. It is an attempt to bring under control the public borrowing requirement and the spending of money. It represents an attempt to deal with overseas borrowing which began with Lord Barber's Budget in 1973 and has continued until now. The starting point of the economic picture in which the Chancellor has set his Budget is clear, and probably accepted on all sides. It is that of The Rake's Progress. My right hon. Friend mentioned that we are living beyond our means—this 5 per cent. gap between what we consume and what we produce. The priority is to bring inflation to the average level of our major competitors and prepare ourselves, as a nation, for the anticipated upturn in world trade next year.

It is a Budget with a national approach. I was saddened by the partisan and petty reply from the Leader of the Opposition which contrasted unfavourably with the reply of the CBI and the overseas money markets. Within the limits of political acceptability the Chancellor has begun to strip away the illusions under which our people have been living for far too long. These illusions had to end at some point. Our people have been shielded from reality as a result, for example, of the pricing policies of our nationalised industries, food subsidies and other consumer subsidies.

We cannot ask for assistance from West Germany or the United States if we are seen by them not to be prepared to make any sacrifices in our living standards. It is difficult to challenge the overall assumptions of the Chancellor. Wage inflation clearly has to be checked. This does not mean that the social contract has failed. In some ways it has succeeded beyond what we could realistically have expected.

We are asking trade union leaders to act in a way which is totally contrary to their function, to act against the immediate interests of their own members. The dilemma is illustrated by a headline which appeared in a newspaper this week. Mr. Jack Jones, the General Secretary of the Transport and General Workers' Union, said, when supporting the social contract and the 35 per cent. wage claim by a number of his members on Merseyside, that ordinary trade union leaders have their own constituents, and that they were being asked to play an unrealistic role. By the increase in direct taxation, the Chancellor has imposed what he calls an "anti-inflation surcharge".

The right hon. Member for Devon, North (Mr. Thorpe) said that this should be seen as an inflation-incentive scheme, encouraging union leaders to take into account the extra burdens which this Budget imposes on their members when they make their next wage demands. The Chancellor has threatened the next move he will make if the Budget proves to be a stimulus to further wage demands.

The major unanswered question in this Budget is the problem of an incomes policy. It may be seen as no more than a holding operation before the next step is taken, within six months, towards having a more formalised incomes policy, which would involve consultations with both sides of industry. That may not happen, but certainly the threat is there. It is an enormous challenge to us to see whether we can avoid going along that dangerous road.

In spite of the burdens that the Budget imposes, in many respects the Chancellor has been compassionate. He has given additional help to all one-parent families. In the near future there must be additional assistance for those who exist on supplementary benefits. I ask to what the £50 million cut in relation to council housing relates. I have in mind the problems which local authorities will face in city areas where many of the poorest citizens live. If the consultative council gives rise to a real dialogue between central and local government, it was never more needed than now, when we have these cuts in public expenditure.

The rates revolt is, in part, a revolt against the excessive bureaucracy which many people see at local government level. Within the next year or so my constituents in Swansea are likely to see the creation of a large number of tiers of government, from the community council, district council and county council up to the Welsh Assembly and this Parliament, each employing a large number of bureaucrats, taking people from sectors where they might be employed more productively.

This has been a painful but inevitable Budget, forced upon the Chancellor by the facts of the situation. There are limits to what a Chancellor can do in imposing his own views in a democracy. A Budget has an educative role. It this Budget has told our people that illusions must end and that we are really at a time of crisis, facing a balance of payments deficit, a crisis of inflation, with wage inflation and the enormous cost of overseas borrowing —if the Budget has set that framework, the rest, its educative function and role, will depend upon the people's responses.

8.56 p.m.

Mr. Wyn Roberts (Conway)

The shortness of time, Mr. Deputy Speaker. will, I pray, concentrate the mind wonderfully.

Before the Budget, and, I understand. today, the Chancellor has been under some pressure to reflate the economy to reduce unemployment. I am glad that he has not succumbed to that pressure. although I dislike unemployment as much as anyone. Had the Chancellor succumbed, it would have meant only a postponement of deflation now to create far greater unemployment later. It is a small mercy that at least the Chancellor is taking a mincing step in the right direction, but one is grateful for it.

Those who pressed the Chancellor to reflate and who criticise him now for not doing so must be very short-sighted indeed. Reflation would have increased demand, and that would have spilt over into imports and led to a worsening of the balance of payments position and the string of dire consequences that might follow such a deterioration. Reflation would also have fuelled both wage and price inflation. As we already have one of the highest inflation rates among the developed countries, to add to it in this way would have been totally irresponsible.

Of course, the Chancellor's measures will put up prices and they may stimulate yet higher wage claims. In the absence of a strategy to deal with inflation, the prospect before us today is just as grim —if not grimmer—as it was before the Chancellor's speech. The social contract has clearly and regrettably failed to produce sufficient wage restraint, and we must take the consequence, which is the high rate of wage-led inflation afflicting us now. The Prime Minister said recently that inflation was the father and mother of unemployment". But the Government cannot put ail the blame on the workers. The Government have also contributed by their policies or their lack of policies.

