BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 17 April 1975 vol 890 cc678-802

4.4 p.m.

The Paymaster-General (Mr. Edmund Dell)

I think it may be helpful to the House if at this stage in the Budget debate I say something about inflation, something about investment and something about international trade.

In his Budget speech, my right hon. Friend made reference to the prospect of a deceleration in the rate of increase in the Retail Price Index. He referred to the possibility that in the second half of this year the rise in the cost of living could move down to an annual rate of 12 per cent. to 16 per cent. This could be achieved on the crucial assumption that there is no further acceleration in the rate of wage and salary increases. It would be useful to spell out some of the factors which underlie my right hon. Friend's forecast.

The first point is that such a deceleration would be due in significant part to the easing in the rate of increase in import prices. Since mid-summer last year the import price index, in unit value, has risen at a much lower rate. In the nine months from June to March this year it rose just 7 per cent. In the preceding nine months' period it rose over 46 per cent.

The same story can be seen by looking at the price index for manufacturers' basic materials and fuel, the vast bulk of which is imported. In the year to March 1974 the index rose 66.2 per cent. In the following year—that is, in the year to March 1975—the growth was only 3.2 per cent. While it is true that wage costs have become the dominating element in the inflation of manufacturers' costs, that manifestly does not mean that the benefit from easing import price increases does not continue to be felt. It does so continue and will do so for many months ahead, helping consistently to offset other increases.

In addition, there are a number of largely once-and-for-all factors which, once absorbed, then permit some improvement in the rate of increase in the index. The direct RPI effects of the Budget, the 2¾ per cent., fall into this category. The effect will be felt over the next three months or so and will cease to register on the index by the middle of the year. In much the same vein are the price increases arising from the phasing-out of the nationalised industries' price subsidies. These, too, will have been largely absorbed by the middle of the year, and the same applies in the case of increases in rents and rates.

Those are the main influences, but there are some others. There is, for example, our expectation that the recent rapid rise in the price of foodstuffs should give place to significantly more modest increases. There is, in addition, scope for improvement in labour productivity to keep down unit labour costs.

All these factors create the possibility of a deceleration, but of course other countries will be decelerating, too. They all will be benefiting from the easing of import prices and there will be no grounds for thinking that an annual rate of 12 per cent. to 16 per cent. can be accepted complacently, though it would be a marked improvement on present performance. I hope it will be appreciated just how important it is that we should not throw away the significant chance which such a deceleration would present in helping to prick the bubble of inflationary expectations and to protect our competitiveness abroad.

This brings one to the fundamental question whether the assumption will be fulfilled and whether it is reasonable to expect such an assumption to be fulfilled, particularly against the background of the indirect tax increases in the Budget. Will these push up wage claims? This is obviously an issue of fundamental importance at this time. The social contract said that there should be increased social provision and an increased social wage. That was part of the social contract, and the suggestion cannot conceivably be that such increases in the social wage should not be paid for—unless, of course, the truth of the matter is that in asking for an increased social wage those who do so are not speaking for their members in giving such a social wage a higher priority than a personal expenditure. I hope that it is not true that the priorities have been got wrong, but it has been part of the policy of my party from the beginning to provide a higher social wage.

There is, of course, a dilemma in any system of wage settlements such as a social contract or thresholds which attempt to link wage increases to the cost of living. The claims which are based on such a link may well take account of increases in the retail price index arising from increases in indirect taxation. But the claims which are already being made are well above what is required for compensation for increases in the cost of living, and this therefore provides no excuse at all for increased claims derived from indirect tax increases. But in any case the social wage cannot be provided without its being paid for, and such increases would be entirely self-defeating.

In his Budget Statement my right hon. Friend drew attention to the fact that there had been a fall in the real national income between 1972 and 1974 because of the movements in the terms of trade. Despite this fall, the social contract said that there should be a maintenance of living standards. In the circumstances of a fall in the real national income that is possible only through borrowing. It is possible for a short period to maintain standards of living through borrowing on the assumption that it is simply the maintenance of standards of living. If that target is exceeded, all that happens is that one becomes increasingly dependent on borrowing and there is increasing inflation.

The right hon. and learned Member for Surrey, East (Sir G. Howe) said yesterday that the Government had ignored the fall in real national income. But national income can be divided in many ways, providing that the form of division commands general acceptance. It is possible within a reduced national income to make additional provision for a social wage, without inflation, provided that concept commands general acceptance, but the truth is that we all ignored this major new factor in our circumstances—that is to say, the effect on the standard of living of movements in the terms of trade. We have ignored it for understandable reasons.

In most post-war years the terms of trade have moved in our favour, that is to say, they have helped our standards of living. Only recently has this new, dramatic change occurred, in which the rise in the cost of our imports has so fundamentally changed the terms of trade as to bring about a fall in our real national income. What the future holds in respect of movements in commodity prices cannot, of course, be reliably forecast. The less developed countries are demanding their share in the world's material goods. We have noted some evidence of that in the breakdown of the talks in Paris which were intended to establish a conference on energy matters.

In these circumstances, the only reliable basis for a maintained or increased standard of living must be higher productivity in the United Kingdom. If higher and higher salaries and wages are conceded irrespective of movements in real national income, there will be continuing cuts in public expenditure, because it will be a sign that people are setting different priorities, there will be enhanced inflation and there will be continuing cuts in investment—which is the basis for our future prosperity—because investment is impossible, unless there are free resources to finance it. A situation will be created which will become increasingly unacceptable from the point of view of the aims of the Labour Party.

I turn to the question of investment. I perfectly understand that there are serious problems at the moment facing investors. I recognise many disincentives to investment in the present situation. There are the ill effects of inflation—its effect on costs and the predictability of profits, its effect on competitiveness in export markets, although, fortunately, that remains satisfactory for the moment, and its effect on company liquidity. There is worry about interest rates because, although in real terms these are negative, profit still has to be made. Price control is an irritation, although we relaxed that in November and there was further relaxation in the Budget. Other difficulties lie in the present level of home demand.

Despite all these problems, we welcome the fact that in 1974 manufacturing investment kept up better than had been expected. The fundamental question now is, will industry invest across the depression? Will industry provide itself with the necessary additional capacity, as some companies are doing, or shall we again be short of capacity when the upturn comes?

I will draw to the attention of the House the positive factors in the present situation which should encourage investment. I will first say a word about monetary developments. I am glad to say that the monetary developments referred to by the Chancellor have been accompanied by a welcome revival of confidence in the financial sector generally. The operation by the Bank of England and the clearing banks to support secondary banks with liquidity problems has continued successfully and the situation is well under control. The asset position of these banks, and of other institutions such as insurance companies, has benefited from the reduction in interest rates and a renewal of more normal activity in parts of the property market. The latter, of course, has also been assisted by the decontrol of business rents which my right hon. Friend the Secretary of State for the Environment announced last December and which, since there has been speculation to the contrary, I take this opportunity of saying we have no intention of restoring.

The Government have also done as much as was conceivable, given the present size of the public sector borrowing requirement, to help the finances of the company sector. That has been done by continuing the tax relief on stock appreciation which was introduced last November, a relief which is estimated to be worth £1,300 million in 1975–76 and £1,500 million in future years. We also believe that the financial position of the company sector should improve during the next year. There are signs of reflation abroad and the expansion of world trade, which could be quite rapid, will encourage investment.

We have announced in the Budget various other smaller but important encouragements to investment, such as the amendment to the Price Code. There is the £100 million of selective help which will be rapidly available for action now to assist companies with projects, either the ferrous foundry industry or companies with projects which have been deferred because of the present situation. Thus, in my judgment, there are significant reasons why companies should now go ahead with investment, and there are significant encouragements provided by the Government to that end. The more we can do now, the greater advantage we can take of the upturn in world trade.

There is no doubt that in the longer term much more will need to be done, for example, to improve our planning, to improve our sectoral planning, and to encourage investment in export-oriented sectors. But the problems we have to face are now. We have to do it with the capacity of Government as it is now—not as it may be in the future—with instruments such as the National Enterprise Board and planning agreements. I hope that investment will take place to assist the problems we face now.

Mr. Nigel Lawson (Blaby)

Will the Paymaster-General say where he thinks the money will come from for this investment when the Government are making vast demands on savings to finance the huge borrowing requirement in the public sector?

Mr. Dell

I listened to an interesting talk recently which gave me a clear indication that finances would be available for investment. The Government are pro- viding assistance in the various ways I have mentioned to finance investment. If the hon. Member for Blaby (Mr. Lawson) wishes to draw to my attention the problems of particular companies, I can tell him that it is precisely for that reason that we are making the provisions which were announced in the Budget.

In this conext I should like to say something about personal savings—

Mr. Nick Budgen (Wolverhampton, South-West)

Surely increasing assistance to industry from Government resources will only drive up the borrowing requirement and thus drive up interest rates?

Mr. Dell

The hon. Gentleman should note that we have decided to continue the stock appreciation scheme, which relieves companies of a large amount of tax liability during the coming year. That means that the effective rate of corporation tax falls very much below the nominal rate of 52 per cent. All this should be of significant help to investment. I remind the Opposition that the forecast for investment showed a decline last year, but that in practice investment stood up very much better than was forecast during the year. I am referring, of course, to investment in the manufacturing industry.

I would like to make some reference to personal savings because we are encouraged by their level. In the second half of 1974 personal savings showed evidence of a welcome increase. In the third quarter personal savings rose sharply, to over 13 per cent., seasonally adjusted, and there are signs that the high level is likely to continue. The Government's direct responsibility is with National Savings. There has been a distinct improvement as terms have become more competitive. The estimated net inflow in the first quarter of this year was £191 million compared with £25 million in the corresponding period last year. The Chancellor decided, therefore, not to make any further changes in National Savings terms now, although we shall watch with particular interest the performance of the two new index-linked facilities which will be available in June and July.

On National Savings, I want to pay a tribute to the dedication and service of the voluntary movement under the leadership of Sir Robert Bellinger in England and Wales, and under Lord Elgin in Scotland. The movement will continue to have an important financial and social rôle to play, particularly in schools and places of employment. Sir Robert Bellinger has announced his retirement from the chairmanship and presidency of the National Savings Committee for England and Wales. I am sure the House will wish to join me in thanking him for the sterling public service he has rendered in a difficult period. The Chancellor and I are delighted that Mr. John Anstey has agreed to take on this challenging post, and I can assure him of every assistance from the Government in the future.

Mr. Michael Latham (Melton)

Before the hon. Gentleman leaves the question of savings, would he turn his attention for a moment to building societies? As a result of the increase in income tax, would not it be inevitable for the composite rate of building societies' taxation rate to go up, which will mean that it will not now be possible to reduce mortgage interest rates. Will the hon. Gentleman look at that?

Mr. Dell

I certainly confirm that an increase in the rate of income tax has an automatic effect on the composite rate. There is no doubt about that, Fortunately, as the hon. Gentleman knows, funds are flowing into the Building Societies at the moment. This should help to sustain the supply of houses and enable people to buy houses in sufficient numbers.

On world trade, my right hon. Friend explained in his Budget speech that the strategy assumed a strong but not exceptional recovery in world trade in the course of 1976. On what evidence can one base the assumption of a recovery in world trade beginning later in the year and leading to fairly rapid growth next year? The first and most important piece of evidence is that the biggest economies, the United States of America and Germany, have both introduced substantial reflationary measures in recent months, mainly in the form of tax reductions. The major reform of personal taxation in Germany took effect from the beginning of the year and the United States personal tax rebates have been designed to give a quick stimulus to demand. Given the scale of these measures it is hard to see that recovery could be postponed much beyond the beginning of 1976.

Other factors which should help to promote recovery include completion of the downward adjustment of stocks in the United States and other countries, expansionary measures taken recently in France and Japan, relatively modest though these are, and the growth of imports by the oil producer countries. From the United Kingdom's point of view it is clearly of the first importance that we should be well prepared to meet the resurgence in world demand and trade when it comes.

Before speaking about the United Kingdom balance of payments I should like to say something on the massive surpluses of the oil producers. We have now had to live with these massive surpluses for well over a year. It is encouraging that, in the view of most experts, the accumulated surpluses, though still daunting, will be rather smaller than many feared initially.

There are two aspects to the oil surpluses problem—financing and real resource transfers. On the financing side, the picture is reassuring. The private markets, in spite of one or two periods of uncertainty, have coped very well. There has been progress internationally, as well. New multilateral financing facilities have been established in the International Monetary Fund and the European Economic Community, and most recently with the signing last week of the agreement on the 25 billion dollar financial support fund, the so-called "safety net". The problem now requiring attention is the process of real resource adjustment, both between oil producing and consuming countries and among the industrialised consuming countries themselves.

The establishment of adequate financing arrangements is not, of course, a substitute for real resources adjustment. For the United Kingdom the problem is particularly acute. In part, this is due to our earlier recognition of the deflationary impact of the oil price rises. We recognised the impossibility of securing substantial improvement in our current account at a time of deepening world recession except at heavy cost in unemployment. For this the Chancellor has rightly taken credit. But we cannot continue running a current account deficit on the scale of last year's. It is all the more important, therefore, that we should put ourselves in a position to take advantage of the resurgence m world trade. We must improve our external position relative to other industrial countries.

One important factor in achieving the shift of resources which is now necessary will be our ability to increase our exports to OPEC countries substantially. Our performance here during 1974 was disappointing. According to the OECD, our share of this market fell from some 12 per cent. in the third quarter of 1973 to about 9¼ per cent. in the third quarter of 1974. In the last three months, however, there have been some signs of improvement. Exports to these countries were 23 per cent. higher in value than in the previous quarter. It is of obvious importance that we should do all we can to build on this during the rest of the year.

The massive 1974 deficit of £3.98 billion was caused largely by adverse movement in the terms of trade resulting from the oil price rise. This can be seen from the fact that whereas the volume of exports rose by 7 per cent. in 1974, the volume of imports rose by only a little over 1 per cent. There was thus some shift of resources into the balance of payments in 1974. Invisibles did well, too The net surplus on invisible account of £1.4 billion was £250 million above the 1973 level. But all these favourable developments in the balance of payments were dwarfed by the unfavourable effects resulting from the more than fourfold increase in the price of oil.

In the first quarter of this year the current account figures, after seasonal adjustment, show a fall in the deficit from an average quarterly rate of some £950 million last year to a little over £300 million. The latest figures have undoubtedly been encouraging but they need to be interpreted with great caution. On export and import volumes the picture is encouraging. We seem to have maintained, or even increased, the volume of our exports at a time when the volume of world trade has probably fallen. This suggests that our share of world trade has probably been maintained or even increased. Part of the reason for this may lie in our competitive position.

At the same time, import volumes have been tending to fall, especially in the last two quarters. The terms of trade, after moving sharply against us, have moved slightly in our favour since last August with the easing of commodity prices and a continuing increase in export prices, while invisibles have remained buoyant.

But the underlying improvement in the current account is probably substantially less than the figures for the past three months suggest.

In the first place, it looks very much as if the fourth quarter figures which showed a deficit of £1.1 billion were erratically bad, and the first quarter figures correspondingly erratically good. Second, the dock strike undoubtedly reduced imports recorded under March more than exports.

The moral is that the deficits in the months ahead, while continuing to show an improving underlying trend, are likely to be bigger, perhaps substantially bigger, than those of the first quarter.

The current account deficit is bound to remain large this year. In addition to the massive oil bill, there is likely to be a high level of imports associated with North Sea exploration and development. Thus part of the deficit can be seen as representing investment in the future. Although the deficit is bound to remain large, there are good prospects for reducing it substantially, both this year and again next year. Looking first over the past figures, our current balance must have suffered in 1974 from adverse "J"-curve effects following the depreciations of sterling in mid-1973 and again at the end of 1974. On balance, however, these depreciations should be bringing substantial benefits to the current account in 1975.

Another encouraging sign is that the boom in imports of consumer goods which swelled the deficit in 1973 seems now to have run out of steam. The Budget measures will help in this context.

Looking ahead to the future, there are several reasons for cautious optimism. In the first place, as mentioned earlier, there are strong reasons for expecting a revival of world trade by around the turn of the year, followed by a strong growth next year.

Second, our exports remain competitive in world markets, thanks partly to the depreciations of sterling in 1973 and in the last quarter of 1974. Our prices should remain competitive provided that we do not fritter our position away through excessive pay settlements. Engineering export orders remain at a very high level. Third, the Budget measures should leave ample room in the economy for a shift of resources into exports and import substitutes. The forecasts published in the Red Book suggest that volume of exports of goods and services will increase by around 1 per cent. between the second half of 1974 and the second half of 1975 despite the recession in world trade. Thereafter, a rapid increase in export volumes is forecast—approaching 10 per cent. at an annual rate between the second half of 1975 and the first half of 1976.

There is one further point of importance. Most other industrial countries have gone into deeper recession than we have. This has undoubtedly had the effect of increasing our deficit over the last few quarters. As demand picks up again in these countries, the change in relative demand pressures as between our economy and theirs should be helpful to the balance of payments. Looking further ahead, the prospects are once again good. The continuing increase in imports by the oil-producer countries will mean a rapid increase in the market for our exports. This is an advantage which we shall share, of course, with other industrial countries.

Another factor working strongly in our favour is North Sea oil. At present, North Sea exploration is adding substantially to the current account deficit. Later in the decade, however, despite the recent slippage, there will be a substantial net benefit to the balance of payments from North Sea oil.

It was against the background I have described that the Chancellor was able to say in his Budget Statement that the current account deficit was likely to be at least a billion pounds lower this year than in 1974, that the non-oil deficit on the current account would turn into a substantial surplus and that having achieved a very substantial improvement over the next two years we should then proceed to eliminate the current account deficit altogether as rapidly as possible thereafter.

There is no doubt that the constraints on economic policy making from which we now suffer are largely of our own making. We are confronting the fact that letters of intent are not the only way in which a country's economy may come under international supervision. A similar effect can result from any decision by a country to become dependent for its standard of living on foreign borrowing, especially when that decision is combined with failure to control a high rate of inflation.

In our economic policy making, we have lost one after another of the options which were open to post-war Chancellors. It was already possible to say in March last year, at the beginning of this Government's period of office, that the option of running a balance of payments deficit to stimulate economic growth—an option greatly beloved of the right hon. Member for Sidcup (Mr. Heath)—had been lost simply because of the size of the deficit that was already in prospect. We certainly could not contemplate action that would increase it and indeed were in a much weaker position to deal with the oil price rise precisely because of our pre-existing deficit. It is now necessary to emphasise, that the option of reflating to cut unemployment has also been lost, at any rate for the time being. This is first because of the country's large deficit and the need to finance it and second because of the high rate of inflation in this country, which indeed has its share of responsibility for the level of unemployment.

Since the oil price explosion, and the explosion in other commodity prices, this country has argued in many international fora that the existence of the vast oil surplus necessarily implied current account balance of payments deficits for the industrialised world as whole. We have insisted that those countries of the industrialised world most strongly placed should not hoard their surpluses but should themselves act in an internationally-minded way and reflate their economies as a contribution to reducing the burdens placed by the oil price increase on the rest of the industrialised world.

If those countries, more strongly placed than we, have been in our view slow to act—and perhaps have not yet acted on a sufficient scale—it is because they have had a priority other than dealing with the problem of oil surpluses, which they were in any case more able to contemplate calmly than were we. They have seen, above all, the problem of inflation. They have concentrated on bringing down their rate of inflation. They have had far more success in so doing than have we. They have said to us, "Very well, we will do so much. We will accept our international responsibilty so far as it is consistent with our need to reduce inflation. But what are you, the United Kingdom, doing about your inflation? How are you facing up to your international responsibilities? Is not what you present as good behaviour simply an excuse or cover for your own excessive self-indulgence in inflation?"

The truth is that in confronting our own problems we can rely so far, but only so far, on what others are prepared to do to help. Others are entitled to respond by asking us what we are doing to help ourselves. But much more important, we have to question our own performance and consider how it measures up to a problem which incorporates within itself a massive balance of payments deficit, a massive rate of inflation and what has come to be described as a process of de-industrialisation. It is against that background that this Budget has been widely accepted as the only realistic option open to the Chancellor.

4.37 p.m.

Mr. David Howell (Guildford)

We have now had 48 hours in which to chew over the Budget and as is usually the way with these things, we are beginning to see a certain amount of new light being shed upon it. The best way to describe the second thoughts that are clearly being had all round the place is in the phrase "growing disappointment." There is obviously growing disappointment in industry and in financial circles. There is clearly growing disappointment in trade union quarters, as has been made crystal clear. They have told the country exactly what they intend to do about it. I do not believe that the unions will have been very moved by the somewhat "Alice in Wonderland" lecture the Paymaster-General has just hopefully given them.

Whether there is growing disappointment in the Cabinet as well I am not so sure. Judging by the involvement of the Cabinet in this Budget it looks as though the growing disappointment has got into the Cabinet room. I would be interested to see whether we are to have a referendum arrangement for the Budget, too, with a licence to campaign against it outside the House and an undertaking not to speak against it in the House.

The other thing which we have seen over the past 48 hours is the Society for the Prevention of Cruelty to Chancellors, which has got into full swing. The Financial Secretary became a fully paid-up member of it last night. One way and another I suspect that the Chancellor will be able to look after himself.

The Paymaster-General thought he saw in the Budget significant reasons for futher investment. I would like to deal with this first. There is the £100 million that is to be handed out under the Industry Act. It is difficult to see if the terms are what might be called the "Bennery" terms, in other words, "You take the money and I take a slice of your firm", who will take this poisoned chalice. We should like to know what the terms will be. If they will be the "Bennery" terms, I cannot see much prospect of the £100 million doing much good. I believe that the Paymaster-General recognises that in the company sector the financial deficit is large.

There may be an end to the liquidity crisis in the sense that the imminent collapses of firms for financial reasons may have receded for the moment, but that does not mean that we are in for an era of profitability or anything like it. Liquidity has improved only because many firms have strongly cut back spending and costs, as they had to. The question we must all ask is, what happens when they have to finance expansion? Have they got the profitability which will allow that to happen? With 20 per cent. inflation, and rising, I do not see who will want to invest. Until there is profitability and the prospect of 20 per cent. and more inflation recedes, that will remain the difficulty.

As to the other aspects of the Budget on which the Paymaster-General commented, the one which has raised most eyebrows outside the House, and which is beginning to come through clearly, is the curiously passive rôle which the Government have played, despite the Chancellor's firm talk in the first part of his Budget statement, and despite the ferocious tax increases in the two crucial areas of our economy which lie behind our appalling inflation rate. First, on incomes, as the Paymaster-General in effect confirmed today, the Chancellor has clearly given up any attempt to do anything direct. He has washed his hands of the matter. The social contract is a sieve and there is a certain realism in his view. And if he did not say it explicitly, the Department of Employment figures today telling us of a 32.5 per cent. increase in basic wage rates last year say it clearly. That is the end of the matter. The Government decided that they could do nothing more direct. They have finished with the contract.

On the other key issue, public spending, the Chancellor had a different tune to play. It was "Not this year." He is saying, in effect. "Of course it is important, but for the moment if you are asking me to do something—no. Good afternoon. I shall come back to that next year." He has given us a list of what will happen next year and it amounts to a total, on 1974 survey prices, of £901 million. It excludes—no doubt the Minister of State will correct me if I am wrong—the reductions achieved by phasing out the nationalised industry subsidies, or most of them, in 1975–76. I do not know whether it will include the saving which will be achieved now that the Government, under pressure from the Opposition, have decided to postpone the nationalisation of aircraft and shipbuilding, which I believe was to cost approximately £300 million. Perhaps the Minister can tell us, now that the Government have decided to postpone it, where that saving will come from. It is a very good move, if I may say so. However, none of this answers the question about public expenditure—namely "Why not now?"

Last night the Chief Secretary put forward reasons why there are difficulties about rapid changes in capital programmes. There may be something in that, although I have always believed in the possibility—as I believe the Paymaster-General has; I understand that he has written something about it—of developing a shelf of public sector projects that can he taken down, and that can respond to changes for various reasons, fairly swiftly. Other countries have this. I imagine that a keen planning Government, in power for the last year, might have made some headway there, but clearly they have not.

But if there are difficulties on the capital spending side, if hon. Members look at the list which will apparently be published in Hansard tomorrow, one way or the other, they will find that of the £901 million at 1974 prices, £471 million is in current expenditure on goods, services and other transfer payments. In connection with that £471 million, the argument about postponing it until next year and not doing anything too disruptive does not apply. This is a point that my hon. Friend the Member for Oswestry (Mr. Biffen) made when we questioned the Chief Secretary and other Ministers yesterday. Why cannot this reduction be brought forward this year? In my view, the reply is "Well, we do not really need it until next year." Next year is the time, as the Chancellor has told us, when there will, regrettably, be about a million unemployed.

