THE ECONOMY

HC Deb 22 May 1975 vol 892 cc1637-768

4.5 p.m.

Mrs. Margaret Thatcher (Finchley)

I beg to move, That this House, being gravely disturbed by the total failure of the policies of Her Majesty's Government to curb the accelerating rate of inflation, calls upon Her Majesty's Government to abandon their damaging plans for further nationalisation, to take immediate action to cut public expenditure and to secure a reduction in the level of pay settlements, as essential parts of a programme designed to restore confidence and promote the economic recovery of the nation.

Mr. Speaker

I have to inform the House that I have not selected any of the amendments to the right hon. Lady's motion:

To leave out from 'inflation' to end and add 'demands the urgent introduction of legislation to provide self-government for Scotland to ensure the living standards of the Scottish people through the growth and development of Scotland's oil and other natural resources'. To leave out from 'inflation' to end and add 'takes note with regret that neither Her Majesty's Government nor Her Majesty's Opposition have so far put forward any adequate diagnosis of the causes or remedy of the present inflation which would offer the nation the prospect of effective leadership in overcoming its difficulties'. After 'settlements', insert 'by means of a statutory prices and incomes policy'. However, the motion is in very wide terms, and it seems to me that there could be a wide-ranging debate upon it.

Mrs. Thatcher

We are suffering from what the Prime Minister calls the gravest economic crisis that we have faced since 1931. It is different in its effect. It is different in its cause. But it is equal in its gravity.

In this country, the level of inflation that we are experiencing now, its persistence and its acceleration are new phenomena. In previous periods of history, periods of sharp price rises have been followed by falling prices and money has regained its value. We are bound to question now whether people will ever again regain their confidence in money as a store of value or whether a degree of inflation is now the normal state of affairs.

The degree of inflation that we have in this country at present is wholly unacceptable and must be reduced. As Thomas Mann, the great German novelist, said: A severe inflation is the worst kind of revolution … only the most powerful, the most resourceful and unscrupulous, the hyenas of economic life, can come through unscathed. The great mass of those who put their trust in the traditional order … the elderly who hoped to live on what they saved in the past—all these are doomed to suffer. The real causes of inflation are not economic. They are social and they are political. Inflation is caused first by Governments, through rapidly rising public expenditure beyond what the taxpayers can bear and, secondly, by groups of people who try to get more out of the economy than it produces.

With manufacturing production virtually static—and the latest index is 1051 compared with that in February 1974 of 1068—it is not surprising that we have accelerating inflation and, in addition, that we are increasingly having to finance Government expenditure by borrowing from abroad.

A year ago many democratic countries were experiencing similar inflationary symptoms. I know how difficult it is to make comparable international comparisons which are genuine. I remember one of the Prime Minister's speeches at the beginning of the autumn election campaign, when he said: Next time someone tells you that Britain has the worst record for cost of living increases, tell them to get up to date. Tell them that while in the United Kingdom the rate of inflation has slowed down compared with a year ago—in Canada, America, France, Italy, Belgium, Denmark, Sweden and Switzerland it has speeded up. That was at Bury on 26th September.

Of course, the up-to-date picture is now very different from that of only seven months ago. In the last few months since December the OECD countries as a group have inflated at a rate of less than 10 per cent. per annum. In Britain over the same four-month period the figure was 27 per cent. and, as the Press have already pointed out, the Healey figure for the three months to April was 34 per cent.—almost exactly four times the 8.4 per cent. of which we heard during the election campaign, calculated on the same basis.

This dramatic slide in Britain's position in the international inflation league table is a very good illustration of how our situation and performance have been worsening, while in other countries the opposite has happened. The facts about our neighbours' sucesses are becoming more and more well known. Japan had grave problems. It had a 30 per cent. wage inflation last year and it has now got the level of settlements down to half that level this year. And all that without any change in unemployment worth mentioning. It has one of the lowest unemployment rates in the world. Italy's catastrophic visible trade deficit has almost been eliminated. France has cut inflation from about 15 per cent. last year to about 10 per cent. per annum this year. In Germany the oil crisis put up prices scarcely at all. In 1974 they were only 1½ per cent. or so up on 1973, and the rate is already back to where it was before the crisis—that is to say, the German rate of inflation is about 7 per cent. a year, the sort of increase we get in a two-month period here.

Other countries, therefore, have been able to meet and to tackle the problem successfully. Of course there has been a price to pay—a check to growth and, lagging behind it as always, a rise in unemployment in some countries, though not in all. But it is abundantly clear that almost everywhere the natural forces of expansion are working their way through again, and in many countries the underlying situation is so sound that reflationary measures are being taken, a course of action that could not be contemplated here for the reasons set out by the Paymaster-General in his speech in Stoke on 20th May—set out and spelled out, if I may say so, extremely well in a speech which could almost have been made from this side of the House. One just hopes that the Government will act upon the sentiments then expressed.

While the situation is improving elsewhere, here it is still getting worse. But the successes of our neighbours show that inflation can be tackled and substantially reduced. That means that there are no excuses for the different pattern of events that we have experienced here. We could have acted last year and we did not. It would have been difficult, but far less so than to correct the situation we face now. Indeed, the Bank of England itself pointed Jut in its excellent commentaries, at which we always look very carefully—[Interruption.] I rather thought the Chancellor of the Exchequer was greatly in need of the facilities provided by the Bank of England, first for his overseas borrowing and possibly later as a printing press. The Bank of England said: It is … likely to be more difficult to bring about a deceleration of inflation now that prices are rising rising 20 per cent. a year, than when they were sing at 7 per cent. or 8 per cent.—a rate which some years ago used still to be regarded as excessive. The rate of inflation could then be appreciably reduced by a relatively short period of more moderate growth in money wages and salaries. But not so now, and it goes on to explain why.

The Government have constantly vilified my right hon. Friends for suggesting that it would be better to take a little action earlier than to leave it and to have to take a lot of action later. But the Government in fact left it, and now we are facing a position in which they will not be able to go on very much longer before taking action.

There were no magic remedies which the other countries took. They took the necessary steps, which are all recorded and set out. The situation in France has been extremely well documented and the situation in other countries is known. The levels to which they have reflated are known. There are no magic solutions, no panaceas. But each of them faced reality, each of them took determined action, explained to the people what was necessary and managed to get the people to follow them and to join with them to win the battle against inflation.

I turn to the question which I know would be raised if I did not deal with it, the question of unemployment. It is often said that we have not had such a severe rate of unemployment as has been experienced in other countries. In fact, on the figures the seasonally adjusted rate of unemployment is already up to 3.6 per cent. which is above that experienced by some of the other European countries. But at least they are on the way to tackling inflation, while we are on the way still to higher inflation and higher unemployment.

Japan, of course, is a different case. It has always had a totally different attitude towards these matters, and a very good one. The companies have always looked after their workpeople during difficult periods and the work-people have stayed with the companies. Consequently the rate of unemployment there is only about 1.6 per cent.

The Chancellor has already warned of the possibility that by the end of the year we might have 1 million unemployed in this country.

Mr. Sydney Bidwell (Ealing, Southall)

Surely we can draw the conclusion from what the right hon. Lady has said that by and large the employers in Britain have not looked after their workpeople, have not sustained the spirit of co-operation that it has been possible to achieve in other countries. That is what is urgently needed here, and the right hon. Lady has a major responsibility for existing attitudes.

Mrs. Thatcher

I am grateful to the hon. Gentlemen. What the lesson of Japan shows is that there is two-way co-operation. The workpeople have been willing in the battle against inflation to restrain wage claims, and the companies have been willing to look after them during that period. The point is that it was two-way co-operation, and I would be the first to say that that is the only way to tackle inflation. It cannot possibly be done without the co-operation of those who are employed and the co-operation of the unions.

With the present rate at which unemployment is rising here it is possible that we shall reach I million before the end of the year. Not merely is it rising at record rates for this time of the year on the seasonally adjusted figures, but the fact is that the Government have so little control over the situation at the moment that they cannot take action to deal with it.

They are powerless to do anything about the situation. Treasury spokesmen have made it clear that they dare not and cannot relate. All they can do is to sit and wait for the world economy to expand, hoping that some of the increasing business will come our way.

I turn to the balance of payments. The Government's claim last year that they were making a good job of handling the economy rested on three claims. The first was that unemployment was falling. It is not. The second was that prices were moderating. They are not. The third was that the balance of payments was improving—which it is. There has undoubtedly been substantial improvement in the trade deficit this year, and since no other major economic indicator whatever shows any signs of improvement, we shall probably hear a good deal about that. According to a Treasury spokesman two days ago, for the whole of the last year for which figures are available the balance of payments gap was equivalent to 5 per cent. of gross national product, or to £68 for every man, woman and child in the country. We have been living well beyond our means, as the Treasury spokesman stated.

Now there is some improvement in the balance of payments and comment has come in the Press and from economists about the reason for it. Before we rejoice too much it is as well to analyse that reason and to see whether the improvement is likely to be sustained. A recent article from the London Business School said, The recent improvement in the balance of payments is being brought about by factors which may not be desirable in the longer run. It refers to two things, the first being exports. It is not that the volume of exports is rising. That has fallen. The improvement stems entirely from the increased price. But that is not a healthy situation. The faster our export prices rise today, the smaller the quantity of goods we shall sell in the future. We are therefore in difficulty on the export side because the volume is not rising but the price is rising.

The second factor was imports. They have certainly fallen, and that has been partly brought about by manufacturers reducing the level of stocks, particularly the stocks of oil which, for reasons we understand, became very great and had to be reduced. The improvement is also associated with the slowing of economic growth and increasing domestic recession.

The London Business School forecasts also strongly suggested that such improvement as there may be in 1975 will not last. Whether or not the exchange rate slips, it forecasts a worsening current balance of payments over the years to 1977. Its conclusions only go to show that one cannot build a healthy lasting balance of payments on a foundation of declining production and runaway inflation. Even the cheer on the balance of payments front is therefore very muted.

I turn to a subject which the Prime Minister forecast I might mention—public sector borrowing. Overseas holders of sterling are not only worried about the current rate of inflation; they are increasingly concerned at the borrowing situation inside the country, particularly the Government's own finances. They know that it can lead to a substantial fall in the value of their money.

At the time of his first Budget the Chancellor aimed for a massive reduction in the public sector borrowing requirement, and I think we all applauded him for that. He aimed to have a public sector borrowing requirement of £2.7 billion in 1974–75. It now seems that he no longer cares very much about the public sector borrowing requirement because the acid test of his and the Government's attitude lies in the figures produced for the latest Budget. He set out to plan for £2.7 billion. By November the figure had risen to £5.5 billion. The out-turn was £7.6 billion for the last year. This year he planned for a further £9 billion, and since he announced that figure there have been numerous proposals for further expenditure in the last weeks. Already the papers are forecasting a rate of £10 billion before we go any further.

Of course, even the £9 billion was a figure in real terms, and if one adds to it the degree of inflation—

The Chancellor of the Exchequer (Mr. Denis Healey)

No.

Mrs. Thatcher

It must have been the figure in real terms. If not, on what terms was it based? [HON. MEMBERS: "Answer".] What level of inflation did the Chancellor build into it?

Mr. Healey

It assumed that inflation would be governed by a continuation of settlements at the current rate.

Mrs. Thatcher

Which settlements and which current rate—the three months or the annual rate? If it is the annual rate of inflation, it is 21.7 per cent. If it is the Healey rate of inflation it is 34 per cent. Perhaps the Chancellor will tell us when he winds up the debate whether he still stands by a public sector borrowing requirement of £9 billion for this year.

Mr. Healey

Yes.

Mrs. Thatcher

He does? Well it is already too high. The Paymaster-General had a great deal to say about it in his recent speech and I am amazed that a Chancellor who set out to have a public sector borrowing requirement of £2.7 billion 15 months ago should be so happy with his planning that the figure is now £9 billion.

He knows full well that this figure will be very difficult to finance by a mixture of the balance of payments deficit and personal savings. There is a danger that the gap between these two figures will be financed by other means. As the Paymaster-General so aptly put it the day before yesterday, when this happens the Government have to borrow from the banks.… This is where the problems start. This method of finance enables the public authorities to settle their bills, but it tends to leave a corresponding flood of cash and bank deposits in the economy. It is known —and this is a Treasury Minister— figuratively as resorting to the printing press. As last year's borrowing requirement jumped from £2.7 billion to £7.6 billion in 12 months—an unforeseen increase of £5 billion—we are entitled to apply that kind of planning to this year. On the most generous basis, if one were to add not the same percentage figure but the same amount of increase to the public sector borrowing requirement, it would end at the fantastic figure of £14 billion. We know full well that at the level at which wage settlements are proceeding in the public sector, the Government are apt to be in considerable difficulties about whether their revenue will be sufficient to match their expenditure when it comes to meeting these claims.

I come to public expenditure. A fundamental reason why the Government are having to borrow so much is that they are spending too much. At present public spending amounts to 60p in the pound of national income, about 35p being taken up by making transfers and 25p by goods and services. But this figure of 60p is almost certainly beyond the tax capacity of this country. The Government's decision not to match their increased expenditure last year by increased taxation is evidence that they, too, realise that the population has nearly reached the limit of what it can take in increased taxation.

Mr. John Pardoe (Cornwall, North)

Does the right hon. Lady recall the time when as Secretary of State for Education she helped to increase the borrowing requirement of the Conservative Government, which they inherited as a minus quantity, to £4.5 billion? Will she say why the Conservative Government did not have the guts to increase taxation to pay for their profligate schemes?

Mrs. Thatcher

The hon. Member will remember that the Conservative Government had to announce its public expenditure cuts one month after the oil crisis had started, on 17th December 1973—cuts greater in real terms than those which the Chancellor has now announced. They are all on the record. I took the view, I believe rightly, that at a time when growth in the economy was going well and we were expanding, education should be a major beneficiary, and the nation did very well at that time. That is the view of my colleagues, too. We took the view that when we had to have cuts, education also had to share more in those cuts than it had on 17th December 1973. I notice that some of the cuts which were made, although they were greeted with howls of derision by the then Opposition, have never been restored, even though this Government have added some £20,000 million of expenditure to their plans over the current two years.

The present level of public expenditure is well beyond the country's tax capacity and the Government's decision not to match it by increasing taxation really reveals that. It is evident that the population has nearly reached the limit of what it will take in increased tax. One cannot go on increasing public expenditure in times of no growth in the same way as, or even faster than, when the economy was growing. To do that is to redistribute the nation's income from the people to the public sector in a way which the people and the private sector will not accept and which they will strain by wage increases to correct.

The Government have no alternatives in this deteriorating situation but to reduce public expenditure, first because they cannot get enough in tax and, secondly, because they will not be able to borrow enough on a sound financial basis and therefore may be forced to use the printing press. Of course, the Government challenge us about where we would make cuts, implying that if political decisions were too difficult we need not make any decisions to cut. But in the present deteriorating situation they will make them anyway. They have been listed in the Official Report on 15th April—£1,100 million that could be brought forward to this year but are not.

In the present deteriorating economic position we have no choice but to make some cuts and, like the Economist this week, I have no doubt that at least the Treasury is preparing a substantial contingency package for later in the year. As a start, the Chancellor of the Exchequer could bring forward his £1,100 million in cuts, at present prices. I understand that effectively they will be worth only £900 million at 1974 prices. He could bring those forward and implement them now. Beyond that, all who have sat on the Front Bench know the processes that go on when there are Treasury cuts, and doubtless those on that Front Bench will have had experience of the process that goes on.

Those who were upstairs in the Public Expenditure Committee the other day heard evidence given in public by the Chief Secretary about how the Treasury goes about it. It would seem that times have not changed, and that the usual procedure has been followed. In practice, individual Departments are told to cut expenditure by a certain amount, and the choice of cuts is left to them, in the light of the state of current contracts and commitments and the costs of dislocation. Things are still the same, but the Chancellor of the Exchequer knows that below the Blue Book on Public Expenditure there is a Public Expenditure Survey Red Book which gives far more detail, at which I would love to have a look now. Below that there is a great sheaf of papers from each and every Department dealing with everything.

The Chancellor knows full well that when a direction goes out to cut expenditure it cannot be done just like that. Certainly, in my own Department one had to go through contracts pending, contracts signed, costs of compensation and cost of transfer payments to see where cuts could be made. There are certain places where one can cut, and then one is left with making cuts on things such as procurement. It is my suspicion that that is exactly what is going on now. If the Chancellor would give us access to those figures it would give us great pleasure to go through them and to see where cuts could be made.

Mr. Ioan Evans (Aberdare)

Before the hon. Lady gets to the point, is she going to itemise the places where she thinks the Government should make cuts, in view of the fact that earlier her Front Bench colleague was demanding additional social services expenditure and her party is demanding an increase in defence expenditure?

Mrs. Thatcher

I understand that the process is already under way. I was looking at The Guardian of 4th May dealing with cuts in education. According to reports—and I know that the Government can neither confirm nor deny unless they make a statement—the exact process that I have indicated is already under way. My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) gave a number of examples of cuts when he spoke on the Second Reading of the Finance Bill. It would take a long time to go through them all in detail. If I may precis them it will be quicker.

He said we would bring forward into the current year as much as possible of the £1,100 million cuts planned for next year. He said that there are some things we cannot afford and that it would be better for us to recognise that. He said that sometimes the Government seem to go about public expenditure in the wrong way; they never seem to ask, "What can we afford to spend as a nation?", only "What must we spend and what must people be made to pay for? What must we borrow abroad or print?"

We would reduce now some of the £2,000 million being spent this year on subsidies for council rents, food and nationalised industry prices. All this is in the Official Report. The hon. Gentleman might not know that housing subsidies have doubled in the past two years. They have gone up tenfold in the last ten years, and have done precious little to sort out the housing situation. It would have been far better if the Government had saved that money and used it to follow our proposals at the last General Election. I note as I see him sitting there that in a letter—

Mr. Douglas Jay (Battersea, North)

rose—

Mrs. Thatcher

May I just finish and then I shall be perfectly willing to give way, although I have a long way to go. [Hon. Members: "Hear, hear."] I am glad that hon. Members think I have a long way to go. I wish to refer to a letter of 11th April about houses from the hon. Member for Manchester, Ardwick (Mr. Kaufman) who is an Under-Secretary of State at the Department of the Environment. He was asked about the cost to the public purse of purchasing council houses and providing financial assistance to house purchases, and he said: On our estimates, the net cost of a new council house in its first year of occupation will, on average, amount to about £700, i.e. loan charges and management and repair costs of about £1,000 per annum and £300 per annum for unrebated rents. He went on at the beginning of the next paragraph, Turning to the private sector, the estimated amount of benefit received, on average, by mortgagors in England and Wales in 1973/74 was £101. So that it is very much cheaper, certainly in the earlier days—although the hon. Gentleman made a different comparison in later years—to help people to purchase their own homes than it is to have these massive council house subsidies.

My right hon. and learned Friend the Member for Surrey, East went on to tell the Government what we would not do with some of their expensive schemes. We would not carry through the Petroleum and Submarine Pipeline Bill which will create a borrowing requirement of £900 million. We would not nationalise the aircraft and shipbuilding industries at a cost of £550 million. We would not carry through the Community Land Bill which would mean employing 14,000 administrators at a cost of £660 million a year when put into effect. We would not endlessly dole out money to enable nationalised industries to run into bigger and bigger debts and we would not, out of spite, cut out pay beds from hospitals at a cost of £40 million. Part of the problem—

Mr. Jay

Does the right hon. Lady also recall that the previous Conservative Government took decisions in favour of immense expenditure on Maplin, the Channel Tunnel and exceedingly extravagant motorways in London all of which have been cancelled by the present Government?

Mrs. Thatcher

As the right hon. Gentleman knows, the Channel Tunnel would not have been heavy on public expenditure. It was the rail link that would have involved the expenditure. In the early years Maplin would not have cost very much. I accept that in the later years it would have done. What was the other point?

Mr. Jay

The motorways.

Mrs. Thatcher

We cut the motorways severely on 17th December 1973. I remember that future expenditure on motorways was severely cut then. We did not hesitate to make cuts when they were necessary. It is quite a different matter to increase public expenditure during the period of growth that we were experiencing then in the period of virtually no growth such as we are currently experiencing.

It is important to stop further nationalisation measures coming forward. They are far more expensive than anything the right hon. Gentleman mentioned as having been cut and they place tremendous burdens on the Exchequer in future years as well as adding a great deal to the public sector borrowing requirement. Many of those measures were announced after the Budget measures. For a Government whose chief objective is to fight inflation the question is not whether the Chancellor is to make further cuts in public expenditure but how long it will be before he announces them.

I turn now to the social contract and wages.

Mr. J. Enoch Powell (Down, South)

Before the right hon. Lady leaves the question of the public sector borrowing requirement, having indicated that in her view £9,000 million is a grossly excessive figure, may I ask whether she can give some guidance as to what, in the view of the official Opposition, is the acceptable, safe, size this year of that net borrowing requirement?

Mrs. Thatcher

It would be that size which could be financed without resorting to the printing press. Neither the right hon. Gentleman nor I know that amount. If we succeed in getting down public expenditure, that amount in any event would be less. The right hon. Gentleman knows that full well.

The motion also refers to the effect of the social contract. I have dealt with the monetary route to higher inflation but that is only part of the story. We are also suffering at the same time from the failure of the social contract to curb wages and prices. If we take as an illustration the period before the social contract, 1964–74, because it gives a much better average, we find that prices rose at the same rate as earnings, less about 3 per cent. which was the average increase in productivity.

We have therefore some means of calculating the expected rise in prices from the increase in earnings with a suitable time lag. We now turn to look at the figures for the past year. They speak for themselves. When the Government came into power the increased cost of living year on year was 131 per cent. Wage increases were running at 14 per cent. They were approximately the same. Now the wage rate increases over the year are 32 per cent. while prices have risen over the year 21.7 per cent. I am taking the annual figure. This means, taking the criterion I have given, that many of the wage increases for the past year have still to work through into prices. These are social contract wage increases. This is the past 15 months.

The Prime Minister (Mr. Harold Wilson)

The right hon. Lady will be aware that many of the increases last summer were the result of actions taken by her Government. The Pay Board had already started the reference on London weighting allowance. It had to consider the nurses, the teachers and the postal workers. The railway arbitration restructuring was already on. Many of those came last summer so that, taking year on year, the right hon. Lady must take responsibility for many of the things her Government started.

Mrs. Thatcher

Is the Prime Minister saying that many of the wage claims now are below that figure? Many of them coming in the next wage round are well above it. They were already rising towards the end of the period. Those wage rates have still to work through into increased prices.

If we find, as we do, that the increased wage rates will soon be reflected in the same figures for prices less about 3 per cent., we find that the social contract becomes an engine for creating inflation not for curbing it. The second guideline automatically allows wage rates to rise as much as the cost of living. In theory if they rise no more than that we might get the rate of inflation down by 3 per cent. a year, if that were held to absolutely. We know that it is not held to absolutely.

Second, we know that that is an absolute minimum and that the other guidelines often add things so that the wage increases permitted by the social contract are well above the minimum. We find that the social contract becomes a method—as its guidelines are at present—of increasing the rate of inflation still higher. That is why a number of us, myself and some trade union leaders apparently, say that the guidelines must be altered if we are serious in our wish to tackle inflation.

Mr. Ron Thomas (Bristol, North-West)

When the right hon. Lady is talking about wage rates would she make it absolutely clear that she is talking about the minimum wage rates? If she is, and I suspect that that is the case, the impact of a 30 per cent. increase in minimum wage rates is far less on unit costs of production because the majority of workers in most industries are already receiving above the minimum.

Mrs. Thatcher

Wage rates are up by about 32 per cent. Average earnings are up by about 27 per cent. to 28 per cent. —still well ahead on the year-on-year level of increase in inflation. That means that they still have to work through. It still means that the terms of the social contract, even if its clauses are adhered to, will be an engine for creating inflation because the minimum which it permits is the increase in the cost of living for the past year. When we add the amounts which can be gained under the other guidelines, reforming pay structures and so on, the hon. Gentleman knows full well that the maximum increase will be well above that. Also, the contract permits people absolutely to recoup the very tax increases which the Chancellor asked them not to recoup but which the guidelines say they may. Therefore, we are locked into a circle in which the contract has become not a device for reducing inflation but an engine for increasing it.

Taking one thing with another, we find that the inflation rate is accelerating sharply. An interesting table was published in the leading article in this week's edition of the Economist putting the rate in 1973 as 9 per cent., in 1974 as 16 per cent. and in 1975—on the same basis—as about 25 per cent. If we look at it year by year, from 9 per cent. one year to 16 per cent. the next year and to 25 per cent. the following year, and continue that forward in progression, it means that we shall rapidly be on the verge of hyperinflation, unless the Government take serious steps to reduce it and to renegotiate the guidelines so that they positively cut down the rate of inflation. Unless that is done we shall have very little hope of tackling inflation in this country.

First, the Government have to reduce public expenditure. They may say that they do not want to do so—no one likes to do it—but they have to in the present situation. Secondly, they must renegotiate the guidelines if inflation is to be reduced. Thirdly, they must stop the schemes for nationalisation, which transfer more and more money from the private sector into the public sector and make it extremely difficult for private industry to continue operating and to undertake the necessary investment that they so need if we are to have industries fit for tomorrow and fit to give us rising standards of living.

The Prime Minister's policy has been to nationalise more, to spend more and to tax more and then to borrow more. When confronted by a really tough situation he is apt to waffle and retreat. Not for him is there the long-term strategy that would lead to flourishing, profitable industry, which is the only source of secure and stable jobs and the only way to rise in prosperity in tomorrow's world. He prefers the short-term expedients that might get him through the day without too much difficulty. That is the lesson of the last year or so.

If, like other countries, we had faced reality and had taken steps with the same determination as they did, inflation would now be falling instead of rising and we could look forward to falling inflation and falling unemployment. It would, perhaps, be too much to hope for tax reductions or real tax incentives to create wealth. That is not the way of a Socialist Government. However, at least we might have been able to pay our own way instead of being so dependent on borrowing from abroad, and we might not have leaned so heavily on future generations for repayment of our debts.

After we had been in office for a few months the right hon. Gentleman the Prime Minister asked my right hon. Friend the Member for Sidcup (Mr. Heath)—[Interruption.]—he is helping to win the referendum; the Government cannot rely on their own troops to carry out their work—this question: Last spring, when the Prime Minister had been in office for just a few months, I asked him a question, which he then evaded, and I ask him to answer it today. How many more years, if they were vouchsafed to him, would he have to be in office before he was prepared to take his own personal responsibility, and accept his Government's responsibility, for the state of the nation under his Government, as a result his Government's policies—and, above all, his and their responsibility for unemployment?"—[Official Report. 2nd November 1971; Vol. 825, c. 32.] The Prime Minister has now been in office for over—[Interruption.] That was the point which the present Prime Minister asked my right hon. Friend the Member for Sidcup when he was Prime Minister. The present Government have now been in office during two periods amounting, together, to over 15 months. During that time inflation has become a record, unemployment is rising fast, borrowing is unprecedented and public expenditure is out of control. These are the results of Socialist measures and the Socialist administration led by the present Prime Minister for which he must take responsibility.

This is not a time to talk, talk, talk. This is a time for action. The Government are in a position to take that action if they have the courage and the determination. If not, the people will continue to suffer.