These factors are listed in the latest OECD survey on the United Kingdom as follows: Investment intentions in manufacturing industry and business confidence weakened through 1974 to historically low levels. Poor profitability, the liquidity squeeze, rapid inflation, weak demand and uncertainty about Government plans for industry and the Common Market, may all have contributed to this. The survey goes on to say that, as some of these influences will persist in 1975, the recovery of investment may be further delayed.

It is quite clear that before employment prospects improve investment confidence must return. That means the confidence of private industry, which still employs seven out of every 10 people in Britain. What has the Chancellor done to restore that confidence, which is shattered every time the Secretary of State for Industry opens his mouth? The Secretary of State for Industry, in particular, and his Left-wing colleagues in the Cabinet bear a heavy responsibility for that 1 million unemployed who are to adorn the record of the present administration.

There are those who believe that if we are prepared to tolerate more inflation we can have less unemployment. But experience surely teaches us that rapid inflation causes a decline in economic activity and consequent unemployment. Can we get this message across to the people? Is it enough simply to get the message across? I am not so sanguine as is the hon. Member for Meriden (Mr. Tomlinson) that understanding alone is necessarily followed by appropriate action.

The United States is beginning to see the end of its recession, the severest since the war, just as we are taking a deeper step into ours. Certainly, wage demands must be moderated if prices and unemployment are not to rise still further. The Chancellor is clearly gambling on the recovery in world trade next year. What happens if by then we have lost our competitiveness in export markets? We must, therefore, control wage increases.

I believe that the majority of people in this country would be prepared to forgo excessive wage increases if they could be assured of greater stability in money values. The trouble is that there are some people who do not want such stability, who still believe in inflation as the great leveller and use it as a political instrument. The Government must have the courage to stand up to them or we shall all be levelled to nothing.

What is the answer to wage and price inflation? I believe that our first task in the United Kingdom is to get down to lower levels of both wage and price inflation, for it can be argued that the change in real personal disposable income indicated by a combination of pay rising at 25 per cent. and prices rising at 20 per cent. is much the same as if pay were rising at 12 per cent. and prices at 9 per cent. Can that transition be achieved by short-term tax measures as suggested by the OECD survey? I hope that the Treasury Minister will answer that. Are there unexplored possibilities in indexation of savings combined with a wage formula?

It is imperative that there should be a strategy for containing inflation, but there is no sign of it in the Chancellor's Budget proposals, apart from his reference to control of the money supply. Inflation cannot be allowed to rip, because it will destroy all of us, neither can it be allowed to burn itself out, because no one knows what will rise from the ashes. One thing is certain. If the worst comes to the worst, we shall have to have a statutory policy. The only question that will remain is what kind of Government will be here to impose it.

The economy has now reached a stage where the people expect new initiatives to protect them from inflation. They can see that we are on the verge of the abyss, with a million unemployed, a £9 billion borrowing requirement and last year's trade deficit of £3.8 billion. The people are not blind to all this. The Government should provide firm leadership in the fight against inflation, for there is developing a new consensus in favour of restraint, in favour of the country living within its means. But I do not think that the Government have the will or the backing within the Labour Party to fight inflation. They should, therefore, give way to those who have the will and the unity.

9.3 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I assure hon. Members that I am as surprised as they are to find myself on the Front Bench on this occasion. I can only say that it is a temporary phenomenon with which the House must bear. However, there may be some coming together of economic thought in the House as a whole. It struck me in the debate today that there is perhaps more common ground about the nature of our problems and their solution than there has been in many previous economic debates to which I have had the privilege of listening.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said that we are now all monetarists. I do not think that I go quite that far. After all, the Left wing of the Labour Party has been totally absent from the Budget debate. I do not think that its members would claim to be monetarists yet. I think that they have been engaged in a "spend-in" in a room upstairs, under the aegis of the Tribune Group, or something of that sort. At any rate, they have been boycotting this important economic debate.

We are also all approaching the monetary question as gradualists. Perhaps we are being too gradual. As my hon. Friend the Member for Conway (Mr. Roberts) said, we are taking mincing steps in the right direction. Perhaps the whole House has a growing awareness of the need for a change in policy.

Before coming to the Chancellor's Budget judgment I must make one or two points on some separate matters. First, is it true that the Government will not allow the Money Resolution to permit further amendment to the capital transfer tax? That seems to me to be absolutely monstrous, especially as we were given pledges in Committee on the last Finance Bill that the Government would make further amendments. Of course, the Opposition want to make certain amendments. I do not think that we can leave the CTT in its present form. It may be that the Government are planning another Budget in the summer and another Finance Bill in July. If that is their plan, it might do instead, but they should come to a conclusion. We want to have a wide enough Money Resolution. I hope that the Financial Secretary will respond to that point of view.

Little has been said about the new VAT rate. The new rate shows how dangerous Socialist ideas can be, because, first, the Chancellor cut the rate from 10 per cent. to 8 per cent. and then, in the hope of recovering a little more revenue, he invented the new 25 per cent. rate for so-called luxury goods. I reckon that if we still had the 10 per cent. rate the Chancellor would be getting an extra £700 million. He will save only £220 million through his 25 per cent. rate. Therefore, he has lost approximately £500 million worth of revenue. He has caused confusion to 50,000 or more retailers and he will cause himself all the old problems of definition with which we used to grapple during the days of purchase tax.

