BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 21 April 1975 vol 890 cc986-1123

Mr. Speaker

I have selected the amendment in the name of the right hon. Lady the Leader of the Opposition to delete paragraph (a). I gather that it would be convenient for the hon. Gentleman who is winding up for the Opposition to move it at the end of his speech. Of course, the Chancellor of the Exchequer will not be precluded by that from dealing with the whole debate.

3.45 p.m.

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

The House has clearly been greatly concerned in these discussions by the inflationary treadmill on which the nation finds itself, and I hope that the House will allow me to divert a little from the detail to some of the central economic positions which have resulted in this unfortunate circumstance.

In the whole of the post-war period we have had chronic inflation. I do not want to go too far back because of the limitations of time, but in 1970 inflation started to take off, and in 1972 it got really under way with a fast, sharp increase in commodity prices which was added to in 1974 by the spectacular increase in oil prices. It is difficult to be certain about what caused this sudden take-off from the chronic level of inflation, which at first used to cause great alarm to which we later became reconciled as long as it was kept to what we thought were manageable proportions. One factor which has been greatly underestimated is the failure of the world to evolve a satisfactory new monetary system leading to currency stability after Bretton Woods in its then state had out-lived its effectiveness. Whatever may be the reason, that massive inflation started, and from 1972 to 1974 we witnessed inflation throughout the industrial world at a level not seen before in the post-war period and rarely seen before in the history of the advanced countries of the world.

The effect of the sharp increases in raw material prices—particularly the effect of the increase in oil prices—was asymmetrical. It produced price inflation but demand deflation. It reduced demand by sending up prices. Not surprisingly, wages responded to the rising prices. Not surprisingly, the Finance Ministers and Chancellors of the Exchequer of various countries found themselves in an insoluble dilemma. The remedies that they had for price inflation were poison to the demand deflation problem, and vice versa. Therefore, we watched a raging inflation in terms of prices but a demand which was by no means adequate to keep all our economies fully employed. So we had rising prices and a fall in employment, and that is why, as the Chancellor pointed out, in 1974 wage rates increased by much more than prices.

In his Budget speech, the Chancellor said that wage rates, not take-home pay, were increasing much more than prices. Take-home pay in real terms has been stagnant in this country and in many other countries since 1972. So the situation is that wage rates are going up faster than the cost of living, net real earnings are not increasing and demand is inadequate to sustain full employment. That is the national reflection of the world situation in which the price jump acts as a deflator of demand and, on the other hand, increases the cost of living. It is well, however, to bear in mind that, although it would have helped greatly the fight against inflation if we could have kept wage rates below the rise in the cost of living, the demand effect would have been even greater and the real earnings of workers would have fallen quite sharply.

In the present situation it is clear that the power of the Chancellor is limited, as is the ability of the trade union leaders and workers to accept wage increases lower than the rise in the cost of living, or even to feel enriched by wage increases which are greater than the rise in the cost of living, when demand is slackening throughout. The trouble is that no means exist by which individuals or groups can be faced with the aggregate effects of their demands, and as a result there is incongruity between the general will to share in an orderly way what is available in resources and the actual outcome.

I do not want to seek to explain why we have managed in the past in some respects, though by no means in every respect, rather better with this problem. We have got on to a treadmill and have been pushed there dramatically by the rise in commodity prices and oil prices. We are now kept there by self-sustaining inflation caused by wage increases. This situation must be dealt with.

It is difficult to say how we managed in earlier years. It is correct to say that in the past we did not manage in every respect in a better way because sometimes we paid a high price for our ability not to have to worry about inflation. It is as if we have been in a traffic system where the traffic was lighter in the past and when drivers drove more delicately. We have now a heavier weight of traffic with drivers moving at a much higher speed. It is obvious that we must find a solution which involves greater self-discipline, based on a greater awareness of our situation, than was the case in the past.

We want to maintain full employment, but it is clear that, unless we reduce the rate of inflation, the search for higher money wages will threaten full employment—and indeed is already doing so. The importance of the social contract lies in the change of attitudes which it implies. That change of attitudes will mean that working people will seek voluntarily to make effective the general will which exists but which at the moment is not entirely in line with ultimate individual outcomes—[Interruption.]

Conservative Members are entitled to have a laugh if they want one, but the Conservative Government were not startingly successful in handling industrial relations. They hardly left this country with a high rate of prosperity and contentment as a result of their various convolutions. They were elected on a pledge not to bring in a statutory incomes policy. They scrapped that pledge without very much advantage to our people. However, I agree that nobody on the Labour benches is entitled to claim that we have the magic answer to all these complex problems.

There has also been a good deal of confusion about what is involved in the social contract. [HON. MEMBERS: "You can say that again"] What we ask for in that contract is not wage restraint but wage orderliness—that is to say, an attempt to produce a broad division of available resources and reasonable order, to the advantage of all, since we would gain nothing by a disorderly scramble for the limited resources which we have available. Nobody is asking working people to restrain their claims on society in real terms. What the Government are asking is that they sacrifice the shadow of monetary claims for the substance of real earnings which are compatible with the resources we have available.

I know that Conservative Members enjoy a good laugh at the concept of the social contract. We are told that it is dead, and I shall deal with the matter a little more fully later in my remarks. But no Conservative has come forward with a very convincing alternative—and that applies to the Conservatives when in Government and even now when they have the freedom of comment in Opposition. They have not offered the electors a cogent reason for believing that a Conservative Government would offer solutions to our inflationary problems and the industrial problems that go with them.

There are a number of cosmetic achievements in this area to which Con- servative Members can lay claim. We are constantly being offered solutions which involve monetarism. We are told that we should cut the MI monetary supply, or the M2 or the M5, which I think goes up to Scotland or Wales. I do not know what relevance these cuts have to the problem before us.

We are also told to cut the public sector borrowing requirement and the public sector deficit as a solution to our inflationary problems. [HON. MEMBERS: "Hear, hear."] That may be relevant, but it is more relevant to the man in the street to know what the policies entail in terms of employment prospects and our standard of life.

What, then, are the Tory so-called solutions? We are treated to statistical remedies. Somebody once said that statistics do not bleed. I could also add that statistics do not vote, and, therefore, Conservatives are a little timid in offering their views as to ways out of our problems. [Interruption.] I do not mind divisions of opinion in the Conservative Party on these matters. There have been divisions of opinion in the Labour Party on more difficult and tormenting questions. Even on matters which do not receive the same prominence in constitutional forms, in specialised areas, there can still be differences of opinion in the Labour Party.

I think it must be said that nobody on the Labour benches is sure about Conservative policy on inflation and on industrial relations. Is a statutory policy still their hope or intention? The answer might be given in this debate by the right hon. Member for Leeds, North-East (Sir K. Joseph). Will the right hon. Gentleman be recounting his views on behalf of the whole of his guilty party on its ineffectual efforts at a statutory policy? On the question of monetarism I hope that he will help simple provincials in the Labour Party, such as myself, by telling us not what will be the statistical effect of monetary controls, but the real effects on the ground in language that employees will understand. I hope that he will tell my constituents what are his estimates of the number of unemployed that will be required, and for what length of time.

I respect the right hon. Gentleman's integrity and courage. I do not believe that he will shrink from giving an answer. The trouble is that he does not know the answer, any more than I do, about how many unemployed would be involved in the monetary solutions he commends to us.

Mr. David Crouch (Canterbury)

Before the right hon. Gentleman proceeds to confuse us any more about monetarism, will he make clear one matter which he began to explore—namely, what the social contract means? He said that it did not mean wage restraint. Will he explain to a simple provincial, such as myself, whether the social contract does or does not involve some form of self-restraint and not use words such as "orderliness"? If he would make the matter clear to this House and to the people of this country, we might make some progress on the road which the Chancellor is seeking and, indeed, which the whole House is seeking.

Mr. Lever

What it means—and we must not become engaged in a long semantic argument—is an apparent restraint of monetary demand. It is not an invitation to restraint in real terms. It is an attempt, while we are on our inflationary treadmill, to obtain apparent restraint in terms of the shadow of monetary claims. It is not, and never been, a demand to reduce in real terms. It is a demand to obtain for our working people, our industry and our community the substance and not the shadow.

Mr. Peter Walker (Worcester)

When the right hon. Gentleman talks about the concept of "real terms", does he mean that under his "orderly" social contract trade unionists should take into consideration the benefits of the social wage as well as of the real wage and, therefore, reduce their real wage if they are getting increases in their social wage?

Mr. Lever

It would take into account the net resources available for wages after all expenditures, including defence, police forces, gaols, and other things which do not necessarily arouse the unqualified enthusiasm of every member of the community. This is one of the difficulties.

Remarkable efforts have been made by many trade union leaders and by millions of work people on the concept of the social contract. Nevertheless, it has to be stated frankly that it has not worked welt enough to protect us from the rising inflation which we have experienced this year. What is more, it must work a great deal better if inflation is not to rise next year. That means not that we must discard it but that we must improve its effectiveness.

Several Hon. Members

rose—

Mr. Lever

I do not want to go into great detail on every point.

We shall improve it by sitting down with the leaders of the working people of this country, the trade unions, and by making an appeal to ordinary people and employees to exercise greater monetary restraint in their claims with a view to enabling them to enjoy a higher standard of real earnings.

The question I leave with the right hon. Gentleman in unmistakable terms is: what alternatives have we? I shall tell the House the only alternatives of which I know. The first is serious deflation of our economy and large-scale unemployment in an attempt to bring down the price level. The second is a statutory programme. These are alternatives, but neither of them is a permanent solution to our problem. They have both been tried. They were both tried by the Conservatives. They have both met with the same kind of difficulties as we find with the social contract.

We intend to stick to the social contract because we believe that if we succeed in the principle behind it—broadly a voluntary agreement to bring aggregate monetary wages into broader approximation with the real resources available—we shall achieve a permanent and enduring solution to one of the central problems which beset not only the British economy but the economies of every advanced country. I hope that the House will reflect carefully before thinking of jettisoning or impeding this attempt, because hon. Members should bear in mind the alternatives and down what dangerous roads we may be taken in pursuing them.

I do not propose to single out just one aspect of our affairs for unbalanced treatment, because one of the weaknesses of past Governments has been that they tended to focus on one aspect of our affairs and then suddenly switched so that all their attention was focused on the balance of payments, and the consideration of industrial and employment problems was sacrificed. Sometimes the balance of payments was ignored in the fight against unemployment. We have gone round in circles chasing our tails.

We must learn to keep all the factors in mind in a comprehensive way when we deal with the problem. Unless all the factors in the governmental and public equation are kept in mind we cannot succeed. Otherwise we should be like a doctor who on one occasion treats a patient's leg and ignores his heart, head and arm and on another occasion treats his head to the detriment of his heart. We must keep the whole picture in mind, although we must inevitably focus from time to time on particular aspects of it.

The main features I wish to comment on are public expenditure, private consumption, the balance of payments and the private enterprise sector. I shall try to cover the ground as briefly as possible.

Public expenditure rightly has grown in real terms in recent years. It should be remembered that in a state of total barbarism there is no public sector. The achievement of no public expenditure is not one at which any of us should aim. Public expenditure has increased in a situation of inflation, for two reasons. First, public expenditure is normally budgeted for in real terms by both parties. Incidentally, it has increased in real and money terms under both parties, because both parties had budgeted for it in real terms. This is a dangerous habit which will have to be looked at again.

There are two reasons why this is dangerous. First, public expenditure tends to be labour-intensive and, therefore, reflects more rapidly monetary inflation. Secondly, unlike expenditure in manufacturing industry, public expenditure does not have the mitigating factor of increasing productivity at most points to reduce the impact of the rising cost. This large increase in money terms in times of inflation call hardly be matched, unobtrusively, by higher taxes. If it is done obtrusively it tends to raise wages problems.

Another problem of the constantly rising proportion of public expenditure has been drawn attention to by my right hon. Friend the Secretary of State for Industry. I am sorry that he has left the Chamber. I want to stress his words of wisdom—that we must pay more attention to keeping up the strength and labour force of manufacturing industry. Obviously, if every year there is a large drain of manpower into public service, however desirable, not surprisingly there will be difficulty in maintaining an adequate labour force in the manufacturing sector.

The Chancellor was absolutely right to reduce at this stage the growth of public expenditure so as to make available the maximum real income to working people during this period of extreme pressure. I very much welcome the principle of public expenditure, but I cannot support a practice of giving it out m money terms beyond the resources available within the country. [HON. MEMBERS: "Hear, Hear"] That is the kind of statement that always arouses immense approbation from the Opposition, of whichever party it may be formed. However, it is the practice of the principle that I have just enunciated which both parties find more difficult when they are in office.

Let us take a simple illustration. If resources are taken as 100 and if 80 of those resources have been pre-empted, as it were, by other aspects of our social demand before the Government expenditure comes in, and the Government want to finance 30 units of public expenditure, they can do so only if they recognise that they are using the engine of inflation to make room for the satisfaction of that demand. It will be difficult for the Government who make use of the engine of inflation, for however laudable a purpose, to give lectures to the working people which incline them to reduce their monetary claims. There are circumstances in which Governments have to do that. Let us suppose that 100 was claimed by all other sources than Government. The Government cannot abandon the defence of this country, the police force, and so on, because of that. They have to make room for public expenditure. Nevertheless, the public expenditure has to be tailored to our resources.

The Chancellor of the Exchequer has planned cuts in resources. We can argue about where the cuts could have been or should have been made, but we all agree that they have to be made. The Chancellor is right in setting an example in doing it in an orderly way and in not seeking to do it abruptly. [Interruption.] Hon. Gentlemen opposite find this a source of merriment. We shall be here next year to supervise this. The cuts will be real.

The Chancellor made it quite clear that, although he has dealt in this Budget with next year, that does not mean that in the year following—as the Chief Secretary made plain in his speech—there will not have to be the same rigorous examination of public expenditure.

On the question of private consumption, the Chancellor of the Exchequer cannot reflate—and this is the only way in which he could increase private consumption and demand—without adding further to price inflation. Some temporary unemployment is inevitable, but my right hon. Friend has made it clear that his is not a policy of creating unemployment in order to lower inflation rates. He is preparing for what I am sure he is right in anticipating; namely, a very considerable increase in world trade next year. We must be ready for it, because it will offer us a tremendous opportunity of improving our employment prospects and our balance of payments without at the same time increasing the rate of inflation.

Let me say a few words on the question of the balance of payments, which is one of the other factors which must be borne in mind. Most politicians give me the impression of having missed their vocation, which is of a religious character, especially those who occupy the Front Benches, and we are continually being told, in a statistical sense accurately, that we are living beyond our means. However, I hope that people will realise that that does not imply a sudden lurch to profligacy on the part of the British people. The terms of trade since 1972 have turned against us so sharply that we are now running the biggest deficit in our history, whereas, on the same export-import performance at 1972 prices, we should be running the biggest surplus.

We cannot run away from this problem, but it has not arisen because of the failure of the working people or the com- petence or otherwise of Governments. It has arisen because of the change in the terms of trade, which was partly aggravated by the inadequate and delayed reform of the monetary system which we undertook internationally. But there have been many other factors, too.

The difficulty is that this has involved us in getting into very heavy international debt and faces us with the prospect of further debt. There are many solutions to this problem, though it is my experience that creditors are notoriously less avant-garde in their monetary thinking than debtors. It is the latter who more readily and sincerely embrace the more advanced theories for handling large quantities of debt. It follows, therefore, that the Government must have regard to our ability to borrow the large sums which will be needed to cover the changed circumstances of our trade.

The reason for our deficit gives a clue to the way in which we should tackle its correction. If the deficit had occurred because the nation had taken to excessive drink, did too little work, and so on, I should have thought that the sooner it was put right the better. But it did not arise in that way. It arose because of the sudden sharp increases in the prices of the goods we must import which could not be matched correspondingly by increased export prices.

I suspect that a good deal of the change in the terms of trade will be long-lasting, although I am always hesitant to predict. In so far as the change will last for the next few years, we must meet it or get into debt. We propose to meet it. One can increase the price of oil five times overnight. One cannot increase five times the production of the goods to meet it, even if the customer is willing to take them, in order to meet the new obligation.

Therefore, getting into debt does not represent a moral short-fall on our part. It represents a practical inevitability. We must ensure that, steadily and as fast as reasonably possible, we begin to export more to meet the new obligations which the changed circumstances have brought. This is part of the strategy of the Chancellor of the Exchequer.

Mr. Eric Moonman (Basildon)

Is my right hon. Friend suggesting not that we have been foolish but that successive Governments have been totally inefficient and inept?

Mr. Lever

I am prepared to say that almost all Governments which I can recall, except the present Government, have been foolish and inept, but that is not my theme.

The terms of trade have changed against this country as a result of which a given quantity of exports, instead of paying for imports, leaves us heavily in debt. If the terms of trade had remained as they were in 1972, we should be running an enormous surplus and rejoicing about it, saying what a splendid lot of chaps we were, instead of beating our breasts and announcing our own decadence because the price of copper, sugar and oil had increased in a spectacular way.

Mr. Julian Ridsdale (Harwich)

Why does not what the right hon. Gentleman is saying apply to West Germany?

Mr. Lever

It does apply to West Germany. The West Germans, as soon as they got on their feet, have out-performed us practically throughout the post-war period, and they continue to do so. That does not startle me. The performance of the British is such that, given the export-import price situation of 1972, we should have an immense surplus instead of a record deficit.

I mention this matter only as a guide to those who are always anxious to denigrate the British people, particularly the work people. The facts do not justify any such attitude. Incidentally, I have never taken part in the denigration of the business and manufacturing entrepreneurs of this country. They, too, have performed reasonably well in the achievement which I have just mentioned. They will have to perform better to meet the strategy of the Chancellor of the Exchequer in reducing our debt and getting ourselves into balance in the new adverse circumstances.

Another central part of our affairs is private enterprise and the private sector of our economy. I am ashamed to raise this subject again, because I have spoken on it many times, but once more I make it plain that the Government recognise that only with a healthy and prospering private enterprise sector can we hope to maintain our standard of life, pay our way in the world and in general achieve the objectives, public and private, which we have set ourselves. The Government are firmly committed to a healthy private sector and are firmly opposed to any concept of a dirigiste siege economy which could not deliver the goods our people require.

The Chancellor has had little recognition of the fact that he has done more than any previous Chancellor to adjust the tax mechanism to deal with the pressing and urgent problems of the private sector in a period of inflation. No Chancellor has ever done as much to assist the creation of a healthy private enterprise sector as my right hon. Friend has done.

Mr. Nigel Lawson (Blaby)

What about the capital transfer tax?

Mr. Lever

I cannot see how the capital transfer tax is seriously to be related to the massive aid given by the Chancellor in his two Budgets in the form of stock appreciation relief. It is my opinion—and I am not in the habit of expressing encomiums of the Chancellor which I do not sincerely feel—that, whatever criticisms people may direct against other aspects of his policy, this action of my right hon. Friend is the greatest single help, in a period of inflation and at a crucial time, which any Chancellor has given to the private enterprise sector. Moreover, I am not absolutely certain, but I am nearly certain that it exceeds in importance any comparable effort to assist private enterprise made in any advanced country.

The Chancellor has proved in practice that he is anxious that there should be a healthy private enterprise sector. Dealing with another aspect of the liquidity problems of the private sector in a crucial inflationary period has also occupied his mind. I refer to the FFI, where massive further support for private enterprise liquidity problems occasioned by inflation was given. The Chancellor has recognised that that is important in the private sector. When the public sector is subjected to a liquidity squeeze, the worst it can mean is a bad half hour with Treasury officials. In the private sector a liquidity squeeze can mean ruin. Therefore, the Chancellor is to be congratulated on the attention he has given to the crucial question of the effects on industry of the current inflation.

As regards the growth performance of industry, I do not think that we should encourage the practice, which has been all too popular with both political parties of late, of denigrating our industry on the basis of international comparisons, the main effect of which is to undermine its morale and its international credit status. No one has satisfactorily identified the reasons for the differential in growth between, for example, Germany and France and ourselves. There are factors which are suggestive of the explanation in terms of the utilisation of surplus agricultural labour in those countries, which achieved higher agricultural productivity much later than we did. Some people like myself may think that the stop-go performance of the financial strategy of successive Governments has hardly helped British industry. None of us must be as naive as the former Leader of the Opposition who, when he produced measures which failed to create industrial investment, thought that that was an occasion not for self-examination but for offensive comment on industry. The Government, rather than industry, must take responsibility when industrial investment fails to respond to Government measures.

I hope that nobody believes that this country just needs more investment. The country needs more good investment. More bad investment would be a disaster in our present strained situation. Unfortunately, I do not have time in which to enter on the question of the National Enterprise Board. I shall avoid that trap. [Laughter.] Unfortunately, merriment has been occasioned in the wrong parts of my speech. However, it is better to evoke merriment at the wrong time than not at all.

The National Enterprise Board recognises that it must approach its task with great caution and great humility. Nobody has the right to believe that all that is required for more investment in our country is to present a team, however well intentioned and however experienced, with a vast cheque book. That will not produce the right kind of investment. Certain gentlemen with remarkable experience of industry, and with an immense experience of a wide range of industries, already have large cheque books available for investment. However, they have not felt it appropriate to invest now. I am sure that Sir Don Ryder, with his experience, would feel the same.

I should proceed with great caution and humility in taking action. People such as Sir Arnold Weinstock and Lord Kearton have considerable unused cash resources for which they have been unable to find a profitable investment outlet.

However, there is an area for which there is an increasing scope for further public support. Modern technological change constantly throws upon private enterprise burdens which are greater than it can bear. Technological change puts private enterprise into the classical dilemma of taking gambles of a size which will bring ruin if they do not come off but which, if not taken, may result in an even bigger certainty of ruin. The typical case was the Rolls-Royce RB211. Rolls-Royce came to the conclusion that if it did not develop the RB211 with all its attendant risks, it would have to pack in the heavy engines area of aircraft construction.

The systematised partnership in taking risks with that kind of technological gamble—I can give many other large and small examples—means that there is a rôle for well-directed Government support for some aspects of private enterprise. However, I can deal with that matter at greater length on another occasion.

In praising the Chancellor's strategy, we must keep in mind all aspects of our economy. I refer to a healthy private sector, public expenditure within our resources, a gradual switch of resources to exports to improve our balance of payments, and at the centre a social contract which finds genuine acceptance, by maintaining a high level of employment, and avoiding the brutality and waste of unemployment on the one hand and the rigidities of a statutory policy on the other, which are the only alternatives of which we know.

The Government must, therefore, earnestly apply themselves to those problems and, in doing so, seek to harness all the practicality and wisdom of the British people.

4.26 p.m.

Sir Keith Joseph (Leeds, North-East)

It is lucky that the House recognises the qualities of the Chancellor of the Duchy of Lancaster—otherwise, there might have been impatience with the speech to which we have just listened. We well understand the right hon. Gentleman's capacity, on most occasions, to give the House a penetrating and constructive analysis on the subject being discussed. Today, the first 33 minutes of his speech were far below his normal level. He showed no evidence of homework or of treating serious arguments, which exist on both sides of the House, with the seriousness they deserve. I suggest to the right hon. Gentleman, for whom I have the greatest respect and fondness, that he should at least have read the Budget speech of the Chancellor of the Exchequer. The argument of the Chancellor of the Duchy of Lancaster differed diametrically in almost every detail from the speech made by the Chancellor of the Exchequer last Tuesday. As for the content of the first part of his speech, if a Tory Minister had made so flimsy and shallow a speech—[HON. MEMBERS: "Oh!"]—the Opposition would have been very impatient. I say that with great respect.

The right hon. Gentleman emphasised the terms of trade, which have incidentally turned in favour of the Government during the past months. My hon. Friend the Member for Harwich (Mr. Ridsdale) rightly pointed out that other Governments have coped with changing terms of trade and have done so on the whole very much better than this Government.

Both sides of the House share some aims with the Chancellor of the Exchequer, though with sharply differing emphases. I believe that the Chancellor of the Exchequer seeks to abate inflation, but he does not mind whether the country emerges from that experience more collectivist than it is today. We share his purpose of abating inflation, but we want to come out less collectivist than we are today, and with more decentralised ownership and decision making. In his task, the Chancellor and his colleagues have one great advantage which the Tory Government lacked—they face a responsible' Opposition. Therefore, it gives me no pleasure today to criticise a number of the Chancellor's policies.

In my view the Budget does not deserve the generally good Press it has received. I have had the advantage of several days to think about what the Chancellor proposed and to study what the experts and analysts have said. The Budget speech certainly gave the impression of toughness and realism. Elements of the Government's policy are tough and realistic. Indeed, they are brave with the bravery of necessity. In some parts—for instance, in its impact on the direct taxpayer, taking into account the effects of inflation—the Budget is too tough. But the overall strategy does not in our view rise to the level of national need. It was a tough speech and a soft Budget.

True, the Chancellor has been denounced by the Left, and that is a good sign. It is a necessary but not sufficient condition for a sensible policy. True, the Chancellor has changed his own tune from the past, and that is welcome. But he is still the man whose 1974 pre-election bonanza on borrowed money made the plight of this country worse. He is the man whose pre-referendum inertia is now making the country's plight worse still. The Budget, at a time when inflation is the main peril, is itself inflationary. It assumes a greater increase in public spending than in revenue.

We are in our present mess because as a country we have for so long put off adjusting our spending to our output. That point was emphasised by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe). We have put off the changes necessary to increase our output. Now, because of our dependence on borrowed money, we are on a collision course with the need to adjust, but the Chancellor has put off the adjustment yet again.

Subsidies and foreign borrowing have created an unreal and transitory plenty for half the population. We are over-spending, overtaxing, overborrowing and overmanning. We are much worse off than we seem. We have to change gear to phase out the excess. The Chancellor recognised this in his words but did nothing like enough to deal with it in his actions. He has deferred action on the crucial overspending side. No doubt the Chancellor and his colleagues are planning for another Budget. However, the Government's delay in tackling public spending and their over-reliance on the social contract have meant that our recession and our inflation will drag on while other countries have got their own over fast and are now resuming progress on a sounder basis. We therefore criticise strongly the Chancellor's delay in tackling public spending as well as some of his methods in doing what he has done. No one of my right hon. or hon. Friends believes his task is easy, and I shall not say what I have to say in any sense of suggesting that it is all simple. However, we have to penetrate beneath the words to the relevance of what is proposed to the country's needs.

Mr. Lever

The right hon. Gentleman said that other countries are now resuming a healthier progress because of their reduction in inflation. We all concede that they have lower inflation rates. Will the right hon. Gentleman name those industrial countries which are now expanding their employment and industrial production in this satisfactory way?

Sir K. Joseph

I said that they are ready to resume progress. I did say resuming progress.

The Chancellor of the Exchequer (Mr. Denis Healey)

What about unemployment?

Sir K. Joseph

If the Chancellor is going to repeat again the total fallacy that countries overseas have higher unemployment than we do I think that he is misusing the figures. I have the comments in The Banker on his argument which show that with a couple of exceptions he is misstating, without deliberation, I am sure, the real position. The position is that, while the United States has, on a comparable basis, 5½ per cent. unemployment against our 3½ per cent., Germany has 1.8 per cent., France 3.3 per cent. and Italy 2.7 per cent. The Banker concludes its paragraphs with: So much for Britain's Chancellor". The Government have shown by their own White Papers and analyses—[interruption.] The Chancellor should rise above misquoting on the question of unemployment statistics.

Mr. Healey

The Banker magazine is a commercial magazine for which I have no responsibility, and presumably the right hon. Gentleman is in the same position. It quoted a footnote in the Bank of England Bulletin which used exactly the same figures as I used. It is perfectly true, as I have often said, that the basis on which unemployment statistics are collected and announced differs from country to country. The National Institute, for example, which I would say has quite the same competence in this area as the Bank of England—which is not expert in employment matters—gives a completely different set of comparisons. The United States at the present time, by its own announcement, has more than 8 million unemployed, and unemployment among black teenagers is over 40 per cent. For the right hon. Gentleman to pretend that there is any comparison between that rate and ourselves is to misrepresent the facts, and the right hon. Gentleman knows it.

Sir K. Joseph

The right hon. Gentleman cannot escape like that. He used the comparison with European countries as well. It is quite wrong of him to denigrate The Banker, which was quoting from the quarterly bulletin of the Bank of England which says in its footnote on page 3 that unemployment on a comparable basis with ours is 1.8 per cent., in Germany, 3.3 per cent. in France, and 2.7 per cent. in Italy.

Mr. Healey

If the right hon. Gentlemen's researchers had taken the trouble to look at the Batik of England Bulletin they would have seen that it used exactly the same figures as I did and that in a footnote it said that it was difficult to make comparisons and that at a very rough guess it made its estimate. The guess made out by the Bank of England Bulletin is totally inconsistent with that made by the National Institute and by our own Department of Employment.

Sir K. Joseph

I apologise to the House for causing that particular comparison to be followed. In fact, the point remains that other countries have taken their medicine more promptly than we have —partly because of the election timing, no doubt, and partly because of the referendum timing. As a result, this country will have to endure worse and more prolonged medicine in due course.

The Government are planning in their proposals for the next quinquennium for far less than 1 per cent. per annum growth in personal consumption. That is on the assumption that everything goes well and that we have a growth rate of at least 2½ per cent. a year. In the first year of that quinquenniuin we have had a nil growth rate. Against this must be taken the treble offset that we need a 5 per cent. cut in our national spending by the Chancellor's admission, and we all agree that we are overspending; secondly, that public spending is out of control; thirdly, that of any small residue left for increased personal private consumption the big battalions of the unions have taken far more than their fair share already.