4.57 p.m.

The Prime Minister (Mr. Harold Wilson)

Before I reply to the speech made by the right hon. Lady the Member for Finchley (Mrs. Thatcher)—I hope she will forgive me if I do not follow her entirely—I want to remind the House of the background to this debate. I shall not follow her because I want to talk about the policies of the Conservative Party and my party, and not some of the other things she wanted to talk about.

It will be recognised that a week or two ago great concern—and this is the background to the debate—was being expressed at home and abroad about the state of the pound sterling. A great deal of this was, of course, related to anxieties about inflation, to which the right hon. Lady referred, as I shall.

However, first, I should like to take up the references the right hon. Lady made earlier in her speech to what is, and must be, the main determinant of the foreign exchange position; that is, the progress of Britain's overseas trade. I should like to ask the House objectively to review that progress.

In the fourth quarter of 1973 our visible trade deficit was £976 million; that is, an annual rate of over £3,900 million. I remind the House that the effect of the increase in oil prices had hardly been felt at that time. This was natural trade, not the increase in oil prices. Even so, by that time our trade balance on normal trade was heavily negative.

Therefore, we had nearly £4,000 million a year deficit, with hardly any effect from increased oil prices. The right hon. Lady will concede that even by her rather idiosyncratic notions of collective responsibility, she had at that time—[HON. MEMBERS: "Oh."] I shall have something to say about this later. The right hon. Lady will concede, I think, that she had full responsibility as a member of the Government which had produced this situation in 1973, even though I am prepared to be now—as I was then—generous about the effects of the increase in commodity prices. That was the position—an annual rate of deficit, before the oil price increases, of £4,000 million.

On 9th November 1973 the Institute of Directors was told, on behalf of the Government of which the right hon. Lady was a member: There are two kinds of problems and they feel very different. There are the problems of failure and the problems of success. Today if only we could all realise it, we are facing the problems of success. So all right hon. Members of the Opposition, whether they sit on the Front Bench or have retreated elsewhere, have that phrase strung around their necks" the problems we are facing are the problems of success." That is what the right hon. Lady was associated with—a deficit of £4,000 million a year, before oil. I wonder what she considers, therefore, to be the position about the present balance of payments situation. Incidentally, the right hon. Lady quoted the Economist just now. It rather surprised me that she quoted the Economist, because within a few weeks of that "problems of success" boast all the quality Conservative papers, from the Economist upwards, were headlining inflation rates of 20 per cent. in 1974, and they were calling for an anticipatory election before we reached the 20 per cent. inflation which the right hon. Lady has been talking about. They were also warning at that time—I have the cuttings in front of me—of a heavy lurch into unemployment in 1974. So, £4,000 million a year, by her standards, therefore, was a problem of success—unless she wants to dissociate herself from that statement—and 20 per cent. inflation already committed.

Let us now judge, therefore, the country's current performance. I started by referring to the fact that this debate began because of the position of sterling. Let us judge the country's current performance against that criterion.

In 1974 as the full effect of the fivefold increase in oil prices worked through, this by itself imposed, on top of the Conservative's deficit, an extra cost of some £2,500 million on our balance of payments. Yet the balance on the rest of our trade, excluding oil, was better in every quarter of 1974 than the Conservatives achieved in the last quarter of 1973.

Therefore, we started from a prospect of a £6,500 million trade deficit; £4,000 million already reached without the oil surcharge, and an additional £2,500 million with the oil surcharge. In the first four months of 1975, this year, the country's visible trading deficit, when we include oil, has been £972 million, an annual rate of less than £3,000 million. That is a substantial improvement, including oil, on the last quarter of 1973, when the increase in oil prices had hardly begun to work through. In these four months of 1975 we have been in surplus on our non-oil visible trading account, in surplus compared with that multi-billion deficit we inherited, which, by Conservative standards, was just "a problem of success."

The House will recall that my right hon. Friend the Chancellor of the Exchequer said in his first Budget more than a year ago: as with the oil deficit, we cannot hope to eliminate the whole of the underlying deficit this year."—[Official Report, 26th March 1974; Vol. 871, c. 285.] That was the inherited £4,000 million a year rate. But in the first four months of 1975 we have done just that, and it would be right for the House to recognise the magnitude of that achievement. I wish the right hon. Lady had said more about that instead of trying to depreciate it. Tory parties, we have noticed, are always somewhat cyclical in their readiness, rhetorically, to sell Britain short. The cycle starts on the day they get into office—[Interruption.] Cyclical patriotism", says my right hon. Friend the Chancellor.

Mr. Julian Amery (Brighton, Pavilion)

The right hon. Gentleman is speaking as though the rate of £4,000 million a year deficit was something which would have been continued through 1974, irrespective of oil. However, he will he aware that the Treasury forecasts against the background of the last quarter of 1973 as regards investment intentions showed that we would have been in balance early in 1975.

The Prime Minister

Something must have happened between the right hon. Gentleman seeing the forecasts which he saw the day after the election, four days before we came into office—there was that long delay—and over those four days, because the forecasts that we were given were very much worse than that, and they said that we should not be in balance even without the oil situation. That was the forecast we were given on coming into office in March 1974.

On top of what I have mentioned, there is the substantial surplus in our balance of invisible trade, which increased last year, and to all those responsible I paid tribute in my speech on Tuesday night. When account is taken of that, the deficit on our total current account so far this year has been £492 million; so our current account deficit this year, including oil, is running at a rate 25 per cent. below the rate in the last quarter of 1973, when the oil price increases had had no major effect. This is a significant improvement. I am surprised that we have not heard more about it from the right hon. Lady. Compared with the same four months last year, 1974, the current account deficit has been cut by over 60 per cent. We had no credit for that this afternoon.

On this basis, therefore, including invisible earnings, the non-oil current balance has been transformed from a deficit of £784 million at an annual rate in the last quarter of 1973 to an estimate surplus at an annual rate of £1,506 million so far this year.

Mr. Powell

Will the Prime Minister, in addition, point out that the record of his Government would be even better if on the same basis he would allow for the very large deficit with the EEC?

The Prime Minister

I hope to come to one or two points about that shortly, in relation to the export figures, if the right hon. Gentleman will bear with me.

There is another fact which is relevant. I have been quoting so far monetary figures. If we take export and import volumes, the House can take some encouragement from recent trends. At a time when the volume of world trade has surely been declining we have done well in maintaining the volume of our exports. This must suggest that our share of world trade over these past months has been maintained, and possibly increased. On the other hand, import volumes have been falling steadily in every quarter since the end of 1973.

Taking particular markets—I can respond to the right hon. Member for Down, South (Mr. Powell), as this is the next bit of my speech anyway—in 1974 the EEC took more than one-third of our exports, more than the rest of Western Europe and North America put together, and in the most recent three months the value of our exports to the other members of the EEC increased by 4 per cent. on the previous three months at a time when exports to North America fell by 5½ per cent. and to Australia, New Zealand, South Africa and Japan, taken together, by 9½ per cent.

I should like to come to OPEC markets. As I understand it, this is not part of the Common Market debate this afternoon. The House will agree that it is particularly important to turn the OPEC countries' monetary surpluses into extra trade with us. The opportunities are clearly there provided we can shift the necessary resources into exports. These countries are estimated to have imported goods and services worth around $40 billion in 1974, an increase in volume of around 40 per cent. on the previous year. We have tried to respond—our traders, exporters and industrialists.

Last year our performance in these markets was a bit disappointing and we appeared to be losing market shares and not taking full advantage of increasing opportunities. My right hon. Friend the Secretary of State for Trade, who has visited many of these countries in recent months, has reported that while our goods at present fully meet requirements on price and quality—let no one discount that—they fall short on availability and delivery performance, a point to which I shall come later.

More recently, however, the figures have been rather better. In the three months February to April, exports to oil-exporting countries were 27 per cent. higher than in the previous three months and were 111 per cent. higher than in the same period last year. We must do everything possible to ensure that this upward trend continues.

I am not claiming these export figures as problems of success, or even achievements of success. I am citing them as a tribute to British exporters, and British industry, and everyone at every level and on both sides of industry, because I believe they deserve the praise of this House. I believe these are an essential component in a fair and balanced picture of how Britain is meeting the challenge which hit us so hard 18 months ago. And not our exporters only. The House will know of the help now being given to exporters by developing direct intergovernmental arrangements; by seeking to involve public corporations and Government agencies in support of large-scale projects; by helping with the vital training needs of these countries: and by various more specific measures to help exports such as the schemes for cost-escalation cover, for help with performance bonds, and for the provision of pre-shipment finance, which are particularly directed towards OPEC markets.

The House will be aware of the opening up of the Soviet market to our exporters. Senior Russian Ministers are now talking of the prospect as being even better for our exporters than was envisaged when the trade agreements were signed in Moscow three months ago. Even better than that, there has been an encouraging quickening of response to these opportunities by British exporters, ranging from some of the largest firms in the country to quite small businesses.

Of course, it can be said, and will be said—I thought that there was a hint of this in the speech of the right hon. Lady—that the improvement in import volumes, or the reduction in import volumes, reflects the level of production in British industry. It is a fact that the world as a whole is suffering from the deepest recession since the 1930s. I mean the world as a whole. This affects us all. This warning was given during the last General Election by leaders of all major parties. It cannot now be in doubt that it has happened. But it is also a fact that in terms both of unemployment and of declining industrial production, other major countries have suffered more than the United Kingdom.

Mrs. Elaine Kellett-Bowman (Lancaster)

Is the Prime Minister aware that male unemployment in my constituency is double what it was in the equivalent period a year ago? The figure for female unemployment is also double. The figure is now over 7 per cent. This unemployment exists in a part of the country which the Prime Minister is supposed to know. What is he going to do about it?

The Prime Minister

The hon. Lady is right to say that. If she will bear with me while I deal with the point raised by her right hon. Friend, I shall say something about some of the problems in her area and the surrounding areas.

The Leader of the Opposition challenged me in a convoluted set of questions, and referred to "her", "him" and "the Prime Minister". It was fascinating to listen. She challenged me about unemployment during the period in which the Labour Government had been in office. Earlier in her speech she said that unemployment in Britain was now above that of some of our overseas neighbours. She ignored the fact that when the Labour Government came to office we were told how serious unemployment would be as a result of what the Conservatives left behind. Let us forget that. What she said this afternoon does not correspond with what her right hon. Friend the Member for Leeds, North-East (Sir K. Joseph), mentor and Svengali, said about unemployment today. [HON. MEMBERS: "Where is he?"] He was here. He has now probably gone to the BBC to fill in what he said at lunchtime today.

Today the right hon. Gentleman referred to today's unemployment figures. He said that the figures were thoroughly misleading, and had been so for years, in measuring the slack in the economy, and that the published unemployment figure greatly exaggerated the number of people available, willing and ready for work, and, on the other hand, it greatly understated the number of jobs for them to do. So he went blathering on and on about the statistics. This was his conclusion—[interruption.] I want to see the Conservative Party more united. It might then produce a coherent policy.

After a certain amount of analysis, the right hon. Gentleman said there were about 400,000 job vacancies. He compared that figure with the number of unemployed. The interviewer, who was called Mr. "H" said: And in percentage terms how do you judge unemployment? The right hon. Gentleman replied: Well, the official figure is that we have got 3.7 per cent. unemployed and my figure, taking everything into account, is that we have got about 1.6 per cent. unemployed. It gives a very different reality. The right hon. Lady always waits before she speaks in the House. Quite rightly, she takes her time. I suggest that she should sort out this matter with her right hon. Friend, who, we are told, is her personal, private "think tank". Perhaps we shall hear whether what the right hon. Lady said this afternoon is the view of the Conservative Party on unemployment, or what her right hon. Friend said—

Mrs. Thatcher

What does the right hon. Gentleman think about the Government's statistic of 3.6 per cent.? I did the Prime Minister the compliment of using Government figures throughout.

The Prime Minister

I shall come in a moment to what the right hon. Lady said about the unemployment figures in her article in the Sunday Express, when she depreciated it. I replied to her when she did that in February. I do so now. These are the figures accepted by successive Governments over the past years. I accept them. The right hon. Lady, in her article in the Sunday Express, did not accept them. Today, for other purposes, she accepted them, but her right hon. Friend did not. Perhaps she could take a little time off to sort it out with her right hon. Friend.

Before referring to this fascinating broadcast I said that in the latest three months production had not fallen as much in this country as in other countries. The right hon. Lady did not concede that. Compared with last year, Japan's production has fallen by 20 per cent., and that of the United States, Germany, Italy and France by between 10 per cent. and 15 per cent. In Britain, by contrast, production has fallen by only 4 per cent.

At this point—bowing to the hon. Member for Lancaster (Mrs. Kellett-Bowman)—I should like to say a word about certain associated industries.

As hon. Members representing Lancashire, Yorkshire and other areas know, the textile industry is going through one of its most virulent cyclical depressions, like so many in the past, not unconnected with violent swings in raw materials prices. This depression is, in fact, the most violent which has hit some of the industries, areas and businesses concerned since 1931, and it has, of course, worldwide repercussions.

The Government have given the most urgent and careful study to the problem, and I hope, with permission, to make a statement tomorrow about the action which we propose. For reasons which I shall more fully explain to the House tomorrow, which in our view are decisive, I shall not be announcing controls on imports. But I shall be informing the House of other action we propose to take which will be of more direct help to the industry and more appropriate to the nature of the problem.

There is reason to begin to hope—

Mr. Peter Hordern (Horsham and Crawley)

rose—

The Prime Minister

I shall deal with this matter in detail tomorrow. Perhaps the hon. Gentleman will try to catch the eye of Mr. Speaker then. I should now like to continue with my speech. I have already given way three times. I do not know why the hon. Gentleman cannot wait for tomorrow's statement.

Mr. Deputy Speaker (Mr. George Thomas)

Order. There must be only one hon. Member on his feet at a time.

The Prime Minister

It would be helpful if the hon. Gentleman would wait for my statement tomorrow.

I was referring to the fact that the world depression has hit this country far less hard than most other countries. I gave the figures.

There is reason to begin to hope that some of our major trading partners are, or shortly will be, moving out of the worst depth of their own recession into a period of expansion. Following the measures taken by the United States, Germany and the Netherlands, France has now introduced a reflationary package though on a more modest scale and directed primarily to next year.

Other factors which should help to promote recovery—I mean world recovery, including our own—include what appears to be the completion of the downward adjustment of stocks in the United States and the continued rapid growth of imports by the oil-producing countries. Because of this and, indeed, the most recent action taken only today by Germany there seem to be good reasons for hoping that the recovery in world trade will have got under way by the end of this year and will be accelerating next year. As my right hon. Friend the Chancellor has said, by the standard of previous cycles there will be nothing exceptional to be surprised about if we were to see a growth of world trade in the range of 10 per cent. to 15 per cent. during the next year. But, and here I agree with the right hon. Lady, all these possibilities, improvements and achievements once again underline, as she said, the need for us to maintain and improve our competitiveness and to be able to fulfil export demand during the resurgence in world trade and demand, when that comes, as we now have reason to think it might come very quickly. This is partly a question of ensuring that the resources are there and industrial capacity is there, recalling how lack of capacity affected our exports in 1973 and 1974. Indeed, what we hope to do for the textile and associated industries is related to seeing that the capacity does not go out of production, because it will be needed when world trade recovers in the next few months.

Still more, it depends on the fullest co-operation of all our people in bringing down the rate of inflation at least to a level comparable with that of our competitors. The fundamental issue—there is no disagreement between the two Front Benches—is that of industrial costs.

As I said in an intervention to the right hon. Lady, the outcome last year was distorted by action which had to be taken, perfectly fairly and which we supported, to deal with special cases left over from the period of statutory incomes control. The Conservative Government, before leaving office, were committed to special action on the London weighting allowance. I always felt that they agreed with what had to be done with the long-overdue settlements in respect of nurses, teachers and postal workers. I do not think that the Opposition ever dissociated themselves from that. Of course, the biggest single item in increased wages and costs over last autumn was the thresholds with which they left us. I do not think that anyone doubts that. Indeed, they have in some cases been written into permanent income agreements further on. I am not complaining about that. However, I do not want them to throw at us the consequences in the wages index of things with which they left us when they left office.

Having said that, it is the fact that the overall level of wage settlements has been too high. The TUC made no bones about the gaps in the observance of the guidelines in the very tough statement which the General Council issued yesterday.

Many commentators at home and abroad, many critics, friendly and otherwise, are urgently demanding statutory control over wages and other incomes. Some of us have expressed our views or suggested that a statutory policy is not the way out of our difficulties. I will quote: We had that before … I think we have a similar experience to what one or two other countries have had: you can put on and operate a freeze for a comparatively short time. You can even have one stage out of the freeze but, when it comes to the second stage out, if you are careful you have to put in so many exceptions and variations that you get such a high permitted guideline that it can in fact produce inflation which it is meant to curb. You also get … a lot of rigidities introduced and you, if you are not careful do not manage to get the people where the jobs are. So you can operate it for a short time, but no country in the world has been able to do it for very long. That is a sound statement. [Interruption.] It may have sounded a little long-winded. Those are not my words, even though long-winded, although they are a carbon copy of the words that I used in a television interview a week last Sunday. Almost word for word the words that I have quoted against statutory controls were the words of the right hon. Lady in her television interview a week ago. So both of us agree, and I believe that practically the whole House agrees with what we have both said.

But rejection of a statutory policy—if that is what these words mean, as they must—carries with it an acceptance—here I think we are in agreement again—of the need for greater voluntary restraint and greater voluntary acceptance of the kind of settlements that the country can afford within our democracy.

Above all, it means more concern to be shown by some who are in a position to exercise their industrial and financial muscle and more regard on their part to the fact that every penny which they take out in excess of what can be afforded by the country prejudices the interests of their working comrades who cannot assert the same degree of industrial power. At the same time, it directly penalises pensioners and others unable to help themselves, in addition to harming our fight for exports and economic recovery.

The challenge that all of us in this House have to face, against the background of these statements by the two main party leaders, is how to achieve this within a democracy, within a system of voluntary collective bargaining, without sending trade unionists or anyone else to gaol.

In the past week or two, ideas have been put forward, commended, attacked and mulled over throughout industry.

There have been a number of proposals. There was my own, which happened to be the first, for consultation with the CBI and the TUC. I suggested—I meant it seriously—that the Government, the CBI and the TUC should aim to agree on the best forecast of the national product that we could. Against that forecast of GDP and against the background of our joint determination to reduce inflation and to make the necessary provision for exports and investment, I should like to see more consultation on the right division between essential public expenditure, on the one hand, and the total of private consumption, on the other, and on the allocation between spendable personal incomes of all kinds and the profits which are required for investment. When such a system was fully working, all of us should then be able to consult on this every year and to monitor the outcome at regular quarterly intervals. But there is no reason why we should not start this process soon.

When I said that 10 days ago it was immediately welcomed by the Director General of the CBI and the General Secretary of the TUC. I hope that we shall see these ideas further discussed at the next meeting of the NEDC, which I shall be chairing.

There was also the suggestion put forward by Mr. Jack Jones this past weekend, when he said that attention should be paid not so much to percentages as to cash approach. Again, ideas of that kind are welcome and deserve full consideration. His argument—others have said it—is that if £X a week is required in an annual settlement to maintain the living standards of those who are hardest hit, there is no reason why the percentage that the increase bears to their incomes—the lower paid—should go right through the whole of industry and society. That raises the whole question of differentials, because where there is insistence on exactly maintaining differentials in percentage terms, this inevitably increases the gross pay differential in cash terms.

Yesterday the CBI put forward its proposals. Other trade union leaders are doing this. There was the statement by the General Council. I believe that what we are seeing today is a genuine realisation—the right hon. Lady in her broadcast called for this as much as I am calling for it—in almost every section of our society of the need for a joint endeavour to overcome the evils of inflation.

I turn now to the proposals put forward by the Opposition in their motion, as elaborated in the speech that we have just heard.

They began by expressing their disturbance about the failure of Government policies to curb the accelerating rate of inflation". So far as industrial costs are concerned, including incomes of all kinds, clearly, from what we have heard the Opposition have nothing to propose, apart from fiscal changes which have been discussed and voted on in long days and nights of debate over the past few months on the Finance Bill, and so on. But I will come to one or two taxation questions later.

We read an advance copy of the right hon. Lady's speech in the Press, which published with great authority all the main points. In this advance forecast we were told that the right hon. Lady was going to tell us—I thought she did—that what was needed was that the commonsense majority should be encouraged to tackle militancy at its source. That is fine. Most of us agree with that. I am delighted that the right hon. Lady agrees that there is no difference between us on mindless militants who threaten the very future of their jobs and the jobs of others.

We made that clear in the massive investment assistance to British Leyland, when we said that the performance of the corporation would be strictly monitored and that co-operation, in terms of both industrial peace and manning and productivity problems, would be an essential part of that performance and a criterion judged by us for continuing help.

I have also made clear our position in relation to Chrysler. If the right hon. Lady, or the right hon. Gentleman who is to wind up, has in concrete terms any more clear ideas for strengthening the voice of moderation against the clamour of militancy, the House will wait to hear them.

All we know from yesterday is that the Conservatives are against what we have done in the case of British Leyland and other concerns. Indeed, 50 of them are even more against than the official leadership. In our view, all of them show far too little concern for the industrial and social consequences of the unemployment which would inevitably have followed had we not acted, for example, in the cases of Leyland and Ferranti. Their attitude would render us still more dependent upon imports and lose the nation essential exports.

To me it seems to recall a philosophy more than once expressed in the House by members of the previous Government, I think about 1971, in those halcyon, anti-lame duck years which preceded Rolls-Royce and Upper Clyde, when it was even suggested that the country would do better to run down our steel industry, if not to do without it altogether, and rely on imports, without saying where we would get the necessary exports to pay for our essential steel imports.

Again, I gather from what the Opposition have said on the subject this afternoon that they are ideologically opposed to the principles of NEB, but then, I remember that they were ideologically opposed to the creation of IRC. They fought the IRC Bill with all-out opposition day and night, as back-door nationalisation. That same ideology caused them immediately they took office, on doctrinal grounds, to scrap IRC without a moment's considera- tion, a decision which I believe, to be fair to them, they later came to regret. Certainly, the whole nation had cause to regret it when we had to face the industrial problems of 1974 with nothing but the Conservative 1972 Industry Act, for which—I do not want to be churlish—we are grateful. Opposition ex-Ministers who normally sit below the Gangway or on the back benches are significantly absent, but I am sure that they are proud of that 1972 Act. I should like to know whether the new Tories on the Front Bench are proud of the 1972 Industry Act. They will have plenty of opportunity in the present situation of being able to approve recommendations under the Act which they so wholeheartedly supported in 1972.

Whatever the answer, I am sure that most hon. Members on both sides of the House will agree that, apart from the overriding short-term problem of inflation, our competitiveness as a nation over many years, under successive Governments, has been undermined by a total inadequacy of industrial investment, both to create capacity and, above all, to advance modernisation.

It is not only a question of the amount of new investment. I fear that what has been significant about Britain's performance under successive Governments—this is not a party point—is that even when we have had a higher rate of investment the physical return on that investment in terms of productivity and real earnings was much lower than that recorded in many other countries. The NEB will play a major rôle not only in raising the rate of investment but in revising, too, the physical return on that investment.

More than 30 years ago the war-time coalition Government of all parties in their White Paper on full employment accepted the Keynesian doctrine that where investment of all kinds was insufficient to maintain employment the State must step in with capital spending programmes. With Keynes the emphasis was on roads, bridges, the draining of swamps and the rest. The NEB concept is an updating of what we all agreed in the 1944 White Paper. [Interruption.] Will hon. Gentlemen, even those who have just emerged on the Opposition Front Bench, listen seriously? The NEB concept is an updating of what we all agreed in the 1944 White Paper. The NEB concept is designed to maintain and increase the volume of investment, certainly with the idea of safeguarding employment, but the difference from the macro-economic approach of Keynes is that the NEB has the special facility of being an instrument for channelling investment directly to where it is most needed in terms of productivity, employment and an improvement in our national competitiveness—where it has not been going up to now.

Keynes, who was concerned only with the general level of employment, had no more to offer as his answer to unemployment to a skilled toolroom fitter than the prospect of a job as an unskilled labourer building a road. The NEB is concerned to give the skilled man, and his mates, in industry more power to his arm and more power to his skill by modernisation. We do not see the rôle of NEB as a people's dispensary for sick businesses. It will be the instrument through which the Section 7 and Section 8 powers of Mr. Chataway's 1972 Act will be carried through, on an agency basis, at the request of the Government, and with appropriate accounting arrangements. It is the right agency to do it. Its main purpose is modernisation and expansion.

Perhaps the best opportunities will come with existing companies where there is a strong management anxious to expand and a willingness to see NEB finance for the company's investment programme or to form a joint venture to carry out a particular project. In all those joint ventures the willingness must be mutual; it cannot be forced.

The Opposition's views in the House and outside on this NEB proposal for public ownership, including the Aircraft and Shipbuilding Industries Bill are well known. They are fundamentally doctrinaire and totally ignore the fact that what we are doing we set out unequivocally in two manifestos in two successful General Elections last year. The same is true of their opposition to public participation in North Sea oil—and ultimately Celtic Sea oil. Ideology apart—and I always allow for that when studying the views of right hon. Gentlemen and right hon. Ladies on the Conservative benches—some of their arguments are economically unsound. For example, they talk about checking the swelling public expenditure on nationalisation. Surely they under- stand that there is no additional direct demand on resources by purchasing existing shares by stock. Although there may be some secondary effects on demand because some holders of shares will choose to sell some of the compensation stock in order to spend the proceeds, this is unlikely to be substantial. There is no difference between the transfer of resources in a measure of this kind and the transfer of resources when a big merchant bank buys up a small firm in the ordinary process of the market.

Even where the Conservatives are prepared to concede that there is a case for action—they were the nationalisers of Rolls-Royce, and we went along with them after due consideration—they reject the right of the community to take an appropriate share in the equity and control. Yet what they resist is happening every day in private industry and in the City of London. Few prudent merchant banks, investment banks or big investors would agree to provide a majority share in the capital of the business without ensuring an adequate share in the profits and an adequate voting power to ensure control. Only this morning I read in the newspaper of an important national bank which has taken greater control of one of its subsidiaries, which had been losing money, by taking an increased shareholding so that it had the effective control. One of the most distinguished figures in the whole history of the Conservative Party—Lord Aldington—presided over that operation.

That is happening in private industry, and that is what we are asserting in the case of NEB on behalf of the community, and it is what we are asserting no less in the case of the two major industries, shipbuilding and aircraft, which for years have largely subsisted on Government aid and Government orders.

Mr. Nigel Lawson (Blaby)

As the Prime Minister is saying that there is no difference between the NEB taking participation in a company and a private merchant bank taking participation, is he saying that the NEB will conduct its operations solely and exclusively according to commercial criteria?

The Prime Minister

It will conduct its operations according to commercial criteria and in accordance with the instructions given to it in the Bill at present before the House. The hon. Member for Blaby (Mr. Lawson) used to be very progressive in these matters when he was City editor of the Sunday Telegraph before he became a Tory politician. He would have understood in those days that anyone who takes a lot of the risk capital is entitled to a share in control whether it be public or private.