I am sure that Sir Gerald Nabarro turned in his grave yesterday when he heard the news about the new rate. It will be an impossible job to define what is and what is not a luxury. Today I went into a jeweller's shop to have my watch mended. The jeweller said that he did not know whether he should charge me VAT at 8 per cent. or 25 per cent. He said that he did not know which of the goods in his shop—and there was every sort of thing, from jewellery to souvenirs—should carry the high rate and which should carry the low rate. He said that the problem of definition would be virtually impossible. The new rate is a great mistake, and I wish the Government had heeded the advice given to them not to embark on a second rate for VAT.

The heart of the Budget is the Chancellor's judgment. Given the present level of public expenditure the Budget deficit or the borrowing requirement is, in real terms, about the same as the out-turn for last year. It is the same percentage of the gross national product—some 12 per cent—as the out-turn for last year. We are going from £7.6 billion to £9 billion in real terms. Allowing for the fall in the value of money, the position is just about the same. If we consider the matter in terms of the percentage of gross national product which it is necessary to achieve to maintain inflation, the position appears to be mildly deflationary. The gross national product last year was £73 billion and the rate of inflation was 20 per cent. It would be necessary to print £14½billion to maintain the going rate of inflation. The Government are seeking to print only £9 billion.

They are not printing enough to maintain the going rate of inflation.

The Budget is mildly deflationary. It will have the effect of increasing unemployment, and for a rather longer period than forecast by the Chancellor. Whether that will ever bring us to a point where we reach the end of deficit financing and the end of inflation is a question I shall discuss in a moment. I do not think many hon. Members have yet faced the question of how we can return to borrowing levels which can be accommodated. We have a situation involving a deficiency in Government finances of £2.50 per head of population per week—a deficiency which has either to be printed or borrowed abroad. That is the extent to which we are living beyond our means.

There is also some relationship between the borrowing requirement and the overseas deficit at a later stage. The right hon. Member for Birmingham, Stechford (Mr. Jenkins) discovered in 1969 that he could bring the trade balance into surplus by having a surplus on his domestic account. However, it was not the right hon. Gentleman who brought that about; it was Mr. Richard Goode of the International Monetary Fund, who in those days ran our affairs. I thought it was significant that the Chancellor warned the Labour Party that Mr. Goode or his successor may not be very long in coming back to take over the management of the British economy. When I think of many quotations I should like to cite from the Chancellor, the following is the one I most prefer: By relying unduly on borrowing we would run the risk of being forced to accept political and economic conditions imposed by the will of others. This would represent an absolute and unequivocal loss of sovereignty which I think neither side of the House would wish to invite."—[Official Report, 15th April 1975, Vol. 890, c. 284.] In one sense I would invite such a loss of sovereignty, as appearing to be preferable to keeping our economy in the hands of the present Treasury team.

I know that my right hon. Friend the Member for Down, South (Mr. Powell) would not like to see a permanent loss of sovereignty, but judging by the way we are going it would seem that some control from the IMF might be very much greater loss of sovereignty than any involved in our membership of the EEC. The right hon. Member for Devon, North (Mr. Thorpe) also dealt with that point.

Therefore, we should be wise to seek to protect ourselves from those in the Cabinet I call the "four letter" Ministers who would do far more harm to the whole of our economy than would anything arising from membership of the EEC. I hope Labour Members have taken to heart the warning that unless they improve the performance of the country they will find themselves in the hands of some official from the IMF.

How do we get down from this £9 billion pounds borrowing requirement? Unemployment inevitably will rise, as the Chancellor said yesterday. But he is not seeking to reduce the deficit. In real terms it is the same. He has warned that there will be unemployment and in real terms has not brought down the deficit. If, next year, the right hon. Gentleman's forecast of £3 billion—and his forecasting record is not all that good—proves correct, what will be the consequences? How shall we be able to continue for long periods—possibly for many years—with unemployment in the region of 1 million or more? Will the Government have the political courage to see this long period through? This is the policy on which the Labour Party has embarked and its Left-wing Members, who have not attended the debate this afternoon, should know that this is the course on which they have set themselves.

I am worried about the long-term strategy. There is some doubt about the Chancellor's guess that commodity prices will remain low and that world trade will improve. If world trade moves into a boom situation, commodity prices will rise. However, if world trade remains slack, commodity prices will remain low. Either way, the Chancellor will be wrong. If there is a boom and commodity prices rise, our problems will remain. If there is no boom and there are no opportunities for those exports which the Chancellor foresees, it will make life difficult for us. It will not ease the appalling difficulty of moving out of a period when we are seeking to borrow £9 billion to a period where we live within our means. All that is left is the hope of North Sea oil, but if commodity prices drop, the price of North Sea oil drops. That will make the problem more difficult.

I do not believe that the Government have begun to understand the scale and scope of the problem. The key to it must lie in public expenditure. It cannot lie anywhere else. Looking at public expenditure over the past three years, I am struck by the greed of the Government.

The out-turn of the last Budget of Lord Barber, as he now is, in 1973 included a total public expenditure of £33.3 billion. The out-turn of the Chancellor's first Budget last March was £39 billion. His estimate of public expenditure in this Budget is £53½ billion. In his first Budget he increased public expenditure by £5½ billion. In his second Budget he increased public expenditure by £14½ billion, making a total of £20 billion in two years.