The prospect for the future, therefore, even if all goes well, is that unless the Government radically alter their approach to public spending there is bound to be a taxpayers' as well as a ratepayers' revolt in the near future.

There is, however, some common ground in analysing the country's needs. We are all agreed, as the Chancellor made absolutely clear in his Budget speech, that inflation destroys jobs and creates unemployment. The Chancellor and we are agreed that overspending must be phased out and that the growth of the money supply needs to be kept below the growth of the money gross national product. I am sorry to quote that against the Chancellor of the Duchy of Lancaster, but I am paraphrasing what the Chancellor said several times in his Budget speech. After that, however, the common ground seems to end.

We have to deal with three different sorts of inflation. There is overt inflation —at over 20 per cent. a year; suppressed inflation—concealed by price controls and subsidies but which will need to emerge; and deferred inflation, which is the repayment of the loans on which we are dependent for 5 per cent. of our current spending. I do not believe that it is enough to control the money supply as the Chancellor prides himself on doing. Whether the slow down in money supply on which he prides himself is deliberate or whether it is a happy accident resulting from the balance of payments deficit and low credit demand from industry we cannot be sure.

However, it is not just control of the money supply that is needed. There is also domestic credit, as the International Monetary Fund so sharply pointed out in 1968–69.

The growth of the money supply is the symptom of inflation. Public spending in these days is the great inflator. Strict monetary policy at the expense of the private sector, while State spending roars on, could do almost more harm than good. The fact is that the monetary and budgetary policies of the Chancellor point in diametrically opposite directions. The huge borrowing requirement plus the large tax-take are, themselves, inflationary.

Moreover, the Chancellor's own analysis of his Budget speech appears to be confused. Of the eight paragraphs devoted to an analysis of the causes of inflation, 3½ claim that inflation is caused by cost-push and 4½ claim that it is caused by demand-pull. One ineffable paragraph contains both interpretations within the same 10 lines. I hope that the Chancellor will achieve a more rational and effective strategy than that which emerges from his own analysis, which appears to have been drafted by two quite different drafts-men in his Department because there is great conflict between the different theories of causation.

Although demand now appears to be moving closer to supply, we still have excessive demand on the economy in the sense that there is certainly not scope for increased demand without making inflation far worse. I know that hon. Members will say that there are 800,000 unemployed and another 200,000 on short time.

Incidentally, the Chancellor of the Duchy of Lancaster challenged me to say whether I thought it would mean fewer unemployed if the Conservative Party was in office. I believe it would, because unemployment is worse than it need be on account of the anti-business and anti-profit attitudes of Ministers. Do Ministers honestly think that business men, faced with taking decisions, reaching out into the future, depending on freedom of price according to the market and depending on freedom to take what action they consider necessary with their business, will ignore the threats and the attitudes of members of the Cabinet? I assert to the Chancellor of the Duchy that if the Ministers were Conservative Ministers—I am not making a larger claim than this —there would be that much less unemployment than stems from the anti-profits and anti-business vendetta of the Labour Party.

Mr. Lever

The right hon. Gentleman has answered a question I did not ask: namely, would unemployment have been higher under a Tory Government? Will he now answer the question I asked, which is: what level of unemployment does he think will result if we attempt to cure inflation by the methods he proposes?

Sir K. Joseph

The answer is easy. I was about to deal with it, but I shall give it now so as not to break continuity.

The level of unemployment, under the policies as enunciated by the Chancellor, will depend almost entirely upon the behaviour of trade unions in their wage claims. I am not evading the question in the sense of knowing the answer and hiding it. The answer is unknowable unless we know the conviction the Chancellor carries, that he will stand by the policies he has adduced. The more he carries conviction, the more unions know that he will allow firms to go bankrupt and keep to the money supply programme the more he carries conviction, the less unemployment there will be.

On money supply, four and a half paragraphs of the Chancellor's speech put the responsibility for inflation on a link, complicated intensely by trade union behaviour, between money supply and output. To that extent we would follow that part of the Chancellor's policy, but we would not intensify and exacerbate it by anti-business attitudes and policies.

Mr. Healey

I should be grateful if the right hon. Gentleman would confirm the impression he gave me when I spoke recently at the Mansion House. Would he agree with many of his hon. Friends that a major cause of inflation in Britain is the excessive increase in the money supply which took place in 1973, when he was a Minister?

Sir K. Joseph

If we are to go back, I should have to go back to the excessive reaction in 1968 when the IMF was caused to come in by the right hon. Gentleman's colleague the Foreign Secretary. I have put my views on the record. All Governments since the war, including the three in which I have had the honour to serve, have, in their good intentions to do more for the British people than was practical without causing inflation, overspent. I hope that satisfies the right hon. Gentleman. My words are clearly on the record.

I wanted to spend time analysing the relationship between the real, available, willing and fit-to-work unemployed in the Keynesian sense and the vacancies available to them. I hope that the House will allow me, because of lack of time, to state that probably about half of the unemployed are available in that Keynesian sense and that there are at the moment about half a million vacancies. I am willing to corroborate this by argument on another occasion. Therefore, we have about 400,000 Keynesian unemployed in the sense that leads in his view to consideration whether there is a demand deficiency, and we have about half a million vacancies. I am multiplying by three the figure in the last monthly Gazette, on the advice of the Department of Employment.

I grant at once that those half million vacancies are not in the right place, that they do not call for the right skills and that many of them are for women. Matching the unemployed to the vacancies is a problem of overcoming rigidities, of easing the housing movement, of improving the training, and it is a problem of facilitating transferring men and women from jobs that are disappearing to jobs that are available. That is why the active manpower policies introduced by my right hon. Friend the Member for Sidcup (Mr. Heath) in his Manpower Services Agency legislation are so central to the problem of making better use of the resources of this country. It appears that the Secretary of State for Employment is not particularly interested in his manpower policy. The rigidities may get worse under the Government.

The question is whether we still have demand-pull. I maintain that there is still enough demand-pull to make it highly dangerous, in terms of inflation, for the Chancellor to dream of expanding demand. If the analysis of half the Chancellor's Budget speech is correct—that is, the influence of demand-pull flowing from money supply, on inflation—it is crucial to do as he suggests; namely, to keep the money supply below the growth rate of money gross national product.

The question the House has to ask —if I have carried some hon. Members so far in my argument—is: who can stop the Chancellor achieving what he set out to do? The answer is: —some of his colleagues and some of the trade unions.

Wage claims that are passed on in prices do not cause inflation unless the Government increase the money supply to accommodate them, if they are in the private sector, or to finance them, if they are in the public sector.

Trade unions can do many things. They can cause devastation: they can, by excessive pay increases, cause unemployment. They can bankrupt firms, deprive other workers, rob the Government of the scope to improve the social services, and force the Government to raise taxes, as the Chancellor has done, and/or to cut public spending, as the Chancellor has threatened to do. All this they do, can do and are doing.

I thought that the Chancellor put it very well to the Parliamentary Labour Party, when he is reported to have said that not even he could make the waters of Niagara run uphill. I should like to put it this way. No Chancellor can prevent trade unions pricing people out of jobs. No Chancellor can do that. It is up to the trade unions. However, I assert to the Chancellor of the Exchequer that his colleagues the Secretary of State for Industry and the Secretary of State for Employment are actually increasing unemployment by half suggesting that, whatever the wage claims, they will with public money rescue a firm that is threatened by bankruptcy. It is they who are encouraging unions—in some cases; not in all, of course—to make excessive pay claims. This removes one restraint on the suicidal pay claims of which one sometimes reads in the private sector.

Mr. Tam Dalyell (West Lothian)

To take one recent example, the Burmah Oil Company, will the right hon. Gentleman say what the Conservative Party would have done on that matter, given the dilemma that my right hon. Friends faced?

Sir K. Joseph

I am not trying to avoid a question but, with respect, that has nothing to do with pay claims at all. It is quite a different issue.

It is in the public sector when it comes to pay claims that the Chancellor's main problem lies. At present he is conducting a dialogue of the deaf with the unions. The question he has to ask himself and the question which we have to ask him is this: will the Government allow excessive pay claims in some sectors to have their effect in reducing jobs? The rail-ways may be a case in point. Are the Government about to consider putting some ceiling on the cost of the services? Surely it is not right to tax the public because the wage earners in a very heavily subsidised service put their wages far beyond the capacity of the traffic to obtain? My right hon. and learned Friend the Member for Surrey, East, the Shadow Chancellor, was surely right to stress that it is not right to punish the whole public when the answer may be that if wage earners choose to do this in a subsidised industry, the industry should be contracted.

Trade unions, by forcing up unemployment by excessive wage claims, can bring pressure on the Chancellor to expand home demand. But such expansion where there is a going rate of inflation at 15 per cent. to 20 per cent. already would end any hope of an improvement in the balance of payments and would accelerate inflation to South American levels and destroy jobs on a vast scale. The Chancellor knows that if he reflates, if he stokes up home demand again, he will place the pound in grave jeopardy.

When, therefore, we see the Chancellor with his back to the wall—with perhaps trade union pressure to accommodate excessive wage claims—we must also recognise that the Chancellor has his back to something more than a wall. He has his back to a fall, a precipice, because if he were to expand demand the pound would fall, and jobs and the standard of living would go with it.

The Chancellor hones for export-led expansion. We hope he is right. However, I think that I speak for my hon. Friends when I say that in his analysis we find a neglect of the probability that if there is a turn-up in world trade there will almost certainly be a simultaneous turn-up in world commodity prices, and in interest rates, perhaps, flowing from a change around in America. If the Chancellor's hopes are to be realised and are not to be merely another Chancellor's chimera, we believe that he must phase out dependence on overseas borrowing and make room—real room—for an improvement in the balance of payments.

As my right hon. Friends—my right hon. Friend the Leader of the Opposition in particular—pointed out at once, the Chancellor is deferring cuts in public spending until a time, by his own prediction, when unemployment will be rising. We accept that it is not easy to cut public expenditure fast. But when the Government have provided the huge indiscriminate subsidies that at present exist on the housing front as well as on the food front, there is ample scope for very rapid cuts of public expenditure on the indiscriminate subsidies front.

It is not only myself, a Tory, who is saying this. There are Socialists who are saying it. I should like to refer the Chancellor to the view of John Mills in a recent book called "Redistribution: A Review of Progress" by the Labour Economic Finance and Taxation Association. This is a very good analysis, and it is thoroughly worth while reading. He claims that indiscriminate subsidies are no help in the redistributive purposes of the Labour Party. Therefore, I should have thought that the Chancellor could cut far quicker if he wanted to do so.

But the more that the Chancellor defers cutting public expenditure—I hope that the Chancellor of the Duchy will listen, because he spoke somewhat slightingly of anyone who was worried by the borrowing requirement—until the balance of payments has improved, the more difficult the financing of the borrowing requirement will be, because it will then be necessary to finance the borrowing requirement without the help of the counterpart of the balance of payments deficit. It would be a far harder job for the Chancellor to finance the borrowing requirement if his hopes came out right in connection with the balance of payments.

The public spending assumptions on which the Chancellor has predicted a borrowing requirement of about £9 billion—£9,000 million—as the base from which he hopes to make reductions are, we believe, dangerously shaky. I venture to believe that the one Sunday newspaper yesterday speculating that the borrowing requirement might be over £13 billion might be nearer the truth.

Let me analyse all that this sort of statement is suggesting. As the Chancellor of the Exchequer and the Chancellor of the Duchy both emphasised, the predictions are in "funny" money; that is, constant money, which itself is misleading. Second, the White Paper on public expenditure bases its work on the assumption which seems to us to he ludicrous; that the relative price effect will be negative. That means that those who compiled this White Paper are assuming that public service costs will not rise more that private sector costs. that will deny the experience of all of the last years and it seems to he a very dangerous assumption. Third, the Chancellor spoke of his bitter experience—that is evidence against him— of £5½ billion of creeping upwards in public service expenditure as between his first and his fourth Budgets, not on account of policy decision but sheerly on account of inflation the relative price effect, bad control of public spending and bad and inadequate control of local expenditure.

Why should that not occur again on top of the £9 billion mark? Successive Chancellors have had this problem. They will have to achieve a much greater restriction of public expenditure—I agree that it is very difficult—if they are to avoid a creeping upwards of this sort. This, too, makes no allowance for the financing of British Leyland, for instance. or policy decisions beyond a very small. skinny contingency reserve. There is a grossly inadequate provision already for unemployment benefit which will nearly double the number allowed for in the total. The £9 billion borrowing requirement is not a realistic estimate of where the Chancellor starts. It could be very much more. As the Chief Secretary has said, we cannot any longer borrow our way out. We have to phase out the 5 per cent. over-spending. Unless we do, we must remain in pawn.

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

Given that the right hon. Gentleman would not have increased taxation in the way that the Chancellor has done, will he say precisely by how many billions of pounds he would reduce public expenditure in 1975–76?

Sir K. Joseph

The Chancellor made his own problems worse by the public spending bonanza last year. He first reversed the cuts in public spending introduced by my right hon. Friend the Member for Sidcup when he was Prime Minister. and then he added as much again— probably £2½ billion turnround in public spending last year. We would not have done that.

Mr. Joel Barnett

The bulk of that is for housing, social security and pension increases, which the Opposition wanted to increase every six months, which would have added another £300 million a year.

Sir K. Joseph

The housing subsidies are indiscriminate and are coinciding with the growth in homelessness because they are anchoring many who could look after themselves to accommodation they do not need. The housing subsidies alone account for £1.billion. That would be a good place to start. I say with full consciousness that it would be humane, in the interest of helping the homeless with the housing that they need more than those who are not paying enough, to start in that area.

Mr. Healey

The right hon. Gentleman must recognise that this interesting academic disquisition will appear to the country as a hypocritical sham unless he is prepared to tell us how many billion pounds he would propose to cut from public expenditure and where those cuts would fall. Unless he is prepared to do that, the whole intellectual edifice that he has constructed this afternoon will be flim-flam.

Sir K. Joseph

If we took over at this moment, with the Chancellor's profligacy behind us, it would be hard to do that. But the right hon. Gentleman has caused the situation to be so difficult by his own profligacy. We certainly would not go in for Bennery. We would have more control of public and local authority spending and would cut indiscriminate subsidies. The fact is that the Chancellor can do nothing for the country or for his party unless public spending it cut. No one who has been in Government has any thought that cutting public spending is easy. It is extremely difficult. If I were in such a Government, I would probably resist the Chancellor unless he persuaded me that it was in the public interest.

There are increases in staff at every level—some of which I caused by my reform of the National Health Service—and ceilings ought to be imposed. There ought to be a total review of local authority salaries in the light of the country's position. There ought to be some ceiling on various forms of public expenditure.[Interruption.] With respect, it is open to us to say that, in the light of the Government's failure to keep to the borrowing requirement of £2½ billion that the Chancellor laid out, he is put on warning that he must do better if he is not to find a £9 billion borrowing requirement turned into a £13½ billion borrowing requirement by this time next year.

It is only proper to ask whether there are alternative strategies to those adumbrated by the Chancellor. There are grave difficulties and disadvantages in either of the alternatives of an incomes policy or a siege economy.

A number of right hon. and hon. Members have spoken about an incomes policy. No one should be absolute on any subject, but they should recognise the force of the argument against their case. There is a very good document, which I recommend them to read, "Incomes policy in Phase IV" by Sir Richard Clarke, published by the Manchester Business School, in which he said: there is no great problem in launching the space-ship Incomes Policy or indeed in getting it round the moon, but in every case so far the re-entry has been a total failure, and the space-ship (and its occupants) have been destroyed ". In other words, in anything but the short term, an incomes policy does not achieve its objectives, according to Sir Richard Clarke.

The second alternative is a siege economy. I was glad to hear the Chancellor of the Duchy of Lancaster deny that there was any prospect of a siege economy. The hon. Member for Ashfield (Mr. Marquand) put it very well on Wednesday when he said: I believe that that"— the siege economy— would spell the end of personal freedom in this country."—[Official Report, 16th April 1975; Vol. 890, c. 502.] The point of substance for the House is that, whether it be the Chancellor's present policy, an incomes policy or a siege economy policy, which particularly some hon. Members below the Gangway on the Government side want, all three crucially depend upon cutting public spending, because excessive demand, when one is trying to run an incomes policy or a siege economy or trying to cope without either, as we are, wrecks any chance of reducing inflation. Excessive demand is the bane.

The new Cambridge school, which has most eloquently put the case for a siege economy and for import controls, emphasised the importance of cutting over-spending, and cutting it starting in this Budget.

The Chancellor does not avoid responsibility by teasing us with the responsibility in Opposition of identifying where we would cut so many billion pounds. If he does not cut public spending more sharply than he proposes, I suspect that the brokers will be with us again as they were last time. We would rather the Government did it. The Chancellor is a proud man, and I suspect that he would rather do it. But we shall probably have to wait until July and the end of the referendum before we know whether he intends to do that.

The export boom to which the Chancellor looks forward depends on the private sector, but the private sector must be encouraged if it is to flourish. It is no good imagining that the private sector can continue as the milch cow of the economy. The fact is that the tax eaters —the nationalised industries and subsidies and public services—are growing faster than the tax producers—industry and the private citizen. It is absurd to expect the shrinking and embattled private sector and most private house-holds to carry not only the unlimited increase in the cost of services provided by monopoly nationalised industries but the cost of keeping services for which there is no longer a demand.

The private sector, the indispensable base on which all else is built, has been given a financial reprieve, albeit from some of the pressures that the Chancellor himself put upon it. But the private sector is under attack from a score of different fronts. Those who attack it are in danger of sawing off the branch on which all our people and services are sitting. Profits are desperately low in real terms.

The Industry Bill, far from promising regeneration, promises ossification and degeneration. Industry has to struggle to survive. It has not been given a chance to do the benificent work that it could do for the people of this country. I very much agree with the Chancellor of the Duchy of Lancaster that new investment, which everybody says we need, is not so important as good investment. What is the point of hoping that business men will invest if they see no prospect of profit or the same overmanning being forced on them in new plants as they are suffering now?

The private sector is the source of our standard of living. Yet we discourage those who make it work. Someone has to create national wealth. I hope that someone will one day be found who will be so free of Ministers that he will be able to make wealth for the nation even in the nationalised industries. That has not yet happened. The worker on his own cannot create wealth. We need the wealth-creating, job-creating entrepreneur and the wealth-creating, job-creating manager. We treat them very badly. Those are the people who, for the usual mixture of motives, give themselves ulcers, but they mobilise and organise men, women, materials and the money to meet demand at home and abroad.

We reward entrepreneurs and managers working within the law and subject to competition by the highest marginal tax rates in the free world, by abuse, by discouragement, by a stream of legislation and interference. The net income of British managers is a fraction of the net income of equivalent managers abroad. The task of winning co-operation on the shop floor gets harder, but the rewards for increased responsibility of managers get less. In fact, they are derisory. The differentials of managers are squeezed. By "managers" I mean professionals and managers as well. Their net pay is not merely not keeping pace with inflation and the tax bite, but it is actively deteriorating compared with the pay of those whom they supervise. They have insecurity and worry. They are meant to take risks. All these functions are necessary to society's progress. They deserve a chance of reward. These are the ulcer people—talented, job-creating, potentially wealth-creating for the country. If they are not treated reasonably, if they do not feel appreciated, they will quit either by way of the brain drain or by the internal brain drain which might be called switching off. There is a great deal of switching-off in this country not only in the nationalised industries, but principally in them, because of the messing around, the discouragement and the interference to which management is subject.

It may not be possible—I recognise this—for the Chancellor to reward them properly now but even a gesture would help. What is the gesture in this Budget towards management and professional people? It is a mean-minded attack on private health insurance by taxation. It is a mean-minded gesture in the wrong direction towards people who are under great pressure. It is part of a much larger attack on the freedom of choice. It is part of a vendetta against any private health service. On these people's vitality, their self-confidence and success depends our standard of living.

Last year I spoke of the twilight of the middle classes. It has been a bad year for them and for management. Damage to management is damage at one remove to the entire population, particularly the vulnerable. It has been a dramatic year for winners and losers. There have been millions of losers—small business men, many professionals, most managers, people retired on savings, less powerful workers, unorganised workers, wage council workers and many groups of the poor.

The Chancellor has pretended that he has put on direct taxation by a mere £200 million, but nothing could be further from the truth. He has put up the yield of income tax by no less than 40 per cent., by £4 billion a year. That is the result of not indexing, of not giving thresholds to correspond with the movement of the rate of inflation. I do not say that some way of finding that extra money was not necessary, but the way in which it has been done is brutal to many households and it would be far better if more taxes were put on spending rather than on earning.

The Chancellor faces my successor the Secretary of State for Social Services with many intricate problems in the overlap between new thresholds, family income supplement and school meals, in working on the poverty trap. These are the groups in despair at the receiving end of the social contract. It is not possible to help them by soaking the rich. What they need is an end to inflation, less greed by the big battalions and a prosperous economy.

That is why there is a need for wealth-creation for the benefit of all—spontaneous wealth-creation, organic wealth-creation, unforced but encouraged. There is no other way to raise standards. If anyone thinks that that is only a Tory point of view, let him read John Mills, to whom I have referred, and Michael Young's annual report on poverty and see how we are inching forward by an attempt to redistribute wealth when the only real way forward is to create more wealth. For further confirmation of what I have said I invite hon. Gentlemen to read Rudolf Klein on the finances of the social services.

We criticise the Chancellor of the Exchequer and the Government for not rising to the needs of the nation. We are over-spending by living on borrowed money to the tune of £3 per week for each man, woman and child. This has to be phased out. The anti-business atmosphere needs calling off. Profit earned in competition should be allowed to do its work of creating investment, tax revenue and jobs. If the exchange rate is allowed to work and the money supply is held to a sensible growth pattern, regeneration and expanding employment will occur spontaneously, not at once but when confidence recovers from its battering.

The amount of unemployment will depend to a large extent on wage claims and on the degree to which industry is encouraged to invest and expand for profit. The Chancellor's words have gained notably in realism. That we recognise. If he and the Government survive let us hope that his next Budget after the referendum will not only recognise realities verbally but do more to adapt policies to them.

5.14 p.m.

Mr. Jack Ashley (Stoke-on-Trent, South)

We have just listened to the authentic voice of the Conservative Party and we have heard a speech from a man who is put forward as an intellectual, the right hon. Member for Leeds, North-East (Sir K. Joseph), who has put forward a policy of naked and unashamed Conservatism. The essence of his policy is that we should return to the law of the jungle. That was the essence of his message.

The right hon. Gentleman was uncharacteristically ungallant to my right hon. Friend the Chancellor of the Duchy of Lancaster when he said that his speech was flimsy and shallow. That was an astonishing statement to make about my right hon. Friend's speech. It was the right hon. Gentleman's speech which was flimsy and shallow when he was challenged about what he would do with regard to cuts in public expenditure. He gave no realistic answer and, after demanding massive cuts, all he could suggest to the House was, first, that we should cut food subsidies, and secondly, that we should cut expenditure on town halls. The right hon. Gentleman is the kind of man who would solve our economic problems by taking bread out of the mouths of babes and gold chains off the shoulders of lord mayors and mayors in town halls, and I suppose one could not be fairer than that.

The right hon. Gentleman was proved wrong at every point in his analysis. He said that members of the Labour Party are engaged in a vendetta against business. When the word "vendetta" was used I thought that the right hon. Gentleman was speaking of himself, because it is the Conservative Party which has carried out a vendetta against the trade union movement for many years and it was the Conservative Party which, by its vendetta against the trade union movement, brought us to the impasse which has left the country in such an awful state—and led the Chancellor to take the measures that he has in his Budget.

I believe that we must win this debate tonight. I do not mean just the number of votes in the Lobby, important though they are. We must win votes in the country. We must win the minds and hearts of the people because they are being bombarded by massive propaganda about my right hon. Friend's Budget. This bombardment is absolutely nonsense. Right hon. and hon. Conservative Members who are attacking the Government are not really important in the last analysis. What is important is the attitude of people outside this House and the views of the trade unions. It is their views and those of my hon. Friends on this side of the House with which I am particularly concerned this afternoon.

I am genuinely disturbed at the reaction of some of my colleagues and of some trade unions, notably the Scottish TUC, to the Budget. The implications of what the Scottish TUC has been saying may be that the policy and strategy outlined by the Chancellor of the Exchequer will end in ruins. So will the economy if the views of the people to whom I have just referred are followed. It would be disastrous if the country were to follow the advice of the Scottish TUC, the McGaheys and those who think as they do.

I do not believe that the Budget is by any means perfect, and I have some reservations about it. First, I do not believe that the Government have paid due regard to the under-privileged, the disabled, the old, the sick, the poor, and the unemployed. All these people could have had a better deal from the Chancellor.

Secondly—and I must admit that I was outraged by this—no increase in overseas aid has been provided. The House will have seen the comments of the Secretary-General of the Commonwealth, Mr. Arnold Smith, who only yesterday talked about the plight of overseas countries when he said: For hundreds of millions of citizens of developing countries in the present Commonwealth the present crisis is a matter of life and death, of eating or starving. Yet the Chancellor cuts £20 million from our overseas aid budget. I regard this as a shocking and shameful act. I hope that my right hon. Friend will reverse it.

Nevertheless I realise that my right hon. Friend faces considerable difficulties. He is a man of strength and compassion, as I have found in my dealings with him when I have asked him to help the under-privileged groups I mentioned earlier, and he has helped when he could.

The fact remains that the country must face the consequences of the reactions to the Budget that I have mentioned. The people in the trade union movement who condemn the Budget claim that the Government have broken the social contract and that as a result of this breaking of the social contract they must feel free to make even bigger wage claims than they have made so far.

I regard the claim that the Government have broken the social contract as complete nonsense. Anyone who examines the claim carefully will recognise that the Government side of the social contract is a vast ranging commitment. It involves a large number of policy commitments. The trade unionists who condemn the Government should scrutinise those commitments to see precisely what the Government have done. If they do so they will find that the Government have done what they said they would do by repealing the Industrial Relations Act and the Housing Finance Act, in giving massive increases in old-age pensions and linking those pensions to earnings, in increasing family allowances, and in introducing the capital transfer tax and the wealth tax. This is apart from matters like the Employment Protection Bill, the National Enterprise Board, and the planning agreements.

I do not believe that any trade unionist assessing the Budget can brush aside the Government's record on these issues. Neither do I believe that trade unionists can brush aside the sombre background against which the Budget is presented. We are accelerating our rate of inflation and, by doing so, we are speeding to disaster. With pay increases at 30 per cent. and price increases of 20 per cent. we are seeing the sad symptoms of a sick society, and it is well for all of us, defenders of the Government and critics alike, to realise that. When these symptoms are added to increased borrowing and reduced investment they can spell economic catastrophe.

How do we respond? I suggest, for a start, that we do not respond as the right hon. Gentleman did by making party political points of the type we have just heard. I enjoy such party political points during an election when they are made by right hon. and hon. Members, especially when their firecrackers turn out to be damp squibs; but they have no place in a serious debate of this kind. So I believe that that response was utterly misconceived.

I believe that the response of the Scottish Trades Union Congress and of a number of trade union leaders such as Hugh Scanlon is also utterly misconceived; because, if they destroy or disregard the social contract and make even higher wage claims, they will be fanning the very flames of disaster which we are all seeking to extinguish and they will thereby damage the interests of their members in addition to damaging the interests of other trade unionists.

I want to make a few proposals of my own in the light of the present situation. I emphasise that when I speak of incomes I do not speak solely of wages. I speak of all incomes, especially those in the upper brackets, because, although we hear a great deal about the wages of the miners and the engineers, I believe that they are amateurs in terms of self interest when compared with the judges, the civil servants, the lawyers, the doctors, the dentists, and the consultants.

The question is, how can the House and the nation regain control of what must be acknowledged to be a deteriorating situation? The first step—I am trying not to be doctrinaire, and I really believe this —is for the Government to ensure that those with very high incomes are hit the hardest. I am not anti-profit, but I believe that in terms of social justice and equity we must do this. The Government must adopt a proper attitude to those people. either by controlling their demands in one way of another or by tougher rates of taxation. Whatever means are adopted they must be taken by this Government, and the Government must not be blackmailed by threats that these people will leave the country. If they want to leave they must be allowed to do so. I do not believe that they will.

Secondly, we must end the calculated ambiguity of the social contract. The Government were right to adopt the element of flexibility in the social contract to avoid the brittleness which characterised the Conservative policy and which damaged relations for a very long time and created the collisions which occurred. The flexibility in the social contract enabled our Government at the time to deal with special cases like the miners and the nurses, people who faced prejudice from the Conservatives. Now that special cases have been dealt with, this is the time to clarify and to define the social contract more precisely and to insist on its observance, because the social contract is becoming an anti-social contract as the strongest in our society exploit that flexibility at the expense of the weakest.

The social contract now requires a specific figure written in.

Mr. Edward du Cann (Taunton)

How could the Government insist on the policy?

Mr. Ashley

I really will come to that point.

I suggest a figure of 15 per cent. I know full well that many trade unionists would regard this as too low. Nevertheless, I nail my colours to the mast of 15 per cent. and say that this is something at which the Government must aim. This figure would need a Government commitment and an endorsement from the TUC. In this way I believe that the viability of the social contract would be preserved.

The right hon. Member for Taunton (Mr. du Cann) asked me how we could insist on this policy. This is a very fair point which must be answered by anyone making a speech of this kind. The sanction at that stage would be twofold. There would, first, be the Government's commitment to the policy and the clarity of a specific figure. There would, secondly, be the sanction of public opinion. If the TUC endorsed the policy and agreed to vet wage claims, there would also be the sanction of its own unique authority. It has already had some experience of wage vetting, on which it can build and, given the gravity of our economic situation and the enhanced prestige of the TUC, I believe that the TUC could have a significant influence on the course of Britain's future if it were to back this policy.