Now is the time when confidence is most precarious, when the world is expecting to see a vigorous operation on public spending, and when at least the current expenditure cuts could be brought forward. Treasury Ministers will have to forgive both hon. Members and commentators outside if they seem a little sceptical that these cuts will ever take place. If they are needed, they are needed now. They can and should be done now. We believe that unless they are done, there will be not only scepticism but a dangerously precarious lack of confidence continuing in our economic situation.

That is the curious aspect of this Bud get—the supine inertia of the Government on the two chief components of our appalling economic crisis, namely, incomes and public expenditure. The Government have chosen the third way, which is to hoist taxes on various fronts, and to hoist them up considerably. This is obviously the more natural way for a Socialist Government, as my right hon. Friend, the Leader of the Conservative Party, pointed out the other day. Maybe it makes many Socialists feel more comfortable. Even if it is half right, it is only one blade of the scissors, or, in the graphic phrase which came from the pen of the right hon. Member for Down, South (Mr. Powell), it is like trying to clap hands with only one hand. It is half the problem, and I am not sure that it is not the wrong half.

The approach of going all out for increased taxation and ignoring the public expenditure side at this stage, saying, "Never mind, that will come next year", has one virtue and one virtue only. The thing that dished the German Government in August to November 1923 was that the appalling inflationary impact on public spending, of the kind which in its incipient stages we are beginning to see here, was in no way matched by rising revenue. The revenue situation got totally out of control, and that led the way to disaster for the German Government.

It is true that as long as the Chancellor can at least keep revenue running along behind—even if it is falling away—and as long as he can manage this remarkable high-wire trapeze operation with the enormous public sector borrowing requirement, a very precarious operation, we shall at least be safe for the moment from the sort of Weimar outcome. That is a little comfort to Treasury Ministers.

Our inflation will be of a more genteel and less dramatic kind, but it will arise—and the Chancellor had plenty of words to describe this graphically—from a persistent overspending by Government and an unwillingness to do anything about it. As long as that remains, as long as the Government ignore that blade of the scissors, as they appear determined to do—despite their undertakings that it will happen next year, sometime or never—the only outcome can be wages and taxes chasing each other up the price inflation ladder. That is what the trade unions have indicated in unambiguous terms. That is what they intend to do.

It brings out the basic contradiction in the social contract which the Paymaster-General was trying to circle in rather a strange way at the beginning of his speech. The basic contradiction is between the Chancellor's proposition that we must all take a substantial cut in our living standard as a nation, both in the public and private sectors, and the proposition of the social contract that living standards will be maintained. The two do not add up. They never did, and the attempt to make them add up has only increased the tension and disappointment that already exist.

However, it does more than that. Because of the reflation last year, for which the Paymaster-General said the Chancellor takes credit, we are in a worse position in the face of the business recession than practically any other country. We shall be in a worse position to exploit the situation as world trade improves next year.

The situation is worse than that. The hon. Member for Meriden (Mr. Tomlinson) made the significant and perceptive comment yesterday that at the end of this process we shall have worse unemployment than anything the Chancellor is talking about or predicting now. The hon. Gentleman is right. That is the certain outcome of the present strategy and the failure to tackle the central components of inflation, which are mainly public spending.

The weight put on the taxes side has two other unfortunate effects, which both help to create the growing tension in our society of which the Chancellor warned us. First, there is the collective punishment for selective guilt, to which my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) rightly referred yesterday. If a person has gross pay of £80 a week, the increase of tax is just the same whether he has had that amount for four years or has just received it through a 33⅓ per cent. wage increase. Either way, one still takes the tax increase between the eyes. Although it may not look big, it is substantial, allowing for inflation. It is an unpleasantly unfair operation, and I do not think that that unfairness will pass unnoticed by many millions of people who have not been on the wages escalator and have not taken wage increases of 33⅓ per cent. or similar proportions. They will have their say.

Secondly, Treasury Ministers are led into the nonsense of the higher rate VAT. We warned them about this. Here we are moving into incomprehensible, complicated country. The late Sir Gerald Nabarro would have had a field day. On pages 12 and 13 of the Budget Resolutions we have a list of some of the items that will not be included in the higher rate VAT, together with some that will. It needs only a moment's study to see that we can get into a fine old muddle. Group 1 excludes tools of a kind used wholly or mainly for carpentry, metalwork or masonry work". That is all right, but further down we find that if they are used for horticultural purposes they catch the tax. In other words, if the drill is taken into the greenhouse it is taxed. If it is used in the garden shed or for any other form of carpentry in relation to horticulture, such as work connected with growing tomatoes, it is taxed. But if it is used in the house it is untaxed.

Under Group 2, if one has an intercom or internal telephone between the kitchen and the greenhouse, the end that is in the greenhouse carries the tax, but the end in the house does not. That is lunacy.

The lunacy goes even further. What is not mentioned in Group 2 is that the higher rate of VAT will apply not only to services but, as the Financial Secretary told us last night, to television rental payments, because, I understand, each payment is deemed to be for a fresh supply of the service of television viewing. Therefore, the people who bought their television sets made an even wiser decision than they thought, while those paying the weekly rental will be clobbered far harder than they thought. That is a recipe for mayhem in the television industry. It is grossly unfair.

Those are just some of the appalling consequences that are bound to follow from going into multi-rate VAT country. I do not know whether the Treasury Ministers are short of work, but they will take themselves into a nightmare of complications when it comes to the legislation and the anomalies which will come up again and again when they try to make the items on pages 12 and 13 of the Order Paper work in practice. Those items will not work. The anomalies will be shown up and will look absurd.

Those are the difficulties of sticking to the tax side only and ignoring the public spending side. Public spending is the root of the matter. When the Chancellor looked at the public spending issue, it was the one from which he walked away. Some pessimists predicted before the Budget that the public sector borrowing requirement would go up to about £7 billion to £8 billion—using "billion" to mean "thousand million". Some optimists said "No". The Chancellor will hold it at what it was believed to be in November—£63.3 billion." No one dreamt that it would go to £9 billion, and that it would have gone well over £10 billion but for the cut-backs and the increased revenue from tax. No one foresaw that it would go to the colossal, almost ungraspable figure of £9 billion.

We have a right to know how that sum will be financed. The Chancellor said that the supply of unconditional funds could well run out. If so, where will the money come from? In any case, how can we rely on the figure of £9 billion? We mistakenly relied last year—or perhaps the wise ones did not—on the Chancellor's aim to get the public borrowing requirement down to £2.7 billion. He was to slash it. He said that it was much too high and that it was inflationary. But it came out at £5 billion, then £6.3 billion, and finally more than £7 billion. What do we make of the figure of £9 billion this year? Where will it end? One hesitates to articulate the actual figures which, on past performance and present likelihood, might be the out-turn in 1975–76.

The Chancellor says that next year he will get a massive cut of £3 billion. There seems to be some hope that rising exports will produce rising incomes, which will produce rising revenues, which will in turn close the gap in that direction, and that his public spending cuts, if they ever materialise, will begin to close the gap the other way.

We should like to hear from the Minister of State today and from the Chancellor on Monday a good deal more about how this miraculous drop in the borrowing requirement will be achieved. This £3 billion cut will be a cut from what figure—from the £9 billion or a much bigger figure which was not foreseen and which nobody understood, because none of us realised the appallingly inflationary effect of public sector expenditure? The House has a right to know, because we are not only living on borrowed money but are in a most precarious situation, in which the gusts and eddies of international crisis could blow us over the edge at any moment. We have a right to know the score.

As for public spending control, the Chancellor made explicit and candid his problems here. I agree that it would be much more satisfactory if public spending were set out in current prices rather than in constant prices. My right hon. and learned Friend was right to make that point yesterday. That would make a vast difference. I had some experience here in the early 1970s, when we were trying to introduce new systems to reinforce the existing systems for public expenditure control. The inability to deal with things in money terms, the concentration on resource terms, was the Achilles heel of the whole matter, the weak link without which efficient public expenditure control is not possible. I agree with those who say that if public expenditure were in money terms, if one did not drain off price and wage effects, that would make departmental budgeting much more realistic. It would ease the load on the Chief Secretary, who has a poisonously difficult job, as we all recognise, and it would begin to bring the first shreds of realism back into departmental budgeting in Government. That is good. The Chancellor has said so. However, I do not know what he proposes to do about it. The Chancellor must take action in recognition of the fact that we are in a crisis.

I cannot give the same welcome to the talk of a conference with local authorities. That seems to me to be wishy-washy stuff. It does not reflect the nature of the crisis. There is a problem. I know that there are difficulties about interfering with the constitution or the lawful right of local authorities to conduct their affairs in their own way. However, we are in a crisis. We are living on the edge of a precipice. It should have been possible to introduce or devise measures with more punch in them than the proposed conference with local authorities.

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

Perhaps the hon. Gentleman would care to spell out what he is suggesting. Does he suggest that in what he called the emergency we should take the control of local spending out of the hands of the local authorities?

Mr. Howell

I think that in the present situation such a pro tempore measure should not be ruled out. It is strange that the suggestion should come as a surprise to the Chief Secretary to the Treasury.

The Chancellor is right to emphasise the central significance of public sector pay and the enormous percentage increases now being granted in an area where we have visible evidence that the pay situation is out of control. The frenzied interlocking process of rising public sector spending, financing public sector pay increases is creating the situation whereby public pay and public expenditure feed on each other. That demonstrates the suicidal, cannibalistic, inflationary process which is going on. We must cut into that process. It is no use running away from it. It is wrong that the Chancellor should have washed his hands of the matter and said "We must stick to higher taxes". It is essential for politicians on both sides of the House to face up to that issue. We cannot run away from it since it is the source of our inflationary process.

This is an appallingly difficult problem. However, we would stand a better chance of succeeding if we dealt with it by means of public expenditure and the Budget rather than purely in terms of wages and norms. That is my view. I suspect that we are beginning to hear that view from the Treasury bench. I am glad to hear Treasury Ministers, when discussing major public sector pay claims, talking about the total wages bill, the jobs that may be forgone, the recruitment which may be run down, the prices which may be increased, and the cuts in other services. Since the Government must pay the bill, they should say who will have the money taken from them and who will lose. Will the losers be the old people, the school programmes, the disabled or the homeless?

Excessive wage claims are a brutal business. Perhaps we need more brutality from the Government, because when huge wage claims are financed by the Government other people are badly hurt.

Mr. Ian Wrigglesworth (Thornaby)

Will the hon. Gentleman spell out where he would make the cuts which he has requested the Government to describe?

Mr. Howell

The Opposition would have brought forward the current expenditure cuts to this year. We would bring forward to this year the £470 million cuts. There is no reason why they should wait until next year.

As I say, this is a brutal business. The Chancellor has referred to the rake's progress. He used the right imagery and the right explanations. He said that if we continued as we were, we would face an appalling cut in our public and private living standards within weeks. On present trends, that could happen anyway.

In this situation we are borrowing abroad. Such borrowing is risky. It is far riskier than relying on our gilt-edged market and on private savings to support Government expenditure. That is the proper way to finance our borrowing requirement. It is desperately risky to finance the Government with a vast proportion of borrowed money coming from overseas in the fortuitous circumstances whereby oil-producers have surpluses and when the interest rate situation is relatively mild. All that could change overnight.

Every thinking subject of this kingdom wishes instinctively to support the sincere efforts of the Chancellor to curb inflation and to deal with the appalling crisis now upon us. But we cannot stand by uncritically in the face of a £9 billion public sector borrowing requirement, which is planned for this year. If everything goes well that process will result in an inflation rate of 12 per cent. to 16 per cent. That is a big "if", as we have learnt to our bitter cost. We cannot stand by uncritically while public overspending leads to higher public sector wage increases, price increases and super-inflation. Inflation is bad enough. It is unfair and unjust. We are all beginning to know what Socialist injustice means. But the present strategy and the high rate of inflation constitute a sure recipe for mass unemployment. That is why the hon. Member for Meriden (Mr. Tomlinson) was deadly accurate in his remarks. That is what we resent most about the Chancellor's strategy.

We believe that the Chancellor is on the wrong road. There could be no more devastating comment on what happened on Tuesday than the fact that the world is now sitting down, waiting for the Chancellor's next Budget.

5.8 p.m.

Mr. Ian Wrigglesworth (Thornaby)

The Budget has been accepted as the consequence of the difficult economic situation in which we find ourselves. Although its provisions may be distasteful I believe that it provides the minimum necessary to keep the economy on an even keel till 1976, when the effects of the world trade cycle will help us to ride through our difficulties.

I am glad that the Chancellor rejected the proposal for general import controls. Despite the more pessimistic balance of trade forecasts made by my right hon. Friend the Paymaster-General, I hope that he will not resort to import controls later in the year. However, there may be a case for import controls where there is unfair competition and where they will not lead to retaliation. The introduction of import controls would be a tourniquet and would not help to make our industries more competitive, which is what we failed to achieve during the past two decades.

The TUC call for an injection of £1,000 million into the economy is totally unrealistic against the present background of a £9 billion public borrowing requirement, with last year's balance of trade deficit standing at about £3,800 million and totalling this year about £2,500 million. That does not mean that the United Kingdom is still not a good credit risk in the league of nations in the world. I hope that the United Kingdom will remain creditworthy, certainly till the 1980s, when North Sea oil starts to flow. There will be no difficulty in raising money overseas in the immediate future. Our main problem is that of home-grown price increases. I want to say a few words about them, but first I turn to three other matters which are not so central to the Budget strategy.

I am pleased that my right hon. Friend the Paymaster opened the debate today. I was one of those who pressed him towards the end of last year to restrict the import of gold coins. I welcome the measures in the Budget to stop their excessive import. There was an adverse balance of trade on gold coins of about £100 million in the year up to February. In December of last year alone the adverse balance of trade was some £33 million. With the economy in the state that it is at the moment that is an intolerable deficit which my right hon. Friend has been right to stop. I felt at the time that it was a non-productive investment, and that gold coins were allowing people to sidestep exchange control regulations and regulations which would normally apply for holders of overseas assets. They were having an adverse effect on the balance of payments. They were a highly speculative investment, and many people who could not afford to put their savings into such a highly speculative investment were being encouraged to do so by advertisements and by salesmen.

I welcome my right hon. Friend's measures to boost investment, in addition to those which we are taking already through the Industry Bill and through the previous Government's Industry Act to try to stimulate investment. I give a special welcome to the £20 million which has been given this year and the £30 million which will be given next year to the Manpower Services Commission to encourage the training of skilled workers and others for our industries. In my own constituency we have the incredible situation of an enormous demand for skilled workers which cannot be satisfied, while at the same time there are in the area industries which have in their apprentice schools training capacity which has been under-utilised in the past because those firms could not use it. I hope that some of this money will go into the provision of sponsored training to provide craftsmen for the North Sea oil industry and other developing manufacturing industries which we need so vitally. It is an area in which we have under-invested in the past, and I hope that this start of £20 million this year and £30 million next will put that right.

As the House knows, I am a Cooperative-sponsored Member of Parliament and proud to be so, and my right hon. and hon. Friends on the Treasury Bench will not be surprised to hear the reaction of the co-operative movement to the Budget in respect of one item. It is the extension of the 25 per cent. VAT to the range of goods outlined in the Resolution. The co-operative movement deeply regrets this decision. It does not believe that VAT, with its cumbersome collecting procedures for retailers, should be used as an economic regulator in the way that purchase tax was. We prefer an invoice tax such as that used for cars.

Although the present burden caused by the 25 per cent. rate is limited to luxuries we hope that its incidence will not be extended to a wider range of goods in subsequent Budgets and that another intermediate rate will not be introduced at a later stage. I do not need to rehearse the arguments about the difficulties which the co-operative movement and other retailers have experienced as a result of the introduction of this tax, but I hope that the Government will not respond to pressures to introduce any further level of VAT, and that they will not extend the 25 per cent. rate to any further items.

I come back to the central problem to which most right hon. and hon. Members have referred, that of home-grown inflation, the impact of wage increases on our increasing prices and the future of the social contract.

There have been too many glib assertions that the social contract has failed over recent months and is failing at present. There is a deathbed confession in the Daily Express this morning that the social contract is the only wall against a tidal wave of demands. That is staggering, coming from a newspaper which has been almost wishfully calling for the collapse of the social contract. If the social contract had not been there, matters would almost certainly have been worse than they are—and they are pretty bad.

Even at this late stage we ought to remind ourselves what the social contract said, because Government supporters as well as Opposition Members and others in the country have forgotten exactly what is said about wages. First, it said that … the scope for real increases in consumption at present is limited, and a central negotiating objective in the coming period will therefore be to ensure that real incomes are maintained. The second point was that … this will entail claiming compensation for the rise in the cost of living since the last settlement … But it went on: … an alternative approach would be to negotiate arrangements to keep up with the cots of living during the period of the new agreement. Then it said that … the twelve-month interval between major increases should in general continue to apply and that priority should also be given to attaining reasonable minimum standards of pay for the low-paid and there should be a continuing aim to eliminate all discrimination against particular groups, notably women.

Contrary to what my right hon and hon. Friends and newspapers and Opposition Members seem to have been saying, clearly the norm in the social contract is not simply the increase in the cost of living. Putting it in the present context, it is not true that the social contract said that wage increases over the past year should have been 20 per cent. because it was by 20 per cent. that prices increased. Inevitably the social contract means that increases in wages and other increments over the past year would be above 20 per cent. because the additional provisions for the low-paid and for special groups inevitably meant that it would be above the increase in the cost of living.

If we then look at the settlements which have taken place, we see that some of them can be justified within the terms of the social contract and that they would take settlements possibly up to 25 per cent. So it is not as bad as some people pretend. The social contract has not failed as much as some people suggest.

Mr. Peter Hordern (Horsham and Crawley)

If the social contract is working and has been successful, when national earnings are rising at an average rate of 30 per cent., does the hon. Gentleman feel that the increases in taxes proposed by the Chancellor of the Exchequer are right? Ought not the hon. Gentleman to vote against them?

Mr. Wrigglesworth

If the hon. Member for Horsham and Crawley (Mr. Hordern) had waited till I had finished he would have discovered that I was not coming to the conclusion that the social contract had actually worked. It has failed. I am saying that it has not failed as badly as some people appear to be suggesting. That is important. It may not be important for the Opposition, but it is important for the Government.

It is no good Members of this House lecturing the country, lecturing shop stewards, and lecturing the trade unions. The Government must go to the TUC and say that the social contract has not worked and ask what can be done about it. It seems to me that, as a matter of urgency, we must have discussions with the TUC to sort out the guidelines to which I have referred so that the trade unions, employers and the Government can clearly understand what the criteria are.

I suggest that three major areas need to be looked at. Will settlements cover prospective increases or retrospective increases? The contract is not at all clear. The alternative is there, but we seem to have reached the stage, clearly illustrated by Mr. Buckton's comments in the last 24 hours, where trade unions are claiming for prospective increases in the cost of living.

Do the guidelines mean that trade unions should take into account gross or net increases after tax? Again, this point is not clear and needs to be made clear.

In my view, we need more emphasis within the guidelines on productivity agreements and measures which will bring about greater production per working man.

There is a desperate need for these matters to be discussed with the TUC. I appeal to the Government to make urgent approaches to the Trades Union Congress to get the criteria clearly sorted out.

It is no good the Government having discussions with the leaders of the trade union movement and members of the TUC and not involving and getting support for any discussions from the shop floor. I could have told anybody months ago, as could other hon. Members who have regular contacts with works conveners and shop stewards, the way that things were going. The fact is that shop stewards—the people who are eyeball to eyeball with the employers in negotiating wage claims—have not felt involved in and therefore not sufficiently committed to the social contract. Indeed, I go further. I am afraid that in many instances they have not read it.

I have discussed the terms of the social contract with shop stewards in my constituency. In arguing matters with them, it has become patently obvious to me that they have not read the terms of the social contract. I do not blame them necessarily. Possibly it has not been drawn to their attention. After all, there were plenty of myths at the time of the last election whether the social contract had in fact been written down. If anybody should have known that it had been written down, it was the shop stewards who were negotiating wage increases.

I think that there is an urgent need not only for discussions between our leaders, but for the trade unions to involve within their own structures the views of their members and, when agreements have been reached, to pass them down the line so that the people responsible for negotiations may know exactly the terms of the agreements with the Government.

Some hon. Members have said that the Chancellor is using the weapon of unemployment to beat down the rate of inflation. I do not think that my right hon. Friend had any option but to do what he did. The comments that he made last night to the Parliamentary Labour Party were absolutely right. I remind potential abstainers on this Budget and our trade union colleagues who are saying that the Government have broken the social contract that the alternative is a Conservative Government. If that is what my hon. Friends who are thinking of abstaining and our trade union colleagues want, then they should scratch their heads and think again.

We have just heard from the Opposition exactly what a Conservative Government would do. They would reduce the borrowing requirement far more stringently than the Chancellor has reduced it. That would inevitably lead to a substantial growth in unemployment. It would probably make one million unemployed look like chickenfeed. That is what the hon. Member for Guildford (Mr. Howell) has not made clear to the trade unionists. It is our job to make clear that the only alternative to a Labour Government and Labour Budget is the one to which the hon. Gentleman referred.

Mr. David Howell

The hon. Gentleman is making an interesting and reasonable speech, but getting my point 180 degrees wrong. I said that if the present strategy were pursued, the enormous in- flationary potential of the borrowing requirement would lead to unemployment on a far bigger scale even than the Chancellor foresees.

Mr. Wrigglesworth

But at least the Chancellor of the Exchequer is not deliberately trying to increase unemployment to the gargantuan level to which the Opposition would increase it if they reduced the borrowing requirement to the level which the hon. Gentleman described. Indeed, he mentioned £470 million of public expenditure cuts and has talked vaguely about cutting down the borrowing requirement. That would inevitably lead to substantial increases in the number of people unemployed later this year. I find that unacceptable. That is why I shall support the Budget and why I expect my hon. Friends and the trade unions to support it.

5.27 p.m.

Mr. Peter Walker (Worcester)

I followed with interest the arguments adduced by the hon. Member for Thornaby (Mr. Wrigglesworth) who stated that, in his judgment, the social contract has not necessarily failed in the eyes of genuine trade unionists, but that it has failed pretty miserably in the impact that it was hoped to have on countering inflation.

The hon. Gentleman said that he felt that that was the trend of what had been happening over the last six months. I believe that the Chancellor also felt that that was the trend of what had been happening over the last six months. Indeed, he must have felt that if he reads the newspapers.

Since last November the Chancellor has been saying to the trade union movement: "If you go on as you are going on now, I will tax you in April." We have witnessed that taxation. The deplorable fact is that the Government and, seemingly, the whole of the Labour Party and trade union movement have allowed that situation to continue for six months to the considerable aggravation of our economy.

In many ways this is a remarkable Budget debate. It is described as a debate on the Budget and the economic situation. This is the first time during my 14 years as a Member of this House that we have had a debate on the Budget and the economic situation in which no major Minister in the Cabinet, apart from Treasury Ministers, has taken part. When this House debates supposedly major matters of the year—we now have Budget debates two or three times a year—to have no contribution from the Secretary of State for Industry, the Secretary of State for Trade or the Secretary of State for Employment is a pretty bad way to treat back benchers, of whom I am proud to be one. I hope that in future we shall not have debates on the economic situation confined basically to Treasury teams.

I should like to point to some important gaps in the Chancellor's statement which conceal from the country the reality of the present situation. Yesterday, my hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said, I only wish that the Chancellor … had been one half as candid 14 months ago as he was yesterday."—[Official Report, 16th April 1975; Vol. 890, c. 451.] I hope that my right hon. and learned Friend was not suggesting that the Chancellor was being totally candid in his speech. I am sure that he was not. There are many important omissions from and many important points in the Chancellor's speech about which the House and perhaps the country were deceived.

First, there was no real mention of the nature and size of our overseas debt. Secondly, the interpretation upon the current position in world trade, continued today by the Paymaster-General, gives a false impression of the reality of the situation. Thirdly, the reality of the position regarding fixed investment in industry is far bleaker and worse than that suggested by the Paymaster-General today or by the Chancellor in his speech on Tuesday. Finally, there is the terrifyingly real position of wage-created inflation.

