SAVINGS

HC Deb 21 March 1975 vol 888 cc2079-124

11.16 a.m.

Mr. Michael Neubert (Romford)

I beg to move, That this House, recognising that the present accelerating rate of inflation represents the most serious threat to the welfare of the British people since the Second World War and observing that its harshest effects are felt by those on small and fixed incomes, particularly retired persons, who can see the benefits of a lifetimes' work devalued daily by rising prices, falling dividends and sagging share values, calls upon Her Majesty's Government to ensure greater protection for the value of savings and to give every encouragement to the prime virtues of thrift and self-provision. In November 1923, at the height of the inflation in the Weimar Republic, the rate of exchange was 4.2 billion marks to the dollar. Weekly payrolls were being trundled away from banks in wheelbarrows, and eventually bank notes, by the time they were printed, were worth more as waste paper and were promptly shredded and pulped. A simple wedding ring became a family fortune.

Of course, that was 50 years ago, and, of course, that could not happen here. But it happened again in Germany immediately after the Second World War, when cigarettes became the main negotiable currency. More recently, in South America countries have become notorious for high rates of inflation, salaries having, in some cases, to be doubled overnight to maintain their purchasing power.

There seems to be some general realisation that inflation of that order can come about only when there has been some major upheaval such as a war or a revolution. In this country we have had inflation, apart from the years of depression, since the beginning of the century. Prices are now some 10 times what they were in 1900. It seems that we are able to live with a mild degree of progressive inflation, but there is reason to think that the decision by the oil producers in the Arab countries to increase oil prices fourfold almost overnight was, in the perspective of history, such a major upheaval which could cause inflation of that order.

Here in the United Kingdom in the last 12 months inflation has been running at an annual rate of 19.9 per cent. There is wide agreement that when inflation reaches a rate of 20 per cent. it takes on not just a difference of degree but a difference of character. Here we stand, after 12 months of Labour Government, just one-tenth of 1 per cent. short of that critical point.

It is indeed ironic when we once again look at Ministers' statements to see the comparison of performance with such statements. It was less than six months ago that the Chancellor of the Exchequer, in a pre-election Press conference, made the claim, to reassure the public, that inflation was then running, on a three-month basis, at an annual rate of 8.4 per cent. Using that same basis of calculation, now, less than six months later, the rate is 25.9 per cent.—about three times as high.

Then there was the statement by the Prime Minister on 20th February of last year at Preston, when he said, again just before the first election of last year— The remorseless accelerating rise in prices is a menace which, unless checked, will destroy the fabric of our society. It is eating away at the savings, the security and the future of ordinary families. We in the House have become accustomed to the gulf beween what the Prime Minister says and what he does, but who would have believed that after only 12 months one of the Prime Minister's hon. Friends could have said that in every month under this Government, with the exception of August, the rate of inflation has not only risen but accelerated?

So, despite that graphic description given by the Prime Minister before the first election of last year of the damage that can be done by high rates of inflation, we are now poised on a rate of inflation of 20 per cent. where people's savings are daily devaluing and where rising prices is the principal issue of concern to the people.

In medieval days philosophers used to dispute how many angels could stand on the point of a pin. With the Prime Minister, the only question is "how many convolutions does a corkscrew have?" Yet it is ironical that only some 400 days later we bring the issue of inflation to the House.

It is not just the issue of inflation, because that is commonplace. What is raised by the motion is the effect of inflation on those on small, fixed, and particularly retired incomes, because it is those who stand to lose most by high rates of inflation. When inflation rages, everybody loses. The universal currency is devalued and all of us are affected by that. However, some are better able to withstand those pressures than others.

This is particularly so when we concentrate on the social contract here in the House. That arises, perhaps, unfortunately, from the trend in recent years for tripartite talks at No. 10 Downing Street between the Government, the Confederation of British Industry, and the trade unions. They grapple with the major issues of State, but they represent in the main the big battalions, those who are best able to look after themselves—major manufacturing industry, on the one hand, and the leading trade union leaders, on the other, who, let it be pointed out, at best represent only their 9 million members and their families out of a work force of in excess of 23 million and who, at the very worst, represent only themselves.

So the motion attempts to focus attention on the much wider number of people who are affected by savage rates of inflation. If I choose to concentrate on the retired, it is because, as they are at the end of their lives in terms of active earning they are less able to withstand the competitive pressures that inflation puts upon society. The damage that the Prime Minister forecast in his statement last February is already being done, but most seriously to those who have no means of fighting back, no muscular industrial bargaining power with which to compete. Many of these people will have saved for a lifetime to provide for themselves in their old age. The value of their savings is diminishing daily. If they invest it in stocks or shares or Government loans which have interest rates, the interest comes nowhere near reaching the rate of inflation.

Particularly does the interest not come near to reaching the rate of inflation when it is subject to taxation, as it so often is. These people reel under the double impact of inflation and taxation. The message is beginning to get through to the public at large, if not to the Government.

Hon. Members may have seen recent advertisements by a major British bank of their "money doctor" service. Half the advertisement depicts some desert scene with vultures—rather gruesome vultures, with blood dripping from their beaks—crowding round the whitened bones of the corpse of life savings. The vultures are described as taxation, inflation, redundancy and recession. The most serious of those is inflation.

In a similar advertisement—equally brutal by British standards—life savings are shown as a small vessel being dashed on the rocks of taxation and being threatened with being overwhelmed by the rising tide of inflation—that same rising tide which echoes the report of the Price Commission last November for the three-month period immediately preceding, in which the commission said: This hope"— of abating a big rise in prices— has now been swept away by a tide of rising wages and rising salaries. So these people, peculiarly unable to defend themselves vigorously against the forces which have been unleashed, see the injustice of concentration on a social contract. It is a curious enough contract by anybody's standards. It is voluntary on one party, compulsory on the other. It is an obligation for the Government, an option for the trade unions.

The injustice of such an arrangement between the trade unions and the Labour Government is that many people outside that contract—in speaking of a social contract one would think that it applied to the country as a whole—see that the excessive and inflationary wage settlements achieved under the terms of the contract, and with the apparent approval of Ministers, or at least their tacit disapproval, are achieved only at the expense of people living on small and fixed incomes. Rising prices is the penalty that they pay for such inflationary wage increases.

Therefore, people in this category deserve the full consideration, sympathy and active support of the Government. They need the Government's support. They have no other resort. In view of recent events, one cannot be encouraged by the Government's attitude, because even in this short period of 12 months there have been a number of measures which have seemed to be spiteful and malicious as regards savings.

There has, first, been the lowering of the qualifying amount for the investment income surcharge to a level of £1,000. which hon. Members opposite still seem to regard as a large sum. With inflation at a rate of 20 per cent. a year, that will be a piffling amount before much longer. When one has saved all one's life to secure such an income and then finds that it is to be subject to taxation thereafter, it is disheartening and demoralising and can drive people to despair. That is the present situation.

I quote from a letter I have received from one of my constituents, whose sentiments I am sure will be echoed in letters to many other hon. Members: We are people who have worked hard for a full working life, hoping now to reap some benefit from investment of savings out of tax income. I emphasise that savings are out of taxed income. So this is a three-way impact on savings. They are taxed at source. They are taxed when income is derived from them in later years. They are diminished by inflation. We have no means of updating our income by striking and cannot even maintain the value of our capital. In another letter to me this same constituent says: The result of all this is that people who during the whole of their lives have been good citizens and endeavoured to make a contribution to the country are increasingly becoming anti-social. There is a further twist of the screw for these people. Many of them—I had a letter only in this morning's post from one such person—are people who through sheer patriotism invested in Government stocks—in War Loan and, to mention a particular case, the 3½ per cent. Treasury Stock 1975. These people supported their country throughout these years. They invested in Government-encouraged loans. Yet those investments are most vulnerable to inflation on the pitifully inadequate interest rates they now enjoy. So savers generally are discouraged.

There are two kinds of savers. No doubt the Minister will tell us that savings are keeping up. They might be, because there was, with the excessive wage increases of last autumn, an increase momentarily in real income which was no doubt retained and which reflects savings as a ratio to the whole. But the National Institute for Economic and Social Research which forecast this high level of current savings running at 13 per cent. states that it is likely to drop in the fourth quarter of this year to 10.4 per cent. This will be the inevitable trend. If savings are seen to be a diminishing asset, fewer people will save.

I should like to point to the rather misleading advertisements by Government agencies. There is the current advertisement by the Post Office National Savings Bank which shows a peaceful country village scene—almost a "Toytown" scene—with little shops and people bustling about, and up in the sky there are three wild ducks, in the form of an enormous 9 per cent., flying into the sunset. It would seem to indicate that 9 per cent. is the measure of the generous return on people's investments. But it is nothing of the sort. It is a cruel deception. With single-figure interest rates trying to cope with double-figure inflation rates, the saver can only lose.

Another advertisement asks "Are you on to a cert?", implying that anyone investing in national savings is on to a certain winner. In fact, people who invest in national savings or any other form of Government savings are on to a certain loser. That is the injustice.