I realise that I have referred to pounds. I am not talking in real terms. Perhaps it is easier for us to talk about constant prices, real terms and 1970 prices. Those are terms which we understand. However, the public is more likely to understand a figure such as £20 billion, which is the scale of Government overspending so far. Apart from rotten housekeeping, Government forecasts leave us in doubt as to this year's out-turn, while last year's appears to have increased to £2.76 billion. The increase in expenditure was due to Government policy. Many chickens are coming home to roost as a result of the year during which there were two elections.

I pay a tribute to the Government for their phasing out of subsidies to the nationalised industries. The right hon. Member for Devon, North said that food subsidies, which amounted to £550 million, should be reduced. We all feel that there is scope for phasing out food subsidies. The White Paper on Public Expenditure forecast that housing subsidies would rise by £1.3 billion over two years. I welcome what the Chief Secretary to the Treasury said about developing a policy next year to require tenants to pay a small part of the cost of their housing. I thought that that was very brave of him.

The White Paper on Public Expenditure shows the vast sums spent by the Government on housing subsidies. The Chief Secretary will realise that economies can be made in that area. After all, everyone living in a council house is not unable to pay the rates. Perhaps one of the first actions of the Government in their mad dash for popularity last spring was to stop the operation of the Housing Finance Act. They are now paying for this by jeopardising the nation's finances.

Then we come to that which has now come to be known as "Bennery". I am surprised to see that the increase in the expenditure of the Department of Industry is to be only £200 million on revenue account, and that only £50 million capital is included for the coming year. But the Secretary of State for Industry has said that he wants not £50 million but £6,000 million. It was splashed all over the newspapers the other day that that is what he says it would cost to regenerate British industry.

My hon. Friend the Member for Morecambe and Lonsdale (Mr. Hall-Davis) called for a non-aggression pact with the private sector—but in vain, I fear. This call was rebutted from the other side, and I am certain that the Secretary of State is determined to pursue his expensive vendetta against the private sector.

Not a penny extra has been allotted for the British National Oil Corporation. How much more will it cost to expropriate the capital investment in the North Sea and interfere with the oil operations upon which to some extent we rely for salvation? That is not included. So how much more will there be—

Mr. Crawford

To whose salvation does the hon. Gentleman refer?

Mr. Ridley

I should have thought that the people who made the investment should be first considered for receiving the salvation.

The danger with Bennery is that it costs a large amount of money but prevents the Chancellor's strategy from working. The Chancellor has now pinned his strategy to increasing unemployment to 1 million, but every time the Secretary of State for Industry rescues a plant or a factory, he helps to prevent that from happening— [Interruption.] It is the same part of the argument. This just shows how the monetary argument works perfectly sensibly when what happens in individual cases is demonstrated.

Finally, I wonder whether the cuts suggested in the Budget will ever come through, like all Government expenditure cuts. I now have the schedule of cuts. I see that £52 million will be taken from education, libraries, science and the arts. Will it be impossible to start that this year? Then there is £17 million from other public services and £61 million from health and social services capital expenditure. I could read out more examples.

Why cannot these cuts be imposed this year? Why has it to be next year before they take effect? Why is it that taxation has to be put up this year and the cuts imposed next year? Would it not be better to do it the other way around? All that is achieved by putting up taxation is a further reduction of the ability of many people to produce and deliver the goods which will be necessary for our salvation.

The other element in public expenditure which is clearly out of control is the cost of wages. The numbers in the public sector have increased by 70,000 since about 1964. There has been a decline of about 50,000 in the private sector to match that rise. Is the reason for the Secretary of State for Industry's much-vaunted industrial decline of British industry the fact that 70,000 people have been pinched by the public sector out of productive employment in the private sector? Is that why we are falling behind in many industrial activities?

On top of that, wages in the public sector have risen by £2,000 million in the last year. In the private sector, as the hon. Member for Rossendale (Mr. Noble) said, they are already on the turn; in some industries they are on the downturn. He said that some of his constituents were earning half as much as they used to.

Mr. Mike Noble

On a matter of fact, I said that when people were enjoying—if that is the right word—short-time working, if a husband and wife were working in the same company, as is often the case in my constituency and if the wife does not pay the full stamp, when there is unemployment or short-time working, she does not get the dole. Therefore, their income is cut by more than half—their income, not their earnings.

Mr. Ridley

But that is a cut in earnings, about which everybody has been clamouring.

The Government's policy of creating unemployment is working in the private sector. It is beginning to influence wages to turn down in some, but not all, industries. In the public sector it has had no effect at all.

What effect will 1 million unemployed have on public sector wages? What is the means by which the Government intend to influence public sector wages? That is the question which my hon. Friends have been asking. It prompted some, like my hon. Friend the Member for Leek (Mr. Knox), to suggest that we should have a compulsory incomes policy. Indeed, it leads me to suggest that we should have some form of determination within the public sector, like any good employer does, on relativities and a flexible system of trying to sort out the problem of public sector wages.