If we look at the overseas debts position, ignored so far in these debates, we have a situation where in 1974 our overseas sterling liabilities increased by 36 per cent. to £5 billion and in foreign currencies to £3.5 billion. At the present time, including in London, we have about £10.5 billion of short call liabilities compared with £2.9 billion of reserves.

That is a frightening position for any country to be in. We should add to that situation the borrowing requirement for the coming year. It was interesting that the Paymaster-General said today that in his view perhaps for the coming quarter and the rest of the year the balance of trade and the balance of payments figures might not, for various reasons, be as good as they have been in the first quarter. The Chancellor and the Paymaster-General predicted that in any case there will be substantial overseas borrowing requirements this year.

On what basis are we to attract these overseas borrowings? Will it be on the basis of saying "Come to London, we are going to give you 10 to 12 per cent., and during the period that money is here you can expect inflation of 20 to 25 per cent."? That is no basis on which to attract permanent funds into London. The main reason that we have been able to attract these funds to date has been the weakness of the dollar. Many of the Arab countries have suspected American foreign policy, and a combination of these two events has made it much easier to attract money to Britain. But the likely position of the next 12 months is that probably American foreign policy will shift in relation to its prejudice in terms of the Arab-Israeli position and there is a considerable likelihood that the dollar will strengthen. In this situation, with the rate of inflation that we can expect, the position on overseas borrowing will be terrifying.

Consider what would happen if that vast amount of short-term money decides to leave London and go, say, to the United States. I do not believe that in that situation the United States would let a country like ours sink. The United States would recycle the money through the IMF. The Chancellor's comments in his Budget Statement and the words of the Paymaster-General today made it perfectly clear that that is a possibility if things do not go better. If that possibility were to materialise they know that the conditions would be laid down for our economic situation, conditions about pay policy, and that would certainly divide the Labour Party from top to bottom and create a position in which our economic affairs were controlled from abroad instead of in this country.

On the trade position let us look at the picture painted by the Chancellor and the Paymaster-General. They say that our exports have risen by 7 per cent. in volume, that we have been getting a bigger proportion of world trade and that we are doing rather well. They say that we are still pretty competitive. But what is the reality of the situation on exports? They were 7 per cent. up in volume, but when did they reach their peak? That happened in the third quarter of last year, six months after the Government came to power. The Government inherited the biggest export order book in our history and they know full well that on any projection on exports, orders are delivered many months after they are taken. For the House to deceive itself on that question is to practise a remarkably foolish form of deceit. The export position reached its peak in the third quarter of last year. In the first quarter of this year, when once again we were rather pleased with our exports, they were slightly lower than in the third quarter of 1974.

The volume of raw materials and machinery being imported is going down. Rightly, the Government claim that, as expected, our import bill is getting lower. In fairness, the Paymaster-General mentioned the question of raw material prices. But surely the frightening aspect for the Government about imports is that whereas in the last quarter the figures for raw materials and machinery are falling, the imports of motor vehicles and manufactured goods continue to rise.

The latest surveys conducted by the CBI and the Financial Times show that twice as many firms were expecting increased export orders at the beginning of 1974 as were expecting them at the beginning of 1975. Four times as many firms are expecting lower orders this year than were expecting lower orders at the beginning of 1974. In January 1974, for the previous four months, 60 firms had received increased orders and only 8 per cent. had received fewer orders. In the four months leading up to January 1975 32 per cent. of firms reported increased orders and 34 per cent. reported fewer orders.

Perhaps the most frightening figure of all is in the latest surveys which show that whereas at the beginning of 1974 17 per cent. of firms were saying that price competition had prevented them from getting export orders, the figure is now 46 per cent. Three times as many firms find now that they cannot compete on price compared with a year ago. The figures are increasing month by month.

We have heard a marvellous recital by the Government that Britain gave a lead last year in retaining a reflationary position. There was good old Britain with this great oil deficit saying that it would not do anything about it. Germany, France, America and Japan acted appallingly by doing something about it. But the result is that their economies have met the problem of the oil deficit, not as the Government did by increasing public expenditure, and not as the Government did by the sort of economic policies they pursued last year.

Last year the Government were not endeavouring to deal with the oil deficit, they were endeavouring to win the October election while all our major industrial competitors were preparing for the new set of world conditions. The position, therefore, is that our exports are going to be less competitive every month. When the Paymaster-General referred to our efforts in the OPEC countries being not too good in 1974 and said that he hoped that they would be better in the future, he must have realised that they could not be much worse.

I have an obvious interest in perhaps potentially the most prosperous of the OPEC countries, Iran. I remember being jeered at by the Labour Members when as Secretary of State for Trade and Industry I went to see the Shah at St. Moritz and tried to do business with him. There has been total complacency towards that market in the period since. Whereas the Prime Ministers of France, Germany and Japan have been there, whereas major foreign economic missions have been sent there constantly, Britain has made two ministerial visits, one by the Chancellor of the Duchy of Lancaster to explain to the Shah how he should recycle his money, and the other by the Secretary of State for Trade who is more interested in fighting the battle of the Common Market.

During the last year Iran has placed orders and business throughout the world. Orders worth £2 billion have been placed with France, with the same amount going to Germany. Orders for £5 billion have been given to the United States. Britain has received orders of £500 million. That is how we are doing in the OPEC countries, and that reflects the complacency with which we have dealt with that opportunity.

Mr. Dell

Will the right hon. Gentleman say whether, facing the very serious position that he has just described, he regards private industry in Britain as having no responsibility in the matter?

Mr. Walker

Of course I do not, but when private industry is confronted with the tax policy of this Government, when it is confronted with the massive threats of nationalisation and with the volume of wage increases that the Government have allowed, then private industry is considerably handicapped compared with the private industry of other countries. I certainly recognise the rôle of the Government in such arrangements. Perhaps some of my hon. Friends disagree with that, but I believe that in our trading throughout the world, and particularly with the OPEC countries, Government agencies are of immense importance, and there should be considerable Government action in co-operation with industry. That was why, when I was responsible for these matters, not only did I go to Teheran on two occasions, leading a mission there, not only did I meet the Shah in St. Moritz, but I agreed with the Minister for Trade and Economics in Iran that thereafter in 1974 I should have bi-monthly meetings wih him and his officials to decide, month by month, how we should increase trade between the two countries.

Mr. Bob Cryer (Keighley)

What happened?

Mr. Walker

Unfortunately, another Government came to power and nothing happened at all.

There have been enormous drops in our supplies of raw materials. One of the reasons why the balance of trade has improved is that British industry has been running down its stocks of raw materials. What are we doing about it as a country? Basically, we are running down our stocks of raw materials at a time when raw materials are much cheaper. We shall be virtually devoid of stocks if there is an up-turn in world trade, and we shall then have to buy them at much higher prices. This is a trap into which we have fallen before and into which we shall fall again.

The Paymaster-General has said how splendid life is for the investor and how many good things are working to his advantage. I agree that if we want to encourage investors it is good policy to keep the Secretary of State for Industry away from this debate.

There was a 10 per cent. increase in fixed investment last year. The Government know that that was primarily investment decided upon in the previous year. They would not deny that. Everyone knows that if an industry invests in new fixed investment, the decisions are made sometimes years, or certainly many months, beforehand.

Let us look at the current situation. At the beginning of 1974 59 per cent. of firms expected an increase in investment in the coming year, 14 per cent. expected it to remain the same and 21 per cent. expected a decrease. The latest survey, which was published just before the Chancellor's Budget Statement, shows that 39 per cent. of firms expect an increase, 17 per cent. expect to remain the same and 44 per cent. expect a decrease. Whereas three times more firms expected an increase rather than a decrease at the beginning of 1974, now more are expecting a decrease than an increase.

What chance is there for production? As usual, the Chancellor was skilful in his manipulation of statistics when he mentioned increases in production. He said that we had recovered from the three-day week and within a short period of time, by the middle of 1974, production was running at between 1 per cent. and 2 per cent. above the previous year. He did not go on to say that since then it has constantly been running at 3 per cent. below what it was in 1974 and 3 per cent. below what it was at the beginning of 1973. Over the last six months, we have had falling production and falling investment intentions, we have become less competitive in world markets and at the same time we have given ourselves the most enormous wage increase.

I never thought that I should ever sit in this House and hear a Socialist Chancellor say that he intended to pursue policies which would probably mean a million unemployed by the end of the year. Already we have a million unemployed or on short-time. His prediction may, alas, be on the modest side. If any of my right hon. Friends had stood at the Dispatch Box and said that they were planning to have a million unemployed by the end of the year, the criticism and hostility from Labour Members would have been immense.

The Government say that they will have to take action on wage claims in the form of taxation. My hon. Friend the Member for Guildford (Mr. Howell), referred to the devastating figures announced this morning. However, the atmosphere at present is totally incredible. In November, the Chancellor said that wage increases were too high and that if this situation continued he would tax us in April. He has seen all those wage increases take place and he has done nothing, except make speeches. He has now come to the House and has made a speech describing the horrors that will befall us if this situation continues. But he has done nothing to slow down wage increases in this country. Not a single strand of his Budget Statement will bring them down.

Let us look at what is happening. I shall take as an example the week before the Budget. I have collected every scrap of industrial news to be found in the Financial Times. It is a newspaper which is probably as detailed on labour matters as any newspaper. In the week before the Budget, shopworkers asked for a 30 per cent. increase, the London dockers rejected 30 per cent., the Co-op workers accepted 40 per cent. over 16 months and the engineers decided to delay their ratifiction of a 31 per cent. rise. That all happened on Tuesday.

The following day Merchant Navy officers rejected 20 per cent. and said that they needed 40 per cent. The railway-men announced that they would press for 30 per cent., and NATSOPA recommended 32.5 per cent.

On Friday, NALGO announced that it would ask for 35 per cent.

Those claims are equivalent to £350 million upon the salary bill for the administrative staffs of local government. Last October manual workers obtained £330 million. They are now asking for a further £46 million to top that up. If the claims of NALGO for its administrative and manual local government employees are met, the total will be £716 million. Under the Houghton award the teachers received £432 million. Therefore in these categories of local govern- ment expenditure only, we have agreed to increases of £1,148 million—or £88 for every family of four in this country. If the rate support grant comes in, at 60 per cent., it can be argued that that £88 would mean £700 million on the Budget deficit and £450 million on the rates.

I shall put this into the perspective of the Government's strategy on public expenditure. Taking into account the cuts in expenditure in defence, in the civil programmes and in housing, over the next two years the Government will save £565 million. In those two years we shall have paid these three categories of local government staff £2,296 million. If we look at the proportions and the manner in which this volume of wage increases is perverting our whole society, we recognise that this is an area in which something must be done.

Last Friday, the seamen rejected 21 per cent. Rolls Royce workers in 1971 announced that they wanted £12 a week extra. Vauxhall. on Saturday, announced a triumph. It agreed to a 29 per cent. increase over 12 months and 41 per cent. over 20 months, but with a threshold of up to 4 per cent. to be added to it.

On Monday, doubtless to the relief of the Chancellor, the headline on page 1 of the Financial Times was "Jack Jones urges unions: Keep to social contract." I can imagine the Chancellor smiling at breakfast as he saw it, but when he turned to page 2 he would have seen that Mr. Jones's union in Liverpool was asking for 35 per cent. and that the same union in London, which had already obtained a 50 per cent. increase, was asking for more because of the way things were going.

Pottery workers accepted an increase of 29 per cent. The staff of the British Broadcasting Corporation asked for a further 30 per cent. increase, having been told only a few months previously that their last award was too big. On Budget day we read that the Civil Service had been awarded 32 per cent. over 15 months. The cost of this will be £360 million. Therefore, civil servants in central Government and local government have been awarded increases which would amount to more than £1 a week extra for every family of four in this country. We have a Chancellor who started the week giving the civil servants a rise of 32 per cent. How will he end the week? Probably, he will obtain a settlement with the railway-men. These are two spheres where the Government are in total control. The Government decide whether or not to give civil servants an increase. British Railways is so heavily in deficit that if an increase is to be paid, the Treasury has to pay it. At the beginning of Budget week the Government have given one set of workers 32 per cent. and there is no doubt that by the end of the week they will give another set of workers 30 per cent.

Has the Chancellor said to the Chairman of British Railways, "You must not settle outside the social contract, otherwise I shall not give you the money"? Has he said "If necessary, confront them and have industrial action rather than give wages of that level"? Of course he has not. He will doubtless meet the chairmen of the nationalised industries and say "Do what you can, chaps, but for Heaven's sake let us have no conflicts."

That is the position that the Government are in. All they can do is to impose some tax increases. They know that the tax answer is no answer at all. If the did not know before, Jack Jones, Len Murray and Ray Buckton have all made it clear since. They have said "If you increase our taxes and costs, we shall increase our demands". They have answered straight away.

Before the end of this debate we need a comment by the Government as to how they will meet that attitude. It is no use the Chancellor starting the debate with strong words about how he will see that this is settled and this is why he is tough, and then every trade union leader saying "We shall take no notice of that. It will increase our demands rather than bring them down." The Chancellor must then say "If you do that, I shall tax you even more." We shall then have a happy leapfrogging of taxes and wage increases. which would be totally disastrous for the country. The Chancellor must do something.

What terrifies me about the whole debate is that here is a country deeply in debt, with the worst inflation of any of its competitors, and here are both sides of the House agreeing that the main danger now are these massive wage increases, but Parliament is not willing to do anything about it. Hon. Members on both sides of the House keep saying that it is deplorable. My right hon. and hon. Friends on the Opposition Front Bench say that the social contract has failed. The social contract must succeed, says the Government Front Bench. But no one is willing to do anything about it.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) rightly commented on this subject. He said, Therefore, if the social contract is to be reinstated—and, by Heavens, it needs reinstatement—as the keystone of the Government's economic policy, it must be fundamentally renegotiated at once. He went on to say, very significantly, Then—and this is even more important—it must be observed."—[Official Report, 16th April 1975; Vol. 890, c. 461–2.] Alas, my right hon. and learned Friend did not say what he would do if it were not observed. The Government Front Bench have not said what they would do if it were not observed.

Therefore, at present, as far as the country is concerned, Parliament sits here using words saying how deplorable it is, and both sides of the House watch this country with the most raging wage inflation ever and decide that Parliament, for all sorts of uncomfortable reasons, must not say, no matter how deplorable the state of affairs—and it is totally deplorable—that it will take any action.

I recognise, having had to live through it, all the dangers of Parliament intervening on wages and of a statutory wages policy. The Government genuinely tried by their social contract to get a voluntary agreement. My Government, the previous Conservative Government, genuinely tried to get a voluntary agreement. We both failed. At present we are both in the situation that either we say that Parliament rids itself of this responsibility and will just punish by taxation those who take no note of the words of Parliament, or at some time in the coming months one of two things will happen: either Parliament will decide to take that action which in my view would be the best course or, alternatively, our overseas creditors will decide to tell this country that it must take this action if it is to survive.

I believe passionately that unless Parliament exerts itself in this sphere and unless it tackles the prime evil of inflation at present at its true source, we shall fail. If we do fail we shall have massive unemployment, which I deplore and hate more than anyone else. We shall fail to have the resources to meet the great public expenditure programmes which I wish to see go ahead and we shall fail to have a real impact on world affairs.

5.54 p.m.

Mr. J. Grimond (Orkney and Shetland)

I follow up at once the remarks of the right hon. Member for Worcester (Mr. Walker), who has brought us back to the realities of the situation. It would be easy to say that at the end of his speech he did not say what measures he would adopt, but that is a common parliamentary device. The situation is much too serious for the scoring of points and possibly one should not put too much stress on that matter. However, it is fair criticism.

Mr. Peter Walker

I made it clear that I believe that the time has come for a statutory wages policy.

Mr. Grimond

That is extremely interesting, but I do not remember that from the right hon. Gentleman's speech. However, he has now advocated a statutory incomes policy.

To do justice to it, the Liberal Party, at any rate, has said—we said it at the election and got into some hot water for it—that it believed that there must be an incomes policy. To do further justice, certain hon. Members on the Government side of the House have said the same thing. I believe that we shall have to find some common mind in Parliament in this situation. I fully take the right hon. Gentleman's point that if we are to continue with inflation at 30 per cent. with no increase in production, it may be either that measures will be forced upon us from outside, or the alternative is that internally we shall face a dictatorship. That has been the answer in all countries which have reached this rate of inflation. This is the main issue before the House in this debate.

Further, it is also only right to say that we are inheriting a situation left to us by a Conservative Government. The noble Lord, Lord Barber, nice man as he is, was the worst economic Chancellor that we have ever had. We are now in a state in which the public sector has been borrowing too much, but it is at least trying to borrow less than it was in the days of the Conservative Government, only 18 months ago.

However, let us turn from these party disputes to the question of what is to be done now. The Chief Secretary said yesterday that it would be regarded very hardly by the nation if we had to make big cuts in public expenditure. I should be the first to say that there are certain areas in which public expenditure ought to be increased, but there is a great deal of public expenditure which could be used differently. Many people in this country would welcome a different view about public expenditure.

We have lately had a very devastating report about the situation in certain parts of Scotland, a terrible account of the deprivation facing children who are brought up on housing estates in the West of Scotland. I am astonished that this has come as news to people. Anyone who takes an interest in these matters will have known that in education, employment, housing and health, the possibilities and opportunities in certain parts of Scotland were far below those common in the suburbs of southern England. It did not need an inquiry to tell us this.

But this is not for lack of public expenditure. Millions upon millions of pounds have been spent on public housing estates in Scotland and on ruining the cities in Scotland. The result has been thousands of empty houses in Scotland, because these houses are of such a low standard that people will not live in them. These have been built not by private landlords but by public authorities. Therefore, let us not be too distressed if we have to take a different view of public expenditure and, therefore, its better use.

Furthermore—here I lay the blame on the Conservative Government—the right hon. Member for Worcester was perfectly right about the enormous additional expense for local authorities. I believe that there are outstanding claims for £2,000 million. But who increased the staff of local authorities by 100,000? It was the Conservative Government. Local authority staffs have risen by 100,000 in the last two years under Conservative legislation. Of course it is ridiculous. No one asked for it. The benefits are negligible. In fact, in many ways this has been positively harmful.

I do not deny that there are certain areas—such as my county of Shetland which is involved with oil and needs further administrative staff—which have needed increases. But every day one reads in the newspapers advertisements for more staff for local authorities and public authorities. But under whose legislation has this been occurring? They have now been given a 30 per cent. increase in their salaries, but do not let us say that that is the fault of wicked Socialism. Far from it. It it the legacy of the Government of which the right hon. Member for Worcester was a member. No doubt the right hon. Gentleman will protest about that.

Mr. Peter Walker

First, the figure of 100,000 is totally wrong. Does the right hon. Gentleman wish to take the increase in local authority staff as a whole, including teachers? I did not notice that the Liberal Party opposed reducing the size of classes. The areas of local government in England that had local government reorganisation had far smaller increases in their administrative staff than areas such as London and Greater London that had no local government reorganisation.

Mr. Grimond

If the right hon. Gentleman is satisfied with the results of local government reorganisation, I must ask him to come to Scotland. In every department of every local authority in Scotland staffs have been increased. I do not dissent from the fact that my figure is based on total staff but there is no question that there has been an enormous increase in staff and that the figure is correct. That was not asked for and in my view it was not necessary. The advantages accruing from that increase to the ordinary members of the public are remote. Further, local authority staff are demanding buildings, cars and various other things.

I turn to the extremely interesting speech made by the hon. Member for Thornaby (Mr. Wrigglesworth) that referred to the social contract. Apparently the social contract means that if prices increase by 20 per cent. wages must increase by 20 per cent. It seems that if prices were to increase by another 20 per cent. wages would increase by a further 20 per cent. That is a self-defeating process. If there are no more goods to purchase it would not matter whether wages were increased by 20 per cent., 30 per cent., 40 per cent. or 50 per cent. Such increases would serve only to put up prices. Given that situation the rich and the well-organised would gain and the pensioners and the poor would lose out. That is what is happening at the moment.

What is now being done? Treasury wisdom is the same now as it was when I became a Member of Parliament—namely, "Put something on cigarettes and alcohol". Does anyone think that inflation will be stopped by putting an extra 64p on a bottle of whisky? Does anyone think that the extra VAT on what are called luxuries will help? Now that the Conservative Party is led by a woman, I very much hope that we shall have the knocking together of Treasury heads about what is a luxury and what is not. Is it suggested that a washing machine is a luxury? Does the Chancellor's wife do her washing on a scrubbing board? Is a pneumatic drill a luxury? Are we to let men use pick axes? It is absurd that such items should be treated as luxuries in this day and age.

Next, I direct my remarks to the use of motor cars. Is it thought that my constituents, who have no public transport, motor round Orkney for fun? They have to use their cars to carry out their business. Who are the people who have the unjustified use of a motor car? Ministers, senior civil servants and senior officials have the use of a car in London, where there is excellent public transport. Every day we can see large black cars taking officials and Ministers to lunch from their Ministries. Why do they not use a bus or take a taxi? It is absolute nonsense to suggest that a motor car is a luxury that is used by a farmer or by someone who lives in the country when 200 motor cars are reserved for Ministers and senior officials. Not one car in that fleet has been cut as a result of the energy crisis.

Mr. Frank Tomney (Hammersmith, North)

I do not know what the right hon. Gentleman is trying to say, but if he wants to get a message across to the country he will have to make more serious points than those he has made so far.

Mr. Grimond

Certainly, but to get a message over to the country it is necessary to set an example. If the hon. Gentleman thinks that the country will take notice of exhortations that are made in the House but are not heeded by hon. Members, I am afraid he is mistaken.

The amount of money in circulation must be curbed, but I believe that we must also have an incomes policy. My right hon. Friend the Leader of the Liberal Party yesterday outlined how he believed that a counter-inflation taxation scheme could have been introduced in the Budget. I agree with him. Further, the Government must give us a clear indication of which sections of the community they think are entitled to have more and those which must take less. In our present position, no one will get more unless someone else takes less. I do not believe that we have fully appreciated the situation in which we find ourselves. We must encourage production.

I do not take such a gloomy view as do some people about investment. It may well be that with the amount of money that the Arabs have to invest we can look forward to a degree of investment in this country. I take the point made by the right hon. Member for Worcester that if there is uncertainty in industry about nationalisation and if there is uncertainty from month to month about fiscal policy—we shall have had three Finance Bills in under a year—it cannot be expected that there will be a good climate for investment. Nor, indeed, is Government policy sympathetic to private investment. Of course, it is not a rewarding occupation to save and invest bearing in mind rates of interest compared with the rate of inflation.

The Government have great powers at their disposal which they have not used. Many strikes today are aimed at the public interest and not at wicked employers. Many strikes, on the Government's own showing, are unjustified. In one way or another such strikers are subsidised. The social services keep them going to an extent. That situation can be altered. The Government must consider giving an incentive to people who do not make excessive demands.

Day after day Members are met with powerfully argued cases for increases of 30 per cent. or 40 per cent., but in the private sector the threat of unemployment is holding down wage claims to a lower level. In the public sector the situation is more difficult. The public sector is under the Government's control, and the Government must take up a much stronger attitude about excessive wage claims. It is extraordinary that they gave 32 per cent. to the Civil Service within 14 months of its last claim. The main obligation rests upon the Government to make clear what they consider to be the priorities. If they think that some people are entitled to a pay increase when we get extra production, they should hold back severely the claims that are made from the rest of the public sector. Over-manning must be abolished and ceilings for total expenditure established.

The message must come out of this House loud and clear that there is no point in giving people more money if there are no goods on which to spend it. It is no good blaming the increased price of oil as being responsible for inflation. Indeed, it is to a degree deflationary if it takes up money which would otherwise be spent on other things. We are faced with self-induced inflation. If it continues, there can only be the end of a free society. It does not make the slightest difference whether we have a Socialist Government a Conservative Government or a Liberal Government: we cannot continue with inflation at the present rate. The fact that it is running at such a rate is our own fault.

6.8 p.m.

Mr. Giles Radice (Chester-le-Street)

We have heard two eloquent speeches from the right hon. Members for Orkney and Shetland (Mr. Grimond) and Worcester (Mr. Walker). The right hon. Member for Worcester, who has, unfortunately, left the Chamber, made a particularly forceful speech. I hope he will forgive me if I remind him of the fantastic complacency which he showed in his speeches in 1973, my first year in the House. As our balance of payments deficit mounted and our economy weakened. I remember his telling us that everything was fine and that our problems were the problems of success. To hear the Cassandra-like tones and the rather self-righteous tones that he took up today was a bit much.