Measures like the capital transfer tax seem to strike at the principle of saving by one generation for the benefit of the next generations, implying that a father's ambition to save for his son is despicable and socially undesirable. If the Government do not give greater encouragement to savers, the suspicion will grow that they are concerned, by means of inflation, to achieve the redistribution of wealth and power in this country at the expense of people on small incomes. Socialism does not grow only on overt acts of aggrandisement such as the Industry Bill; it can work in other ways to make the small saver, the individual, increasingly dependent on the State. To quote from a letter from the Minister of State to me in response to an approach from another constituent: I am well aware of the difficulties facing pensioners and believe the best way of helping all pensioners is to increase the amount of the State pension ". That may be one way of helping, but it is not in all cases the best way. People would prefer to be independent of the State. That is the purpose of saving throughout their working lives. Yet in practice, as a result of inflation and measures introduced by the Government, the value of people's savings is reduced.

All Governments are ready to rush forward with concessions to retired people. They may introduce rent rebates, rate rebates, beef tokens, food subsidies, free television and concessionary bus fares, but Socialist Governments seem unwilling to allow retired people to have what they prize above all else, and that is their independence. Philosophically, independence is anathema to Socialism. What the Socialist State would like to see is complete dependence on it. It is the relationship of the drug addict to the pusher. The State seduces retired people with more and more public money until they become totally dependent on it. That does a grave disservice to many forthright self-principled people who, through the years, have supported the country through thick and thin and who now, in the twilight of their lives, see their endeavours put at nought and they become increasingly dependent on the State.

There is the danger that people may welcome this situation. After all, what other choice do they have? May I quote from another constituent whose husband had his own professional practice until, because of ill-health, he was obliged to sell it. He was, of course, taxed on the capital gain. He now has a very small amount of capital as his only source of income, and there is no tax relief on that, even though it is his only source of income.

His wife writes: Maybe it would be better if we spent everything we have before my husband receives the pension at 65, and then we could do as a good many others do and get all we can from social security. Do the Government wish to encourage this attitude, or do they genuinely wish to see people save for themselves and relieve the State of the increasingly heavy burden which has been put upon it?

There is another reason why the Government should consider encouraging savings. If the notion gets around that to save is pointless and that to spend is the best alternative, this too will merely fuel inflation. There is some indication that consumer spending is going into matters like wine, spirits, beer and gambling, to the detriment of productive industry and the production of goods which could be exported to enable us to earn our way in the world. Unless this is stopped, we shall be creating more trouble, and not less, for ourselves.

I call upon the Government to take specific and definite measures to encourage saving. They will have the opportunity very soon to do this when they introduce their next Budget. They have made a start, and I am sure the Minister will point to the Government's achievements. They have recently introduced an index-linked savings bond for retired people, but only up to £500 and only for five years. They have introduced a small scheme to enable people to save up to £20 a month for five years, with the option of another two years. That, too, is index-linked so that the money value is maintained. To the Government's credit, any bonus is tax-free.

These, however, are very small measures compared with the drastic effects of current rates of inflation. The abolition of the national savings stamp, although economically justified perhaps by its administrative cost, seems to me to have been a psychological error because it discards the thrifty practices of people, and particularly children, giving the impression that at a time of inflation to put money aside has little point and ought to be abandoned. I hope that we shall see the encouragement of greater measures of saving.

The Government face indictment from people such as Sir Robert Bellinger, Chairman of the National Savings Committee, who said: I have been deeply distressed that incentive to save has been inexcusably neglected by those responsible for it. The sorry result is that we in the United Kingdom have the slowest personal savings rates … of any of the developed nations of the world. That is a very sad commentary on the current situation.

These measures to encourage savings can achieve some effect. They can raise some hopes in the increasingly despairing minds of those on small fixed incomes, particularly retirment pen- sioners. But they probably cannot do more than that. I am not arguing for complete annexation of savings, because that would have the effect of institutional-ising the rate of inflation and would make the situation more rigid than it otherwise might be. But there are opportunities for making concessionary moves towards easing the effect of inflation on people who are saving. This is something which the Government ought to do because it would be accepted as an alternative to heavier taxation.

What the Government can do, particularly to help these people, is to cut the rate of inflation by two main means. One is to reduce public expenditure, and this is a first priority. It has gone up in the current year by about 9½ per cent., and the people who support such a heavy burden are in many cases unable to bear it for much longer. Secondly, the Government can attempt to constrain the rate of wage increases much more vigorously than they have done so far. Here again I am asking for something short of a rigid incomes policy, for I can see the difficulties and defects of such a policy. Surely a social contract which seems to allow wage increases to run at approaching 30 per cent. is not achieving the desired end. Unless there is much firmer talking, it would seem to be an empty gesture. Whereas we have price control, dividend restraint and rent freezes, we have no restraint on the level of wage increases. Here again, the burden falls not on the able-bodied and active worker, who can achieve such increases by muscular bargaining power, but on those who have to stand by and watch helplessly as prices rise in the shops and the value of their savings diminishes.

I hope that in all those ways the Government will seek to alleviate the burdens and meet the needs of the people about whom I am here concerned, people who have so often been overlooked and neglected but who represent the very backbone of Britain. The Government have the power to do it. Indeed, they have a patriotic duty to respond to the plight of those who invested many years ago, or more recently, and to ensure that they do not end their lives in penury. If nothing is done, we shall have to conclude that the Government, for reasons of their own or through sheer negligence, are intent on the impoverishment of the savings classes.

Next month, in his quartely Budget, the Chancellor of the Exchequer will have a unique opportunity—unique to him—to do something, that is, to arrest the rate of inflation. If he does not take it, if he does not arrest the rate of inflation, if he does not attempt to mitigate the irreparable damage being done to people's life savings by the present situation, he will earn the undying resentment of many millions of his fellow citizens who are not in a position to fight but have merely to stand by and see their savings vanish. If he fails to take that opportunity, he will not be forgiven.

11.41 a.m.

Mr. Alan Lee Williams (Hornchurch)

I congratulate the hon. Member for Rom-ford (Mr. Neubert) on initiating this important debate through his motion, although, as I develop my theme, he will find that, although, on the whole, I agree with much of what he said about the danger created by the erosion of savings, I felt that his approach, especially towards the Treasury Bench, was rather narrow and, in fact, highly partisan. I think that some of his comments in the latter part of his speech would have been better delivered to the Bromley Conservative Association.

In my view, the hon. Gentleman did not put his speech in the proper context. In the first place, he gave the impression that there was no history to this matter, but I am sure that he realises that the problem of inflation has affected several administrations. For example, several decisions were taken by the previous Conservative Government which were more than partly responsible for the present high rate of inflation which the nation faces. Among some of the policy decisions adopted by the Conservative Government, I think, in particular, of the printing of money by the then Chancellor of the Exchequer, Mr. Anthony Barber, as he was at that time. For my part, I wish to discuss the motion not in the context of a party debate—I think that that is where the hon. Gentleman missed his opportunity, if I may say so—but in a far broader setting.

The problem of inflation affects the whole Western world, but where it is to be found at its gravest and most damaging is in Central and Latin America. There are some lessons to be drawn from events in that part of the world which we should be foolish totally to ignore simply because we were too interested in making party-political points about the present Chancellor of the Exchequer and Government. It would be far better if we examined precisely what happened, and is still happening, there and drew guidance from it.

The terrifying situation in Latin America is not without warnings for us. Among the Latin American countries, there are rates of inflation of over 200 per cent., and it is a striking feature that the societies in those countries are almost all dictatorships. The only way one can deal with the situation when the rate of inflation is at 200 per cent. is to govern by dictatorships, which cannot easily be turned out of office and replaced.

The only exception, which stands out like a beacon in Central and Latin America, is Uruguay. There are certain similarities between Uruguay and Britain. Uruguay has a tradition of parliamentary democracy not unlike our own. It, too, has faced, and is facing, problems not unlike ours. It has had structural problems in the economy, it has an old industrial base, and it has very high rates of inflation. Moreover, one cannot be sure that its parliamentary democracy will be able to survive the strain of such rates of inflation and the terrible problems which that creates. Nevertheless, Uruguay is the only country where parliamentary democracy does survive in Central and Latin America, with traditions similar to our own, while at the same time facing serious inflation.

Turning to Europe, we can, I believe, be encouraged by the example of France, and I hope that my hon. Friend the Financial Secretary will look at what has happened there. The French have had quite remarkable success in slowing down their rate of inflation at a time when in this country, as the hon. Member for Rom-ford said, the rate of inflation has been over 19 per cent. per annum. The French have managed to bring their rate of inflation down to between 8 per cent. and 9 per cent. in round terms.

Admittedly, the French have been able to do that at the same time as having a high rate of unemployment, and I do not recommend that to my hon. Friend as a way to proceed. However, that is not the whole story. The French have energetically tackled Government expenditure, and they have done it in a way which, I imagine, my hon. Friend would in many respects envy because they have been able to make drastic cuts in capital expenditure. Indeed, that is why I, for one, believe they were not too unhappy about the cancellation of the Channel Tunnel, in spite of what has been said by hon. Members opposite and by some of my hon. Friends. The French have seen that this is the way in which the problem can basically be tackled.

Naturally, my hon. Friend the Financial Secretary will not be able to tell the House very much today because he, like the Chancellor of the Exchequer, is in purdah, as it were, being unable to comment on what may be proposed in the Budget. There is no doubt, nevertheless, that the Chancellor must rise to the occasion.