One point sticks out a mile. Everybody wants to get into the public sector because wages cannot be controlled. Why on earth do the Government set about increasing the public sector? If this is the one area where they cannot hold wages, which it obviously is, surely the thing to do is to make the public sector smaller, not greater, or we shall end up with no workers at all. There will be nothing but social workers, nationalised industry board members, trade union organisers and junior Ministers. The rest of our workers will have emigrated to try to earn a decent living abroad.

Mr. Tomlinson

Does the hon. Gentleman agree that public sector wages have been let rip now because of the discriminatory effect of past incomes policies on the public sector?

Mr. Ridley

I would not accept that, because that is a long time ago. I believe that it is because there is no ultimate discipline. Both sides of the House must seek to find one.

Mr. Nick Budgen (Wolverhampton, South-West)

Will my hon. Friend give way?

Mr. Ridley

No. I have almost run out of time, and I still have a little more to say.

I want to talk about the social contract, or its tattered remnants, in the last few minutes of my speech. The Chancellor has buried it in his Budget and the Government have abandoned reliance upon it.

All hon. Members who have spoken in the debate have made the point that collective punishment for the nation as a whole is no substitute for making those who have had increases pay the greater share of the necessary extra tax that we have to find. The man who has had more than the increase in the cost of living can keep 65 per cent. of it, even after the increase in income tax, whereas the man who has had no increase in his wages or salary has to pay more tax as well as higher prices and, in the case of the self-employed, more national insurance contributions and probably higher rates and taxes from previous Socialist Budgets which we have all had to survive.

My hon. Friends the Members for Renfrewshire, East (Miss Harvie Anderson) and Wellingborough (Mr. Fry) spoke about these people movingly and accurately. The Government have not yet seized the measure of the despair, demoralisation and disillusionment of those who have been on the receiving end of the social contract and seen that they are always singled out as the target by the Chancellor, whereas those who have succeeded in getting higher wages, whether within or without the social contract, are benefiting.

It is interesting that in his Budget proposals the Chancellor has lowered income tax for those earning up to £3,000 a year. People earning above that figure will pay a higher proportion of their incomes in tax after these changes are made. But those earning between £2,000 and £3,000 a year are the very people who have been breaking the social contract and been the cause of the warnings and chastisements which the Chancellor gave the trades unions yesterday. In effect, although the Chancellor said that everybody must bear a fair share of the burden, those people have to pay a slightly smaller share of their earnings in income tax than any other section of the community.

The right hon. Gentleman's period at the Treasury has been full of envy, hatred, malice and all uncharitableness. He has caused insecurity among very many people and the feeling that it may be that there is not a place for them in this country. Whatever it may be necessary to do with the levels of taxes—and nothing that have said has criticised the right hon. Gentleman for putting them up—he must think more carefully about the distribution of the burdens throughout all members of society.

Not long ago I met someone from the Middle East who has seen Socialism in operation, sometimes violent and sometimes non-violent but always confiscatory. He has seen the cities of the countries in which he has lived destroyed by the Socialism which many Government supporters would like to see in this country.

One of the factors which have contributed to our greatness has been the security and stability of our society. It has been the envy of the world. It has caused people to come here as political refugees. It has caused people to try to start businesses here. It has caused the infusion of new blood, new ideas and new thought into our society for 2,000 years. Now the trend is the other way. This is a country which is becoming thought of as unstable. Until the Government bring down the rate of inflation by pursuing sensible budgetary policies and until they look to the distribution of the burdens more fairly, it will not change.

9.31 p.m.

The Financial Secretary to the Treasury (Dr. John Gilbert)

I am delighted to echo the welcome which my right hon. Friend the Chief Secretary extended to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), who has resumed what we consider to be his rightful role as a Front Bench spokesman for the party whose cause he advocates so eloquently.

Today we have had a wide-ranging debate which has probed many aspects of the Budget judgment of my right hon. Friend the Chancellor of the Exchequer. I have to say with some regret that, dearly as I should like to be able to reply to as many as possible of the matters raised by right hon. and hon. Members today, I shall have to confine myself largely to certain questions related especially but not exclusively to indirect taxation, just as my right hon. Friend the Chief Secretary had to deal primarily with public expenditure in his opening remarks. Therefore, I hope that I shall be acquitted of any discourtesy if I am not able to range over all the issues raised as widely as I should like, including the subject of the textile industry, about which my hon. Friend the Member for Rossendale (Mr. Noble) spoke so eloquently in his contribution.

There is one small matter that I should get out of the way before coming to my main remarks. The hon. Member for Cirencester and Tewkesbury asked me whether there was any prospect of changing the resolution with respect to the capital transfer tax. He will not be surprised to know that I cannot give him any encouragement in that direction. Bearing in mind the many representations that he has made to us in the past about how ill-digested the tax was, I should have thought that he would welcome a period of recollection and tranquillity so that when we came forward with our proposals they would have been the result of mature consideration, having seen the tax in effect for a short time. But that does not derogate from any of the assurances given by me or by my right hon. Friend the Chief Secretary in Committee or on Report on the last Finance Bill.

Sir John Hall (Wycombe)

In Committee the assurances given to the Opposition seemed to indicate to any normal listener that we should be given an opportunity in the coming Finance Bill to introduce further amendments to the capital transfer tax provisions. Is not this a departure from those assurances?