As a contrast, my right hon. Friend the Chancellor has been remarkably can-did. He has told us about our massive balance of payments deficit and our high rate of inflation. He has referred to our growing unemployment, our poor investment prospects and our reliance on overseas creditors to finance our balance of payments deficit and our public sector deficit. I believe that my right hon. Friend has been candid.

No one who has spoken so far in this debate has come up with an alternative suggestion how to reduce our public sector deficit at a time of nil growth and high inflation. There has not been an alternative to the policy of reducing expenditure or increasing taxation. My right hon. Friend the Chancellor and my right hon. Friend the Paymaster-General have been frank with the House about the need to be seen to reduce the public sector deficit. If we do nothing the Chancellor and the country will be under growing pressure from our creditors. In that sense the Budget was realistic. It will also help some of the less well off in our society—notably the one-parent families.

The Budget offers some hope for the future. The Chancellor is basing his strategy on an expected upturn in world trade in 1976, but there are two crucial gaps in my right hon. Friend's strategy which I wish to explore. The first gap relates to the lack of any effective sectoral planning apparatus. We have no mechanism to ensure that in 1976 exporters will be able to take advantage of that upturn in world trade which has been forecast or to ensure that we shall have the domestic capacity to meet any upturn in our economy.

The last time we tried to plan our economy in this sense was in the years 1965 and 1966 with the national plan put forward by the former Department of Economic Affairs under Lord George-Brown, as he now is. Everybody knows that that national plan was a failure, but that does not mean that all planning is a failure or a waste of time. France and Japan, not notably Socialist economies, are just two examples of countries which through planning have been able to iron out the bottlenecks in their economies and concentrate industrial investment in those sectors where most needed to the great advantage of their economies and balance of payments. Therefore, instead of abandoning planning, as we have done since the 1960s, we should now try to learn from our mistakes.

The national plan failed for two reasons. First, there was not adequate linkage between micro and macro policies so that with the July measures of 1966 the whole plan collapsed in ruins. The second reason for its failure lay in the nature of the plan. It was too ambitious and lacked the instruments and backing necessary to ensure that the targets set were secured and achieved.

Today, we have the advantage of having a Chancellor who, unlike Conservative Chancellors, is fully aware of the need for effective macro-economic policies to complement his budgetary policy. In the Budget he has allocated special funds to encourage investment and modernisation, and also given more money for training, which is badly needed.

No doubt we shall soon have in the National Enterprise Board potentially a useful instrument to help restructure British industry, but my fear is that unless the NEB works within a set of planning objectives it will spend most of its time and resources in rescuing lame ducks and very little of its time in modernising British industry. That is an important consideration. What we need urgently is an effective planning apparatus to encourage and direct investment in line with the special budgetary strategy in key industries, particularly those which are concerned with our balance of payments. I was pleased that my right hon. Friend the Paymaster-General also emphasised this point in his speech. The best work in this area has been done by the NEDC, which has carried out a number of extraordinarily useful surveys —such as the survey into the ferrous foundry industry—which locate bottlenecks which have held us up in the past.

I should be much happier about our prospects for 1976 if I thought that similar work were now being carried out by the Department of Industry in conjunction with the Department of Trade. For example, has the Department identified the reasons why British industry has been so slow in taking advantage of the growing market for our engineering and capital goods in terms of exports to oil-producing countries? Has it fully explored the supply constraints in the engineering, machine tool and steel industries which, every time the economy expands, tend to hold us up since they suck in imports to the detriment of our balance of payments? What are the Department's priorities for British industry in the year ahead?

These questions must be answered if Britain is to take advantage of any up-turn in world trade in 1976. No Chancellor can do that work by himself or through his Budget. He must have the support of other Departments, and, above all, of the Department of Industry. That Department must now set up a planning body to identify the problems, set objectives and work out some of the answers. Otherwise we shall fail, as we did in the 1960s and 1970s, to overcome the structural problems of the British economy.

I turn to the other great gap in the Chancellor's strategy, the lack of an effective policy for dealing with inflation. My right hon. Friend the Chief Secretary to the Treasury has rightly pointed out that our inflation is now running at twice the OECD average. There is also little doubt that our inflation is wage and salary led —and I emphasise salaries. Our over-heads are now running 8 to 9 per cent. ahead of prices. If inflation at this rate continues we shall not be able to take full advantage of any expansion in world trade. I have always been a believer in a voluntary incomes policy and was an early supporter of the social contract idea, but, regretfully, I must accept the Chancellor's judgment that, in a number of important cases, particularly in the public sector and in local and central Government, the social contract has been substantially undermined.

As a northern Member of Parliament, naturally I am desperately worried about the increase in unemployment, particularly in the Northern Region. It is a tragedy that when, for the first time for a generation, the Northern Region seemed to be weathering the recession as well as if not better than, most other regions, it should be condemned to a further spell of unemployment. Therefore, I urge the Chancellor to bring forward his temporary employment scheme as soon as possible, because it could be of great assistance to our region.

I must admit, however, that when inflation is so high and when our balance of payments is so weak, it would not have been possible for the Chancellor to have given way to bodies, such as the TUC, which ask for a general reflation. It was not on the cards. Trade unionists and employers—employers are the people who give way on wages, and we have heard little about them in the last few days from the Opposition benches—must face the fact that wage inflation not only makes it impossible for the Chancellor to expand the economy, but it will also in-exorably lead to higher and higher unemployment as our goods are priced out of world markets.

We as a nation must face the fact that soon or later—I believe sooner—we shall have to accept voluntarily that the pace of wages increases must be reduced or we shall have such a decrease forced upon us by our creditors, who will refuse any longer to prop up our economy. I pray that we shall accept a wages policy voluntarily. A forced solution could lead to the collapse of this Government, and possibly of democratic institutions as a whole.

6.18 p.m.

Mr. Walter Clegg (North Fylde)

The hon. Member for Chester-le-Street (Mr. Radice) has made an honest and interesting contribution to the debate, but perhaps he will forgive if I do not take up his remarks.

As you know only too well, Mr. Deputy Speaker, such is the number of those who wish to speak that I have sat through this debate for nine hours waiting to be called. They have been nine infinitely depressing hours—indeed, I cannot remember nine worse hours for a long time.

Not least among the snags of listening to this debate for so long a time is that one is submerged by a flood of jargon. At one time it was comparatively simple. The Chancellor would tell the House about the national cake and of cutting it into slices. That is the sort of imagery I can understand. Now we have the social contract, social compacts, social wages, index-linking, micros and macros, snakes in tunnels, and after J-curves we now have corsets. Indeed, watching the Chancellor trying to struggle out of his corset was perhaps one of the lighter moments in a dreary debate.

What perturbs me is the hypocrisy exhibited in this debate. For months and years Labour Members prated and preached about social justice, yet their Chancellor of the Exchequer brings forward a Budget in which the innocent are punished along with the guilty. This is a strange form of social justice. When one has listened to Labour Members trotting their social consciences up and down the House, it comes a bit hard when their Chancellor introduces a concept such as this; because in my constituency, as in every other constituency in the land, the people who have not pushed up wage inflation—and the self-employed in particular—will not understand why they have to pay more in taxes for other people's sins.

Perhaps the most depressing thing of all is that this debate is irrelevant. I do not think that people outside the House give a damn what we are saying here inside the House. And the people who are not listening at all, I believe, are the trade union leaders. They will not be moved one way or the other by this debate. They are not going to be moved one way or the other by the speeches, some of them very genuine, which have been made.

What was infinitely depressing this afternoon was the reliance which the Government are placing on those very trade union leaders. This was evident in the speech of the Paymaster-General. I think he said that no further increases in wages or salaries was one of the crucial assumptions the Government were making. Yet all the voices outside, the voices of those with whom power lies—because power does not lie here, as it used to do—are saying "Anything the Chancellor takes out of our wages, anything the Chancellor puts on prices, we will recover in the next wage claim." Therefore, the hon. Member for Chester-le-Street and the right hon. Member for Orkney and Shetland (Mr. Grimond) are quite right to be worried about the way things are going.

What will happen if the trades unions do not respond and if they take counteraction to recover these depredations by the Chancellor of the Exchequer? Some of my hon. Friends and some Labour Members have said that we must go back to a statutory incomes policy. I am the last person, having supported it as a Whip in a former Government, to treat such a suggestion with contempt—far from it. I have, however, to ask myself not whether it is wise to have such a policy—it may well be wise—but whether, if we have one, it can be enforced. That is the question which the people who put forward the suggestion have to face. It is one I faced in the February election of last year and which I found damned difficult to answer. I think it is very difficult for us to answer that, because that is the crucial test.

I am of the belief that the unions will not answer that question and that they will not co-operate with a voluntary policy. I think they would try to destroy any statutory policy which was wished upon them by this House, even by Labour Members, because they fought very hard for free collective bargaining and they have virtually got it, social contract or no social contract. The only reality to which they will listen is the harsh reality of jobs lost. I regret to say that it will happen only when the militants are defeated. They are like a row of successful generals, sweeping along and carrying bastion after bastion, and of course the workers will follow them with enthusiasm.

What worker would not follow some-body who produced a wage settlement 10 per cent. over the social contract? A worker would not turn it down; he would continue to follow. I regret to say—and this is a very real regret—that it looks as though the economic blizzard has to sweep very fiercely over the country before anybody will become moderate or sensible again. That is my deep fear.

I should like to close, because many more hon. Members wish to take part in the debate, by referring to one of the strands which has not been mentioned very much, although the Chancellor referred to it in his Budget Statement. I refer to the contribution that agriculture can make to the solution of our problems. The White Paper "Food from Our Own Resources" has been produced today. I have barely had time to read it, but I would say to the Chancellor, and particularly to the Minister of Agriculture, Fisheries and Food, although the Treasury plays a big part in this, that the farmers will require some convincing that expansion is a good thing. After all, they expanded two or three years ago and they have hit very hard times since then. If the Government really mean to expand agriculture, the Treasury must be very committed to the farming industry before the farmers will believe a word that politicians say. Of course we should have food from our own resources. It makes absolute sense. It has been making sense for years. Why we have taken so long to put this policy forward as a major plank of policy I cannot imagine.

We shall be judged outside by what happens in the country. We have to try to find a way of making people listen to this House again. I hope it does not need a catastrophe for that to be done.

6.25 p.m.

Mr. Denzil Davies (Llanelli)

I agree at least in one respect with what the hon. Member for North Fylde (Mr. Clegg) has said. I, too, do not believe that a statutory incomes policy, whatever its merits or demerits in theory, would work in practice, especially at a time of high inflation, because I do not believe it would be accepted by the people of this country.

It would, perhaps, be unduly masochistic if I were to say that I wholeheartedly welcome my right hon. Friend's Budget, with its increases in taxes and cuts in public spending. Having said that, I am bound to say that I do not see how my right hon. Friend could have done anything different from what he did, especially bearing in mind the high rate of inflation and the enormous public borowing requirement. While I believe, generally, that it is fairer to raise revenue from direct than from indirect taxes, I think that in this case he could not have raised from direct taxes any more of the revenue he needed and was forced back on indirect taxes. Apart, possibly, from the increase in the road vehicle licence, I do not see how anybody in the Labour movement and on this side of the House can complain that indirect taxes are raised in areas of consumption such as tobacco, alcohol, and mainly luxury goods. I do not see how anybody in the Labour Movement can call for compensation in respect of cuts in living standards when these involve cuts in the consumption of alcohol, tobacco and luxury goods.

Having said that I must also say that it was not clear from my right hon. Friend's statement how he proposed to deal with the essential problem of the balance of payments, because this is our central problem, the fact that we are not exporting enough, that we have been importing too much, that we have been borrowing far too much from our foreign creditors. Commentators since have suggested that possibly the Treasury is hoping that the world recession, with the accelerating unemployment in this country, will moderate our rate of inflation, and will also cause our import bill to fall. The hope in the Treasury is that within a year or two, when world trade again improves, when the economies particularly of Germany, the United States and Japan climb out of the troughs of recession, British exporters will be poised ready to take advantage of the situation, exports will improve, our trade deficit will be diminished, unemployment will fall as resources will move into the export industry.

If, as I understand, this is the expectation and the intention, I am bound to say that I have grave fears as to whether they will be wholly realised. No doubt we shall see a resurgence of world trade as the economies of America Germany and Japan climb out of the recession period, but I have misgivings whether the British manufacturing industry, for a variety of reasons, has the capability to meet the challenge and provide the massive increase in exports which will be necessary.

With our pathetic rate of investment since the war, with the intense competition we are going to meet, especially in consumer goods, from Germany and Japan, and with our high rate of inflation compared with that of those countries, I fail to see how we can meet the challenge fully.

Our balance of payments position has improved over the last few months and our export performance has not been too bad, but it should not he forgotten that one reason why our balance of payments position has improved is that over the last three to six months the terms of trade have been reasonably favourable and reasonably beneficial to us. Commodity prices have fallen. In the main, commodity prices, excluding oil, which is a special case, have fallen because there has been a world recession and the demand for commodities has fallen.

If the major economies of the Western world are now coming out of the recession, the demand for commodities will increase. The effect of that demand will be to increase the price of commodities and the price of raw materials with the result that when the boom in world trade comes, if it does, our import bill will again increase, because we have to depend on raw materials and commodities which are increasing in price. Our exports then, to close the gap, will have to pay for some of the debt obligations we have incurred and for the increased import bill which will be the inevitable consequence of a resurgence in world trade. I do not want to be gloomy and pessimistic, but, on past performance, I do not see how our export industries will be able to meet the challenge.

I come to a part of my speech which, I fear, will not find favour on either side of the House. I do not have a crystal ball, nor does anyone else, but if my analysis is correct, I see no acceptable alternative—I stress "acceptable"—to the imposition of quota restrictions on imports, especially imports of manufacturing goods. I have tried on several occasions to make this case during the last 12 months and, despite the improvement over the last few months, I still cannot see how we can solve our basic problems without a period of import control.

I advocate import controls not because I want what is sometimes imprecisely called a siege economy, not because they will moderate our rate of inflation, not because they will cut unemployment at a stroke, although they would take some pressure off employment, but because they would give us the time and the resources to put British industry back into a competitive position, compared with the manufacturing industries of other countries. The time and the money saved by import controls would have to be utilised, and hard decisions would have to be taken. The time would have to be used to put our manufacturing industry back into a competitive position.

I realise that it would be extremely difficult for the Government to bring in import controls. There are strong internal and international arguments against them, but, on past evidence, I do not see how British industry in its present state, without a period of import controls, can compete with other countries and with the manufacturing industries of our main competitors. I hope that the Government will not rule out import controls as one method whereby we can improve our manfacturing capacity and solve our economic problems.

In proposing cuts in public expenditure, which I fully support, the Chancellor had to take a difficult decision. I do not like cuts in public expenditure and Opposition Members want to see blood when public expenditure is cut, but it was inevitable that the Chancellor had to reduce public expenditure. I echo the speech made by my hon. Friend the Member for Chesterle-Street (Mr. Radice). The time has come for us to look not only at the level of public expenditure but also at its composition.

We are living in a difficult economic situation, and we should try wherever possible to reduce public expenditure on non-productive items and channel it into productive items. We need a planning structure to enable us to increase investment in our basic industries, both in the public and private sectors, and in agriculture, and to divert the resources which are being used for non-productive public expenditure. I am concerned not with cutting public expenditure for the benefit of consumption, but with reallocating resources in the public sector in favour of productive instead of non-productive investment.

We should invest more in our basic industries—energy, steel, communications and agriculture. We have not sufficient money to do that and also to invest in non-productive assets. We have to make a basic choice. The priority is to channel that money into productive expenditure for the sake of manufacturing industry and jobs in manufacturing industry. The danger is of diverting resources away from public investment which could benefit manufacturing industry and our balance of payments position to areas which may be important but which cannot make a direct contribution to our balance of payments position, the economy and jobs in the manufacturing sector If we have to borrow abroad—as we shall have to do for a long time—to finance public expenditure let us try as far as practicable to invest that borrowed money in productive assets instead of in non-productive assets and ancillary services.

Since the last war successive Governments have sought to solve our recurring economic crises by using the conventional remedies of deflation, devaluation, reflation, credit control and so on. To many economists that process is known as fine tuning, There may be nothing wrong with fine tuning, provided that the basic engineering is in fairly good shape, but in many sectors of manufacturing industry we are dealing with what might be described as an old crock. An old crock cannot be fine tuned without giving it a new part. We have to put new parts into British industry to meet the competition that lies ahead. The only way we can do that is by the Government, by direct action, creating a shift of resources away from imports and non-productive public expenditure to investment in manufacturing industry. If we do not do that, I believe, with the Chancellor, that there will be a further decline in the percentage of our manufacturing exports, a further decline in our manufacturing industry, which will result in diminishing services in the public sector, a lower standard of life and, eventually, a lower quality of life for all our people.

6.38 p.m.

Mr. John Biffen (Oswestry)

The hon. Member for Llanelli (Mr. Davies), as is often the case, has made a thoughtful speech. I detected the proposition that perhaps a reordered sense of Labour priorities in public spending would shift resources from the Department of Education and Science and the Department of Health and Social Security towards the Department of Industry. That is such a formidable proposition that it would require at least a Supply Day's debate in itself, but the hon. Gentleman is right to raise such a challenge—such a spectre—because the background of the debate is one of progressive unease.

My hon. Friend the Member for North Fylde (Mr. Clegg) said that he has had to endure nine hours of the debate. I cannot think what crime he must have committed to have had that penance visited upon him, especially as a former incumbent of the Whips Office. But my hon. Friend is right. The debate proceeds with growing apprehension on every Budget that we consider, and we have to consider them frequently enough nowadays.

The Chancellor put it perhaps as aptly as anyone could. That must be because he sits in a position from which he can perceive this more acutely than can the rest of us. He saw situations when, he said. We would then face the appalling prospect of going down in a matter of weeks to the levels of public service and personal living standards which we could finance entirely from what we earned. I do not believe that our political or social system could stand that strain."—[Official Report, 15th April 1975; Vol. 890, c. 283.] That observation leaves us with the thought, to which I shall hope to return at the conclusion of my speech, that there are dangers in supposing that we can inch our way delicately out of the situation as well as the danger of believing that we can blunder too speedily out of this dilemma.

It is quite clear that the Chancellor has decided that he is now to tread the stony path of reality. What many in the House would like to know is what garb he will be wearing on that pilgrimage. I have the suspicion that he is fingering, and no more than just fingering, the discarded vestments of Philip Snowden. It would not be wholly inappropirate action for a fellow Yorkshire Socialist. The language of a Government of national unity is just beneath the surface of many contributions in this debate.

I have in mind the remark made by my hon. Friend the Member for Leek (Mr. Knox) yesterday and also the speech of my right hon. Friend the Member for Worcester (Mr. Walker). I would say, in that friendship which I from time to time extend to the Treasury Bench, that I hope the Chancellor will be a little careful when considering what travelling companions outside the Labour Party he chooses to accommodate. I have a feeling—the memory is still too green within me—that the statutory control of wages has such a proven record of destruction to social cohesion in this country that it would be a very foolhardy party, or collection of political groups and parties. who essayed that particular experiment with our recent experiences still so handy to point to the disaster.

I say this because I believe that for many in politics power and place is an aphrodisiac. Again, there is an itch towards centralised authority and control, expressed potentially in the most dangerous forms by those who seek the eternal and embracing statutory controls of wages. As I understand it, there is a sit-out of the Tribune Group for this Budget debate. I though it therefore quixotic though not entirely paradoxical that it should fall to me to make a quotation from the late Aneurin Bevan's "In Place of Fear" which I thought apt in the circumstances. It is a good comment which the House would do well to take to heart. Aneurin Bevan said: Incessant propaganda is aimed at making the people believe that they had held power for a long time and that the present state of affairs is the result of their failure to use it properly, when in fact they have hardly started to use it at all. In this fashion the people had their self-confidence undermined and the way is prepared to hand power over to a class of so-called exceptional people or to a Leader who is assumed to have the virtues they are supposed to lack. That is not a bad text for all of us to carry.

Turning to the more immediate issues of the Budget which is before us, it would he extremely uncharitable if I did not say that it marked at least some gain for reality. There are probably three gains. First, I hope we shall not deceive ourselves. We are witnessing the obituary notice of the social contract. In my judgment it died some time ago. I believe that the corpse has been putrefying but the obituary notice may do some good. After the conflict between the advice proffered by the TUC Economic Committee, referred to by the hon. Member for Thornaby (Mr. Wriggles-worth), and the actual action of the Government, there can be no doubt that the essential conduct of our affairs is at least being repossessed by the Treasury Bench. I for one am wholly delighted that that should be so.

It was never feasible that the Government of this country could be put out on commission to the TUC or anyone else. I believe that in the long run it would have been as disadvantageous for the TUC as for the Government for the belief to develop that power resided in some joint compact between one political party of this nation and a powerful extra-parliamentary group. Having read the obituary notice, I believe that we move forward to a situation where the realities, broadly speaking, will be a net advantage to the way in which we try to conduct our economic affairs.

Secondly, I note some realism in the growing apprehension that control of public spending cannot properly proceed until we have some way of appraising and controlling the extremely labour-intensive public service. Here the Chancellor of the Exchequer said, in discussing the high impact of wage settlements on the total levels of public expenditure: Indeed, it must cause one to reflect seriously on the wisdom of planning public expenditure solely on the basis of constant prices."—[Official Report, 15th April 1975; Vol. 890, c. 279.] As my hon. Friend the Member for Guildford (Mr. Howell) said in heartily endorsing the sentiment, we can all agree on the analysis.

Now let us proceed to act. At least let us say that it is a gain for this House to be at least agreed on the analysis. But again let the House be under no illusion. I believe I can find myself joining hands with the hon. Member for Llanelli (Mr. Davies) in the belief that the final outcome could well be that we shall have to have a much more searching value analysis of what we expect and what we shall spend upon the labour-intensive welfare services.

I turn to the third point of a gain in reality in the Chancellor's statement. That was his modest candour about the prospective movement in the numbers of unemployed if inflation is to fall from its present rate to the rate he has forecast. One of the accompanying consequences of a falling rate of inflation will be a temporary rise in unemployment. If I may slip for a moment into economists' jargon, those who are monetarists have always thought that there would be a temporary rise in unemployment which would follow a fall in inflation and I understand that to be what the Chancellor is saying. All I can say is that I hope he will not be assailed on all sides because he has had the candour honestly to mention the dread figure of a million unemployed.

I feel obliged, because this is the House of Commons, to place on record that I do not believe that there is one Member who believes in the use of unemployment as a means of controlling inflation. There are many on both sides who believe that controlling inflation has as one of its inevitable consequences certain effects on unemployment. If some kind of understanding can be reached on this one narrow but none the less highly important point, I hope that we will be spared ever again the absurdity of the Chief Secretary accusing my hon. Friend the Member for Blaby (Mr. Lawson) of "relishing" unemployment. Times are too serious for that kind of language.

I turn to explain why, notwithstanding the generous tributes to the Chancellor's realism that I have made, I somehow cannot bring myself to give full-hearted endorsement to the Budget and the strategy that it involves.

Mr. Radice

Shame.

Mr. Biffen

It is partly because of the language of the hon. Member for Chester-le-Street (Mr. Radice)—I noted his words—when he said "There are great gaps in the Chancellor's strategy" It is not for him to sit and shout "Shame" when I enter my caveats. My caveats are that I believe doubts persist, will persist and will intensify.

I shall give three areas in which those doubts will intensify. First, there must be growing alarm about the size of the borrowing requirement. The hon. Member for Meriden (Mr. Tomlinson) nods his head. I warn him. Later he will realise that I am always looking for the slightest indication of support I can find in any quarter of the House to develop this argument. He can ask "Why watch my head when you can read my speech?" It is true that this is exactly the point he made yesterday. It was a point made, too, by my hon. Friend the Member for Norfolk, South (Mr. MacGregor).

If we take away some of the drama which inevitably surrounds the Budget and go back to the central point, my hon. Friend the Member for Guildford was absolutely right. None of us, if we had been told that the Chancellor intended to increase the borrowing requirement from £7.6 billion to £9 billion, would have believed that that was in any sense an accurate or serious forecast of his intention, especially since almost every one of us believes that it will be more difficult to borrow abroad this year than it has been to borrow abroad in the year past, given the change in the international oil situation and the likelihood of there being fewer funds available.