The first phase of the social contract, which we all welcome, I believe, as an alternative to compulsion—even the hon. Member for Romford welcomed the social contract—is now moving towards its end, and we can sec the need now for fresh guidelines. The lesson of the past six months is that, unless a new impetus can be given to the social contract, the Chancellor of the Exchequer may have to be exceedingly tough in his Budget. Indeed, he will have to be swingeingly tough if the social contract fails to keep wages within reasonable bounds.

I have a deep concern, which, I believe, is shared by some of my hon. Friends, about the wage explosion which is taking place and which in many respects shows no present sign of abating. One of the most disappointing aspects of this state of affairs is that the whole idea of the social contract, the whole imaginative concept, has somehow or other not got through to the shop floor. This may be due to a failure of trade union leadership to explain exactly what it is all about, but what I find so disturbing as I meet active trade unionists on the shop floor is that so many vague interpretations are put on the social contract.

This is just not good enough, and I hope that our debate today, for which we are indebted to the hon. Member for Romford, will be taken as an opportunity for my hon. Friend the Financial Secretary not only to consider what can be done in respect of the Budget but to pass on to his right hon. Friend the Secretary of State for Employment the urgent need to ensure that the social contract is tightened up and that there is a willingness on all sides, especially on the trade union side, to recognise that if the social contract were to fail not only would the future of the Labour Government be in jeopardy but the very fabric of our society and the very essence of our parliamentary democracy would, in my belief, be endangered.

Without doubt, the Central and Latin American experience shows that if one allows rates of inflation to exceed 20 per cent. the escalation becomes very fast, and once we go beyond 20 per cent. and up to 30 per cent. and 40 per cent. our kind of society will inevitably find it extremely difficult to survive.

11.50 a.m.

Mr. Cyril D. Townsend (Bexleyheath)

I welcome this opportunity of taking part in the debate. I congratulate my hon. Friend the Member for Romford (Mr. Neubert) not only on the precise wordinig of the motion, with which I agree 100 per cent., but on the manner in which he moved it.

I represent a constituency with a very high home ownership level, and I am conscious that there are many people in it who are living on fixed incomes. You, Mr. Deputy Speaker, and I know that "fixed incomes" is a wicked euphemism. It means that people have less coming in every week and, at the same time, their rates and other charges are increasing. My hon. Friend has spotlighted a most important matter.

We must as a nation do all we can to encourage people to save for the future, to think of their retirement and to try put a small nest egg aside. Goodness knows, that is difficult enough these days. We cannot get away from the fact that the Government's policies have greatly damaged the idea of saving for the future. Iain Macleod once said that savings were the harvest of a good man's life. That is an approach which I share.

The hon. Member for Hornchurch (Mr. Williams), in a reasonably toned speech, criticised my hon. Friend the Member for Romford for making a partisan speech. I have no doubt that he will find that I fall into the same trap, if it is a trap, but I believe that my party's approach is the right approach and that we should not think that because a man makes party points they are necessarily false points. The hon. Member for Hornchurch talked about the social contract. This is the essence of the debate. How can we protect the small saver and investor if we do not control inflation?

The Government's main weapon apparently is the social contract. I should remind the House of the origins of the social contract. For this purpose we must look back to 1973, when the Labour Party, in opposition, was encouraging every form of strike for more pay and then condemning the resulting price increases. Hansard records this only too clearly. But it was seen to be a hopeless position for a party facing a General Election. Therefore, the Prime Minister was the leading light in producing out of the hat the social contract. We remember only too well the solemn and binding pact with the unions which preceded it. It was not solemn or binding, and, unfortunately, it has not been kept.

The social contract was a publicity exercise in its infancy which, unfortunately, the Labour Party was forced to take seriously when it unexpectedly won the February election last year. The pact was originally between a minority Labour Government and a major sectional interest, and it was strongly resented in my constituency. People sometimes forget that there are about 14 million people who are non-union workers, and they resent being left out of this cosy pact between the big battalions and the Labour Government.

The Government would be most critical if the Conservative Party or, for that matter, the Liberal Party, whose members are conspicuous by their absence this morning, made a pact with a powerful pressure group, perhaps the motorists, farmers or shopkeepers, because they do not represent all the community. The Government must have a social contract with the nation and not just with an important part of it. No one denies that trade unions are a most important estate of the realm, but I resent the fact that the Government seem to regard them as the realm.

My right hon. Friend the Member for Sidcup (Mr. Heath), when he was Prime Minister, had long and comprehensive talks with the unions. I believe that they were the most detailed talks which have ever taken place on the problem of controlling wages. Unfortunately, the present Prime Minister has not adopted the same approach. He merely said to the unions "This is our problem. Can you help us out? What do you want in return?" A bargain was struck, and there were two items in it—defence cuts and certain proposals on picketing—among a number of others.

Is it realistic to expect the country to support the defence cut proposals? I do not wish to stray over the line, but this is a subject dear to my heart. It is utterly irresponsible at this time of crisis in NATO to propose major defence cuts. Many people resent the Government's attitude to picketing. How can one go to the CBI and say "The social contract wants a bit of back-up. Will you join in this pact with us?" How can any respectable industrialist, knowing that the social contract is tied in with "Bennery ", say "I will do my bit too "?

The social contract has got us off to a very bad start. The unions are increasing their demands. Many distinguished union leaders—and I mention just two, Ray Buckton and Arthur Scargill—have made it perfectly clear that they will have nothing to do with the social contract. I am conscious that a number of trade union leaders—probably the majority—have behaved responsibly and have tried to make the contract work. All credit to them. But they have been given an impossible framework within which to work. Unfortunately, the strike figures are appalling. One needs only to consider what is happening in Glasgow where British Service men are being used to clear up the refuse.

I have no doubt that, apart from Europe, inflation is the most important issue facing our country, and, apart from Europe, it is the issue on which the Government are most divided. A few days ago the Home Secretary made a robust speech supporting wage control. It is curious how attention focused on the speech of the Secretary of State for Education and Science, which, to my mind, carried less weight than that of the Home Secretary. I quote briefly from the Home Secretary's speech, with which I agree entirely: Let there be no doubt that our present rate of inflation is the main cause of our economic difficulties. There never has been a more mistaken piece of economic analysis than the view that we should accept inflation to avoid unemployment. Inflation today, so far from being an alternative to unemployment, is its main cause. I am sure that the right hon. Gentleman was right to state that so clearly and vigorously.

In my first election, in February last year, it was being said "Inflation is 12 per cent. Unless we support the Government, it could go up to 15 per cent." Now it is touching 20 per cent., and the hon. Member for Hornchurch rightly warned of the dangers if it goes beyond the magic 20 per cent. I have a horrible feeling that it will.

The Government are lucky. Thank goodness, world commodity prices are falling, and in the newspapers the Sunday before last there was talk of oil prices coming down. I hope that they will. But the Government seem to be relying on a miracle rather than putting forward their own practical policies. The figures show that the wages explosion is way out of control—about 30 per cent. Alas, I was not present when the Chancellor addressed members of the Labour Party upstairs, but The Times quotes him as giving a clear warning of the threat of wage inflation. Labour Members will not need reminding of his words.

But perhaps I could remind them that Germany is one of our major competitors, whether we are in the Community or outside. I was told the other day that Germany's rate of inflation is about 5.8 per cent. and that in recent years it has never been over 7 per cent. One does not need to be an economist to realise the danger when a major competitor is containing wage inflation within 5 per cent. and we are fighting desperately to keep it at our present level. Why are the Germans taking such a robust line? It is because they have suffered the effects of inflation and because they have a Government who appreciate the dangers and are taking suitable action.

The fault lies not in our stars—not with the oil sheikhs—but with ourselves and the Government that the country has elected. We are simply paying ourselves more than we earn. We are ordering new carpets while borrowing to pay the rent. I hope that the Minister will tell us the Government's current borrowing requirement. I saw an estimate the other day that it is £6,000 million a year. I hope that that is not true, but I have heard even higher figures. If so, they are terrifying.

It could be said that we are in a large tanker heading towards the land. Land is in sight, and if we stay on our present inflationary course we shall hit the rocks and suffer mass unemployment, mass bankruptcy and mass misery. The ship takes a long time to respond to orders from the bridge. The passengers were at first surprised that the captain took so little action: now they are appalled. One reason why the captain is taking so little action is that there is a dispute among his officers on the bridge.

The right hon. Member for Newham, North-East (Mr. Prentice) did his duty as a responsible Cabinet Minister. He simply said that we must control wage inflation, which is surely the task of every responsible Cabinet Minister at this time. He was most unfairly singled out for criticism in the House yesterday by the Prime Minister, and to our astonishment we read that, instead of getting its backing as a man who, with all his faults, at least states the blunt facts, he is now in trouble with his local association.

I have been proved wrong. Like the Leader of the Liberal Party, at the time of the last election I thought that the Government would be forced into a statutory wage freeze by Easter. One remembers that after the 1966 General Election the Labour Government were forced into statutory wage controls, and I was terribly conscious of the struggles within my own party. It was committed in 1970 to free collective bargaining, but under the sheer pressure of inflationary events—and what were the rates then compared to present rates?—it was forced to take tougher action than it had intended.