Dr. Gilbert

It may be that the hon. Gentleman was not listening with his normal close attention. If he refers to the proceedings on that Bill he will find it difficult to accuse Treasury Ministers of being in breach of any undertakings in that respect.

I want to touch on one minor matter in passing. Earlier today my right hon. Friend was asked about the table of public expenditure cuts which was to be circulated in the Official Report. He said that arrangements were being made for the table to be published tomorrow. Unfortunately, the House authorities have had second thoughts about this, and it will not be possible now, I am afraid. However, I expect that the table will appeal in the Official Report which will be published on Friday.

I thought it right to say a little about capital gains tax. Yesterday my right hon. Friend announced the Government's intention of reviewing the incidence of the capital gains tax in the coming year. As hon. Members who Sat on the recent Finance Bill Standing Committee will recall, I have always recognised that capital gains tax in its present form has a number of defects, and I am sure that the House will welcome the announcement of the review.

Mr. Nott

On a purely administrative matter, will the Financial Secretary elaborate a little more about when this table will be printed? I had a copy of it yesterday. If Hansard is being printed, will he explain why the table cannot be included in Hansard?

Dr. Gilbert

I understand that the problem lies with the Table Office. I am sorry that I cannot tell the hon. Member any more. We are not seeking to be obstructive. The table will be printed as soon as possible, but this is not a problem with the Government. I understand the problem lies with the House authorities, who are now wrestling with it. I can but express my regrets for a matter which is not my responsibility.

This year the Chancellor decided that the Finance Bill should concentrate only on the most urgent reforms of capital gains tax, and among these he is putting a stop to what is known as the "bed and breakfast" manoeuvre. Legislation will be directed primarily against manipulation of the capital gains tax rules by companies establishing losses for capital gains tax by selling and repurchasing the next day shares which they never really meant to dispose of. Hon. Members will have seen many such cases reported in the Press, and in the autumn one company was reported as setting up a loss of £30 million through one of its operations. Another was frank enough to tell its shareholders in its published accounts that there was no need to make provision for any deferred taxation on a subsequent rise in values since the circumstances in which liability to tax would arise in the future—namely, disposal of the shareholding in question outside the group—was considered to be remote.

The Inland Revenue may be challenging a number of these transactions, but my right hon. Friend decided, without prejudice to the outcome of the Revenue's inquiries, to put a stop without question to this abuse of the rules. It may be asked why the new rules are confined to companies. We have decided to exclude individuals since as long as all capital gains are ultimately brought into charge to tax there is no fundamental objection to the "bed and breakfast" device by individuals. We recognise at the moment that this might not be the case while there remains no capital gains tax change on death. However, we have always made it clear that it is our intention to restore that charge, although as a result of pressures of space in the current Finance Bill we are not able to do so immediately. As hon. Members will realise the position is different with companies. There may be no ultimate capital gains tax liability there, and this is particularly the case where large holdings in publicly quoted companies are concerned.

Mr. Hall-Davis

Perhaps this is a small and trivial point, but is there not something rather ghoulish about people knowing that the best they can do in the interest of their families is to die now and not to live any longer?

Dr. Gilbert

Actually, this proposal would help to reduce one of the anomalies that the Opposition have urged us to eradicate. The hon. Member for Morecambe and Lonsdale (Mr. Hall-Davis) was not in Standing Committee with us, so that he would not know that it was suggested there that the absence of a charge to capital transfer tax on death was locked in and that we were urged to end the situation where under capital transfer tax there was a discouragement on people to transfer assets earlier in their lives.

Apart from this, my right hon. Friend thought it right to concentrate on the expansion of capital transfer tax reliefs for working farmers and the owners of certain business assets and the application of the capital transfer tax principle of conditional exemption for historic houses.

In his Budget speech my right hon. Friend referred to a proposed change in the structure of certain of the Revenue duties, whereby the customs duties on imports would be replaced by excise duties. These changes will not come into force until 1st January 1976. What is involved in most cases is essentially a change of name, but I am afraid that this will require what is, at first sight, very complex legislation. I am sure that the House will be happy to accept my suggestion that we await the detailed provisions of the Finance Bill, although I could deal at this stage with one or two matters that will be involved.

First, we are proposing no change in the structure of tobacco duty. This would raise complex issues which we feel are better left on one side for the time being. Moreover, there is no obligation upon us, as a result of our membership of the Community, to make changes at this time.

Secondly, we are proposing a small change in respect of perfumed spirits. There is a curious anomaly in our existing tax structure which stems from a 1974 GATT agreement, under which the duty on imported perfumed spirits has been frozen at its 1948 level. As a result, importers now have a substantial preference over home manufacturers. This GATT obligation lapsed on our accession to the Community and we are taking this opportunity to propose the abandonment of the discrimination against British manufacturers.

Thirdly, we are proposing a recasting of the duties on imported wine and British wine. In most cases this will involve no real change in practice, but we are proposing from the beginning of 1976 to replace the customs duty on wine and the excise duty on British wine by two new duties. First, all wine made from fresh grapes, whether imported or produced in the United Kingdom from British grown grapes, will be subject to a wine duty. Secondly, there will be a duty on what we will now term, for this purpose "made-wine". This will cover all fermented alcoholic beverages, whether imported or produced in the United Kingdom, other than beer, wine of fresh grapes, spirits and certain cider and perry. It will fall mainly on what is at present dutied as British wine.