Within that context there is a genuine credibility difficulty about the present Government. There is no saving strategy with this Government. A saving strategy does not comprise of votes of thanks to Sir Robert Bellinger of the National Savings Movement. A saving strategy derives from a widely-held public belief that the Government have a sense of values which coincides with those of, dare I use the phrase, the saving classes of this country. This Government harbour hostility to private provision in education and in medicine. Although these are relatively modest things in themselves, they are symbolic of attitudes which are wholly destructive to the idea of large-scale saving in the private sector.

I turn to my second point of anxiety. It is that the public expenditure cuts are being postponed. I thought that when I made this point in an intervention during the speech of the Chief Secretary maybe I was treading controversial ground. I discovered that there are many who are concluding that if we are to have the medicine for Heaven's sake let us not have one dose before the referendum and another dose afterwards. Why not have the full dose now and be done with it?

The whole finances of this Government were adversely affected, totally convoluted, by the prospect of an autumn election last year. That was the point made by my right hon. Friend the Member for Worcester. How tragic that that might be repeated in the electoral considerations of a referendum. There is now a growing feeling that the Government could have done more with respect to cuts in public spending. The cuts will have to fall in housing, transport and food subsidies. They will have to fall in the area elaborated by the hon. Member for Meriden and they will have to be substantial. It is not for a mere-back-bencher to cast figures around, but I suspect they will certainly have to be in the order of £1 billion to £2 billion. In the absence of substantial and quick-acting public expenditure reductions, much of the work of this Budget will be frittered away and we will lose the benefit of the confidence that it can inspire at home and abroad.

Finally there is the consideration that the scope for further tax increases is severely limited. This point was touched upon by several speakers. We all know that the tax-bearing capacity of the British public is near its limit. That is a serious constraint upon the Government. We also know from observations round and about that referenda have an unpleasant Nemesis in that they produce exotic political outcrops. There is always the fear that Mr. Glistrup may be a pinstriped solicitor—who knows, in Fylde—waiting to convulse our political system with a taxpayers' revolt which will pay little regard to the traditions for authority which are enshrined in this House. That is not too idle an observation in the social unease of today.

It is on those counts that my doubts outweigh the plaudits I give for the realism shown by the Chancellor. I conclude as I began by noting the dangers inherent in the quick dash for stability. There are equally dangers inherent in believing that we can inch our way back at a timing of our rather leisurely choice having regard to the electoral time cycle, to the domestic difficulties of the Labour Party and to everything else. That is a dangerous counsel of leisure.

The dangers of the long, slow haul are that we shall have a protracted period during which a sense of national failure transmits itself into a fear that we have lost the will and capacity to test ourselves in the world's market place. That ultimately will be the test of what kind of people we are. Only reality can disarm our fears. To construct national finances on the basis of borrowing for yet another year at the rate of over £3 a week for every man, woman and child is a continuing and dangerous flight from reality. It will neither give this Government authority nor the nation confidence.

9 p.m.

Dr. Colin Phipps (Dudley, West)

I am not sure that the vision of pin-striped hordes of solicitors roaring down the M1 is not the most chilling vision we have had in what has been an altogether chilling debate. I join the hon. Member for Oswestry (Mr. Biffen) in congratulating the Chancellor at least on his realism. My right hon. Friend has done us a service in particular in concentrating our minds, not least in the House but also in the country, on our serious economic crisis.

It has been an extraordinary feature of the past 12 months that we seem to have been going along on some sort of wave of hedonism—a philosophy of, "Eat, drink and be merry for tomorrow we die". I am not at all sure that there are elements within the trade union movement anxious to see us saved from that death. It is certainly one of the difficulties faced by a Labour Chancellor at this time to persuade the trade union movement that it has to support both a Labour Chancellor and the whole Labour movement in extracting us from one of the most serious economic crises we have seen since the war. It is not a crisis which seems to have been accepted generally by the public or by the House.

I wonder whether the time has not come, in defence of social compacts or social contracts, for a TUC Budget. Possibly each year the TUC and its member unions should sit down with the Chancellor and look at just what is available for the nation and the workers. The TUC might come to some conclusions about what we can spend and what can be distributed among the workers at large.

I worked in South America for many years, especially in Venezuela, which had a special economy in that it was based completely on the oil industry. The oil union was the largest and most powerful. It embraced all trades within the oil industry, but it was not a trade union for a specific trade. It was by far the most powerful union, and because the oil industry provided in those days—the late 1950s and the 1960s—about 90 per cent. of the total earnings of Venezuela most other unions were wholly dependent on what the oil union did.

The oil companies, and indeed the Government to the extent that they had any involvement, were able to come to contractual arrangements with the oil union which effectively became contractual arrangements for all the unions in the country. I am not suggesting that our economy is as simple as that. However, I was impressed by the way that this type of arrangement worked.

This cannot be done overnight. It is time we told the TUC that if we are to have a social contract, an arrangement between the Government and the working people, it has to play its part in deciding how the cake is to be split. We suffer, within the Labour movement and especially within the trade unions, from the difficulties faced by people who can be described as moderate trade union leaders and militant trade union leaders. Both are bidding each other up on the basis of differentials.

The reason for the enormous explosion of wage inflation is that differentials can be applied and used as sticks to push wages up and up and to leapfrog one union over another. My hon. Friend the Member for Thornaby (Mr. Wriggles-worth) said that he thought the social contract had not worked quite as badly as many people had said and that it had really been a partial success. It depends what one considers to be a success or a failure. If 50 per cent. above what we had hoped for is regarded as a partial success, I shudder to think what an absolute failure of the social contract might be.

It is a tragic reflection of the past 12 months that we are now in a situation in which a Labour Chancellor is conducting economic policy largely on the basis of unemployment and cuts in public expenditure. I accept that it has become inevitable, but it is tragic. My right hon. and hon. Friends in the Treasury can correct me if I am wrong, but it seems to me that the £1.2 billion cut in public expenditure is almost exactly equal to the annual cost to the Exchequer of 1 million unemployed. The two figures are extremely close. It is tragic and inefficient to conduct our affairs in such a manner that we have to have I million people unemployed who, after all, are the people on the backs of whom the rest of us hope to be saved. That figure is equivalent to the cuts in the public expenditure, which in themselves produce unemployment.

I should have wished to maintain public expenditure and perhaps raise taxes in other areas. I accept what many hon. Members have said, that the taxable capacity of the British people is probably close to its limit. However, given the choice, I would have raised taxes and kept the public expenditure. Its effect on unemployment would have been beneficial, and the net result would have been altogether better in terms of the total balance that the Chancellor is trying to obtain.

I was especially disappointed at the proposed £20 million cut over the next two years in foreign aid. This is a tiny and particularly mean amount. My right hon. Friend the Chancellor could recoup £9 million by scrapping the referendum.

Another matter on which I may not have understood the Chancellor's statement is scrip issues. I appreciate the importance of taxing scrip issues when used in lieu of dividends, but I trust that it is not intended to tax scrip issues of the ordinary kind—a capitalisation of assets within the company, where all shareholders benefit equally. There are a number of companies—I can think of at least two—whose articles of association. largely because they operate in foreign countries, demand that they capitalise increases in assets at various times. It would be totally wrong to tax them, as there is no benefit derived by the shareholder.

I turn to two statements by the Chancellor which are of extreme importance and which have not been developed extensively in the debate. My right hon. Friend said: In 1974 we had little difficulty in borrowing sufficient money to cover this enormous deficit on commercial terms, from sources which imposed no policy conditions on their lending."—[Official Report, 15th April 1975; Vol. 890, c. 274.] He later said in effect that we also benefited during 1974 from a progressive reduction in interest rates. These two factors are not unconnected. If we are to get out of our economic difficulties, it is essential that we are enabled to continue to finance our deficit by foreign borrowing.

Most hon. Members will know that our foreign borrowing has come largely from the oil-producing countries. One of the reasons why there have been no string attached to it is that these countries have had an enormous influx of funds for which they have not had homes. They have not been spending them on imports, and they have had spare money. However, I have said in the House before that there will come a time, as petrodollars accumulate, especially in the banks of Saudi Arabia and Kuwait, when these countries will want to be certain that the value of those petrodollars will be maintained. The very countries that they will not be prepared to invest their money in are those whose currencies they believe will become debased or devalued. If, because our currency is weak, the only way in which we can attract Arab moneys is by increasing interest rates, we shall find it difficult to take advantage of the boom in world trade which most of us confidently expect by the end of this year.

The problems faced by the Arab countries are that they must have their money invested in something secure enough to continue to provide them with an income long after they have no more oil to produce. I have said in the House before that often there is no point in making the desert bloom. One can grow 10-dollar lettuces, but there is no point when they can be imported for 10 cents from somewhere across the Mediterranean. These countries must have security for their money. This can be achieved only through proper international agreements and banking systems. In the very short term—and for this country that means the next 12 months, and certainly the next two years—we must be able to continue to attract those funds to this country.

I believe that our continued membership of the European Economic Community will be very important in maintaining that confidence in the pound which is essential if we are to continue to gain Arab petrodollars to support our deficit. Confidence in the pound will be the most important factor in deciding whether we survive the crisis. I join the hon. Member for Oswestry in asking Treasury Ministers what is their strategy for keeping the pound strong, which must take a high priority if we are to get out of our present economic troubles.

Unless we are prepared to finance our own way out of our difficulties, we cannot expect the Arab countries, the oil-exporting countries, to finance our deficits for us. I believe that the Budget goes some way to putting us on the right road, but I am not yet convinced that we have a strategy which will save us long enough to benefit from the income from North Sea oil, which I confidently expect to start in late 1977.

7.11 p.m.

Mr. Ian Stewart (Hitchin)

The Paymaster-General very properly opened this afternoon's debate with a review of some of the assumptions which the Government have taken into account in preparing the Budget. Indeed, it would be unreal to discuss the Budget apart from the assumptions. It is a measure of the seriousness of our situation that so many hon. Members on both sides of the House have concentrated not on the Budget's technical details—and there were plenty of those which called for comment—but on some of the underlying assumptions on which the success or otherwise of the Budget strategy must be based.

I welcome the tone of moderation and realism in the speeches of hon. Members on both sides of the House, and above all the greater sense of economic responsibility and financial realism which Treasury Ministers have displayed in the past three days. But the assumptions on which financial planning have been based have often gone awry. The Chief Secretary said yesterday that the assumptions in the White Paper on public expenditure to 1979 were already out of date and that the public spending programmes in it could no longer be maintained. Past forecasting by the Treasury on which Governments have built their plans has been extremely ineffective when measured against performance.

The January White Paper forecast that for a year or two we should have sluggish growth in gross domestic product, which would then show a dramatic increase in the following three years to give a satisfactory average over the five-year period. It also projected a dramatic rise, which we are already experiencing, in the growth of public spending in the current and immediate future period, but then a tailing off to a negligible growth in public spending over the following three years. There is no probability that that will happen. The Third Report from the Expenditure Committee comments on that.

It is instructive to look back to what has happened. In 1971–72 the forecast for 1972–73 was a growth in public expenditure in real terms of 3–7 per cent., and the out-turn was 5.9 per cent. The following year the forecast was 4.5 per cent., and the out-turn was 6.1 per cent. For 1974–75 the projection was 2 per cent., and the out-turn was 7.2 per cent. Therefore, when we see that the projections for next year in the latest White Paper were 1.7 per cent., and for 1976–77 were 1.5 per cent., we know that they are the figures of fairyland. It serves no useful purpose that such figures should be used in the calculation of what resources may be available within the economy for the planning of the growth of public expenditure or any of the other variables of economic performance.

The Expenditure Committee said: We suspect that this pattern —the pattern I have just described— has the primary purpose of reducing the average rate of increase in forecast expenditure over each survey period. Were this to become a perpetual feature of Public Expenditure White Papers, the Treasury would create a credibility gap which would largely nullify their usefulness I believe that that credibility gap already exists. We see that the fairyland becomes fancier and weirder as we go along, when we look at these figures and read comments about the future pattern of public expenditure, when whole areas, such as the demands of the National Enterprise Board and industries which are planned for future nationalisation are omitted altogether, because those demands are uncosted or the plans are undeveloped.

As usual, the tendency is to err on the side of optimism. That is natural. It is, in particular, a failing of politicians that that should happen. But in such a precarious position as that in which we now find ourselves, is it not dangerous to base our assumptions on the belief that the gross domestic product will rise faster than it has in the past, that exports will improve at a more dramatic rate, that personal consumption will advance more slowly than the public has been willing to accept in recent years and that public spending will be reined in to a level which we have not achieved in the recent past?

The evidence of history is against the assumptions on which the present economic strategy is based. I say this not to cavil or criticise but merely to point out the excessive dangers of formul- ating any economic policy or budgetary strategy on the basis of such optimistic forecasts.

In our present situation we must be realistic. We must consider what will really happen. Does anyone believe that the borrowing requirement this year will be kept down to £9 billion? If that happened, there would be a real chance of the Budget strategy being successful. It is because of the doubts, which are so strongly fortified by experience, that markets are nervous and speaker after speaker has expressed our anxieties.

It is because of the underlying problem of inflation and its effect on the levels of public expenditure this year and next year that we need to address attention to it with a degree of urgency which at last has become apparent but which has long been necessary.

The Chief Secretary said yesterday that in looking at public expenditure we had to assess the priorities. Certainly, but I had the feeling that he was talking about the structural content of public spending. That is difficult to change at short notice. The capital element of public expenditure cannot indeed be altered at short notice. No doubt that is one of the reasons why there has been a year's delay in the proposed implementation of some of the measures which have been announced.

But there are two separate elements in the present crisis in the growth of public expenditure. We must contrast the structure and the costs. We need to see a distinction between the controllable content of public expenditure and its uncontrollable cost. We face a crisis because of its uncontrollable cost. It may be nice and reassuring to say that we can deal with it by structural changes in capital expenditure a year from now. But the crisis is with us now. Deliberate changes in Government spending policy are the Government's responsibility. They can be implemented by the Government and adjusted from time to time in the light of experience. That is the responsibility of any Government. A Socialist Government have the right to transfer resources from the private to the public sector. We expect that of them. However, after they have done so they come up for judgment before the electorate.

However, it is the creeping, insidious, accidental and surreptitious transfer of national resources from the private individual to the public sector because of inflation which constitutes the real danger to our economy. We cannot control public expenditure programmes if we do not look at them in terms of current money because today's spending must be paid for with today's or tomorrow's pounds and not with the fictitious funny money of the Treasury's accounts.

Last year many of the problems connected with the increase in the borrowing requirement resulted from an uncontrolled and uncontrollable increase in public spending arising very largely from unexpected, unwanted, unplanned and highly undesirable, excessive wage settlements in the public sector. General increases in public expenditure take time to work through the system and create inflationary forces the effects of which are felt two or three years later. How-ever, excessive public sector wage settlements immediately increase demand and the cost of labour and so are a more direct cause of our inflation.

The Chief Secretary to the Treasury joined the Chancellor in pointing out that inflation caused by public sector wage settlements was at the heart of our difficulties. Today that idea was endorsed by the Paymaster-General. The Opposition welcome the realism of their words. However, our anxiety is that they have no means with which to implement their intention. They are all economic illiterates now for they see wage inflation in the public sector as one of the crucial dangers to the balance of our economy at this difficult time. Perhaps they should consult the person in charge of the Department of Employment to discover whether the Secretary of State for Wage Inflation yet agrees with them.

Although we welcome the posture and the statements of the Government about this crisis, the crisis itself was adumbrated as long ago as the end of last year when the Chancellor began to make remarks about the danger of the social contract being broken There has been no indication as to the Government policy regarding public sector incomes. The Government must tell us of their intention before this debate finishes.

I believe that public sector pay policy is the unresolved problem of this Budget. Discussion of the Budget is meaningless without an understanding of what the Government intend to do about it. I think that the financial jitters in the markets for Government debt and the pound sterling could be removed if the Government could reassure us that they had a coherent and workable policy. They have no such policy—or, if they do have one, they have said nothing about it. They owe such a statement of policy to the House, to the country, to British industry and to our foreign creditors. If I may appeal to their self-interest, the survival of the Government depends on what they mean to do. They must say whether they have a policy to deal with excessive wage settlements in the public sector. If they have such a policy they must tell us what it is and tell us during this debate.

7.25 p.m.

Mr. Alan Lee Williams (Hornchurch)

I do not know whether I shall be the last Labour back bencher to speak this evening. Perhaps my hon. Friend the Member for Blyth (Mr. Ryman) may speak later.

I welcome the realism displayed by the Chancellor of the Exchequer, although I should have to be masochistic to welcome it with any enthusiasm.

I was disappointed at what the hon. Member for Guildford (Mr. Howell) said. I followed his speech with interest. The hon. Gentleman usually speaks in a moderate and thoughtful way. However, I was disappointed with his contribution today. I do not know whether his speech was affected by the tenor of the speech of the Leader of the Opposition. I should like to have heard more from the Opposition Front Bench Members about the areas of cut-backs in Government expenditure, and I should have welcomed some indication of the time scale which the hon. Gentleman had in mind. He was critical of the Treasury Bench on that score.

I was amazed at the speech of the right hon. Member for Worcester (Mr. Walker). I cannot claim to be a great admirer of his. I always felt that he was one of the most spendthrift Ministers in the Conservative Government. He seems to have changed his philosophy almost overnight. I believe that he earned his reputation as a Young Conservative and as a stand on your own two feet industry man. As Minister he gave large sums of money to industry without strings attached. Above all, he was a great optimist. However, this afternoon the right hon. Gentleman was deeply pessimistic. He is a good debater. He spoke powerfully. However, I was astounded when, in response to the right hon. Member for Orkney and Shetland (Mr. Grimond), he said that he was in favour of a statutory incomes policy.

I know that the hon. Member for Oswestry (Mr. Biffen) is a long-standing critic of an incomes policy. Some years ago I debated this issue with him on Anglia Television. On balance, the hon. Gentleman was right and I was wrong. At that time I was a firm believer in a statutory incomes policy. However, events have shown to me that it is impossible to work that policy.

I welcome the present spirit of realism because it demonstrates that if there is no statutory incomes policy we must try to make some kind of social contract work. If an incomes policy does not work the Chancellor is forced to bring in this type of Budget. There is no other way round the problem. That is the central difficulty of this debate.

The tragedy is that the failure of the social contract is not the fault of the trade union leaders. We cannot blame Jack Jones. He has done his best. Let us look at the structure of the Transport and General Workers' Union. The general secretary does not do the negotiating. The negotiating is done by the respective trade groups of that union. That is also true of a number of other unions. In other words, the people doing the negotiating have not really been parties to the social contract, and it is doubtful whether many of them have even read the terms of the social contract. So I do not believe it to be the failure of trade union leaders.

However, the time has arrived now for a more evangelistic style of politics. Unless this Government and unless all Ministers explain very clearly to the country the enormous dangers that we face this may be the last chance that this Parliament will have to discuss the matter in a traditional framework. I also believe that many of my fellow countrymen, and certainly a large number of my constituents, see the situation in these very dark terms.

So I am very pleased to see my hon. Friend the Member for Keighley (Mr. Cryer) in his place. Part of my criticism is directed towards him and others of my hon. Friends. For too long now some but not all of us have been frightened to speak the whole truth. That is why I have been brooding for nine hours about whether to speak in this debate. I have already a number of hostages to fortune amongst my hon. Friends, and I do not want to add to my difficulties However, the time has arrived for people to speak out, and I have been very much encouraged by the contributions made by a number of my hon. Friends.

If the Chancellor of the Exchequer can maintain this strategy for a relatively short period I believe that he will have the opportunity to introduce a more optimistic Budget. He will not have to maintain it for too long because sooner or later the upturn in the economy will come. No one can be precise about when it will come, but perhaps it will come in seven or eight months.

The House must bear in mind that examples of failure can be seen elsewhere. What is more the price of that failure can be seen. We can see examples in Central and South America where rates of inflation of 100 per cent. have been tolerated simply because of forms of Government which bore no resemblance to parliamentary democracy. That is why this debate is an historic one. It is also an opportunity for this Government at long last to spell out the message simply, clearly, honestly and in tough terms.

7.33 p.m.

Mr. Nick Budgen (Wolverhampton, South-West)

I am grateful for an opportuinty to take part in what has been aptly described as an historic debate. As always, these debates reveal the deep emotional divide between those who are most concerned with the evil of inflation and those who are most concerned with the evil of unemployment. I state my position clearly. I am concerned most of all with the terrifying evil of a 20 per cent. rate of inflation.

The Chancellor of the Exchequer made clear what would be the economic effects of this high rate of inflation, but in doing so he made one remark which frightened me very much. He said that his objective was to keep inflation down to the international average. There, I disagree with him. Inflation is not just a relative evil. It is an absolute evil. What is more, we should recognise that inflation is primarily an internal social disaster because it makes madmen of us all.

Let us consider for a moment those workers who are organised in unions who now demand wages of between 30 and 40 per cent. higher than the wages of the previous year. They are no less patriotic than any other section of the community. But they believe that their first duty is to their families. They believe that they must make claims which take into account the rate of inflation which is both past and prospective.

Let us consider the doctors or the inshore fishermen. Each and every group, in the current rate of inflation, believes that personal survival is all. For each group, the end justifies the means.

My hon. Friend the Member for Morecambe and Lonsdale (Mr. Hall-Davis) spoke of the need for moderation. But the British character contains more than just moderation. With a 20 per cent. rate of inflation, it is goodbye to moderation, it is goodbye to legal contracts, it is goodbye to the constraints of civilisation and democracy and, as we have seen so often in recent years, it is goodbye to the rule of law.

As we have been discussing inflation during the past 9½ hours each and every hon. Member to have spoken has given his or her own analysis of the causes of inflation. When we have tried to analyse them, it is relatively easy to move towards the remedies.

For my part, I believe that the excessive increase in the supply of money is probably the sole cause of inflation. It is an analysis which is attractive to the simple mind like my own, but it is also attractive to the sophisticated economist of the monetarist school. Thus, I believe that it is by reducing the supply of money that we show the way and the condition precedent to containing inflation.

For that reason, I welcome the way that the Chancellor of the Exchequer has frankly admitted that the social contract has died, though the corpse is still stinking. In the face of this failure, the right hon. Gentleman is left with no policy other than monetary control. But I criticise him for failing to spell out his monetarist beliefs. He has never told the unions that he proposed to hold the supply of money tightly. He has never made it clear to the unions that if he holds down the supply of money they cannot cause inflation but that they can cause unemployment.

If the Chancellor of the Exchequer had been honest with the unions from the beginning, he would have prevented much human suffering in the form of higher unemployment in the future. He would have reduced inflationary expectations, just as Dr. Schacht in the Weimar Republic reduced inflationary expectations by telling the population that the supply of money would not be increased.

I resent the way in which the Chancellor suggested in certain passages of his Budget statement that high wages were a cause and not a sympton of inflation. That is wholly inconsistent with the monetarist stance which he has taken, and it is grossly unfair to the trade unions. I ask myself why he does it. The answer is that, like every politician, he wants to blame someone else for inflation. He wants also to leave open the option of the statutory control of wages, and there are still many right hon. and hon. Members who wish to see a statutory control of wages.

I argue that, at best, an incomes policy can do no more than temporarily mask or suppress inflation. But there are deeper political reasons why a statutory incomes policy is not open to this Government. They were perhaps best illustrated by the speech of the hon. Member for Preston, South (Mr. Thorne). A large number of wage earners at the last General Election voted Labour in the mistaken belief that by doing so they would be voting for a party and a Government who would take this country out of Europe. There is at least a serious risk that those people will have been conned.

Surely the history of the last few years shows that no Government can sell out their supporters more than once or, at any rate, not very often. The Labour Government were elected after giving the clearest possible promises that statutory control of incomes would not be introduced. I believe that if they introduce statutory control of incomes, they will die of the same destructive deceit as the last Tory administration.

I suppose that, faced with the unpleasant transitional consequences of a monetary policy, it is understandable that many Members of the Tribune Group who have sat out of the debate should have been casting around during the last few days to find an alternative to the monetary policy which they recognise is being imposed upon them by the Chancellor.

I believe that they have two solutions. The first is the siege economy solution. They say, "Blow the Arabs. Do not borrow any more money. Put controls on capital and on imports and, if necessary, even on the movement of people. Let us move into an isolated planned Socialist economy" But they forget that no isolated planned Socialist economy has been able to exist without equal planning and without equal statutory controls over wages, which, more often than not, are backed by criminal sanctions.