It seemed to me in October that any responsible Government would be forced, faced with the mass unemployment that inflation of 20 per cent. involves, to take firm action and have some form of statutory incomes control. I am the first to admit that there are all kinds of problems with statutory controls. To name an obvious one, what happens about the self-employed? But how can we be serious about combating wage inflation if we ignore in our discussions the possibility of a short freeze?

What should the orders from the bridge be? The first should be to drop the social contract, or what is left of it. So long as it is around our necks like an albatross, it is very hard for the facts to penetrate to the people on the shop floor. Instead, we should have a national contract. Surely the Government must have a contract with all the nation, not just with one important and powerful section of the nation. We want fair guidelines. How monstrous it is that, day after day, we ask Ministers whether something is within the social contract only to find that no one knows because there are no clear guidelines.

There must be proper talks among the Government, the CBI and the TUC, not just a private pact with the trade unions. There must be signed agreements, and they must be presented to Parliament. Parliament has never approved the social contract. I want a national agreement which is brought to the House by the Secretary of State and agreed by Parliament. There should be some body to which the most difficult problems of differentials could be referred—a sort of long-stop. The Prime Minister should tell the people the truth. In Lord Randolph Churchill's phrase, he should trust the people. One cannot always appease lions by feeding them Christians. In addition, there must be restraint of public expenditure, nationally and locally, and rigorous control of the money supply. I agree that the Government have a good record on the last point.

Inflation is destroying our economy. Certainly it is destroying the small savings of many people in my constituency and is actually damaging our institutions. War unites a country, but inflation is a secret enemy which destroys the people's unity. Tomorrow, unless it is brought under control, it could destroy the peace and stability of the realm. In the next few weeks the Government must get away from the social contract, attack inflation head-on and eventually destroy it.

12.6 p.m.

Mr. Ernest G. Perry (Battersea, South)

My first task, of course, is to congratulate the hon. Member for Romford (Mr. Neubert) on raising this subject so that hon. Members can seriously think about the effects of inflation on savings. However, I agree with my hon. Friend the Member for Hornchurch (Mr. Williams) that both speakers from the other side have tried to put a scare into people about savings. I intend to try to encourage people to save rather than to go along with their approach.

My whole training in life has been to put something by for later on. Despite what hon. Members opposite have said, I want to pay tribute to the national savings movement for the wonderful work that it has done for many years in inspiring people to save. The thanks of the House should go to those in the movement, particularly those who trudge around year after year collecting small sums.

It is the hardest thing to get people to save. The emphasis of our society is on spending. Every newspaper, ITV, BBC —all the media ask people to spend money. The hon. Member for Bexley-heath (Mr. Townsend) said that people are now buying carpets and other things instead of saving money. The hon. Member for Romford emphasised that people were now putting their money into wines and spirits and gambling instead of saving.

Mr. Townsend

Just to get the record straight, I was saying that as a nation we are buying carpets when we have to borrow to pay the rent. I would be delighted to join the hon. Gentleman in a tribute to the national savings movement and to those who, against all the odds, are saving. But can he honestly say as a good constituency Member that he would encourage someone in his advice bureau tonight to take out national savings?

Mr. Perry

I would certainly advise anyone who came to see me tonight to save money and to put his money into national savings or a building society if he wished to do so. What is more, as I said a fortnight ago, I would advise people to put their money into good traditional insurance companies. I cannot go further than that.

The emphasis today is on spending, not saving. We must try to change the emphasis, to make people realise that if this country is to survive we need a better form of saving and we need more savings. I do not want to decry the efforts of the building societies and the insurance companies over the past few years. Although throughout most of last year there was a recession in the movement, at the end of last year and the beginning of this year the amount of money pouring into building societies has been steadily improving. There was an increase last year in the gross income of insurance companies of 22 per cent. for traditional life offices.

Mr. R. A. McCrindle (Brentwood and Ongar)

The hon. Gentleman must take into account the effect of inflation in increasing the percentage to 22 per cent.

Mr. Perry

I was about to deal with this point, but I shall do so now. Listening to the hon. Gentleman, the House might imagine that inflation only started 12 months ago when the Labour Government took office. It might almost be thought that the word "inflation" had not been heard of in the English language before then.

The hon. Member for Romford said that since 1900 inflation had increased tenfold. Since 1900 the Conservative Party has been in power for the longest period, followed by the Liberals and then by the Labour Party. In 1971–72 the Chancellor was at pains to introduce measures to encourage more investment in industry. He reduced taxation on wealthy people to such an extent that hundreds of millions of pounds were put into their pockets. While his motive might have been good, the effect was not the one he desired. Money was not invested in industry. Quite a lot of it was invested in property. Hence we saw an enormous rise in property prices in London. We must not create the impression that inflation is something new or that the Labour Government, in office for 10 months last year and now with a small majority, are responsible for inflation, because they are not.

The savings movement is to be congratulated, because there is now pressure on people to spend their money. In this movement I include building societies, insurance companies, the national savings movement and any other organisation which encourages people to invest. It is to its credit that it is trying to make this country more stable and prosperous.

The hon. Member for Romford referred to the quarterly Budgets of the Chancellor. This was rather unfair. It could lead people to believe that an interim Budget had never previously been introduced. I have been a Member of Parliament for 10 years, and even before that Budgets were often introduced when something happened. Usually there was one in July. In the present situation there must be continuous control and alteration of the monetary policy. The idea of a Budget once a year, in April, is wishful thinking. Chancellors in Tory Governments have introduced interim Budgets.

Savings are the seed corn of this country. If we do not save more, we shall suffer more economic ills. We have to find a happy medium between spending and saving. If everyone saved everything and did not spend any money, our shops and factories would be overloaded with goods they could not sell. This would give rise to unemployment.

Like other hon. Members, I am not happy about the present economic situation. We have to tackle this problem. It does not make any difference what the Government say or do. We shall not be successful if people do not carry out the policies of the Government. This applied to the policies of the Tory Government between 1970 and 1974, and it applies today. I cast no stones at that Tory Government. They carried out policies which they thought were correct. Some of them have proved to be wrong.

No matter which Government is in power, current policies may prove to be wrong in a year's time. I want to see the savings movement encouraged. We know that people on fixed incomes are suffering greatly from inflation. People who have saved money, invested it in a building society or a company and received dividends are to some extent suffering because of the rate of inflation. The Government must tackle it. I am sure that they are as concerned about it as we are. When the time comes I have no doubt that the Government, with the co-operation of industry, the trade unions and most hon. Members, will try to solve this problem of inflation so that those who save may have the benefit of their savings in their retirement.

12.22 p.m.

Mr. R. A. McCrindle (Brentwood and Ongar)

I congratulate my hon. Friends the Members for Romford (Mr. Neubert) and Bexleyheath (Mr. Townsend) on their speeches, and particularly the former for giving us the opportunity to discuss these matters. I hope I shall be forgiven if I also pay tribute to the most interesting and courageous speech by the hon. Member for Hornchurch (Mr. Williams). I could not disagree with a great deal of what he said, especially when he warned us of the disaster which had resulted in South American States when the rate of inflation went into orbit at about 20 per cent. "Disaster is a frequently-used word and its use is not always justified. In this case, however, the hon. Member was perfectly justified.

I have visited South America, too, and seen the miseries that result and the almost inevitable dictatorship which supervenes. The hon. Member has done the House a service in warning us about the need to combat inflation if we are not to be confronted by that sort of situation.

I listened with great interest to what the hon. Member had to say about the social contract. I hope that my hon. Friends will forgive me if I try, as far as possible on such a controversial subject, to adopt a slightly more bipartisan approach by conceding that if there was the slightest chance of the social contract succeeding it would deserve to receive the blessing of every hon. Member.

The hon. Member for Hornchurch told us that the guidelines of the social contract have to be revised. He warned us of the difficulties of a wage freeze. My hon. Friend the Member for Bexleyheath seemed to go along with a short, sharp wage freeze. I do not disagree except to say that it is not so much a wage freeze that troubles me but what takes the place of it when the freeze ends. It is clear in retrospect that statutory policies introduced in the past by Governments of both parties have not worked. I hope I shall be forgiven if I say that it is equally clear that the social contract is not working in the way in which the Government and the TUC envisaged.

Mr. Townsend

My hon. Friend said that incomes policies have not worked. However, if we look at the details of the wage settlements achieved during the last half of the period in office of the Conservative administration, there are good grounds for thinking that their incomes policy was remarkably effective in the circumstances.

Mr. MeCrindle

When I recollect the host of anomalies which resulted, the bitterness of the low paid, and the resultant pressures for considerable wage claims, my satisfaction is more controlled.

The hon. Member for Hornchurch said that we must make the social contract work between now and the Budget; in other words, in the next few weeks. That worried me because I thought that he implied that we must move away from the social contract, which is effectively a voluntary wages policy, and from a statutory wages policy, which I think he agreed had not succeeded, to a period when the only way of controlling wages, salaries and incomes would be by tax methods. It may be that he is right. Perhaps the Chancellor is taking those suggestions into account. If so, I suggest that the unfairness of statutory policies and the social contract will be exceeded by the unfairness resulting from an incomes policy which attacks wage increases by means of taxation, because that will affect not only those who obtain increases as a result of the exercise of industrial power but those who do not. I underline that if the Government and the TUC, with employers' participation, can make the social contract work, I suspect that the Opposition's criticism of the social contract will decline.