Let me explain the difference between the two parties in historic terms. This year is the 150th anniversary of the first passenger railway, the Stockton and Darlington. The motto of that company, which I have translated from the Latin, was "Private risk, public benefit". That was the philosophy in 1825, and the hon. Member for Blaby has just about caught up with it. The Conservative approach to these matters, whether in Government or in Opposition, is based on the principle "Public risk, private gain". The public take the risk of the adventurous or difficult situations, and then there is a private profit. It is the taxpayer that pays the losses; it is the shareholder that gets the gain.

For these reasons I reject the Opposition's claims that investment in North Sea oil is, in effect, non-productive expenditure. That, again, is a transfer of control and part of the profits from one set of owners to another, from private owners to the community as a whole.

Mr. Kenneth Lewis (Rutland and Stamford)

They do not make any profits.

The Prime Minister

I am prepared to make an agreement to exclude all the shores of Rutland from the Bill dealing with North Sea oil.

Their arguments about the cost of community ownership of land betray a similar confusion of thought. The finance of transfer of land to public ownership does not make a net additional demand on national resources. What it will mean is that the development profits created by the community will remain with the community. When our proposals for community land are fully operational—they will take effect over a five-year period—it is expected that the costs will be fully covered and recouped on disposals of land.

Finally, I come to the Opposition's panacea—this is referred to in their resolution and in the right hon. Lady's speech—on cuts in public expenditure. After listening to the right hon. Lady I am still no clearer on the exact areas of expenditure where she would make cuts which would have some meaning in support of her argument. I must press the right hon. Lady a little further. I hope that she will be more forthcoming than she was in her speech. I must deal with an important contradiction, as I see it, in her philosophy. The right hon. Lady's motion attacks inflation—very right and proper. She proposes to attack inflation by cutting public expenditure—no doubt arguing that that will reduce demand inflation. Of course, everything that she said about unemployment suggests that demand inflation is the last thing from which we are suffering. But nearly every area of public expenditure which she has said she would like to cut, some of which have been emphasised publicly by her Front Bench colleagues, would increase price inflation and would, therefore, risk more income inflation.

Let me give one example. Before the Conservatives fought the February General Election last year they were against food subsidies. In October they were equivocally in favour of them. The right hon. Member for Lowestoft (Mr. Prior) distinguished himself in this matter. First he was against food subsidies, and then he said that he would propose to keep them if elected.

Apparently the right hon. Lady now wants to eliminate food subsidies. From what she has said I gather that she also wants to end rent subsidies. Indeed, that was endemic in her attack during the last election, when she attacked the whole concept of local authority housing, except for her proposals that local authority housing should be confined to ghettos uniquely inhabited by the old, the sick, the disabled and what she calls "special cases", whatever that means. I remember that Aneurin Bevan a generation ago rejected the concept of council estates inhabited exclusively by elderly people peering, as he put it, through curtains at their neighbours' funerals. We thought that that was the end of the argument when he said that. Aneurin Bevan failed to foresee the emergence of the right hon. Lady and her latter-day Bourbon supporters. The right hon. Lady must realise that if we are to end rent subsidies there will be an increase in the cost of living.

The right hon. Lady referred this afternoon in her quaint way to speeches that were made in the last election. Indeed, she was good enough to quote some of mine. Of course, to do all that they promised in the election—and the right hon. Lady played a leading part in this—would add more than 3 per cent. to the rate of inflation. The immediate elimination of all subsidies to the nationalised industries beyond the rate at which they are already being phased out would only add further to the difficulty. As regards the nationalised industries, we are following exactly the proposals that were announced, as the right hon. Lady has fairly said, on 17th December by Mr. Anthony Barber, as he then was, the then Chancellor of the Exchequer.

Was the right hon. Lady saying this afternoon that her party would cut house building? Would they reduce the assistance given to local authorities for the house building programme, assistance which has led us in the first quarter of this year to increase public sector completions by 28.9 per cent. compared with the first quarter of last year, enabling us to increase new starts by 24.4 per cent. over the same period? I should have thought that on the evidence of their October election speeches they would cut house building.

But what about mortgages? What about that 9½ per cent.?

Mrs. Thatcher

Before the Prime Minister goes much further, he said that if we cut subsidies it would involve putting up prices. Yes, it would; but will the Prime Minister tell us what his suggestions are for bringing the nation to live within its means, when the Paymaster-General, on 20th May, pointed out that the nation was living beyond its means? One of the ways of doing so is to reduce subsidies and to put up prices. Hugh Gaitskell acknowledged that in 1951 and Rab Butler did it in 1952. The result was that we were out into growth again in 1953.

The Prime Minister

All that is really very touching, but what I am trying to say to the right hon. Lady is that we are being criticised by her party for carrying out the Barber announcements and making the nationalised industries pay their way. The figure that Mr. Anthony Barber quoted of £500 million turned out to be a much larger figure when we took office. We are now taking the odium for that, and for rents and rates, as a result of what he announced on 17th December. This is a matter for the whole House, of course, but it is particularly a matter between the right hon. Lady and myself at this moment. Of course, it is a matter between us in public.

The right hon. Lady did not have the generosity to say how much the balance of payments situation has improved—

Mr. Reginald Eyre (Birmingham, Hall Green)

rose—

The Prime Minister

No, I am concerned with the right hon. Lady. I do not want this both ways do not want it with the hon. Gentleman. I am concerned with the right hon. Lady.

I ask the right hon. Lady about mortgages. I understand her embarrassment. What about that 9½ per cent.? Was this the face that launched a thousand Tory canvassers on every owner-occupied estate last October, to promise, first, a reduction in the rate from 11 per cent. to 91 per cent., and then, as the light of battle entered her eyes, to do it by Christmas? The mortgage subsidy, she promised, would certainly reduce the living costs of the families concerned—and indiscriminately across the board—but, far from providing the immediate action she has now called for to cut public expenditure in the terms of the motion, it would have meant, on one estimate, increasing Government expenditure by £180 million net of tax. The building societies talked of £300 million.

Mrs. Thatcher

No.

The Prime Minister

It would have put up Government expenditure by £180 million, and the building societies' estimate was £300 million. Is the right hon. Lady still supporting that? If that is so, I hope she will stop talking about cutting public expenditure.

Mrs. Thatcher

We had this out during the General Election. The building societies supported my figure and the Housing Research Foundation's figure and accepted that it was very much cheaper to have a 9½ per cent. mortgage to help people purchase their own home than for the council to build a home at a comparable price.

The Prime Minister

Of course, that is what one would expect. The building societies are in the mortgage business. It seems that the right hon. Lady thinks that the whole country should be exclusively within the mortgage business and that we should cut the provision of council houses. She has made that clear.

I ask the right hon. Lady another question. Would her party cut defence expenditure? Of course it would not. In fact, Conservatives want more expenditure and not less. They voted against the Defence White Paper and in favour of an open-ended commitment to defence, unconfined by any views about the level of public expenditure involved, in 1975–76.

We have had such learned expositions built up for this debate and it seemed that the right hon. Lady was going to tell us, when she finally decided to speak, everything that we needed to do to deal with expenditure. I want to ask what it all means. We have cut defence—indeed, the right hon. Member for Farnham (Mr. Macmillan) voted against it—so do not let us hear Conservatives talking about public expenditure.

Mr. Maurice Macmillan (Farnham)

rose—

The Prime Minister

No, I cannot give way. I have given way enough. I have now gone on for nearly as long as did the right hon. Lady and I want to conclude.

The Government have cut £300 million in defence spending this year and will cut £380 million next year. The Conservative Party's policies will mean not a cut but an increase in expenditure.

What do the Conservatives intend to do about the social services and health? Do they intend to cut those services? They are always asking for more expenditure in that respect. Furthermore, they ignored our advice on an earlier occasion that in present circumstances we could not afford to relax the earnings rule. That action alone will mean additional expenditure of £145 million within three years.

Mr. Eyre

rose—

The Prime Minister

I am sorry; I cannot give way. I have given way as often as did the right hon. Lady in her speech, and she was very generous, too. I am trying to put some questions to the Opposition. I have stated the Government's policy. I am trying to deal with the evasions of the Conservative Front Bench on the motion which they have put before the House and which I am asking the House to reject.

Will they explain their policy on the tax credits scheme? According to the last Conservative Chancellor of the Exchequer, that would mean an extra £2,300 million on the public sector borrowing requirement. How is that to be raised? Is it intended to bring in the money by means of taxation? Will it mean reducing take-home pay? What about the right hon. Lady's pledge to abolish local authority household rates, and also to transfer teacher's salaries to the Exchequer?

The right hon. Lady's proposals would cost the Exchequer £1,500 million and involve that kind of borrowing requirement. It would mean another 4p in the pound in income tax or another 5 per cent. on VAT. This is why she was so edgy this afternoon on the question of Maplin and the Channel Tunnel and all the other expenditure commitments to which she was committed. I know that she can say that she was not committed to those pieces of expenditure—or that, although she was committed at the time, she is not so committed now. But she cannot live the rest of her life in a posture of rejecting any guilt by association with the then Conservative Prime Minister. The right hon. Lady tabled the motion that is before the House and it is right that it should be answered. It is right that these hollow pretensions should be exposed to the House.

I am asking the Opposition to confirm that their policies will involve the spending of far more money than the sums involved in our proposals. The reductions in expenditure proposed by the right hon. Lady would be offset, in part, if not in whole, by large increases in public expenditure for which the Tories have been asking ever since the Labour Government came to power.

It is significant that we have heard nothing this afternoon about the Conservative Party's basic economic philosophy. We have heard nothing about monetarism or about unemployment. We have made the situation clear in successive Budget speeches and debates. There has been no matching performance by the right hon. Lady. We surely should expect her to know the answer to these questions. One of the functions of the Opposition is that they should have an alternative policy to put before the country.

We understand that there has been a shift on the question of monetarism. We know what that means in the mind of the right hon. Member for Leeds, North-East—the right hon. Lady's Rasputin, who has been kennelled up for this debate so that we are unable to ask him about his policy. We have at least had the benefit of the right hon. Lady's views as set out in the Sunday Express. In that article she discounted the problem of unemployment by saying that the figures did not mean very much.

I have gone on for two minutes longer than the right hon. Lady's remarks and I wish to conclude, although the House will know that I have had a few more interruptions than the right hon. Lady had to contend with.

We have heard a lot from the Conservative Party in recent weeks about the Cabinet's agreement to differ over the Common Market. I have explained the reasons, and that episode will end with the referendum. But the Conservatives' agreement to differ with their previous Government—with themselves—is a continuing phenomenon. When there is a little more time in which to do so, I shall draw to the right hon. Lady's attention the generally accepted doctrine on collective responsibility laid down by a Conservative Prime Minister, the Marquess of Salisbury—a doctrine which she preaches every day of her life.

Mr. Maurice Macmillan

Oh!

The Prime Minister

That is what happens when a man has been a distinguished Cabinet member and is sacked from the Tory Front Bench.

I now wish to conclude my remarks. Those on the Opposition Front Bench now seem to dissociate themselves from everything the previous Tory Government did, when they were members of that very Government. I do not know of any precedent in maritime history of rats leaving the ship after it has sunk. [Laughter.] Well, it is original. It has never happened before, so it must be original.

Mr. Eyre

What about some leadership, Harold?

The Prime Minister

The hon. Member for Birmingham, Hall Green (Mr. Eyre) no doubt cast his vote in February and he must take the responsibility. I did not have a vote in that election. Certainly the policies put forward by the Leader of the Opposition this afternoon were no recipe for getting the country out of the crisis which all of us have emphasised the country is facing. In my view, they would be a recipe for a permanently weakened Britain in a divided and unjust society. I ask the House to reject them by rejecting the motion.

5.58 p.m.

Mr. Jeremy Thorpe (Devon, North)

I am grateful—

Mr. Deputy-Speaker

I hope that hon. Members who are leaving the Chamber—those who feel they have to—will leave quietly to enable the right hon. Member for Devon, North (Mr. Thorpe) to be heard.

Mr. Thorpe

I am grateful to you, Mr. Deputy Speaker, for calling me before the winding-up speeches in the debate. It appears that the opportunity of making remarks will not accorded to as many hon. Members as one might at first have expected.

We have listened to speeches which, in their brevity and scintillating nature, have been unparalleled in this House in debates on economic affairs for a very long time. Whether they contained any recipe aimed at getting our country through its present crisis is a matter of opinion. Certainly anybody listening to the Prime Minister's remarks would not feel that the country was facing a devastating crisis and very real problems. Furthermore, anybody listening to the right hon. Lady the Leader of the Opposition would not have been aware of any blueprint contained in her remarks to deal with our problems.

Having begun on that totally non-controversial note, I should like to put before the House certain facts which are surely agreed on both sides. Because of the gravity of our economic situation, the sooner we revert to debating the economy the better. The first point I wish to make is that the rate of inflation in this country is far above that of any of our European counterparts. The second factor is that most European countries are beginning to control inflation but we show no signs of exercising a similar control.

The United Kingdom has a borrowing requirement of £9,000 million—a requirement which shows every indication of rising, whatever the Chancellor of the Exchequer may say, to £11,000 million within a year. I should be very surprised if the figure were much less. We have seen public expenditure from 1973–74 to 1974–75 increase by over £10,000 million. What is highly significant is that one-quarter of the £10,000 million is accounted for by increased pay settlements in the public sector. We have a wage-push inflation of 27 per cent. It is now, according to the latest figures, over 30 per cent., and within a period of three years the nation's wage bill will probably double. What the effects of that will be on our investments, on our competitive ability in the markets of the world and on employment in this country is a terrifying prospect. All that is against an economic position in which the growth rate of our economy is roughly 2 per cent. a year.

The Government certainly have plenty of intentions for Government expenditure. In the immediate future their various plans for nationalisation, some of which the right hon. Lady herself mentioned, will cost over £2,000 million. It is against that pattern that the Chancellor of the Exchequer, in his Budget speech, told us that he believed that the unemployment total in this country would be 1 million by Christmas. My view is that it will probably be very much higher.

The Conservatives' Supply Day motion calls on the Government to abandon their damaging plans for further nationalisation". That is perfectly explicit and I find myself in agreement with it. It also calls on the Government to cut public expenditure, but there was no indication in the right hon. Lady's speech of where they should cut it. The right hon. Lady has talked about council house subsidies and nationalisation, but she has not gone into those matters in the detail which I certainly hope to do and which I believe it is the duty of any Opposition to provide when they put down such a motion asking for a reduction in the level of pay settlements. Even the Prime Minister had more to say about that matter than the right hon. Lady when he spoke about what I think one could call the national dividend which he has in mind. Perhaps he has answered the question for the Opposition and they do not find themselves in agreement with the amendment which my hon. Friends and I have tabled, which has not been called but which certainly will be one of the great debating issues in running the economy of this country.

The right hon. Lady quite properly talked about the level of public expenditure, and my hon. Friend the Member for Cornwall, North (Mr. Pardoe) pointed out that the former Conservative Government inherited from the present Home Secretary, when he was Chancellor of the Exchequer at the time, a situation in which there was a payments surplus and a nil borrowing requirement.

In the four years of Tory Government—it is right to remind ourselves of this, because they are now the people who are the monetarists of this country—the borrowing requirement rose from £840 million in the first year to £1,000 million in the second year, £2,500 million in the third year and £4,500 million in the fourth year, without any question of an oil deficit.

The fact remains that the two largest spending Ministries were those of the Leader of the Opposition and of the right hon. Member for Leeds, North-East (Sir K. Joseph) who accounted for nearly £3,000 million out of the total £5,500 million increase. One is entitled to ask whether the right hon. Lady, with her new-found monetarist policies, believes that there should have been cuts in the expenditure to which she was committed as a Minister or whether she believes that it was a perfectly proper programme which should have been continued but that there should have been an increase in Government revenue to deal with it. Unless she has been converted by the error of her own ways when she was a Minister, I believe, with great respect, that she is not in a position to accuse others of committing the same error now.

The right hon. Lady said that it was all very well to increase the borrowing requirement provided that if we borrowed we did not have to resort to the printing presses. It is also right to say that during 1971–72 and 1972–73, under the then Chancellor of the Exchequer, now Lord Barber, there was a 60 per cent. increase in the money supply. That is what turning the printing presses mean. Therefore, at that time there was a greater increase in the money supply and we saw the beginning of this disease of public borrowing expenditure, which, I believe, the present Government have inherited and for which the right hon. Lady herself must bear a very large share of the blame.

It is not without significance, when talking about public expenditure, that of the £10,000 million which I mentioned was the two-year increase in public expenditure, one-quarter of it or £2,500 million was accounted for by pay increases at the rate of 29 per cent. The Prime Minister would be the first to agree that if it had been possible for those wage increases not to be 29 per cent. but to have been kept down to 15 per cent., that would have immediately taken £1,255 million off the public borrowing requirement. That figure would be more than the total increased tax yield of the Chancellor in the last Budget.

I come now to a point which is of crucial importance. While one wishes the Prime Minister every possible success in the discussions which he is to have about what I think one could accurately call a national dividend, so that at the beginning of the year we decide what we can afford to pay ourselves, it will be as ineffective as the social contract has been unless there is some way whereby those who cause inflation suffer through the tax system for causing it.

The Conservative Party has not come very far on prices and incomes, save to say that five out of the six right hon. Members who signed today's motion were all members of the Heath prices and incomes Cabinet and those five have now departed from the policies of which they were in favour. On 17th May 1974 the Shadow Chancellor said that the social contract needed to be replaced. On the same day the right hon. Lady, when addressing the Scottish conference, said that new wage guidelines were urgently needed. That is about the totality of the movement that we have had from the Tory Party on this issue.

I believe that the suggestions of Jack Jones are fresh thinking on his part. They are not entirely fresh, because the idea that there should be some form of automatic increase in wages when food prices rose above a certain level was first put forward by my hon. Friend the Member for Cornwall, North, during our conference in 1973. Mr. Jack Jones's proposals deserve serious consideration because they would help the lower paid. I believe that no Government will have the moral authority to expect restraint further up the wage scale unless and until they have shown that they have looked after the lower paid.

The most difficult problem raised by the proposals of Jack Jones is that they would cause a reduction between differentials. Mr. Clive Jenkins has already indicated his immediate view of that aspect. I do not dissent. He is acting, as one would expect, on behalf of his members and he is putting their interest first. That is his job.

The third point is that these proposals would ensure that the better off in our society contributed most, because, as I see it, there would be an actual increase and not a percentage increase. In my view this is a variant of an indexed freeze. That being so, I do not believe that it could last for more than six to nine months. It would be a very temporary measure.

If the Prime Minister is successful in his national dividend—and I hope that he is—there will have to be some means whereby those who make more out of the economy than the nation can afford will find it clawed back in taxation. The French have recently introduced an anti-inflation levy which is a temporary confiscation of part of the gross margins made by manufacturing industry, to be repaid when inflation has not exceeded 1.5 per cent. during three consecutive months. This is a deterrent to people against putting up prices.

The signs are that in Canada there will be some form of agreement between the Government and the trade unions about what they think the rate of inflation will be and certainly what the target is below which they will keep it. Wage claims and wage awards will be below that target. If Ministers or the Government go beyond it, there will be compensating factors a year afterwards.

In this country we shall have to have an inflation tax on pay, prices and dividends for those who exceed the statutory limit. The Chancellor moved in this direction by what he called his anti-inflation tax during the Budget. It was not an anti-inflation tax. It was an incentive to inflation, because it put up the cost of living by 2 per cent. for everybody, irrespective of whether people settled inside or outside the social contract. Therefore, there is no reward for those who keep within the social contract, and there is no deterrent to those who go beyond it.

I believe that if prices and dividends go beyond the norm they will have to be subject to a surcharge on the corporation tax of the firms involved. Those who have excessive wage or pay awards—from management downwards and upwards—will have to be surcharged on their national insurance contributions. I see no reason why a quarterly six-monthly or annual return cannot be made by every major industry in this country. I see that the Prime Minister is leaving the Chamber and I quite understand why he has to go.

The great failure of this debate so far is that no one has discussed how the social contract will be made fair but effective. We must get on top of wage inflation. All hon. Members on both sides of the House, certainly on the Front Benches, now agree that it is the major cause of inflation in this country. The Leader of the House said with great clarity when he was answering Questions on behalf of the Prime Minister, during the Prime Minister's absence in Jamaica, that having got the thresholds out of our system, having accepted the problem of commodity prices and having come to live with the oil deficit, we should find that the major part of our inflation would be wage inflation. I think that in the next six months that will be the issue on which every right hon. and hon. Mem- ber will have to vote in the House. Many people will have to make up their minds where they stand. My right hon. and hon. Friends and I know exactly where we stand. We believe that an inflation tax is inevitable and will be introduced in a Budget by a Labour Chancellor—if not in July, probably in October.

That leads me to two short points. If we are to make the national dividend work, if we are to have an effective prices and incomes system, we must change not the doctrine of collective bargaining but the monopoly power of certain trade unions. Collective bargaining must be decided much less on muscle and much more on merit. That will cause a fundamental restructuring of industry, with the sharing of power right down to works councils and plant bargaining.

The Amalgamated Union of Engineering Workers antics of Mr. Scanlon this week have indicated how more democracy is needed, not less. I hope that the Government will allow a free postal ballot for any union which wishes to avail itself of it. It costs the Electrical, Electronic, Telecommunication, Plumbing Union £20,000 a year to ballot its members. It is in favour of that system because it believes that it brings about more interest and a wider franchise. A free postal ballot would save it £20,000 a year, a small expenditure to ensure democracy.

Sterling has been mentioned. I think that the Morgan Guaranty report is right and that sterling still has a long way to fall. We have not seen it hit the bottom yet. But the sterling exchange rate is inevitably associated with the rate of inflation. We shall not see sterling restored in value until we conquer inflation. We shall not do that until we can control wage inflation, and we shall never do that until we have a prices and incomes policy backed by statute.

This is certainly not a debate on the Common Market. But I saw in my newspaper this morning that the Government were considering satisfying part of their borrowing requirement by borrowing from a European fund to which the Arab nations have recycled their petrodollar surplus, funds which will be available to the Nine collectively but which I should have thought would not be available to Britain on our own. There could hardly be more eloquent testimony that this country requires the strength of the European Community behind it. In our present condition, with the economy as it is now, the uncertainty of 18 months' renegotiating in the hope that we might get more favourable trading arrangements, while investment was held up, while we were forgoing training grants and while tariffs were going against us, seems to me to have been a recipe for economic chaos.

The Conservative Opposition have rightly drawn attention to the gravity of the economic situation, but they have put forward no constructive proposals for dealing with it. We see a total absence of policy to deal with it, a total absence of policy on wage inflation in particular. This is the subject on which they are hedging. They cannot carry on hedging much longer. They will have to come to a decision.

Therefore, my right hon. and hon. Friends and I have not the slightest intention of voting for the motion, which is woolly and puts forward no constructive proposals. We shall certainly not vote for the Government. Therefore, we shall abstain.

Just as the Liberal Party has saved the Tory Party on its European policies, just as a Conservative and Liberal Opposition have saved a Labour Government on their European policies, so, in the very near future, we shall be part of a spearhead which will have a Budget from the Government which will introduce a form of prices and incomes policy for which they will not have a majority among their own Members. They will certainly have our support. The sooner they do it, the better.

6.15 p.m.

Mr. Hugh Fraser (Stafford and Stone)

There is no question but that from the Prime Minister we had the most Panglosian speech of a brilliant and Panglosian career. We heard that nothing was wrong. Easter had risen. The spirit of Whitsun was about. All criticisms were by the way and beside the point.

I should like to touch on a few matters that the Prime Minister raised. First, he said that all was well with the balance of payments. But it is certain that we shall see the effect of the central deficit of Government spending appearing in a balance of payments situation which must deteriorate by the end of the year. The right hon. Gentleman also said that the answer to the wage problem was undoubtedly further talks, further discussions—all the sorts of things that happened in 1967, when he was discussing with the CBI and TUC a plan for a national dividend or something of the kind.

It is good that we should go away inspired by the Prime Minister with the absolute certainty of all being well. But the facts are totally different from what he supposes. He was so gracious in the way he said that other countries were having their little difficulties while we were having none. The fact is that the country and the Government will soon have to come to grips with an inflation which has got out of hand and a borrowing requirement which is almost out of control. I trust that when the Government take action they will deal with the imminent crisis in a far more orderly fashion than they dealt with the last, which began in March 1967 and which they did not get on top of until November 1968 because of indecision.

I do not want to bore the House, but I should like to give some examples of the indecision. We had the cut in Government expenditure of about £2.4 billion after devaluation in November 1967 running through to an indecisive end of October 1968 when the currency exchanges had to be closed for three whole days and further restraints were imposed—a masterful display. My great fear is a repetition of the sort of indecision which was so disastrous then. The Prime Minister again and again rejected devaluation until finally, when, as far as I can remember, he was on a trip to Moscow, the Chancellor of the Exchequer was forced to perform the ghastly act.

Fortunately, the present Government are protected to some extent by the floating exchange rate, which is definitely an advantage when a Government cannot face up to the problem. It prevents the sort of holocaust of our currency that we saw in November 1967, but that is no reason to suppose that action should not be taken, and it must be taken on a very wide front.

As I look back over the years I see that the fundamental thing that has happened is that we have engaged in a regime of public expenditure which the country could no longer afford. That is the root of our troubles. In 1958 the right hon. Member for Down, South (Mr. Powell), whom I see beside me, Lord Thorneycroft and Lord Rhyl resigned over an unfilled borrowing requirement of £100 million. It was published as £50 million. The Chancellor of the Exchequer of the last Conservative Government had in unfilled borrowing requirement of £3,000 million. The present Chancellor of the Exchequer has one which I think is much nearer £10,000 million than the £9,000 million publicly announced. Is it supposed that the right hon. Gentleman is 200 times more dishonest than my right hon. Friend, or that the pound has depreciated in these years by 20,000 per cent?

What has happened, quite simply, is that over these years there has grown up a consensus between the two main parties to spend Government money as it comes—or as it does not come. Today we are faced with a breakdown not of the capitalist system but of the multi-welfare State, in which as long as someone arrives in a Rolls-Royce and asks for £15 million, he gets it—just like that. It is not just the old-age pensioner who has been protected. It is industry as well. Throughout the economy today and in this House, in the party system, there is this theme, this consensus, which has to be broken, and until it is broken the country will simply go from worse to worse.

We have seen it happen again and again. We have had stop-go, whether under a Conservative Government or a Labour Government, caused by fiscal extravagance. No wonder some of our industries are in difficulty. No wonder we have the problem drawn to the attention of the world not just by my humble voice but by the ASTMS. Its distinguished General Secretary, Mr. Clive Jenkins, has been very good on this aspect. Today we face the fact that at the moment we simply have not the productive wealth in this country to sustain the sort of public extravagance upon which all Governments are now engaged.

I will mention two very simple statistics which bear out what I have to say. The point has also been made by Mr. Clive Jenkins and others. In 1957 the productive manufacturing industry, of this country provided 37 per cent. of the gross domestic product. Today that has dropped to 30 per cent. Agriculture in 1957 provided 5.4 per cent. of the gross domestic product. It has now dropped to something like 3 per cent.