That is the policy I advocate. It may fail. Given the sanctions by the Government and by the TUC, it may still fail. What do we do then? Those people in the trade union movement who attack the social contract must recognise that if the policy which I put forward should fail the only alternative would be a statutory policy. It is not one that I want, and it is not one that I would be happy to advocate, but it is one which the Government would be compelled to adopt, with their arm twisted, if their policy, and the policy to which I referred just now, were to fail. It is a matter now for the Government's commitment, for the TUC's commitment, and for the trade unions. On this triumvirate lies the future of our economy.

The Chancellor has laid down the strategy which he hopes the Government will pursue in the next year. It is a strategy which I applaud, with the reservations to which I have alluded. I support it most warmly, as I support the Government. Not everyone on this side of the House will agree with the amendments to the social contract I have suggested. I put them forward in good faith. The last thing I want is a statutory policy, but the Government will be forced into it unless we all co-operate. Let this Government, the Opposition, the trade unions, the employers and the country as a whole co-operate to tackle this appalling problem and avoid the disaster which is staring Britain in the face.

5.32 p.m.

Mr. Edward du Cann (Taunton)

I am sure the House will wish to congratulate the hon. Member for Stoke-on-Trent, South (Mr. Ashley) on the sincerity with which he speaks, not least on the subject of overseas aid and the disabled for whom he has done so much in so many practical ways. However, most of us, at any rate on this side of the House, would depart from him strongly in what he said on the subject of what one might call insistence. I believe that the road to a statutory policy is paved with frustration, disappointment and danger. I hope we never go back to it.

I agree with what the hon. Gentleman said, I think by implication, throughout his speech. I am not one of those who believe or profess that economic disaster is certain or inevitable. Equally, the overwhelming majority of our citizens, uncomprehending of the economic dangers which we face and of their gravity—even the best informed among us—should appreciate the extent to which the position of the United Kingdom relative to other countries has deteriorated in recent years.

I will trouble the House with these examples, first, of comparative wealth in the EEC. When the negotiations began for us to sign the Treaty of Rome in 1961, a process which I regretted, it was suggested that the gross national product of the United Kingdom represented 25 per cent. of the whole. As the Foreign Secretary prophesied in that rather cringing —in inverted commas— "renegotiation" of his, by the end of the 1970s it will be the equivalent of a mere 14 per cent. If one takes GNP per head of the population, and assuming that the average of the EEC countries is 100, the Germans and the Danes are on an index figure of 140 and the United Kingdom at 70. Bottom of the list are Southern Ireland and Italy, just slightly below us, with a figure of 60.

In terms of production per man, the figure for Germany is £4,500 per annum, for France £4,200 per annum, and for the United Kingdom the comparatively trivial figure of £2,800 per annum. Thus it is that a worker by hand or brain in Germany, France, Denmark, etcetera, is likely today to be better off in real terms than his United Kingdom counterpart. He is likely to enjoy a higher standard of life. He is likely to receive or to have in prospect a more generous standard of social welfare. The unkindest cut of all—this is a comment on something that the hon. Member for Stoke-on-Trent, South has said, and my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) made the same point—is that his United Kingdom counterpart is likely to be paying very much more in tax. I agree with my right hon. Friend. I am certain that the limit of taxable capacity in direct terms has now been reached.

We have fallen behind, and, as matters stand, we are in danger of watching the disparities widen further. As Mr. Walter Wriston said at a commercial seminar in Boston a short time ago, quoting Paul Valéry, "Even the future is not what it used to be". This position is certainly not acceptable to me or to any of us on this side of the House, and I hope it is not acceptable to anybody in the House. Nor need it be as it is. We have it in our power in this House of Commons to change matters if we so will. It was the Duke of Wellington who said "There is nothing in life like a clear definition". To answer the question how will now be my attempt.

Attention tends to focus upon the two stages of our economy—inflation, that disruptive scourge now causing so much hardship with so many consequences on our people; and unemployment, currently at unacceptable levels, exacerbated by short-time working and worse in prospect as the Chancellor envisaged. These are the symptoms, the consequences, of what is wrong.

I agreed with my right hon. Friend the Member for Leeds, North-East when he remarked that the Chancellor has received some praise for the supposed realism with which he spoke, especially about what the Economist calls wage-induced slumpflation—an inelegant phrase, I fancy, if ever there was one. I long to praise him, too, for his success would be the nation's success, but the more I consider it the harder it is. It is a man's deeds that one should honour in this House, not the verbiage in which he cloaks them, or, indeed, which he substitutes for them. I would sooner be remembered as one who pioneered a wider share ownership in practice than as a mere prattler about a property-owning democracy.

This Budget represents, I regret to say, a wasted opportunity. The subject for debate, the matter for action, is how the most disturbing trends to which I referred can be arrested or reversed. In my view, one of the first things we might do—and it is high time we did this—is to downgrade the Budget day itself. Of far greater practical significance each year is the White Paper on Public Expenditure. I agree absolutely, as the hon. Member for Stoke-on-Trent, South rightly points out, that we have not yet even troubled to debate it or found time to debate it. As my right hon. Friend the Member for Leeds, North-East said, the Chancellor's most significant failure has been his failure to bring public expenditure under a reasonable command. I am not for the moment arguing how great a proportion of public expenditure might be cut or the sectors that might qualify for change, but I recall saying, as loudly as I was able to say, in this House a year ago that public expenditure is now wholly out of control. In the four years that I have been, first. Chairman of the Select Committee on Public Expenditure, and then Chairman of the Public Accounts Committee, I have watched this process develop, and develop to a stage which I now find terrifying.

Recent events are, so to speak, proof of the pudding. The increase in the deficit is now greater even than the rate of inflation. The weight of public expenditure, national and local, is far and away the biggest factor in causing inflation. It is, in fact, the prime cause of inflation in this country, and, what is worse, in so many respects it is a dead hand upon production, invention, development and what my right hon. Friend called the process of wealth creation in our country.

The Chancellor spoke well of the need to restrain Government and local authority expenditure. Our complaint about his Budget is that his actions were trivial. While a deficit exists on the current scale, any fine tuning of the economy is impossible. I go so far as to argue that even £1,000 million of tax changes will be virtually meaningless unless public finance is under better control.

I do not argue for blind, slashing cuts in public expenditure. I never have. What I call for is a statement of the principles on which we should base our attitude to public finance. The Chancellor owes us that above all else, and it is greatly needed.

In a short speech of this kind I can give no exhaustive list, but here are some examples. Less public money should be spent on services which private citizens can be encouraged to provide for themselves. I do not believe in transfers for transference sake. Again, public money should not support unviable enterprises or outdated industrial practices. Per contra, public money should be a positive encouragement to effectiveness. For example, voluntary saving is much to be preferred to compulsion. Above all, the Government have a duty to ensure that there is no waste of resources.

And so one could go on. It is not difficult to formulate the principles, to set the strategy, but the Chancellor enunciates no principles, and he has no strategy in this regard. He is content to permit a borrowing requirement of £9,000 million, which, as my right hon. Friend said, may easily go higher—amounts unthinkable a few years ago, and they should be regarded as outrageous today. It must fan the inflationary flame. What is worse, the Chancellor has missed a splendid opportunity, which was undeniably his at this time, greatly to change the whole atmosphere of the public attitude to profligacy, waste, effectiveness and efficiency.

My second criticism relates to the Government's and the Chancellor's attitude to the nationalised industries. I am no dogmatist in this regard. I believe in a mixed economy. For better or worse, we are visited with it. If we are to have State industries, I wish to see the public sector successful, competent and pros- perous. However, as we all know, it is, with some honourable exceptions, none of those things in general.

Let me now be specific. There is hardly a public industry which is not heavily overstaffed. If the steel industry were staffed at European levels the salary or wage bill could be cut by about £160 million a year, and if it were staffed at American levels the bill could be cut by £400 million a year. In the coal industry —I am aware of the difficulties and differences—we produce less than half United States' output per man, and I reckon a saving in wages of about £200 million a year could be contemplated. Again' on the American analogy, in electricity there could, perhaps, be a saving of £100 million. The pattern is the same almost throughout—the same on the railways and the same on the airlines—and hence these industries, because of their profligacy in manpower, find themselves with less money than they should have and could have for productive investment.

In scale of salaries, too, as we all know, the public sector is well up with the inflationary leaders. Examples appear every day in the newspapers. Moreover, the public sector is increasingly less effective and efficient than it should be. One need but instance the way in which the rationalisation of the steel industry is delayed. If there be any argument for nationalisation it is an argument for rationalisation. Yet we see investment programmes delayed on every side, and costs of production rising faster than they should.

The Government have a duty to set an example of good housekeeping and sound finance, and equally they have a duty to make the public sector a model of industrial efficiency. There is no sign of any determination to this end in the Chancellor's speech or in the attitude and actions of any Treasury Minister. Here lies the second missed opportunity.

I echo what my right hon. Friend said in criticising the Chancellor for his cynical and unconstructive attitude to the private sector. We have had much platitudinous talk from him, with a little more certainty from the right hon. Member for Manchester, Central (Mr. Lever), perhaps, but little that is really helpful. It is deeds, not words, that count in practice in establishing confidence among business men— the managers and entrepreneurs who are as my right hon. Friend rightly said, carrying so heavy and difficult a load today.

The House is invited to applaud the non-perpetuation of penalities such as the surcharge on advance corporation tax. We are asked to note the Chancellor's soothing phrases while he is at the same time conniving at other attacks and illogicalities. Again, I give some examples. There is the full frontal attack. if one may so describe it, of future nationalisation—perhaps "expropriation" is the better term—and the more indirect and insidious though equally lethal effect of other attacks. For instance, some of my right hon. and hon. Friends complained during the speech of the right hon. Member for Manchester, Central of the equally lethal attack presented by the capital transfer tax. There are the burdens on the self-employed. and there is what almost everyone in private business regards as the deliberate transfer of resources to the State on a massive scale.

There is hypocrisy to be seen in certain Government actions. We have—I welcome it—a White Paper calling for greater food production, but at the same time tax anomalies such as the allowance—or lack of it—on agricultural buildings and the methods of taxing livestock are perpetuated. Worse still, there is a call for more investment and, as the right hon. Member for Manchester, Central would, no doubt, say, better industrial investment, while price controls are perpetuated and corporate profitability is limited—and all this in the context of a financial deficit estimated at over £2,000 million a year now. There is a call for bigger and better industrial investment, yet dividend controls are maintained, thereby penalising the efficient firms and, one may add, the 14 million or more workers who are members of their companies' pension funds, and penalising also—let us recognise it—all those in the United Kingdom who hold savings in such forms as life assurance policies.

Then, too, for all the claims this afternoon of the right hon. Member for Manchester, Central, there is great disappointment that there was no statement by the Chancellor on inflation accounting and the Sandilands Report, which, I understand, has been with him for some time. What the Chancellor has done in regard to stock appreciation, although a welcome step in the right direction, is trivial by comparison with what he should be doing.

Finally under this head I come to matters of plain silliness. To speak for a moment, if the House will forgive this tiny boast, as Admiral of the House of Commons Yacht Club, I regard the increase to 25 per cent. in VAT on boats as a profound piece of foolishness. The tunover of that industry has risen to £100 million a year, which compares with £600 million a year for all shipbuilders. Let us consider what help has been given to that industry by this House, right or wrong, and compare it with the attitude now to boat building. The industry doubed its exports last year to about 40 per cent. of the turnover, and the Chancellor slaps on this extra tax at a time when the industry is in great difficulty.

In the past 12 months the West Country has lost six firms and 300 jobs. We shall, no doubt, have one Ministry building advance factories and giving all sorts of special help while the Chancellor on the other hand slaps down the constructive efforts that some are making to improve craftsmanship and to provide employment opportunities.

In the aggregate, the total which I am attempting to describe—the lack of command over Government expenditure, the irresponsibility, the carelessness, the lack of determined forcing of efficiency in the nationalised industries, the unfair and unreasonable attitude to private enterprise—represents bad government and incompetent government. That is not the way to give national leadership, and it is not the way to promote national unity. The examples are too blatant. There is no need to look elsewhere than at the Government to discover why the United Kingdom's comparative performance is so mediocre. I criticise the Chancellor and his Budget because he seems to show no sign that he understands this, and makes little attempt to remedy a situation for which he more than any other Minister is responsible.

Perhaps I may end as I began. I am not among those who believe that economic disaster is certain or inevitable for this country. The House may remember the words of Labouchere, the great editor of the magazine "Truth", who, on his death bed, saw the candle flicker. "Flames?", he said. "Not yet, I think". The situation is neither helpless nor hopeless as some would have us believe. It is possible, in seeking to mitigate inflation, to make unemployment less likely in the future without the compulsion to which the hon. Member for Stoke-on-Trent, South and others have referred during these debates, without the bureaucracy of controls and penalties which I have criticised. It is possible to hold the confidence of those who lend to us, deposit their savings in the United Kingdom actual and potential.

One realises how anxious are the Chancellor and Treasury Ministers on this score. If these men will not do it and cannot do it, the nation will replace them, and the sooner the better, for what they are doing at present is far from satisfactory.

5.53 p.m.

Mr. Douglas Jay (Battersea, North)

I agree with the right hon. Member for Taunton (Mr. du Cann) that the public are still uncomprehending of the real situation today. In passing, I warn him about the figures he used of comparative national incomes, which are in money terms which do not allow for the fact that most prices are still much lower in this country and which make the comparison of real incomes appear even worse than it is. That fallacy is a bit too prevalent.

If the public are uncomprehending, public authorities and we ourselves are to some extent to blame. I much regret that we have had no debate on the public expenditure White Paper and no economic debate at all since Christmas. I also regret that the Government of some years ago, of which I think the right hon. Member for Taunton was a member, abandoned the annual publication of the Economic Survey which in the early years after the war was a sincere attempt to explain as widely as possible to those who would listen the economic facts of the case. It is partly because we have abandoned the Economic Survey and because we so seldom have debates that set out the facts that the public are so uncomprehend- ing and that some of our economic policies are failing.

Hugh Dalton once said: Socialism works best when it is in harmony with the laws of arithmetic". It is in that spirit, before saying what I think should be done—because, like my hon. Friend the Member for Stoke-on-Trent, South (Mr. Ashley), I believe that there are alternatives to what the Government are doing now—that I should like to repeat a few simple arithmetical truths which were once trite but which seem to be ignored today.

The first is that if the flow of goods and services available for consumption does not rise and we all pay ourselves more money, prices will rise proportionately. The second is that if we stop the money supply rising and at the same time go on forcing up pay rates, unemployment will rise roughly proportionately. The simple arithmetical conclusion from those two truths seems to me to be that until the flow of consumable goods and services begins again to rise the only way to avoid both unemployment and an ever-continuing rise in prices is to have the sense and self-discipline somehow to restrain the rises in money incomes.

At the moment—in my view this is beyond serious dispute—we are suffering from a headlong rise in the price level due to a headlong rise in pay rates. If we let this run not for much longer we may, I fear, see 40 per cent., 50 per cent. or 60 per cent. a year rises in both pay and prices.

I should like to clear away a fallacy. It is often glibly said—I have heard it this afternoon—that inflation leads to unemployment. Inflation does not lead to unemployment. It is possible to go on for years, as South American countries have often done, with prices rising 100 per cent. a year, the exchange rate falling and everybody scrambling for money. What inflation does is to force Governments into a dilemma in which they are compelled to choose between unemployment on the one hand and an ever faster fall in the value of money on the other.

That is what people should understand. That is where the Chancellor found himself this year, and I believe that he was right to call a halt. After all, despite a payments deficit last year of £3,800 million, all he has done after these heroic and allegedly severe efforts is to cut the borrowing requirement in 1975–76 from £10,000 million to £9,000 million. Why should he not simply have let the price-wage spiral go on swirling merrily upwards on the South American pattern?

My reasons for thinking that my right hon. Friend would be wrong to do so are not quite the conventional ones. They are these. I cannot believe that with prices and pay rising by 50 or 60 per cent. a year, the exchange rate falling and interest rates presumably rising to 40 or 50 per cent., we could seriously hope for the massive increase in the right kind of industrial investment, productivity and modernisation which we all agree we need.

Secondly, and more crucially, I believe that when the rise in prices reached the order of 50 or 60 per cent. or more the public would demand a halt, and any Government would then be forced to act. This at least is certain: that if one is to call a halt at some time, the longer one waits the greater and the more prolonged will be the unemployment caused when the halt is finally called.

I am convinced not merely that the Chancellor was right to call a halt but that much more needs to be done and that the Government must act quickly. We must have this summer a new social contract and a revised incomes policy. I agree with the right hon. Member for Taunton this far: that statutory pay control has been proved over and again to be impracticable, because in the last resort one cannot put 20,000 men or women in gaol if they strike against the law in an industrial dispute. But what one can do and should do—and what we are not doing now—is to mobilise all possible moral force behind sensible pay bargaining and pay awards.

One of the worst mistakes made by the Conservative Government was gratuitously to abolish the National Board for the Prices and Incomes, which did not descend from Mars into the sea and disintegrate but was deliberately killed by the then Government. The board, with all its faults—it no doubt had many—was regarded as fair, conscientious and independent.

Therefore, my practical advice to the Government is threefold. First of all, they should set up again a last resort umpiring authority—independent, authoritative and outside the Government—to which unresolved pay disputes could be referred in the last resort whether involving the judges, the Queen, doctors, dustmen, lorry drivers or anybody else. There is no sense or justice in having different final tribunals for each group, and certainly no sense in a situation in which each group announces that its 30 per cent. pay arise is in accordance with the social contract and a Minister mildly protests that he does not agree. One might as well try to play the Cup Final without a referee.

I believe that a White Paper should be issued by the Government, and approved by Parliament, setting out the Government's incomes policy in clear and unambiguous terms. Valuable as were the TUC's excellent social contract documents, they are neither unambiguous nor binding on anybody and they have now served their useful purpose.

Thirdly, the main lines of a new agreement must surely be accepted, not only by the trade union movement and by one political party, but by the leading employers' organisations, and finally by Parliament as well. The contract will not otherwise command the necessary moral force for very long, as experience in the last 18 months has shown.

Defeatists and cynics—and there may be some in this House today—may say "But what is the use of all the apparatus of a supreme pay tribunal, references, hearings and all the rest of it if at the end of the day any aggrieved group can go on strike against the law with legal impunity?" My answer to the defeatists is briefly as follows. Given an umpiring authority at least as respected as was the NBPI in later years, a great many awards would be accepted as they were then. Secondly, even if the effort were only partially successful, at least, judging by experience, it would be likely to do a good deal better than the present system. In addition, even if some intransigent group from time to time were determined in the last resort to strike against an impartial award, against the Government's policy and, in effect, against the will of Parliament, in the last resort nothing could stop it, because even with legal sanctions one cannot enforce the law against 20,000 or 30,000 people. However, we would at least be better off in the sense that we would not have discredited the law at the same time.

Therefore, I urge the Government, in addition to all that they are rightly doing, to try a new initiative, on lines such as those I have outlined. This must surely be preferable to letting the present Rake's Progress drag us down ever faster. I do not believe that fiscal action alone will bring the present situation to an end. The only other possible supporting device I can see left—this was a Liberal proposal, although I do not find it particularly practicable in that form—involves some sort of excess income tax, combined with cost of living subsidies. That device would be economically sound, but I am not convinced that as yet it would be workable in practice.

Finally, if the initiative I have suggested is not attempted or proves to be a failure, the outlook will indeed be grim. There will be no emergency brake left to us but only outright fiscal and monetary deflation, with all the tragedies which that involves. I devoutly hope that there is enough common sense left in this country to make that solution unnecessary.

6.8 p.m.

Mr. J. Enoch Powell (Down, South)

My agreement with the right hon. Member for Battersea, North (Mr. Jay) in his analysis is less extensive than it is on another topic on which he has soldiered longer than most of us, but in which he and I have soldiered and still soldier together. In particular, I cannot share his enthusiasm for the practicability of any form of incomes policy, compulsory or voluntary, nor do I believe that it is relevant to our predicament.

Still, I think the right hon. Gentleman made an important contribution to the debate when he exploded the nonsense, so often repeated in the four days of this debate, of attributing a rise of unemployment to inflation. There are certain phases in hyperinflation when such inflation can cause unemployment this was exemplified in the course of that never-to-be-forgotten year in Germany, 1923—but the right hon. Gentleman is right to say that, broadly speaking, inflation creates an insatiable demand for labour and that it is the stabilisation or fall of inflation that is linked with unemployment.

I find that this debate, nearly all of which I have attended, has been a weird one for more than one reason.

Mr. Peter Hordern (Horsham and Crawley)

On the question of unemployment and wage claims, in the present circumstances, with the Government controlling fairly closely the increase in money supply, if a large wage claim is made the company has no alternative but to pay the wage claim. It then finds that its wage costs are increased and it therefore has to cut down on prospective future employment or even reduce its present labour supply.

Mr. Powell

Yes, my hon. Friend has illustrated at any rate one part of the mechanism which links the cessation of inflation with the emergence of unemployment: the condition which he rightly posited was that the Government were taking action which rendered an ever-increasing supply of money no longer possible.

As I was saying, there has been more than one reason why this has been a weird debate. In the eerie emptiness of the Chamber during most of the debate one hon. Member after another, and especially from each of the Front Benches, has echoed, literally or by implication, the cry that we are all monetarists now ". Many have tumbled over one another in their eagerness to swear fealty to monetarism. Yet the very same right hon. Gentlemen in the same speeches—sometimes in the very next sentence—have delivered themselves of sentiments which are not only inconsistent with the monetary analysis of inflation but which. I am grieved to say, suggest that they have not even understood what that analysis is.

The Minister of State, Treasury envisaged that in one period inflation would be caused by rising prices, but that when prices ceased to rise it would be caused by rising wages, not realising that, if it is basically due to an ever-increasing flow of money, when the pressure relaxes in one place it will increase in another: it will be a balloon which, if pushed in at one point, billows out at another. Some of the language which has been used in the debate has been positively antediluvian in its continued belief in such concepts as inflationary price increases, inflationary wage increases and the rest.

Much more painful, however, than this intellectual contradiction has been the attitude of virtually the entire House, starting from the Chancellor of the Exchequer, to the acknowledged facts of our predicament. The right hon. Gentleman established his analysis unassailably. He pointed out that he was confronted with a net borrowing requirement of £10,000 million as at present foreseen. He argued irrefutably that this was unacceptably dangerous. The Chancellor of the Duchy of Lancaster himself, in a speech which was rather embarrassing, because the House is really very fond of the right hon. Gentleman, illustrated at one point, with beautiful clarity and simplicity, how such a huge net borrowing requirement in itself, unless it could be met from revenue or from genuine borrowing, would be overwhelmingly inflationary. Moreover, the Chancellor of the Exchequer also accepted and declared that, even if for a few months or even for a year or two it was still possible to finance this unprecedented net borrowing requirement without a huge increase in money supply, still the very fact of the increasing load of debt which was thus being piled up, being largely devoted to consumption, rendered unacceptable the prospect by which he was faced. It seemed to me that in that judgment the whole House concurred.

Having made that judgment and presented it so starkly, the right hon. Gentleman knocked £1,000 million off his unprecedented net borrowing requirement, leaving £9,000 million, and then, as it were, just walked away, saying "Cheerio, I'll be back next year" Of course, he held out the possibility that next year he would go a little further towards reducing that figure; but this is total delusion. Next year it will not be that figure that will be there. Surely the experience of 1974–75, in which the Chancellor of the Exchequer at the beginning thought his net borrowing requirement would be £2,700 million and ended up with £7,300 million, bears out one of the basic facts of Treasury control, namely, that for the purposes of Treasury control next year does not exist—it is a non-existent period of time. When a Chancellor of the Exchequer starts talking about what he is going to do to expenditure next year, we may be assured that we are lost.

There was one obiter dictum in the Chancellor's speech—it is often in the form of obiter dicta that truths arrive in the House, as it were on the feet of doves—where he said that the Government were faced with the unenviable choice between cuts in the expenditure programmes previously planned or massive increases in taxation. Then followed the historic words: Indeed, it must cause one to reflect seriously"— that is the kind of language in which a great new truth is often introduced to this Chamber— on the wisdom of planning public expenditure solely on the basis of constant prices."— [Official Report, 15th April 1975; Vol. 890, c. 279.] This is the beginning at last, so long desired, of the breakdown of the whole nonsense of long-term estimates and planning of public expenditure. Right from the beginning, when this was initiated after the Plowden Report in the early 1960s, I protested to Chancellors of the Exchequer—including the present occupant of the Chair when he was the Chancellor—that such long-term forecasts of expenditure were bound to destroy Treasury control.

They destroy it for the reason which the right hon. Gentleman gave—that they have to be given in real terms and therefore ignore the factor of inflation, whereas the Treasury is dealing with a cash budget—Treasuries which do not deal with cash budgets are lost, for Treasury control is cash control.

That, however, is not the only evil of the long-range forecasts with their apparent logic and planning. The other evil is that they expose a programme which becomes in a sense sacrosanct and which tempts Chancellors of the Exchequer not to make reductions in expenditure but only to make reductions on proposed increases of expenditure. The right hon. Gentleman, in most of what he said about cutting public expenditure, was not really talking about cutting public expenditure but was talking about reducing proposed increases in public expenditure. And how did anybody come to know about those proposed increases? Because they had been put in a White Paper. This is not real at all. These are not real decreases in public expenditure. This fooling around with fictitious figures has nothing to do with the predicament of a House and a country still faced, after the right hon. Gentleman's tax changes, with what every hon. Member knows is dangerously unacceptable a net borrowing requirement of £9,000 million.

The conclusion is that we must operate in this year: that is the only deduction which can be drawn from the predicament as outlined by the right hon. Gentleman that we need not to make a reduction of £1,000 million in the net borrowing, but to take steps which will enable us in a foreseeable period—I put a figure to it, and say in two financial years—to see the virtual end of the net borrowing requirement.

The Rake's Progress—the Chancellor's phrase—will not be dealt with by saying "This year I had a £10,000 million net borrowing requirement. Aren't I a good boy? I have reduced it by £1,000 million. Next year I shall be an even better boy: I shall nibble away at it again and knock off another £2,000 million"—all done in imaginary figures.

Mr. Healey

rose—

Mr. Powell

The right hon. Gentleman need not take time by interrupting me. I shall go over the ground. He need not ask in advance questions which I shall answer before I sit down.

Mr. Healey

I want to expose a contradiction. The right hon. Gentleman made the interesting statement, which I suppose is literally true, that next year does not exist. However, he made a great deal of what he claims to be the fact that it is impossible to plan public expenditure more than a year ahead. Yet he has just said that he proposes reducing public expenditure over two years. How does he achieve this miracle according to his own weird logic?

Mr. Powell

I need not have given way to the right hon. Gentleman. Unless the net borrowing requirement is halved in the present year, nobody will believe that it will be eliminated in the next year.

That is the way in which a Chancellor who was seriously setting about meeting the implications of what he placed before the House would be acting in this financial year. Instead, what the right hon. Gentleman has done in the Budget is barely tinkering. So far as it goes, it follows from my analysis that my hon. Friends and I will support it. We do not believe that he should have denied the House the opportunity of again looking at the capital transfer tax. We also believe that if he wanted more money from VAT, he should have obtained it by being man enough to go back to the 10 per cent. rate instead of introducing a second rate. We shall indicate that accordingly. But if there is any disposition at the end of this debate to damage what little the Chancellor managed to do in the right direction, he will have the support of my hon. Friends and myself in resisting it. Still, it remains only tinkering.

I must now answer, at any rate in outline, the question which the Chancellor foreseeably put to the right hon. Member for Leeds, North-East (Sir K. Joseph) and which, equally foreseeably, the right hon. Member did not answer. It is classically the function of Government to manage the Budget as a whole and equally classically the function of Opposition, individual or collective, to criticise individual parts without being responsible for the whole. But I do not believe that any hon. Member, on the Front Bench or on the back benches, confronted with the analysis underlying this Budget, has a right to take refuge in that classic definition of the different functions of Government and Opposition.

I say, then, that most of what needs to be done cannot be done by manipulating transfer payments. With the utmost boldness, £1,000 million at most can be obtained from the reduction of transfer payments in the budget of public expenditure. It follows that it is overwhelmingly on capital account that the nation must make the dramatic reduction in the volume of public expenditure needed to enable the balance between our income and our ambitions to be regained.

I am making no party point. This is just as valid for the Socialist who wants to see public expenditure grow as it is for the Tory who wishes to see it restrained. Neither dare say or should imagine that what we wish to attain can be attained by the fundamental dishonesty of inflation —by taxing, as the Chancellor of the Duchy of Lancaster said, by unobtrusive methods, which is what inflation is.

I am glad to see the hon. Member for Meriden (Mr. Tomlinson) in his place, because it seemed to me that he made one of the outstanding speeches of this debate. He faced this fact, that in practice it is not in current expenditure on the salaries of employees, not even on the numbers employed—those can be influenced gradually only by recruitment and so on—but on capital account alone that we can tackle that which we have to tackle. He picked as number one in that sector—and I agreed with him warmly—expenditure on roads.

One hears, one imagines, the immediate reaction "But roads are part of the equipment of a civilised country and a progressive economy". Indeed, there are grounds for all capital expenditure, whether on public or private account: but that is not the point for this country, situated as it is. We must act where we can act in order to restore the balance which the Chancellor has proved must be restored. Otherwise we live like the inhabitants of Pompeii and Herculaneum under the live volcano of this great mass of borrowing which not only leaks over us from year to year but threatens to become a torrent at any moment, for reasons beyond our control.