The second argument of the Tribune Group is, "Never mind about the borrowing requirement. Increase it and, if necessary, inflate into hyper-inflation". They say that hyper-inflation is often the catalyst and the condition precedent to a revolution. They are right. The French Revolution was preceded by hyper-inflation. Indeed, the coming of Hitler in the Weimar Republic was preceded by hyper-inflation. But they are wrong if they believe that the Left wing in this country would benefit by any hyper-inflation. There would, of course, be an initial abortive, inefficient coup by the Left wing, but the probability is that this deeply conservative country would go the same way as Germany, and we should end up not with democratic control of the Left, but with a Right wing and probably a Fascist dictator.

I conclude that the Chancellor's monetarism, uncertain and inconsistent though it is, is the only solution. But, as so many of my right hon. and hon. Friends have said, the great danger that looms ahead and above every part of us is the terrifying size of the public sector borrowing requirement.

It is all too easy to make noises like that without making specific suggestions. I intend to make two suggestions. First, I believe that there should have been an immediate cut in food subsidies this year. That would have saved £550 million. Secondly, I believe that housing subsidies to council tenants should have been cut this year. That would have saved about £1 billion. Together, those cuts would have taken as much off the borrowing requirement as the increases in taxation.

I ought to say something about the cutting of housing subsidies to council tenants, because politically it is a highly contentious matter. The argument always is that it is wasteful to cut public expenditure programmes that have been started and that it is difficult to find areas within a capital programme where cuts can fie made. But these two cuts can take place now without waste.

I believe that the cut that I propose in housing subsidies is, in the terms of the Labour Party, socially just. Many council tenants who are now heavily subsidised by other taxpayers and ratepayers have enjoyed a rate of wage inflation in excess of the going general rate of inflation. The Chancellor, in his speech, said that they may indeed be 8 per cent. or 9 per cent. better off than the going rate of inflation.

Therefore, I believe that the Chief Secretary was brave and sensible when he announced, 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 will be achieved."—[Official Report, 16th April 1975; Vol. 890, c. 472.] I am not so politically unrealistic as to suggest for a moment that the Government should go back to the fair rent policy. Indeed, I applaud the splendid and noble stand that they took on behalf of the Clay Cross rebels. I am not suggesting that the rule of law was in any way breached. But, in a spirit of nonpartisan friendship, perhaps I may suggest a new word. Of course, we are not going to have fair rents in future. Therefore, I suggest that we have community or social rents or, indeed, if it is easier to sell to the Left wing, let us call them Marxist rents. But we want something approaching economic rents.

I suggest that that can be allied to something else. Let us cut the continuing subsidy by offering council houses to council tenants at substantial discounts. But even that will not cut the borrowing requirement very quickly.

We must, as my hon. Friend the Member for Oswestry (Mr. Biffen) said, move towards a balanced Budget as quickly as possible. It is a terrifying thought that, as every moment goes by, it becomes more and more difficult to finance this vast borrowing requirement in a non-inflationary way outside the banking sector. All hon. Members have pointed to the way that, to the surprise of the developed world, the Arabs have shown that they are increasingly able to spend the money that they gain from their oil revenues at home. We see signs that the oil cartel in OPEC is cracking in the face of the reduced demand for oil. If oil prices fall, the Arabs' surplus funds will be reduced.

We see how the Arabs are becoming increasingly sophisticated in their lending and are rightly sceptical about our financial stability. We also see the way that they are threatening to lend more of their loanable funds to the Americans in the belief that it is dangerous to lend all their loanable funds to one borrower alone.

Above all, everything is pledged in the expectation that all will come right when the North Sea oil comes flowing in. The irony is that if international rates of inflation continue, it is probable that the high price of oil will continue. But if international rates of inflation fall and commodity prices generally drop, we shall find that the relatively high cost of oil will drop and it will no longer be economic for us to get out our expensive North Sea oil. It seems to me that we are taking a terrifying risk in pledging everything on the future incoming of North Sea oil in the 1980s. If that happens, the spectre of hyper-inflation will become a reality. It will become not merely an economic but a social disaster, and a disaster, most of all, for those of us whose dearest wish is to remain part of a free, democratic country.

7.50 p.m.

Mr. John Ryman (Blyth)

I wish to make a short speech on certain specific proposals in the Chancellor's Budget Statement which I am very worried about and which many people in my constituency are deeply concerned about, too. A lot of matters have not been stated precisely enough. Perhaps in due course the Government will clarify them. I understand that the Budget was praised in a first leader in The Times yesterday, by the City columns in newspapers today and by the Tory Party on various occasions in the course of the debate. One therefore knows straight away that there is something seriously wrong with it if these three sections of reactionary society all come out in praise of it.

I wish to direct the Government's attention to certain points in the proposals which, recognising as I do the serious position in which the Chancellor finds himself, I believe will cause genuine distress, worry, hardship and injustice in areas where they could still be avoided. I refer first to the reduction in the capital expenditure programme of local authorities on housing. I should like to know what the Chancellor meant when he said, No reduction is proposed in the building of new council houses, but a saving of £50 million will be found from other capital expenditure in the housing programme."—[Official Report, 15th April 1975; Vol. 890, c. 295.] Which capital expenditure is he referring to? If he is not referring to the construction of new council houses, I strongly suspect that he means capital allocations by the Government towards the improvement of existing houses.

This concerns me very much, because my constituency, as elsewhere in the North-East, has housing which urgently requires immediate improvement. For some time local authorities have been planning sensible and not over-ambitious programmes to achieve improvements, and to maintain their houses at a reasonable standard of habitation. The longer such a programme is postponed the more expensive it becomes. The cost of repairing and the cost of wages go up and the houses become less and less habitable. It is a false economy to put off that expenditure because in the end more money will have to be found to do the same work.

Mr. Michael Morris (Northampton, South)

We on the Opposition benches share the hon. Member's concern. It might be helpful to remind him that at Question Time on Wednesday it became clear that the Government had not actually decided where they would cut the expenditure. The hon. Member has raised a relevant point, and I hope that we shall get an answer to it tonight.

Mr. Ryman

I read the passage in question and I agree that the Government must come clean on this because at the moment the local authorities are planning their house improvement programmes. Contracts are being entered into with building firms which want to preserve their work forces. The planning of that work has to take place in the immediate future. The issue is urgent in my constituency where we are seeking to encourage new industrial developments by attracting new firms into the area. We have to provide new housing for key workers, and we also have an enormous housing list to deal with. My local authority is dealing with that terrible problem by a sensible and realistic house improvement and house building programme.

If £50 million is to be cut, the Government must make up their minds and spell out precisely where that cut will fall. I hope very much that it will not be in house improvement grants because that would be a dreadful mistake. It would be a false economy which in the long run would mean that more money would have to be spent in that direction.

Another aspect of the Budget to me makes no sense. I refer to the imposition of a multi-rate VAT on certain goods classed as luxuries. I do not believe that the Government can appreciate the hardship—and it is a genuine hardship—which is suffered by traders already seeking to administer the collection of VAT for the benefit of the Customs and Excise. They already have to wrestle with a monumental amount of paper work, and the number of forms to be filled in is enormous. The insane and asinine literature with which the Customs and Excise inundate traders is becaming intolerable. I have had many examples of this drawn to my attention by small traders in my constituency who have reached a point when they can no longer cope with the burden of collecting VAT—and that is before the introduction of a multi-rate tax.

I know that the Minister can confirm that the Chancellor had repeated representations from various organisations and traders before he announced his Budget proposals. He was warned what would happen if a multi-rate VAT were introduced. The warnings came, I understand, from all over the country, from every type of trader and every type of constituency. It was spelled out loud and clear that the burden on smaller traders had become intolerable. There had been increased postage and telephone costs, and an unfreezing of rents an insane decision announced by the Government just before Christmas. On top of that comes the imposition of a multi-rate VAT. Small traders are faced with the prospect of burning midnight oil for even longer periods, filling up even more forms and doing even more calculations for the benefit of the Customs and Excise. In addition, a cumber some, bureaucratic Civil Service machinery must now expand enormously.

Mr. Budgen

Will the hon. Member deal in his usual moderate way with why he believes the unfreezing of rents to have been so ridiculous? Does he think that these rents should have been frozen in perpetuity?

Mr. Ryman

I shall deal with that point—

Mr. Deputy Speaker (Sir Myer Galpern)

In view of the number of hon. Members still anxious to take part in the debate it is unfair if hon. Members who have already spoken at considerable length intervene again. It reduces the chances of their colleagues taking part. In addition it means that the hon. Member who has the Floor lengthens his speech in order to reply to the intervention.

Mr. Ryman

Nevertheless, Mr. Deputy Speaker, I shall deal with the hon. Member's point in passing.

I was dealing with the multi-rate VAT. I appreciate the correctness of the approach which seeks to distinguish between luxuries and necessities. The argument hinges around what constitutes a luxury. There is a good deal of room for argument whether particular items are luxuries or necessities.

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

It might help my hon. Friend to abbreviate his remarks if I drew his attention to the passage in the Chancellor's speech where he made it quite clear that multi-rate VAT could not be applied solely to luxuries and that we were not attempting to categorise those types of goods that will be covered by the term "luxuries". It was certain less essential goods that had to be covered.

Mr. Ryman

My hon. Friend has missed the point entirely. I was seeking to draw the Government's attention to the real hardship that will be imposed upon many small traders, who are already labouring under intolerable burdens, by the further intolerable burden of having to deal with multi-rate VAT.

I want to deal with another point of detail on which, I dare say, the Government could again spell out their ideas, if any. I am concerned about the enormous increase of –15 in the car excise licence. We recognise the dilemma that the Chancellor is in and his need to raise money by taxation. It would be wrong not to distinguish at all between different types of cars. This is an idea which has often been discussed. It is wrong that the owner of a Rolls-Royce should pay exactly the same for his motor excise licence as the owner of a cheap car, such as a Mini. The argument is advanced that theoretically the revenue from the excise licence fund contributes in some way to the road-building management programme. The truth is that it does nothing of the sort. There is also the argument that a Mini and a Rolls-Royce both take up space on the road. However, the basic principle of a fair system of taxation for the general body of taxpayers is that people should be taxed in accordance with their ability to pay. That is the basis of a fair philosophy of taxation.

It is utterly wrong to apply one criterion to income tax and not to apply the same criterion to other taxes. By all means let us tax expensive cars heavily, but at the same time we should not stigmatise owners of cheaper cars in a way which must seriously prejudice their chances of owning a car at all.

A large proportion of expensive cars in this country are not owned by individuals at all. The Rolls-Royces, Bentleys and other expensive cars that purr outside the Connaught Hotel are not owned by individuals. They are owned by companies. It costs those companies absolutely nothing to run those cars. They set off the capital depreciation of the cars and the running costs against taxable income which can then be written off. It is wrong that the private motorist, who works hard and saves hard to run a car, should be stigmatised in this way.

Mr. John Nott (St. Ives)

As the hon. Gentleman feels so strongly about these two resolutions, may I take it that he will not be supporting them when he votes on them?

Mr. Ryman

I have not made up my mind about this yet. I am prepared to listen to the speeches which will be made. I shall try to make up my mind on the merits of the case. I seek to approach this debate not in a doctrinaire or partisan spirit but by looking at the merits, if any, of the proposals.

I represent a constituency in the North-East of the country which will be adversely affected by some of these proposals. Any recession in the car industry will have the most terrifying repercussions on all sorts of industries up and down the country. In my constituency we have a factory manufacturing car components. If the car industry is hit substantially, the jobs of men and women working in that factory may well be in jeopardy.

The multi-rate VAT applies to luxury goods, such as television. In my constiuency there is a large factory—one of the best of its kind in the country—that makes components for television sets. I shall approach the vote in this debate on the merits of the proposals, and not from any blind loyalty to one side or another.

It ill becomes the Tory Party to criticise this Budget. If the Chancellor thinks, as he obviously does, that excessive wage claims, if granted, are a substantial contributory cause of inflation, against which stern measures have to be taken, would the Minister tell me why the Government so readily allowed substantial increases in pay for senior civil servants, judges and chairmen of nationalised industries at the end of last year? It is ludicrous to explain to working-class people that they must hold fire and not agitate for wage claims when senior civil servants receive increases in the region of £6,000 or £7,000 a year. The argument is, of course, that after taxation the net gain will be nothing like as large as that. However, it is psychologically insane to tell the unions that they must not ask for more money and at the same time give senior civil servants, judges and people such as that huge increases in pay.

Why is it necessary to introduce a Budget of this kind? I emphasise that many Labour Members recognise the dilemma the Chancellor is in. Why were not these measures introduced last year? What has happened since last November for the position substantially to deteriorate, which now compels the Chancellor to recognise the situation? This Budget will bring great sorrow and distress to many working-class households. It is the plain duty of the Government to explain why these forms of increases in taxation are necessary when there are many other forms of taxation open to the Government which have not been used.

I give one example. Why on earth tax bingo and not increase the taxation on betting turnover? It makes no sense at all. Cash betting has increased enormously. The report of the Commission on Customs and Excise proves that up to the hilt. It is the easiest thing in the world to increase the yield from cash betting by increasing the tax on the turnover. This would have yielded millions. A tax on bingo is a pathetic tax which will raise little money but inflict real hardship and distress on many people whose sole pleasure it is to engage in this sort of recreation. Although the Chancellor wishes to raise this sort of money to combat the twin problems of unemployment and inflation, he ought to think carefully again.

8.8 p.m.

Mr. Robert Taylor (Croydon, North-West)

The hon. Member for Blyth (Mr. Ryman) opened his speech by pouring scorn on the Budget on the ground that it had received support in The Times, in the City Press and from certain parts of the Tory Party. If he had been present throughout the whole debate this week, he would have found a great deal of support for it from his own colleagues who have had the courage to stand up and support their Chancellor in the unpleasant actions which he had to take on Tuesday. Those Labour Members have shown a realism which was singu- larly lacking from the hon. Gentleman's contribution. If he had been a regular attender over the last 10 hours, he would have found himself isolated, in the company of only his hon. Friend the Member for Preston, South (Mr. Thorne), because apart from his own contribution and that of the hon. Member for Preston, South, the other speeches from his side of the House have been entirely in support of the Chancellor.

The hon. Gentleman concluded his speech by asking what difference there is now from the state of affairs that existed in November, and he asked, if these measures are now necessary, why were they not necessary in November. Does he not realise that it would have been too blatant to have fought an election on a suggested inflationary rate of 8 per cent. and two weeks later to have introduced measures to combat an inflation rate of 20 per cent.? If he does not realise this, he is singularly lacking in political foresight.

Unlike some of my right hon. and hon. Friends, I give a cautious welcome to the overall strategy of the Budget. But my welcome is coupled with two strong reservations. The first is that, like many others who have spoken in the debate, I have great misgivings about the still excessive borrowing requirement. However, as that point has been dealt with so fully in the speech of my hon. Friend the Member for Oswestry (Mr. Biffen), and, indeed, by the hon. Member for Meriden (Mr. Tomlinson) yesterday, there is no need for me to elaborate on it further. It is sufficient for me to add my name to all those other hon. Members who have expressed reservations on this borrowing requirement. I hope that on Monday evening when the Chancellor winds up our debate he will take note and give us some explanation of how he can continue to see the country making headway against inflation with this massive borrowing requirement.

My second reservation may perhaps seem paradoxical. I am gravely concerned at the effect on the elderly in our society of some of the measures introduced by the Chancellor, particularly where he has increased indirect taxation. The difficulties for the elderly today are enormous. Many of them are grappling with severe increases in domestic rates. We all know that. Now we find that as a result of this Budget any elderly person on a fixed income who wishes to run a car and to continue owning a television set, as the result of this and a previous measure of the present Government, will find that £1 a week is taken out of his savings income simply to pay for the licences for those two items.

I should have liked to see the Chancellor giving a further rise in the age allowances as he did in November. If he would like to know where I recommend him to look for the money, I would say that I should prefer him to have taken that action than to give his new subsidy, suggested in the Budget, to firms in order that they should continue employing redundant workers.

The central theme of the Budget was the need to boost exports. No one would disagree with that need. Certainly it is not a new objective. But the Chancellor also drew the attention of the House to the high level of manufactured imports. My right hon. Friend the Member for Worcester (Mr. Walker), in his speech today, also referred to this matter, and he particularly pointed out that these manufactured imports are now luxury items, such as cars, jewellery and so on, whereas previously many of the manufactured items we imported were in the form of industrial machinery.

I think that the Chancellor went to the heart of our problem when he referred to this high level of manufactured luxury items, but I cannot agree with the hon. Member for Llanelli (Mr. Davies) who suggested that the remedy should be some form of import controls. However, if we accept that the problem is one of imports, we should give more credit to those who are very successful in exporting for us at present. Too many hon. Members are saying that the exporter is not fulfilling his job. But our exporters have served the country well over recent years, and it is the imports which have served Britain so ill. Indeed, I believe that many people in our society seem to take a masochistic pride in purchasing foreign goods when British goods are available which are competitive in price, design, quality and delivery.

If one asks any export salesman how he obtains orders abroad, the answer is that even if our exporter meets those criteria of delivery, price, quality and design, he will still be very lucky if he gets an order against competition from locally-manufactured goods because many people abroad put their country first by purchasing locally-manufactured goods.

The Chancellor claimed that this Budget helps exports. In what way does he believe that he will achieve this objective? It is true that the ECGD will provide facilities for the provision of working capital for large export orders—I underline the words "large export orders" because large exporters in our country today have been well served by the ECGD, but it is the small exporter who needs the encouragement. I find nothing in the Budget which will be of help to him.

Let me make a suggestion to the Chancellor which could be incorporated in the forthcoming statement on the new approach of ECGD. Let us suppose that seven weeks ago a small business man had delivered a consignment of, say, £50,000 worth of goods to London Docks. He would have expected payment for those goods, and he would have expected £50,000 in his cash flow within three or four days, because normal terms of payment are on sight-draft. However, because of the dock strike he was unable to obtain that payment for five or six weeks or even longer. This is a serious handicap to the small exporter. It should be comparatively easy for the ECGD to find a solution to this problem. All that is needed is for the ECGD to guarantee facilities for the small exporter through the normal banks on production of dock documentation to say that the goods are held up at the docks by a dock strike. That liquidity coming into the small business man's firm would be a very real help. This is not an idea which would cost the Chancellor very much more money.

How else can the Chancellor help the small exporter? I believe that there has been considerable success in the scheme whereby companies have been forced to declare in their annual reports the amount they have exported. I believe that this has given an incentive to companies continually to strive to improve the amounts year by year. But it would be equally valuable to include in company reports the amount which has been imported, because at present we do not know whether a company is making a net contribution to the balance of payments. Many companies may publish figures of exports of very substantial sums, but those sums may be overtaken by the amounts they have imported. That information put into companies' accounts and published would be a disincentive to increase imports.

The Chancellor says that he is a great supporter of the exporter. I hope, therefore, that he has read the letter which appeared in yesterday's edition of The Times from the managing director of Taylor Woodrow International, one of our biggest contractors overseas. In that letter Mr. Aldred said that the recent Finance Act has hit recruitment of men who are prepared to work overseas.

Of course, it is true that people who work overseas and people who leave their families behind here expect some extra reward. The present Government, by the recent Finance Act, have made it very difficult for them to obtain that extra reward, and the incentive to work overseas is much less now than it was before the last Finance Act. I hope that that is another point to which the Chancellor will refer on Monday evening.

Another point on the question of supporting exporters is this. I find it difficult to understand how any companies in Britain today—or, for that matter, trade unions—are prepared to buy and run foreign cars on their companies or on the trade unions. What individuals do is a matter for individual conscience. I am not in any way suggesting that we should take any action which could invoke retaliation from our overseas competitors, but I feel that this country is unique in that so many companies indulge in that luxury. It is a luxury which is harmful to us in a period of recession. I would like to see it enforced that company reports should publish the number of vehicles included in the assets of a company and the number which are of British manufacture. That would be a disincentive for anyone to run foreign cars, particularly for people who are engaged in supplying components or anything else to the car manufacturers.

My next point in support of exporters is perhaps the one of the greatest importance. If the Chancellor is intent on promoting further investment in exports and further effort in the export market, there is a quite simple way in which he could achieve a considerable increase in volume. Perhaps I should declare an interest in that I am personally involved in the export market. I believe that firms with proven export records should have an advantage when tendering to any Government Department for the supply of materials. This can cover a multitude of products. It could cover, for example, books, office equipment, building materials, clothing, cleaning materials, carpets, clocks or anything else.

The Government are a major purchaser of equipment, and if people who wished to get a share of that lush market knew that they would be at a disadvantage unless they could provide with their tender a statement of their achievements in the export market, they would get overseas very quickly and begin selling abroad to protect their home market.

I very much welcome the Chancellor's decision to do away with the mid-term census. The 16 Members who stayed very late four or five weeks ago to register their protest against the Government's extravagance have been proved correct. Perhaps an apology might be due from the Minister who told us that the matter had been carefully considered and that it was a subject of the greatest importance to the economy.

If we are considering small items of expenditure like that, I urge the Chancellor once again to look at the innovation whereby, out of taxpayers' funds, opposition parties are subsidised for research. It may be that a small amount is involved, but it is a slippery slope and not something that we should embark upon. Once a payment is made, the process will never be halted. No Government could stop a payment to an Opposition party once they themselves had received such a payment when in opposition. I hope that that might be another token contribution to the fight against inflation.

My final point is one which I made about three years ago in a debate on the Queen's Speech. On that occasion my hon. Friend the Member for St. Ives (Mr. Nott) replied. If the Chancellor wishes to make a vital contribution to the fight against inflation he should take action to control the free distribution of credit cards. That distribution is bringing into the economy a great deal more purchasing power which has not been earned. This is a matter of vital importance. To control that distribution would, in a way, be more effective than raising taxes as it would withdraw a considerable amount of purchasing power from the economy.

I cannot suggest that credit cards should be abolished altogether—that would be totally unrealistic. However, if they were subject to a stamp duty of £10 per annum that would at least mean that they would not be sent around unsolicited by the banks. That is a point which should be seriously considered by the Chancellor if he is determined to win the fight against inflation.

I end by wishing the Chancellor well with his Budget. I believe that it is a small step in the right direction. For the sake of the nation I hope that it is the first small step on the path towards a successful fight against inflation. I hope that the Chancellor is successful in the coming year.

8.25 p.m.

Mr. John Garrett (Norwich, South)

I wish to make the bulk of my observations not so much on the Budget itself as on the budgetary process, which seems to have become progressively detached from any long-term strategy for national development. Before doing so I shall comment upon a few details contained in the Budget.

Given the size of the borrowing requirement and the level of our foreign indebtedness, the general tendency of the Budget was inevitable. I disagree, however, with the balance that the Chancellor has struck between increases in taxation and reductions in public expenditure. Such reductions will have the effect next year of cutting the social wage by 1½ per-cent. in revenue terms and by 10 per cent. in terms of capital expenditure.

The Chancellor was careful to tell the House what would not be cut as a result of the reductions in public expenditure. He said that essential school places, general practitioner services and new council house building would go ahead, but he did not tell us what would have to be cut. I suspect that we shall see cuts in specialised local authority accom- modation, homes for the elderly, hostels for the homeless, hospital services, and local amenity services. All those are fundamental to the quality of life in our communities. To cut them represents a misjudgment of priorities compared with further increases in taxation for those who could afford to pay.

The aid to single-parent families seems to be too little and too late and the postponement of the child endowment scheme appears to be a gross error. There is no other social benefit which could relieve as much poverty as family allowance for the first child. Few measures could do as much to advance women's rights as the creation of a mother's wage with a substantial sum for all children, including the first. That is a crucial reform which is easily forgotten and which is always postponed by successive Governments.

I welcome the removal from tax of the lowest paid 400,000 people, although it is fair to point out that those people have been brought over the tax threshold only recently as a result of inflation. In considering the need to raise taxation and to cut expenditure, the Chancellor has swung too much towards the cutting of essential public expenditure which benefits the poorest in the community. I consider the small cut in overseas aid to be shoddy. Given our wealth compared with the wealth of the countries to whom we send the aid, I was ashamed to hear my right hon. Friend announce that cut.

My main point concerns the way in which we plan and control Government revenues and expenditure and fail to relate either to an overall strategy for the development of the industry base of our economy.