Sir Geoffrey Howe

The Minister might well like a moment's relaxation from that splendid piece of prose. It is absurd that the document intended to be circulated in the Official Report yesterday, as a matter of sheer practicality, although available yesterday in the copy of the Chancellor's speech circulated to me, with 500 copies in the Library today, should not be published. If I ask a question in the appropriate form, perhaps the Minister might like to read it into the address. Perhaps he might like to ask the permission of the House to circulate it in the Official Report now. It should be possible to do it in some way, if I can ask the Minister now.

Dr. Gilbert

The right hon. and learned Gentleman is being frivolous. There are 500 copies available in the Library. If any hon. Member wishes to get a copy it is perfectly easy for him to do so. It is the grossest frivolity for the right hon. and learned Gentleman to rise three times on a point of this sort during a Budget debate.

I turn to the question of the higher rates of value added tax. One matter which pleasantly surprised me today was the few complaints we have had about even the principle of the multi-rate structure. The hon. Member for Caernarvon (Mr. Wigley) attacked the principle of multi-rate VAT. He will recognise that we have not been able to confine it to luxury goods. We have never made any pretence that we have been able to do so. Generally speaking, the extension of the 25 per cent. rate will apply to less essential goods and to the large ticket items. We have been at pains to ensure that we shall not have a great many anomalies of the sort that Sir Gerald Nabarro's name was so frequently associated with. We all know that the present structure of VAT is not without its occasional anomalies. Anomalies are inescapable in any form of indirect taxation. We do not pretend that there will not be anomalies associated with the widening of the higher rate of charge, nor do I pretend that there will not be additional burdens for business as a result of the proposals. However, our proposals have taken account of the difficulties experienced under purchase tax and those that might have been encountered if we had imposed a complicated multi-rate system on a mass of retailers.

There are three points that I should like to make at this stage. First, we shall have only one higher rate. It is illuminating to compare this with other countries with the multi-rate system. For example, in Luxembourg and the Netherlands there are three rates; in Belgium and France, five; in Ireland, six, if one includes the zero rate; and in Italy, which is in a state similar to ours when we had purchase tax under the Conservative Government, there are five, including three temporary rates.

Secondly, many items taxed at the higher purchase tax rates will not attract 25 per cent. value added tax. To name a few, they include light fittings, clocks and watches, other than those made of precious metal, toys, trunks, bags. most toilet requisites, gramophone records, most fancy goods, perfumery and cosmetics. I hope that the fears of pharmacists and retail newsagents will be considerably allayed by our decision to exclude such items.

In addition, there has been a long period of discussion and preliminary planning by the Customs and Excise, in conjunction with all the trades involved. The delay in the introduction of the higher rate until 1st May, which will be the commencement date of a VAT accounting period for many traders, and thereby the acceptance of a considerable degree of forestalling on the Government's part, will help the retail trade still further.

Before I pass from the higher rate VAT it will be for the convenience of the House if I correct an incorrect report that appeared in the Evening Standard today and, I believe, in The Guardian; namely, that the 25 per cent. rate would not apply to domestic freezers and refrigerators or to powered gardening equipment. The reports are erroneous. Those categories of goods will be charged under item 1 of Group 1 of the table in Resolution 16, which deals with domestic appliances, and under item 2, which deals with those operating by gas and bottled gas rather than by electricity.

Sir Geoffrey Howe

This demonstrates at an early stage the kind of misunderstandings and complexities that are bound to arise from the change. Does not the category of accessories to radio sets and so on which is to fall within the new higher rate VAT include such things as batteries? We see the inclusion of photo- graphic equipment, although films are excluded. Both represent items likely to be within the range of goods sold by pharmacists. Is this not just one illustration of the way in which pharmacists are likely to be affected?

Dr. Gilbert

I cannot understand why the misunderstanding should have arisen, because the matter is clear from the resolutions.

We have decided that the 25 per cent rate should apply to accessories and the servicing of goods which are themselves chargeable at the 25 per cent. rate, because we think it desirable in general that parts of goods should be taxed at the same rate of VAT as the complete goods in order to reduce the incidence of anomalies. This will also reduce an incentive to distortion in trade. Without such provisions, it would be possible for people to buy parts at the 8 per cent. rate and assemble them themselves, which would be seriously to the detriment of the retailer who was selling the complete goods.

Similarly, we shall be charging a 25 per cent. rate on servicing because, again, we could have all sorts of anomalies springing up if there was an 8 per cent. charge with respect to servicing but a 25 per cent. charge with respect to the parts involved. The hon. Member for Cirencester and Tewkesbury asked why on earth my right hon. Friend did not keep the standard rate at 10 per cent. instead of introducing multi-rate VAT. He pointed out that we would have had a higher yield as a result.

The hon. Gentleman is absolutely right. The yield would have been higher. On the other hand, what he has totally failed to appreciate is that an increase of that sort would have left the retail price index over ½ per cent. higher. My right hon. Friend decided to forgo the extra revenue that would have been available as part of his contribution to keeping down the cost of living.

I turn to the question of vehicle excise duty. Several hon. Members have urged upon us the total elimination of the increase in vehicle excise duty and its replacement by an increase in the tax on petrol.

