BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 07 April 1976 vol 909 cc444-566

4.3 p.m.

Sir Geoffrey Howe (Surrey, East)

For all of us there come moments when on either side of the House we reflect on the nature and quality of the progress we have made in fulfilling the objectives which bring us all into the House, namely, to advance and improve the condition of the people of this country and the country as a whole. That kind of moment tends to come, obviously, with a change of Government. It comes as well, with perhaps less reason but certainly it comes, on a change of Prime Minister.

On this occasion, therefore, many of us had hoped that we might see something in the way of a new departure, a fresh beginning, on the part of right hon. Gentleman the Chancellor of the Exchequer in addressing himself to the country's economic problems. We are not wholly convinced that he would be able to set out in that way because it is fair to say that the Prime Minister has not universally been regarded as the most successful Chancellor of the Exchequer since the War. Indeed, it might be said that in some respects the Prime Minister has been pioneering some of the paths that the Chancellor has been treading these last couple of years. He has been round some of the buoys before.

At all events, we were glad to hear the Prime Minister's early pronouncement in his very first broadcast to the people that we could not, as a nation, go on borrowing for ever, that it was time we began telling people the truth and time that we began seeking a policy that would unite the nation. He told us yesterday that we ought also to recognise the extent to which many of the shortcomings of our industrial scene result from mistakes over the last 30 years.

Against that background the Chancellor came to present what he himself described as the most important Budget of this Parliament. He proclaimed that he was learning, and intending to learn, from the mistakes of previous Administrations. We all had very high hopes of what that might produce. Certainly I can tell the Chancellor that if he had brought forward a Budget that represented, in our view, a right response to the needs of the nation, we on this side of the House would have been only too willing to support him and to respond to such a Budget presented with candour, sanity and courage.

The unfortunate fact is that the Chancellor, notwithstanding the situation, has failed, and failed seriously and fundamentally, to match the needs of the occasion. He has failed, in the first place, to apply himself and his Budget-making to the fundamental problems. He has not recognised, in action as opposed to words, the grave underlying weakness of British trade and industry. He certainly has not recognised, even in words, the dangers of continuing as he is with a public sector that is spending too much, much too much; a public sector that is taxing too much, far too much; and, above all, a public sector that is borrowing far too much.

It is a rather chilling thought that in each of the last three Budgets which the Chancellor has introduced he has set out, in words at least, to reduce the public sector borrowing requirement. Only last year he set out to reduce that year's borrowing requirement by £1 billion and he stated that it was his intention to reduce the borrowing requirement for the year that has just begun by £3 billion. Therefore his target figure for the borrowing requirement for this year, when he spoke a year ago, was £7 billion.

This year he has wholly abandoned that objective, He has even abandoned the idea of seeking to make any reduction at all in that figure and is actually planning this year to increase the borrowing requirement by £1½ billion. If, when he is planning to increase it, he does anything like as well as he did when he was planning to reduce it, Heaven help us all ! He is ignoring the importance of that factor altogether and has ignored the other lessons of the past. Because of that, he has committed the nation to an economic strategy which in our view is doomed to failure.

I want to say something about the method by which the Chancellor has chosen to proceed. The truth is that he has not truly produced a Budget at all. If we look at the Red Book we see no outturn figures on which we can rely. He has come before the House with what is no more than an opening bid in negotiations yet to continue. Of course, I do not deny, and nobody will, the importance of the need to discuss with people outside this House, with outside bodies and with the public as well, the essential central features of the Government's economic policy, and I do not deny the importance of getting them understood and accepted. But to go about it as the Chancellor has done is an entirely different way of proceeding. The Chancellor has made it clear that he is handing the evolution, the working out, of the central part of his Budget package to the TUC.

I must ask how acceptable that procedure will be to all those who are not represented by or on that body. How acceptable will it be to middle management, who may find as a result of decisions taken by a body outside the House that differentials are once again suppressed, if not eliminated? How acceptable will be the decisions that are taken outside the House to impose a cutoff limit or a top limit in an incomes policy?

How acceptable a procedure will this be for widows? If the additional tax cuts do not come through they will find themselves, at the behest of an agency which does not represent them, paying tax on every pound that they earn.

How acceptable will it be to workers who are not represented by the TUC, who last year, on the Chancellor's own admission, found themselves being punished by higher taxes for the failure of the social contract? This year they find themselves being similarly clobbered by the disappearance of their tax allowances through no fault of their own.

I must warn the Government against finding themselves delivering yet further wrong-headed policies, policies which they may be obliged to deliver in the course of bargaining, promises and policies that should not be delivered, in exchange for promises that may never be fulfilled.