The amount of investment going into productive manufacturing industry today is absolutely static. It has been declining since 1970. This is what is happening. The true productive wealth of this country has not increased. There are various reasons for this. In this connection I should like to touch on one of the answers put forward by the right hon. Gentleman this afternoon. He said that the answer to this problem was the National Enterprise Board and more State interference, or nationalisation if need be.

I should like to compare for a moment the figures just given by the British Steel Corporation with those of Bethlehem Steel in America, a unit of precisely the same size, producing 22 million tons of raw steel a year. For the British Steel Corporation there is a deficit forecast to the taxpayer for this year of £375 million. In America precisely the same size unit, employing exactly half as many people as are employed in the British Steel Corporation, has just reported profits last year of $350 million.

It is no use saying that the answer is the NEB or what the right hon. Gentleman, in one of his more extravagant passages of bad economics, called "the rebirth of Keynes by the micro-economics of the NEB". The fact is that the microeconomics of the NEB are based on the fallacy that the Government can run things better than private enterprise. It will take a very long time for the NEB to come into effective operation, and it will undoubtedly have great difficulty in recruiting the necessary people to run these industries. That is the second fallacy in the argument.

The NEB, looked at in relation to the ideas put forward by the ASTMS for increasing investment in manufacturing industry, is the worst possible, the slowest possible and the most incompetent machine. We have seen this type of interference at work under both Conservative and Labour Governments. The last Conservative Government made the mistake of nationalising Rolls-Royce. We have seen the same sort of thing done by other Governments. Not one of these measures has worked effectively.

The only answer is to have better investment, and investment will be essential this year, because whatever may be said in this House now I believe that by the end of this year its main concern will not be inflation but massive unemployment. That is why it is so important to prepare schemes now for getting investment moving against that eventuality. This massive unemployment is bound to come as the currency of this country is dissipated by the extravagance of Government expenditure.

Therefore, I believe that the most important thing the Government can do is to see that proper assistance is given to manufacturing industry in the Budget that they are bound to bring forward this autumn. They will have to take it from somewhere to be unfair if necessary—but this manufacturing base is the base which has to be built up by giving special help to investment.

In the past, as we know, the grants poured out by this Government and the last Government to industry as a whole have often been wasted. How much better it would be to cut out these grants and provide a proper tax advantage by reducing taxation on manufacturing industry.

These are some of the thoughts which we must all have in our minds this afternoon, having listened to the Prime Minister and witnessed his amazing leap into optimism at this time. I believe the situation is so serious that before the year is out the Government will have to do what we have suggested. They will have to cut Government expenditure. They will have to come forward with a new Budget. When they do, I hope they will base that Budget on giving encouragement to our manufacturing industries. That is the only way in which wealth can be produced and our economic balance restored.

6.28 p.m.

Mr. Dalyell (West Lothian)

The right hon. Member for Stafford and Stone (Mr. Fraser) will understand that we do not agree with his sweeping charges of extravagance in public expenditure, but I very much agree with some of his remarks about investment. One of our problems in this country is not only the amount of our investment but the quality of the investment we make and the rate and timing of return on capital. This must give us all reason to think rather deeply compared to the timing of return in similar German investment.

I had the enormous good fortune to be chosen as leader of the Inter-Parliamentary Union delegation to Brazil, which returned earlier this month. Before the Minister of State, who was there in 1969, or the Treasury officials, think that they spy any bee in my bonnet, I ought to make clear in my next breath that I am not proposing that a system which has produced a double-digit growth rate over 10 years, with an average 30 per cent. inflation rate, can be transplanted lock, stock and barrel with any success to this country, where the political, trade union, stage of development, resource and central banking circumstances are wholly different.

Having protected myself from having charges laid against me of being overenthusiastic about the Brazilian economic system, now that we ourselves are experiencing what we used smugly to think of as a Latin American rate of inflation I wonder whether we have not something to learn from at any rate part of the Brazilian experience.

I have in mind the question of saving and of consumption. One new feature in British society which bothers me greatly is the number of people, far from wealthy, who, when they have a little money to spare, go out and buy goods or services regardless of whether they need those goods or services.

Frankly, I thought that the Leader of the Opposition was right to be concerned about money as a store of value. We face the problem that there are people who feel that they are using their money rationally if they spend it. There is a loss of faith among too many members of the public in the monetary system as such. This is a very dangerous development, because, if we are not careful we shall come to experience the flight from money. I am not casting aspersions on or even blaming people who make the decision to spend. Who is to say that it is wrong from their point of view? It may look sensible and prudent to buy a new fridge, even though the old one is working well, simply because the money is available. Cumulatively, however, we have to face the fact that such an attitude swells domestic demand and unnecessary imports.

Therefore, there is a case for looking very seriously at one aspect of the Brazilian system whereby, we were told, the Brazilians have succeeded in getting some 12 million small accounts protected by indexation or monetary collection against inflation. Clearly such protected accounts would have to be limited to a very modest top figure of, say, £5,000. Not to have a ceiling would be both expensive from the point of view of the Treasury and socially unfair. I am not claiming too much for such a scheme as a source of investment funds, but it might help to achieve some brake on less than necessary consumption.

It is up to us to put forward concrete suggestions. In view of that, whatever the merits or demerits, my first suggestion is that Treasury experts could not do better than to pick the brains of economic heavyweights such as Roberto Campos, the current Ambassador in London, Delfin Netto, currently the Ambassador in Paris, and Carlos Langoni, of the Getulias Vargas Institute, who is coming here in August. Albeit in different circumstances, these are men who have coped with some success and who have brought inflation under control while maintaining growth.

The House would not thank me for going into detail about an enormously complex subject, so I suggest that the Government ought to ask some of its senior economic advisers to put a series of questions to Messrs. Campos, Netto and Langoni.

I suggest that they be asked, first, "Given your knowledge of Western Europe, have we anything to learn, from the experience of monetary correction and indexation in Brazil, about our current problem of the erosion of working capital?" Let us face the fact that it is this erosion of the purchasing power as much as any other factor which was the root cause of our spending eight hours yesterday on the problems of British Leyland. One of the most serious effects of inflation throughout British industry is the erosion of purchasing power of working capital.

I must reflect that the Japanese Brazilians, who are very active in that economy, asked us, both in the light of Brazilian experience and in that of Japanese experience, why in the long term we were so shy about financing growth out of bank lending. In our present situation, I feel that that is a fairly reasonable question to put to our banks.

The second question which I should like Treasury officials to ask the Brazilians is "How have you allowed for inflation when it comes to taxation, and to what extent have your tax measures encouraged investment?" it is a bit too easy to dismiss the success of the rate of investment in Brazil simply as being the result of a tough military régime in the late 1960s. I am aware of this. But I believe that we should look at a system which gives tax advantages both to companies who pay their taxes promptly, without lags, in this kind of inflationary situation, because June's pound may be significantly less valuable than January's and equally to those companies which fit in with the criteria of investment and re-equipment in the national interest.

Thirdly, I happen to be one of those who support the idea to which the Prime Minister alluded again today and which he put forward on television with Peter Jay on 11th May and in 1967 shortly after one of his more controversial speeches to the Parliamentary Labour Party which perhaps overshadowed it. If we are serious about my right hon. Friend's suggestion, it would be eminently sensible to talk in depth to the Brazilians about the concept of filling out the social contract.

During his interview with the Prime Minister, Peter Jay said: … the Prime Minister was talking about his new ideas for what I suppose could be regarded as a kind of successor to the social contract—a national wage fixing plan and I would like to follow that up with him a little bit if I can. My right hon. Friend said: This is not a replacement of the social contract. It's filling it out. It's making it more based on consent and prior discussion as to what can be afforded. It would rely still on leadership and education if you are going to ask people to work their guts out, as we need to do. The reflection which I make is that the Brazilians have tried not exactly the same scheme but a similar one which is worth investigating. Minimum wage levels, the remuneration of Government employees and all wages subject to collective bargaining are adjusted only once a year. For the latter a wage-control formula is applied, aiming to maintain constant the real purchasing power of wage earners. The average of the variation in the cost of living over the preceding 24 months and an estimate of the rate of inflation for the ensuing year are taken as the basis for the wage adjustment. To this average is added a percentage corresponding to the average increase in national productivity in the preceding two years. Adjustments to minimum wages and to the remuneration of Government employees are usually made to parallel the ones obtained in applying the wage-control formula. Special considerations and improvements eventually may be incorporated in this formula to deal with certain circumstances.

This is not a statutory wages policy. It is much more a kind of prior agreement on the national product. The House will acquit me of being silly enough to suppose that a system of national wage bargaining which has contributed to Brazil's economic stability in the last decade can be transplanted here. It cannot. For one thing, British trade union leaders are in business to negotiate on behalf of their members and will not lightly allow that function to slip away from them.

Having said that, if the Prime Minister is in earnest—and I am sure that he is bearing in mind that he put forward the same concept in March 1967—it would be wise to get his senior economic advisers to talk to the Brazilians about their achievements and shortcomings in this area. It might also be sensible to discuss with them their investment strategy and their export strategy.

Here I come to a second worry. A good picture was rightly given by the Prime Minister of British exporting. However, we have to face the fact that much of it is extremely itsy-bitsy. At the moment, the Scottish Council (Development and Industry) is in Brazil and endless chambers of commerce are going to endless countries, all subsidised by the Department of Trade. We never hear of the Osaka trade delegation, the Kyoto trade delegation, the Yokohama Chamber of Commerce trade delegation, the Wurtemburg Chamber of Commerce or the Hamburg trade delegation. We hear of the Japanese or the German specialist trade delegation or, more likely, of resident Japanese or Germans involved in a joint venture.

If we are to increase our exports, we have to do something about the package deal of the joint venture. This is the modern way to success in exports. Countries in Latin America and Asia want to persuade their people that joint projects are their own. We are far too amateurish about it even in this day and age. Coupled with this we have to apply very stringent criteria for public investment, taking into account the return of capital.

To change the subject slightly, looking at us the Brazilians who had travelled in Europe time and again asked members of the delegation this question: "Why is it that you spend so much on sheer administration in your country? I have to say that local government reform, right or wrong, whether we like it or not, has been an exceedingly inflationary operation. Every hon. Member of this House can recount examples from his own area of local government officers—I do not criticise individuals—who are drawing higher salaries for less responsibility.

Moreover, local government reform has contributed its share to the rapid growth of non-industrial employment in this country, which has outpaced similar growth in other industrialised countries. The 1962–73 figure from the "Year Book of Labour Statistics" are alarming enough. Whereas the growth in non-industrial employment in the United Kingdom totalled 29 per cent. over that period, in Germany and Japan the growth of non-industrial employment was less than 8 per cent. The TUC has produced some very interesting figures to the effect that our manufacturing sector was 36.4 per cent. in 1959 and 33.7 per cent. in 1973; that public administration had gone up from 5.8 per cent. of total employment in 1959 to 6.8 per cent. in 1973; and that other services had gone up from 30.7 per cent. in 1959 to 37 per cent. in 1973. Hugh Scanlon, worried about manufacturing industry's burdens, carrying the rest of us, is very right on this particular occasion to be worried about these figures, as he has expressed himself in public.

So I ask my right hon. Friends, before introducing any schemes for Assemblies in Scotland or Wales, yet another tier of government, yet another level of bureaucracy, to ask whether we can afford it. The answer may be "Yes", but the question must be asked. The Government, who are understandably concerned as to what they do when they receive the Boyle Report on Members' salaries, really ought to ask themselves whether 140 MPs in Edinburgh paid not less than MPs in the United Kingdom, and the whole paraphernalia of government that goes with it, really is an economic priority.

Lastly, I raise what I know is a very delicate issue, because questions of liberty, freedom of speech, a reputation for truthfulness and other values are involved. I gently question, however, whether our trade and currency can ever really prosper while the BBC goes on as it does. Having talked to members of the World Service, I quite understand that they have 12 million or more listeners throughout the world precisely because of their good reputation. But if one talks, as the delegation was able to do, to the British business community in Sao Paolo, the members of which are in a position to put massive amounts of trade our way, they have a picture of an unreliable Britain, where nothing ever goes right. What is certain is that no other nation on this planet talks itself down in world markets as we do, and the cumulative effect of much of what the BBC puts out really breaks the heart of many of those who are trying to handle our exports.

It is not only the World Service. Most of us, I suspect, listen to the early-morning radio programme. As an example, last Thursday Pierre-Paul Schweitzer, formerly Director of the International Monetary Fund and now president of some private bank in Paris, was being interviewed. He said that the British had had all this before and would get through it somehow. I have not got the script, but the interviewer then went on to press him, saying "If there is a run on the pound", 'When there is a run on the pound". When this goes on day after day, it becomes a very gloomy start for those who have to make decisions in this country. The impression left was that Schweitzer was relaxed and sensible and that the interviewer talking on chirpily about a run on the pound was really pressurising him into predicting some kind of doom.

That is not an isolated case. Again this morning I woke up, as I suspect others did, to hear an item on Chrysler, and the first words I heard on gaining consciousness were "If Chrysler goes bankrupt". If an economy depends on confidence it really does not do any good to have people wallowing in gloom. I think it would be a good thing if an all-party delegation of some kind talked seriously to the BBC, particularly those in the World Service, and asked them if they think that is the right way to carry out their duty.

I speak as one who in 13 years as an MP has never complained about a journalist, a particular article in a newspaper or a television item, but I think we have a straight choice. We must ask ourselves which is the more important—the unsullied purity of the BBC, leaning over backwards to be critical of Britain and faithfully reporting everything that goes wrong, or the employment of tens of thousands of our people resulting from more confidence in British industry. I feel this is a question which has to be put.

6.45 p.m.

Mr. Geoffrey Johnson Smith (East Grinstead)

I have listened with very great interest to what the hon. Member for West Lothian (Mr. Dalyell) had to say about Brazil. It is a dynamic country, and I think that many lessons could be learned from it on how to live with inflation. Travel broadens the mind, and it is a pity that some of his hon. Friends have not had the same experience. I hope he will not mind if I do not follow him all the way to Brazil and back, although there is one aspect I should like to touch on—the consistency which ran as a thread through his experience in Brazil. The people of Brazil have the quality of consistency, and they know the policy, and people in the private and public sectors can plan accordingly. I believe that one of our great defects is the lack of consistency in government.

On the question of the BBC the hon. Gentleman touches a special corner of my mind, as he knows, from my previous connection with that organisation—or previous incarnation, if he likes to put it that way, although I hope no one would ever, as one hon. Member unkindly and harshly did, refer to me as the hon. Member for Lime Grove. That organisation is capable of mistakes, misjudgments, just as is any other organisation. But I would answer his question very simply. So far as the quality of overseas broadcasts is concerned there can only be one guiding principle, and that I have always believed to be the principle uppermost in the organisation's mind; it is the truth, whether palatable or unpalatable. That, I insist, can be the only principle if it is to be a free broadcasting corporation which will continue to win the respect of the world. If he has reason to believe that it has departed from this principle, he has every right to question it in this House and we can have a debate about it.

Mr. Dalyell

There are many aspects to this and some may be frankly masochistic, but one must confess that the Germans, the Japanese, and many other exporters do not do the same thing.

Mr. Johnson Smith

They are exporters. I am talking about the BBC broadcasting and truth. It is one of our most precious possessions, and we have nothing to learn from the Germans or the Japanese on that score.

Leaving aside the Prime Minister, who increasingly dwells in this matter, as in others, in a Walter Mitty mood, there have been many reasons put forward in this debate explaining why our economy is in such a mess: the level of public spending, wage and consumption inflation, the huge borrowing requirement, the oil deficit, the effect of the commodity price explosion, and lack of investment. All these have been mentioned, and running through the debate quite clearly we have seen different theoretical and technical economic hypotheses.

Whatever the cause of the mess, the story has a depressing familiarity. That is why this country is deeply anxious and expects us in one form or another during the next weeks to agree on a few fundamental measures which we might take.

When I first came to this House some years ago we had just entered the period which the right hon. Gentleman the Member for Stafford and Stone (Mr. Fraser) refered to as "stop-go". It was stop-go economics, with brisk and rather unexpected changes from the brake to the accelerator, which it was alleged was the main cause of our problems. The answer, we were told, was to go for growth, and we did for a time, until we hit the buffers. Then we were informed by a distinguished economist that if we could only run our economy just a few points below full employment level we would avoid overheating the economy and would not have to slam on the brakes and have all that trouble with our balance of payments.

Then I recall being told that we should cut our cloth to meet our reduced status in the world by ridding ourselves of those awkward overseas military bases, certainly the increasingly intransigent colonial possessions, and all the other trappings of an erstwhile imperial power—including, of course, the rôle of banker to half the world's trade and most of the world's developing countries. We therefore progressively dispossessed ourselves of the colonial terroritories. We evacuated most of the bases, and the pound ceased to play the predominant rôle it had done in the fifties. There was talk of the crawling peg, and eventually we ended up with the floating pound.

Finally, there were those during this period who saw our problems more as of industrial relations. They put the emphasis on incomes policies of different varieties from the declaration of intent some nine years ago to the present social contract, via—and it affected both Front Benches at different times—various comprehensive statutory prices and incomes policies which caused us all so much grief.

It seems that during this short period we have tried just about everything except, perhaps, trying a little harder to live within our means. I know that mentioning that topic usually provokes many hon. Members to ask precisely where the cuts in expenditure should fall. We had quite a lot of that earlier in the debate. No one at this stage will challenge me, however, if I say that anyone looking at our history must surely come to the conclusion that we would not necessarily get top marks for our performance in this respect.

Perhaps we might, therefore, have tried harder to live within our means—we have to whether we like it or not—and we have never tried a reasonably consistent policy for any length of time. That at least might have helped to provide some stability. That is what the Brazilians have achieved, and they seem to be doing pretty well by it.

This is a most depressing story. I do not want to tempt the hon. Member for West Lothian from his sedentary position, but the BBC keeps telling it that way because it happens to be the truth. We are living in a profoundly depressed economy, and this is a depressing time in which to live. What makes it all the more depressing is that there is still too wide a gap between too many of us in this House. In recent years the House has become more ridden with dogma, and the impression that the public gets is that we seem not to have learnt very much from our past experience. There is still a tendency to put a major portion of the blame on one single phenomenon—whatever happens to be the fashionable trendy nostrum of the day. That all depends on the individual's degree of trendiness, and that in turn depends on which part of the political spectrum he believes he fits into.

If one is close to the Secretary of State for Industry one would agree with him that the main cause of our industrial deficiency is the lack of investment. That is the cry. Of course, if one took up the right hon. Gentleman's approach one would forget all the stories about the level of overmanning in both private and public sectors, even after modern plant has been installed. Despite what the right hon. Gentleman may say, many plants in this country have very efficient management and a great deal of up-to-date plant but a record of productivity which, compared to some other countries, is very poor. That may have something to do with the relationship of management and the unions.

Since I do not believe that this blessed plot, this tiny corner of the world, is blessed, by some strange act of God, with the world's most incompetent managers, or the most work-shy workers, and since I do not subscribe to the view that all City men are sharks, I find it difficult to accept the over-simplified diagnoses of either the Secretary of State for Industry or the "ultras" of the monetarist school, who, I suspect, in practice would be compelled to dilute some of their theories.

We get into real trouble, if I may be permitted a political philosophical reflection which might prove a trifle disturbing to some Labour Members, when the cure propounded, such as more investment, is wrapped up in a package deal containing more nationalisation, more State controls and more powers for the State to intervene. To me the blind faith of some Labour Members, mostly below the Gangway—and I am glad to see that one of them is here at least—is one of the main causes of our inability to adapt to the changed conditions of the 1970s.

I say that because there seems to be no recognition of what is happening in the more successful economies of Western Europe. There it is certainly recognised that the State plays more than a passive rôle in industry, but the motivation seems so very different from that which so often emanates from Labour Members who, like some of their friends outside, still regard industry as a battlefield between capital and labour.

In the countries to which I refer the rôle of government, just as those I meet in the EEC believe it to be the rôle of the Commission, is that of a partner which understands the limits of its authority and which expects others—management and trade unions—to understand theirs. The Governments of France and Germany do not denigrate profits. They do not make it more difficult than it needs to be to create wealth, to compete freely, nor are they hostile to entrepreneurial skills. These Governments recognise that in the end they depend on consent and consultation. Discussion is the accepted procedure, as it is for managements in their relations with trade unions. Consultation is also a traditional rôle of trade unions in Britain, but those who analyse our industrial affairs and economic performance objectively see too many examples of trade union power, often allied to political dogma, pushed to the limit.

In this connection there is a most interesting and, in the context in which it is written, startling article written by Mr. Paul Johnson in the current edition of the New Statesman. It is entitled "A Brotherhood of National Misery". and in it the author has something to say about the manner in which sections of the trade union movement operate in this country. On the question of pushing power to the limit he says: We call the process 'free collective bargaining' but it is really nothing of the sort. It is groups of people using their strength to force other groups, or society as a whole, into compliance with their will". He goes on later to say We have seen in recent years, whole new categories of workers joining in the competition for wage increases, demonstrating their militancy and smashing their fists in the community's face". If management must take its share of the responsibility for the failures in the economy, so should we recognise the effects of the minority of the trade union movement who use their powers to the limit to frustrate the plans both of Government and of management. It is this negative, if not hostile, attitude which has done so much to embitter the atmosphere in British industry that makes it so difficult to make the social and economic progress we so badly need. Surely we can now all appreciate that if the Government, management or trade unions in any enterprise push their powers to the limits we shall never succeed in creating the right economic climate to enable fiscal and other policies to work towards the common good.

As I see it, the real challenge to our ingenuity and skill is not so much a challenge to the Treasury. It is a challenge to the interface of the Government, management and the unions. That means creating the right institutions and the methodology which will enable communication and constructive co-operation to take place. But there must be the will and the good will. I am not suggesting that there is no room in this country, and certainly not in this place, for rival philosophies, that there are no big economic or financial decisions for a Government to take based on the firm support of the electors. Governments by their very nature must work out their political priorities.

I am suggesting that not one of the Chancellor's schemes will have a truly lasting beneficial effect if the Government insist, with 39.6 per cent. of the electorate allegedly supporting them, on ramming through this Parliament policies which are deeply disturbing to, if not a majority of the electorate, at least a sizeable minority.

I believe that the Confederation of British Industry was right in pointing out recently that it was the frequency with which Governments have changed their plans that had done so much to damage industry's long-term plans and the ability of successive Governments to sustain a favourable investment climate. The threats which have come from some quarters, including some trade union leaders, to destroy what they choose to call the capitalist system, as though we were still living in a laissez-faire society, are bound, I would have thought, to undermine industry's morale.

This is no doubt why, with such thoughts in mind, Mr. Paul Johnson should write these words referring to some men in some trade unions: Smug and self-assured; oblivious of any criticism, they have encouraged British industrial workers in habits and attitudes, in rules and procedures, in illusions and fantasies, which have turned the British working class into the coolies of the Western world, and Britain into a stinking bankrupt industrial slum". Strong words, and no doubt if they went out over the BBC many would question whether they were, in fact, a truthful description of the British scene. I find them exaggerated. Nevertheless they tell us that things are nowhere near as good as they ought to be, and they come from a well-trained observer of the British scene.

Mr. Dalyeil

Would not the hon. Gentleman agree that there are trade union officials who do a first-class job?

Mr. Johnson Smith

I prefaced my remarks by saying that that was true of some and suggesting that one of the reasons why we do not make the progress that we ought to is the embittered atmosphere in British industry. It is little wonder that some of our best brains and most capable people have chosen not to work in British industry, to avoid submitting themselves to the vilification which so often goes with industrial management at every level. If they help steer a company into healthy profitability they are charged with cupidity and favouring the interests of a particular class. If they make a loss, even where it is the fault of the Government, they are charged with failing the nation. Either way they lose.

The climate is no better in the public sector, as the Chairman of British Rail, Mr. Richard Marsh, said recently: None of the 5-year investment plans we have produced has remained intact for more than six months because of the inability and unwillingness of Government to settle investment plans for more than an inadequate period ahead. The cost to the taxpayer of the present short-term nature of the Government's … method of allocating investment to the nationalised industries is frightening. No doubt at some suitable date we shall have a not dissimilar comment from Sir Monty Finniston. I imagine that Mr. Marsh's criticisms were not just addressed to the present Government. He might have been addressing himself to Governments in general.

For my part, I would gladly support a Chancellor who would let common sense and not dogma be his guide and who would have at least the quality of consistency. As my right hon. Friend said in opening the debate, the time has come for the Government to face reality. If it does so it will certainly not find us lacking in a constructive response from these benches.

7.5 p.m.

Mr. John Tomlinson (Meriden)

I do not want to follow in detail what the hon. Member for East Grinstead (Mr. Johnson Smith) has said but I would like to take up one point he made early in his speech about the country being anxious and looking to this House to agree upon some kind of solution to our problems.

I would suggest to the House that, however we agree and whatever we agree, the decisions that are made in this House will only marginally alter the real problems that the country has to face. The real solutions to our problems will largely be determined by the attitude of 50 million people in this country, how they are prepared to visualise their own levels of personal consumption at a time when we are living 5 per cent. beyond our means and how, in their collective organisations at their places of work, they are prepared to respond within the framework which the Government themselves can change by the decisions that they have taken and will be taking in the area of economic affairs.

I do not believe it is within the collective capacity of 635 people in this House to find a solution. What 635 people between them can do is to change the framework within which people outside will have to find a solution. If we are encouraging people to look to this House to come forward with some kind of panacea, we are encouraging them in a process of self-delusion that there is something that can be decided as a neat package which we merely impose by some legislative form and which somehow will produce a result. A result will come through changes of attitude of management and men and through people in our community combining to use the limited resources that we have far more effectively than they manage to do at the moment.

Mr. John Stokes (Halesowen and Stourbridge)

I am following the hon. Gentleman carefully and partly agreeing, but surely in this House both the Government and the entire House must give a lead to the nation, and that is the fundamental factor which is missing now.

Mr. Tomlinson

I agree entirely with the hon. Gentleman, and if I have ever suggested anything to the contrary I cannot recall it. I was merely commenting on the suggested need for some kind of solution to emerge from this House. Of course, there are things the Government can do, and have already done, and there are further things that I hope they will be doing to create the kind of framework within which people are more likely to combine together to find a collective solution to the problems of the country than they are at present doing.

There are some encouraging signs, and my right hon. Friend the Prime Minister went through some of them during his speech to the House this afternoon. There can be no doubt that the balance of payments situation is improving. It is certainly nothing like sufficiently improved for anybody to have any long-term confidence, and I still regret the general tendency of people to distinguish between oil deficits and non-oil deficits. As I have said in the House before, the oil situation is a permanent factor in life now and we have to learn to live with the total trading situation without somehow trying to excuse our problems by saying that our trading situation, excluding oil, is coming into surplus. We have to be able to balance our trading position on all factors, oil and non-oil alike.

Nevertheless, the trend is an encouraging one and one which I am sure everyone will welcome. Equally, the way that the levels of industrial production have stood up in this country compared with levels of industrial production in other countries during the recession of the past 12 months is in itself encouraging, as is the way that our level of unemployment has stayed relatively low—although far too high in absolute terms for anyone to be happy with it—compared with many of our competitor nations.