As regards the effect of inflation on savings, I declare an interest. I am associated with a life assurance company. However, my interest is much broader than that. It springs from what I may modestly call a lifetime of dedication to the encouragement of small savings. That interest flows from a personal experience of the contentment which can result from the application of thrift and the prevention of unforeseen domestic disasters which befall every family from time to time. The idea of millions of small contributors pooling their contributions to make the ordinary man more secure and more self-reliant is something of which this country can be proud. It has created a private savings business which is the envy of a great many other Western countries, and which invests the savings of the ordinary man in British industry, thus helping to create the jobs from which the ordinary man benefits.

All that has recently changed. Whereas most insurance companies would have been able to boast effectively a few years ago that money invested over a period of time would have kept pace with the value of money, they are not able to claim that today. In a period which hovers on the brink of hyper-inflation, savings can only be returned with benefit if they have been invested in a productive end. I challenge the Minister to tell me of the areas of productive investment today which can produce a return equivalent to the present rate of inflation.

The tragedy is that people have become suspicious of and disillusioned with savings. In the near future, as a result of the reduction in the savings of ordinary people, industry will be affected. Jobs will no longer be created by the investment of these moneys in industry, which in turn means that there will be less wealth to invest, since the workers will be unemployed, on short time, or living on reduced incomes. Thus we have the appalling vicious circle that inflation creates for people's savings.

Retired persons, and those on the point of retiring, are especially worried about the way in which the pensions to which they have looked forward for up to 40 years can be eroded progressively by the effects of inflation. It is not only the pension, which stands as an inadequate protection against the ravages of inflation; it is the nest-egg, the family protection, and the amount that was thought to be adequate to maintain the family left behind in the event of early death which are affected.

It would be irresponsible to give the impression that people are looking forward to retirement with occupational pensions have nothing to fear. I think that it must be recognised that in view of the high final salaries on which pensions are based, and low returns on investments, the time may come when the absolute promise of a pension being paid through a firm can no longer be realised.

I hope that that will not be so. I emphasise that that is not the case now. But that is the threat which inflation, in my view, poses to the ordinary man.

I should like to pay tribute to the virtue of self-support. I recall the description by Sir Winston Churchill when I first entered politics of the ideal situation of this country. He said that he wanted to see a ladder and net society—a ladder up which everyone would be encouraged to climb, and a net into which those who were less fortunate could fall. That is still my view of society as it should be. It is right to encourage those who are the strong members of society to rely upon themselves. However, encouragement reaches an appallingly low ebb when inflation takes over.

I want to be more specific in recommending a course of action upon the Government than has any of the other contributors to this debate, because I believe that this is a time for greater encouragement from the Government and from the private savings media. I recognise that the greatest encouragement that the Government can give is to combat inflation. That is a desirable course which all Governments contend they support. However, why should there not be more specific encouragement? The tax relief given to those effecting life assurance policies could be reconsidered. That tax relief has not been changed for many years. Because of the introduction by the Home Secretary of the device known as qualifying policies, a major abuse, in the form of the opportunity to take advantage of tax relief on life assurance policies, has substantially evaporated.

Although I do not expect a firm answer from the Financial Secretary, I ask him to put this proposition to the Chancellor of the Exchequer. Indeed, I ask him to go further and to inquire from his right hon. Friend why there is an underlying reason which says that tax relief to encourage saving in life assurance is right but tax relief to encourage regular saving in, for example, building societies or unit trusts without the presence of life assurance is not justified. I know that a number of reasons have been given in the past, but, in the new circumstances, I wonder whether the time has not arrived for the Government to undertake a very extensive review of tax relief to encourage savings.

My hon. Friend the Member for Rom. ford referred to the introduction by the Government of index-linked savings. I join my hon. Friend in congratulating the Government on taking a step which flows from the Page Report on national savings a couple of years ago. But I wonder whether it is right to restrict that index-linked saving to such a narrow sector of society and whether it would not be right to issue some Government stock on an index-linked basis which could be taken up by insurance companies and other institutions and could have built round it some of the life assurance benefits which they as private institutions could provide, so that we had a combination of the private and the public approach to attracting people's savings.

In my judgment, competition for savings is good. As one who is involved in the private savings industry, it falls to me to say that I would welcome an encouragement to national savings. In that regard, the Financial Secretary might be well advised to reconsider the Save As You Earn scheme. I think that it attracted considerable money at the time that it was introduced and, to be fair, offered a reasonable bargain. But I wonder whether the basis upon which SAYE is established is altogether right in these inflationary times.

I turn for a moment to the building societies. I say now what I have said many times before only to be told that it is either impracticable or impossible. But again I appeal through this House to the building society movement, and I ask the societies to consider whether in a period of inflation, when perhaps one of the best hedges against inflation is private property, they could not issue shares which, in return for accepting a lower rate of interest—which, incidentally, would allow lower mortgage rates to the borrower—could be tied to the average value of a range of properties; in other words, the saver would have some involvement in the capital gain which at the moment results only to the borrower—the owner-occupier. I think that that is worth exploring.

With property still in mind, I want to say a passing word about investment in property bonds. Here I speak with personal knowledge. Those who invested in property bonds a year or so ago have not done well. On the other hand, if we look at property investment by the small man in this unitised way over perhaps the past 10 years, it will be seen that it is a sufficiently good hedge against inflation that to jettison it and to criticise it without redemption is quite unjustified.

We hear a great deal these days about the pressures being mounted by the self-employed. I had some evidence of that pressure yesterday at a mass meeting in the Grand Committee Room in Westminster Hall. But, there again, I wonder whether self-reliant people who often have given up jobs to take upon themselves the running of businesses with irregular hours and great challenges are not the sort of people who could be more easily encouraged to save by providing for their retirement in the shape of the self-employed retirement annuities first introduced in 1965 and whether the limitations based upon what a self-employed man can invest are themselves up to date.

Having started on the general and moved on to make recommendations, I come back to congratulating my hon. Friend the Member for Romford for giving us the opportunity to consider the devastating effect which inflation has on savings, especially those of people who have retired or who are on the point of doing so. To assist the House and the country and to give some reassurance to people who are so worried by the present rate of inflation, I hope that the Financial Secretary will give real consideration—if not today, in consultation with the Chancellor of the Exchequer—to seeing whether there are not revised ways of encouraging saving. Most of all, I hope that the hon. Gentleman will be able to persuade his right hon. Friend of the real and deep fears which exist about the ravages of inflation upon personal savings.

12.37 p.m.

Mr. David Howell (Guildford)

I think we all agree that my hon. Friend the Member for Romford (Mr. Neubert) has done the House a real service in giving us the opportunity to debate this crucial and central issue in the relatively quiet atmosphere which rather limited numbers generate. It has also provided an oppor- tunity for some extremely constructive speeches from my hon. Friends and for some candid and forthright speeches from Government supporters, especially the speech of the hon. Member for Horn-church (Mr. Williams), which had that flavour of candour about it which we are beginning to hear, alas a little late in the day, from more and more hon. Gentlemen opposite as they realise the appalling course upon which the policies of the Labour administration have set the country.

To come back to savings, it looks as though the overall savings picture presents something of a paradox. I have no doubt that the Financial Secretary will tell us in a moment or two that personal savings in national savings and the building societies have been rather high and rose rapidly in 1974. At first glance the personal savings situation could be interpreted as looking not too bad, but the overall savings situation from the nation's point of view is appalling. It is totally inadequate.

At the moment we are overspending grotesquely. Last week the Chancellor of the Exchequer said that as a nation we were living 5 per cent. beyond our income, and many people would regard that as a very conservative estimate.

It is a piece of evidence beyond dispute wherever one looks at Britain from outside in the Western world that this country is persistently and unrestrainedly overspending in relation to our earnings; in other words we are dissaving, whatever we may be told. There is no hope of getting into equilibrium again until savings match investment and exports and until investment and exports are far higher than they are today.

The paradox is explained by two factors. It is explained by the fact that, although personal savings may be high temporarily, the surplus of the company sector is down disastrously. The company sector is in deficit to the tune of about £4,000 million, and there is still a dangerous level of illiquidity. That is one reason why personal savings are being offset. Probably the major reason, however, lies in the Government sector. Here we see the Government dissaving on a grand and spectacular scale.

My hon. Friend the Member for Bexleyheath (Mr. Townsend) said that he had heard about a £6,000 million borrowing requirement. I am afraid he has worse news coming to him. We shall not get from the Financial Secretary today the level of our present borrowing requirement, but it is certainly higher than the £6.3 billion which emerged when the Chancellor discussed these matters in November.

The Government are the big dissaver. They are doing the opposite of saving on such a massive scale that at the moment they are totally overshadowing any efforts at saving that are being made in the personal sector. Indeed, they are outbidding the company sector in its deficit as well.