We must get another £4,000 million in this financial year—as to the minority out of transfer payments, subsidies, etcetera, but overwhelmingly by a virtual moratorium on many branches of capital expenditure. If anybody says that that means a severe shock to the building and construction industries, the answer is "Yes, it does, but we are in for a severe shock". That is where we have got ourselves. If the analysis of the Chancellor is correct, that is a consequence we must accept.

I have this afternoon refreshed my memory of a verse of A. E. Housman: Could men be drunk for ever With liquor, love or strife, Lief would I rise at morning And lief lie down of night. The nation today is drunk, drunk upon inflation; and the intoxicant, and the measure of the intoxicant, is the rapidly mounting excess of public expenditure over any acceptable method of financing it. Whether for the moment we are meeting it from acceptable domestic sources or from external sources, that is the intoxicant on which the nation is drunk.

Like Housman in the poem, if we could. be drunk upon inflation for ever, I could happily reconcile myself to it; I should: see no reason for not going on. But beyond the fact of the Chancellor's analysis is the other, equally certain, fact that it cannot go on like this. I do not know whether the right hon. Member for Leeds, North-East is right in saying that it is likely that the requirement will turn out at £13,000 million. However, one thing is certain about inflation—about slow inflation, and even more certainly about fast and accelerating inflation—and that is that it must stop at some time. It cannot accelerate for ever. Here I rejoin the right hon. Member for Battersea, North. Therefore, the only choice is whether we grasp the nettle now or leave it until later.

To grasp it now, to halt the rate of inflation at 20 per cent., and, by budgetary action, strike at the known and proven source of inflation, the root cause, will cause the sort of dislocation to which my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) alluded. It means the emergence of a level of unemployment which no one can precisely quantify. But we can say this about the unemployment which emerges as a result of the inevitable downturn of inflation: the higher the rate before it turns down, the severer will be the unemployment. Therefore, let all those who hate unemployment for its own sake, which includes all hon. Members, join together to say "We must deal with this now. We must bear the cost and make the necessity of bearing the cost understood by the country" If we leave it till later we shall be in dereliction of our duty.

Since the Chancellor of the Exchequer has faltered and failed before the challenge of his own analysis, there is transferred to the House—perhaps more to the Labour back benches, but also to the whole House—the duty of standing up to that challenge. We must choose whether to go on with inflation, whether to continue piling the Pelion on Ossa of a huge borrowing requirement one year after another, or to deal with it, and be seen by the world to be dealing with it, sooner rather than later.

The right hon. Member for Taunton (Mr. du Cann) referred to "action, not words". That is a well-established slogan of the party to which I used to belong and of which he was a distinguished chairman. But in the end it is words which are the action of politics, because it is through words that we give our fellow countrymen the opportunity to face the real dangers and to share in dealing with them. I therefore believe that, beyond all the party and personal inconveniences of such a debate as this, it is the duty of us all to confront for ourselves, and to do it openly in the face of the House and of our constituents, the predicament fraught with peril which faces the right hon. Gentleman and from which the Government—no doubt his colleagues more than himself—have run away.

6.33 p.m.

Mr, Frank Tomney (Hammersmith, North)

The right hon. Member for Down, South (Mr. Powell) gave us an extensive lecture of intellectual quality. However, it did not contain as much practical realism as the argument warranted. I understood this to be his thesis. Since the debate started we have been bathed in economic jargon, which we must have been either specially or expensively educated to understand. I was neither. However, I intend to introduce some practical realities in answer to the convoluted argument.

The right hon. Gentleman spoke on his favourite theme of monetary policy. There is a lot to be said for the enlargement of that argument. Penalties arise, which cannot be denied, and I shall attempt to deal with some of them.

Last September the Prime Minister addressed the Trades Union Congress. He stated the issue in terms of the social contract. He looked at the congress and deliberately said "I tell you, it is this or nothing" We have not reached that stage yet. However, we are very far on that way with a £10,000 million borrowing requirement. I agree that we must stop inflation in its tracks before it goes any further.

Ten years ago, looking at this country with its lack of investment, lack of re-tooling, competition from world markets and its large population, I said that by the end of the century we should probably be over-populated in terms of the decline in the supplies of raw materials for an industrial nation.

Mr. Douglas Crawford (Perth and East Perthshire)

Not Scotland.

Mr. Tomney:

I shall take Scotland with me, too. I do not want to be pernickety about this.

I have not changed my thinking. This is part of the dilemma in which the nation finds itself. The control of the situation rests chiefly on persuasion. It is one thing to have a manifesto. It is another to have a cosmetic mirror whereby we look at ourselves in the best light. It is difficult to put words into action. Action matters, not words. But we live by words. Where there is neither inspiration nor leadership, the nation perishes. However, we have not reached that stage yet.

I have read that persuasion seeks the subject when force is inadmissable and reason ineffective. We do not know what has happened today in the talks between the Government and the TUC. In a free democracy persuasion has to be the order of the day. If we cannot persuade the rest of the nation and the organised labour movement to follow us in our endeavour to reduce the tremendous rate of inflation we shall find ourselves on the slippery slope to hyperinflation. This nation could not contemplate a situation of that character.

During the last election the Chancellor referred to an 8¼ per cent. rate of inflation. I had just had my election address printed, 50,000 copies of which were stacked in the committee rooms. Apart from an election manifesto, I have always believed in taking directly to the people the words of the candidate as an interpreter of events and of what are likely to be their penalties and benefits. That is the only way in which the public can keep faith with politicians. Political fortunes are at a low ebb, witness the General Election figures and the splintering of parties at the last election. The people are urgently seeking the leadership that will take them out of that dilemma. Consequently I inserted into my election address a passage which I thought was germane to the situation. Over three months the argument could have been sustained on a monetarist basis. I said: The most serious problem facing the next Labour Government will be inflation, now running at an estimated 20 per cent. which means in effect that prices and wages could double every four years. If we take inflation at this rate on a recurring compound basis to the year 2004, a £40 man's suit would cost £1,281! I saw clearly where we were going. I went on: The annual wage of the average British worker would be £70,000 and a State pension would be £34,000. The Shirley Williams loaf will cost £5.20p without a subsidy and 20 cigarettes £8.22p; a £20,000 house would be up for grabs at £175,000. I finished by saying: These figures … reflect inflation taken to the extreme and the position, of course, could not really occur because a Government would take action, but they illustrate very vividly the continuing fall in the value of the £. Working class people in the main are savers, not investors, and the actual fall in the value of their money is probably at an estimated 11 per cent. per annum. If we were to tell them that since 1970 they have lost 30p in every pound they saved through insurance policies and otherwise they would be frantic, but because they do not draw that money they do not appreciate that fact. That is how far we have slipped, and we cannot afford to slip much further. We owe it to them. There is a penalty on theft in this country, and this is part of the reason for the huge public expenditure bill. As parliamentarians we should endeavour to rectify a situation of this character as soon as possible, but it will not be easy.

For instance, in the 1972 Barber Budget there was a deficit of £4,000 million and the objective was to allow industry to expand. It did not happen for the obvious reason that the banks were given freedom to lend their money and they lent it to property developers. Once prices are forced up in that sector of the economy the mobility of labour is restricted. It is not possible easily to transfer from a job in one region to a job in another. South Wales is facing the shutdown of steel and glass works and 18,000 men are affected. They have nowhere to go because they are chained to the valleys. That is the result of this kind of non-directive policy. When we talk about planning, advance financing and constant prices in an inflationary situation, it is necessary to take the whole compass of the nation's problems into account. In a small country like this we cannot have one region, with problems in unemployment and development, out of balance with the rest of the country, but that is what we have been trying to achieve.

It is said that inflation will be reduced, and the Chancellor said yesterday that he expected it to be 13 to 14 per cent. later this year. It is a bit too early to start talking in those terms. I want to see the action taken rather than hear the words, and I want to see something done. The situation we face is similar to that in the United States where there are 8 million unemployed. I was in Florida a few weeks ago in connection with the aerospace programme, and I saw there fully qualified aeronautical engineers who were working as bell boys in restaurants, with their wives driving taxis. I did not realise until I got there that Florida is a depressed area. That is what happens when a nation goes out of balance. Even if the United States gears up for expansion in two or three years' time, that will stoke up interest rates with an obvious effect on the money supply.

We cannot compete on that basis, and, even if we tried, it would not be on the usual basis because we have moved a long way since the end of the last war. Many families throughout the world have completed their purchasing of capital and durable goods which do not need replacing in a short span of years. All the money has been spent here, in France and in Germany. It is impossible to invade the export markets of Japan. They will beat us on performance and delivery every time. It is impossible also to do it with Germany or France. It will be impossible with the United States if ever that country, as it will have to, becomes more export-oriented. All this will place Britain in a very difficult position. It is better, therefore, now to try by some means to control our disastrous rate of inflation. There is no sign of that happening at the moment. I am told that order books are 2 per cent. below last year's level and that investment is below last year's level.

Only one thing will solve the situation in terms of money, and that is the creation of new money. The question is how do we get to it. There is great public concern, and the public do not fully know how to express themselves yet. However, they may learn if we reach rates of inflation of 40, 50 or 60 per cent. It may be at that level that we shall eventually find that there is a revolt. The signs can already be seen. For the first time there have been demonstrations about rates, and in view of the type of person involved they are understandable. Men who live near me, who are fully qualified engineers, and who have been prematurely retired at the age of 55, cannot get another job. If this situation is allowed to drift on this country will get into a spiral which it cannot stop.

The talks today, therefore, must lead to a thorough reconsideration of the social contract. There must be between the Government and the TUC an agreement which will stick. We cannot do otherwise than appeal to the good sense of the bulk of trade unionists who have an interest in the retention of their own jobs. They have children and mortgages to consider, and these amount to contractual obligations which cannot be shed overnight. We must get the message across to them.

On overseas debts, we must owe in London about £10,000 million. Some is borrowed short term from the Arabs. This is another reason why stability is necessary. We do not know whether our much-heralded oil will come on stream on time and whether it will rescue us from our plight. We do not know yet of the impact this will have on Arabian oil supplies or whether the Arabians, having reaped a financial bonanza by that time, will drop the price of their crude to take a further advantage and to retain their markets. We cannot bank on North Sea oil to the extent that some of us are. That is a dangerous assumption for Scotland or anyone else. I have never subscribed to the view that it is Scottish oil. It is in the North Sea and it belongs to all of us. The Scots cannot walk on the water, good as they are. This is the proposition to which we ought to be trying to adjust ourselves.

There is one factor about which I join hon. Gentlemen opposite, and that is the explosion in local authority finances. I have never fully understood, after we had the redistribution of parliamentary boundaries and the number of local authorities was reduced from 1,390 to 433, why we still had to continue with two-tier government. I have never understood why we had to do that and I do not understand now. We should transfer county government to local government. The present system means more manual workers. The county staff could go. It would mean more committees for local authorities but the abandonment of a top-heavy bureaucratic local civil service. It is in this sphere that positive savings can be made.

Whether the figure of £9,000 million or £10,000 million will escalate to £13,000 million by next year, no one knows. I listened carefully to the Chancellor's speech. He stated that even the most dedicated and foremost economists in the country did not really understand the workings of the financial and economic monetary and commercial mechanism at present. If they do not, we have to adapt ourselves to some plain common sense. Someone has to find the answer.

Listening to the welter of language used in this Chamber, not one-fiftieth of the ordinary public sitting in the Gallery would understand, from the economic jargon that we use, what the hell we are on about. If we were to talk about rents, prices of children's clothing, jobs and future employment, they would understand. In the remainder of this debate, especially in the reply, let us try to put our arguments in plain language so that the public can understand. If they do not understand, we do not have a hope of winning their confidence. If we do not get their confidence, we shall not get the breakthrough and the retention of full employment and prosperity.

Politician after politician has stood in this Chamber since last Tuesday and said that we are dedicated to the principle of full employment. Of course we are. My hon. Friend the Member for Glasgow, Garscadden (Mr. Small) and I are two ordinary men who have had experience of what the dole queue means, and it is not very nice, especially when it lasts for over two years. I would do anything to persuade, cajole, inspire, direct or lead to prevent unemployment once again pushing itself on the men and women of this country.

Between now and the next Budget the House of Commons should devote itself to slashing this rate of inflation by at least 50 per cent. Then it should plan its forward markets on a proper and realistic basis of what the nation can achieve in every sector of its planning operations. We have industries which are almost totally obsolete. As an example, let me take British Leyland. It is not that Lord Stokes was wrong when he tried to streamline and cut down the range of models produced to secure a more effective and efficient labour force. What was wrong was that he had to do it in a period of intense inflation and this placed him in the difficulty of liquidity ratios. All the chief industries of Britain have been categorised, with the exception of chemicals, which has always been a front leader. It is these things about which we should be talking in future industrial debates. We should leave the economists to their log fires and their sherries. Let us get on with the job which we know best.

We can pull this country round only by a sustained effort which is recognised by the trade unions and in concert with them. It has to be on the basis that no one will be defrauded or outsmarted. During the debate I thought of one group of people—the miners. The capital of British taxpayers goes into the mines. Miners have the responsibility to produce coal. There is a shortage of such labour to produce such a valuable commodity. In that situation what would gold or diamond merchants have done? They would have charged the highest price. Therefore, no one can blame the miners' leaders for not getting the best out of the situation for their men. Coal is a very scarce commodity. However, only a select band of men are able to get it. If we look at it that way, we can begin to understand the complex industrial situation. This situation needs managing.

There should be a proper effort by trade union leaders, who are responsible men, and by the Government, over a sustained period—a longer period than 12 months. With taxation, investment and industrial policies we can proceed to get somewhere. If we do not, we could slip into a position from which we could never climb back.

6.57 p.m.

Mr. Peter Hordern (Horsham and Crawley)

The hon. Member for Hammersmith, North (Mr. Tomney) has given some very practical examples of the evils of inflation. He gave a practical speech about the way in which we should deal with these problems. He asked hon. Members who wish to speak not to be too technical. That is a request which I do not particularly enjoy trying to meet, and I am quite certain that those who will be replying will not be too simple either. However, the hon. Gentleman reflected the underlying tone in this debate, which is a serious one. It is rather different from the way in which the Budget has been received in the country at large, certainly by the professional commentators in the Press and elsewhere.

The mood of the House is much more in keeping with our situation than that of the commentators and some of the reactions outside. The general feeling is that the Budget does half of what needs to be done. It is in many ways an interim Budget. There is a sentiment on both sides of the House that there is more to come from the Government in the way of a Budget, probably quite soon. I recognise that some Labour Members will not enjoy this process, but even if they are unhappy about this Budget they can be safely assured that they will be greatly more unhappy about the next Budget which will probably follow the referendum.

Hon. Members have referred to our balance of trade position. It is our worst balance of payments position in living memory and we have a borrowing requirement of such a size that it is almost unthinkable. What do the Government propose to do about this? What they say is that they will cut public expenditure in due course and that they are counting on an improvement in world trade. The reason why they are counting on an improvement in world trade is that they think that world trade will expand over the next year or 18 months. However, in order for us to take advantage of that expansion we need to make sure that our competitive position is correct and that we shall be able to gain advantage ourselves from the improvement in the course of world trade.

I am sorry to say that the Government's hopes in this direction are simply a matter of wishful thinking. We can only be guided by the way in which prices have been moving in recent months at the wholesale level—which has still to find its way through to the retail level. During the last three months the increase in that level has been 26.3 per. cent. here, 2.5 per cent. in the United States, 5.3 per cent. in Germany, 0.5 per cent. in France and 0.9 per cent. in Japan. Therefore, at the wholesale level our prices are rising much more quickly than those of our competitor countries.

Another matter is that we do not find our competitors complaining about their oil deficits. They have done something to get matters right. They have taken measures which will act on their own balance of payments swiftly and they have found concrete results in doing so. We, on the other hand, have not taken the necessary action and we have depended far more on borrowing.

Of course the Government claim that we are in a uniquely favourable position with our vast deposits of coal and oil. But what matters in these affairs is that when we come to produce our coal and oil, even with the vast resources that have been found, we produce them at the right prices. The fact is that it costs at present 35 cents a barrel to produce oil in the Middle East. Oil from the North Sea now costs $5 a barrel. The Government are counting on the fact that they will be able to sell oil at $10 a barrel and that their costs will not increase more than the present level of $5 a barrel. They are looking for their revenue to the difference between their cost price and their selling price. This is altogether to ignore what might be the effect of the OPEC countries on the oil price in some years to come. Therefore, this Eldorado on which the Government are counting ought to be looked at with very great caution.

In the last year alone we have borrowed $4,710 million. Most of it was not for investment at all but simply for consumption. This process is not happening anywhere else in the world. It is only we who are borrowing anything like these sums for such vast expenditure on consumption at home. The question must be asked: how much longer will our creditors be prepared to be so accommodating? There is a difficulty in both Iran and Kuwait. Their national expendi- tures are increasing very quickly, so they will not have so much money to dispose of by lending it on the money markets of the world. We shall physically find it a great deal more difficult than it has been in the last year or so to borrow money from these countries. Only Saudi Arabia —there is great competition for Saudi Arabian money—is in a position to continue lending with confidence vast sums of money to other countries.

I noted with interest the terms of the $25 million "safety net", the OECD safety net to which the Chancellor referred recently. Those terms require, first, that all the IMF facilities should have been used and, secondly, that there should be no restriction on trade and, therefore, no import controls. These are conditions which I am sure the Government will have noted. I hope that the Cambridge economists and the Labour Party will have noted them. But before we even reach that particular loan from the OECD and those facilities we should have had to have exhausted our facilities with the IMF.

It is worth reminding the House of what the position was in 1969, when we last had major recourse to this particular fund. I have noticed in recent months that the Chancellor has taken a good deal of pride in his ability to control the money supply and in his monetary policy generally. Unfortunately for him the IMF, as a creditor, will not be quite so impressed with this level of control if we have to use its facilities.

I remind the House of the position in 1969 by referring to paragraph 8 of the Letter of Intent of 22nd May 1969, which said: The rise in money supply in 1968 of £986 million"— what happy days!— was broadly in line with the growth of GNP; but the increase in credit in the economy was too high, and the Government intends not to permit credit to be supplied to the economy on anything like this scale in 1969–70. They did not. That refers to domestic credit expansion, and that includes all the sums which we borrow abroad—the whole lot. Therefore, if we have recourse to the IMF, we shall find without doubt the same kind of terms and conditions being applied to us in a way which we are not prepared to deal with at present.

If anyone wants to know what the Government's present economic policy is, it is this. It is to beg, to borrow and, so far as the Secretary of State for Industry is concerned, it is to steal. We should note a number of aspects of this borrowing. The first is the internal debt interest, which has grown by 25 per cent. in one year, from just over £3,000 million to over £5,000 million forecast for this year. Secondly, it is no use the Government referring, as they do, to the borrowing requirement as a proportion of the GNP, which itself is grossly swollen by inflation.

The fact is that this sum of £9,000 million must be found either from our creditors abroad, which will be very difficult, or from the non-bank public lending the money in this country. That will be an extremely difficult task to perform. Even if, as the right hon. Member for Down, South (Mr. Powell) said, the borrowing requirement were to remain only at £9,000 million, who, looking at the level of pay increases and awards in the public sector and the growth of the public sector, now believes that this will be the case? Sooner or later our creditors will insist that public expenditure should be cut.

This is one of the matters which has come out so strongly in the debate, from both sides of the House. It is time that we set our own house in order and were not so dependent on resources borrowed from other countries. It is much better that we take the view that it should be done now rather than that we should wait until next year. As it happens, the proposed cuts that the Chancellor says he will make will come at a time when there will be, on his own reckoning, over 1 million unemployed. Has the TUC taken that in? Has it taken in the fact that the cuts in public expenditure will come when unemployment is rising fast and will already be over 1 million? Is that a prospect to which the TUC has yet given its attention?

Of course, the House is quite right to be cautious and somewhat sceptical about whether public expenditure will or will not he cut next year. That is another matter. But what will the TUC have to say about that proposition? Certain items of public expenditure cuts have not yet been noted. There is no provision for example, for the extra borrowing requirement which will be needed because of the nationalisation proposals of the Secretary of State for Industry, or any of his other bailing-out efforts in which I have no doubt he will be indulging—what one might call "Bennery". There is a saying, that those whom the gods wish to destroy they first make mad". In the case of the Secretary of State for Industry the gods appear to have carried out the first part of their programme but are rather slow in getting on with the second part.

Some of us who have taken a monetarist view over the years have been encouraged to learn how many converts there have been to this cause. But I wish that they would not have quite so much enthusiasm for a subject which those who have held this view for some time like to feel is delicate and needs to be put forward with great care. It should not be used as a bludgeon. However, those of us who have held that view have grown accustomed to a certain amount of abuse. We have been accused of wanting to use unemployment as an instrument of policy. That charge can never again be levelled by this Chancellor or Government. Indeed, the Chancellor said: But this "— unemployment— is part of the price we have to pay for inflation at current levels."—[Official Report. 15th April 1975; Vol. 890, c. 320.] The right hon. Gentleman is prepared to see 1 million unemployed. Whoever would have thought that a Labour Chancellor would be prepared to say that in terms of the number unemployed?

This is not a question of semantics. The Government have turned their face against the injection of further money into the economy for the purpose of holding employment. This is a significant occasion. I am sure that the Chancellor did not want to take that decision but that it was forced upon him by the fact of his own irresponsibility during the course of last year, when he not only cut revenue in cutting value added tax but increased public expenditure at the same time.

It has been said that the social contract has been torn apart for all to see. It is not easy to tear a myth apart. The mistake is to act as if the myth were true. We know that earnings are rising by 30 per cent. a year on the latest figures. I believe that the social contract, so far from doing good, has in fact done great harm.

The Government have acted as the political committee of the TUC on both the Industry Bill and the Employment Protection Bill. They are virtually carrying out the TUC'c demands. They have acted with increasing hostility towards the private sector, particularly privately-owned business, in the proposals for both the capital transfer tax and the higher self-employed contributions to the National Insurance Fund. What have the unions done for their part? All they have done is to increase their claims.

For too many years successive Governments have put increasing emphasis on an incomes policy. Worse still, they have banked on it. It does not matter whether the policy has been statutory or voluntary. The fact is that action that should have been taken to control public expenditure has constantly been deferred in the expectation that an incomes policy would work. Indeed, extra money has been pumped into the economy at various times to promote growth, to safeguard employment and, last year, simply to win the election. The cruel part about it is that if only successive Governments had not done these things the rise in unemployment would have been much lower then than it is bound to be now.

All our competitors have suffered from the increase in oil prices and from increases in unemployment. They are now recovering while our position is getting rapidly worse. I know that some hon. Members on both sides of the House cannot abide an apparent waste of human resources in allowing unused capacity within the economy. What matters is how that capacity is taken up. We must shift resources within the economy out of the public sector and into exports and investment. That cannot be done by borrowing or by printing more money.

On Tuesday the Chancellor told us that the reason why the borrowing requirement rose by over £1 billion between last November and April this year was largely due to higher wage settle- ments in the public sector. I do not know whether that is what he meant by the term "increasing the social wage". But it is time that we looked at the resources which we devote to the public sector compared with what other countries are prepared to do. I refer in this context only to employment.

I have not got up-to-date figures—these figures go back to June 1972—but I believe that the relative position has become a great deal worse since then. In June 1972, 27 per cent. of the employed labour force worked in the public sector in the United Kingdom. In West Germany the figure was 13 per cent., in France 8.5 per cent., in Japan 8:4 per cent. and in the United States 18 per cent. If we remove all the public corporations, which indeed are common to many of these countries, and all the nationalised industries, the United Kingdom figure is still over 20 per cent. These people are no doubt doing admirable work, but they are exporting nothing. That takes no account of the increase in the level of employment by local authorities in the last two or three years.

Last year 240,000 people came out of manufacturing industry of whom 120,000 went straight into the Civil Service and local authorities. How can these people be attracted into the private sector? It seems to me that there is only one way: to make the private sector more profitable. As it is, company profits as a proportion of GNP, which have declined in real terms, have fallen from 12 per cent. over the last 10 years to 7 per cent. in 1974. The best way to achieve the objective of making companies more profitable is to remove price control altogether. That would have the effect of reducing consumption and increasing investment, which is what needs to be achieved.

I know that some of my hon. Friends still hanker after a prices and incomes policy, despite the fact that all our experience shows that prices have been restrained while incomes have climbed through the roof. That has done lasting damage to companies.

I do not believe that it is right or that it would work to set up a permanent body to set the level of prices and incomes throughout the country. The first duty of the Government—of any Government —is plain. It is to protect the value of the currency and to halt inflation. The Government have no duty to print money to accommodate high wage increases. Indeed, by doing so they discard their main function and responsibility and attempt to transfer it to the trade unions by simply asking them not to press their wage claims. By making that money available the Government put up prices, make our goods more uncompetitive, make our balance of payments worse and make unemployment much higher than it would have been or needs to be. That is the road that we have been treading for too long.

There is an alternative. It is to tell the negotiators that they have freedom to settle but that neither the money supply nor foreign borrowing will be expanded in the next two years beyond the level required to bring our payments into balance. If higher wage claims are then pressed, the inevitable result will be higher unemployment in that firm and in that industry. The trade union negotiators will be directly responsible and those who are put out of work as a result will know whom to blame.

We have reached a turning point in our affairs. No Government could under-write our present level of inflation either now or for years to come. It is a delusion to think that the Government can do anything now to stop unemployment rising to very high levels during the next few months. If they were to try to do so, the certainty is that unemployment would eventually get much worse than it otherwise would be.

The Government can restrict their own expenditure. and they should do so without delay. That is the surest way of controlling inflation, and that is their primary duty. The social contract is dead. At last we have a prospect of a contract with reality.

7.19 p.m.

Mr. Eric Moorman (Basildon)

I am not impressed by the speech of the right hon. Member for Leeds, North-East (Sir K. Joseph). Indeed, it is clear that since the February General Election the Conservative Opposition have not learned a great deal from their experience. One may disagree with the conclusions of the right hon. Member for Down, South (Mr. Powell), but from what he said and from what was said a moment ago by the hon. Member for Horsham and Crawley (Mr. Hordern) one begins to feel that there is an attempt to analyse some of the problems. The rather poor and inadequate speech of the right hon. Member for Leeds, North-East posed great problems, but I do not wish to spend the few moments that I have in dealing with the Opposition. They must look after themselves.

It is important that we look more closely at the Budget and, indeed, at the way in which the Chancellor has presented his case and been supported by my right hon. Friends. Like most of his predecessors, my right hon. Friend the Chancellor of the Exchequer must at this stage of the debate be feeling somewhat confused at the variety of criticism which his measures have elicited not only here but among the media. In other words, whoever wins it is not the Chancellor of the Exchequer.

On the one hand, the Observer yesterday described as peanuts the Budget's efforts to reduce the total of £10,000 million which the public authorities need to borrow, and on the other hand there is a feeling among some of his colleagues that my right hon. Friend is an Iron Chancellor and is too tough and difficult in dealing with social problems.

The most vital thing about the Budget is perhaps not the use of the regulators, or in the mechanics, but in the attempt by the Chancellor to try to begin the process of educating the public to the realities of economic life. This is no small job. This is a massive task. It has to be presented simply, but it has to be presented, because part of the education must be that there is no one unbreakable law which says that everyone will get richer all the time regardless of what is going on in the world outside. There is no divine right to stay on doing the same job in the same way regardless of whether anyone wants to buy the product. We must modernise our industry, and in the process many people will have to learn new skills and move to new places, and we must all accept a setback in living standards while we plan for the future.

What the Budget lacks is a feeling of urgency, and this is an important omission, for time is not on our side. This view has been conveyed from both sides of the House. The Government are fortunate in having the good will of the trade unions in this fight, but we must convey to them the urgency of the need to strengthen the social contract and to make sure that this is kept not only in spirit but in fact. A speech two or three weeks after an agreement has been reached saying that the social contract will be observed is not playing the game by any standards. The TUC guidelines need to be strengthened, and we cannot expect this unless we introduce into the scene a referee. This point has been made this afternoon, and I endorse the idea of having a referee in the form of a national agency which will see that the social contract applies to everyone, and not just to selected groups of people.

There has been criticism of the fact that management has not taken on its own responsibility in the social contract. Why should it, when it has not been brought into the contract? There are professional groups and managements which would no doubt be prepared to share in some of these guidelines if they were related by the Government. The Government have a major responsibility in extending the idea of guidelines so that we involve not only the trade unions and the Labour Party but managements, too.

It is vitally important that at a time of economic crisis the national cake is shared out as fairly as possible. In this sharing there are not just two partners—Government and industry—or two opponents—Government and unions —or only two ways in which to divide the cake—prices and incomes. There are four partners—Government, employers, unions and the general public or consumer, and some of these loyalties merge. Nevertheless, the cake has to be shared four ways—in terms of taxation, which is the Government share, return on investment, whether public or private, wages, and level of prices, and all these things must be taken into consideration.

It then becomes questionable whether the Treasury is the right agency for the job of planning our economic future. A few weeks ago a knowledgeable witness to a Select Committee of this House described Treasury procedures as being much the same as they were in the days of King James VI. He went on to describe how totally inadequate they were when applied to the budget of an innovating industry with long-term development projects and how much less they are appropriate today when dealing with the planning needs of an industrial nation in the twentieth century.