Mr. David Howell

Before the hon. Gentleman leaves the point about the higher rate of VAT, may I put a question to him? He told us that this is now to apply to the servicing of appliances as well as to the appliances themselves. This seems a considerable advance in burden from what the Chancellor was saying yesterday. Servicing is already a costly item. Is the hon. Gentleman saying that servicing for all items of this kind, including regular contract servicing, is to be charged at 25 per cent.? If so, this extends the 25 per cent. rate over a wide area because contract servicing is a widespread practice.

Dr. Gilbert

The answer is that generally speaking it will be. We shall be applying the 25 per cent. rate to servicing of domestic appliances, radios, television, hi-fi equipment, small boats, light aircraft, caravans, cameras and binoculars, together with the repair of furs, most jewellery and all goods supplied in connection with that servicing. We have excluded the servicing of aircraft for reasons of safety. There is also an exception for parts and materials in general use except when they are supplied in connection with the higher rate servicing. This exclusion covers such items as nuts, bolts, screws and general materials such as paint and flex.

Sir Geoffrey Howe

Does not the imposietion of a trebled rate of VAT on the servicing of electrical appliances represent a disastrously retrograde move from the point of view of consumer safety? Is the hon. Gentleman not aware that the availability of servicing facilities of that kind is already the subject of an investigation by the Office of Fair Trading? Does he not appreciate that this is likely to jeopardise the safety of many electrical appliances, with people being unwilling or unable to pay the high tax imposed—a tax on safety? Is the hon. Gentleman not following swiftly down the road so clearly warned against by the late Sir Gerald Nabarro?

Dr. Gilbert

A great number of anomalies would arise if the charge were not applied to servicing, as there would he anomalies if the higher rate tax did not apply to parts. We recognise that, and we recognise that the higher rate will be unwelcome, but this is the best way to guard against a serious extension of the anomalies that would otherwise arise. In that context I should have thought that the right hon. and learned Gentleman would welcome it.

Mr. Thorpe

This is a very important point. Is the hon. Gentleman merely saying that VAT will be charged at 25 per cent. on specific spare parts, or that 25 per cent. will be charged on the whole servicing bill? If it is the latter, he will be aware that if the customer pays the 25 per cent. to buy the item and 25 per cent. for three services, it will be 100 per cent. of the cost, which is paid by the taxpayer.

Dr. Gilbert

The right hon. Gentleman has got his arithmetic wrong. Parts which are essential ingredients of the piece of equipment which carried the 25 per cent. rate would also carry the 25 per cent. rate, and the servicing of that equipment would also carry the 25 per cent. rate. There is no question of a tax on tax situation which the right hon. Gentleman is suggesting.

The right hon. Gentleman raised the question of vehicle excise duty. My hon. Friend the Member for Renfrewshire, West (Mr. Buchan) would have preferred the Chancellor to increase the tax on petrol by 1p or 2p a gallon rather than to increase the vehicle excise duty. Alas, the equivalent increase to bring in the same amount of revenue would have been no less than 6p per gallon. The crossover point for a car averaging 30 miles per gallon would have been about 7,500 miles a year, which is about 150 miles a week. Anyone who expects to use his car to travel more than 150 miles a week will be paying less tax under these proposals than if my right hon. Friend had put all the increase on petrol. That will prevent the burden falling seriously on constituents of right hon. and hon. Gentlemen who represent rural areas.

The right hon. Gentleman complained that the increase was a flat-rate licence increase for Minis and Rolls-Royces. He will be aware that this has been the situation in motor vehicle taxation in this country for about 27 years. It was changed in 1948 largely at the request of the motor industry, because of the problems manufacturers had, especially at the margins of each engine capacity band. That is the long-term problem—the design problem about which the industry is concerned. The short-term problem is that a change of that sort would suck in imports that the British car industry is not at present in a competitive posture to keep out. As I am sure the right hon. Gentleman will recognise, the increase last November in the rate of tax on petrol is to the disadvantage of high-consumption cars.

It was noticeable and welcome that no hon. Members complained of my right hon. Friend the Chancellor's increases in excise duties on tobacco, beer, wines or spirits. It must be a long time since a Chancellor put increases to the extent of anything approaching the present amount on discretionary expenditure without a single complaint from an hon. Member during the debate. This marks a considerable change in social thinking about the effects of smoking and the dangers of alchoholism.

It is noticeable that even in the Press that dissents most vigorously and consistently from the policies of my right hon. Friend the Chancellor and the Government, he had an almost unanimous accolade this morning for his courage The reception that he has had from those sections of the Press that are normally unlikely to applaud him was in marked contrast to that which he received from Conservative spokesman yesterday and today. Yesterday the right hon. Lady the Leader of the Opposition said: The Chancellor of the Exchequer has taken virtually no steps to deal with inflation and still has no strategy to deal with it."—[Official Report, 15th April 1975; Vol. 890, c. 324.] Yet today an article published in The Times says that We do have a Chancellor who is facing the crisis of inflation with firmness and decision. He deserves equally determined support, because he is going to be under fire from men who do not understand. There on the Opposition benches are the men who do not, cannot or will not understand, but the country at large does understand.

It being Ten o'clock, the debate stood adjourned.

Debate to be resumed tomorrow.