Notwithstanding those encouraging features, the facts are fairly clear. They are that we have a dangerous level of inflation which is clearly wages-led at this point, whatever historical reasons there may be leading up to that situation. It is clearly wages-led now and clearly being fuelled by the level of the public sector borrowing requirement.

It is to this that I wish to address a few remarks. On the wages side we have a general comment in the motion calling upon us: to secure a reduction in the level of pay settlements". That is a form of words which can mean all things to all men. In practice we have three alternatives that can be examined. We can look at a statutory incomes policy. I hope that everyone will combine to reject the concept of statutory regulation of pay. The horrific public sector settlements we are going through are clearly the consequence of the discrimination of a statutory incomes policy against public sector settlements.

We had a Halsbury Report because the Whitley Council system could not deal with the consequences of a statutory incomes policy and the discrimination that it led to in the public sector. We had a Houghton Report with 35 per cent. for teachers and all the back pay that went with that because of the discrimination of a statutory incomes policy against the public sector. If those who are concerned with industrial relations examine the pattern of industrial disputes of the past five years they will find that it has changed dramatically. It has not been the usual repetition of car workers, printers and dockers who have been the centre of industrial disputes. It has been the local government workers, the miners, the railwaymen, the Post Office workers, health service workers, teachers and civil servants. Go through the list: almost every major official dispute has been a public sector dispute arising from the discrimination of an incomes policy.

Mr. Alastair Goodlad (Northwich)

Will the hon. Gentleman tell the House why he thinks that a future incomes policy needs necessarily discriminate against the public sector?

Mr. Tomlinson

I am waiting for someone to come up with the formula which will show that we can treat with equity those areas of private sector employment with plant bargaining and those areas of public sector employment with national bargaining, with the Government being directly or indirectly the paymaster. In the private sector there was no real attempt at that. The whole experience of the Labour Government's statutory incomes policy was that when there was a nil norm in the public sector there was a 6 per cent. rise in earnings in the private sector.

We all know how that was done, by "phoney" productivity deals, job regrading and a whole series of what we could term "fiddles". At the end of the day we got a year-by-year 6 per cent. discrimination against public sector employment. That has been largely the cause of the public sector-led wage inflation which we have been suffering recently.

Once there are 30 per cent. to 35 per cent. settlements from Halsbury and Houghton they become the norm for which other public sector employees will look. When they get that such figures become the norm which private sector employees will expect. So the process goes on. I hope that we have a large measure of agreement against the return to a statutory incomes policy.

Then there is this peculiar beast, the so-called voluntary incomes policy. I am never quite sure what that means. A voluntary policy which has no sanctions is, for my money, no policy. If there is agreement there is no need for it. We are left with the third alternative, which is to get to the people who are running a system of wage bargaining which they choose to call free collective bargaining. I agree with the hon. Member for East Grinstead about how far we can define that. That is the system of wage determination which will remain with us.

In such circumstances we have to make it abundantly clear to those who have the responsibility for exercising so-called free collective bargaining that the consequences of their decisions to bargain in excess of what a particular institution can afford to pay will be unemployment of their creation. That is the only discipline that exists in free collective bargaining.

No one wants to see an extension of unemployment. We hope that there will be a moderation of pay claims and a reduction of wages-led inflation. The Government should not represent themselves as a body who will automatically provide bail. This may sound a harsh philosophy but it is consistent, if consistently applied. I must confess that I am somewhat confused by the philosophy which spells that out firmly to the Chrysler company but takes a totally different view with British Leyland. We need to have a clear understanding of exactly what is to be the attitude of the Government to unemployment arising from excessive wage-led inflation. I believe that it has to be that the consequences of such inflation must be faced by those responsible for creating it.

I come now to the public sector borrowing requirement. This has clearly risen, is rising and needs to be reduced. There is not a great deal of division between many of us about the need to reduce this requirement. Where there are differences between us is in the views we take about how this should be done. I am not convinved that we can reduce the public sector borrowing requirement by trying to meet it through increased taxation or trying to play about with current expenditure.

If we are to make any significant impact on a public sector borrowing requirement of £9 billion we have to be talking about cuts on capital account. That is why I must repeat what I said earlier, that we must find capital account programmes that we can attack dramatically. The one which I would select as a priority is the motorway programme. We can achieve substantial savings here without dramatic consequences on the quality of life, particularly on the quality of life of many poorer people.

In our economic debates there is a cyclically fashionable argument which emerges. That which seems to be emerging now and which distresses me somewhat is the argument that somehow all investment is good and that all we are short of is a bit of investment. That argument suggests that if we can get a bit more investment somehow we shall be a bit more productive. This is dangerous and self-deluding nonsense. My information is that there is no shortage of capital. There is no shortage of supply. The problem in British industry at the moment is a shortage of demand. In those circumstances we ought not to be talking about how we can get money to invest. We have to be examining the factors which inhibit people taking up the available investment capital.

The major inhibiting factor is the problem of productivity and how, productively, to find investment opportunities. Certain improvements have happened, partly in consequence of my right hon. Friend the Chancellor's Budgets and certainly because of the changes in the terms of world trade. Cash flow problems in British industry have improved dramatically over recent months. However, there still has not been a sufficient upturn in confidence for people to start to take advantage of the investment funds available. People do not fully understand exactly where our long-term future lies.

I should like to reassert my belief, as a Labour Member of Parliament, in the mixed economy. The mixed economy depends on the profitability of investment in the private sector. Any fool can invest money. The National Enterprise Board has an unlimited propensity to invest public funds. We have to find profitable opportunities to invest public funds and useful areas of public sector investment where we can invest those funds for some social purpose rather than for some grandiose idea of extending the public sector. It has to be far more meaningful than that.

Many of my right hon. and hon. Friends believe in a mixed economy, but the mixed economy will only generate the investment that is needed when there is a conviction within it that people can get a profitable return on their investment. Before they seek new investment there will have to be a clear understanding on the part of those involved that they will want to see profitable returns on their existing investment.

The major inhibiting fact to new investment is not the lack of its availability but the fact that at present there is not the opportunity to get an adequate return on investment capital that is already there. People will not throw good money after bad, if that is how they regard their existing investment.

This brings me to the question of how to use our existing means of production more effectively and profitably. Like the hon. Member for East Grinstead, I do not believe we have the world's worst products or the world's worst workers or management. In many areas we have exceedingly good products. In most areas we have exceedingly good workers with high levels of skills and training, and good quality management. However, we seem to have a system of industrial relations that prevents those three combining with maximum effect to produce goods profitably, with high levels of return to workers and to investors, and a capacity to sell those goods competitively overseas.

It is to this industrial relations problem and the consequential problem of productivity that most people outside this House have to turn their attention while the Government, in turn, turn their attention to the areas within their control—the areas of public sector borrowing requirement and public expenditure. However, to expect the Government to come up with a solution encourages people to believe in a panacea that is not there. There will have to be a reciprocation of the Government taking the steps that they have already begun to take and that, within the next few months, they will further go along the road towards taking. Those steps, in turn, although generating confidence overseas and among some of our creditors, will not produce the solution but will produce an environment in which a solution is possible. The solution will come by people outside accepting that lead and using their combined resources to work together collectively to produce the goods and services competitively on which all our futures depend.

7.26 p.m.

Mr. Maurice Macmillan (Farnham)

First, I must apologise to you, Mr. Deputy Speaker, and to the House for my somewhat unseemly laughter in the middle of the Prime Minister's speech. I was suddenly struck by the ridiculousness of a comparison between him and the late Lord Salisbury as Prime Minister in a united Government who believed in the doctrine of collective responsibility.

The Prime Minister's speech was an absolutely brilliant performance, almost totally frivolous and irrelevant and irresponsible, but as a public relations production certainly deserving an Oscar. He gave us the sort of soft-focus view of the economy that we have got used to in those sentimental rather than sexy television commercials which are shot through a gauze screen, blurring the hard lines of economic reality. I am glad that hon. Members later in the debate returned to reality.

A good deal has been said about wage restraint. Since the debate on the Finance Bill a fortnight ago I have detected a slightly greater sense of urgency in this House, by commentators and writers outside and by those in industry who are responsible for and affected by these matters. It was a great pleasure for me to hear Mr. Jack Jones talking of the kind of flat-rate wage increases which would help the lower paid. It took me back to 1972 and the time when Mr. Jones was saying, at all those meetings which my right hon. Friend the Member for Sidcup (Mr. Heath) and others of us had with trade unions, that this was not quite the thing, although in those days Sir Sidney Greene was putting forward this same concept. However, late conversions are always welcome and better than none at all.

It is right that we should examine all these matters and all suggestions, from wherever they may come. I do not think that we are, in fact, going quite far enough; nor do I think that on wage restraint, pay restraint or incomes policy we are necessarily moving in exactly the right direction. It is not high wages or high wage settlements that are the problem, but high wage costs in industry. Therefore, as the hon. Member for Meriden (Mr. Tomlinson) was the first to mention this afternoon, the problem is equally one of production, productivity and profitability in the private sector and above all, in our present circumstances, of how to cope with overmanning and how to restore this situation without causing undue hardship and dislocation.

I was appalled to read a report in the Press today—I hope it is untrue—that the Chancellor of the Exchequer apparently intends to encourage overmanning in the private sector by using public funds to pay private industries to employ people they do not need. If this is true, it is a retrograde step and I hope that the right hon. Gentleman will be able to deny this as a calumny when he comes to wind up.

Our production is roughly at what used to be called the three-day week level. Investment in industry is for various reasons—and I agree with the hon. Member for Meriden that lack of funds is not the main reason—lower in the United Kingdom than that of our competitors. One reason, as the hon. Member said, is lack of confidence. We have a level of demand which clearly cannot be sustained indefinitely in this country without improvement in our economic effort.

The Chancellor of the Exchequer is left with very little choice, and he has narrowed the choice even further. Obviously he cannot reflate without causing an enormous increase in the current inflation rates. He dare not deflate and follow policies which one of his predecessors, Lord Snowden, followed because of unemployment, which he does not wish to cause and which, though he can by no means avoid it, he would be frightened to seem to cause. He will not go for any sort of incomes policy, despite the recommendations of the Leader of the Liberal Party and the views of some of his own back benchers. He is left with one alternative, namely, to let the pound float slowly downwards—after, of course, June 5th. It is now down to about 25 per cent. below Smithsonian. Even without any run on the pound, it could no doubt drift down to about 30 per cent. I am not saying that this is necessarily wrong or need cause great alarm, but this is what may happen. Perhaps it could go even lower.

If the Chancellor is relying on that happening, he is doing so because he hopes that in that way he can escape the blame for the unemployment which will inevitably follow from the devaluation caused by such a policy, and that he can use this indirect method of domestic deflation to hide behind as the unemployment figures mount.

However, my fear is that this will not do the trick for the Chancellor and that it will not bring down the rate of inflation and will not even begin to halt the rate at which it is increasing to any significant extent. Indeed, it may well not prove of any great benefit to our exports. If it is true that it is not primarily prices that are making our exports uncompetitive, nor even quality, but delivery dates, after-sales service and general unreliability, no amount of devaluation will cure that.

Lower prices will not make our foreign customers buy if the reasons why they are not buying are simply that they cannot get the goods when they want them or the spares or the after-sales service when they want them. Therefore, it will not help us and, indeed, it may in the end make it difficult for us to be able to price our goods competitively, because the raw materials and the part-finished work which we import will become so expensive—four or five times as expensive as those of our competitors if the pound floated far enough down. Therefore, in the end the Chancellor will be forced into other policies.

My fears are that meanwhile inflation will continue, and, as has been repeatedly pointed out, it is the weak who will suffer. The policies which the Chancellor in the end will have to use will be of an unnecessarily savage nature, because they will have been too long delayed, and will damage not only the weak but the small, not only the consumer and the pensioner but also business. I am worried that in this process of dilatory dealing with problems that require a great sense of urgency we shall find that it is the smaller and medium-sized businesses that are being hurt, that it is the confidence to which reference has been made that is being once more shattered, that investment is not coming and that the expansion and growing innovation of the middle and smaller end of the private sector, which is so important as the seed corn of our future great industries, will be once more discouraged from playing its proper part.

One factor has not really been mentioned in the debate though it inhibits confidence and investment and the whole of our future recovery. The Leader of the Liberal Party referred in rather delicate terms to the need to have merit rather than monopoly power as the criterion for wage settlements. The Prime Minister referred to industrial and financial muscle being used against the interests of work-people's working comrades. These are fine words. They are true. But I think that they conceal the urgency and depth of the problem which we all face.

I am not here particularly seeking to cast blame on the trade union movement for the position in which its history and that of management has put it and has put managements too and their relations between the two. However, much of our industry is facing rather more than the type of minor difficulty which was implied by the Prime Minister. It is facing a situation not unlike that of the clothing industry in New York when Mr. Lucky Luciano was drawing his living from protecting it. Costs are rising in any case. Customers are finding it difficult to pay the prices. If one pays the protection money, one goes bust. If one does not pays it, one's shop gets broken up and one goes bust anyway.

If this House or, preferably, the unions themselves really cannot curb this abuse of monopoly power, we shall be continually in a situation in which it is not worth while investing. No one in his senses will make new industrial investment if he is compelled to continue to pay more people than are required to operate the new machines. No country can continue unless there is a degree of mobility of labour. No country can remain competitive if overmanning is the rule and not the exception. That is widely accepted by all concerned in principle, but in practice far too little is actually done about it, and I doubt whether it can be done without some special policy, if necessary with statutory backing to bring it into action.

I am talking here not so much about the limitation of incomes—that is part of it, perhaps—but more important is their relation to productivity, investment and increased output. There is no point in holding down incomes if it can only be done by making overmanning a permanent feature of our economy and preventing the mobility of labour. Yet that seems to me to be the underlying idea behind a great deal of the Government's thinking. I agree that it requires a great effort by management, a great deal more of what is called worker participation and a great deal more effort on the part of boards of directors and managers at every level to take workpeople whose future is affected into their confidence and to work together and have a sharing of responsibility. But it also requires that where there is the power there should rest the responsibility.

We in this House, and the country, know that power lies now not here in Parliament, nor with the Government, nor with employers; it lies with the unions: there too must be responsibility. It is up to the Government, if that responsibility is rejected, to ensure by one means or another, by fiscal, monetary or incomes policy, that power is not able to be used against the rest of the country. It is up to us in this House to see that the Government fulfil this duty, and to support them when they do.

Like the hon. Member for Meriden, I believe that we can achieve solutions by agreement, by discussion and by policies which will prove acceptable, but we must recognise that this puts a very heavy burden of responsibility on all those who are in a position to exercise power.

7.37 p.m.

Mr. James Kilfedder (Down, North)

I sympathise with the right hon. Member for Farnham (Mr. Macmillan) for being forced into uncontrolled laughter at one ridiculous remark made by the Prime Minister towards the end of his speech. I certainly felt disappointed by what we heard from the Prime Minister. It did not match up to the kind of speech one expects from a person in that office. It did not strike the note one would expect at a time of economic crisis.

The forecast has been made that there could be more than 1 million unemployed before the end of this year. Northern Ireland, with 500,000 insured workers, already has 40,000 people unemployed. Last week a further 1,100 men and women were sacked. I deliberately use the word "sacked" because it conveys some idea of the misery which unemployment brings and of the psychological impact of losing one's job after contributing much to a particular firm or factory. The threat of unemployment creates a feeling of insecurity and breeds suspicions which alienate employees from employers, and it brings more support for militancy.

Northern Ireland's redundancies and short-time working are not brought about by high wages in the Province. That cannot be said about Northern Ireland. In some cases the headquarters of a company in England has decided to economise or is perhaps forced into it because of recession. The first to suffer are the branch factories in the Province.

In engineering the chief culprit is high capital costs coupled with low investment. The clothing, textile and footwear industries in Northern Ireland, as well as in the rest of the United Kingdom, have suffered badly. That has been due to the influx of cheap products from the Far East, South America and Eastern Europe. Many of the imports are sold in the United Kingdom at little above cost price. If we are to avoid the double tragedy of trade recession and uncontrolled inflation, we must control the imports of foreign goods. British jobs must be protected from foreign competition when such competition is based on sweated labour. I look forward to the statement on the textile trade which the Prime Minister intends to make tomorrow.

Northern Ireland has always had a severe unemployment problem. There has generally been between 8 per cent. and sometimes 11 per cent. unemployment. That does not mean that we have accepted the situation. Far from it. We have a large and successful industrial training programme which is proportionately the largest in the United Kingdom. However, all too often the apprentices and the other trained men and women have no jobs to go to when they leave the Government training centres or the technical schools. That is disheartening for the people who have been trained and for those engaged in training them.

Special industrial development measures have increased the employment potential of the Province. Those measures have provided an incentive for investment. However, all that will count for nothing if we cannot tackle the problem of raging inflation, which we all agree has reached crisis proportions.

We have heard a range of suggestions as to what should or might be done. I agree with much that has been said by the hon. Member for Meriden (Mr. Tomlinson). I was impressed by an answer which I received to a recent Parliamentary Question to the Chancellor of the Exchequer about the relationship of Government expenditure to the gross national product. I was told that in the past 10 years the proportion had risen from about 35 per cent. to about 50 per cent. The rise has been dramatic in the past two years. That clearly indicates that Government expenditure is far too high. It means that the time has come for a long hard look at the results and at what must be done. It means that action must be taken now—not next year.

Mr. Jack Jones has suggested a method of controlling wages inflation without a statutory policy. That suggestion seems to have been sympathetically received by the Government and many other people. It is well worth examining. With one third of the working population employed in the public sector, or in circumstances where the Government are the paymaster in one way or another, a non-statutory wages policy should be possible, but its implementation will need guts, determination and regard for the lower-paid worker.

Pay settlements outside the social contract, such as those of the Liverpool and Glasgow bin men, should not have been allowed to happen.

I believe that the economic crisis requires a separate Department, with a Minister in charge of a national wages policy, to control wages inflation.

Consultation and consent are vital ingredients, and the Government's remoteness from the shop floor must be overcome by the setting up of local income committees. Local consultation will help to bridge the gap between Westminster and the individual firms.

In the case of Northern Ireland I have advocated a change of direction of Government expenditure. This is especially important if total expenditure is to be reduced. The Government must concentrate more expenditure on manufacturing industries, agriculture, fisheries and foreign trade. It is the creation of wealth which should receive the major share of our resources at this time of economic crisis. Since as a nation we must live within our means, we must get better value for the money we spend and put it to better use. That will mean a much closer liaison between budgeting for income and decisions on expenditure.

Some time ago I asked the Prime Minister to consider appointing local economic advisers for the regions such as Northern Ireland, under Sir Don Ryder. The Prime Minister would not entertain the idea at the time, but perhaps the time is now ripe for him to reconsider this matter.

In his speech the Prime Minister quoted the motto of the Stockton and Darlington Railway, which was "Private risk, public gain". He twisted it to mean today, "Public risk, private gain". I do not believe that such cheap jargon will get us anywhere. I believe that if this country is to escape from its present economic mess everyone must be involved in resolving the situation. Unles there is a civil contract, and unless everyone makes his contribution, we shall find ourselves in a far worse mess than we are in now.

7.46 p.m.

Mr. Brian Sedgemore (Luton, West)

Unemployment rising to 1,500,000 by 1978, falling living standards and an import-led decline accentuated and accelerated by the Common Market are glum thoughts with which to start the Whitsun Recess. There will be 1½ million people unemployed because of the shift of resources needed to deal with the balance of payments problems. On past experience, the Government's export targets of 10 per cent. per annum compound are not achieveable.

The Government appear to have ruled out the devaluation which might be involved, partly because of the existence of foreign balances in the United Kingdom and partly because of its effect on inflation in Britain. Import controls appear to have been ruled out. An import surcharge of 20 per cent. to 30 per cent. all the way across the board in manufacturing industry, such as some hon. Members believe is necessary, is ruled out by our membership of the EEC. I thought that that point was brought out by Professor Neild when he mercilessly bullied the truth out of my right hon. Friend the Minister of State for Foreign and Commonwealth Affairs in a recent television programme. That seems to provide a fundamental reason to leave the Common Market after 5th June.

However, if we rule out the export projections made by the Government, devaluation, and import controls, we are left only with unemployment. It is difficult to see how the Government have worked out a logical solution to the economic mess in which the country finds itself.

Secondly, I refer to falling living standards. It does not matter who is to blame. However, we shall experience falling living standards in the next few years. The social contract or compact was perhaps badly worded. These phrases are nice but they do not mean very much. If we had to have a social contract, we should have decided to limit the rise in unemployment by means of a policy or tariff protection whilst we re-equipped and reinvested in our major manufacturing industries. Here I refer to selective investment, and almost certainly massive public investment in British manufacturing industry with public accountability.

That is one side of the social contract. If it held out a genuine hope of prosperity at the end of the tunnel, we might legitimately ask the trade unions, by consent, not for falling living standards but for a moratorium on increases in living standards during the next few years. Unless the Government are prepared to introduce that kind of social contract—which I believe Jack Jones and other trade union leaders would be prepared to accept—I shall not support any new proposals.

The third point, on which I want to spend a little time, concerns what I call the import-led decline. That worries me, and it is a matter about which the Secretary of State for Industry seems to upset so many Opposition Members.

It is a truism that the bulk of our productive resources comes from manufacturing industry. Equally, it is a truism that manufacturing industry is trapped in a spiral of decline. Rightly or wrongly, I take the view that we need to protect manufacturing industry behind a tariff barrier whilst we re-equip and reinvest. If not, as a manufacturing nation we may find ourselves finished.

Historically a number of countries—the United States, Japan in various ways and West Germany—have built up their industrial empires behind tariff barriers. We cannot and certainly would not be able to do that, whatever the Market regulations are about what we can and cannot do in a crisis. We could not have the kind of tariff barriers which I am suggesting for a five-year period inside the Common Market. Therefore, we should reject its ideal world because it could cripple British manufacturing industry.

The decline is serious. We should look not at the depression but at the figures at the height of the previous two booms in 1969 and 1973 and compare what happened. Comparing what happened in 1973 with 1969, we find that one-quarter of manufacturing industry showed an absolute fall in output and 90 per cent. showed a fall in employment. It is extraordinary that 90 per cent. of manufacturing industry should show a fall in employment at the height of a boom. Overall the increase in manufacturing output in 1973 was 7 per cent. less than would be necessary to achieve what most people would regard as a target of full employment. There was also a 7 per cent. shortage in industrial capacity. In the years 1970 to 1974 we were losing 180,000 jobs per year in manufacturing industry and replacing less than one in three of those jobs by any new form of manufacturing industry.

Throughout each industrial sector we find a horrifying picture regarding trade. From 1970 to 1974 the volume of imports of manufactures to Britain rose by 67 per cent.—twice as much as the volume of British manufactured exports, which rose by only 35 per cent.

We cannot pick out one sector of manufacturing industry here and there and say that it is in decline. Almost every sector is in decline. If we continue with our current policies—I believe that if we stay in the European Economic Community basically we shall have to continue with those policies—in the decade 1970 to 1980 we shall have shut down 15 per cent. of our manufacturing capacity and made 2 million industrial workers redundant. That does not strike me as a happy thought.

Some people say that it is scare-mongering and gross exaggeration to suggest that the EEC is in any way causing unemployment either in particular industries or in general. My right hon. Friend the Prime Minister appeared to be having some difficulty today when he said that it was true that, if we went into a new trading area and reduced trade barriers, imports of certain goods would go up and unemployment correspondingly in the whole market would rise, and vice versa with certain exports.

The balance of those jobs is represented by the trade figures. One does not need to be an economist to realise that if we have a 38 per cent. import of foreign cars—that was the latest trade figure which came out last week—and at the same time unemployment in the car industry is rising, there might be some correlation between the two.

One does not have to be an economist to look at the unloading of steel at our ports and relate it to the massive threatened redundancies in our steel industry. One does not have to be an economist to see that this year there is a 25 per cent. increase in the quota for textiles, cotton yarns, and to realise that in February 18,700 textile workers were out of work. It may be that tomorrow the Prime Minister will announce that the quota has been changed. Who knows?

It is important that we should look at the 1975 trade figures, because when we use the 1970 to 1974 trade figures people say that the situation has changed since then. The January to March trade figures show that we are importing net 120,000 cars, which I calculate as being a loss of 40,000 jobs. We are importing net 3 million tons of steel, which I calculate as a loss of another 30,000 jobs. Over manufacturing industry as a whole it would appear that, as a result of the trade deficit, according to the January to March trade figures and working out the rate of change, we are in the process of losing 150,000 jobs. Applying a foreign trade multiplier of three, that takes us to 450,000 jobs.

People have been coming to me, since I wrote an article on this matter last week, saying that the concept is invalid and that one cannot translate trade figures into jobs. The Prime Minister, at the Dispatch Box this afternoon, said he was not sure that he agreed with certain figures published by the Secretary of State for Trade which are not all that different from the figures I published.

The right hon. Member for Finchley (Mrs. Thatcher) said that she saw no evidence at all that the European Economic Community was causing a loss of jobs. I believe that if one spread the evidence on her eyeballs she probably would not see it. I do not think that she should seek to wash her hands clean as if she were the daughter of Pontius Pilate.

That aside, a number of distinguished economists have checked the figures. Economists can be wrong and produce concepts which have no validity. There is a Government economist who advises the Chancellor of the Exchequer. I believe he is called Mr. Wynne Godley. He had nothing to do with the production of these figures. However, I suspect that he and some of his former colleagues would say that the technique behind those figures was valid. The Chancellor of the Exchequer has not been too aggressive about the nature of the effect of membership of the European Economic Community. He may be slightly concerned about the economic effect.

Economists all the way from the Left to the Right of the political spectrum talk about the need to have export-led growth if we are to grow. Equally, just as we can have export-led growth, so we can have import-led decline. For some reason or other we do not wish to talk about that concept because it interferes with some metaphysical free trade concept which we have had for over 100 years with a few interruptions.

If I were to publish in a learned document that, as a result of entering into a certain trading organisation, we were about to increase our exports by £100 million and if I were to translate that into jobs and then apply an economic multiplier—macro-economists do that every day of the week—everybody would say that that was perfectly valid. But because some of us have done that in reverse by using the import figures and translating them into jobs through value-added figures and have used the economic multiplier, and because that upsets their concepts of a particular trading bloc, people throw up their hands in horror. They do not bother to make an analysis to see why the concept and the figures are wrong. They simply will not tolerate a truth which gets in the way of a serious issue about which there happens to be a referendum in two weeks' time.

To say that there is no correlation between trade and jobs or that the correlation cannot be statistically quantified would be absurd, and no one would risk making that statement. If, however, someone did so, I would invite him to give a reasoned critique or to work out alternative figures and not simply to say that he does not believe the Secretary of State for Trade or that a particular bunch of economists do not know what they are talking about. Let him say that it is true that the flood of imports from certain sectors of the world causes unemployment in this country but that he has different figures and different arguments. Let him produce his figures and arguments. Let him get away from mass hysteria and straightforward propaganda for the referendum.

Mr. Denis Skinner (Bolsover)

I think my hon. Friend will agree with me that, contrary to the rather explosive denials made by some of his right hon. Friends on the point he is pursuing, when they wanted to defend their position as instanced by the possible downfall of British Leyland they used the multiplier to which my hon. Friend refers and talked not just in terms of British Leyland jobs directly but of the multiplying and secondary effects on a whole range of industries.