The Treasury is governed by tradition, and, as the American futurologist Alvin Taller has demonstrated in his new book "Eco-Spasm" published in the United States but not available here—I hope it will become compulsory reading, and as I see present a representative of the Treasury may I ask him to ensure that his staff get copies to this country?—the traditional features of planning in industrial nations are an obsession with economics to the exclusion of other concerns. In other words, I am suggesting that we have a time bias in Government that regards five years as long range, and a system that removes more and more decisions from ordinary people and hands them over to remote bureaucrats. We need to establish that the horizon for judgments of this nature is much closer to 25 years. Reference was made by the right hon. Member for Down, South to the fact that tomorrow does not exist, which is the Treasury attitude. This is correct, and it is much more devastating when tomorrow or next year does not exist, when some of us feel that the time scales have been wrong in thinking of four or five years.

With the complexities of international companies and international relations, many of these organisations think far more deeply, more extensively, than anything that is done by the Government. It is necessary to plan on a large scale and at long range. The interdependence of nations is a factor that we cannot leave out of account. France must take Germany's plans into account when it looks at its own future. The United States must know what the Japanese are doing when it is planning more car assemblies. We cannot plan without taking OPEC into account. The problem is how to reconcile this with the need to keep in touch with the needs of ordinary people and with the actual effects of planning at ground level.

The answer lies in having a planning agency. The aims of the Department of Economic Affairs, when it was in existence, were the kind of aims to which I have referred. It is fashionable to think of the DEA as a myth. It was not. It was extremely successful, but the failures of that Department had much to do with the inexperience of the Government at the time. It was perhaps too radical a Department for a team that had come out of opposition after 13 years. But, as with the IRC, we can learn from our mistakes and produce a better version. I suggest that this type of operation is what we need.

The instigation of what are virtually quarterly Budgets meets the need for the fine tuning of the economy, for adjusting the working of plans at the critical point of operation. The Budget has tackled this problem to a greater extent than ever before. The "micro economic" measures designed to exact a particular response from one industry or even one firm are a vital part of our strategy. We need to have an analysis of how we are doing each year, whether the Budget and the manifestations of the Budget and the social factors associated with it are the right thing—whether right for the nation is another matter—but we need to think in terms of a long period of analysis—hence the idea of time scales up to 25 years and at the same time—this is no contradiction; it is contained in the Budget—we need to make sure that we have a better idea of what is happening within individual firms.

It is a pity that alongside much of the debate and politics of the Industry Bill and the argy-bargy about "Bennery" we are missing a vital point. Industry is willing to share information if it feels that that will help to improve the quality of Government decisions. What industry and management are not prepared to do is to give information and find the same inept decisions being taken by the Government at the end of the day.

I welcome many of the things that the Chancellor has mentioned. I welcome the way in which he has attempted to get closer to industry. I welcome those measures designed to prepare industry for the expected upsurge in world trade next year, such as the £30 million given to the Manpower Commission for retraining, which will ensure that we have the skilled workers that we need, the special assistance for major investment projects which would otherwise be shelved, and the new major investment plan for the iron foundry industry.

It is important that we get our planning right now, for on any assessment there are encouraging signs. There is a substantial fall in the deficit. The boom in imports of consumer goods has run out of steam. The Americans and West Germany have introduced special reflationary measures, reducing the risk of a trade war.

It is significant that when reference is made to the social contract no one seems to appreciate that it is neither dead nor extremely viable, and everyone wants it to be given accuracy of measurement. Within industry, it means enlarging it. But let the process of educating the public continue, otherwise the social contract will not be worth the piece of paper it was never written on.

7.30 p.m.

Mr. John Pardoe (Cornwall, North)

The Chancellor, in making his Budget Statement—this has been referred to by many hon. Members throughout the course of the debate—wanted us to believe that this was a tough Budget. He went out of his way on television that night to say that it had been a tough, rough Budget this time". In his Budget Statement he called it a hard Budget which was, he said. dictated by the harsh reality of the world we live in".—[Official Report, 15th April 1975; Vol. 890, c. 321.] That is exactly what it is not. That is why there will have to be another Budget before long. In his first Budget the right hon. Gentleman announced that there would be another in the autumn. In the event he produced two, one in the July and another in the autumn. This time there has been no such announcement, but it will happen anyway.

The Chancellor, I regret to say, is not the only person to have been led to believe that this Budget is tough or tough enough. Some newspapers have used the word "bravery", and even the word "courage" has crept into the odd editorial. Down in my own area the Western Morning News greeted the Budget with the headline Rake's Progress comes to a savage halt". That is utter and total nonsense. Total public expenditure will rise to £10,000 million, or by one-fifth. Total public spending and lending will rise from 57 per cent. of GNP to 60 per cent. The £9,000 million of borrowing requirement will be a larger share of GNP than the £7,500 million last year. The £9,000 million borrowing requirement is the same, for instance, as the total revenue from Customs and Excise duties, and it is twice our expenditure on defence. So I do not see how anyone who has any regard for the meaning of words can pretend that the Budget measures up to economic reality.

It may be that this Budget measures up to what is politically possible, but those two things are not necessarily the same. When there is a long and widening gap between what is politically possible and what is economically necessary, democracy and democratic institutions cannot survive. I suggest that the only way in which it is possible to argue that the Budget faces up to economic necessity is to convince oneself that the economic situation is less serious than it is.

Over the past five years we have had a whole array of what I call idiot's optimism. It has characterised British economic policy under successive Governments of different political persuasions. We have had one record of just how this affected the last Conservative Government. Mr. Brendon Sewill in the last Hobart paperback "British Economic Policy 1970–74—Two Views" first of all makes it clear that, in spite of detailed preparation of policy in opposition, the Conservatives were unprepared for the rate of inflation and the level of unemployment which they experienced. The right hon. Member for Leeds, North-East (Sir K. Joseph), in an article in yesterday's Sunday Express, confirmed that he, too, was taken by surprise by events just after the Tories had returned to power. That was a fatal flaw.

The result of this, as Mr. Sewill makes clear, was that the Tories panicked—that is Mr. Sewill's word—at unemployment and cobbled together—those are again Mr. Sewill's words—a prices and incomes policy. Towards the end of their period in office they fastened on to the hope that somehow falling commodity prices would happen and would help them over the problem of the statutory prices and incomes policy. As a result of that belief—it proved an erroneous belief in the event—they ushered in far too lax a phase 3 of their prices and incomes policy.

The present Chancellor has also been optimistic about inflation, now the borrowing requirements, our ability to borrow and the balance of payments. I do not want to go over old ground, but it is just as well that we try to learn from a few of the past mistakes and see whether we cannot correct them in the future.

At the last election the Chancellor held a Press conference at which he implied that a forecast in the name of the Liberal Party that the underlying rate of inflation was 20 per cent. was a lie. He implied that we were liars and he demanded a withdrawal. We did not make a withdrawal. It was a very good thing we did not. Taking the Chancellorian mathematics, he calculated that inflation at an annual rate in the three months leading up to September was 8½ per cent. It then went to 13.5 per cent.,21.5 per cent., 23 per cent., 26 per cent. and 25. per cent.

Why did the Chancellor say that? Did he really believe that the underlying rate of inflation had dropped to 8½ per cent.? If he did, does not that show something about the utterly appalling nature of the advice on which he was making his economic judgment? Or was it in fact a deliberate attempt to mislead the country and particularly the electorate?

Why did the Chancellor make the tax changes in July in VAT which mainly led to the reduction in the General Index of Retail Prices? Was it in fact intended to fiddle the index, or was it because he got the judgment wrong?

The Chancellor has been very optimistic about the borrowing requirement. In his first Budget Statement he said: … I am aiming at a massive reduction in the public sector's borrowing requirement, a reduction of about £1,500 million compared with 1973–74."—[Official Report, 26th March 1974; Vol. 871, c. 294.] He even set a new target of £2,733 million. He was then told by his Cabinet colleague the Prime Minister that he had to win the election. After the July Budget, when he came to make his Budget Statement in November he revised the estimate of the borrowing requirement upwards and said £6,500 million.

The Chancellor has been extraordinarily optimistic about our ability to cover this, particularly borrowing against the doubtful asset of North Sea oil. When I took issue with him on behalf of my party in a television broadcast during the course of the election, he patronisingly dismissed my warning that we could not borrow and borrow for ever. Now at last he has realised that we were right.

On the balance of payments, the Chancellor has been ludicrously optimistic in the past and is making precisely the same mistake again. In November he forecast that exports would increase by 4— per cent. between the first half of 1974 and 1975. We now know from the Red Book that the latest estimate is that they will not have increased at all. He is now forecasting a 5 per cent. increase from the first half of 1975 to the first half of 1976. I very much doubt whether that will be achieved either. Certainly the OECD survey on the British economy, which the Prime Minister agreed with me at Question Time last week was very gloomy, shows that there will be nothing like that increase in exports.

In the light of this, it might be thought that we have had enough optimism, but there is still some around and some of it, I fear, has been launched on to the public by the hon. Member for Guildford (Mr. Howell). He said last week, apparently on behalf of his party, that we should not get neurotic about wage increases. I suppose that if we define "neurosis" accurately there is no need to be exactly neurotic about them, but there is certainly a great deal of cause to be very worried about them. Wage rates, we now know since the hon. Gentleman made that speech, though he must have known it when he made the speech, rose by 32 per cent. in the last year.

The hon. Member for Guildford, like the rest of his party, seems to have been converted to the monetary solution and believes that the money supply will do the trick. I think that the hon. Gentleman and many of his colleagues on the Conservative benches should read not just the OECD survey on the British economy, but—it is, perhaps, even more salutary—the OECD survey on the Italian economy, which admits that the Italian Government have done many of the things that the British Government are being pressed from the Conservative benches to do. They have in fact rigorously controlled demand and they have not even been deterred by the fear of precipitating a recession—with what result? The survey's depressing conclusion is that there has been very litle result. It concludes that inflation has become so ingrained in the Italian system that it is self-perpetuating through a wages-price spirial which no longer has any close relationship with domestic demand. We in this country may already have passed the point of no return. I think that that kind of optimism on wages is entirely uncalled for, and I hope we do not hear any more of it from Conservative spokesmen.

I understand why Conservatives do not wish to go over the ground of their own history, but a brief summary may open up some vital questions for the future. As my right hon. Friend the Leader of the Liberal Party made clear on the first day of this debate, the Conservative Government inherited a plus on the borrowing requirements, so to speak. In other words, they had a surplus. In 1969–70, the last year of the Labour Government, there was a surplus of Government income over expenditure. By the time the Conservatives went out of office in 1973–74 there was a massive borrowing requirement of £4,461 million. In those two years, those disastrous first two years, the money stock M3 increased by 60 per cent. The right hon. Member for Leeds, North-East. who is a monetarist—

Mr. John Nott (St. Ives)

Never.

Mr. Pardoe

The hon. Member for St. Ives (Mr. Nott) says "Never". Perhaps he will read the latest statement from a confessed monetarist, Ralph Harris, in the Hobart paperback and he will find the statement quoted there. I quote from page 10: If we take the broad definition M3 (defined in the note to Table 1), which was admittedly boosted by the upsurge of bank lending following the replacement of credit control by competition in banking, the money stock grew by a staggering 60 per cent. in two years.

Mr. Nott

In two years.

Mr. Pardoe

In two years: that was what I said.

May I remind the right hon. Member for Leeds, North-East of what happened. Between 1970 and 1973 the cost of all Government programmes rose by more than 50 per cent. The real damage was done in 1971–72 and 1972–73. During that period public spending rose by £5,582 million; £2,956 million of it occurred in two Departments, Health and Social Security and Education, presided over by the new monetarist champions of the Tory Front Bench, the right hon. Gentleman himself and the Leader of the Conservative Party. More than half of all the increase in those two years occurred in those two Departments.

In case anyone thinks that this is all fudged because I am counting real money and not taking into account the inflationary effect, let us look at what the White Paper on Public Expenditure now lays bare on 1974 prices. It makes it clear that between 1971 and 1972–73, while all other Departments kept their increase down to £499 million or 3.17 per cent., those two Ministers together got an increase of £1,640 million or 12.7 per cent.

I know it is easy to condemn. The right hon. Gentleman can say "I accept that it was all wrong then, and we made arrangements for the future" But he did not tell us what those arrangements were. How are we to believe that this will not happen again? How can we be sure? In that same pamplet Mr. Brendon Sewill says: The Ministers who took office in June 1970 were united in their eagerness to cut public expenditure. It was essential to wield an axe quickly before their ardour became cooled by Departmental responsibilities How this happened is set out in great detail in a new book, which should be read by all members of the Conservative Party and by Treasury Ministers, called "The Private Government of Public Money". On page 135 there is an interesting comment. The whole thing is a magnificent appreciation of how the leviathan of public expenditure gathers pace and it cannot be stopped: Inside his Department, the spending Minister who is uninterested in increased spending is likely to be viewed, if not with distaste, at least with despair. … The tendency was put to the test in 1970. Few governments can have started out more devoted to government economy than the Conservatives, with their business-minded reforms in education: charges for school meals and an ending of free school milk. But a year later the economising Minis- ter of Educationm … could be found in the usual political operation of commending herself to a client audience by citing increased spending. There are pages and pages of like analysis of what happened to those spending Ministers in that Conservative Government. How can we be sure that that will not happen again if the whole solution to the problem, as the right hon. Member for Leeds, North-East told us, is to reduce public expenditure?

Secondly, public expenditure cuts never happen. I shall not quote in detail from the Select Committee's comments on the White Paper on Public Expenditure, but it is made clear that in the matter of public expenditure success is always just round the corner. It is always tomorrow, never today. The Committee also made clear that the cuts announced by Mr. Barber, as he was, in his last year were not cuts at all. They were forecast cuts, and the money was not likely to be expended anyway because there were not the resources to meet it. The whole exercise is totally phoney, and there is no point in saying that we are going to learn from that experience or from what the Government are promising now.

Over five years, by the time the average person has paid for the correction of the balance of payments deficit, the necessary investment and the voracious appetite of the public sector, he will be allowed to spend on himself and his family 17p out of every £1 he earns. That is how the White Paper on Public Expenditure works it out. I suppose that no one has ever tried to govern a modern industrial democracy in which people are to be allowed to enjoy so little of the fruits of their labour.

Public expenditure is one flaw in the Chancellor's strategy. Another is the impossibility of getting down the rate of increase in the money supply if the borrowing requirement remains at anything like its forecast level. I emphasise "forecast level" because I do not believe in it. The major flaw is on the wages front. The Budget will raise the cost of living by 2¾ per cent., by more than otherwise would have happened. Actually I think it will raise it by more than that, but that is the Chancellor's estimate of the direct effect of the tax increases. As he himself said attempts to offset these higher taxes by pay increases would be wrong, damaging and, in the end, self-defeating. But that is not how trade union leaders see it, and it is not how they will be able to afford to see it. They will simply add this increase to their pay claims, and what will their members say if their leaders quote the Chancellor's words at them as an excuse for putting in for a lower increase?

This is the fallacy of a voluntary incomes policy. Many Members on the Government benches are now reconverts to a statutory prices and incomes policy. Many Members are about to become re-converts. Many Members on the Tory benches are now reconverts against a statutory prices and incomes policy, and that is the way of this House. We have learned to honour this kind of idiocy. I am convinced that in the short and medium terms, until we have carried out the most essential change, a statutory prices and incomes policy is essential. An incomes policy may be imposed—I was glad to have support from the right hon. Member for Battersea, North (Mr. Jay)—by taxing those who force inflation by excessive wage increases. I believe it is practicable, and it has had good Labour Party support from Baroness Wootton.

Mr. Robert Kilroy-Silk (Ormskirk)

The hon. Gentleman is talking about a statutory incomes policy. Does he mean an incomes policy or is he, as his last sentence suggested, talking about incomes restraint, pay freezes and all the rest of the caboodle which we have had in the last decade? If he is talking about an incomes policy, he must be talking about a redistribution of incomes and wealth, and not starting now and saying "We will tax further wage rises".

Mr. Pardoe

The trouble is that once one becomes involved in saying that one really believes not in an incomes policy but in a redistribution of wealth, one can always run away from the crunch issue. I believe in the redistribution of wealth, I believe in the redistribution of incomes, but first and foremost I believe in controlling the rate of inflation, which is now about to destroy our democratic institutions. A redistribution of wealth and of incomes will not do that this year. On the other hand, the sort of statutory incomes policy which I am advocating could make a substantial difference to the rate of inflation this year, and certainly in the course of two or three years.

Therefore. while I accept the hon. Gentleman's point that what is important in the longer term is a reapportionment of incomes, and certainly longer-term planning of incomes—I have always advocated that—I do not see it as a major weapon in the attack upon inflation now.

An incomes policy is no more than a holding operation. The change which we need to make is a change in the balance of power within industry and within our society. We must in some way restrain the monopoly bargaining power of trade unions which is exercised through the collective bargaining process. This monopoly bargaining power may not cause inflation—I am sure that the right hon. Member for Down, South (Mr. Powell) will tell me that—but it can certainly stop the Government pursuing a monetary policy to its effective conclusion. The reduction of demand for labour should lead to lower wages, which should mean that we then have the same amount of employment, but at lower wages. But that does not happen in practice because the monopoly power to which I refer can always stop it, intervening even to destroy the monetarist solution.

There is no evidence that unemployment will reduce wage increases. At some level of unemployment, of course, it would, but is that level possible in a democracy? I do not believe that it is. Would any Government survive such a level? Would not any Opposition party take the chance to walk straight through the political gap opened up by the kind of levels of unemployment which some right hon. and hon. Members on the Conservative benches now seem to imply?

The gaping void in the economic strategies of both the Labour and the Conservative Parties is political rather than economic. It is the inability of Governments—any Government—to stop trade unions using their monopoly bargaining power to push up their members' wages and salaries by far more than the increased value of their output. The only long-term hope lies in a fundamental change in the collective bargaining process through which trade unions at present exercise their monopoly bargaining power.

That cannot be done by a direct confrontation with the trade unions or with their leaders. We have seen that that does not work. Therefore, we must create new power centres in industry to challenge these monopoly powers. We must bring the new powers of the new world of industrial partnership into existence to redress the balance of the old world of industrial strife.

I am aware that the solution which I am offering is far more of a political solution than an economic solution. But we face a political crisis first and fore-most and an economic crisis only as a secondary matter. Britain's principal economic problems stem not from bad economics but from bad politics. We have the worst managed economy among the major industrial democracies because we have been the worst-governed of the major industrial democracies. It is in our system of government that fault lies. It is for that reason that I believe that Professor Ralph Dahrendorf was right in his Reith Lectures to say that competing interest groups were destroying representative democracy as the arbiter or referee between sectional interests, and that is why I regard that analysis as so important.

The Government's social contract, in my view and, I think, the view of most Government supporters, is now dead, but it is not the death of that social contract that I fear—I could live happily with that—but the death of the social contract of John Locke, upon which all representative democracy is based and lives. It is the breakdown of trust in democratic institutions to protect the individual that I really fear if our present economic malaise continues. Systems of government survive by success. Ours has had just too many failures.

7.54 p.m.

Mr. John Horam (Gateshead, West)

We have just heard a characteristically pungent and thoughtful speech from the hon. Member for Cornwall, North (Mr. Pardoe). He dealt with the central problem of inflation, and he dealt also with the question of a statutory incomes policy. This latter topic has been discussed by several right hon. and hon. Members during the debate—by the right hon. Member for Worcester (Mr. Walker) in a notable speech last Thursday, and by my hon. Friend the Member for Ashfield (Mr. Marquand) on Wednesday, for example —and I think that we ought to consider the arguments for a statutory incomes policy at this time, given that it is obvious that a major cause of inflation—I do not say the major cause of inflation—is incomes rising faster than prices by a considerable measure.

The arguments for a statutory incomes policy today are fairly strong. First, it is clear that whatever kind of incomes policy one posited, it would have the effect of making incomes rise more slowly in relation to the retail price index than they are at present doing. Second, because under a statutory incomes policy one would have a clearer idea of the future course of income increases over, say, the next 12 months, one would have better ground for planning than one has at the moment. One of the problems of inflation is that it causes uncertainty in planning, apart from the actual increases experienced.

Third, it would be a positive piece of Government action. If collective bargaining were suspended for, say, 12 months and we had wage increases related in some way to the rise in the index of retail prices, and this was announced in a package this summer after the referendum, that would be the positive action which some people are looking for, and action of that kind would engender further confidence both here and abroad. That in itself would increase employment and diminish unemployment.

Finally, action of that kind on the wages problem would make it possible to bring in some other measures which certain of my right hon. Friends, for example, have been advocating for some time. Import controls, I believe, would be a greater possibility if we had some protection by means of wage controls against their inflationary consequences. The hon. Member for Cornwall, North pointed to the example of Italy. The Italians have had import controls for more than 12 months now, I believe, and Italy is the only country ahead of the United Kingdom in the EEC inflation stakes, which shows the inflationary consequences of import controls unaccompanied by any other measures. For my part, I should prefer an element of devaluation if we are to deal with the balance of payments, and even that would be made easier if there were at the same time greater control on incomes.

There are, therefore, strong arguments for the sort of line which has appeared in speeches by hon. Members of all three parties during the debate. Nevertheless, one has to point out that against these strong arguments there are equally strong countervailing arguments. First, although a statutory incomes policy has been advocated by hon. Members of all three parties, it is right to remind ourselves that not only is there not a majority for such a policy in my own party but, I believe, since the change in the leadership of the Conservative Party, there is not majority support for such a policy in the House as a whole.

Second, given the depth of opposition in this Parliament at least to such a policy, if the Government did try to introduce it they would find that it required an enormous amount of effort, and the effort would probably exhaust them. We have seen repeatedly how an attempt to impose a statutory incomes policy and the ramifications entailed exhaust a Government for any further constructive action, and we have seen how detailed the whole machinery of Government becomes in relation to such a policy. I regard this as a considerable danger.

Moreover, although it is true that a statutory incomes policy would reduce unemployment—I certainly think that it would—it is true also that, whatever happens, unemployment will rise and become great during the next 12 months. Those who oppose a statutory incomes policy would not simply accept that it was reducing unemployment, but would point to the dreadful consequences which we are likely to face and say that those consequences stemmed from the whole nature of the policy which the Government were pursuing. This would have serious consequences in its turn for the future development of the incomes policy.

Finally, and perhaps most fundamentally, to adopt a freeze or an indexed freeze policy over the next 12 months would postpone the time when we have to face our real institutional problems.

My hon. Friend the Member for Ash-field put the question which those who advocate this policy always put: what happens when we reflate? I put a countervailing question: what happens when our institutions and attitudes emerge unchanged from the 12 months' cold storage period, pawing the ground to indicate their great and diminished strength?

Although I have long advocated some such policy, one has to think carefully whether it is politically and tactically right to introduce it at the moment. On balance —and for the moment—I come down against the suggestion made by the right hon. Member for Worcester and my hon. Friend the Member for Ashfield, who openly advocate such a policy.

Instead, I believe that we must follow the logic of our present institutions until the consequences on those institutions are fully seen and those consequences begin to modify the attitudes which are fundamental to our problems. Therefore, I support my right hon. Friend the Chancellor in his basic approach to the problem, which is repeatedly to spell out the logic of the situation. He has done this month after month, sometimes alone, sometimes with help. He must continue to enhance and develop this approach.

The next stage is to exert further pressure on settlements in the public sector. Indeed, I believe that extra pressure should have been exerted earlier on the settlements in the public sector. Hon. Members may remember that there was some fuss about the report of the Top Salaries Review Body just before Christmas. The misjudgment that was made then has been reinforced by giving other branches of the Civil Service a 26 per cent. rise on the very day before the Budget. That not only breaks the social contract; it reinforces my view that there is something radically wrong with the Civil Service. As The Economist said, while we certainly should pay well, we should get value for money. To some extent we are not getting that from the Civil Service machinery. It is difficult for someone outside to put his finger on exactly what is wrong, but I think that there is something wrong. Civil servants may argue that politicians are also to blame for what has gone wrong with the country over the past few years, but we at least have accepted a freeze on our salaries since January 1972 as some mitigation for the errors we have perpetrated on the population as a whole.

Next in line are the railwaymen. I have great sympathy with the railwaymen. The NUR in particular is a moderate and responsible union, and many railwaymen are pillars of their local society. But with the taxpayer footing so much of the bill for British Rail, the Government cannot allow the railwaymen also to go beyond the social contract, much sympathy though I may have with them, given their relative position to surface workers in the coal mines and the power workers, with whom they compare themselves. NALGO specifically repudiated the social contract and now wants 30 per cent. If NALGO wishes to go beyond the social contract, I would reinforce the Government's line by saying that the extra element must be found from rates and not from taxes.

Mr. A. J. Beith (Berwick-upon-Tweed)

What does the hon. Gentleman make of the remarks of his right hon. Friend the Secretary of State for Social Services in the context of doctors' pay? She says that the social contract cannot apply to doctors because they are not subject to collective bargaining, and that the only criterion is their relationship to other professions. Is not that a recipe for leap-frogging in professional and public service employments?

Mr. Horam

Unfortunately, one does not get justice from free collective bargaining. In collective bargaining workers use their industrial muscle. Doctors and consultants have used their industrial muscle and have reaped the reward. The railwaymen will not get justice. They have free collective bargaining, and if they have less industrial muscle than have the miners they will get a lower reward. That is one reason why I always thought in the past that theoretically greater justice could be achieved by means of a properly worked out and effective incomes policy.

It is clear that the centrepiece of the Government's strategy towards wages must be additional pressure on public sector settlements over the next few months. In addition, they must also exercise extra pressure on the level of public expenditure as a whole. Some criticisms have been made of the Chancellor in this respect, but the balance of analysis in the newspapers and media generally following the Budget is clearly right. Peter Jay in The Times, for instance, has long advocated restraint in this area, and he threw the Chancellor some bouquets.

As the Labour Party, which believes in a high level of public spending, it is always our lot to follow in power a party which tends to eulogise public restraint. But we always find that it is they who have indulged in a positive binge of public spending and we, contrary to our essential nature, have to exercise restraint. That has happened too often in post-war history for it to go unremarked in this debate.

While I therefore support my right hon. Friend's general line, I would say to him two things. First, I hope that he will bring forward his public expenditure cuts rather earlier than he announced. We all know that public expenditure can be increased or decreased without a Budget. Whether or not we have a Budget in July, I hope that some attempt will be made to bring forward the proposed cuts at an earlier stage than was envisaged in the Budget.

Secondly, my right hon. Friend should analyse public expenditure more clearly in cash terms. We have developed public expenditure analysis in terms of constant prices, not in cash terms. We should reverse this process. Perhaps we might reach a halfway stage. The Times advocated that by distributing the "relative price effects" in a different way way we could do something useful without throwing out the baby with the bath water. Whatever may be the technical solution, a more rigorous control must come from a clearer knowledge of the implications in cash terms of what we are spending publicly. That is an obvious and straightforward step, and I hope that my right hon. Friend will carry further the suggestion at which he merely nodded in his Budget Statement.

I urge the Chancellor to exercise greater restraint in public expenditure and greater pressure on public sector wage settlements. I do that because no nation has ever rebuilt itself, or, indeed, started from scratch, and secured a long period of sustained success without a previous period of restraint and discipline. No nation has ever been able to do that, apart from rare exceptions, in the history of our times. Even with North Sea oil, we are unlikely to prove an exception to that general rule.

We certainly face a difficult task in renewing our economic strength. If the trends of the past 25 years continue for a further 10 years, our gross national product per head will be 43 per cent. of that of France and only just ahead of that of Greece. I have nothing against the French or the Greeks, but I shudder to think what would happen to the standard of living of our people, and to their morale and psychology, especially as by then we may no longer be the British people, but simply the English and Welsh, if that eventuality comes to pass.

8.10 p.m.

Mr. Cecil Parkinson (Hertfordshire, South)

I shall not take up the points made by the hon. Member for Gateshead. West (Mr. Horam), although the hon. Gentleman and I seem to have a special facility for being called after each other at about this time of the evening. I agree very much with one of his remarks—a matter dealt with in the speech of the right hon. Member for Down, South (Mr. Powell)—namely, that the sooner we stop talking in "funny money" terms about public expenditure, the better. It is at the heart of many of our problems and I hope that the Treasury, which has been receiving this advice from all quarters of the House, will begin to take this matter on board.

I wish to comment on the remarks of the hon. Member for Cornwall, North (Mr. Pardoe), who spoke scathingly of the records of my right hon. Friend the Leader of the Opposition, the former Secretary of State for Education and Science, and of my right hon. Friend the Member for Leeds. North-East (Sir K. Joseph), the former Secretary of State for Social Services. The hon. Gentleman referred to my right hon. Friends as big spenders. Nobody would deny that, but I remember in the last election listening to Liberal Party speakers making promises to get rid of the private sector in education. Surely that could only increase public expenditure in that sector. I heard Liberals make extravagant promises to pay pensions on a scale which all parties would like but which few parties would be shame-faced enough to pretend they could afford.

Mr. Pardoe

I cannot think what the hon. Gentleman is referring to in the private sector. The idea that the Liberal Party would ever wish to abolish the private sector is the sort of lunacy one would expect from the Tory Party. It is just not true. The other point I wish to make to the hon. Gentleman is that during the tenure of office of the right hon. Lady the Leader of the Opposition, as Secretary of State for Education and Science, I consistently opposed the raising of the school leaving age. It is a pity that she did not take my advice.

Mr. Parkinson

It was not the raising of the school leaving age which was the cause of any great increase in public expenditure. Once again the hon. Member for Cornwall, North has demonstrated what we all know—namely, that Liberals are all things to all men. The Liberal spokesmen in my part of the world were in favour of the comprehensive system and of getting rid of the private sector and of direct grant schools—not just yet but in the future. It is part of the hon. Gentleman's privilege that he can stand in his place and enjoy himself by criticising others. That is one reason why he can he so irresponsible—and no doubt he will be in his place on the Opposition benches for a very long time.