The truth is that the Chancellor has surrendered a large part of his duty and responsibility in a fashion that we must regard as being fraught with danger. He continues to preside over the disastrous devaluation of the pound, but he has now succeeded in devaluing the Budget as well. He has placed his high office, for the exercise of which he is responsible to the House, into the hands of a labour-only sub-contractor That will be seen by the country, as well as by the House, as an intolerable procedure.

But there are more fundamental problems. The Chancellor has not had the courage or the integrity to face the realities of the position and to spell them out honestly.

Before I come to the essentials of his strategy I shall give two illustrations. First, the House has recently been dealing with the way in which the increase in pensions has been handled. Yesterday, almost in a throw-away observation, the Chancellor said that an increase of £3 in the rate of pension for a married couple would be more than enough to match actual and likely movements in earnings in the 12 months to November, but he added to that figure another 30p. He received a cheer for his apparent generosity beyond the requirement.

But, as we have learned today, the last uprating went to March 1975. The present uprating is to go from November 1975 to November 1976. Therefore, he has succeeded in missing out the increases in the Retail Price Index between March and November last year, the months in which the Retail Price Index increased by 15 per cent. That is an annual rate on the 8.4 per cent. basis—an approach with which the Chancellor is familiar—of 50 per cent. a year. Those are the months that the Chancellor has overlooked.

Whatever may be said about the merits or necessity of that conclusion, it may well be inescapable. It is a revealing insight into the state of the economy that the Chancellor and his colleagues regard the Budget as being so overspent that working people and pensioners have had to be denied the protection that beyond doubt they were promised.

On 18th March 1975 the Secretary of State for Social Services said: I need hardly stress the importance to pensioners of having these firm guarantees of full protection against inflation. In the original White Paper I described that protection as ' one of the most precious assets of the new scheme '."—[Official Report; 18th March 1975, Vol. 888, c. 1491.] If the right hon. Gentleman's conclusion was inescapable, that may be an insight into the economy, but the fact that the Chancellor did not choose to tell the House about it yesterday, deciding to cover it up, is an even more revealing insight into the mind of this disreputable Chancellor. He did not have the guts to tell us the truth about what he was doing.

I have a second example of a similar kind. Yesterday the Chancellor positively oozed across the nation's television screens and in the House when he spoke of the importance of stability for industry. He referred to the importance of maintaining a stable pattern of corporation tax. I do not know how he has the nerve to do it. All that we know about the story of value added tax should put him totally to shame.

We all know why the right hon. Gentleman cut value added tax to 8 per cent. It was the basis of the 8.4 per cent. pretence on which he was elected to office in 1974. We have less idea why he chose to increase it to 25 per cent. over a whole range of products. As we pointed out at the time, it was an astonishing policy. An additional 1,000 civil servants were taken on for the sake of destroying the jobs of tens of thousands working in industry. We warned him about it at the time, but he persisted for the sake of additional yield to the Exchequer, a yield which was less than the forecasting error of the yield of value added tax that is revealed in this year's Red Book. He now comes along and unctuously claims credit for going back to 12½ per cent.

The right hon. Gentleman knows as well as anyone in the House that he should go back to 10 per cent. across the board. He knows that he was wrong, twice wrong, and three times wrong, but once again he does not have the courage to admit it. It is a disastrous story of incompetence and deceit. The British people, in this respect as in so many others, have been obliged to try to cope with problems that have so often been created by the Chancellor himself. It has been said that a husband is someone who stands by you in troubles that you would not have had if you had not married him. Let it now be said that a Healey is someone who pretends to stand by you in troubles which you would not have had if you had not voted for him.

More serious than that is the deceit that is at the heart of the Chancellor's strategy. There should by now be no room for doubt about the gravity of the nation's problems. It is clear that they will not be quickly overcome. They will be overcome only by sacrifice—sacrifice not only by the people but by the Government. All commentators are agreed about the unprecedented scale of the growth of output and exports that is needed if unemployment is to have a ghost of a chance of coming down to the level that the Chancellor predicts. We are all agreed that that cannot be achieved with existing policies. We are impossibly constrained by the decline in the scale and vigour of the private sector and the scale of the trading deficit. It is still huge even at the trough of a recession.

Only the new Cambridge school purports to offer ways of squaring the circle. The Chancellor disdainfully, and rightly, rejected those prescriptions, but, as the Prime Minister has said, there are no easy solutions. It is only with honesty, realism and sacrifice, and above all with patience, that we can have a chance of putting these things right. I stress patience most of all. We can put them right, but we cannot do so with existing policies.