This creates a thoroughly precarious situation. Precariousness is the quality which most outside commentators would now attribute to our economic policy and our economic situation. There is the feeling that we are on the edge of an enormous avalanche which could slip at any moment. Much of our borrowing is based on rather ill-defined terms, but they are terms which may carry with them great difficulties for the future.

That creates overall an appallingly precarious situation for three major reasons. First, the high level of personal saving could begin to shrink. It could shrink quite quickly as people begin to realise the basic arithmetic of the situation—namely, that there is a negative rate of interest on most savings. That applies even to Consols at 2½ per cent. Even if an investor is earning 13½ per cent.—very few small savers are doing that—how can that compare with an inflation rate of just under 20 per cent.? Probably the real rate of inflation is considerably higher than 20 per cent. Of course, the answer is that such interest rates do not compare with the present rate of inflation.

Small savers are not being paid for lending money to the Government. They are paying for the privilege of lending money to the Government. They have had—this is no news to anyone who follows these matters—an appallingly rough deal. Everyone knows that small savers get their 9½ or 10 per cent. That may seem a high interest rate compared with the past, but they are watching their money shrink every day while it is invested.

I am not sure how long that situation can continue, I wonder how long the illusion will remain. How long will it be before reality and understanding emerge? I wonder when the money illusion will disappear and when we shall begin to see a rapid decline in personal savings as a different philosophy takes over. The hon. Member for Battersea, South (Mr. Perry) referred to that philosophy. It is the philosophy of "Spend now; eat, drink and be merry, because tomorrow the savings will go ". It may even be that the present high level of savings—I would value the views of the Financial Secretary on this matter—is in the form of tactical saving. It may well be saving up to spend on larger items rather than saving in the sense of permanent thrift. The idea of permanent thrift is something that my hon. Friends strongly welcome and we believe that it should be encouraged. It seems that that view is also shared by the hon. Member for Battersea, South.

So for a number of reasons personal savings are a precarious quantity on which to pin any faith. They are precarious because of the rate of inflation and because there is no example from the Government. On the contrary, the Government's example is to spend. As the days go by the Government are putting further measures on the statute book which make it more and more difficult to undertake the process of saving and less and less worth while to do so.

My hon. Friend the Member for Romford (Mr. Neubert) mentioned the capital transfer tax. That is one measure which will make a more devastating attack on the whole motive for saving and for accumulating possessions such as productive assets, or a business or farm, to pass on to the family than any other Socialist measure. It is only beginning to dawn on the country outside what a lethal proposal the capital transfer tax represents. We know that it is complicated to the point of administrative craziness. We know that it is an unfinished measure, a half-sculptured piece. There are many more amendments and changes that the Chancellor of the Exchequer wishes to effect. When it was rushed through the House, time did not allow those amendments and changes to be made.

What the country does not yet realise—I believe that it will soon appreciate this —is how that tax will strike into every transaction between families and between individuals regardless of motive and regardless of the effect it has in discouraging more thrift, more saving and the handing on of a thriving family business. The capital transfer tax will be there to strike at personal and intimate transactions and to undermine the basis of saving for the family. That is a major contribution, if that is not too sardonic an expression, by the Government to the savings effort of this country. Those are some reasons for personal savings being in a precarious position despite their present reasonably encouraging level.

The second reason for the whole situation being so worrying is the deficit in the company sector. Because it is so big now, investment is not taking place in the way that everyone would wish. Companies are still dangerously illiquid. The stock appreciation tax measures taken by the Chancellor in the autumn helped to a small extent, but against those measures have to be offset the soaring costs of labour and materials and price controls. The recipe for bankruptcy is control on prices with soaring costs. What is squeezed between the two are profits for investment and savings in the company sector. That is what is now happening.

The third element is one that I have mentioned already—namely, the Government's contribution or non-contribution to savings. The Government are the great dissaver. We are now depending very heavily on Arab money. The nation is asking how long the situation can continue. How long can we continue with a borrowing requirement that may now be heading towards £8 billion for the coming year? For how long can we rely upon the good will of the Arab countries and the oil producers to reinvest funds here and to allow us to continue to overspend? To suggest that we are ordering pile carpets and Wilton carpets in the front room while we cannot even pay the rent is a correct analogy. How long can it continue?

The Financial Secretary must know that the situation as I have described it cannot continue. We have to take remedial measures. I believe that somehow personal domestic savings must be jacked up to cover the immense borrowing requirement, or else the revenue expenditure balance of the Government has to be improved, and improved notably by cutting Government spending. We have a number of proposals for how that should be done.

I believe that we shall have to operate on both fronts. We shall have to determine how personal domestic savings can be increased so that we are no longer relying, in this hair-raising way, on foreign borrowing which might be withdrawn at any moment. In addition we have to determine how we can improve the Government expenditure balance by cutting public spending. Let us have no doubt that that is also essential. Even the Government's Public Expenditure White Paper—paradoxically it is blue—made that absolutely clear. In the development of public finances over the next five years savings by the nation will need to rise by one-third from their present level as a proportion of our gross national product. That is what is required if the aims of the White Paper are to be achieved, although most people will realise that those aims are relative fantasy compared with the realities now staring us in the face.

Against the need to increase savings by that dramatic amount, the outlook is for a decline in personal savings from their present high levels. Personal savings from personal income are bound to become more difficult because when the Government do what they have to do, and what I hope they will do—namely, increase nationalised industry prices by removing the remaining subsidies and cut food subsidies, as I believe they have said they will—there will be transferred to personal incomes an additional burden. That will make the difficulties of personal savings all the greater and the need to provide encouragement even to stay where we are all the greater.

We are left with the question which my hon. Friend rightly posed, namely, how we can achieve the really big permanent increase in personal savings—not just temporary savings because wages have gone roaring up and one wants to save for a bigger car or a better holiday—so that we can again with self-respect provide from the personal sector some cover for the Government's huge borrowings instead of having to rely on the begging bowl around the world and so that we can let the company sector keep more of its savings and generate more profits, thus enabling us to get back to a high investment rate.

That is the big switch that has to be pulled by the Government if this country is to turn aside from the collision course on which we are now firmly set. It is a major task, and I think that it needs imaginative and constructive ideas to put it into being. My hon. Friend the Member for Brentwood and Ongar (Mr. McCrindle) mentioned a number of points on the personal side as well as the major changes needed by the Government on the policy side.

I agree with the hon. Member for Battersea, South that the savings movement is essential. It was a psychological error to do away with the stamp. I recognise the strong arguments that were made by the Page Report about administrative costs, but it is essential that new schemes should be developed by the Government very quickly to reinvigorate and keep together the voluntary savings movements which has done a great service to the country. It is not good enough to say that in secondary and comprehensive schools the schools savings movement can rely on the banks. That may be so in some cases, but in infants and junior schools we need new schemes of a tangible kind to replace the tangibility provided by the stamp. The sooner we have these schemes to fill the gap left by the stamp, the better.

Mention was made of indexing, and the Government have put their toe into the water on this matter. I take the point made by my hon. Friend that if we were to go further much faster we should put a question mark over the whole market for Government securities and make great difficulties, but the Government have put their toe in the water and we have in the past wished them well on this matter.

If one is looking for further areas for indexing, the next areas are not on the savings side but on the tax threshold side where some of the thresholds are ridiculous. My hon. Friend mentioned the absurdity of starting the investment income surcharge at £1,000 or £1,500 for retired people. This is a classic example of an area in which the threshold could be adjusted in common fairness even if one agrees—which I do not—with having it at that level in the first place.

Finally, there is another need if we are to get a permanent larger increase in the proportion of national output saved, and that is for the Government machine to gear itself more effectively to the need for savings. One has the feeling that savings for investment as part of national policy are a bit of a Cinderella. I know that savings are the responsibility of the Treasury and that pronouncements are made from time to time by Treasury Ministers. Investment in industry is the responsibility of the Department of Trade, and from time to time announcements are made by that Department. I should like to know who sits down and takes a view about the level of national savings needed to finance the kind of investment that we need and what policies are thereby required to bring about that level of savings. I do not want to know about Ministers who sit down and say that they want this much more public spending and, therefore, they want that much more taxation. Presumably that process goes on although the gap between spending and revenue is very large, and appears to be getting larger. We know the predilection of Labour administrations for taxation as a form of forced savings rather than encouraging individual savings and thrift. I recognise that as a traditional part of the Socialist view of managing the State economy. Putting that aside, however, there is a real necessity for the Government to give more political and administrative weight to the mobilising of savings for industrial investment. Changes are needed there, and I should like to hear the Financial Secretary's thoughts on that.

When all is said and done, and when we have put forward constructive schemes and proposed new policies, the fact remains that as lone as there is a negative rate of interest it is irrational to save. As long as the net result of putting money aside, even with an apparently quite high rate of interest, is to end up with less purchasing power than when one started, it does not pay to save. Somehow we have to make it pay to save again. Only when we do that, only when saving really produces a real net return to the saver, can we honestly stand up and urge the nation to show the virtues of thrift which are required.

That will be done only when the rate of inflation is reduced from its present appalling and apparently still climbing level. The Government have given us very little idea of how they will do that. We seem to have reached a state of policy paralysis. The Chancellor is saying that he cannot reflate, and he is right, but we have an oncoming business recession in which unemployment will rise. Every other country will be able to take measures of reflation—Germany, Japan and the United States—and have the opportunity to reflate to offset or counteract to some extent the oncoming business recession. But we are paralysed. We are boxed in and we cannot move.