I listened with great interest when the right hon. Member for Down, South talked of the intoxication of inflation. In typical, vivid phrases he brought home to all of us what had happened in the last few years. We have all heard that Camden Council paid £40,000 or £50,000 for houses to let at rents of £10 per week. We have heard about local authorities planning to spend millions on new offices. All of us could give examples of huge items of public expenditure being entered into because authorities have taken the view "We cannot afford not to take this action, because if we do not spend this money now we shall have to spend it next year and it will cost us a great deal more."

It has been encouraging to hear Treasury Ministers speak in self-righteous, sanctimonious, regretful terms. They have given us little lectures about the need for us to live within our means. We were told by the Minister of State, Treasury, that the United Kingdom's standard of living is at present 5 per cent. higher than we are earning by our own efforts."—[Official Report, 17th April 1975; Vol. 890, c. 801.] We have also been told by the Chief Secretary that The country cannot afford to exhaust itself in the futile, self-defeating chase which is inflation."—[Official Report, 16th April 1975; Vol. 890, c. 479.] We heard similar sentiments from the Chancellor of the Duchy of Lancaster this afternoon. Those sentiments are admirable, but on looking at the facts one finds a different situation. The very people who tell us that the country is living beyond its means, chasing its tail and rushing towards the brink are the people who this year are presiding over increases in public expenditure of £10,000 million. They are stepping confidently into 1975 by planning to borrow £9,000 million to balance their books.

The public expenditure White Paper displayed a certain falling-off in ambition to increase public expenditure, but the Government are still working on the basis of an increase in gross domestic product of 3 per cent. between 1973 and 1979 when there is little likelihood that that will happen. Furthermore, it must be realised that if the Government's spending programme is maintained there will be no scope for private consumption and private expenditure. In other words, the people who lecture us self-righteously about what the country must do are the very people who have embarked on a gigantic spending spree and who have no intention of stopping it.

Government spokesmen are worse than reformed alcoholics who lecture us about the evils of drink. They are like alcoholics who, while they lecture us on its evils, plan to stop drinking next year. There is no intention on the part of the Government to live in the way they urge the country to live if we are to survive. The present Government in 1974–75 exceeded their own spending programme by several thousand million pounds.

One can listen to strong words and be impressed by them but at the end of the day, when the euphoria has evaporated and the commentators begin to look closely at the figures, the Government will find themselves facing serious problems. The euphoria has not lasted long. The weekend commentaries were noticeably more restrained and less optimistic. On Friday a settlement of £160 million was announced, a settlement which already makes the Chancellor's Budget statement slightly out-dated. That has happened after only three days. "Creep" has already entered into our 1975–76 figures. The Government must know that their estimated borrowing requirements are hopelessly optimistic. All the indicators show this to be the case.

I urge the Financial Secretary to convey to his colleagues the severe disquiet of all sides of the House about the basis on which the Treasury is planning to administer our affairs in 1975–76. The most optimistic view of our affairs is that if we carry on on the basis of our plans our currency will be under very severe pressure and quickly increasing unemployment and precipitate action will become absolutely unavoidable.

The Government are setting themselves a series of mutually exclusive objectives. They are planning not to cut public expenditure this year but have promised to take action next year. We shall believe that when we see it. As the same time the Government are urging the private sector to invest more. They are urging the private sector to take action, but the Government by their own proposals are depriving that private sector of the opportunity to do so by competing with the private sector for the limited resources available.

It seems to me and to many of my right hon. and hon. Friends that control of public sector wages is the key to many of our problems. It is no use Ministers such as the Secretary of State for Social Services saying, as she did on Friday, that we have to give increases because the private sector is leading the way. It is not true. Public sector wages are the pace-setters.

Let us be perfectly frank. None of us in the House knows how to handle public monopolies and trade union monopolies operating within public sector monopolies. The Conservative Party has learnt one thing from its experience, namely, that whatever else one does, one does not plan to extend the public sector until one finds a method of controlling it. We must not plan to create more State monopolies if we have no idea how to handle the present ones and if we know that they are the source of so many of our problems.

The Government's answer is to extend the range of the uncontrollable, to create the National Enterprise Board and to put in charge of it Sir Don Ryder. Sir Don Ryder has the effrontery—if we can believe the leaks—to produce a report about British Leyland which is critical of its overmanning. It is based on the views of the middle management of BLMC. I wonder what sort of report the middle management of IPC would have written when Sir Don Ryder was in charge. I wonder what Sir Don Ryder made of the Daily Mirror tand recently to try to reduce overmanning and to ensure that it did not have to replace the three 84-year-old gentlemen who are still fortunate enough to work for the Daily Mirror.

Sir Don Ryder presided over a company in one of the most overmanned industries in this country, yet he has the effrontery to produce a report criticising BLMC's overmanning. What is worse, he is the great white hope of the National Enterprise Board, which will do something that none of us has seen the Government do yet, namely, monitor the public sector.

Why is public expenditure rising? Why are we embarking on an extension of an experiment which by no stretch of the imagination can be described as a success? We are embarking on it in the name of the social contract. Recently I appeared in a television programme with the hon. Member for Tottenham (Mr. Atkinson). He said that the Budget would explode the social contract; it was all over. I had to ask him whether we would notice the difference. A whole range of things has been done to our country in the name of the social contract. The end result is a wage inflation rate of 32.5 per cent.

I am glad that the social contract is in danger of disappearing. I hope that it disappears completely. I believe that it is a smokescreen under the cover of which the Treasury and innumerable other Government Departments have set on courses which spell ruin for our country. The sooner we deprive them of the fig leaf of the social contract, the better.

I should like to deal with two other points. The first is the Chancellor's expressions about his ambitions and his hope that industry will invest more and create more capacity to serve the boom that is coming. I have some advice for him: "Do not make too many of your plans, Mr. Chancellor, on the basis of that notion". Since the Chancellor took office he has, by his actions, totally destroyed industry's confidence in him. In his first Budget he announced that the private sector could take up the strain. There was a great deal of excess profit in the private sector, and up could go the taxes. A lot of money was to be taken out of that sector. Within a matter of months we find him giving stock appreciation relief and explaining that the social contract is vital to our economy and that there are no excessive profits. The profits he was taxing were vitally necessary.

The irony is that the profits which before the February election he described as obscene and scandalous are the ones which he sets out to relieve in his stock appreciation relief clauses. He knows that industry needed those profits and was, thanks to stock inflation, in cash flow difficulties. He put the pressure on industry at the wrong time. He relieved it later, but by that time industrial confidence had gone and the world boom had turned into a world recession.

The idea that there will be an upsurge of industrial investment is a myth. Listening to the Chancellor, I thought that he was producing a rehash of some of the speeches which we have had in the past from the Treasury. The country was to get out of its difficulties by means of an investment and export-led boom. In October 1973 I toured Canada making that sort of speech, and I could make it now; it still sounds convincing. But the Middle East war broke out and Britain was caught in an exposed position.

Now that we are in the middle of a world recession, however, what is the Chancellor offering us as the way out, the reason why he can defer the action which we all know he must take? It is that in 1976 there will be a boom—he hopes. There was a boom in 1973 and we were competitive. The pound had been floated, British goods were cheap and there were full export order books. The order books are flat on the ground at the moment. There is no boom. Yet the Treasury again is saying "We need not take the action which we all know is necessary because there is an outside chance that we shall get an export-and investment-led boom in 1976."

Few hon. Members, if they were betting men, would put a fiver on the likelihood of there being a boom in 1976. If they did, they would think they were taking a gamble. But the Chancellor is basing the whole of his strategy on that gamble. He is gambling not with a £5 note but with the future of our country. He is using the prospect, the possibility, of a boom as his excuse for not taking the action which he knows is necessary.

I hope that the Government will abandon their plans to extend their activities in the public sector and that they will realise that if anything goes wrong—it went wrong in 1973, and the Middle East is no more stable now than it was then—and the boom in 1976 does not occur, the measures which the Chancellor will have to take will be frightening. It will not be a question of tinkering with tax rates or cutting £1,000 million off Government expenditure in a year's time. The advice which the right hon. Member for Down. South gave the Chancellor was right. The right hon. Gentleman must face up to setting in train a major cut in Government expenditure. He simply cannot afford to gamble with the future of our country.

8.28 p.m.

Mr. Robert Kilroy-Silk (Ormskirk)

I found the Budget speech of the Chancellor of the Exchequer and his whole Budget package to be very disappointing and, indeed, dispiriting. My suspicion that it followed Treasury orthodoxy and was in many respects a Tory Budget was confirmed today by the speech of the right hon. Member for Down, South (Mr. Powell). The right hon. Member trundled out plaudit after plaudit, with an occasional caveat, in favour of the Chancellor of the Exchequer. He even offered his vote, and the votes of his hon. Friends, in support of the Chancellor should he need them.

The Chancellor said that we have two major problems: rising unemployment and rising prices. "But do not worry about them," he says. "I will deal with rising unemployment and rising prices, by an extra dash of increased unemployment and an extra dash of increased prices" That, in effect, is what he has done. Inflation is damaging and serious, but it is tolerable. Unemployment as a weapon and means of controlling and managing the economy is despicable. Yet the Chancellor came as near as possible to saying that next year he will be using it as a weapon for managing the economy. We shall save ourselves—if that is the expression—at the expense of and on the backs of the unemployed.

I cannot accept that a Socialist Chancellor should callously and blandly propose that we deal with our economic problems by using people. Many hon. Members on both sides have shown not one tinge of compassion for the people about whom they spoke. They spoke of the unemployed and of the need for cuts in public expenditure. However, they failed to point out that people's livelihoods and manner of living would be destroyed.

I do not accept that the problems in Merseyside will be dealt with adequately by the measures in this Budget. Already we have an unacceptably high level of unemployment. I do not accept that the people living there, or their livelihoods, or the future of the region, will be benefited at a stoke by increasing the overall level of unemployment. There is a great paradox here. The Secretary of State is making plans to set up factories, stoking up the grants and giving us special development area status. However, the Chancellor appears and vitiates all the efforts of the Secretary of State for Industry to create more secure employment prospects on Merseyside.

We are hardly in a position to take up the challenge of the so-called potential export-led boom when the Chancellor has already reduced our resources. This is a strange way to enable us to face and overcome the challenge of next year. The proposals will increase social and political tensions and damage our position. The policy is misguided.

An attempt to control wages by increasing unemployment will not succeed. We cannot control wages effectively by stimulating unemployment. That happened at one time, but is no longer possible. There must be a very long time lag between the creation of unemployment and the expected follow through of reduced wages. It is intolerable that a Socialist Chancellor should blandly accept the figure of 1 million unemployed. We have already reached that figure. But for him calmly and callously to accept that the unemployment rate will exceed that figure in the next year is contrary to the dreams which many Government supporters had when they entered Parliament last year.

It is incomprehensible that we cannot manage our affairs better and that we are incapable of dealing with them in a sensible, sensitive and humane manner. The position is made worse still in the context of the welcome, though paltry, sum offered by the Chancellor to the Man-power Services Commission for training and retraining. That sum is paltry in comparison with the sums given by the governments of our competitors, who are pointed to as examples that we should emulate.

The social contract has figured in many speeches of hon. Members on both sides. If that social contract has not been breached already by several wage claims, it has certainly been breached by the Chancellor's Budget. Yet that social contract provides an essential element with which to create a society where justice and fairness can be seen to exist. The social contract was not a trivial concept. It was not cobbled together, as suggested by the Opposition, for merely electoral purposes. It has many faults and drawbacks. It would be strange if it had no faults. However, at least it was a realistic and fair attempt to grapple with our problems and to deal with them. No alternative to the social contract has been proposed by any other hon. Member. Our problems must be dealt with by voluntary consent, by people working together because they believe in the objectives to which the Government are committed. If the evidence existed at one time, it does not exist now. The evidence that may have existed in the Government's intentions, if not in their ability or competence. has certainly very largely been destroyed by what the Chancellor attempted to do on Tuesday.

What the Chancellor did was to introduce an interim Budget. The real Budget is yet to come. Many hon. Members on both sides have talked about the need for and desirability of a statutory incomes policy. The Chancellor is now squeezing the pips of the trade unions until they squeak. He is waiting for the howls of anguish from the trade unions at the rising level of unemployment so that he can offer them deliverance by means of a statutory incomes policy. That, I suspect, is what is behind the present strategy. I believe that the Chancellor has already made contingency plans for a statutory incomes policy, and I should like to hear him deny that emphatically tonight when he winds up, as it has been denied emphatically on other occasions.

The social contract needs to be rewritten and renegotiated, and perhaps we need to widen its terms and make sure that it encompasses a larger number of people. It is more important, however, that the existing terms should be spelt out in a clearer and more articulate way to the country. Many people are unaware of its terms. They see it purely in respect of its effect on wages and rarely, as it should be seen, in terms of its effect on social and industrial policy.

We should be planning far more not in terms of a statutory incomes policy which for various reasons, many of which have been outlined in the debate this afternoon, will not work and, as has been demonstrated in the past, cannot work. We should be planning our industries. We need a sector-by-sector analysis to ensure that proper investment is made in those areas of potential growth and potential exports and that it should be channelled centrally, and that is precisely something that we are not doing.

We have had a very erudite analysis of our problems, but a blunt instrument has been brought forward to deal with them. There is no analysis in depth of how industry can be stimulated to invest more and how the Government can channel their investment sources into the right areas of potential growth. We shall not get growth by wasting the vast bulk of our manpower on unemployment, by increasing the social wage or in getting the country to what the Chancellor considers to be the appropriate position in which it can face the challenge of the so-called export-led boom, by bringing it and the regions in particular to their knees.

It would have been far better to have lowered our exchange rate and to have benefited as a result from the increase in exports and the increased employment and prospects. We should have benefited by industry being in the position to take advantage of any revival in world trade. That would have been a far more effective way of dealing with our problems than the sick, callous and cold-hearted method of simply turning people out of jobs, making them socially and industrially useless and reneging on the promises that I and a large number of my hon. Friends were elected here to carry out.

I cannot praise the Chancellor for his Budget. I have great reservations not only about its details but about the fundamental strategy and tactics. In addition, I have very serious misgivings about my right hon. Friend's future intentions. I hope that he will seriously reconsider what he is doing today and what he intends for the future. I hope that he will take what we always considered to be a Socialist view of the economy and eschew the Tory plaudits and applause and the Treasury orthodoxy which has led him into his misguided ways.

8.40 p.m.

Mr. Nigel Lawson (Blaby)

I find it rather difficult to follow the hon. Member for Ormskirk (Mr. Kilroy-Silk) because he seemed to be living in a different world from the world in which I live and the world in which most hon. Members live.

It is the world of something for nothing. the besetting sin and the great myth that politicians of all parties have been guilty of instilling in the public mind—that we can get something for nothing. Now we have to tell the public that we cannot get something for nothing, and it is hard to get people to believe that. I would also give the hon. Member one word of advice. It is unwise to impute motives, whether to the Chancellor of the Exchequer or to any other hon. Member, that are unworthy, accusing him of being inhumane and cold-hearted. Whatever our analysis may be—and we may differ—we all have the interests of the people of this country at heart. It may be that the means are difficult, but they are the lesser evil.

Like most hon. Members, I should like to talk, briefly, about the big issues that most of us have been discussing this afternoon — inflation, unemployment, public expenditure, the borrowing requirement and—yes—even the social contract Before doing that, perhaps I might say a few words on the smaller issues about which I understand we may ostensibly be voting tonight.

By introducing a second rate of value added tax the Chancellor has made VAT into a second-rate tax in a second-rate Budget. Had he, instead, simply reversed the grotesque blunder of his July measures and put the tax back from 8 per cent. to 10 per cent., as the right hon. Member for Down, South (Mr. Powell) mentioned, he would have raised as much money as he will raise with a 25 per cent. rate and with the increase in the road fund licence, and had some to spare. Of course, that would have meant admitting his earlier error, and perhaps humility is not the right hon. Gentleman's strongest suit. Certainly this seems to be the explanation.

Nevertheless, we make a mistake if we concentrate too much on indirect taxation. Table 8 of the Budget Red Book shows that the Chancellor is budgeting for a 23 per cent. increase in the yield from indirect taxation as a whole. With a rate of inflation at 20 per cent. and 1 per cent. real growth, that represents a very small increase in the real burden of indirect taxation.

If, however, we look at direct taxation we shall find that the yield of income tax is budgeted to rise by over 35 per cent. This is a severe increase, a really savage increase, in the real burden as a result of which, incidentally, for the first time ever, over half the Chancellor's tax receipts will be income tax. So much for the Chancellor's claim that what he is doing is reducing income tax for 9 million people.

What is true, however, is that very little of this increased burden, as my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) pointed out, is due to the increases in tax rates and the changes in the allowances announced in the Budget. The vast bulk is simply the effect of inflation on a non-indexed and highly progressive tax system. This process is economically damaging, fiscally unjust, politically dangerous and an insult to Parliament. In the world in which we live, it seems to me crystal clear that the indexation of tax rates, tax thresholds, tax bands and tax allowances is essential.

Behind this swingeing increase in income tax lies, as has already been made clear by right hon. and hon. Members, the failure to cut public expenditure. I acknowledge the difficulties that there are, not least of which is that public expenditure cuts have to carry the consent and agreement of the whole Cabinet whereas tax increases are, in effect, a matter for the Chancellor of the Exchequer alone. I realise, too, that—as the Chancellor indicated in his Budget speech, although it seems, strangely, that he does not intend to do anything about it—the present system of planning public expenditure in an inflationary age on an artificial constant prices, or "funny money", basis means that public spending is very nearly out of control altogether. But, given the present desperate situation, all this merely serves to underline the need to make a start on the essential cuts. Instead, and incredibly, no cuts are planned until the year 1976–77.

The excuse trotted out by the Chief Secretary in this debate last week was that to take action this year would be disruptive. He had the impertinence to pray in aid the Third Report of the Expenditure Committee, which came out just over a week ago. But that really will not wash, on at least two counts. First—and I speak as a member of the General Sub-Committee of the Expenditure Committee which produced the report which the Chief Secretary adduced —if the right hon. Gentleman cares to turn to the final paragraph of the Third Report he will see the passage in bold type to the effect that what we were explicitly concerned with there was the effect of changes in capital expenditure. As my hon. Friend the Member for Oswestry (Mr. Biffen) pointed out in his excellent intervention in the debate last week, less than half the Chancellor's proposed cuts for 1976–77 are in capital expenditure anyway. Indeed, both in housing subsidies and in food subsidies there is a really vast scope for further cuts, over and above what the Chancellor is proposing, which could be implemented immediately without any disruptive effect whatsoever.

But, secondly, even on the capital side, the only advice—if there is any advice—or rather the argument is that changes in public spending should not be more drastic than are necessary. No one is suggesting that now. Indeed, by doing nothing now the Chancellor is merely making the cuts which will be needed next year even more drastic.

I do not think that the extraordinary nature of what is being proposed by the Chancellor has yet sunk in. Therefore, I should like to spell it out. Public expenditure last year, 1974–75, was well above the White Paper figure in Cmnd. 5879. For this year, 1975–76, the Red Book implies a further rise in real terms of about 2 per cent. Then, suddenly, we are expected to believe that in 1976–77 public spending will plummet to some £900 million below the White Paper projection for that year.

What this means, if we are to believe what the Chancellor is asking us to believe, is that between 1975–76 and 1976–77 public spending is scheduled to fall by well over £2 billion, or some 5 per cent. in real terms.

That is not merely a fall in the rate of increase but an actual fall. It is clear from this where the Chancellor is getting the idea that he will save the bulk of £billion reduction in the public sector borrowing requirement for 1976–77.

But surely this sort of approach is sheer moonshine. If the Chancellor is unwilling or afraid—or perhaps the Cabinet will not let him; I do not know what—the idea that a 5 per cent. cut year on year, not even a cut in the rate of increase, the idea that a 5 per cent. cut year on year, a genuine cut, in public spending next year is just incredible. Indeed, a 5 per cent. cut from one year to the next is unprecedented. There have been very few years when we have had a cut at all. In not one year have we had a cut of 5 per cent. Yet that is what we are solemnly being told is going to happen. Least of all is it credible that this will happen in March or April of next year, when unemployment will be approaching 1½ million.

The failure to grasp the nettle of public spending this year is a political and economic error of the first magnitude for which we shall all suffer a very heavy penalty indeed.

I should like to make one further point about public expenditure before I turn to its effect on the borrowing requirement and on inflation. It has become fashionable in Government circles lately to refer to the very large social element in the total of expenditure as the "social wage" —which, we are told, is now running at £1,000 a year, 12 per cent. up in real terms over a year ago. The fact is that that again is inflationary. I will not go into the argument again. If the Financial Secretary cares to read an article that I wrote which appeared in The Times four years ago called "The Influence of the Social Wage" he will find it all set out there.

There is another point which has not been taken on board or remarked upon. At £1,000 a year, untaxed, the social wage is now roughly one-third of the average man's total net wage—that is, his take-home pay plus the social wage. When he is not working he can expect to get, in addition to the normal social wage, about three-quarters of his normal take-home pay. In other words, the cash benefit of working is a mere one-sixth of his total net wage including the social wage. No wonder that in his Budget television broadcast the Chancellor was driven to appeal to patriotism when he asked people to work an extra hour a week. No wonder we are in a mess.

The result of the Chancellor's failure to do anything about public spending is a public sector borrowing requirement this year officially estimated at over £9 billion. Bearing in mind his failure to keep any control over the borrowing requirement in the past, largely due to public sector pay rises, we know how much credence we can place on that figure now. Even if it turns out right—let us be charitable and assume that it may be right—the wholly unwarranted rise from £7½ billion last year to £9 billion now has certain consequences which are worse than they seem. Of the £7½ billion, £3 billion was financed through the balance of payments deficit, leaving £4½ billion to be financed domestically. But we are told that the balance of payments deficit will go down by £1 billion. Therefore, of the £9 billion, £7 billion will have to be financed domestically. The amount which will have to be financed domestically in the borrowing requirement will go up from £4½ billion to £7 billion. That is a massive increase, and I find it difficult to see how this can be achieved in a non-inflationary way.

Another aspect about which there has been much talk in the Budget debate—there is in every Budget debate—is the need for more industrial investment. I confess that I do not share the obsession of hon. Members on both sides of the House with now investment. It is notorious that we could produce far more than we do from our existing capital stock. Until we do that, there seems little point in worrying about new investment. When we do—when the climate of profitability and industrial relations is such that we can produce more from our existing capital investment—business men will invest in new equipment without any need for Government bribe or exhortation.

That apart, it seems ludicrous to complain about lack of private investment in industry at a time when the Government are pre-empting £7 billion of private saving to finance their own borrowing requirement and public spending.

Nor do we need to look any further for the explanation of that new vogue concept "deindustrialisation" about which we have heard so much. When we have brought about a situation in which one employee in five is employed by central Government or local government directly—usually a local government employee—and the proportion is inexorably rising, we can see that deindustrialisation, if it happens, will occur not because of some great economic trauma—that might in some way be beneficial—but because of creeping municipalisation of our whole economy.

I must give credit where credit is due. The Chancellor has made big changes, as has been pointed out, in one aspect of his policy. In his November Budget he said: Even if we ignore the moral obscenity of such a policy, to try to deal with these specific shortages, as some people recommend, by depressing the general level of demand and throwing a million people out of work would be like burning down the Houses of Parliament to roast a chicken."—[Official Report, 12th November 1974; Vol. 881, c. 256–7.] What a change there has been since then. Either the Chancellor has grown fonder of roast chicken or he has grown less fond of the Houses of Parliament. But to revert to the motoring metaphors of brakes and accelerators, which we are accustomed to using when talking about economic matters, the Chancellor has at last shed his L plates.

No one—and this is the answer to the hon. Member for Ormskirk (Mr. Kilroy-Silk), who I am sorry is not here at present welcomes unemployment, but, as the Chancellor said, it is part of the price that we have to pay for inflation. He should have said—it is a slight change, and what he almost said it is part of the price that we have to pay for curbing inflation, not just bringing it down, but even for stopping it from accelerating.

One big question, as the hon. Member for Ashfield (Mr. Marquand) said, is whether the Chancellor will keep his nerve. I believe that he will, but I do not think that that is the real question. The real question is whether the Prime Minister will keep his nerve, and I um afraid that I do not believe he will. This is yet another reason why I view the future with considerable foreboding.

But at any rate, let us have no more of the nonsense that we have had from the Prime Minister and the Chancellor of the Exchequer of asking us how much unemployment we are going to create and how much unemployment we in the Conservative Party are going to tolerate. Let us have an end to that sterile, barren and economically illiterate debate.

I was sorry to hear the Chancellor of the Duchy of Lancaster in opening the debate this afternoon refer to the social contract. I had wrongly hoped that the social contract was dead. He said—and we had this thrown at us again and again —that no one has come forward with an alternative. But why should there be an alternative? What does the social contract mean? It does not mean an end to inflation. All it means—and we see this from the little guidance note which has apparently been handed to Labour Members on the subject of the Budget and the social contract—is the Industry Bill, excessive public spending, the Employment Protection Bill so-called, the capital transfer tax and trade union legislation that threatens the freedom of the Press. That is what the social contract means. That is what they proudly declare it means, not wage restraint.

The social contract is sealed in the blood of the small business man, and it is merely a means of inflicting grave dam- age on our economy. Since we have no intention of inflicting grave damage on our economy we have no need for either the social contract or any alternative to it.

I think I should end by suggesting what I consider to be the right course. The right course, as spelt out by my right hon. Friend the Member for Leeds, North-East, is to pursue a path of fiscal and monetary rectitude, which means much larger public expenditure cuts, and much sooner than we have been threatened with so far. It means a real degree of overall money control, or cash control, so that excessive public sector pay rises if they occur, inexorably result in fewer public sector jobs, because the cold wind of economic reality has to affect the public as well as the private sector.

I realise that a policy of that kind may, at some stage, risk a confrontation with a major and powerful trade union, but I am convinced that any confrontation that may occur in this context will be infinitely less damaging and serious than the sort of confrontation that is likely to occur in the course of a statutory incomes policy which so many hon. Members on both sides of the House, and particularly Labour Members, seem to be moving towards again.

1 must say, as someone who has consistently opposed incomes policies since the days when Mr. Speaker was Chancellor of the Exchequer in 1961, for reasons which I have no time to go into now but about which I have written on a number of occasions, that I cannot share the view of hon. Members on both sides of the House who look again to a statutory incomes policy, although it may be, as the hon. Member for Ormskirk said, that the Chancellor of the Exchequer has this as a contingency plan. Indeed, I would say that any Government who sought to impose such a policy on a statutory basis would certainly have to do without my vote, for what that is worth.

The problem of trade union power, however, is a very real one. It exists. It is a very real power, and it has to be dealt with by other means. The trade unions are, in economic terms, simply organisations for the creation of unemployment. That is why anybody who seeks as I do to see unemployment at a sustainably low level must also seek to reduce trade union power, in contradistinction to the present Government, whose every other action is to increase trade union power.

This must be a long-term objective. In the meantime, we have to go through the valley of the shadow of deflation. Let no one think that it will be easy; but, still more, let no one think that there are any alternatives, least of all the poisoned chalice of a statutory incomes policy.

9.0 p.m.

Mr. John Nott (St. Ives)

I beg to move to leave out paragraph (a).

I want to say briefly that we deplore the fact that the resolution is drawn so narrowly as to prevent us from debating amendments to the capital transfer tax. We shall have more to say about this in future debates, but in accordance with what Mr. Speaker told us I shall devote my remarks to the wider issues which have arisen during the debate.

Although the debate has at times taken place in a virtually empty House, the quality of the speeches has been excellent. as I am sure everyone who has attended throughout will agree. One hon. Member described the debate as historic. I thought as he said those words that history is sometimes made in strange ways. because when he made that statement there was only one other hon. Member on the benches beside him and no Cabinet Ministers have taken part in this debate. Indeed, as far as I am aware a Cabinet Minister has hardly been present, with the exception of the Chancellor of the Exchequer himself and the Chancellor of the Duchy of Lancaster today.

It is the contrast between the sense of impending crisis, which has been the theme of most speeches in the debate, and day-to-day life outside the House which will prove to be the enduring memory of the debate, because although many sections of the community have already been hard hit and although there is much concealed poverty and distress —indeed, as my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) said, there is a growing feeling of insecurity about and some sections of the community have been very badly hit —nevertheless there is hardly an air of economic crisis in the streets. Yet the Chancellor's warning that our political and social system could hardly stand the strain if we were forced to live within our means has been echoed again and again throughout the debate.

The hon. Member for Hornchurch (Mr. Williams), no doubt with this in mind, asked for a more evangelistic style of politics to explain to the country the dangers we face. Addressing his own Front Bench, he asked for Ministers to take part in that evangelism. I think that the right hon. Member for Battersea, North (Mr. Jay) was seeking the same thing.

There was a note of depression in the remarks of my hon. Friend the Member for North Fylde (Mr. Clegg) when he expressed the regret that it looked as though the economic blizzard has to sweep very fiercely over the country before anybody will become moderate or sensible again."—[Official Report, 17th April 1975; Vol. 890, c. 730.] My hon. Friend the Member for Rutland and Stamford (Mr. Lewis) developed the theme—who pays, who governs, who cares? We know that every hon. Member cares deeply about the problems the country faces, sometimes it seems to us in eccentric ways. However, I fear that it is evident that the Chamber of the House of Commons is no longer thought by a great number of hon. Members to be an appropriate or useful place to express these views.