At the end of last year, the Treasury produced a public expenditure White Paper, on which the Expenditure Committee reported just over a week ago. That White Paper set out the priorities and the growth of public expenditure for the next five years. This week the Chancellor has cut public expenditure by £1,000 million. The Expenditure Committee has pointed in the past to violent swings in public expenditure forecasts and to the habits of Chancellors of taking out and putting back hundreds of millions of pounds without relating those cuts or increases in any way to a larger strategy for the development of the economy.

The public expenditure forecasts are not directly related to taxation policy so that the two can be considered together, and they are not even expressed in the same monetary terms. The public expenditure plans are no longer believed by anybody who examines them closely. In fact, the Expenditure Committee said in its report that the underlying assumption in the last public expenditure White Paper of an increase in exports of 10 per cent. a year was incredible since the highest rate of increase in exports this country has ever achieved was 6½ per cent.

The White Paper is no longer a forecast, it is not a plan. It is simply a wish list—a vague aspiration which tries to make the immediate future look more promising than it is. British public expenditure forecasting when it was first introduced after the Plowden Committee Report of 1959 was held to be a very great advance in public administration, not only in this country but in the world. Gradually, over the years, successive Governments have debased the plans for public expenditure until today they are totally unreliable. A country in our situation must have a comprehensive national plan with specified aims and measurable objectives for the planning period ahead. In this country a national plan should be based on the need to develop our industry.

The industrial development which is required is well-known and well-established. First, British industry invests in this country about half the level of our main competitors. This is the prime reason behind the extraordinary low productivity of British labour.

Secondly, the British industrial structure is biased towards the older manufacturing sectors and has a very low representation in areas for which world demand is most rapidly growing. For every 1 per cent. increase in world income, world demand for British goods increases by ½ per cent. Thirdly, Britain has a staggeringly high propensity to import foreign manufactures. For every 1 per cent. increase in our national product, our imports of manufactures rise by 4.3 per cent.—a characteristic which hitherto has been common only in under-developed countries. These are the root problems of our economic decline.

Therefore, I should have thought that any plan for economic recovery must rest in the short run on import controls, and in the long run on a massive investment programme to modernise and re-equip British industry and a plan for import substitution and export promotion.

I am well aware of the arguments against import controls—namely, the protection of the inefficient, the risk of retaliation, and so on. I think that controls should be relatively short lived. I also think that our trading partners in GATT and the EEC would be wise to prefer import controls to the collapse of the British economy, with all the risks which that entails in respect of their trade with us. The Italian Government successfully pleaded with their EEC partners when they imposed an import deposit scheme of 30 per cent. on their imports. Within a year these import controls had improved the Italian balance of payments by one billion dollars and could then be dismantled. Import controls are the only way in which we could be sure of an improvement in our balance of payments and could gain the breathing space we need.

The investment problems can, to my mind, be dealt with only on a sector-by-sector basis. Outdated plant and equipment and poor anticipation of demand has meant that in 1974 we imported £107 million-worth of machine tools, that we are no longer competitive in massive sectors of the machinery industry, that we import one-third of our footwear requirements—which has led to short-time working in my constituency—and that we Import more than that in terms of our textile requirements.

To revive these and other industries we must have a development plan for each industry, as the French and Japanese do. In both cases those plans have proved to be the mainspring of industrial development. However, voluntary planning agreements, such as proposed in the Industry Bill by my right hon. Friend the Secretary of State for Industry, are not enough. The NEB will be so busy rescuing industrial casualties that it will be years before it makes any contribution to the problem. Sectoral planning, backed by Government inducements and sanctions, possibly operated through the NEDC system, seem to me to be the only systematic way of ensuring that British industry invests, particularly in sectors in which we either import the bulk of our requirements or have a low share of world trade.

Finally, I see no evidence of any attempt to plan our overseas trade, not only through the use of import controls but also through State intervention in direct import substitution or export promotion. The Department of Trade is still basically a regulatory agency rather than interventionist. It seems to carry out no analysis of our trade strengths and weaknesses and to have no policy for filling the gaps in our trade portfolio. It appears to have dropped the idea which was current 10 years ago of a State trading corporation to help the smaller exporters and it seems to be unwilling to take up any idea to encourage industry to replace imports. In sum, good or bad, the Budget seems to me to lack any strategic perspective whatsoever.

Mr. Deputy Speaker

In the 25 minutes that remain before the winding up speeches begin there are three hon. Members who still wish to take part. I wonder whether they could co-operate one with the other so that each can say a few words. It is entirely up to the hon. Members.

8.36 p.m.

Mr. Kenneth Lewis (Rutland and Stamford)

As one of my hon. Friends has said, this Budget debate has been certainly singularly depressing, but it must have seemed even more depressing to hon. Members on the Government side, because they have not been here either to cheer or even to listen.

This is a remarkable Budget for a Socialist Budget, a people's Socialist Budget, but at least we get satisfaction from the fact that, for the first time, the Government have been forced to indicate to the British people through this Budget that they pay. Getting money out of the rich is finished now. The rich are now down to their vest and pants and it would be both difficult and improper to take the undressing of the rich any further. Consequently the Chancellor has had to get his money, as was inevitable sooner or later, from the broad mass of the people.

I do not want to go into the details of the Budget proposals because this is something that one can deal with at Committee stage of the Finance Bill and at Report stage afterwards. What I want to do is ask three questions and see whether the Chancellor has an answer to those questions in his Budget proposals.

The first is, who pays when we get into a mess of this kind? Secondly, who governs when we get into a mess of this kind? And thirdly, who cares? These are the kinds of question that people are asking around the country.

First of all, who pays? Who pays when the country gets into the position of being in pawn to the foreigner lending us money, in greater pawn than we have ever been before?

We have been heading towards a disaster situation progressively over the past few years with no Chancellor until now even seeking to arrest the process. The criticism I make of the Government is that they do not go far enough, because the debts we have are too great, should be rolled back, and should have been rolled back before. My hon. Friends have indicated that they think this should have been done by cuts in Government expenditure to take effect this year rather than next year.

If we reach the crisis situation —and certainly hon. Members on both sides of the House have said that in the next three months we might—who pays? It is the people on the shop floor, the people who are in jobs and who lose them. The high unemployment, on the Chancellor's own admission, will go forward, but the still higher unemployment that would arise from a crash would hit the ordinary men in the factory and in the office. They would lose their jobs. This would happen simply because Chancellors have let things get out of control in every way on the wages front, on the spending front and on the borrowing front.

The other people who would suffer would, of course, be the old-age pensioners, the people who are getting social security benefits of one sort or another. The social wage that we have heard about today from the Front Bench opposite would be cut. It would inevitably be cut. In a crisis, these cuts would be dictated by the foreign lender, and the first thing he would be forced to consider is spending on social services and whether economies could be made in that direction. It is all very well for Government supporters of the Tribune or any other group to say that we should disregard what the foreigner says and not make cuts. But we cannot do that because, if we have already borrowed money from foreigners and are seeking to borrow more to keep going, the foreigners can dictate the terms.

For the first time in this Budget the question "Who pays?" is answered by the Chancellor. He says that unless we get things right on the wages front and on the spending front, the whole nation will be in trouble.

I am almost 100 per cent. certain that we are moving towards a wages freeze. The social contract is bust wide open. It has been broken by many large groups of workers, including those over whom the Government have direct control—the civil servants and the teachers—people to whom the Government can say "No". We do not know what will happen about the railwaymen at the end of this week. The Government have two options. They can say that what the railwaymen are asking for is a breach of the social contract and if they want to go on strike they must do so, or they can have a battle. The Government can either have a battle or they can run away. If the Government run away from a battle with the railwaymen we will be nearer a freeze. For if the railwaymen win the battle, in six months' time when the wage cycle starts again someone else will win a battle and there will be no end to it. That is the choice which the Government will have to face within the next two or three weeks or months.

The second question that arises from all this is, who governs? It has been suggested that there should be a gettogether between the Government and the TUC and that the TUC should lay its own Budget before the Government. I thought we had obtained the social contract on that basis about six months ago. The social contract was on the basis of general discussions between members of the Treasury Front Bench and leaders of the TUC. We were told that it was a social contract not just for the unions and industry but for the nation. We are now being asked to start that process all over again.

Neither the trade unions nor the employers run the country. They do not have to pay the country's bills. The Government have to pay the bills. We had an election on the issue of who governs the country. The Chancellor's economic policy is now on the issue of who governs. Unless the majority that stems from the House of Commons governs, the wild forces outside the Government, the militant members of the TUC, will succeed in ruining their own members. They will destroy the ability of industry to pay its bills and they will destroy the ability of the country to pay its way in the world. So who governs is still the problem. The third question is, who cares? This is where the credibility of this House of Commons and all the parties in it is of vital importance. People outside the House are beginning to ask, who cares? Strangely enough, many of those who are picking up these big wage rises are themselves asking, what is it all about, this question of prices chasing wages, prices chasing my salary or my wages? It has been going on like a merry-go-round over the last few years and people who are receiving these benefits are beginning to ask themselves when the break up is to take place, when the crisis is coming. They ask, when am I going to find myself out of this rather pleasant, euphoric situation I have been in, and in a situation where suddenly the floor drops out of everything?

People are looking for a lead from this House of Commons, from Government and Opposition together. If we are not careful, we shall destroy the confidence of the people of this country. At the level of the direction of industry, at managerial and executive level, and right down to the shop floor, the people of this country have two ingredients which have kept us afloat and enabled us to do well over many years. These ingredients are an innate confidence and a readiness with all moderation to accept leadership. They have not had this leadership in the last year or two and therefore, because of this lack of leadership, they are asking, who cares? Do the politicians care enough? We have to answer that question.

I believe this lack of confidence arises largely out of the fact that policitians on both sides of the House have been following groups both within the House of Commons and outside. Pressure groups have had far too much influence upon this place, pressure groups who say that they want certain things to be done by Government and if they are not done action will be taken to force the issue—and because it has been easier to give in to the pressure groups, those groups have won over the heads of the moderates.

Mr. Cryer

Like the consultants.

Mr. Lewis

Does the hon. Gentleman want me to give way?

Mr. Deputy Speaker

Order. In view of the hour, interventions should not be encouraged.

Mr. Lewis

I was not quite sure what the hon. Gentleman said.

A second thing which has caused great difficulties in Government in this House of Commons has been that there has been too much gearing of policies—and I do not say that one party or the other is responsible—to what is thought to have been popular because of personal ambition, ambition to stay in office, ambition to stay as Prime Minister; in other words, simply changing direction so as to be in power. This is now finished. In the next few months the House of Commons and both political parties have to decide, and hon. and right hon. Gentlemen opposite in particular have to decide, that now is the hour to take a line in the interests of the whole nation instead of in the interests of any group or in the interests of simply remaining in office.

This is the challenge that the people of the country are throwing to this House of Commons. If it is not possible to have a Government of national unity, it should be possible at least for the parties in this House, and individuals representing those parties in high places, to reach agreement on some kind of policy which will be in the interests of the nation as a whole, because who pays, who governs, who cares are questions the House has to answer—the Front Benches and back benches together.

Mr. Deputy Speaker

Order. The hon. Member for Rutland and Stamford (Mr. Lewis) has been good enough to give us 10 minutes before the Front Bench speeches begin. Could I appeal to the hon. Member for Keighley (Mr. Cryer), whom I am about to call, to split the 10 minutes and allow the hon. Member for Daventry (Mr. Jones) a few minutes?

8.50 p.m.

Mr. Bob Cryer (Keighley)

I always yield to your entreaties, Mr. Deputy Speaker. The hon. Member for Rutland and Stamford (Mr. Lewis) spoke about it not being possible to tax the rich any further. A report in the Daily Mail of 4th March pointed out that it was "a tough life" for Marks and Spencer heir Joel Lerner. He fled British shores because of the tax situation and the Chancellor's proposed wealth tax. After renting villas around the Continent he finally took up residence in Monte Carlo. He has left behind him in this country a £250,000 estate in Berkshire which is now on the market at the knock-down price of £200,000. At the time the average full-time earnings for male manual workers were £48.63 per week and for full-time female workers £27 a week. So there are still some differences in society which the hon. Member may have overlooked.

The hon. Member also said that the social contract had some breaches. That is undoubtedly true. Those who are clambering through the social contract are following through the breach made by this Government when they awarded massive increases to the civil servants and to the judges at the beginning of this year. Those increases were of the order of £2,500—to people who were in a position to withstand the difficulties of economic recession. The miner and the railwayman might well look askance at the Comptroller and Auditor General, for instance, who has had an increase from £16,500 to £18,500. They might say that their betters were not setting a very good example in this difficult economic situation.

The hon. Member said that the people always pay. I agree that they do. They pay for everything, and it would be nice if they had some control over the economy for which they create the wealth. He also mentioned the massive overseas borrowings, and he was right to say that these borrowings tend to dictate our policies. We must reduce these borrowings because. as the Chancellor said. I cannot afford to increase demand further today when 5p in every £ we spend at home has been provided by our creditors abroad and inflation is running at its current rate. The Chancellor is saying there that his policy is dictated in that way. The TUC asked the Chancellor to reflate to curb unemployment. Unfortunately my right hon. Friend ignored that advice. To create the sort of Socialist society we on these benches talk about and aim for, we have to be able to exercise our own control and resist overseas dictatorship.

We have also to exercise control over the movement of capital from this country in the short and long terms. For instance, the export of capital to South Africa grew at an average rate of £50 million a year between 1957 and 1972. By 1972 it totalled about £1,400 million. We have to control that sort of investment which is making unscrupulous use of an odious apartheid regime to maximise profits and is depriving British workers of urgently needed investment capital.

We ought to look at the control of imports. The Chancellor is wrong in trying to diminish demand in this country and so control the flow of imports into it. As he said, In the last 20 years the situation has been made worse by the fact that our imports of finished manufactures increased so much faster than our exports of manufactures, making our net exports increasingly inadequate to pay for our net imports of food and raw materials."[Official Report, 15th April 1975; Vol. 890, c 282–8] Quite recently we had a comprehensive debate on textiles. It was pointed out that the textile industry, which employs 900,000 people and which is a large contributor to the export trade, had been asking for some form of import control because it was facing unfair competition. The Textile Spinners Federation has put in an application for anti-dumping action, about which nothing has been done so far. The Minister has told me that Interlaine, a continental organisation of manufacturers, has had such an application circulating around Europe since 1973. The Minister also said that we could not apply that type of control, because it was already with the EEC Commissioners. If we are to have control over our economy, to get the sort of society that the Labour Party wants, we must be able to do it without interference from the European Commissioners.

One of the prerequisites for any progress in this direction is for the country to say "No" in the referendum. There is a danger of reciprocal messages, and we must not blind ourselves to that. This is a judgment that has to be made. Fiscal and monetary measures have been tried in virtually the whole of the post-war period, but we still find ourselves lurching from economic crisis to economic crisis.

I had a great deal more to say, but I shall now conclude. Defence expenditure has been cut by £110 million. That vindicates the 54 Labour Members who went into the "No" Lobby at the end of the debate on the defence review last November. A number of critics said that we should have supported the Government. The Government had massive support, as they did over the EEC, from the Opposition. Defence expenditure can be cut again and again. The illusion, fostered by some, that there is an enormous threat is so much mythology.

The public expenditure that we have to maintain is that on housing, social services and education. That is what we were elected to do. That is what the Labour movement is for. Cutting defence expenditure is on the right road, so let us have more of it.

This is a disappointing Budget and not the sort of Budget that we expected. It has the germ of a good idea for cushioning unemployment, but we were elected not to foster and maintain unemployment but to combat it.

8.57 p.m.

Mr. Arthur Jones (Daventry)

I know that the hon. Member for Keighley (Mr. Cryer) represents a wide section of his party. What he has said emphasises the division that exists in the Socialist Party ranks. That division has been significant during the course of the Budget debate.

As I have only a limited time, I shall refer to the proposed formulation of the consultative council of central Government on the one hand and representatives of local government on the other. This is a recognition of the wider partnership that there should be between central and local government. However, there are dangers in this relationship.

It is up to the Government of the day to take decisions about the level of local government expenditure in the services that the Government essentially control. We cannot move away from a situation in which the Government must take the pre-dominant decisions. They take such decisions, for example, in the rate support grant, and we have seen the competing demands on local authorities by a number of central Government Departments. This has led to the escalation of local government expenditure far beyond the country's capability to finance.

This situation has arisen because many decisions taken here are passed to local authorities to implement and as a result local government expenditure has exploded. As in so many other matters, the buck stops here. I cannot envisage a sensible relationship between the Government and local authorities in a consultative council. The power lies with the Government. It is not fair to expect local authorities to join with the Government and take decisions which will be at their expense. We certainly need a dialogue, but at the end of the day it is the Government who must decide. It would not be wise to build too great hopes on the idea of a consultative council. I agree with what my hon. Friend the Member for Guildford (Mr. Howell) said about that.

In the whole of local government we have allowed expenditure to escalate, regardless of the consequences to budgetary control, which has clearly been absent in recent years and for which the pressure of events now calls. Decisions to reduce expenditure should have been made voluntarily as part of the long-term objective rather than having them forced on the country, as has happened in some of the Budget proposals. They are essentially so minor that many and much greater economies must be forced on local government if we are to get out of the serious difficulties which we now face.

It is a sad and serious reflection of one way in which the nation's affairs have been mismanaged. We wait until we are forced by events before taking the decisions which we know will have to be taken. They are inescapable, yet we wait, hoping that they will go away. It is symptomatic of the lack of purpose and absence of will to engage in sound housekeeping and husbanding of our precious natural resources. Now we hear of monitoring and the contribution that central and local government have to make to urgent policy decisions.

For the Chancellor to take shelter behind the concept of a consultative council is an admission of lack of the will to solve our problems by the central Government, upon whom the responsibility essentially rests. He asks local authorities to engage in the unavoidably stringent rate support grant settlement for 1976–77"—[Official Report, 15th April 1975; Vol. 890, c. 297.] Whenever were local government organisations listened to on the rate support grant settlement? It is not a dialogue. They are called in and told what the rate support grant will be.

To try now to shift the responsibility that central government must have for local authorities is a clever trick. Trying to suggest that local government should instrumental in curtailing its own expenditure is the very negation of what local government is about. Local authorities are responsible for the interpretation of Government measures in the interests of their communities. They will not engage in a dialogue that will reduce the services they offer to their electors.

It is events that are taking decisions for the Government in the context of unacceptable levels of rate demands throughout the country. This is reflected in the present proposal.

Year after year local government expenditure has grown significantly beyond the growth in the gross national product. Expectations have been permitted to the British people far beyond our ability to meet the bill, and a bitter harvest of disillusion and community strife is to be the result. The Chancellor speaks in generalities. When they are interpreted into goods and services, or the lack of them and falling standards the failure of Government policy will be clear for all to see.

9.4 p.m.

Sir John Hall (Wycombe)

I have been privileged to be a Member for nearly 23 years. I cannot recall any Budget debate which has been so poorly attended by hon. Members—and I refer mainly to the Government side. There was a time when I thought that the Opposition would have to carry the debate. It may be because of the nature of the Budget. Certainly, over that same period I cannot recall a more sombre Budget, not so much because of the swingeing increases in taxation as because it seems a Budget without hope.

Hardly any intelligent person would disagree with the Chancellor's analysis of the dangerous situation in which we now find ourselves. I do not think that anyone would disagree, either, with his concentration on the cancer of inflation as a disease that we must cure before it kills us. He was right to say that inflation redistributes the nation's wealth and income in an arbitrary and antisocial way, that it engenders a deep sense of insecurity in all sections of society, distorts the allocation of resources, and makes rational planning of expenditure extremely difficult. He should have gone on to say that we faced the danger of hyper-inflation, which could lead to a complete breakdown of our present social order. I have an uneasy feeling that there are those in this country who would welcome such a result and who are doing all in their power to bring it about.

I believe that the Chancellor was right to point out that our present standard of living is supported by our overseas creditors, and that if we continued our present rate of progress, to use his own words, We would then face the appalling prospect of going down in a matter of weeks to the levels of public services and personal living standards which we could finance entirely from what we earned. I do not believe that our political or social system could stand that strain."—[official Report, 15th April 1975; Vol. 890, c. 283.] If that means anything at all, it means that we must face a reduction in our standard of living unless and until we increase the national wealth.

After that clear-sighted and courageous analysis, I expected a Budget which would do three things. First, I expected that the Budget would restore confidence to industry and hope to the individual so as to stimulate the creation of greater national wealth. I thought that the Budget might give an immediate reduction in public expenditure, and some tangible evidence that the same disciplines in the use of manpower and resources would be applied in the public sector as must be applied in the private sector in the present economic climate. I thought that the Budget would take either directly or indirectly, positive action to offset the effects of continuing wage increases which all impartial observers and hon. Members on both sides of the House agree as the main cause of the present and continuing inflation.

Mr. J. Enoch Powell (Down, South)

Who agrees with that?

Sir J. Hall

I should have known better.

We all read the articles and hear the speeches from the politicians and economists which start off with a brilliant analysis of the situation and then tail away into generalities when it comes to producing a solution.

What do we have, instead of the measures to which I have referred? We have a few measures designed to help investment in a restricted field, which were referred to by the Paymaster-General this afternoon. I do not believe that anyone, even those on the Treasury Bench, believes that those measures will have more than a limited effect on total investment. We received a promise that the National Enterprise Board would soon be active—a promise which I must confess is likely to strike a chill through every boardroom in the country.

We had an indication during the Chancellor's speech that companies can look forward to an increase in tax to above 52 per cent. in the next Budget. Speaking as an industrialist rather than as a politician, I find nothing in the Budget which encourages me, or the companies with which I am concerned, to invest more than the minimum amount necessary to maintain existing production and replace machinery. I find nothing which would encourage companies to develop high-risk and frequently high capital cost projects, whatever the gross return that might be expected from such ventures. Against the anticipated fall in investment, which I do not believe that the Budget will offset, I find this prospect deeply disturbing.

What is the scene confronting most businesses today when they consider what action to take? Already, they are carrying a heavy burden of taxation, including the unprecedented rise in the rate burden over the past two years or so, and they face the possibility of a further rise in tax, only put off this year, according to the Chancellor, because he felt that they had been going through a difficult time. At the same time, prices are restricted and wages soar. They are threatened with or promised possible acquisition or direction by a future National Enterprise Board. Private companies face the real possibility of destruction through the operation of the capital transfer tax which we discussed at great length only a few weeks ago. They are being exhorted by the Government to make themselves efficient by the better use of manpower and resources while they see an ever-expanding public service taking up an increasing amount of the manpower and resources which have to be paid for by the efforts of private enterprise.

Businesses still face liquidity problems, despite the optimism of the Chancellor of the Exchequer that these are beginning to disappear. They face the cost of new money, which is often as much as if not more than the profit that they can hope to get from the ventures in which they are about to engage. They find rising costs, especially rising wage costs, making them less and less competitive in the export market. I am by no means as optimistic as the Treasury Bench about the prospects of our exports over the next 12 months. I have some experience of the export market. We are finding it increasingly difficult month by month to meet price competition overseas. In the circumstances, it is hardly surprising that industry has lost confidence.

The only gleam of hope is the anticipated world trade revival in 1976 on which the right hon. Gentleman appears to be gambling. I am gambling on it myself. But I expect that the improvement in world trade will take place much later in 1976 than the Chancellor of the Exchequer seems to think. If that is so and we do not get a recovery in world trade of which we can take advantage early in 1976, what is the answer to the question which has been asked on several occasions from the Opposition benches? What will happen then, with unemployment probably running in the spring of next year at more than a million, to the proposed reductions in public expenditure for 1976–77? Will the right hon. Gentleman be inclined that year, if we have not experienced the recovery on which he is banking, to carry out the cuts which he has outlined and which have been circulated to us not in Hansard but in the list which is obtainable in the Vote Office?

I notice from that list of cuts one of £110 million in defence. I find that a little surprising after last month's White Paper. From where will these additional cuts come? Services pay and allowances account for more than 50 per cent. of defence expenditure. Does it mean that more men are to be discharged? I suppose that that is one type of unemployment which the Left wing of the Labour Party would tolerate without protest. Does it mean a further reduction in the new equipment which, despite the cuts in the White Paper the Services hoped they would get? Does it mean a reduction in the number of aircraft that the RAF has been promised after all the cuts announced in the White Paper?