The Chancellor made what seems to have been a pre-emptive bid in relation to the observations of the Expenditure Committee. It pointed out with commendable brevity that the achievement of the Government's objectives presupposes a substantial improvement in the performance of the economy—indeed, by United Kingdom standards, almost an economic miracle. The Chancellor is almost alone in believing that that will happen. I suggest that the Chancellor is not merely wrong but dangerously wrong to proceed on that assumption. By proceeding upon that miraculous assumption he is taking a quite unacceptable risk. He is assuming a 5½ per cent. growth in gross domestic product and more than 10 per cent. growth in exports. He is making the big assumption that effective control of the money supply will be sustained, that unprecedentedly effective control of public spending will be sustained, and that he will secure delivery throughout the second and much more difficult phase of the pay policy of a pay norm of 3 per cent.

A policy for incomes may well have a rôle to play in diminishing expectations and in checking unemployment. But we should remember that no such policy has been sustained for longer than two years, and that all of them have allowed—if that is the right word—actual earnings to rise several percentage points, generally twice as far as the stated norm. This policy assumes a 3 per cent. figure. It will be interesting to know whether the Chancellor regards that as the maximum throughout the next, the second, year, when differentials have been massively compressed this year, and when the figure last year was as high as 33 per cent. So even if the rest of the Chancellor's policy was right, it would be a rash gamble to bank on that turning out.

It is not likely that policy for incomes has a chance, however, because the Chancellor is actually planning to reflate and thereby to create circumstances in which the policy for incomes which he is setting out is far more likely to fail than succeed.

His speech yesterday contained the curious statement: I believe it is well worth accepting some increase in the public sector borrowing requirement in order to achieve a lower rate of inflation."—[Official Report, 6th April 1976; Vol. 909, c. 281.] That surpasses even his record for economic illiteracy. To assume that all these miraculously desirable premises will be fulfilled is grossly irresponsible. The Chancellor knows that it is, or he ought to know it, even from his own Statement yesterday. Referring, presumably, to the British Leyland situation he said: Recent events illustrated more forcibly than any abstract argument that it can be highly dangerous to expand domestic demand without a firm assurance that our industry has both the will and the capacity to meet it."—[Official Report, 6th April 1976; Vol. 909, c. 241.] There are warnings far more trenchant. The Public Expenditure White Paper, for which, presumably, the Chancellor accepts a lot of responsibility, said in paragraph 21, referring to the high-growth expectation, … it would be imprudent, in planning the public use of resources, to count on such an improvement until there is clear evidence that it is being achieved. It goes on, in paragraph 22, But there are also greater risks on the downward side … The lower growth rate . . should therefore be regarded as purely illustrative and not necessarily as a lower limit. But the Chancellor has chosen to throw to the winds all the prudence that these warnings should have driven home to him.

There is an even more telling warning on the danger of believing economic miracles. I want to quote to him a passage from a previous Budget speech: Of course, it is possible that the previous Government would have achieved and maintained a 4 per cent. growth rate for the next four years in a row. I do not say that miracles cannot happen, but the programmes that we have taken over have been planned on the assumption that the miracles have already happened."—[Official Report, 11th November 1964; Vol. 701, c. 1030.] That passage was from the speech made on 11th November 1964 by the Prime Minister when he was Chancellor of the Exchequer. It seems to have been heeded very little by the present Chancellor. The Prime Minister has learnt a lot more about economic miracles since then, and even since succeeding to his present office. He went on in 1964 to help Mr. George Brown to construct the National Plan, but even with that experience behind him—a miracle which would have made the feeding of the 5,000 look like a three-card trick—he confirmed the present Chancellor in office. It was his first act as Prime Minister, and he may well find it to have been his most serious mistake.

I move on—[HON. MEMBERS: "Hear, hear."] I am sorry that hon. Members opposite do not welcome what I am saying, but they must face facts. I move on to telling the Chancellor what he should have done. First—and I am glad to say that he agrees with us—he needs to maintain proper control of money supply. I often wonder whether there is any sense of shock among hon. Members opposite below the Gangway at the frequency with which the Chancellor assents this. They have been taught for years that monetarism is second only to Fascism in the pantheon of sin. They must be shaken to have a Chancellor, for whom they vote night after night—or almost night after night—who is the greatest self-confessed monetarist of all.

Secondly, the Chancellor should set about restoring, and in a big way, the profitability of British industry. He had a lot to say yesterday about industry. He expressed concern about ensuring ample finance for industry. He spoke about production and an appropriate fiscal and economic environment so that industry could finance the necessary increase in investment during the recovery. He used lots of other comparable expressions. But he continued the process of treading delicately round the fundamental question of profitability. His only express reference to profits was when he referred to them rather pejoratively in saying that he hoped that money would not be "creamed off" in profits.

With the exception of the continuation of stock relief measures—even he could have hardly overlooked that—he did nothing of significance to strengthen profitability but confined himself to giving an assurance that, in considering the future of the Price Code, he would take full account of the needs of industry, and in particular of the need to allow sufficient recovery of profits to encourage new investment and the jobs which we know that new investment would bring. But that will be nothing like enough.