If I may make just one personal comment in passing, I wonder, when fashionable opinion insists on spawning more and more specialist committees with their papers, their experts and their professional advisers, whether this trend is not going too far. If we take everything in Committee upstairs, the gut issues of politics will be discussed and settled more and more in the "pubs" and on the factory floors rather than here on the Floor of the House of Commons. If I agree with the right hon. Member for Ebbw Vale (Mr. Foot) in nothing else, I have always agreed with him in what he has said about this in relation to the procedures of this House.

Before I leave the subject of the role of Parliament in our financial affairs, I must refer to one specific and important matter which has arisen again and again in this debate. It was referred to first by the Chancellor, then by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), and today by the hon. Member for Hertfordshire, South (Mr. Parkinson), my hon. Friend the Member for Blaby (Mr. Lawson) and, of course, by the right hon. Member for Down, South (Mr. Powell). It concerns the methods and procedures which we have been using in controlling public expenditure in this country since the Plowden Committee in the early 1960s.

I believe—this has come across again and again in this debate—that there are increasing reasons for examining its effectiveness. I think that the Chancellor of the Duchy of Lancaster overstated the case when he said that it was a dangerous habit which we must look at again. If the constant price basis of looking at public expenditure is a dangerous habit, the Chancellor of the Duchy and his colleagues hold responsibility in the matter. This is a very big subject with major political implications, but the five-year rolling programme seems increasingly to provide its own momentum and self-justification regardless of the actual cash resources available to the Chancellor of the Exchequer. There cannot be anything quite as telling as actual cash—the amount of goods and services which can be exchanged for real money at any particular point in time. I refer not just to the pricing basis of the public expenditure White Paper but also to the national income forecasts which precede all the final decisions on the Budget.

For all its deficiencies and its dependence upon the assumptions made about the movement of national income, I believe that the flow of funds analysis which has been developed by the Bank of England over the years is proving a much more useful forecasting tool than was admitted a few years ago. In so far as I approve of this Budget—and my approval is strictly confined, as will become evident in my speech—I can detect a perceptible shift of attitude in this direction. I detected it in the Chancellor's speech. The Chief Secretary said that cash limits do not provide an easy option, and, of course, they do not. We are well aware of that. Ultimately, whether we have a current price basis or a constant price basis, everything depends upon the political will of the Cabinet, and particularly on the will of the Prime Minister, who has to back his Chancellor in this area if in no other.

My final comment on this matter comes from an excellent lecture given by Sir Samuel Goldman, the last but one Treasury official in charge of public expenditure, when he talked about this important subject to the Civil Service College in 1973. He said: One cannot discourage inflation by forcing those who have to plan the orderly use of major national resources to cut back or accelerate because prices and incomes have deviated from what had been expected. It would be illogical, for example, to reduce the hospital building programme because the wages of nurses had risen more than had originally been estimated. Would it be illogical? I think not. I think we have now moved to the state where the tools of the 1950s devised by Plowden are no longer appropriate to the problems which we face. Therefore, I echo and agree with the comments which have been made on this subject throughout the debate.

I mentioned the concept of flow of funds. It is interesting to look first at the company sector in this regard. It is true, as the Chancellor said, that the technical financial position of companies—their liquidity position—is likely to improve substantially this year. Indeed an interesting article in Economic Trends indicated that an improvement in the financial position of companies had almost always preceded a rise in the Financial Times index, and this, apparently, is what is happening now.

However, the improvement is coming about largely because companies, for the sake of survival following the Chancellor's gross misjudgment this time last year, have been running down their stocks and withholding investment in order to keep going. When the upturn in world trade comes—as my hon. Friend the Member for Hertfordshire, South rightly said, the Chancellor is hanging all his hopes on that upturn—British industry may have neither the goods to sell, because it has run down stocks, nor the capacity to manufacture them. The hon. Member for Llanelli (Mr. Davies) voiced this fear very clearly, saying: I have misgivings about whether British manufacturing industry … has the capability to meet the challenge and provide the massive increase in exports which will be necessary." —[Official Report, 17th April 1975; Vol. 890, c. 732.] I hope that the Chancellor will say whether he is confident that, when the upturn comes, the company sector will be able to meet it.

In his interesting speech, my right hon. Friend the Member for Worcester (Mr. Walker) pointed out that the competitive position of British industry in world markets is now deteriorating sharply. Assuming that the sterling parity holds—a big assumption, about which I shall say more in a moment—I see little to justify the Chancellor's optimism in this respect.

The hon. Member for Meriden (Mr. Tomlinson) made a very useful contribution on this aspect of the Budget. He said: I believe in the mixed economy. Would that more hon. Members on his side would come out publicly and say that they, too, believe in the mixed economy. The hon. Gentleman went on: That means that the private sector of industry must be a profitable sector and must regenerate its future investment from profitability. He was referring, of course, to the equity base of companies, not to the financial position of companies generally. It is no use the Chancellor of the Duchy telling us how much the Chancellor of the Exchequer has done by financing Finance for Industry and giving it £1,000 million. That is primarily debt, and what is required now is an improvement in the equity base of companies, for it is upon that that our country's future prosperity depends.

The ideological passion of the Left wing to widen the parameters of the public sector the whole time can be achieved only with accompanying lowered living standards. Perhaps that is a price which the Left wing is prepared to pay, but I do not believe that that is what the country generally understands or wants.

The hon. Member for Meriden touched on an even deeper issue, for he said: What we should be doing is creating an atmosphere of understanding in industrial relations so that we can get far more effective use of our existing investment…"—[0fficial Report, 16th April 1975; Vol. 890, c. 512.] Does that not mean in the last resort smaller plants in which men know one another and know the boss, not massive inhuman factories where men are little more than robots chained to machines? It must mean that. We must think far more closely not only of the economic cost but of the social cost of nationalisation and the establishment of larger and larger plants.

That brings me to the personal sector or, to be more precise, to personal incomes and wages in the public sector. Much of the debate has centred upon this crucial area. After his powerful speech, my right hon. Friend the Member for Worcester was provoked into two interventions. In one he advocated a statutory incomes policy, and in the other he challenged the Minister of State, then replying for the Government, to withhold extra money from British Rail if the forthcoming railways settlement was outside the social contract.

Although a statutory incomes policy does not necessarily preclude the withholding of money from British Rail, there is an important distinction to be noted between those two methods, for the one implies that cost-push factors are the main cause of inflation, and the other that inflation can best be tackled by withholding the supply of money. My right hon. Friend is, unfortunately, not here to comment, but his threat was the threat of the law, whereas the sanction he suggested in a specific case was to withhold the cash.

There are too few options in economic policy to reject the use of any policy for ideological reasons, but I have to say to the hon. Member for Ashfield (Mr. Marquand), my hon. Friend the Member for Leek (Mr. Knox) and others who supported a statutory incomes policy in this debate that it is hard to see how such a policy could be enforced in current circumstances without bringing Parliament and Government into total disrepute. Even if it could be enforced, it is hard to see whether its economic benefits would be ephemeral or downright bad. Whatever view is held on that matter, the House generally rejects the proposal for a statutory incomes policy, but that does not mean that a new accommodation of some kind is not urgently necessary with the trade unions.

The social contract never had anything to do with economic or wages policy. It was in part a peace treaty between the Labour Party and the unions, following "In Place of Strife", and it was in part an electoral gimmick. Looked at in that light, it has had a short, successful but very expensive life. It has cost each family in the country about £400 apiece, or about £8 a week for each breadwinner in the family. I arrive at that figure by taking the approximate £6,000 million increase in the Government's financial requirements since they came to office. If the £10,000 a year man were taxed at 100 per cent. the yield would be £50 million. If the income of everyone left with more than £5.000 a year were taken away the yield would be approximately £1,000 million. That shows that the Chancellor's claim that the Government would finance the social benefits under the social contract by taxing the rich was always a complete delusion. [Interruption.] I remember well what was said, perhaps not by the Chancellor. If he did not say that I withdraw it, but it was widely said by the Labour Party. What has happened is that the Government have had to resort to discriminatory taxation to find the funds.

I mention briefly only two measures. First, there is the vehicle excise duty, which will do enormous damage for the sake of bringing in very little revenue and producing very little energy saving. It will damage the people who live in rural areas and those who need a car because they do overtime. We shall vote against that resolution. Secondly, there is the 25 per cent. rate of VAT which shows up massive anomalies. The Financial Secretary's defence was that we should be thankful that the Chancellor was not introducing a luxury rate on perfumery, cosmetics, fancy goods and bags. The whole measure is riddled with anomalies. Furs, except for rabbit skin, are to be taxed at 25 per cent. Why is only rabbit skin excluded from the 25 per cent.? Perhaps the Chancellor has some affinity to the rabbit.

As the social contract seems to be a sacred symbol, if the Chancellor and the Government do not tear it up I suggest that it should be renegotiated on the TUC's own terms. The TUC in paragragh 175 of its economic review stated that the social wage rose by 33 per cent. last year. That is the precise equivalent of the Chancellor's figure of £20 a week which he gave in his Statement. Not only have wages risen on average by over 30 per cent. in the past year, but the social wage has risen by 33 per cent. These two items must be compared with a rise in prices of 25 per cent., and the social wage must be paid for.

The right hon. Member for Battersea, North said that Socialism worked best when in harmony with the laws of arithmetic. That could not be more true.

Mr. Jay

It was not I who said that. It was Hugh Dalton.

Mr. Nott

The right hon. Gentleman quoted Hugh Dalton, and he was quite right to do so. The Chancellor of the Exchequer said way back in 1972 The second factor on which I hope we can all agree is that the trade unions are not the main cause of inflation. Mr. Jack Jones obviously is not in control of every single shop steward in his union, but the Chancellor is, or should be, in control of the amount of money which the Government pay out in the social wage.

The Chancellor of the Duchy of Lancaster said that if the public sector were to get into trouble, the worst that could happen would be a bad half-hour with Treasury officials. If that is all that can happen, it is hardly surprising that Government expenditure has got totally out of hand. If the Chancellor loses the argument in the Cabinet, if he goes to the Cabinet and says "The social wage has grown too fast. I cannot afford to finance it to the extent at which it has been running in the last year", he stands condemned. It is no use his finding other scapegoats and constantly reminding us of 1971 and 1972. He has been in office for over a year, and it is high time he took responsibility for these matters on his own shoulders.

Given the vital importance of the company sector in generating the nation's wealth and the vulnerability of the overseas sector to the terms of trade and the problem of controlling incomes by direct action we must regard the public sector, of which the social wage is part, as the residual matter because at present we are not in total control of any other sector of the economy.

Treasury Ministers have been paraded before us in this debate to say that Government expenditure cannot be reduced in the short term, and where it can be reduced immediately, as with milk subsidies, the Government do not want to take such action. Their view is that they want to postpone the cuts until there are 1 million unemployed. It is a new economic theory—a reverse counter-cyclical device of which nobody has heard before. But the longer we postpone these cuts, the worse they will have to be.

What is now happening is that we are sitting waiting on the referendum. That is what is holding everything up. It has been apparent to the country and to every Conservative Member that public expenditure has been getting out of control for more than a year, yet nothing has been done about the situation. It is no use the Chancellor coming along and saying "We cannot do anything about it until the end of the year."

One other solution to all our problems has been advocated in the debate. I refer to the solution advanced by the Liberal Party. When we have had such a surfeit of wisdom and experience, although not of practical experience, and when we have heard the Leader of the Liberal Party, the ex-Liberal Leader and the Liberal Shadow Chancellor of the Exchequer all speaking in one debate, it behoves us to consider their inflation tax. Such a tax would require an even tighter legal framework than a normal statutory incomes policy. It would have to have a far more rigorous and exhaustive definition than did the Pay Board because at that time there was a certain element of discretion. The overwhelming objection to such a tax is that it would bring the whole tax system into total disrepute.

How often have I heard the Liberals say that the rating system or the taxation system is breaking down? Is not the PAYE system difficult enough to explain to the ordinary working man? Can one imagine workers on the factory floor trying to understand why various deductions have been made? It would bring the whole of the tax system into the centre of industrial disputes. It would mean a massive new bureaucracy, because we have to distinguish between breaches of the norm and other legitimate variations of income for promotion, overtime, absence, sickness or change of job.

The ex-Leader of the Liberal Party, whom I am delighted to see present, coupled all this with his statement that local authority staff and the Civil Service were growing far too quickly everywhere except in Orkney and Shetland, where they needed a lot of extra people to deal with Scottish oil—it may have been Viking or Norse oil. I suggest to the Liberal Party that its scheme would not stand up to a thorough examination.

Mr. Pardoe

Would the hon. Gentleman care to comment on the view expressed by his right hon. and learned Friend the Shadow Chancellor that it was probably unfair of the Chancellor to increase income tax because it fell both on those who had broken the social contract and on those who had obeyed it? How, therefore, does the Conservative Party propose to tax in order to distinguish between the two?

Mr. Nott

I do not know whether the hon. Gentleman has been listening to what I have been saying.

Mr. Pardoe

That is no answer.

Mr. Nott

I said that given the practical difficulty of controlling prices and incomes by statutory means, and given that the overseas sector was not totally within our control, one had to regard public expenditure as residual. It was not good management that held the sterling rate last year. It was the fact that Dr. Kissinger was rattling his sabre and the dollar was very weak.

This year the Chancellor is having to finance £9,000 million of his borrowing requirement without recourse to the printing press. This is a staggering figure and I certainly wish him luck. I hope that he can find his £9,000 million by borrowing in the non-bank sector and from overseas. Given the sharp deterioration in the credit of the British Government in international markets, I fear that his task will be extremely difficult.

I compliment the Chancellor on his Budget Statement, because in a way it was characterised by brave words and the high quality of his analysis. Everyone would agree that his analysis was impeccable. That was certainly the view of the Opposition. I shall leave aside the feebleness of its prescription and its inordinate length. As the right hon. Gentleman moved with skill in and out of the corset—the M1 and the M3—I saw in him a frustrated monetarist, almost a true monetarist, to an even greater extent than many of my hon. Friends. As he drew upon all the imagery and language of the 1930s, I thought that he was going to take us back on the gold standard. But no. The words rang out that gold coins have no value other than their content of the metal "—[Official Report, 15th April 1975; Vol. 890, c. 293.] We all recognise the hand of the Treasury draftsmen in that phrase. Yes, the Treasury was back in control again. I could not imagine the Chancellor ever drafting such a silly phrase. If gold has no value other than the content of the metal, what is the value of a £1 note? If I may use the Healey electoral multiplier which was used by the hon. Member for Hammersmith, North (Mr. Tomney), at the end of this month we shall be running a rate of inflation, on the three-month multiplier, at 30p in the pound. Unemployment is mounting to over I million and yet we are still living beyond our means to the extent of £9,000 million.

It is a fantastic record for the Chancellor to defend. As far as I am aware, it is excelled this century only by one other politician in the Labour Party—and the two records are not entirely divorced from one another—and that is the record of my constituent in the Isles of Scilly, the Prime Minister, who during the course of this Budget debate outran Ramsay MacDonald as the longest-serving Labour Prime Minister of this century—six years and 294 days of accelerating problems and disaster for the British nation.

9.30 p.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

I begin by agreeing with the hon. Member for St. Ives (Mr. Nott) on a number of points. First, this has been a thoughtful debate, and, as always, the hon. Member's speech was one of the most thoughtful and agreeable, although there was a sting in the tail. I agree with him, if I, too, can be forgiven a personal reflection, that there is a great deal in his opinion that we risk something in diverting debates on major issues to specialist Committees upstairs. We have seen that in the course of this debate.

I agree with everything that the hon. Member for St. Ives said about the Liberal Party, though that perhaps will not surprise him.

Mr. Pardoe

You have said it before.

Mr. Healey

I have said it before, and I shall say it again.

I have some sympathy with what the hon. Member for St. Ives said about the way in which forecasting and public expenditure planning are done in the Treasury, though, unlike him, I hope to do something about it.

The hon. Member for St. Ives asked me how private business will deal with the expected upturn in world trade next year. This is very much in my mind. First, private industry, particularly manufacturing industry, will benefit next year from the 10 per cent. increase in manufacturing investment which took place last year and continued up to December last year and probably still is continuing in some degree. Secondly, manufacturing industry will benefit from the special help given in this Budget in industrial retraining, because the most serious single constraint during the last world upturn was the shortage of skilled labour, particularly in engineering. It will also benefit greatly from the £100 million worth of investment assistance which I announced last week.

The hon. Member for St.Ives must know that my right hon. Friend the Chancellor of the Duchy of Lancaster spoke a literal truth when he said that the help which the private sector has received in the tax relief which I have given to deal with inflation and stock replacement not only in this Budget but in the last Budget is the greatest ever given to private industry by any Government. There is no question that money is available in the banking system and elsewhere if firms want to invest. I only hope that I can rely on the help of the hon. Member for St. Ives and of his right hon. Friends in persuading industry that the time to invest is now so that the product of investment will be available when the demand for it is at its height, as it will be in one, two or three years.

I found it a little odd that the hon. Member for St. Ives should have criticised some of my hon. Friends for not believing in the mixed economy. He must know that the right hon. Member for Leeds, North-East (Sir K. Joseph) opposed the mixed economy root and branch in a speech which he made on 21st June last year. It was issued by the Conservative Central Office, although in those days he was something of an heretic in expressing these views. The right hon. Gentleman said: Conservatives have tried their best to make semi-Socialism work, but its inherent contradictions are intractable. We must decide whether to go down with Benn or on to a more rational economy. To paraphrase Abraham Lincoln, a society cannot be half-free, half collectivised. So much for the dedication of the Opposition Front Bench to the mixed economy. It is possible that the speech of the right hon. Gentleman on that occasion, as on so many occasions such as this afternoon, was meaningless rhetoric and simply an empty pose.

I think that we enjoyed one advantage in the debate today which we did not enjoy during the debate on my November Budget in that the right hon. Member for Leeds, North-East and the hon. Member for St. Ives both spoke from the Opposition Front Bench. However, some would say that it was an advantage that the right hon. Member for Worcester (Mr. Walker) spoke from the Opposition back bench on this occasion.

There is no doubt that this debate has been more meaningful than that in November, because the position put by the Opposition Front Bench was more coherent than on the last occasion. There was something to get to grips with because those hon. and right hon. Members, including the right hon. Member for Leeds, North-East, represent the neoSelsdon doctrine, as I think it is called in some sections of the Conservative Party, although they both represent not perhaps the pure milk of the monetarist counter-revolution but a kind of skim milk Anglo-monetarism.

The counter-revolution which they represent succeeded because the policy of the Tory Government, of which they were members not long ago—I quote a letter by the right hon. Member for Leeds, North-East to the Economist led to— an historic high rate of inflation, an enfeebled economy, with the worst relations with the trade union movement in decades and a lost Election with the greatest fall in the 'Conservative' share of the vote since 1929.' All Government supporters would agree with that as a sober estimate of the last Government's record. This is the first occasion on which I have had the opportunity to congratulate the right hon. Gentleman on his putsch.

I cannot help feeling that it was more than unfair of the right hon. Member for Leeds, North-East to make an ungracious and unmerited attack on the excellent speech of the Chancellor of the Duchy of Lancaster, and to pretend to detect in it some hint of a disagreement with me. It was shameless because as he made his attack on my right hon. Friend only three seats away from him was the right hon. Member for Chipping Barnet (Mr. Maudling), who took a view of my Budget which the right lion. Member for Leeds, North-East attempted to disown. I am glad to see that the right hon. Member for Chipping Barnet nods in acknowledgment of the truth of what I said. The right hon. and hon. Gentlemen poured scorn on the social contract as a basis for the Government's policy for reducing the rate of inflation. However, neither of them offered anything to put in its place. Today they disagreed with the other members of their own Shadow team. The right hon. Member for Chipping Barnet and the right hon. Member for Lowestoft (Mr. Prior) have said that it should be the purpose of all hon. Members, where-ever they sit in the House, to make the social contract more effective. I agree.

However, do the right hon. Members for Chipping Barnet and Lowestoft think that the Conservative Party would have any chance of making the social contract more effective in the light of the relations which it is bound to have with the TUC while its economic spokesman and the guru of its new doctrine is the right hon. Member for Leeds, North-East? He denounced the search for greater equality as the root cause of all our social and economic troubles in Britian. He rejects the concept of a mixed economy. He regards the development of relations between business and Government since the war as 30 years of debilitating semi-Socialism. He sees mass unemployment or complsory wage control as the only alternative to the social contract. He rejects the latter, but it is far from clear to any of us who listened to him this afternoon, or have tried to interpret many of the speeches he has made over recent months, whether he rejects the former [HON. MEMBERS: "Do you?"] Oh, yes. Yet the fact is that his party tried both these alternatives in turn in the four disastrous years they were in power and both failed catastrophically.

Mr. Peter Tapsell (Horncastle)

The Chancellor has denounced my right hon. Friend, saying the only alternative to the social contract is either mass unemployment or statutory wage control. As the right hon. Gentleman made clear in his Budget speech that he felt that the social contract had failed, which of the two alternatives does he prefer?

Mr. Healey

I fear that I made a mistake in giving way to the hon. Member. He knows that I said in my Budget speech that the social contract had so far failed to reduce the rate of wage settlements to the level which was intended. However, like many right hon. Members opposite, and I applaud them for having the courage to say so, I believe that it is the duty of all of us wherever we sit in the House to seek to ensure that the social contract works more successfully in the future. There really is no alternative to it, and that is what I hope to demonstrate now.

What emerged from the lecture on economic theory by the right hon. Member for Leeds, North-East this afternoon —and, whatever one thought of the lecture, it had a magnificent reading list attached to it—was that the right hon. Gentleman believes in mass unemployment as a tool of policy, although he is looking for new ways to describe it. He talked first this afternoon about the number of Keynesian unemployed. No doubt we shall be hearing from him about the number of Friedmanian unemployed or the number of Walterian unemployed. [Hon. Members: "And Healeyian unemployed."] But the fact is that to anyone who is out of work unemployment is an economic tragedy and a personal humiliation.

The right hon. Gentleman complained that I am punishing the many for the sins of the few. His policy of a general throttling down of economic activity, however, would involve ruin for all the people. There will be thousands of bankruptcies and many millions of unemployed, and yet at the same time as the right hon. Gentleman denounces the use of taxation increases which he calls indiscriminate he complains about my discrimination in selective aid to industry. He himself, however, set the precedent in the aid given to Rolls-Royce not so long ago. Is he now saying that we should do nothing for British Leyland and nothing for Ferranti?

Sir K. Joseph

The Chancellor is committing very serious hypocrisy. He is carrying out under the guise of an attack on me the same attempt at gradualised abatement of inflation as I believe in because he knows very well that the one evil that would wreck this country would be to allow inflation to get worse. That really would lead to 1930s-type unemployment. What I believe he is trying to do under the guise of an attack upon me is to keep unemployment to the minimum that the trade unions will accept while gradually abating inflation. I hope that he succeeds in doing so in spite of the humbug of his attack on me.

Mr. Healey

If the right hon. Gentleman means what he just said, his entire speech earlier today was humbug and hypocrisy. In so far as the right hon. Gentleman offered any alternative to the strategy which I put forward, and which he now says he agrees with, it was massive cuts in public expenditure this year. But when we asked him how large the cuts should be and where they should fall, he wriggled and dodged, as his ex-right hon. Friend the Member for Down, South (Mr. Powell) mercifully pointed out. He wriggled and dodged again when he was asked what amount of money the public expenditure cuts he was recommending would generate.

In so far as there has been any threat in the flabby confusion of criticism we have had from the Opposition during the past few days, it was on the question: do more; and do it all by cutting public expenditure, and cut it massively this year. The only clue we got from the right hon. Member for Leeds, North-East, who was under continuous interrogation from Labour Members about the amount, was his claim that taxation in Britain was £4 billion higher than it should be. From this some of us, rightly or wrongly, drew the deduction that public expenditure should be £4 billion lower.

However, as always we are able to rely on the right hon. Member for Down, South to dot the i's and cross the t's. In a speech of vaulting fantasy delivered with his familiar elegance, clarity of speech and confusion of thought, the right hon. Gentleman said that we should cut the public expenditure borrowing requirement to zero in two years—a requirement which would be £10 billion but for tax measures in this Budget which he purports to oppose. [Interruption.] It is £9 billion after the Budget measures which the right hon. Gentleman purports to oppose.

Mr. Powell

indicated assent

Mr. Healey

I am glad that the right hon. Gentleman agrees. In that case, he is asking us to cut £4–5 billion of public expenditure this year and next year. He wanted us to do it, so far as possible, by cuts in capital expenditure in the public sector.

The total financial gross domestic fixed capital formation of this country is only £7 billion, of which £2–4 billion is vital investment by the nationalised industries, investment which is even more vital this year when investment in the private sector seems liable to fall. The right hon. Gentleman wanted to cut the lot by two-thirds in a single year. There would be nothing left to cut in the second year of his two-year programme. A large part of this capital expenditure pays for contracts which were signed in previous years, as hon. Members will know. To cut that investment would involve massive cancellation fees. If we spread the cuts in Government expenditure over current and capital account, the sort of cuts which the right hon. Gentleman honestly admitted he wanted would wipe out the whole of the defence budget this year and the whole of the education budget next year.

Mr. Crawford

There are 150,000 unemployed in Scotland.

Mr. Healey

We respect the integrity of the right hon. Member for Down, South when he told us precisely what he intended to do. We know that he represents an important part of the yeomanry of Northern Ireland, and an important part of that yeomanry actually listened to him this afternoon with that openmouthed and glazed look of surprise which we have come to look for whenever the right hon. Gentleman stands up. Their reaction would have been a little less passive if they had realised that what he was saying means that there should be no expenditure by Her Majesty's Government in Northern Ireland whatever for the next few years.

The fact is that it is impossible to impose public expenditure cuts without notice except at appalling cost. This was recognised by the Public Expenditure Committee, which unanimously reported to that effect only a few days ago. Cuts of the size for which the right hon. Member for Down, South appeared to be asking would push up unemployment to well over 2 million next year, even at a time when some unemployment was being sopped up by the increase in world demand.

Mr. Powell

If the right hon. Gentleman should find it during the next 12 months—as he envisages himself there is a risk—impossible to borrow domestically or overseas the whole of the £9,000 million, and if, for example, he should be able to borrow only £4,000 million or £5,000 million, what will he do?

Mr. Healey

I am not foolish enough to answer a question which makes an assumption I have specifically rejected and which my whole Budget strategy is intended to avoid.

The policies which right hon. Gentlemen are recommending now, on the basis of current Government policies, would involve an enormous increase in unemployment this year when there is no chance whatever of its being mopped up by an increase in external demand.

Mr. Crawford

Does not the Chancellor agree that the blanket application of decreasing public expenditure in Scotland will lead to mass unemployment in Scotland of 150,000 to 170,000 people in the next year?

Mr. Healey

No, Sir. I am very glad to say that the gap between unemployment in Scotland and unemployment in the rest of the country has narrowed dramatically during the last few months and will continue to narrow in the next few months.

I concentrated on tax increases this year because I know I can get them, and I allocated the increases where I believe they will be most easily borne and cause least damage to the individual family and to the community as a whole. The 2p in the pound extra on income tax means that, generally speaking, people with more than average earnings will pay more, but as a result of the increase in the threshold 9 million taxpayers will pay less and 400,000 will be relieved from tax altogether. At the same time we are carrying out a major and overdue measure of social justice for single-parent families.

The hon. Member for St. Ives asked me about the 25 per cent. VAT on less essential goods. One of his predecessors in the debate said that we should instead have increased the general rate of VAT. We on the Government side of the House believe—we make no apology for it—that it is better that people should pay 25 per cent. on fur coats and jewellery than 10 per cent. on children's clothes. We believe that it is better that people should have to spend 25 per cent. more on equipment and colour television than 10 per cent. on furniture. We believe it is right that people should have to spend 25 per cent. on yachts and aeroplanes rather than 10 per cent. on kitchen utensils.

The vehicle excise duties have been raised only to compensate in part for inflation over recent years. I ask the House to listen to what I am about to say, because the hon. Gentleman suggested that his party might vote against the increase in vehicle excise duty. I judged it better to increase the vehicle excise duty this year than to increase the cost of petrol by 6p per gallon. There is a case for total abolition of the vehicle excise duty, which I considered very carefully, and for its replacement by an increase in the cost of petrol. But that would have meant an increase in the cost of petrol of 16p a gallon.

I cannot understand Tory and Liberal Members attacking this increase in the vehicle excise duty. [Interruption.]I have chosen this method rather than to increase petrol tax to assist those who live in rural areas, who would otherwise be paying far more than they will be paying in vehicle excise duty.

The other reason why I chose the vehicle excise duty was that to increase the price of petrol still further now would hit the sales of the bigger cars when Britain was not producing enough small cars. 'That would have led to a still larger flood of Datsun, Renault and other small cars coming into this country at a time when there was already serious unemployment in our own motor car industry.

Mr. Jeremy Thorpe (Devon, North)

I am sure that the right hon. Gentleman would not wish to misquote even his opponents. In fact, the suggestion was that it was outrageous that the same tax should be paid by the owner of a mini as by the owner of a Rolls-Royce. The right hon. Gentleman said that he had to do this because, in his view, the British car industry was not capable of providing the necessary cars. Many of us would disagree with his pessimism.

Mr. Healey

The right hon. Gentleman can disagree as much as he likes, but the output figures are there for all to see. It might make sense to make a change along the line suggested in a year or two, but not at a time when we know the British car industry is incapable of meeting the demand for small cars which would result.