Indeed, it would be truly wrong to move now an inch in the direction of reflation, and it is of some help that the Chancellor appears to realise this. But all this creates an atmosphere of total paralysis which is reminiscent of the Labour Party's economic thinking in the late 1920s and early 1930s, when elders of the Labour Party were unable to apply their minds to or produce any new ideas for the surging economic crisis which then confronted Britain.

I get very much the same flavour now that the elder and senior members of the Socialist Party—left, centre and on the Front Bench—have run out of ideas. There is nothing more they can do except to stand paralysed while the recession moves towards this country and finds us more unprepared and in a worse situation to cope with it than any other country as a result of our appallingly high rate of inflation. This is the gloomy prospect for the future which we shall have to overcome and can overcome by our national energies and by a return to thrift by both the Government and the company sector where higher profits must be permitted. But before we get to that point we need new courage and strength in Government policy, and of that I see not the slightest sign.

12.58 p.m.

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

I should like to add my congratulations to the hon. Member for Romford (Mr. Neubert) both on his success in getting a debate today and on his choice of this extremely important subject. We have had a fairly wide-ranging debate, almost a general economic debate, about the effects of inflation and its causes.

I am sure the House will recognise that as a Treasury Minister, I speak under serious constraint at this stage in the parliamentary timetable because we are now under the shadow of my right hon. Friend's coming Budget. I merely say that quite a lot of prescriptions were pressed upon me today on how to deal with the problem, and they were not all compatible with each other. I should, however, like to assure the hon. Member for Romford that the Government are seized of the importance of preserving the integrity of personal savings and are concerned to continue to encourage them.

As my hon. Friend the Member for Battersea, South (Mr. Perry) said, we need to look at the genesis of the inflation which is one of the problems facing everybody who seeks to save today. As he said, it did not begin on election day in February 1974, or on election day in June 1970 when the Conservative Party took office, and any sensible man recognises that. The increase in the rate of inflation has been a worrying feature of our economy and society for many years.

This phenomenon has not been confined to this country. There have been times when elements of inflation have been wholly out of control of all Governments. The Conservative Government had to deal with a period of rising commodity prices. I recognised that when I was in Opposition. That was part of the problem over which they had no direct control. We disputed whether they might have mitigated the effect in ways that we thought appropriate, such as food subsidies, but they rejected those suggestions. I concede immediately that part of the rise of inflation during their term of office was due to causes outside their control.

However, there were other factors which were within their control. There was a high degree of monetary inflation under the Chancellorship of Lord Barber. The hon. Member for Bexleyheath (Mr. Townsend) has been good enough to acknowledge that my right hon. Friend has cut considerably the rate of growth of the money supply, which under the last Government was accelerating at a rate unprecedented in our history. It produced a great inflation in land and house prices, which in turn produced a great deal of misery for many people and, I think, played no small part in some of the election results of last year.

My hon. Friend the Member for Horn-church (Mr. Williams) called on us to tighten the social contract. He referred to some of the consequences for free societies and democratic societies when inflation is not kept under control. He mentioned South America, where counties have been unable to keep inflation under control in a democratic framework. We are all aware of the point he is making. It is only right that I should pay tribute to the extremely difficult job of responsible trade union leaders, who are faced with the responsibility of ensuring that the living standards of their membership and of the families of their membership do not deteriorate. Many trade union leaders have been travelling up and down the country deliberately telling their members to moderate their wage claims. I refer hon. Members especially to the speeches made by Mr. Jack Jones, of the Transport and General Workers' Union, in recent months.

The hon. Member for Bexleyheath, for reasons of quite understandable loyalty, talked about his neighbouring right hon. Friend the Member for Sidcup (Mr. Heath) and the right hon. Gentleman's talks with the trade unions. The hon. Gentleman said that, unfortunately, the Prime Minister had not followed the right hon. Gentleman's way of approaching the trade union movement. It is true to say that there is a distinct difference between the way in which the last Prime Minister approached the trade union movement and the way in which the present Prime Minister approaches it. All I say to the hon. Gentleman is that I should be surprised if he preferred his right hon. Friend's recipe, because it resulted in a three-day working week, which in turn resulted in enormous unemployment and suffering for many people. Moreover, it brought about the February General Election and the ultimate repudiation of his right hon. Friend by his Conservative colleagues recently.

At present there is no sensible alternative to our trying to get the social contract to work. It is an exceedingly difficult problem. I acknowledge at once the constructive remarks the hon. Member for Brentwood and Ongar (Mr. McCrindle) made in this respect.

I should like to address myself to some of the points made by the hon. Member for Romford. He was good enough to acknowledge that the Government had been the first to introduce index-linked savings certificates and an index-linked Save-As-You-Earn scheme, both of which will be coming into effect later this year. I am the first to accept that these are very modest proposals. I make no great claim for them, except that they establish a new principle. That is extremely important. I am glad to see that the hon. Gentleman acknowledges that. We shall have to see how we go. If the schemes prove to be successful, if the public find them helpful and valuable, if there is an enthusiastic uptake, and if inflation rates are not abated, we reserve a completely open mind about the possibility of extending their range and scope to different kinds of instruments and making them more widely available to the public. I give the House that assurance without reserve.

The hon Gentleman was distressed at the fall in share prices. I can assure him that the Government take no satisfaction in the fact that prices on the London Stock Exchange are considerably lower than their peak of two or three years ago. There has recently been a considerable resurgence in the value of shares traded on the Stock Exchange.

Mr. Ernest G. Perry

They have nearly doubled.

Dr. Gilbert

Yes. They now stand at less than 10 per cent. below their values when the Government took office, but that value in turn represented a fall of over 40 per cent. during the period that the Conservatives were in Government. I do not wish to make party points, but I think that it is worth making that observation in passing.

The hon. Gentleman rightly pointed out that the people who were most affected by the rise of inflation were those on fixed incomes, because they especially were affected by price increases. My right hon. Friend has introduced subsidies on the most basic foodstuffs which people have to buy, as distinct from assistance for discretionary expenditure. The hon. Gentleman will be aware of the wide range of food subsidies that have been introduced by the Government deliberately to try to hold down the cost of living of those on fixed incomes and those with the smallest incomes. I hope that I have the hon. Gentleman's support for those policies.

Last summer my right hon. Friend cut the standard rate of value added tax from 10 per cent. to 8 per cent. That was yet another contribution to cutting—not just holding down—the cost of living, and to cutting further increases, because value added tax, being an ad valorem tax, is what is known as a buoyant tax. As prices go up, so do the tax elements. Our cut in the standard rate of VAT meant that future price increases of goods liable to VAT would attract a smaller tax increase. My right hon. Friend also announced increases in the rent and rate rebates.

Even more important was the increase in pensions. The hon. Member for Rom-ford surprised me. He seemed so dismissive of the increases in pensions as almost to be hostile to them. I took down his words with care. He talked about increases in pensions reminding him of the relationship between the drug addict and the pusher, as though these pension increases were not welcome to the great majority of people. I have to tell him that pensioners in my constituency would resent very strenuously a metaphor of that sort. The fact that the Government kept their earlier election pledge to increase pensions by a record amount has been extremely welcome among those who depend on them as their sole source of income. I am sure that the hon. Gentleman, in his fair-minded way, would be the first to acknowledge that proposals for cutting the rate of tax and investment income surcharges, much as I appreciate the reasoning that lies behind his remarks, would be of no benefit whatever to those who rely solely on the national insurance pension or on social security benefits as their means of support.

Mr. Neubert

To be fair to the case I made on that specific point, I related my comments to the other smaller inducements. Of course, one accepts that the basic pension is a right that people have and that it must be kept up to date with inflation to the best of the Government's ability. But I was talking about other small concessionary facilities and smaller inducements, and in that way trying to meet a need which people would prefer to meet themselves if the value of their savings could be maintained.

Dr. Gilbert

I take the hon's Gentleman's point, but I am sure that he would be the first to agree that the present Government's social security policy has marked a major social advance. He will also acknowledge that we are committed in future to increasing pensions not merely in line with increases in the cost of living but also in line with increases in the average national wage, so that pensioners, who have laid the foundation for prosperity for the country will, in the years of retirement, enjoy the fruits of their labours that have been invested arid worked on by the current work force.

Mr. McCrindle

Will the Minister concede that one of the main criticisms of the new pensions proposals, which we were discussing in the House only a few days ago, is that, while under the previous Conservative Government the second pension would have been funded or, in other words, saved, creating money for investment in industry, the present Government's proposals are on a "pay-as-you-go "basis which requires no savings or investment as we go along but relies on the assumption that when the working man of today retires the working man of tomorrow will be prepared to pay him his pension?

Dr. Gilbert

It would not be profitable for us to renew the debate now over the whole question of the funding of the new pension scheme. However, I am sure that the hon. Gentleman will welcome the fact that pensions in future will be better than inflation-proofed.

I recognise that both Governments have applied a rough and ready inflation proofing to pensions over the years. Pensions have been increased under both Governments, and then there has been a period when immediately after the increase has taken effect much of the benefit has been eroded by further increases in prices.