Mr. Sedgemore

There is a slight difference. Throughout the figures I have used I have erred on the side of caution so that the actual loss of jobs is probably higher than the figures suggest, whereas almost certainly the reverse is true for British Leyland and the exaggeration has probably gone too much the other way.

I am not saying that if we had not entered the EEC there would be 400,000 people unemployed or that there would be a gap of 500,000. Some people have sought to read that into the figures. I am talking about jobs lost, jobs about to be lost and jobs that would be created had the trade been different.

The trade figures are frightening because they tend to show that we are in danger of economic and political domination by a Franco-West German hegemony. I say "political" because politics stems from economics. Our trade figures with West Germany showed a deficit of £46 million in 1970 which became a deficit of £881 million in 1974, almost the whole of which came from chemicals, manufactured goods, machinery, transport and other manufactured goods. We are concerned not with raw materials or food but with the sort of goods that if we are to survive as a manufacturing nation we must be exporting and not importing.

For the whole of our motor trade with West Germany, a deficit of £21 million in 1970 had become a deficit of £129 million in 1974. If one breaks that down by category, one finds that the increase is not in one product but is in every product in the motor industry. It is in cars, trucks, road tractors and, even more important given the way the motor industry is developing in the world, it is in parts and engines.

Mr. Bob Cryer (Keighley)

Does my hon. Friend accept that under Article 93 of the Treaty of Rome, which was not the subject of renegotiation, the Commissioners can intervene to stop any State investment which they regard as distorting competition but that under Article 92 West Germany has specific advantages which allow extra State investment because of its relationship to Eastern Germany which is now a purely historical accident?

Mr. Sedgemore

My hon. Friend is right. One problem is that the history of the twentieth century has been the struggle between Russia and Germany for industrial dominance. Russia won the struggle partly because Germany was divided. Competition between the two halves of Germany is likely to intensify as existing markets in Western capitals of Europe do not expand at the same rate as they have been expanding. From the point of view of West Germany there is some virtue in entering and penetrating British markets.

If one did the same trade analysis for textiles, chemicals, machine tools or other sectors of manufacturing industry, one would find the same truth. Therefore, the Government Front Bench should ask what will happen over the next two years to change this. Are we to say that it is a coincidence that this trade deficit has arisen with the EEC in textiles, a coincidence that it has arisen in motor cars, a coincidence that it has arisen in chemicals, a coincidence that it has arisen in other manufactured goods? Are all the coincidences of the world combining by coincidence to damage the image of the EEC? Will it stop tomorrow, next year or the year after, or are we in a genuine import-led decline?

We are in serious economic difficulties. We are supposed to get help from the EEC but we are not getting it. We have a pitiful share of the regional fund of £262 million which will build one mile of motorway. What sort of future is in store for us if there should be a "Yes" vote on 5th June?

On the continental mainland there is a lot of talk about a golden triangle. From what Mr. Giscard d'Estaing said yesterday, there will be a golden circle. I understand that he is now determined that the EEC countries will go ahead with monetary and political union, if necessary with Britain outside that monetary and political union. In some circumstances that could be a blessing in disguise. I am sure that the thinking behind the French President is that we have an endemic ailing economy which could not stand the strain of such a monetary and political union and that we, possibly with Italy, will become one of the weaker partners outside that inner union.

We can solve our economic problems if we are prepared to have a massive increase in investment and to adopt the right tactics. If we decide to stay in the EEC, all we shall do is to put off our problems for another 10 years and we shall have to take part in a similar debate in the House 10 years hence.

Mr. Deputy Speaker (Sir Myer Galpern)

I dare say that my predecessor has indicated to the House the number of right hon. and hon. Members who are still anxious to take part in the debate. There will be two winding-up speeches commencing at nine o'clock. That means that we are left with 50 minutes for 10 hon. Members who have indicated a desire to take part. I do not need to indicate how long each of them should take if they are all to take part. If they take longer than five minutes some hon. Members will be left out.

8.10 p.m.

Mr. John Biffen (Oswestry)

I shall try to obey your injunction, Mr. Deputy Speaker. The hon. Member for Luton, West (Mr. Sedgemore) said that he wished to err on the side of caution. I shall try to reciprocate by erring on the side of brevity.

It would be a disservice to the hon. Gentleman's speech if I did not comment on it by way of introduction and say that I believe that he has touched on an issue —namely, the import and export relationship between this country and the Community—which will persist after 5th June whatever the result. I happen to think that it will be a "Yes" result. Further, I believe that the hon. Gentleman will find himself in the most exotic company. Already the National Farmers' Union is committed to a plan of domestic agricultural expansion which is fascinating alongside the known existence of a dairy surplus in Western Europe. That paradox will be one of the ongoing attractions of post-5th June politics in which, no doubt, the hon. Gentleman and I will be engaging with as good a judgment as we can bring to it.

I now turn to the main point of the debate—namely, the motion submitted by my Front Bench. It has been the subject of a certain amount of speculation on the part of the Press, as though there would be some gladatorial contest between my right hon. Friend the Leader of the Opposition and the Prime Minister. However, I think that we would do the House a disservice if we overlooked the concern which led to the request, and finally the agreement, to have this debate—namely, the shadow which fell over the exchange rate a few days ago.

The one major point that I wish to make is the virtue, the desirability and the necessity that the exchange rate should be discussable in the House. I quote with approbation the remarks of Mr. Samuel Brittan in The Financial Times of Monday 19th May, when he wrote: Critics of Government policy in next Thursday's Commons debate will have every justification for pointing to the thermometer reading. He was referring to the movement in the sterling exchange rate. He continued: It would be extremely unfortunate if they either refrained from discussing the state of sterling in the mistaken belief that it was unpatriotic to do so, or if their strictures took the form of demanding official action to 'protect' the exchange rate. The House has a prime responsibility to determine whether it still proceeds with its faith in a free exchange rate. In my judgment, the events of the past few days and the past few weeks have been a vindication of the virtues and advantages of a free exchange rate. Had the rate been fixed there would have had to be the most massive rescue and protection operations mounted by the authorities. There are good grounds for believing that we have a marginally overvalued currency. Such a judgment has been endorsed by the Morgan Guaranty Trust Company of New York, which is suggesting that we may be approximately 5 per cent. overvalued.

It is not given to me to judge what will be the market's judgment, but what I do know is that if the authorities had been obliged to protect an exchange rate which had been marginally overvalued, there would have been crisis talk which would have completely obliterated even the nonsensical crisis talk with which we have been bemused by certain aspects of the media—here I agree with the hon. Member for West Lothian (Mr. Dalyell)—over the past few days.

Consideration of the virtues of our having a free exchange rate, and how that has helped ease us through the difficulties of the past few days, touches upon the whole question of whether we shall try to have an exchange rate which is half bond and half free by returning to the "snake" and by being linked with the Community currencies. This is a major consideration when upwards of 30 per cent. of our exports and imports are related to the Community currencies.

My advice is that we should persist with the virtues of a free exchange rate and make it clear that, whatever may be the decision of the French as to whether they go back into the "snake", we shall discuss these matters, and shall continue to do so after 5th June, without having an emotional spasm. There are good, sound, patriotic and Gaullist European reasons for this country to maintain its own exchange rate and to have a free rate. I make that as a point, and I relate it to the fact that the movement in the exchange rate was an indication of foreign views and foreign confidence in sterling that was of particular moment to this country as the Government's finances are so heavily dependent upon foreign borrowing.

That is the real message that we have to take to heart. We have to ask "Is it wise for this country to proceed for the rest of this year with a borrowing requirement, set by the Government, of £9,000 million?" The right hon. Gentleman the Leader of the Liberal Party and my right hon. Friends the Members for Stafford and Stone (Mr. Fraser) and Farnham (Mr. Macmillan) are all prepared to say that our borrowing requirement is now at least £10,000 million. I think that they are probably being conservative in that judgment.

In those circumstances, is it prudent still to proced so heavily dependent upon foreign borrowing? There is no doubt that the inflation that we are now suffering derives from the printing of money of bygone days that is still working its way through the system. In fairness, the Chancellor of the Exchequer has replaced printing by borrowing, but he could be forced into printing on a scale which would make Lord Barber's printing look miserly if funds were to be withdrawn from this country on any substantial scale by the Arabs or by Continental Europeans.

My advice to the Government is that, although they must go through the charade of contesting the wise, prudent and far-sighted motion of my right hon. Friend, they should none the less take cognisance of the central request set out in the motion to take immediate action to cut public expenditure …". I accept that my right hon. Friend the Member for Down, South (Mr. Powell) is anxious that we should fill in a few figures. I do not think that that is pedantry on his part. I believe that there have to be early and substantial cuts in the borrowing requirement. I believe that they must come from public expenditure. That means accelerating as early as possible those cuts which have been promised for the end of the year. Further, it means increases in the prices of nationalised industry products to eliminate part of the remaining subsidies, and certainly in respect of nationalised industries outside transport. It means cutting the food subsidies over and above what has already been proposed by the Government.

I note with satisfaction the Written Question that has been tabled by my hon. Friend the Member for Leek (Mr. Knox) on the Order Paper today—namely: To ask Mr. Chancellor of the Exchequer whether he will consider the imposition of current price ceilings on public expenditure programmes". That is an area where the Chancellor himself has already indicated that he wishes to proceed. Where the validity of the case presented by my Front Bench lies is in its timing. The longer this exercise is postponed the greater becomes the risk. Out of that will eventually come panic, and out of panic comes fear. Once again, for the benefit of Labour Members below the Gangway, I shall quote Aneurin Bevan. He said: Fear is a very bad adviser. Its companion is hate, and hate is the father and mother of cruelty and intolerance. There are forces in our public life today which would like to see an authoritarian resolution of our social and economic problems. They must not be given their opportunity. The longer we postpone decisive action in this House the more we play into the hands of extra-parliamentary forces which have neither affection nor respect for this House or those who sent us here.

8.20 p.m.

Mr. Ioan Evans (Aberdare)

I wish to make a brief contribution to the debate. I always like to hear the hon. Member for Oswestry (Mr. Biffen), particularly on the Common Market, on which he talks a good deal of sense.

I appreciate the hon. Gentleman's reference to Nye Bevan—a quotation which no doubt came from the book "In Place of Fear". It is as well for us to realise in the debate on whether we should remain in the Common Market that the pro-Marketeers are playing on the politics of fear and creating imaginary dangers which will arise if we come out of the Community. We were all told before we went into the Community that it would be disastrous if our efforts were repulsed. Now we are told that it will be disastrous if we come out. What we have found is that entry into the Common Market has been disastrous.

Let me turn to the motion which we are now discussing. I understand that the right hon. Lady the Leader of the Opposition was a little reluctant to participate in today's debate. I understand that in the Shadow Cabinet pressure was brought to bear on the right hon. Lady to speak. I think that probably her judgment in not wishing to take part was right. Probably she would have preferred the debate not to take place just before we go into recess.

We all heard my right hon. Friend the Prime Minister carry out a complete demolition job on the Opposition motion. He went through the motion sentence by sentence and word by word and completely demolished the right hon. Lady's arguments. Therefore, it is a little difficult for Labour back-benchers to participate in this debate because our job has already been done for us by the Prime Minister. Certainly the Leader of the Opposition did not propound any alternative or put forward the Conservative Party's philosophy. Indeed, we have to look at the contribution she made to the annual conference of Tory women at Central Hall yesterday to discover her economic philosophy.

The right hon. Lady in addressing that conference began by saying that people had a right to personal ownership. She said: We do not need statistics to tell us that vast numbers of people in this country own homes in which they can take pride. She said that such a desire may sound a little strange to Socialists—with the implication that the Labour Party does not like the idea of personal property. However, what I must point out to the right hon. Lady is that it is the duty of Socialists to try to enable more people to take a share of that personal property. In a Tory society on the one side there are those with great wealth and possessions and, on the other side, there is the multitude of people who are denied access to cars, houses and other possessions. We are seeking to bring about a system of fair shares.

Despite the troubles which the country faces, we should not be gloomy, for the living standards of our people have improved. For example, over 30 per cent. of our people have colour television in their homes. This is not only the case in the South-East of England; the rise in living standards can be seen in other areas.

The right hon. Lady then dealt at yesterday's conference with the question of enterprise. She said that our writers, painters and journalists added colour and inspiration to our lives and were vital to our prosperity. She sought to imply that a Labour Government were against such enterprise. But many of those journalists and writers are Socialists, and they condemn the type of economic system which the Tory Party has stood for over the years. Certainly those people will have a large part to play as we move forward to a more Socialist society in the years ahead.

The right hon. Lady yesterday went on to assert that her third belief lay in the individual's obligation to his family and community. She quoted examples of voluntary work carried out by people in the Conservative Party. It is great to find people giving their services without thinking of the profit motive—giving to the needy because there are needs to be met and because it is a service to the community. That is what Socialism is all about. We want to create a society which extends the welfare of our own families to all families. One of our principles is a belief in the brotherhood of man. We do not believe that if charity begins at home it should stay at home. We are concerned with the welfare of other people.

We saw this factor clearly in the statement which was made just before this debate began. My right hon. Friend the Secretary of State for Social Services announced that old-age pensioners were to receive a pension increase, bringing the pension to a figure about £1,000 for a married couple. That is as it should be. We are concerned with the well-being of pensioners who have not the means to ensure that in the autumn of their lives they can enjoy the standard of living to which they are well entitled.

The Leader of the Opposition, in addressing the Tory Women's Conference, spoke about the spirit of a real social contract—service not strife, giving not grabbing, creating not classifying. I wondered whether she was speaking to the right conference. We as Socialists believe wholeheartedly in those concepts. The hon. Member for Blaby (Mr. Lawson) shakes his head, but perhaps he will be making his comments a little later. As a party and a Government we believe that we have a responsibility to fulfil our obligations.

The right hon. Lady went on to tell the conference that her fourth belief lay in the protection of the weak and of our country. I repeat that my right hon. Friend the Secretary of State for Social Services has already announced measures to the House which, despite our economic crisis, will give assistance to those who really need it. We seek to ensure that those with low means will not have to bear the brunt of the difficulties which we face as a nation. Therefore, the Labour Government's record, despite those difficulties, should command the respect and support of the people.

The Leader of the Opposition went on to tell the conference that in today's inflation it was the strong who gained and the weak who lost. But she surely supports a society which is based on the profit motive—a society in which the Devil takes the hindmost and others are sent to the wall. That is a situation which we seek to change, and in so doing we wish to bring about a better response from our people.

I should like to deal shortly with the question of public expenditure. I sought to intervene in the right hon. Lady's speech this afternoon to ask her to detail where she believed public expenditure cuts should be made. But a short time before the right hon. Lady made her speech one of her Front Bench colleagues had asked my right hon. Friend the Secretary of State for Social Services, following her statement about assistance to old-age pensioners, for a six-monthly rather than an annual review. Obviously there was a desire for the Government to spend even more rather than to suggest any cuts.

What did the right hon. Lady tell the Tory Women's Conference about defence? She said that defence expenditure was always one of the first candidates for cuts in a time of Labour rule. In the recent defence debate, when the Government faced a Left-wing amendment for extra cuts, there were more Tory Members of Parliament defending the Government than there were Labour Members of Parliament taking a similar stance. We must get our priorities right—and it appears that the priority for the Tories is that of guns before butter. They want a cut-back in public expenditure on food subsidies but they want to increase defence spending.

The right hon. Lady ended by referring to Europe, but there was no reference to Europe in her contribution to this debate. As this is the last full day before we embark on the full referendum campaign, the Leader of the Opposition, who has been campaigning throughout the country, might have had something to say about the Common Market in the debate.

We face many difficulties, which I sincerely believe have been aggravated by the Conservatives taking us into the Common Market. I shall not refer to the future, because who knows whether in 10, 20 or 30 years' time a decision to stay in will prove to be tragic, as some of us think, or the best thing for mankind?

I am not sure that "European Community" is the right title. It is not European. There are about 30 nations in Europe, and the Common Market comprises nine. Europe stretches from Gibraltar to the Urals. There are many countries outside the Common Market. It is not a community but a cartel.

The build-up of food stocks was referred to by the hon. Member for Oswestry. We have 301,000 tons of beef, 225,000 tons of cheese, 400,000 tons of dried milk, 500 million litres of wine—the rumour has it that Lake Killarney will be run dry so that the wine can be stored in Ireland—980,000 tons of soft wheat and 59,000 tons of butter.

By consenting to remain in the Common Market we shall abandon a cheap food policy that we have had in this country since the end of the war under successive Governments. We had deficiency payments for the farmers, guaranteend prices. The British housewife has had a square deal because she has had the cheapest food in Europe. We are in the honeymoon period of the Market. After 6th June we shall have to face reality. Already we are beginning to see our food prices creeping towards those in Europe. There have been no benefits in this regard.

It is not just a question of a food cartel. An article in the Financial Times said: EEC steel producers, including the British Steel Corporation, have accepted the principle of voluntary restraints on production in the Community to help cope with the crisis in the industry caused by plummeting demand". A report is to be prepared by officials in Brussels. It may be produced before the referendum, but it will probably come out afterwards. The British Steel Corporation's production will be restricted. The Economist said a few weeks ago that the steel producers of Europe will pursue the same policy as the Arab oil producers, restricting production in order to force up prices. It will look good for the balance sheets, but the effect of the cartel will be that manufacturing industries in this country will have to buy dearer steel. Steel workers will see their production curbed, with loss of jobs. British Leyland and other motor car companies will have to buy dearer steel.

My right hon. Friend the Prime Minister has answered point by point the Opposition's policies. I have dealt with what the Leader of the Opposition said when she put her economic policies to the Tory Women's Conference.

Unfortunately, the country may well decide to stay in the Market. With The Times, the Financial Times, the Daily Telegraph, the Daily Express, the Sun, the Daily Mirror and the Daily Mail in favour, it is not easy for us to get the facts home to the people. Whether we stay in the Market or come out, we must pursue a policy which is Socialist, which is concerned with the welfare of the individual and which tries to ensure that every man has a proper deal. We do not want to perpetuate the possession by some people of a mass of property while the vast majority are denied.

The Government have made a good start. It is diabolical that the Conservatives, after their record in Government, when they transformed the tremendous surplus that the Labour Government left behind in 1970 to the highest deficit we have had in this country in 1974, should a year or so later criticise the Government. What a nerve the right hon. Lady has! She has taken the place of yet another leader of the Tories. When I looked at the Opposition benches I could see that they thought they had made a mistake. I am sure that it will not be long before the Conservatives elect another leader.

I disagree with my right hon. Friend the Prime Minister about the Common Market but I agree completely with the Government that in economic policy matters we have many achievements. I hope that we shall carry on with the good work, despite the destructive opposition of the Conservative Party.

Mr. Deputy Speaker

Despite my appeal for brevity, the hon. Member for Aberdare (Mr. Evans) took 17 minutes. The debate is as important to other hon. Members as it is to the hon. Gentleman. I feel that regard should be paid to requests from the Chair for brevity.

8.36 p.m.

Mr. Michael McNair-Wilson (Newbury)

I shall not take up what the hon. Member for Aberdare (Mr. Evans) said, except to say that I hope to see an Early-Day Motion in his name condemning the Secretary of State for Defence for daring to buy the maritime Harrier aircraft which our Navy needs, the Hawker Siddeley workers need and our country needs. Because the hon. Member believes that defence is so unimportant, I hope he will put his signature against his voice.

Mr. Ioan Evans

rose—

Mr. McNair-Wilson

I shall not give way. The hon. Gentleman has taken up enough time.

We all agree that the debate is taking place against the back-cloth of the worst economic crisis our nation has seen since the war. My hon. Friend the Member for Oswestry (Mr. Biffen) brilliantly detailed that crisis, especially in terms of the borrowing situation which the nation is now in.

When a nation is creditworthy, it is because it shows signs of controlling its economic situation in such a way as to encourage people either to lend money or to leave their money in the country so that the nation can make use of it. When, however, the Chancellor of the Exchequer is spending £100 for every £80 that he gathers in taxation, I cannot believe that our creditworthiness in the world is likely to last indefinitely. When we are no longer creditworthy, when we can no longer obtain a further overdraft to carry us on our way, we shall have to do some thinking and make the decisions which the Prime Minister so lamentably failed to produce this afternoon and which cannot be put off indefinitely.

If we do not take those measures, we shall be facing not inflation the next time we debate our economy but hyperinflation. I suspect that the panic about which my hon. Friend talked will by then have seized us and that none of us will be sure which way to turn. Therefore, I bitterly regret that we heard nothing from the Prime Minister to encourage Members or our great nation that the Government are taking the matter as seriously as it should be taken.

Far from talking about reductions in public spending, the Prime Minister made excuses for their not being made. He tried to argue that the massive proposals for nationalisation—the nationalisation of the aircraft and shipbuilding industry, the Community Land Bill and the British National Oil Corporation—could not in any way affect the public borrowing requirement. He said that they could all be handled by Government stock of one sort or another. I remind him that in his own Bill there is a borrowing requirement for the shipbuilding and aircraft industries of £500 million. Whether or not he chooses to buy those industries with Government paper, he will have to find money with which to operate them. He is already making allowances for that in his Bills.

The Prime Minister knows that cutting out doctrinaire measures of nationalisation could make an enormous difference not only to the public borrowing requirement but, much more important, to the view abroad that Britain is serious about her economic situation and is making plans to put matters right, never mind housing subsidies and food subsidies. Just let us drop some of this unnecessary Socialism whereby industries that are helping the nation are to be taken into public ownership to satisfy a strange political dogma that seems more and more foreign to our country.

Then what about the real earners of wealth for our nation, our great industries? When will this Government give them a chance to produce their wealth? When will they relieve them of some of the tax burden that they have imposed on them and which is forgotten when they dare to accuse them of not investing? When will the Government wake up to the fact that investment in industry does not produce immediate results and that it takes at least five years for a company to get back its investment, let alone earn more?

And what about that other aspect of our economy which I want to touch on more briefly than I had intended but about which each of us must be concerned—the question of how we control the costs of our goods? We are often told that one of the tragedies of the Common Market is that so many foreign cars are flooding into our market and that this is harming British car workers. But that argument presupposes that if we closed the market to those products we should be competitive, that our workers would be all right and that our car industry would be bustling with activity.

Why do we not grasp the fact that British cars are becoming uncompetitive in cost terms? I am talking now about buying a car in this country. Why do we not grasp the fact that a Polish car is now coming in which will make even the West European cars look expensive? Why will we not grasp that we are not now producing the goods that people want. Until we produce them, and at the right price, we shall not win back markets, never mind the Common Market. That is the task our industry faces. That is the challenge we must all understand.

I come to the question of the effect of wages upon costs. Everyone today—Government, TUC and CBI—finally agrees that excessive wage demand pushes up costs and prices. I used the word "excessive", because therein lies the problem. High wages as such are not harmful to industry—indeed, quite the reverse. They encourage industry to be efficient, because normally if one is paying a great deal for one's labour force one will get the best out of it. Therefore, high wages paid out of a company's real profits are beneficial to industry and to those working in it. But excessive wage rises that demand higher prices are now damaging our industry and our competitive position to an unacceptable degree.

What is more, it is clear that the trade unions are no longer making wage claims which one might say have been bargained with their members' employers. They are making wage claims that owe their size to their comparability with other wage claims from other unions. Thus, from a position of collective bargaining within an industry we have reached a position in which one union is looking over its shoulder at the next to see what figure is being demanded. This gives rise to the figure of around 30 per cent.

The essential guideline under the social contract was that wage claims should enable workers to maintain their real income level in terms of rising prices—no more, no less. But that position has been eroded. Wage claims now are, as I have said, running at 30 per cent., far above the rise in the cost of living and, perhaps worse, containing a built-in element against inflation.

Since that is the situation, I suggest that one at least of the means that the Government must use to solve the economic problems confronting us is to seek a renegotiation of the social contract. I suggest that the CBI must be brought into those meetings immediately and that in place of this very flexible guideline there must be introduced either a flat rate, as Mr. Jack Jones suggests, or, better still, a specifiec norm, perhaps 12 per cent., which allows a measure of flexibility in wage negotiations.

Finally, unless we get wages under control, unless we persuade those who demand wage rises that these increases are simply pushing up prices, and thus creating the very inflationary spiral they are aiming to defeat, we shall not come to grips with inflation in our country. If we do not do that, the harm is not only to those gaining the wage rises but to every man, woman and child in our nation.

Several Hon. Members

rose—

Mr. Deputy Speaker

Three useful contributions could be made before nine o'clock.

8.48 p.m.

Mr. John Watkinson (Gloucestershire, West)

Like many Members, I came here this afternoon to hear the new Tory philosophy on the economy unraveled before us. After the plethora of statistics and confused arguments from the Tory Front Benech, I am still at a loss to know the general direction in which the Tory Party's economic policy is moving. I hope that the right hon. and learned Member for Surrey, East (Sir G. Howe), in winding up for the Opposition, will inform us clearly of the alternative policy of the Conservative Party at this time, whether it be monetarism or some form of backing for the social contract.

The Prime Minister referred to the balance of payments and told the House how well it was doing in the first quarter of this year. The figures speak for themselves. But there are certain worrying underlying factors to which he did not refer and which I hope will be dealt with in the winding-up speeches. To what extent is the competitive edge which was given to us under the Smithsonian Agreement now being undermined?

Further, it should be emphasised that our exports are being maintained at their present level because of the sliding pound. This enables us to continue exporting, but at the same time it has to be accepted that there is a massive increase in the cost of our imports, and as a nation we must continue to import.

The oil deficit was mentioned by my hon. Friend the Member for Meriden (Mr. Tomlinson). There is talk now of a £2,000 million deficit as something of a triumph. The simple brute fact is that this deficit has to be met and to be paid for at some time. We cannot go on ignoring it.

It has to be admitted that the public sector borrowing requirement is of enormous proportions. It will have to be brought under control. To a certain extent the Government have been fortunate in that the public sector borrowing requirement has been largely met through foreign institutions and home institutions outside the banking sector, which has effectively meant that the Chancellor of the Exchequer's monetary policy has remained intact to a certain extent. If, however, we have to go on borrowing and increasing the borrowing requirement, can we keep it out of the banking sector whereby we would lose control over the money supply? This is a very important consideration.

The Government are bringing before this House several measures which I support but they are measures which, I have to concede, will involve increased public expenditure. If that be the case, how do the Government expect to find the money when a Treasury Minister said in a recent financial debate that there were no means whereby £1,000 million could be found to reflate the economy on the selective basis suggested by the TUC? I want to know where the money for these schemes can be found when it cannot be found to bring about a selective reflation in our economy.

I agree with a great many right hon. and hon. Members on both sides of the House that inflation is now wage-led. For a long period I have despaired that we would be able to get that message across to the people. It appears from the policy decisions which have been made by the TUC and from certain undertakings given by the CBI that at last the message is being got across that we are in a crisis. The unions must accept that they have a basic responsibility to bring wage inflation under some measure of control. If they do not, we are entitled to ask them where they think they are leading us. If they say that they want to lead us to some controlled paradise, they must be told that the first thing that will go in their so-called paradise is the freedom to bargain for wages.