I come back to the policy of the official Conservative Opposition. The whole of their policy is based on the assumption that we should have much bigger cuts in the PSBR and that they should be achieved entirely from cuts in public expenditure. Yet we have had no hint whatever from the right hon. Member for Leeds, North-East where we should find these cuts.

We have cut defence expenditure. The Opposition attacked the cuts last year, and they are attacking them again this year.

Are they going to look to housing? The right hon. Gentleman fought the last election in the next constituency to mine on the basis of increasing housing expenditure by £300 million to carry out the promise made by the new Leader of the Opposition of 9½ per cent. mortgages.

Is the right hon. Gentleman planning to cut pensions? He fought the last election on a six-monthly permanent uprating of pensions whatever the rate of inflation.

What about the tax credits scheme, which was referred to in terms of praise? According to the last Conservative Chancellor of the Exchequer, that would impose an extra £2,300 million on the public sector borrowing requirement.

All of us in this House respect the intellect of the right hon. Member for Leeds, North-East. We could under-stand it if a mixture of political tact and personal guilt led him to renounce criticism of the last Conservative Government's behaviour. But he fought the last election, and so did the current Leader of the Opposition, on a programme which would have increased public expenditure by £3,000 million a year.

The House and the country are getting a little tired of these portentous sermons which carefully avoid giving any hint of what action would follow if anybody were unwise enough to take the right hon. Gentleman's advice. It is difficult to believe that the obscurity in which he cloaks his words is intended. Yet the fact is that nobody with such skill in the use of words as the right hon. Gentle-

man is so regularly and often misunderstood. I prefer to take a wager that over the coming weeks every newspaper from the News of the World to the Yachtsman's Journal will be flooded with letters and articles by the right hon. Gentleman explaining what he meant to say this afternoon but, once again, failed to get across.

The fact is that when the right hon. Gentleman started on his crusade he was seen by many as a Moses who would save this country. In 12 short months he has turned into a Malvolio. His policy is bankrupt, his party is bankrupt. and he knows as well as I do that the only hope for this country is the Budget that I have presented.

Question put, That the amendment be made:—

The House divided: Ayes 278, Noes 287.

Division No. 170.]	AYES	[10.0 p.m.
Adley, Robert	Crowder, F. P.	Hall, Sir John
Aitken, Jonathan	Davies. Rt Hon J. (Knutsford)	Hall-Davis, A. G. F.
Alison, Michael	Dean, Paul (N Somerset)	Hamilton, Michael (Salisbury)
Arnold, Tom	Dodsworth, Geoffrey	Hampson, Dr Keith
Atkins, Rt Hon H. (Spelthorne)	Douglas-Hamilton, Lord James	Hannam, John
Awdry, Daniel	Drayson, Burnaby	Harvie Anderson, Rt Hon Miss
Bain, Mrs Margaret	du Cann, Rt Hon Edward	Hastings, Stephen
Baker, Kenneth	Dunlop, John	Havers, Sir Michael
Banks, Robert	Durant, Tony	Hawkins, Paul
Beith, A. J.	Dykes, Hugh	Hayhoe, Barney
Bell, Ronald	Eden, Rt Hon Sir John	Heath, Rt Hon Edward
Bennett, Dr Reginald (Fareham)	Edwards, Nicholas (Pembroke)	Henderson, Douglas
Benyon, W.	Elliott, Sir William	Heseltine, Michael
Berry, Hon Anthony	Emery, Peter	Hicks, Robert
Biffen, John	Evans, Gwynfor (Carmarthen)	Higgins, Terence L.
Biggs-Davison, John	Ewing, Mrs Winifred (Moray)	Holland, Philip
Blaker, Peter	Eyre, Reginald	Hordern, Peter
Body, Richard	Fairbairn, Nicholas	Howe, Rt Hon Sir Geoffrey
Boscawen, Hon Robert	Fairgrieve, Russell	Howell, David (Guildford)
Bowden, A. (Brighton, Kemptown)	Fell, Anthony	Howell, Ralph (North Norfolk)
Boyson, Dr Rhodes (Brent)	Finsberg, Geoffrey	Howells, Geraint (Cardigan)
Braine, Sir Bernard	Fisher, Sir Nigel	Hurd, Douglas
Britian, Leon	Fletcher, Alex (Edinburgh N)	Hutchison, Michael Clark
Brotherton, Michael	Fletcher-Cooke, Charles	Irvine, Bryant Godman (Rye)
Brown, Sir Edward (Bath)	Fookes, Miss Janet	Irving, Charles (Cheltenham)
Bryan, Sir Paul	Fowler, Norman (Sutton C'f'd)	James, David
Buchanan-Smith, Alick	Fox, Marcus	Jenkin, Rt Hon P. (Wanst'd & W'df'd)
Buck, Antony	Fraser, Rt Hon H. (Stafford & St)	Jessel, Toby
Budgen, Nick	Freud, Clement	Johnson Smith, G. (E Grinstead)
Bulmer, Esmond	Fry, Peter	Johnston, Russell (Inverness)
Burden, F. A.	Galbraith, Hon T. G. D.	Jones, Arthur (Daventry)
Carlisle, Mark	Gardner, Edward (S Fylde)	Jopling, Michael
Carr, Rt Hon Robert	Gilmour, Rt Hon Ian (Chesham)	Joseph, Rt Hon Sir Keith
Carson, John	Gilmour, Sir John (East Fife)	Kaberry, Sir Donald
Chalker. Mrs Lynda	Glyn, Dr Alan	Kellett-Bowman, Mrs Elaine
Churchill, W. S.	Godber, Rt Hon Joseph	Kimball, Marcus
Clark, Alan (Plymouth, Sutton)	Goodhart, Philip	King, Evelyn (South Dorset)
Clark, William (Croydon S)	Goodhew, Victor	King, Tom (Bridgwater)
Clarke, Kenneth (Rushcliffe)	Goodlad, Alastair	Kirk, Peter
Clegg, Walter	Gorst, John	Kitson, Sir Timothy
Cockcroft, John	Gow, Ian (Eastbourne)	Knight, Mrs Jill
Cooke, Robert (Bristol W)	Gower, Sir Raymond (Barry)	Knox, David
Cope, John	Grant, Anthony (Harrow C)	Lamont, Norman
Cormack, Patrick	Gray, Hamish	Lane, David
Corrie, John	Griffiths, Eldon	Langford-Holt, Sir John
Costain, A. P.	Grimond, Rt Hon J.	Latham, Michael (Melton)
Crawford, Douglas	Grist, Ian	Lawrence, Ivan
Crouch, David	Grylis, Michael	Lawson, Nigel
Le Marchant, Spencer	Page, Rt Hon R. Graham (Crosby)	Stainton, Keith
Lewis, Kenneth (Rutland)	Pardoe, John	Stanbrook, Ivor
Lloyd, Ian	Pattie, Geoffrey	Stanley, John
Loveridge, John	Penhaligon, David	Steel, David (Roxburgh)
Luce, Richard	Percival, Ian	Steen, Anthony (Wavertree)
McAdden, Sir Stephen	Peyton, Rt Hon John	Stewart, Donald (Western Isles)
MacCormick, Iain	Pink, R. Bonner	Stewart, Ian (Hitchin)
McCrindle, Robert	Powell, Rt Hon J. Enoch	Stokes, John
McCusker, H.	Prior, Rt Hon James	Stradling Thomas, J.
Macfarlane, Neil	Raison, Timothy	Tapsell, Peter
MacGregor, John	Rathbone, Tim	Taylor, R. (Croydon NW)
Macmillan, Rt Hon M. (Farnham)	Rees, Peter (Dover & Deal)	Taylor, Teddy (Cathcart)
McNair-Wilson, M. (Newbury)	Rees-Davies, W. R.	Tebbit, Norman
McNair-Wilson, P. (New Forest)	Renton, Rt Hon Sir D. (Hunts)	Temple-Morris, Peter
Madel, David	Renton, Tim (Mid-Sussex)	Thatcher, Rt Hon Margaret
Marshall, Michael (Arundel)	Rhys Williams, Sir Brandon	Thomas, Dafydd (Merioneth)
Marten, Neil	Ridley, Hon Nicholas	Thomas, Rt Hon P. (Hendon S)
Mates, Michael	Ridsdale, Julian	Thompson, George
Mather, Carol	Rifkind, Malcolm	Thorpe, Rt Hon Jeremy (N Devon)
Maude, Angus	Rippon, Rt Hon Geoffrey	Townsend, Cyril D
Maudling, Rt Hon Reginald	Roberts, Michael (Cardiff NW)	Trotter, Neville
Mawby, Ray	Roberts, Wyn (Conway)	Tugendhat, Christopher
Maxwell-Hyslop, Robin	Ross, Stephen (Isle of Wight)	van Straubenzee, W. R.
Mayhew, Patrick	Rossi, Hugh (Hornsey)	Vaughan, Dr Gerard
Meyer, Sir Anthony	Rost, Peter (SE Derbyshire)	Viggers, Peter
Mills, Peter	Royle, Sir Anthony	Wainwright, Richard (Colne V)
Miscampbell, Norman	Sainsbury, Tim	Wakeham, John
Mitchell, David (Basingstoke)	St. John-Stevas, Norman	Walker, Rt Hon P. (Worcester)
Moate, Roger	Scott, Nicholas	Walker-Smith, Rt Hon Sir Derek
Molyneaux, James	Scott-Hopkins, James	Walters, Dennis
Monro, Hector	Shaw, Giles (Pudsey)	Watt, Hamish
Montgomery, Fergus	Shaw, Michael (Scarborough)	Weatherill, Bernard
Moore, John (Croydon C)	Shelton, William (Streatham)	Wells, John
Morgan, Geraint	Shepherd, Colin	Welsh, Andrew
Morgan-Giles, Rear-Admiral	Shersby, Michael	Whitelaw, Rt Hon William
Morris, Michael (Northampton S)	Silvester, Fred	Wiggin, Jerry
Morrison, Hon Peter (Chester)	Sims, Roger	Wigley, Dafydd
Mudd, David	Sinclair, Sir George	Wilson, Gordon (Dundee E)
Neave, Airey	Skeet, T. H. H.	Winterton, Nicholas
Nelson, Anthony	Smith, Cyril (Rochdale)	Wood, Rt Hon Richard
Neubert Michael	Smith, Dudley (Warwick)	Young, Sir G. (Ealing, Acton)
Newton, Tony	Speed, Keith	Younger, Hon George
Normanton, Tom	Spence, John
Nott, John	Spicer, Jim (W Dorset)	TELLERS FOR THE AYES
Onslow, Cranley	Spicer, Michael (S Worcester)	Mr. Adam Butter and
Oppenheim, Mrs Sally	Sproat, Iain	Mr. Cecil Parkinson.
NOES
Abse, Leo	Carter-Jones, Lewis	Dunwoody, Mrs Gwyneth
Anderson, Donald	Cartwright, John	Eadie, Alex
Archer, Peter	Castle, Rt Hon Barbara	Edelman, Maurice
Armstrong, Ernest	Clemitson, Ivor	Edge, Geoff
Ashley, Jack	Cocks, Michael (Bristol S)	Edwards, Robert (Wolv SE)
Ashton, Joe	Coleman, Donald	Ellis, Tom (Wrexham)
Atkins, Ronald (Preston N)	Colquhoun, Mrs Maureen	English, Michael
Atkinson, Norman	Concannon, J. D.	Ennals, David
Bagier, Gordon A. T.	Conlan, Bernard	Evans, Fred (Caerphilly)
Barnett, Guy (Greenwich)	Cook, Robin F. (Edin C)	Evans, Ioan (Aberdare)
Barnett, Rt Hon Joel (Heywood)	Corbett, Robin	Evans, John (Newton)
Bates, Alf	Cox, Thomas (Tooting)	Ewing, Harry (Stirling)
Bean, R. E.	Craigen, J. M. (Maryhill)	Fernyhough, Rt Hon E.
Been, Rt Hon Anthony Wedgwood	Crawshaw, Richard	Fitch, Alan (Wigan)
Bennett, Andrew (Stockport N)	Cronin, John	Fitt, Gerard (Belfast W)
Bidwell, Sydney	Cryer, Bob	Flannery, Martin
Bishop, E. S.	Cunningham, G. (Islington S)	Fletcher, Ted (Darlington)
Blenkinsop, Arthur	Cunningham, Dr J. (Whiten)	Foot, Rt Hon Michael
Boardman, H.	Dalyell, Tam	Ford, Ben
Booth, Albert	Davidson, Arthur	Forrester, John
Boothroyd, Miss Betty	Davies, Bryan (Enfield N)	Fowler, Gerald (The Wrekin)
Bottomley, Rt Hon Arthur	Davies, Denzil (Llanelli)	Fraser, John (Lambeth, N'w'd)
Boyden, James (Bish Auck)	Davies, Ifor (Gower)	Freeson, Reginald
Bradley, Tom	Davis, Clinton (Hackney C)	Garrett, John (Norwich S)
Bray, Dr Jeremy	Deakins, Eric	Garrett, W. E. (Wallsend)
Broughton, Sir Alfred	Dean, Joseph (Leeds West)	George, Bruce
Brown, Robert C. (Newcastle W)	de Freitas, Rt Hon Sir Geoffrey	Gilbert, Dr John
Buchan, Norman	Delargy, Hugh	Ginsburg, David
Buchanan, Richard	Dell, Rt Hon Edmund	Golding, John
Butler, Mrs Joyce (Wood Green)	Dempsey, James	Gould, Bryan
Callaghan, Rt Hon J. (Cardiff SE)	Doig, Peter	Gourley, Harry
Callaghan, Jim (Middleton & P)	Dormand, J. D.	Graham, Ted
Campbell, Ian	Douglas-Mann, Bruce	Grant, George (Morpeth)
Canavan, Dennis	Dunn, James A.	Grant, John (Islington C)
Cant, R. B.	Dunnett, Jack	Grocott, Bruce

Hamilton, James (Bothwell)	McNamara, Kevin	Sedgemore, Brian
Hamilton, W. W. (Central Fife)	Madden, Max	Selby, Harry
Hardy, Peter	Magee, Bryan	Shaw, Arnold (Ilford South)
Harper, Joseph	Maguire, Frank (Fermanagh)	Sheldon, Robert (Ashton-u-Lyne)
Harrison, Walter (Wakefield)	Mahon, Simon	Shore, Rt Hon Peter
Hart, Rt Hon Judith	Mallalieu, J. P. W.	Short, Rt Hon E. (Newcastle C)
Hattersley, Rt Hon Roy	Marks, Kenneth	Short, Mrs Renée (Wolv NE)
Hatton, Frank	Marquand, David	Silkin, Rt Hon John (Deptford)
Hayman, Mrs Helene	Marshall, Dr Edmund (Goole)	Silkin, Rt Hon S. C. (Dulwich)
Healey, Rt Hon Denis	Marshall, Jim (Leicester S)	Silverman, Julius
Heller, Eric S.	Maynard, Miss Joan	Skinner, Dennis
Hooley, Frank	Meacher, Michael	Small, William
Horam, John	Mellish, Rt Hon Robert	Smith, John (N Lanarkshire)
Howell, Denis (B'ham, Sm H)	Mikardo, Ian	Spearing, Nigel
Hoyle, Doug (Nelson)	Milian, Bruce	Spriggs, Leslie
Huckfield, Les	Miller, Dr M. S. (E Kilbride)	Stallard, A. W.
Hughes, Rt Hon C. (Anglesey)	Miller, Mrs Millie (Ilford N)	Stewart, Rt Hon M (Fulham)
Hughes, Mark (Durham)	Mitchell, R. C. (Solon, Itchen)	Stoddart, David
Hughes, Robert (Aberdeen N)	Molloy, William	Stott, Roger
Hughes, Roy (Newport)	Moonman, Eric	Strang, Gavin
Hunter, Adam	Morris, Alfred (Wythenshawe)	Strauss, Rt Hon G. R.
Irvine, Rt Hon Sir A. (Edge Hill)	Morris, Charles R. (Openshaw)	Summerskill, Hon Dr Shirley
Irving, Rt Hon S. (Dartford)	Morris, Rt Hon J. (Aberavon)	Swain, Thomas
Jackson, Colin (Brighouse)	Moyle, Roland	Taylor, Mrs Ann (Bolton W)
Jackson, Miss Margaret (Lincoln)	Mulley, Rt Hon Frederick	Thomas, Jeffrey (Abertillery)
Janner, Greville	Murray, Rt Hon Ronald King	Thomas, Mike (Newcastle E)
Jay, Rt Hon Douglas	Newens, Stanley	Thomas, Ron (Bristol NW)
Jeger, Mrs Lena	Noble, Mike	Thorne, Stan (Preston South)
Jenkins, Hugh (Putney)	Oakes, Gordon	Tierney, Sydney
Jenkins, Rt Hon Roy (Stechford)	Ogden, Eric	Tinn, James
John, Brynmor	O'Halloran, Michael	Tomlinson, John
Johnson, James (Hull West)	O'Malley, Rt Hon Brian	Tomney, Frank
Johnson, Walter (Derby S)	Orbach, Maurice	Torney, Tom
Jones, Alec (Rhondda)	Orme, Rt Hon Stanley	Varley, Rt Hn Eric G.
Jones, Barry (East Flint)	Ovenden, John	Wainwright, Edwin (Dearne V)
Jones, Dan (Burnley)	Owen, Dr David	Walden, Brian (B'ham, L'dyw'd)
Judd, Frank	Padley, Walter	Walker, Harold (Doncaster)
Kaufman, Gerald	Palmer, Arthur	Walker, Terry (Kingswood)
Kelley, Richard	Park, George	Ward, Michael
Kerr, Russell	Parker, John	Watkins, David
Kilroy-Silk, Robert	Parry, Robert	Weetch, Ken
Lambie, David	Peart, Rt Hon Fred	Weitzman, David
Lamborn, Harry	Perry, Ernest	Wellbeloved, James
Lamond, James	Phipps, Dr Colin	White, Frank R. (Bury)
Leadbitter, Ted	Prentice, Rt Hon Reg	While, James (Pollok)
Lee, John	Price, C. (Lewisham W)	Whitlock, William
Lestor, Miss Joan (Eton & Slough)	Price, William (Rugby)	Willey, Rt Hon Frederick
Lever, Rt Hon Harold	Radice, Giles	Williams, Alan Lee (Hornch'cb)
Lewis, Ron (Carlisle)	Rees, Rt Hon Merlyn (Leeds S)	Williams, Rt Hon Shirley (Hertford)
Lipton, Marcus	Richardson, Miss Jo	Williams, Rt Hon Shirley (Hertford)
Lomas, Kenneth	Roberts, Albert (Normanton)	Williams, W. T. (Warrington)
Loyden, Eddie	Roberts, Gwilym (Cannock)	Wilson, Rt Hon H. (Huyton)
Luard, Evan	Robertson, John (Paisley)	Wilson, William (Coventry SE)
Lyon, Alexander (York)	Roderick, Caerwyn	Wise, Mrs Audrey
Lyons, Edward (Bradford W)	Rodgers, George (Chorley)	Woodall, Alec
McElhone, Frank	Rodgers, William (Stockton)	Woof, Robert
MacFarquhar, Roderick	Rooker, J. W.	Wrigglesworth, Ian
McGuire, Michael (Ince)	Rose, Paul B.	Young, David (Bolton E)
Mackenzie, Gregor	Ross, Rt Hon W. (Kilmarnock)	TELLERS FOR THE NOES:
Mackintosh, John P.	Rowlands, Ted	Mr. John Ellis and
Maclennan, Robert	Ryman, John	Mr. Laurie Pavitt.
McMillan, Tom (Glasgow C)	Sandelson, Neville

Question accordingly negatived.

Main Question put:—

The House divided: Ayes 286, Noes 11.

Division No. 171.]	AYES	[10.14 p.m.
Abse, Leo	Bennett, Andrew (Stockport N)	Buchanan, Richard
Anderson, Donald	Bidwell, Sydney	Butler, Mrs Joyce (Wood Green)
Archer, Peter	Bishop, E. S.	Callaghan, Rt Hon J. (Cardiff SE)
Armstrong, Ernest	Blenkinsop, Arthur	Callaghan, Jim (Middleton & P)
Ashley, Jack	Boardman H.	Campbell, Ian
Ashton, Joe	Booth, Albert	Canavan, Dennis
Atkins, Ronald (Preston N)	Boothroyd, Miss Betty	Cant, R. B.
Atkinson, Norman	Bottomley, Rt Hon Arthur	Carter-Jones, Lewis
Bagier, Gordon A. T.	Boyden, James (Bish Auck)	Cartwright, John
Barnett, Guy (Greenwich)	Bradley, Tom	Castle, Rt Hon Barbara
Barnett, Rt Hon Joel (Heywood)	Bray, Dr Jeremy	Clemitson, Ivor
Bates, Alf	Broughton, Sir Alfred	Cocks, Michael (Bristol S)
Bean, R. E.	Brown, Robert C. (Newcastle W)	Coleman, Donald
Benn, Rt Hon Anthony Wedgwood	Buchan, Norman	Colquhoun, Mrs Maureen
Concannon, J. D.	Hunter, Adam	Perry, Ernest
Conlan, Bernard	Irvine, Rt Hon Sir A. (Edge Hill)	Phipps, Dr Colin
Cook, Robin F. (Edin C)	Irving, Rt Hon S. (Dartford)	Prentice, Rt Hon Reg
Corbett, Robin	Jackson, Colin (Brighouse)	Price, C. (Lewisham W)
Cox, Thomas (Tooting)	Janner, Greville	Price, William (Rugby)
Craigen, J. M. (Maryhill)	Jay, Rt Hon Douglas	Radice, Giles
Crawshaw, Richard	Jeger, Mrs Lena	Rees, Rt Hon Merlyn (Leeds S)
Cronin, John	Jenkins, Hugh (Putney)	Richardson. Miss Jo
Cryer, Bob	Jenkins, Rt Hon Roy (Stechford)	Roberts, Albert (Normanton)
Cunningham, G. (Islington S)	John, Brynmor	Roberts, Gwilym (Cannock)
Cunningham, Dr J. (Whiteh)	Johnson, James (Hull West)	Robertson, John (Paisley)
Dalyell, Tam	Johnson, Walter (Derby S)	Roderick, Caerwyn
Davidson, Arthur	Jones, Alec (Rhondda)	Rodgers, George (Chorley)
Davies, Bryan (Enfield N)	Jones, Barry (East Flint)	Rodgers, William (Stockton)
Davies, Denzil (Llanelli)	Jones, Dan (Burnley)	Rooker, J. W.
Davies, Ifor (Gower)	Judd, Frank	Rose, Paul B.
Davis, Clinton (Hackney C)	Kaufman, Gerald	Ross, Rt Hon W. (Kilmarnock)
Deakins, Eric	Kelley, Richard	Rowlands, Ted
Dean, Joseph (Leeds West)	Kerr, Russell	Ryman, John
de Freitas, Rt Hon Sir Geoffrey	Kilroy-Silk, Robert	Sandelson, Neville
Delargy, Hugh	Lambie, David	Sedgemore, Brian
Dell, Rt Hon Edmund	Lamborn, Harry	Selby, Harry
Dempsey, James	Lamond, James	Shaw, Arnold (Ilford South)
Doig, Peter	Leadbitter, Ted	Sheldon, Robert (Ashton-u-Lyne)
Douglas-Mann, Bruce	Lee, John	Shore, Rt Hon Peter
Dunn, James A.	Lester, Miss Joan (Eton & Slough)	Short, Rt Hon E. (Newcastle C)
Dunnett, Jack	Lever, Rt Hon Harold	Short, Mrs Renée (Wolv NE)
Dunwoody, Mrs Gwyneth	Lewis, Ron (Carlisle)	Silkin, Rt Hon John (Deptford)
Eddie, Alex	Lipton, Marcus	Silkin, Rt Hon S. C. (Dulwich)
Edelman, Maurice	Lomas, Kenneth	Silverman, Julius
Edge, Geoff	Loyden, Eddie	Skinner, Dennis
Edwards, Robert (Wolv SE)	Luard, Evan	Small, William
Ellis, John (Brigg & Scun)	Lyon, Alexander (York)	Smith, John (N Lanarkshire)
Ellis, Tom (Wrexham)	Lyons, Edward (Bradford W)	Spearing, Nigel
English, Michael	McElhone, Frank	Spriggs, Leslie
Ennals, David	MacFarquhar, Roderick	Stallard, A. W.
Evans, Fred (Caerphilly)	McGuire, Michael (Ince)	Stewart, Rt Hon M. (Fulham)
Evans, Ioan (Aberdare)	Mackenzie, Gregor	Stoddart, David
Evans, John (Newton)	Mackintosh, John P.	Stott, Roger
Ewing. Harry (Stirling)	Maclennan Robert	Strang, Gavin
Fernyhough, Rt Hon E.	McMillan, Tom (Glasgow C)	Strauss, Rt Hon G. R.
Fitch, Alan (Wigan)	McNamara, Kevin	Summerskill, Hon Dr Shirley
Fitt, Gerard (Belfast W)	Madden, Max	Swain, Thomas
Flannery, Martin	Magee, Bryan	Taylor, Mrs Ann (Bolton W)
Fletcher. Ted (Darlington)	Maguire, Frank (Fermanagh)	Thomas, Jeffrey (Abertillery)
Foot, Rt Hon Michael	Mahon, Simon	Thomas, Mike (Newcastle E)
Ford, Ben	Mallalieu, J. P. W.	Thomas, Ron (Bristol NW)
Forrester, John	Marks, Kenneth	Thorne, Stan (Preston South)
Fowler, Gerald (The Wrekin)	Marquand, David	Tierney, Sydney
Fraser, John (Lambeth, N'w'd)	Marshall, Dr Edmund (Goole)	Tinn, James
Freeson, Reginald	Marshall, Jim (Leicester S)	Tomlinson, John
Garrett, John (Norwich S)	Meacher, Michael	Tomney, Frank
Garrett. W. E. (Wallsend)	Mellish, Rt Hon Robert	Torney, Tom
George, Bruce	Mikardo, Ian	Varley, Rt Hon Eric G.
Gilbert, Dr John	Millan, Bruce	Wainwright, Edwin (Dearne V)
Ginsburg, David	Miller, Dr M. S. (E Kilbride)	Walden, Brian (B'ham, L'dyw'd)
Golding John	Miller, Mrs Millie (Ilford N)	Walker, Harold (Doncaster)
Gould, Bryan	Mitchell, R. C. (Soton, Itchen)	Walker, Terry (Kingswood)
Gourlay, Harry	Molloy, William	Ward, Michael
Graham, Ted	Moonman, Eric	Watkins, David
Grant, George (Morpeth)	Morris, Alfred (Wythenshawe)	Weetch, Ken
Grant, John (Islington C)	Morris, Charles R. (Openshaw)	Weitzman, David
Grocott, Bruce	Morris, Rt Hon J. (Aberavon)	Wellbeloved, James
Hamilton. James (Bothwell)	Moyle, Roland	White, Frank R. (Bury)
Hamilton, W. W. (Central Fife)	Mulley, Rt Hon Frederick	White, James (Pollok)
Hardy, Peter	Murray, Rt Hon Ronald King	Whitlock, William
Harper, Joseph	Newens, Stanley	Willey, Rt Hon Frederick
Harrison, Walter (Wakefield)	Noble, Mike	Williams, Alan (Swansea W)
Hart, Rt Hon Judith	Oakes, Gordon	Williams, Alan Lee (Hornch'ch)
Hattersley, Rt Hon Roy	Ogden, Eric	Williams, Rt Hon Shirley (Hertford)
Hatton, Frank	O'Halloran, Michael	Williams, W. T. (Warrington)
Hayman, Mrs Helene	O'Malley, Rt Hon Brian	Wilson, Rt Hon H. (Huyton)
Healey, Rt Hon Denis	Orbach, Maurice	Wilson, William (Coventry SE)
Heffer, Eric S.	Orme, Rt Hon Stanley	Wise, Mrs Audrey
Hooley, Frank	Ovenden, John	Woodall, Alec
Horam, John	Owen, Dr David	Woof, Robert
Howell, Denis (B'ham, Sm H)	Padley, Walter	Wrigglesworth, Ian
Hoyle, Doug (Nelson)	Palmer, Arthur	Young David (Bolton E)
Huckfield, Les	Park, George
Hughes, Rt Hon C. (Anglesey)	Parker, John	TELLERS FOR THE AYES:
Hughes, Mark (Durham)	Parry, Robert	Mr. J. D. Dormand and
Hughes, Robert (Aberdeen N)	Pavitt, Laurie	Miss Margaret Jackson
Hughes, Roy (Newport)	Pearl, Rt Hon Fred

NOES
Crawford, Douglas	Thomas, Dafydd (Merioneth)	Wilson, Gordon (Dundee E)
Evans, Gwynfor (Carmarthen)	Thompson, George
Ewing, Mrs Winifred (Moray)	Watt, Hamish	TELLERS FOR THE NOES:
MacCormick, Iain	Welsh, Andrew	Mrs. Margaret Bain and
Stewart, Donald (Western Isles)	Wigley, Dafydd	Mr. Douglas Henderson.

Question accordingly agreed to.

Resolved,

That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but—

1. (a) this Resolution does not extend to the making of amendments with respect to capital transfer tax or estate duty; and
2. (b) without prejudice to any authorisation by virtue of any Resolution relating to value added tax, this Resolution does not extend to the making of amendments with respect to that tax so as to provide—

1. (i) for zero-rating or exempting any supply;
2. (ii) for refunding any amount of tax;
3. (iii) for varying any rate of tax other-wise than by varying the standard rate in relation to all supplies and importations on which tax is for the time being charge-able at that rate; or
4. (iv) for any relief other than relief applicable to goods of whatever description or services of whatever description.