Are the Government determined to destroy the confidence and morale of the Services in the way in which they are destroying the morale and confidence of industry? Defence is a big spending Department and an easy victim for those who, like the hon. Member for Keighley (Mr. Cryer), dislike paying this kind of insurance premium in times of so-called peace. But cutting defence beyond a certain point destroys whatever effectiveness the Services might have, and we are wasting the rest of the money that we spend on them. We might as well abolish the Services altogether. Indeed, it would be more logical to do so. To have a defence force which is likely to be ineffective when it is called upon to be used is a sheer waste of money.

Cuts in public expenditure are always difficult and painful. It is always possible to do without a service that we have never had, but once we have one it becomes indispensable. Many reasons have been advanced by hon. Members on both sides of the House and interests outside why services should not be reduced but should be increased.

There may be a case for Parliament deciding that public expenditure should not exceed a given percentage of the gross national product so that any expansion or development of public expenditure would be related to an increase in the national wealth.

The hon. Member for Llanelli (Mr. Davies) suggested that we should look at the composition of public expenditure. I agree with him. We should, against the present background, examine critically the different items of public expenditure and concentrate on those which are likely to give the best social economic benefit.

One example is the proposed cuts for roads and transport. I notice that in a Written Answer given to my hon. Friend the Member for Warwick and Leamington (Mr. Smith) by the Minister for Transport on 14th April the economic rate of return on many of the road developments listed in the Question is quite good. I hope, therefore, that, in deciding to impose cuts, modest as they may be, the rate of return will be kept in mind.

I turn to the last of my three points—wages. What in the Budget will encourage trade unions to restrict wage demands? That question has been asked a number of times by hon. Members on both sides of the House.

The first thing that the Budget does is to increase the retail price index by about 2¾ per cent. That is not very encouraging to trade union leaders who are trying to restrain their members from demanding too much.

Secondly, it increases taxation in a way which hits everyone, including those whose incomes have either not moved at all or have moved rather less than the increase in the cost of living. That point has made a considerable impact, because it has been the subject of frequent reference certainly on this side and, indeed, on the other side of the House.

Trade unions increasingly tend to negotiate wage increases today on the basis of take-home pay after all deductions, including tax. Both the factors to which I have referred have been seized upon by trade union leaders as justification for demanding further and larger wage increases. Indeed, my right hon. Friend the Member for Worcester (Mr. Walker), in a powerful speech, drew attention to this point and gave many examples.

We have just learned from figures published today that basic wage rates have risen by 32.5 per cent. over the last 12 months and that inflation has topped 20 per cent. It is the first time that it has done that. I think that it is likely that wages are now running at about 11 per cent. to 12 per cent. ahead of prices rather than the 8 per cent. to 9 per cent. quoted by the Chancellor in his speech.

I understand that a further figure, which is to be published tomorrow, will show that wage rises contributed to the forcing up of prices by about 21.5 per cent. over the last 12 months. It is not necessary to emphasise that point, because this contribution of wages to inflation is now accepted on the Government side as well as on the Opposition side and it is also a matter of general acceptance throughout the country.

Even allowing for the fiscal drag, which takes an increasing amount in tax out of pay rises, the figures quoted in the debate show that there is absolutely no justification for demanding further increases to maintain, as it is said, the real value of wages.

We should not blame trade union leaders for trying to get the best deal they can. That is what they are paid for. We are not surprised when a lion in the jungle pulls down an antelope. He is doing what comes naturally. Why should we be surprised when a trade union leader satisfies the appetites of his members without regard to the welfare of the rest of the community? But, of course, the supply of game tends to be limited and it runs out unless it is protected. If the community is not to be destroyed, we have to find some way of checking the trade union appetite, remembering that trade unionists represent less than 50 per cent. of the total working force. To do that any Government must reassert their authority and they must answer the question posed by my hon. Friend the Member for Rutland and Stamford about who will govern.

I do not believe in incomes control, voluntary or statutory. I have said so on several occasions, both when my party has been in Opposition and in Government. I have opposed my party's official line in the past on this type of policy. These policies have been shown not to work for more than a very limited period. They distort the economy and lead to all sorts of undesirable methods of avoidance. When the pressures become too great, the policies tend to break down in ways which cause the maximum damage to the economy.

There is much to be said for a form of inflation tax imposed directly on the individual concerned along the lines suggested by the Leader of the Liberal Party. I made a similar suggestion to a former Tory Chancellor some years ago only to be shot down on the ground of administrative difficulties. I rather doubt whether the administrative difficulties are as great as were represented to me at that time.

I do not believe that the problem we face can be solved by the traditional methods that are beloved of the Treasury. We cannot tax our way out of this crisis. It is the kind of medicine that in the long run is likely to make things worse. We should be considering less orthodox measures, such as the possibility of indexation, which would have to be applied across the board to be successful. Indexation by itself is no cure to inflation, but it does ensure that the burden of inflation is more fairly spread. It also tends to take some of the fear out of inflation and thereby reduces pressure for excessive wage demands. Lastly, perhaps it gives more time for the root causes of the inflation to be dealt with and, hopefully, cured. It is a method of dealing with our present problems which should be studied as a matter of urgency.

But no techniques, however ingenious, can provide a lasting solution. The answer lies as much in changing human attitudes as it does in changing economic policies. For too long we have all lived with the expectation that year by year our standard of living would increase without any perceptible effort on our part. One of the problems we face today is disappointed expectations. Many people still take the view that year by year they can expect an improved standard of life without any greater effort.

Many trade unionists whose wages have constantly been keeping ahead of the cost of living do not know what the crisis is all about. They have not suffered. Their standard of life has improved year by year. It is difficult to get home to them that we are in a serious and dangerous difficulty. We must realise that in the end we can maintain, much less increase, our standard of living only out of the wealth that we generate ourselves. This will not happen without great individual effort, ingenuity and courage. This effort, ingenuity and willingness to take risks will not be forthcoming unless Government policies are thought to be fair, are designed to prevent sections of the community from misusing their power to gain advantage at the expense of the rest, and are policies under which all can hope to get and to retain a fair reward for effort. They must be policies which offer hope of a return to a stable economy and honest money and which give confidence for the future.

The Government's present policies and the policies they are proposing for the future—some of which we are studying in Committee and some of which are set out in the form of White Papers—appear to fail in all these respects. The absence of the key Ministers throughout this debate would seem to add emphasis to this indictment. I cannot remember a previous Budget debate in which only the Treasury team, excellent as they may be—

Mr. Joel Barnett

—Only the Treasury team!

Sir John Hall

—have been present. In the past we have had Ministers from the key Departments taking part in each day's debate.

The Chancellor of the Exchequer (Mr. Denis Healey)

I am the key Department.

Sir John Hall

If everything is now controlled by the Treasury and no other Department has any say, that itself is an indictment. It is unfortunate that Ministers of other Departments have been so lacking in interest in this Budget that they were not prepared to take any part in the debate.

Severe though the Budget appears to be, it makes no real attempt to deal with the basic causes of our economic illness. It must stand condemned for that reason alone.

Mr. Clegg

On a point of order, Mr. Deputy Speaker. Could you give me some guidance. There are eight, possibly nine, civil servants in the Box, and four Labour back benchers. Will you say whether that is in order?

Mr. Deputy Speaker

It is certainly not a matter for the Chair.

9.27 p.m.

The Minister of State, Treasury (Mr. Robert Sheldon)

The hon. Member for Wycombe (Sir J. Hall) was quite right when he said that this has been, if not well intended, at least a good debate. I should like to say how much I appreciated a number of the contributions, especially those from my hon. Friend the Member for Chester-le-Street (Mr. Radice) and my hon. Friend the Member for Llanelli (Mr. Davies), who always intervenes in this debate with great effect and who produced some useful analyses.

I look forward to listening to the contributions of Conservative Members and to hearing how their solutions differ from the measures taken by the Government to deal with our present economic situation. I am always pleased and interested to learn from them on any matters on which they feel they have an understanding that can usefully be injected into the argument. I confess that I received little information from what they had to say and any alternative views, except for the notable speech of the right hon. Member for Worcester (Mr. Walker). I shall mention his speech presently.

The contributions made by Conservative Members largely fell into the category of advocating public expenditure cuts. From listening to those comments, anyone would have thought that my right hon. Friend the Chancellor of the Exchequer had not made this one of the key parts of his Budget strategy.

Mr. Clegg

That will take place next year.

Mr. Sheldon

Of course it is for next year. For some time I was Chairman of the General Sub-Committee of the Expenditure Committee. Any one who has listened to or taken note of what the Expenditure Committee has considered will know the criticism that has been made of these rapid changes in public expenditure. Perhaps my remarks on that matter had better be deferred until I deal with it more fully.

What we really looked for in the speeches of Opposition Members was evidence of how they differed on matters concerning their policies on incomes. This is the real test of any change in Tory policy. What we have been looking for is an explanation of how they intend to reconcile their present intentions with their past actions. Anyone can attack the social contract, but it is when he comes to the test of stating the alternative that we shall listen with greater interest to what he says.

What we have been noticing—as professional Tory-watchers we look at these things with very great interest—is the way in which Tory economic policy is evolving. We know full well that the right hon. Member for Leeds, North-East (Sir K. Joseph) adopted one stance, that the right hon. and learned Member for Surrey, East (Sir G. Howe) adopted a middle stance and that the hon. Member for Guildford (Mr. Howell) occupied yet another. It was, therefore, very evenly balanced.

What we have seen, fascinated as we have been by these events, is the introduction of the hon. Member for St. Ives (Mr. Nott) on the Opposition Front Bench, followed by the hon. Member for Cirencester and Tewkesbury (Mr. Ridley)—hon. Members whom we like very much and for whom we have great affection. However, we also understand that this means a very great change in the pressure of economic policy and in the Opposition's thinking.

I believe that last night the hon. Member for Guildford, in a television programme, ruled out the possibility of an incomes policy. It seems that we can detect the way in which Tory economic policy is evolving. Because of that, we must congratulate the right hon. Member for Worcester on stating quite firmly his total opposition to the stance taken by his Front Bench and stating his firm belief not only in an incomes policy but in a statutory incomes policy. His was a notable speech, which was listened to with great interest by the Government side of the House, as I am sure it was listened to on his side.

The hon. Member for Guildford asked me about the £901 million of public expenditure cuts. He was quite right in thinking that the cuts of £901 million do not include reductions achieved by phasing out nationalised industry price subsidies. The further comments made on public expenditure were very important. There was a great deal of criticism that these cuts were to be for only 1976 and 1977. Successive reports from the Expenditure Committee have made the point that there should not be this frequent changing because of the dangers and damage that arise from it. This has been learned and understood, I believe, but it has now been put by Opposition Members that this applies only to capital expenditure and that for current expenditure these cuts should have been made more quickly.

I can only refer Opposition Members to the report of the Expenditure Committee which criticised the wastefulness of precipitate cuts of public expenditure. This was a criticism made also by my hon. Friend the Member for Norwich, South (Mr. Garrett). These matters include very great time lags. If one really wants to produce wastefulness in Government expenditure, there are few ways of getting that waste going more strongly and in a more damaging way to public life generally than to try to bring about such precipitate cuts in expenditure.

When I sat on the Opposition side of the House as Chairman of the General Sub-Committee of the Expenditure Committee, this was something for which I strongly attacked the then Government. The kind of criticism that was valid then is still valid today.

Mr. Biffen

The Minister is speaking with such authority that I fear he might almost have convinced himself. Will he say what would be the unacceptable dislocation—dislocation certainly, but unacceptable dislocation specifically—if, for example, the proposed cuts of £150 million in food subsidies that are proposed to operate next year were to operate speedily? The hon. Gentleman must know that the bulk of the food subsidy is on liquid milk. What would be the dislocation that would be unacceptable?

Mr. Sheldon

The hon. Gentleman is right in that a Government can always find expenditure that is capable of being cut. If expenditure is found which can be cut and it is cut, the process can be completed, but if it is first decided what it is right to cut and then it is determined whether the cut can be made in the year when it is wished to make it, a much more difficult task is posed. We believe that our priorities in terms of the subsidies that can be changed and how alterations in public expenditure can be made are matters on which decisions should be arrived at first. Subsequently we can make decisions as regards the year in which we should implement the cuts.

Sir John Hall

I do not think that the Minister has answered the question put to him by my hon. Friend the Member for Oswestry (Mr. Biffen). What is it that makes it impossible to make a cut of £150 million now?

Mr. Sheldon

I thought I had explained the matter clearly. I said that the decision that is made first is to decide what should be cut. The second decision is the year in which it is wished to make the cut. Conservative Members would no doubt wish to cut the retirement pension. That could be done very quickly, but does anyone consider that that is the right way to bring about expenditure changes? Of course it is not. Surely this is obvious to anyone who considers the matter. It is obvious that one first decides what cuts it is right to make. One then decides the time scale in which the cuts can be introduced and implemented with the least possible damage. That is the way in which such matters are always best arranged.

Mr. Hordern

As the Minister says, the best time to make these cuts in public expenditure will be next year when he has had the fullest possible opportunity to consider all these matters, but that will be when, on the Chancellor's admission, unemployment will be over 1 million. Is that the best time to implement the cuts?

Mr. Sheldon

As I have said before, one makes changes on the basis of what is believed to be right. Of course, my right hon. Friend has made it clear that the time when demand will be shifted because of the rise in exports that we hope will take effect from next year will be a suitable moment to introduce the change-over, quite apart from the factors that I have already mentioned.

During the debate a number of hon. Members have sought to discover causes for the decline both in our industry and in our economic performance. My own assessment has always been that we never really discovered a proper relationship for our overseas trade once our decline in trade came about as a result of changes within the Commonwealth. When countries such as France, Belgium and the Netherlands lost their colonies, they readjusted their trade. We have not made the same kind of readjustment. One of the consequences from which we suffer even today is that our trade pattern has not been brought up to date in the light of the markets available to us. We therefore see the advantages that other countries had when they entered the Community fresh from their decline, if one want to put it in those terms. Due to their economic relationships with their colonies they were able to produce the kind of transfer which it was not possible for us to make.

My hon. Friend the Member for Norwich, South made the point about the decline in our manufacturing industry and, in particular, in our engineering industry. That is a matter of great importance to us all. We have seen a decline in an expertise that it is notoriously difficult to acquire. We have seen a decline in the working population engaged in our manufacturing industry. Throughout the 1960s the proportion of our working population engaged in manufacturing was about 34 per cent. to 35 per cent. In 1971, 1972, 1973 and 1974 it fell dramatically to slightly more than 30 per cent. It is important to arrest this decline in our industrial base if we are to take advantage of any increase in world trade.

Mr. Tam Dalyell (West Lothian)

Is that not precisely the reason why the promised help for the ferrous metal industry has raised such hopes?

Mr. Sheldon

Indeed, and I am grateful to my hon. Friend for mentioning that point. That is why our industrial base is so important.

Frequently in this House we pay tribute to the work of the City of London and to the growth of invisible trade to which the City contributes. We must also accept that we pay a price for that success. The price we pay is that some of our ablest managers go to the City of London and do not go into industry to the same extent as managerial staff are used in industry in Germany and other Western European countries. We would like to see much more of our ablest talent going into our manufacturing industry.

The need for investment has been cogently argued by many speakers in this debate, and we are making useful, if limited, additions to the level of investment. Where we have been weak in the country as a whole is not only in the sector of investment, although investment has fallen disastrously in recent years, particularly under a Conservative Government. However, that is not the only area in which we have been deficient. We have been particularly unfortunate in obtaining extra production from the investment we make. For example, investment productivity is 20 per cent. greater in the United States than it is in the United Kingdom. In Italy and France it is 50 per cent. greater, in Japan it is 100 per cent. greater, and in West Germany it is 170 per cent. greater. Those figures are derived from OECD information and are estimates. Anybody with a knowledge of industry will know the reality that underlies the statistics.

It was always a dictum when I was a manager in an engineering factory that I would sooner have a first-class manager and staff operating with antiquated machinery than have the finest machinery but without the right quality of men and management. It seems to me that there are often deficiencies in that respect. Therefore, we must do our utmost to obtain from our present resources what we can. We must add to that all the investment which we can successfully achieve, but it means that much more must be done in the long term. The £50 million devoted by my right hon. Friend the Chancellor to the Manpower Services Commission will be a useful help in this direction.

Sir John Hall

With the Minister's long experience of productivity in other countries, does he not agree that perhaps one of the differences lies in the attitude of trade unions in the various countries?

Mr. Sheldon

There are a number of factors, but the hon. Gentleman must realise that some of the best figures are thrown up in Canada, which has not a notably excellent record in industrial relations, and also in the United States, where again industrial relations are not particularly good. Furthermore Italy, which features prominently in my statistics, has far from excellent industrial relations. One must be careful not to oversimplify these matters. Why I was quoting the figures, which have been the subject of a great deal of scrutiny, is that they indicate—I do not claim for them more than that—some ways of looking at these problems which are different perhaps from those most frequently used by hon. Members in making speeches in this House.

I believe that the aim of any Chancellor in the post-war years has been to try to reconcile the best performance he can produce for the balance of payments, for inflation, for growth and for unemployment. He does this generally by trying to operate the economy at as high a level of demand as possible in order to produce a maximum level of growth and a minimum amount of unemployment. He knows full well that if he gets demand too high, the balance of payments will suffer and he will have an inflationary increase beyond a level that is endurable.

In the past it was always open to hon. Members in this House or in pressure groups, whatever they might be, to urge the Chancellor to reflate the economy in order to obtain lower unit costs at the price of a small but normally acceptable increase in the amount of inflation. He knew in the past that if he did this imports would rise but there would be some gains in productivity arising from capacity being operated to the full.

The position that we have now is that inflation is at such a high rate that we are having to operate the economy near to the limits of what is achievable and even endurable. Therefore if we were to reflate now, with inflation at the rate is is, we would be paying even more for imports and we would be drawing on overseas borrowing at a rate that would stretch what was theoretically and practically available to us.

The position is that we have in the past operated on a destabilising cycle, so that every time we started this stop-go we were in a worse position. This has happened over the past 20 years. Conservative Members are probably more responsible for this system than any party in the House, because it was they who gave that spiral its biggest turn in 1972. It was then that we had levels of imports, of inflation and of borrowing requirement that set us on our present path, and each time in this cycle we find ourselves having to inject higher levels demand in order to be able to reduce unemployment and increase growth. This is the problem we have each time we find ourselves at these levels of borrowing re- quirement, so that we have to inject more demand each time in order to reduce unemployment to a modest extent. We find ourselves very much in the classic position of the drug addict who requires each time bigger and bigger doses in order to achieve the same effect.

We are therefore seeing a decline in the relationship between cause and effect, between the cause of pumping the money in and the effect of reducing unemploy-This decline in the cause-and-effect relationship is a most serious matter and it has reduced the ability of the Chancellor of the Exchequer to bring about changes that he might wish to bring about.

There has thus been I have noticed this in the debates in this House—an increasing consensus among those who have been speaking on these matters that it is not within the power of the Chancellor of the Exchequer to bring about the kinds of subtle changes that at one time were possible. That power was pleasant while it lasted. It gave one a feeling of omnipotence. One felt that one could bring about reductions in unemployment and increases in economic activity by a subtle pressure on the lever. That power of wealth creation is not now available to the Chancellor as it was once thought to be.

The success of Keynesian demand-management policies during the post war period has led to the view in some quarters that it is always possible to solve domestic employment problems simply by the creation of more demand. That is a dangerous over-simplification. The Government's power to manipulate home demand to provide full employment is strictly limited on the one hand by the degree of domestically-produced inflation and on the other hand, by the extent of our dependence on foreign banks, which was referred to by the right hon. Member for Worcester. Either of those factors on its own would present a problem in the extension of home demand. Taken together, they are crucial.

We cannot count on being able to borrow on a large scale indefinitely if at the same time we make it ever more difficult for ourselves to sell goods abroad by unnecessarily inflating home production costs through excessive wage increases. The Government are unable to expand home demand without bringing about a crisis of belief in us as a nation. That does not mean that we need do nothing. It means that we must accept the level of employment which is generated by the world economic situation.

My right hon. Friend the Chancellor said that when our inflation rate is down to the level of that of our competitors he will be able to consider reflation in home demand. It is now up to those who produce settlements in pay levels by the process of collective bargaining on both sides of industry to restore the Government's power to maintain the goal of full employment at home while remaining competitive abroad. As my right hon. Friend said, with a lower rate of inflation we should enjoy the same standards of living with lower prices, lower taxes and more jobs.

Mr. Peter Walker

Does the Minister mean that in the negotiation at the end of this week on railway pay the Government will insist on the Chairman of the Railways Board keeping to the criteria he has outlined?

Mr. Sheldon

The right. hon Gentleman knows full well the Government's policy here. I know that the right hon. Gentleman's policy would be to produce the straitjacket which he outlined in his notable speech. I state categorically that that is not the Government's view. We believe that any advantages that might be obtained in that way would be more than offset by the problems that would be created. We urge the railway unions to settle at all times within the social contract, to take into account what the Government are doing on behalf of the people, including those who work on the railways, and to come to an agreement with the Railways Board. That has been our policy and it continues to be our policy.

Mr. Peter Walker

The Treasury will have to provide the money for the increase in the sense that the Railways Board is in deficit. The Treasury has the power of decision whether to advance a certain sum of money or a larger sum of money. Will or will not the Treasury insist that the settlement is within the social contract, and, if it is not, that the Government will not advance the money?

Mr. Sheldon

The right hon. Gentleman must not think that the way in which the Conservative Government operated a pay policy is the way in which the Labour Government are operating the social contract. The two methods are quite different. The negotiation is between the two sides in the railway industry, and the aim of the Government's policy is to operate within the social contract. That will continue to be the way in which the Government deal with these matters.

I shall say something about the changes in import prices and wage rates. For some time prices were the major cause of United Kingdom inflation. Therefore, in the first quarter of last year, if we take the situation year by year, we saw increases in import prices. In the first quarter we saw increases at an annual rate of over 100 per cent. By the fourth quarter of last year it had fallen to something less than 12 per cent. So there has been this very rapid decline in the increase in import prices. On the other hand wage rates, which in the first quarter of last year were at an annual level of 13 per cent., had increased by the fourth quarter to just under 30 per cent. We see, therefore, that whereas import prices in the Western European countries were broadly comparable to the import prices that we ourselves paid, their wage rates were far less. These two factors—import prices and wage rates —are, of course, the two main determinants of prices, including export prices. It is the second factor, that of wage rates, which now gives rise to the greatest concern which is affecting us today.

Mr. Powell

Does not the hon. Gentleman understand that if there is an increase in total demand, in other words if there is inflation, and one set of prices increases more slowly relative to other, other prices will go up faster? It does not show that there are two causes. It is just that the symptoms are varying.

Mr. Sheldon

I understand the point that the right hon. Gentleman is making.

Mr. Clegg

Is the Minister sure?

Mr. Sheldon

Perhaps I can have a word with the hon. Gentleman afterwards and explain it to him, or perhaps he could get his information direct from his right hon. Friend, whichever he prefers. The point I wish to make is that there are two ways of looking at this. Action can be taken by the Government which would in itself operate with great severity on all those engaged in working for a living, the kind of severity that I understand the right hon. Gentleman favours.

All we can say is that if the unions want to operate a social contract and are successful, in a way that the right hon. Gentleman does not believe they can be, this will be an easier situation for the unions themselves and for those in the unions. If they felt able to agree to all the details of the social contract, the situation would be much easier for all concerned. If they do not feel able to agree, we shall find ourselves with Budgets of a kind that will not be very welcome either to this House or to the people concerned.

We see that in face of our economic difficulties the United Kingdom's standard of living is at present 5 per cent. higher than we are earning by our own efforts. Our trading partners are paying us this subsidy, and we are using it not to invest but to spend. This subsidy can be withdrawn at any time, limiting our independence of action. That is the reality facing us today.

My right hon. Friend the Chancellor of the Exchequer has called this a hard and a severe Budget. One of its tasks had to be to tax away all increases in our standard of living which have not been matched by the output of our factories which we can produce and seal. If people continue to increase their pay over and above output, there will be more inflation which will need to be met by yet further taxation. Compared with all the bleak prospects that we as a nation have faced over the past 20 years, this would be the most withering of them all. The responsibility to avoid this rests on the people of this country as a whole.

The question is, are we to accept voluntarily a halt in the rise in our living standards or does it have to be imposed upon us either by harder Budgets still to come or by the international withdrawal of support by those who will at some time refuse to finance our surplus consumption? This Budget is designed to meet these critical realities, and it therefore deserves the support of the House.

Debate adjourned.—[Mr. John Ellis.]

Debate to be resumed tomorrow.