It is said that warnings have been given and that they have not been heeded, that if they have been heard they have not been believed, and that if they have been believed they have been thought not to apply to the believer. But the message has to be got home that we have to do something to bring our inflation under control.

8.54 p.m.

Mr. Charles Fletcher-Cooke (Darwen)

The hon. Member for Gloucestershire, West (Mr. Watkinson) made the shortest and the best speech that I have heard from the Government benches in this debate. It is almost impossible to quarrel with him. I hope that I do not embarrass him by saying so.

The inflation that the hon. Gentleman fears, he fears because it is economically and socially undesirable and very dangerous. I want to put yet another point, which is not merely that it is undesirable and dangerous as it has been practised of late but that it is positively unconstitutional and in some senses actually illegal.

My thesis is that inflation as it is now practised involves a secret taxation of the people. It removes from the money in every citizen's pockets its value, and the Government take that value without any of the procedures involved in levying a tax.

I imagine that lop at today's value will be worth in a year, if we are lucky, perhaps 6½p. Its value will have been reduced directly by Government action, or inaction, by about the same as the standard rate of income tax, if there now be a standard rate of income tax.

It is a secret taxation levied not on those who normally pay direct taxation but upon the whole population. It is a most regressive form of secret taxation, instead of being a progressive one, and it has the additional demerit of being levied without any of the familiar mechanisms that we in this House have developed over centuries for the control of the raising of taxation and for its disbursement and expenditure by means of Select Committees of one sort or another. Yet it is due to Government action, as all Governments know who have practised it in recent years. It is the duty of the Government, perhaps for that reason—because otherwise it becomes secret taxation—to preserve the currency. That is the second duty of the Government, the first duty being the defence of the realm, both externally and internally. The second duty, historically and in fact, is to preserve the currency and if a Government do not preserve the currency then they are acting illegally.

Admittedly, there is no sanction which one can bring against the Government, as one can if they raise taxation openly without the authority of the House or without the mechanisms of which I have spoken. They can raise this sort of taxation and get away with it, although I believe it in a fundamental sense to be totally unconstitutional.

Why, then, is it done? It is done partly because it produces a secret redistribution of income. It produces not only secret taxation but a secret dispersal from the people in whose pockets it orginally was to other people who are the favoured of the Government. That is one reason. But, much more effective than that, because I do not believe it is done deliberately by this or any other Government, it is done because Governments have lost the power, or think they have, to stop it. They can no longer control their own weapons for the reason that Mr. Paul Johnson gave in his terrifying article in the New Statesman this week. The reason he summarised in these words: In the British Labour movement it is absolutely forbidden to criticise the trade union movement in any respect whatsoever. That was the single-sentence message of that very long article.

He is not quite right about that, because in the past week not only has the hon. Member for Gloucestershire, West made some suggestions which would have been quite impossible a year ago even though they were made in the most moderate language, but, of course, there were the words of the Prime Minister himself at his banquet with the CBI, and, perhaps more important than that, the Secretary of State for Energy yesterday referred to the "brute force" of the leaders of the unions of skilled workers. That is language which could not possibly have been used by people in positions of authority such as that even a month ago.

So I think there is hope. I have a feeling that once the referendum is out of the way the Government are going to take courage, as they certainly ought to, and show that they are in control of expenditure, and particularly in control of that much the largest part of the expenditure which goes to the satisfying of very high wage claims in the public sector. If they can screw up their courage to say "No" in that regard, if they can actually bring themselves not merely to criticise but to act against the inordinate demands of the public sector—and the public sector is big enough now to make a very large impact both in fact and in example on the whole economy—I believe that the Government will be able to use their weapons for countering inflation and thus the secret taxation which I for one regard as unconstitutional and illegal and as something which should be stopped as soon as may be.

9.0 p.m.

Sir Geoffrey Howe (Surrey, East)

During the course of this debate we have had a number of interesting and valuable contributions. Among them one certainly cannot include the gravely disappointing speech by the Prime Minister. It was irresponsible in its style, and its lack of substance and seriousness showed no respect for this House or for the intelligence and deep concern of the people of this country.

The right hon. Gentleman failed, as my hon. Friend the Member for Newbury (Mr. McNair-Wilson) pointed out, to begin by recognising the essential gravity of our situation. He failed to acknowledge that which we urge upon him and his Government—the need for action to be taken. Action, to be effective, can be taken only by the Government. Such action when it is taken—and it will be—is bound to be severe. Governments of all parties have in the end been driven to it, and this Government will be driven to it again. Our fear is that when it is taken it will be too little and too late.

I am sorry to have missed the speech by my hon. Friend the Member for Oswestry (Mr. Biffen), but I agree with him, as I have said in this House before, that the longer that action is postponed, the worse it will have to be. My fear is that when it is taken, even then it will be applied too briefly and will leave the underlying problems of our economy unsolved. The action which is now needed is certainly of a kind which will need to be sustained, spread over a period of years. It is for that reason that in our motion we call for it to be taken as part of a programme for economic recovery. If it is to be sustained it will need to be upheld and enforced with the authority of this House. It will be immensely difficult to take because it will place a huge strain upon our democratic institutions.

If it is to succeed, the most important factor will be that it should be explained, argued and driven home with total honesty and brutal candour. It was on these standards that the Prime Minister's speech fell so far short of what is necessary. The candour which is called for must begin with the diagnosis and be carried through into presentation. Actions and words have to march together. As a result, we make as our first criticism not merely that the actions being taken by the Government are quite insufficient and misdirected but that the Prime Minister's insight and exposition are self-deceptive and thus deceive the nation. We are familiar with the fact that he and his Chancellor have deceived themselves all too lamentably in the past.

On 9th October last year the Prime Minister committed himself to the now somewhat embarrassing observation that Unemployment … is beginning to fall, the balance of payments shows a substantial improvement; the pace of inflation and price rises is moderating". He must look back on that now with some misgivings.

On 24th September last year the Chancellor of the Exchequer, basing so much upon a comfortable hypothesis, said: If the social contract is maintained we can get inflation down close to 10 per cent. by the end of next year. He knows from his own Budget speech how far above that figure his own forecasts now run. The time for comfortable hypotheses and self-deceptive observations is past and our indictment of the Government begins from the fact that that attitude is still continuing today.

Of course the Prime Minister acknowledged certain features of the situation, which even he could hardly fail to do. He acknowledged his concern—we all share it—at the high and rising level of unemployment. Let there be no misunderstanding of how high that is. An increase of 59,000 people out of work in the United Kingdom, seasonally adjusted, in the last month, means that by that same standard the Chancellor's expectation of 1 million people out of work will be fulfilled not by the end of the year but by the middle of August.

The Prime Minister acknowledged that investment was falling far behind what he would like. He could hardly fail to say that when the CBI in its latest forecast has pointed out that a very substantial fall must be expected. The Prime Minister acknowledged in a passing reference, referring to the main thrust of our motion, the fact that inflation was accelerating—3.9 per cent. in the last month, 21.7 per cent. year on year and an annual rate, upon what is now universally regarded as the Healey basis, of 34.4 per cent. What is more important, it is far worse than that of our competitors, about twice their average rate. While they are improving their position, ours is getting worse.

Perhaps I may remind the Chancellor of these words: The Chancellor must halt inflation, and be seen to be halting it, because if he does not do so the £ will sink right down to the ocean bed and Britain will become the Brazil of Europe."—[Official Report, 29th June 1972; Vol. S39, c. 1726.] Let the Chancellor reflect upon the comfortable days when he said that to Lord Barber in June 1972, when inflation was running at 6.1 per cent., and set it in the context of today with a rate four times as high. There lies the architect of the Brazil of Europe.

But if those things were acknowledged by the Prime Minister, however rightly, his fatal complacency became very much apparent when he came to consider the state of production within the country. It is true that it is not significantly down on a year ago, but that is a pretty moderate tribute. It is, in fact 5½ per cent. down on what was achieved in the quarter from August to October 1973.

In so far as the Prime Minister can claim that as a success, it is only a symptom of the failure of the Government to act, and to act soon enough, on other, more important fronts. It is the fact that other countries during the last 12 months have seen a sharper fall in their level of production, but generally they have begun to get their inflation effectively under control. They have got their balance of payments under control. They are ready to begin resuming expansion of their domestic and world trade, the very expansion on which the Chancellor's fragile strategy for this country critically depends.

The Prime Minister was equally complacent when he came to consider the position of the balance of payments. In this quarter certainly the deficit is less than it was in the last quarter, but as his hon. Friends the Members for Gloucestershire, West (Mr. Watkinson) and Meriden (Mr. Tomlinson) pointed out during the part of the debate when the right hon. Gentleman was absent, it is still a very substantial figure; and their anxiety, and mine, is that it may yet be expected to grow, the more so if trade expands as the Chancellor of the Exchequer expects and commodity prices start to rise.

It is no answer in the long term, in the present state of world trade, to point only to the non-oil deficit when the oil price rise which has taken place is irreversible and there could well be more oil price rises to come. It is for that reason that other countries—France, Japan, Germany and Italy—have acted as we ought to have done and we must now act, in a way that the Government have failed to do; because my further reason for concern is the extent to which correction in the trade deficit is due to an expansion in the price of our exports and a reduction in the last quarter in volume terms. The CBI is becoming increasingly concerned at the loss of price competitiveness of our exports. It is, therefore, a pretty fragile foundation on which to found optimism about our balance of trade. It is a manifestation of the underlying, fundamental weakness—the failure—of the Government's policies, as we put it in our motion, to control inflation.

As my right hon. Friend the Member for Worcester (Mr. Walker) pointed out in a speech the other day, the correct way of looking at what has happened to production and to the balance of trade over the last year is that while production has been effectively static, pay levels in this country have gone up by about 30 per cent.

We have been paying ourselves for goods we have not produced and we have been financing that payment by increasing dependence on borrowing from abroad to the extent of 5 per cent. of our gross national product, or, as the Paymaster-General pointed out the other day, £68 per head of the population. That is not a situation that can be allowed to continue.

The fundamental instability of our position depends upon three elements that are closely linked. First—we can quote again from the speech of the Paymaster-General on this—we are intolerably dependent on borrowing from abroad. Second, the scale of that borrowing is to a significant extent set by the size of the public sector borrowing requirement. The larger that borrowing requirement is allowed to become so as to increase our need to borrow, the greater will become our incapacity to borrow. It will in itself be further evidence that the central management of our economy is getting out of control. It will probably provide further fuel for domestic, publicly-financed inflation which will destroy our capacity to borrow. That will diminish the willingness of overseas lenders to lend us money in the face of a further fall in the value of the pound. What makes me equally concerned is that the volume of funds available to borrow is likely to be less this year.

There is a fatal temptation with a floating pound, a sinking pound, to think that we shall be able to drift along indefinitely in this way. The fact that the rate of exchange of the pound is no longer fixed may enable us in one way to postpone the moment of truth, but unless we act, unless the Government are willing to summon the will to act firmly and now, the moment of truth will eventually come and the measures that we now urge upon the Government and far more besides—the unthinkable—will become inevitable.

Either the Government will be compelled to resort to the International Monetary Fund and accept the conditions that will then be imposed, as they were in the autumn of 1967, or, quite simply, confidence will be withdrawn. As the Paymaster-General pointed out in his speech to the National Union of Mineworkers on Tuesday: The price of losing that confidence should not be under-estimated. It would be austerity and high unemployment with a vengeance. Cuts in public spending as a whole would be quite literally imposed upon this country from outside.

Those are the reasons why we call for action now and for action on all three of the fronts proposed in the motion. No single proposal, no one aspect of our motion, will be sufficient by itself. Each proposal needs the support of the others. I shall deal with each in turn. They are, first, a reduction in the level of pay settlements; second, cuts in public spending; and third, an abandonment of further nationalisation proposals.

No one now argues that wage inflation is something that can happen by itself and that it is the only cause of our problems, although it was pointed out that it is becoming increasingly perceived as an important aspect of them. Clearly, as a matter of theory, if the total of money is controlled the total of inflation is eventually controlled too.

That balance can be achieved, however, in a number of eventually harmful and destructive ways. For example, wages could be allowed to grow so as to destroy profitability and hence investment. That would be unacceptable. The growth of Government, non-productive investment can be such as to destroy the profitable sector. That would be equally unacceptable. Rising unemployment for most people could be allowed to grow to the advantage of a few who still win high pay. That too is equally unacceptable. At the end of all those roads there is disaster and the need for painful reconstruction. But the balance can and should be achieved in a more sensible way with sufficient resources going to investment in profitable private industry, no more than the nation can afford—which is the central point—to public services and no more than can be afforded to private consumption. Those things can be in balance without inflation.

We ask, why has that not come about? Essentially—and this is the important point made by my hon. and learned Friend the Member for Darwen (Mr. Fletcher-Cooke)—it is because those who control the amount of money spent by the Government—that is, the Government and no one else—have been persuaded, and in the last resort coerced, by those who are prepared, and have learned how, to use industrial power to override the will of the Government and to seize effective control of the Chancellor's cheque book, even of the Government's printing presses.

At the end, therefore, if inflation is to be averted, the authority of the Government and of this House has to be restored. The question that will not go away is, who governs Britain? It still remains to be answered. [Interruption.] The Chancellor may well laugh but he knows how directly he faces the difficulties involved.

Against that background, what, if anything, is the rôle of an incomes policy? Several things are clear. First, if the Government control their expenditure right, an incomes policy is substantially unnecessary. If the Government fail to control their spending, an incomes policy is ineffective. In circumstances of dire and urgent emergency, almost no alternatives can be rejected out of hand. However, today certain kinds of so-called incomes policy can be totally counterproductive and can lead to an entrenched expectation about incomes that is quite inconsistent with the necessary control of public spending. This is what has happened.

The Chancellor has been disabled from taking effective action about inflation because of the impact of the social contract. The social contract, in so far as it is other than a political presentation, has not so much failed but, as my right hon. Friend the Leader of the Opposition pointed out, has literally been the cause of failure of the Government's policy to control inflation. That is now universally recognised. The CBI wishes it to be replaced. The TUC wants it to be tightened. Mr. Jack Jones and Mr. Hugh Scanlon want it to be redefined. Mr. Murray points out one of the consequences. I quote from a report published in The Times yesterday: The growing view is that that 30 per cent. is the going rate and there will be more on top of that. The Chancellor wants it to be redefined, but not yet. The Prime Minister wants it to be redefined, but at the beginning of the next financial year. This is a measure of the failure of the social contract.

One wonders where to look for an alternative. Some people think that a total freeze would be the answer. How far is that conceivably acceptable without matching action on prices, and what would be the consequence, in present circumstances, of a prices freeze? A renewed growth of the deficit of the nationalised industries, which the Chancellor knows would be intolerable, and a last mortal blow to the profitability of the private sector. Therefore, that is quite unacceptable. If there is no matching action on prices, how long could a total freeze be expected to last, and with what could it be replaced, except by the problems we have to face today?

What about the other alternative of a new reformalised voluntary contract? At least that would have the merit of including those who had been excluded from the social contract. How far could one expect it to be any more successful? I remember the almost miraculous qualities attributed to the social contract by the Prime Minister not so long ago. Speaking at Bury on 26th October, he said: The social contract is working"— and, almost as though it was the secret of eternal life— it is our answer—in the short term, the medium-term, and the long-term—to the problems of"—

The Prime Minister

When?

Sir G. Howe

26th October.

The Prime Minister

October?

Sir G. Howe

26th September. The Prime Minister is very easily amused. It is high time he faced up to the substance of the charge. What he said in that speech is totally derisive. He said—and I am not surprised that he is anxious to divert attention from it: It is our answer—in the short-term, the medium-term, and the long-term—to the problems of a modern industrialised society. Industrialised and civilised. If he still has any conviction about the validity of that expectation, he is even further adrift from the truth than I had previously thought.

Let the Prime Minister think also of what he had to say about the comparable commitment way back in 1966. He then said: The Declaration of Intent of December 16th, 1964 was a great landmark when, for the first time in our history, employer, trade union and Government signed a pact designed to restrain the growth of incomes to a norm. On 20th July 1966 he announced: Yet ever since that time wage increases have outrun the figure allowed for and preempted the amount available. The time has come to call a halt. As my hon. Friend the Member for East Grinstead (Mr. Johnson Smith) said, we can hardly face another disillusionment like that.

If one looks at the alternative of a statutory policy, one finds that the experience of that is scarcely encouraging, as has been pointed out from both sides of the House. The rigidities and anomalies will continue to multiply. The implication will remain that freedom lies ahead, and once again a seemingly easy option will turn out as ashes in our hands.

That is why there is at the end of the road no substitute for the re-establishment by the Government of control of the one instrument on which all else depends: basic control of the economy, based on control of the money that the Government spend for themselves. That is the key in our society to an effective control of inflation.

Of course, more than that is involved. It must be supported by understanding, acceptance and consent. That is why it is essential for the Government to promote and secure understanding and acceptance of their policies by making clear their determination to pursue them over a period of time and making clear the consequences of those policies by spelling out, as the hon. Member for Meriden courageously made clear, the consequences of failing to accept those policies, and doing so in every possible forum of debate—industry, the unions, local government, and this House—and with a united voice.

That is why the second feature of our proposal is this. An inescapable and essential feature of the policy that the Government should be adopting must be a determination to control their own spending. Unless they do so, their capacity to borrow will come to an end and the non-productive sector of the economy will destroy the rest and it will be impossible to restore control. They found that that was the cause of their problems last year.

It is no use Ministers continuing to say that that cannot be done. It has been done before. It was done because it had to be done in 1966 by a Labour Government, and again in 1968 at the behest of the International Monetary Fund. The Treasury, in evidence given last year to the Public Expenditure Committee, equally made it clear. What is more, it needs to be done. The Paymaster-General pointed this out again in his speech on Tuesday: The Government must bring public expenditure under better control because it is at present making too great a demand on the total resources of the country. That is the thrust of our case, from a member of the present Government.

Let me tell the Government where and how they should set about that. First, it is essential—I make no apology for repeating the point—to move now to cash controls of public spending. It does not mean discarding real resource planning as well, but cash controls are an essential first element.

Secondly, it means a determination by the Chancellor to reject new public spending commitments. It means a determination to dismiss as folly the decision to phase out pay beds, for example, at a cost of £40 million; to dismiss as folly the introduction at this point of time of the Community Land Bill, involving a huge army of public servants; to dismiss as folly the Employment Protection Bill, with its further burden on industry and more public servants to be employed.

The Government must also reinforce, instead of discarding, the systems upon which control of public spending essentially depends. How can they possibly expect to control public spending throughout local government when they are pressing ahead with their Clay Cross legislation? It is not only constitutionally improper but grotesquely irresponsible to weaken, if not destroy, the very instruments of control upon which this or any other Government will eventually depend.

If the Government want to know what should be done, I am perfectly prepared to defend the manifesto upon which we faced the country last year in that respect. It was a balanced and responsible manifesto. But what we tell the Government to do now is this. Let them bring forward now the £1,100 million cuts proposed for next year and let them recognise that they are not in a position to choose what their policy should be. Of course, they may want to strive and should strive to make some exceptions from the impact of public spending cuts, but it will become eventually essential for every Department of State to cut expenditure. That is why they should start this year rather than next on the reduction of food subsidies, on nationalised industry prices and on housing subsidies.

The Prime Minister says that would raise prices. So it would, for the standard of living must be reduced. He must not fail to understand the strategy of his own Chancellor. The Chancellor is raising nationalised industry prices and taking credit for that. He is heaping huge burdens on indirect taxation. All those things are aimed in the direction in which policy ought to be going. That is why it is folly to complain of the cuts which the Opposition propose in burgeoning public expenditure. Housing is one of the clearest examples. Some tenants need help. That was the object and effect of the Housing Finance Act. But it cannot possibly be right to continue with a situation in which average municipal rents amount to no more than 7 per cent. of average incomes, when 20 per cent. of local authority tenants enjoy incomes in excess of £100 a week, and when twice as much is being spent on housing subsidies as two years ago. Housing provides one example of the growth of local government spending, which should be cut.

Last year we planned initially for a growth in local government spending of 6 per cent. in real terms. The cuts we introduced in May 1973 proposed to bring the figure down to 4 per cent. and then in December 1973, to 2½ per cent. in real terms. The outcome was an increase of 10 per cent. under this Government. There was overspending and a growth in real terms of 10 per cent. Such expenditure must be reduced. That expenditure was directly financed by the Government. There was an increase in the rate support grant from 60½ per cent. to 66½ per cent., which meant that the Chancellor of the Exchequer paid for the Secretary of State for the Environment's party. That is why the Chancellor must take responsibility for the growth in public spending.

This is the importance of the final central point which must be made. Every plan for further public ownership should now be withdrawn. A reason to support that was given by the Paymaster-General. In his speech at Bournemouth he said: Extensions of Government influence need ideally to be proportioned timewise to the Government's capacity to take on new responsibilities. In other words, he implied that the Government had not made much of a success in running the public sector. It is, therefore, crass folly to contemplate extending it. Wages in the public sector have been allowed to race ahead. Strikes in the public sector have proved most difficult to resist. The commanding heights of the economy have become its soft underbelly.

There are many reasons why further nationalisation would be wrong. Nationalisation must be funded by an extension of the public sector borrowing requirement. The Prime Minister did not understand that future investment in extensions of nationalisation will become a charge upon the Exchequer. Profitability of the industries taken into public ownership will disappear. Above all wage claims will become even more difficult to resist. We have only to look at the situation in the steel industry, as was pointed out by my right hon. Friend the Member for Stafford and Stone (Mr. Fraser).

Is it conceivable that if the steel industry had remained in private ownership it would have faced a deficit of £375 million in one year, proposed to put up prices, and been in a weak position to resist wage increases? It is no wonder that the Prime Minister spoke as he did about Chrysler recently. He said to the CBI that there is an idea in the minds of some of those involved that if their actions can drive Chrysler into desperate economic straits then the Government would be forced to bring the firm into public ownership. I hope no-one will harbour such illusions.… The sooner this is realised, the better it will be for the livelihood and security of the workers, and their families. Of course, he was right. However, it is more difficult to make that assertion credible when the world can see the way in which he is acting in other aspects of his policy. How can the Chrysler workers be expected to regard that as entirely convincing when they see the irresponsible way in which the affairs of British Leyland have been carried through? When he made that speech the Prime Minister was crying out for salvation from the twisted logic of the policies to which he and a large part of the Labour Party have been committed for years and to which this House has been prepared for too long to subscribe.

This nation now finds itself in an economic morass—a morass of rising unemployment, roaring inflation and soaring indebtedness. If we are to escape from that morass we need a decisive change of course. It is a change of course which will test our democratic institutions very severely, but it must be undertaken. If it is undertaken, even by this Government at this time, it should receive the support of every Member of this House who is genuine in his commitment to the survival of a free society. I believe that, even now, it will receive the support of our people.

We must face the real gravity of our situation, and that the Prime Minister totally failed to do. We must take firm control of Government spending, and that the Prime Minister flatly refused to do. We must reject the disastrous commitment to yet another bout of Socialism, and that this Government are not equipped to do.

Those are the reasons why I call upon the House to support the motion.

9.31 p.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

After five and a half hours of debate and two speeches from the Opposition Front Bench, I confess that I still do not understand why they forced this debate. But I understand very well why the right hon. Member for Finchley (Mrs. Thatcher) decided last week not to speak in the debate. I dare say that she is now bitterly regretting that she changed that decision.

When the Opposition first announced their intention to force yet another general debate on the economy—we have already had three in the past month—two questions were difficult to understand. The first was why do it at all when they were hopelessly divided on every major economic issue. The second was why the Leader of the Opposition announced that she had more important things to do than to speak in the debate.

The first question is more difficult to understand now than it was even last week. It could have been that the Opposition wanted the opportunity to make a serious contribution to a discussion of the nation's problems and to put forward specific proposals for dealing with them, perhaps on the basis of some defined area of agreement with the Government as they saw it.

All that we have had from the Opposition Front Bench is stale party rhetoric. Every real issue has been dodged. Every point made today had been made and rebutted at least three times in the past month. That was particularly true of the speech that we have just heard from the right hon. and learned Member for Surrey, East (Sir G. Howe), although I am bound to say that he made a better speech than the Leader of the Opposition—but he had already made it twice before.

At least it is some comfort to have the other mystery cleared up. We know now why the Leader of the Opposition told the world last week that she did not intend to speak in the debate. It was because we did not get from her this afternoon either a clarion call to the nation or a battle cry to her own divided and demoralised supporters. All we had was a monotonous recitation of disconnected little homilies on each of the major economic abstractions studded with indigestible quotations from the whole gamut of Tory house journals from the Sunday Telegraph to the Economist and charged with all the moral passion and intellectual distinction of a railway timetable.

One characteristic ran through the whole of the right hon. Lady's speech giving it a particularly disagreeable flavour—a steadfast determination to ignore and play down any aspect of the nation's performance which does credit to Britain. As the Prime Minister suggested this afternoon, the patriotism of the Tory Party, like its loyalty to its leadership, is strictly a cyclical phenomenon.

The right hon. Lady and the right hon. and learned Gentleman know as well as anyone in this country that there are three major criteria of economic success in which Britain has done well in recent months by comparison with almost any of her competitors, all of whom faced the same problems created by the oil crisis and the world recession but none of whom entered the oil crisis with the handicaps that we inherited.

Our output has fallen less than that of most other countries—by only 4 per cent. in the last three months compared with 24 per cent. in Japan and between 10 per cent. and 15 per cent. in America, Germany, France and Italy. Our employment has fallen less than that in many other countries, and our balance of payments position has improved more when we consider that, as the Prime Minister told the House, we entered 1974 with a deficit already running at about £4,000 million, before the oil crisis had exerted more than a minor effect, as the Governor of the Bank of England pointed out to the nation in January last year.

There is, however, one very black spot on which the debate rightly concentrated, and that is inflation. Last year Britain was one among a fairly large group at the higher end of the world inflation table. This year we are almost alone among the industrial countries with a rate of inflation which could be double that of most others unless we do something about it.

The most interesting speech on this matter—indeed, the only one from the Opposition—came from a member of the Government in exile rather than from a member of the Shadow Cabinet. I refer to the right hon. Member for Farnham (Mr. Macmillan). He rightly pointed out—and this is the core of the nation's problem—that the level of wage settlements is only half the problem of inflation. The most important element is the level of productivity. We in this country since the war, by and large, have not had wage settlements higher than those in most other industrial countries. We have had a far lower rate of productivity because we have had too little investment, too much investment in the wrong places, and, when investment has gone into the right places, it has not been fully exploited.

We cannot put that problem right in a matter of months. I have made money available for investment, and the CBI agrees with me that there is now no problem for business in obtaining money if it wishes to invest. I made £100 million available in the Budget to stimulate investment in those areas in which we know it to be possible immediately and in which we know it to be desperately urgent, such as the ferrous foundry industry, on which the engineering industry depends.

The fact is—a point made from the Opposition benches but not seriously discussed—that as long as we have a level of inflation as high as it is at the moment, and no certainty as to where it will move during the coming year, there will be a great disincentive to business to use money which is available for investment. That, I hope, is common ground between the two sides of the House.

We had every right to expect, and indeed to insist, as the Opposition had put this motion on the Order Paper, that the Leader of the Opposition or another Front Bench spokesman would tell us tonight how the Conservative Party proposed to get the rate of inflation down. For one moment only in the right hon. Lady's speech did hope flicker. That was at the beginning of her speech when she said, very rightly, that inflation is a political and social problem rather than an economic problem. I entirely agree with her about that.