What we are proposing in future is to go one better than that and to ensure that future pension increases take account of increases in our national prosperity as a whole, over and above increases necessary to keep pace with the rising cost of living.

There is a further assistance that my right hon. Friend has announced which will be of direct benefit to those who are fortunate enough in their retirement not to be dependent solely upon the national insurance pension. As the hon. Gentleman will be aware, last November my right hon. Friend announced that for 1975–76 we would be doing away with the confusing marginal age exemption relief for those of pensionable age and would be introducing a new age allowance which would be set at £950 for a single person and £1,425 for a married couple. This scheme will be of considerable benefit to the vast majority of people with incomes up to £3,000 a year. The relief will be withdrawn only very gradually for those with incomes over that amount. These are precisely the sort of people the hon. Gentleman has in mind, and I am grateful for his acknowledgement of that. I am sure that they will welcome the Government's proposals when they are translated into legislation.

The hon. Member for Brentwood and Ongar made a most distinguished and thoughtful contribution to the debate. He recognised that I could not comment upon many of the specific suggestions about tax relief. However, his proposals will be studied. I assure him that his suggestion that we review the whole range of tax inducements for savings appeals to me very considerably. When, as a Treasury Minister, I have time to extricate myself from a never-ending series of Finance Bills, it is a suggestion I shall certainly look at closely. I am sure that the hon. Gentleman's suggestions for the building society movement will be noted in that quarter.

One of the points the hon. Gentleman raised was the problem about the return on productive assets being too low at a time of increasing inflation. This point was referred to by other hon. Members. The hon. Member for Guildford (Mr. Howell) said that for a great many savings vehicles there was at present a negative real return. In so far as return on productive assets is concerned, one of the problems is that, as part of the contribution to keeping down the cost of living, the Government have a stringent programme of price controls. If the return on productive assets is to be raised, one of the ways in which one would have to start would be by relaxing price controls. I am glad to see that the hon. Gentleman agrees. However, as soon as one does that, that has an effect on the cost of living, and as soon as the cost of living is affected, it is immediately reflected in the retail price index, and again it has a feedback into wage claims. Again the vicious circle is perpetuated. This is the eternal problem of Governments in this situation —how to break into this vicious circle and try to stop its perpetuation.

The hon. Member for Guildford spoke under some difficulties because he was continually acknowledging that the Government had done certain things of which he approved, but then he was always forced to say that we had not done enough and that he wished we had done more. He acknowledged that personal savings were currently running at a relatively satisfactory rate. We would always wish them to be higher, but they are running at a much better rate than that of a few month ago. The hon. Gentleman was reduced to asking whether they were temporary or permanent savings. Only time can answer such a question. It would be foolish of me to speculate. I am sure that the hon. Gentleman will welcome the fact that a considerable proportion of savings is channelling its way into building societies, which are not traditionally a form of short-term savings or traditionally where people put money just while saving to buy a television set or some other consumer durable.

The hon. Gentleman was good enough to acknowledge that the Chancellor of the Exchequer had made a contribution to improving company liquidity. My right hon. Friend has made it quite clear that he intends to continue that relief this year and to make it available to those companies which, for administrative reasons, were not eligible to receive it under his last set of proposals.

The Government are awaiting anxiously the report of the Sandilands Committee on inflation accounting, which will receive very close attention as soon as it is in our hands.

The hon. Gentleman called upon us to cut Government spending. He will be aware that we have cut the rate of increase here. But, beyond that, I should say that those who call on us to cut Government spending have a responsibility to say where they want Government spending cut and on precisely what items. It is so easy to make speeches saying that Government spending is wasteful and that this or that must be cut. As soon as there is a proposal to cut a hospital which it is proposed to build, or schools which it is proposed to build, or on roads or houses, the pressures that the public bring to bear not only on the Government but on members of the Tory Party, as on members of our party, are enormous. Treasury Ministers soon start receiving representations from people to the effect "By all means cut public expenditure, but not on our hospital and not on our schools ".

Mr. Ernest G. Perry

The attitude is that it should be cut anywhere else.

Dr. Gilbert

As my hon. Friend says, the attitude is "anywhere else ".

Mr. Jonathan Aitken (Thanet, East)

What about cutting food subsidies?

Dr. Gilbert

The hon. Gentleman has not been present for the whole of the debate. However, I will address myself to his informed comment. I will tell him what happens when food subsidies are cut. They may be cut, of course, but the offset is an immediate increase in the cost of living. That, as we have discussed in another context, leads immediately, quite properly, to wage claims from trade unions, which are responsible for maintaining the standard of living of their members and their families. It is not such a simple matter as the hon. Gentleman seems to think.

Mr. Townsend

If the hon. Gentleman insists on casting a fly over our benches, he must not be surprised if the odd trout rises. Cannot he do anything to prevent the mass municipalisation that is going on and costing the public purse in Greater London £70 million.

Dr. Gilbert

It would be more suitable if we discussed such matters in a debate on the Greater London Council such as we had recently. There is a great need to improve the quality of the stock of London's housing. My hon, Friend the Member for Battersea, South will be the first to agree about that. These are costs which rightly and properly will fall on any Government and on a responsible council.

The hon. Member for Guildford also talked about the nationalised industry subsidies. My right hon. Friend has made it clear that he intends to reduce these. The hon. Member will welcome that. I certainly hope that if any of his hon. Friends follow him into that position we shall not get a series of outbursts at the immediate and inevitable consequence on gas and electricity prices. The effect of reducing these subsidies must be to increase the cost of living, and there will have to be compensating adjustments for those who will be affected by them.

One thing is fairly clear. Both inflation, which is the root concern of the hon. Member for Romford, and unemployment are global problems for the whole of the industrialised world. They are inextricably intertwined. They have been showing considerable increases all over the world in the last few months. They have been created in no small part by the multi-billion pound taxes that the oil-producing countries have been levying on the oil-consuming countries.

Britain is doing relatively less well than our trading partners on the inflation side. I do not think that there can be any argument about that. On the other hand, I am sure that hon. Members will be the first to agree that we are doing emphatically better that most of the rest of the industrialised world on the unemployment side. The unemployment figures in France, Germany and the United States are all much higher than ours. In the United States the rate is more than double ours.

If hon. Members were to contemplate, for example, an unemployment rate—I know that the figures are not totally comparable, but they are close enough—of, shall we say, 1.6 million or higher than that, which would be comparable here with what is being experienced in the United States, I think that they would concede that the Government are following a credible strategy.

So often the choice is put in very simplistic terms between inflation and unemployment. The monetarists, of whom there are a great many sitting on the Tory benches, say Let us accept some unemployment as the price, admittedly the painful price, of achieving a reduction in inflation."

Put that way, there are so many questions which are unanswered. How much unemployment? For how long should such a level of unemployment be accepted? To achieve what rate of reduction in inflation? Unless these matters are quantified the argument simply is not intellectually respectable.

Mr. David Howell

The Financial Secretary says "Put that way, there are so many questions unanswered ". That is not surprising, because he has put the question to himself the wrong way. Does he not realise that it is inflation itself, particularly inflation at the levels we now have, which are diverging more and more from those of our competitors and are now more than three times the rate in West Germany, which will inevitably lead to far higher unemployment? Unless he and his colleagues understand that, they understand nothing.

Dr. Gilbert

Of course we understand that. I was just coming to that very point. This has been the theme of speeches by many of my right hon. Friends. I am glad that I have the acknowledgment of the hon. Member for Bexleyheath. This has been the theme in speeches weekend after weekend by my right hon. Friends the Prime Minister, the Chancellor of the Exchequer, the Secretary of State for the Home Department, and many others. Of course we recognise that.

I say again that it is intellectually disreputable to talk about a simple trade- off between inflation and unemployment without acknowledging what rate of unemployment would be acceptable, for how long, and to achieve what reduction in the rate of inflation. If all that had to be accepted was, say, an increase in unemployment of ¼ million to halve the rate of inflation, I do not think any hon. Member would quarrel with such a choice. On the other hand, if we had to get the unemployment figure up to 2½ million to 3 million and keep it there for 18 months in order to knock five or six points only off the rate of inflation, I do not think there would be many hon. Members, not even the most extreme monetarists amongst the Tories, who would accept that as a price worth paying, because of the social strains which would be involved.

This is far too complex a problem to lend itself to such easy sloganising. We recognise, of course, that unemployment and inflation cause waste and suffering. I assure the House that we are far from complacent about that. I hope that I have succeeded in persuading the House that we recognise the problem and that we have done a great deal to mitigate the effects of inflation, not only on savings but on the standard of living of the ordinary people. Hon. Members will not have to wait very long now for my right hon. Friend's proposals for yet a further attack on the sources of inflation.

Question put and agreed to.

Resolved, That this House, recognising that the present accelerating rate of inflation represents the most serious threat to the welfare of the British people since the Second World War and observing that its harshest effects are felt by those on small and fixed incomes, particularly retired persons, who can see the benefits of a lifetime's work devalued daily by rising prices, falling dividends and sagging share values, calls upon Her Majesty's Government to ensure greater protection for the value of savings and to give every encouragement to the prime virtues of thrift and self-provision.