However, nothing followed from that flash of insight. All that we had beyond that was the familiar and dreary chanting of abstract slogans about public expenditure and the public sector borrowing requirement, and the ritual denigration of the social contract, without which no speech from the Opposition has been complete for many months. There was no suggestion either from the right hon. Lady or from her right hon. and learned Friend the Member for Surrey, East as to what they would put in place of the social contract. Indeed, at the end of the right hon. Lady's speech she appeared to suggest that she supported it. She said that one of the three pedestals on which her policy stood was the renegotiation of the guidelines which are the TUC's contribution to a social contract in which, of course, the Government are also involved.

The right hon. Lady then had the effrontery—if I could have her attention and that of her right hon. Friend—to talk to us of the need to keep the money supply under control. The right hon. Lady, along with the right hon. Member for Yeovil (Mr. Peyton) and the right hon. and learned Member for Surrey, East, is representative of a Government who allowed the money supply to rise to 34 per cent. in 1973, three times higher than the increase in GDP in money terms. The right hon. Lady has the effrontery to talk about controlling the money supply which on no definition has come close to the increase in GDP in money terms since we have been in power.

We had the usual monetarist lecture from the right hon. and learned Member for Surrey, East. I suggest that he looks at what the high priest of his church, Professor Laidler of Manchester, wrote last week—namely, that inflation this year in Britain is the direct consequence of the monetary profligacy of his Government in 1973. That is a view to which the right hon. Member for Leeds, North-East (Sir K. Joseph), the Mephistopheles to that shabby Faust, would subscribe.

The plain fact is that our public sector borrowing requirement is too high for comfort, but it is the consequence and not the cause of inflation. I cut it by £1,000 million in my Budget a month ago by increases in taxation, many of which the Opposition opposed and are continuing to oppose in Committee. Moreover, the right hon. and learned Gentleman went further. He was reported in yesterday's Evening Standard as saying that he pledges the next Tory Government to lighten the tax on incomes and savings, to aim for a single rate of VAT, to abolish the capital transfer tax and to ease the burden of the self-employed. I am glad to say that on those matters at least it is taking him more than 24 hours to change his mind.

The right hon. and learned Gentleman made clear today that he would solve the whole problem by cutting public expenditure. However, he has given us no indication of how he plans to cut public expenditure. When the right hon. Member for Down, South (Mr. Powell) asked the Leader of the Opposition by how much she would cut it, she was, and not for the first time, completely at a loss for words. She gave no indication—

Sir Geoffrey Howe

The Chancellor said that he has cut the borrowing requirement by £1,000 million in his Budget. Will he tell the House now by what amount, as a result of the policies consciously or unconsciously undertaken since then, he estimates it has once again increased, and whether he is happy with the picture as it stands today? Does he propose to do absolutely nothing to reduce public expenditure during the months that lie ahead?

Mr. Healey

I shall answer that question of detail later, but I can tell the right hon. and learned Gentleman now that it has increased since the Budget by about £100 million. I shall explain the detailed facts in a moment, although a few days ago the hon. Member for Leek (Mr. Knox) was given the facts in great detail in answer to a Written Question.

The fact is that the right hon. and learned Gentleman once again dodged the question. What does he think the public sector borrowing requirement should be reduced to? He gives no answer whatever to that important question. [An HON. MEMBER: "You are the Chancellor; you should know."] I repeat that we have had no indication whatever where the net cuts should be made.

We had a long rambling historical account from the right hon. Lady, and we heard how she used to talk to Chancellor Barber a few years ago about the problem when she was once in a spending Department. It was about as relevant to our current problems as Dick Crossman's diaries—but not half as exciting.

We had a suggestion from the right hon. Lady and also from her right hon. and learned Friend the Shadow Chancellor that we could bring forward cuts which the Government have decided to make next year. But the right hon. Lady explained why it was impossible to make cuts of that size in the current year. If that is not a satisfactory answer, let me quote from the all-party Expenditure Committee's report published only the other day. Paragraph 19 of the Ninth Report said: We recommend, therefore, that in managing the economy … changes in the level of public expenditure should be used only as a tool of the last resort. No means of managing a complex economy can be ignored but it should be regarded as a confession of failure when changes in the level of public expenditure (usually restricted to capital items or purchases of goods and services) are made and then reversed on a counter-cyclical basis. It follows that the short-term demand management of the economy by fiscal means should primarily be carried out by changes in taxation. We do not, of course, mean to imply that changes in public expenditure cannot be made on a planned, long-term basis.

Mr. F. A. Burden (Gillingham)

What are you going to do about it?

Mr. Healey

The hon. Gentleman should sit here more often in these debates. He would then have heard me describe in detail how I propose to cut public expenditure next year by £1,000 million. The reason why it is not possible to make cuts in the current year is that there would be great cancellation charges, redundancy payments, immensely unecomic disruption of construction contracts, and so on.

In the end the right hon. and learned Gentleman came to one item of public expenditure on which he seemed fairly secure namely, cuts in food subsidies and council rents. He admitted, and indeed gloried in the fact, that it would add 3 per cent. to the retail price index and would raise the cost of living for the poorest members of our community. But he also made clear that this money would be used not to reduce the public sector borrowing requirement, but to cut mortgage interests for the private householder to 91 per cent. In other words, it would go to people who were mainly the better off. So this great device for cutting the public sector borrowing requirement turns out to be a device for taking money from the pockets of the poor and putting it into the pockets of the better off.

There is every indication that under the Tory Party the public sector borrowing requirement would increase because the small savings which might be possible if we were foolish enough to adopt its proposals would be offset by tax concessions and far bigger additions to public expenditure: £2,300 million in tax credits, £1,500 million in terms of rates and £100 million at least according to the Tory Party in additional spending on the defence budget. Furthermore, they would involve hundreds of millions of pounds for all sorts of other extras, such as the £145 million which the Tories imposed on the Government by relaxing the earnings rule last summer.

The whole of the public expenditure element in the Conservative Party's policy for inflation—indeed, the only element in the policy so far as the right hon. and learned Member for Surrey, East is concerned—is revealed as a colossal sham. We are left with only one element of policy, and that is the one which the right hon. Lady referred to as "renegotiating the guidelines." The Labour Party welcomes the right hon. Lady's conversion to the principle of renegotiation. The guidelines are one half of the social contract. They were laid down unanimously by the Trades Union Congress in response to the adoption and carrying out of policies by the Government according to priorities which were shared between the Government and the trade union movement.

Mr. Burden

rose—

Mr. Healey

What we got no hint of today—and it is surprising when we consider what suggestions have been made in recent days on this question—is precisely how the Opposition would aim to renegotiate the guidelines. From the right hon. Lady we had the phrase "renegotiate the guidelines" and no more. From the right hon. and learned Gentleman we got the usual mass of flabby rhetoric which in the end collapsed into another appeal for cutting public expenditure still further. However, the fact remains that hon. Members on both sides of the House agree that we must get the rate of settlements down in the next wage round. [HON. MEMBERS: "How?"] I am coming to that. We also appear to agree that we cannot do this by compulsion—at least, that is what I understood from both Opposition Front Bench speakers. Therefore, we can do it only by persuasion, and that means by sitting down with those who do the wage bargaining in the trade unions and in industry to consider how the problem can be handled better in the coming year.

What is most encouraging is that we have noticed in all sections of the community, and not least inside the trade union movement, a growing recognition that we cannot permit a situation to continue in which the inability of a minority to carry out the undertakings it voluntarily made last September must lead to the Government imposing penalties on the majority which did carry out its undertakings and in which the inability or the unwillingness of the minority to carry out its undertakings compels the Government to cut public expenditure and to renounce every opportunity for combating unemployment.

In the last few days, in particular, we have had some very interesting and valuable ideas from both sides of industry, especially from members of the General Council of the TUC, notably from Mr. Jack Jones. My right hon. Friend the Prime Minister has already declared his intention to meet the CBI and the TUC next month to see how far matters can be progressed. [Interruption.] The silly titter from the hon. Gentleman opposite does no credit to his intelligence or to that of his party, because if we renounce compulsion we can solve this problem only by negotiation and persuasion, and that requires a spirit of conciliation in all parties.

Mr. Victor Goodhew (St. Albans)

On a point of order, Mr. Speaker. Is it not a tradition that those addressing the House should address you, Mr. Speaker? Would it not be simpler—to enable all hon. Members to hear the right hon. Gentleman's speech, instead of just the Tribune Group—if the right hon. Gentleman kindly addressed the Chair?

Mr. Speaker

The important thing is that the Chair should hear, not necessarily see, and I have means of hearing.

Mr. Healey

Thank you, Mr. Speaker, for your tribute to my vocal powers.

On both sides of industry there is evidence of a readiness to talk together about these vital problems and to seek a solution in common. We now see the development of that type of will for united action on both sides which it has been our purpose to obtain ever since we won office in March last year.

But the debate has demonstrated that as the search for agreement proceeds in the coming months we shall receive no contribution whatever from Her Majesty's official Opposition. They lose no opportunity to insult the trade union movement and to denigrate the social contract, within the framework of which alone it is possible to find a solution to the pay problem. The Opposition have pledged themselves to policies on taxation and public expenditure which would rule out constructive co-operation in the search for agreement as effectively as their policies made agreement impossible when they were last in power.

That is the real lesson of the debate, and it is perhaps the reason why in the end it will prove to have been worth while. The Conservative Party has demonstrated that it has nothing to contribute to the vital search for a solution to the problem of inflation. It has proved that it is nothing but a tedious and partisan irrelevance at a time when the whole nation is crying out for a combined national effort.

For these reasons, I ask the House to reject the motion with the contempt that it deserves. I am confident that when the House has done so—[Interruption.]—when I sit down at precisely 10 seconds to 10 o'clock, the nation, no less than all parties in the House, will recognise that the only relevant policies for dealing with the problem are those of Her Majesty's Government. I have no doubt also that many Members of the Conservative Party, reflecting on the humiliation suffered in this debate by their newly-elected Front Bench, will consider once again how soon it may be possible for them to accelerate the next ballot for the leadership.

Mr. Norman Tebbit (Chingford)

On a point of order, Mr. Speaker. May I spin out the time, as the Chancellor has obviously used up all his material and has nothing more to say? I will stand up—

Mr. Speaker

Order.

Mr. Healey

I am grateful to you, Mr. Speaker, for allowing me to finish my speech in the atmosphere of order for which the House is famous.

Once again, I call upon all thinking Members to join the Labour Government in rejecting the motion with the contempt that it deserves.

Question put. That this House, being gravely disturbed by the total failure of the policies of Her Majesty's Government to curb the accelerating rate of inflation, calls upon Her Majesty's Government to abandon their damaging plans for further nationalisation, to take immediate action to cut public expenditure and to secure a reduction in the level of pay settlements, as essential parts of a programme designed to restore confidence and promote the economic recovery of the nation:—

The House divided: Ayes 244. Noes 278.

Division N. 218.]	AYES	[10.0 p.m.
Aitken, Jonathan	Finsberg, Geoffrey	Knox, David
Alison, Michael	Fisher, Sir Nigel	Lane, David
Amery, Rt. Hon. Julian	Fletcher, Alex (Edinburgh N.)	Latham, Michael (Melton)
Arnold, Tom	Fletcher-Cooke, Charles	Lawrence, Ivan
Atkins, Rt. Hon. H. (Spelthorne)	Fookes, Miss Janet	Lawson, Nigel
Awdry, Daniel	Fowler, Norman (Sutton C'f'd)	Le Marchant, Spencer
Baker, Kenneth	Fox, Marcus	Lester, Jim (Beeston)
Banks, Robert	Fraser, Rt. Hon. H. (Stafford & St)	Lewis, Kenneth (Rutland)
Bell, Ronald	Fry, Peter	Lloyd, Ian
Bennett, Dr. Reginald (Fareham)	Galbraith, Hon. T. G. D.	Loveridge, John
Benyon, W. L.	Gardner, Edward (S. Fylde)	Luce, Richard
Berry, Hon. Anthony	Gilmour, Sir John (East Fife)	McAdden, Sir Stephen
Biffen, John	Glyn, Dr. Alan	McCrindle, Robert
Biggs-Davison, John	Godber, Rt. Hon. Joseph	Macfarlane, Neil
Body, Richard	Goodlad, Alastair	MacGregor, John
Boscawen, Hon. Robert	Gorst, John	Macmillan, Rt. Hon. M. (Farnham)
Bowden, A. (Brighton, Kemptown)	Gow, Ian (Eastbourne)	McNair-Wilson, M. (Newbury)
Boyson, Dr. Rhodes (Brent)	Gower, Sir Raymond (Barry)	McNair-Wilson, P. (New Forest)
Braine, Sir Bernard	Grant, Anthony (Harrow C.)	Madel, David
Brittan, Leon	Gray, Hamish	Marshall, Michael (Arundel)
Brotherton, Michael	Grieve, Percy	Marten, Neil
Brown, Sir Edward (Bath)	Griffiths, Eldon	Mates, Michael
Bryan, Sir Paul	Grist, Ian	Mather, Carol
Buck, Antony	Grylls, Michael	Maude, Angus
Budgen, Nick	Hall, Sir John	Maudling, Rt. Hon. Reginald
Bulmer, Esmond	Hall-Davis, A. G. F.	Mawby, Ray
Burden, F. A.	Hamilton, Michael (Salisbury)	Maxwell-Hyslop, Robin
Carlisle, Mark	Hampson, Dr. Keith	Mayhew, Patrick
Carr, Rt. Hon. Robert	Hannam, John	Meyer, Sir Anthony
Churchill, W. S.	Harrison, Col. Sir Harwood (Eye)	Miller, Hal (Bromsgrove)
Clark, Alan (Plymouth, Sutton)	Harvie Anderson, Rt. Hon. Miss	Mills, Peter
Clark, William (Croydon S.)	Hastings, Stephen	Miscampbell, Norman
Clarke, Kenneth (Rushcliffe)	Havers, Sir Michael	Mitchell, David (Basingstoke)
Clegg, Walter	Hawkins, Paul	Moate, Roger
Cockcroft, John	Hayhoe, Barney	Montgomery, Fergus
Cooke, Robert (Bristol W.)	Heseltine, Michael	Moore, John (Croydon C.)
Cope, John	Hicks, Robert	More, Jasper (Ludlow)
Cordle, John H.	Higgins, Terence L.	Morgan, Geraint
Cormack, Patrick	Hordern, Peter	Morris, Michael (Northampton S.)
Corrie, John	Howe, Rt. Hon. Sir Geoffrey	Morrison, Charles (Devizes)
Costain, A. P.	Howell, David (Guildford)	Morrison, Hon. Peter (Chester)
Crawford, Douglas	Howell, Ralph (North Norfolk)	Mudd, David
Critchley, Julian	Hunt, John	Neave, Airey
Crouch, David	Hutchison, Michael Clerk	Nelson, Anthony
Crowder, F. P.	Irvine, Bryant Godman (Rye)	Neubert, Michael
Davies, Rt. Hon. J. (Knutsford)	Irving, Charles (Cheltenham)	Newton, Tony
Dean, Paul (N. Somerset)	James, David	Normanton, Tom
Dodsworth, Geoffrey	Jessel, Toby	Nott, John
Douglas-Hamilton, Lord James	Johnson Smith, G. (E. Grinstead)	Onslow, Cranley
Drayson, Burnaby	Jones, Arthur (Daventry)	Osborn, John
du Cann, Rt. Hon. Edward	Jopling, Michael	Page, John (Harrow West)
Durant, Tony	Joseph, Rt. Hon. Sir Keith	Page, Rt. Hon. R. Graham (Crosby)
Dykes, Hugh	Kaberry, Sir Donald	Pattie, Geoffrey
Eden, Rt. Hon. Sir John	Kellett-Bowman, Mrs. Elaine	Percival, Ian
Edwards, Nicholas (Pembroke)	Kershaw, Anthony	Peyton, Rt. Hon. John
Elliott, Sir William	Kilfedder, James	Pink, R. Bonner
Emery, Peter	Kimball, Marcus	Prior, Rt. Hon. James
Eyre, Reginald	King, Evelyn (South Dorset)	Raison, Timothy
Fairbairn, Nicholas	King, Tom (Bridgwater)	Rathbone, Tim
Fairgrieve, Russell	Kirk, Peter	Rawlinson, Rt. Hon. Sir Peter
Farr, John	Kitson, Sir Timothy	Rees, Peter (Dover & Deal)
Fell, Anthony	Knight, Mrs. Jill	Rees-Davies. W. R.
Renton, Rt. Hon. Sir D. (Hunts)	Sims, Roger	Thomas, Rt. Hon. P. (Hendon S.)
Renton, Tim (Mid-Sussex)	Sinclair, Sir George	Townsend, Cyril D.
Rhys Williams, Sir Brandon	Skeet, T. H. H.	Trotter, Neville
Ridley, Hon. Nicholas	Smith, Dudley (Warwick)	Tugendhat, Christopher
Ridsdale, Julian	Speed, Keith	van Straubenzee, W. R.
Rifkind, Malcolm	Spence, John	Vaughan, Dr. Gerard
Rippon, Rt. Hon. Geoffrey	Spicer, Jim (W Dorset)	Viggers, Peter
Roberts, Michael (Cardiff NW)	Spicer, Michael (S Worcester)	Wakeham, John
Roberts, Wyn (Conway)	Sproat, Iain	Walker-Smith, Rt. Hon. Sir Derek
Rodgers, Sir John (Sevenoaks)	Stainton, Keith	Warren, Kenneth
Rossi, Hugh (Hornsey)	Stanbrook, Ivor	Watt, Hamish
Rost, Peter (SE Derbyshire)	Stanley, John	Weatherill, Bernard
Sainsbury, Tim	Stewart, Ian (Hitchin)	Wells, John
St. John-Stevas, Norman	Stokes, John	Winterton, Nicholas
Scott, Nicholas	Stradling, Thomas, J.	Young, Sir G. (Ealing, Acton)
Shaw, Giles (Pudsey)	Tapsell, Peter	Younger, Hon. George
Shaw, Michael (Scarborough)	Taylor, R. (Croydon NW)
Shelton, William (Streatham)	Taylor, Teddy (Cathcart)	TELLERS FOR THE AYES:
Shepherd, Colin	Tebbit, Norman	Mr. Adam Butler and
Shersby, Michael	Temple-Morris, Peter	Mr. Cecil Parkinson.
Silvester, Fred	Thatcher, Rt Hon Margaret
NOES
Allaun, Frank	Delargy, Hugh	Irvine, Rt. Hon. Sir A. (Edge Hill)
Anderson, Donald	Dempsey, James	Irving, Rt. Hon. S. (Dartford)
Archer, Peter	Doig, Peter	Jackson, Colin (Brighouse)
Armstrong, Ernest	Dormand, J. D.	Janner, Greville
Ashley, Jack	Douglas-Mann, Bruce	Jay, Rt. Hon. Douglas
Ashton, Joe	Duffy, A. E. P.	Jeger, Mrs. Lena
Atkins, Ronald (Preston N.)	Dunnett, Jack	Jenkins, Hugh (Putney)
Atkinson, Norman	Dunwoody, Mrs. Gwyneth	John, Brynmor
Bagier, Gordon A. T.	Edelman, Maurice	Johnson, James (Hull West)
Barnett, Guy (Greenwich)	Edge, Geoff	Johnson, Walter (Derby S.)
Bates, Alf	Edwards, Robert (Wolv SE)	Jones, Alec (Rhondda)
Bean, R. E.	Ellis, John (Bragg & Scun)	Jones, Barry (East Flint)
Benn, Rt Hon Anthony Wedgwood	Ellis, Tom (Wrexham)	Jones, Dan (Burnley)
Bennett, Andrew (Stockport N)	English, Michael	Judd, Frank
Bidwell, Sydney	Evans, Fred (Caerphilly)	Kaufman, Gerald
Blenkinsop, Arthur	Evans, Ioan (Aberdare)	Kelley, Richard
Boardman, H.	Evans, John (Newton)	Kerr, Russell
Booth, Albert	Ewing, Harry (Stirling)	Kilroy-Silk, Robert
Boothroyd, Miss Betty	Faulds, Andrew	Kinnock, Neil
Bottomley, Rt Hon Arthur	Fernyhough, Rt Hon E.	Lambie, David
Boyden, James (Bishop Auck)	Fitch, Alan (Wigan)	Lamborn, Harry
Bradley, Tom	Fitt, Gerard (Belfast W)	Lamond, James
Bray, Dr. Jeremy	Flannery, Martin	Latham, Arthur (Paddington)
Brown, Hugh D. (Provan)	Fletcher, Raymond (Ilkeston)	Leadbitter, Ted
Brown, Robert C. (Newcastle W)	Fletcher, Ted (Darlington)	Lee, John
Brown, Ronald (Hackney S)	Foot, Rt Hon Michael	Lestor, Miss Joan (Eton & Slough)
Buchan, Norman	Ford, Ben	Lewis, Arthur (Newham N)
Buchanan, Richard	Forrester, John	Lewis, Ron (Carlisle)
Butler, Mrs Joyce (Wood Green)	Fowler, Gerald (The Wrekin)	Lipton, Marcus
Callaghan, Jim (Middleton & P)	Fraser, John (Lambeth, N'w'd)	Litterick, Tom
Campbell, Ian	Freeson, Reginald	Lomas, Kenneth
Canavan, Dennis	Garrett, John (Norwich S)	Loyden, Eddie
Cant, R. B.	Garrett, W. E. (Wallsend)	Lyon, Alexander (York)
Carmichael, Neil	George, Bruce	Lyons, Edward (Bradford W)
Carter, Ray	Gilbert, Dr John	Mabon, Dr J. Dickson
Carter-Jones, Lewis	Ginsburg, David	McCartney, Hugh
Cartwright, John	Golding, John	McElhone, Frank
Castle, Rt Hon Barbara	Gould, Bryan	Maguire, Frank (Fermanagh)
Clemitson, Ivor	Gourlay, Harry	Mackenzie, Gregor
Cocks, Michael (Bristol S)	Grant, George (Morpeth)	McMillan, Tom (Glasgow C)
Cohen, Stanley	Grocott, Bruce	McNamara, Kevin
Coleman, Donald	Hamilton, James (Bothwell)	Madden, Max
Concannon, J. D.	Hamilton, W. W. (Central Fife)	Magee, Bryan
Conlan, Bernard	Hardy, Peter	Mahon, Simon
Cook, Robin F. (Edin C)	Harper, Joseph	Mallalieu, J. P. W.
Corbett, Robin	Harrison, Walter (Wakefield)	Marks, Kenneth
Cox, Thomas (Tooting)	Hart, Rt Hon Judith	Marquand, David
Craigen, J. M. (Maryhill)	Hatton, Frank	Marshall, Dr Edmund (Goole)
Crawshaw, Richard	Hayman, Mrs Helene	Marshall, Jim (Leicester S)
Cryer, Bob	Healey, Rt Hon Denis	Meacher, Michael
Cunningham, G. (Islington S)	Hooley, Frank	Mellish, Rt Hon Robert
Cunningham, Dr J. (Whiteh)	Horam, John	Mendelson, John
Dalyell, Tam	Howell, Denis (B'ham, Sm H)	Mikardo, Ian
Davidson, Arthur	Hoyle, Doug (Nelson)	Millan, Bruce
Davies, Bryan (Enfield N)	Huckfield, Les	Miller, Dr M. S. (E Kilbride)
Davies, Denzil (Llanelli)	Hughes, Rt Hon C. (Anglesey)	Miller, Mrs Millie (Ilford N)
Davies, Ifor (Gower)	Hughes, Mark (Durham)	Mitchell, R. C. (Solon, Itches)
Davis, Clinton (Hackney C)	Hughes, Robert (Aberdeen, N)	Molloy, William
Deakins, Eric	Hughes, Roy (Newport)	Moonman, Eric
Dean, Joseph (Leeds West)	Hunter, Adam	Morris, Alfred (Wythenshawe)

Morris, Charles R. (Openshaw)	Rooker, J. W.	Tinn, James
Morris, Rt. Hon. J. (Aberavon)	Roper, John	Tomlinson, John
Mulley, Rt. Hon. Frederick	Rose, Paul B.	Tomney, Frank
Murray, Rt. Hon. Ronald King	Ross, Rt. Hon. W. (Kilmarnock)	Torney, Tom
Newens, Stanley	Rowlands, Ted	Urwin, T. W.
Noble, Mike	Ryman, John	Varley, Rt. Hon. Eric G.
Oakes, Gordon	Sandelson, Neville	Wainwright, Edwin (Dearne V.)
Ogden, Eric	Sedgemore, Brian	Walden, Brian (B'ham, L'dyw'd)
O'Halloran, Michael	Selby, Harry	Walker, Harold (Doncaster)
Orbach, Maurice	Shaw, Arnold (Ilford South)	Walker, Terry (Kingswood)
Orme, Rt. Hon. Stanley	Sheldon, Robert (Ashton-u-Lyne)	Ward, Michael
Ovenden, John	Short, Rt. Hon. E. (Newcastle C.)	Watkins, David
Owen, Dr. David	Silkin, Rt. Hon. John (Deptford)	Watkinson, John
Padley, Walter	Silkin, Rt. Hon. S. C. (Dulwich)	Weetch, Ken
Palmer, Arthur	Sillars, James	Weitzman, David
Park, George	Silverman, Julius	White, Frank R. (Bury)
Parker, John	Skinner, Dennis	White, James (Pollok)
Parry, Robert	Small, William	Whitehead, Phillip
Pavitt, Laurie	Smith, John (N. Lanarkshire)	Whitlock, William
Pendry, Tom	Snape, Peter	Willey, Rt. Hon. Frederick
Perry, Ernest	Spearing, Nigel	Williams, Alan Lee (Hornch'ch)
Phipps, Dr. Colin	Spriggs, Leslie	Williams, Rt. Hon. Shirley (Hertford)
Prescott, John	Stailard, A. W.	Williams, W. T. (Warrington)
Price, C. (Lewisham W.)	Stewart, Rt. Hon. M. (Fulham)	Wilson, Alexander (Hamilton)
Price, William (Rugby)	Stott, Roger	Wilson, Rt. Hon. H. (Huyton)
Radice, Giles	Strang, Gavin	Wilson, William (Coventry SE)
Rees, Rt. Hon. Merlyn (Leeds S.)	Strauss, Rt. Hon. G. R.	Woodall, Alec
Richardson, Miss Jo	Summerskill, Hon. Dr. Shirley	Woof, Robert
Roberts, Albert (Normanton)	Swain, Thomas	Wrigglesworth, Ian
Roberts, Gwilym (Cannock)	Taylor, Mrs. Ann (Bolton W.)	Young, David (Bolton E.)
Robertson, John (Paisley)	Thomas, Jeffrey (Abertillery)
Roderick, Caerwyn	Thomas, Mike (Newcastle E.)	TELLERS FOR THE NOES:
Rodgers, George (Chorley)	Thomas, Ron (Bristol NW)	Miss Margeret Jackson and
Rodgers, William (Stockton)	Tierney, Sydney	Mr. David Stoddart.

Question accordingly negatived.