Without a large growth in profits, nothing on that side will come right. The truth is, when we look upon the historic cost definition basis, that although private sector profits may rise by 25 to 30 per cent., that will not be enough. After allowing for inflation, that suggests a rise in real terms of one-quarter or one-third over a two-year period. In 1975, the true rate of return on capital invested in British industry, adjusted for inflation, was minute. After deducting stock appreciation, computing depreciation and providing for replacement costs, the real pre-tax rate of return in the company sector as a whole was at most 2 per cent.—one-third of the level in the years 1970–74, one-fifth of the level in 1965–70, and one-seventh of the level before 1964, when it was over 10 per cent. Over the next two years, it might go up from 2 to 3 per cent., which is quite insufficient even to take us back to the low levels of four years ago. If that is what the Chancellor is aiming at in this respect, he will be driving yet another nail into the coffin of his economic miracle.

The Chancellor must have the courage to let real profits go up and to say that that is what he is doing. We cannot have more investment and more jobs unless he is prepared to see more profits and to explain that that means higher prices. He at least should have no difficulty in explaining the need for higher prices. After all, he has raised indirect taxes and allowed rates to rise so much that, in the last two years, his own actions have added 7½ per cent. to the Retail Price Index. I wish that he had shown half as much concern with getting that amount of money from the pockets of consumers into profits and investment as he has for collecting it for himself and the Exchequer.

Thirdly, the Chancellor needs to set about making it once more worth while to work. That means in the long run getting income tax down. But that is some hope with the present Chancellor. In the short run at least, it means putting himself into the position where he does not perpetually have to go on put- ting taxes up. But on the present plans, it will not be possible for him to arrive there even if the public spending cuts that he is planning go through and even if all the other assumptions are fulfilled, because, by his plans, the public sector will still be taking 53 per cent. of gross domestic product by the end of the period and taxes will still have to go up further.

One must ask whether the Chancellor has any real insight into human nature at all, as to what it is that makes people willing to work. In each of the last two years the burden of income tax on every family has gone shooting up. This year, even if the pay deal goes through, there will be more of the same. More and more people will find that they receive more by staying at home than they receive by going to work.

And the uprating of the short-term benefits, the untaxed unemployment benefit of which we have heard today, will make that position even worse and even more likely. We must regard that as a wholly unacceptable and intolerable situation. For example, as regards pensioners, a pensioner under the current arrangement getting between £40 and £50 a week will have every penny of those earnings taken away above £39 because of the earnings rule. On top of that, income tax will be payable at 35 per cent. He will therefore be paying a total effective marginal rate of 135 per cent. and at £50 a week will be £3.85 worse off than on £39 a week. So for pensioners, widows, middle management, senior management, every working family in this country, this is an economically intolerable situation.

My right hon. Friend the Leader of the Opposition the other day spelled out some of the figures about the increase in income taxes paid by every household since we left office. Certainly one figure was clear—that the income tax per household payable when we left office was £389, and my right hon. Friend said that in the year that had just finished it would be £724, an increase of £335 per household. My right hon. Friend may not have had time to notice that she was being unduly optimistic and unduly kind to the Government in using that figure because the outturn shows that the average income tax per family last year was £780. So the figure was actually up by £391 since we left office in April 1974.

If we look at what the Red Book holds for the year to come, the average income tax per family in the coming year will be up to £876, so it has gone up by almost £500 in the three years since we left office. It will have much more than doubled during the period that this Government has been in office. That will be part of the price which the people of this country are having to pay for the failures of Socialism.

My final and most insistent advice—and I make no apology for coming back to it—is this: it will not be possible for the Chancellor of the Exchequer to implement any of the advice I have given him unless he starts soon and quickly on cutting public expenditure and cutting it substantially. Unless he does that, he will not be able to cover his borrowing requirement, he will not be able, as he wants, to set free resources for the private sector for new jobs, he will not be able to avoid the danger of fresh outbursts of inflationary printing of money, and he will certainly not have a snowball's chance in hell of being able to reduce taxes ever again. He knows that.

This is not advice which the Chancellor should continue to treat with contempt or disdain, because it was one of the objectives which he set himself last year. All the tax increases he set out to impose were imposed, on his own statement, in order to reduce the public sector borrowing requirement by £1 billion, yet he ended up by spending almost £2 billion more. For this year he was planning to make cuts of over £1 billion, to get the borrowing requirement and the overspending down. In fact this year he has ended by spending £½ billion more than he originally intended when he set out to reduce it by £1 billion.

If he is to achieve any success in this direction it will require determination, discipline and the support of his colleagues and a united Government on a far more massive scale than anything we have seen from this Government so far.

If the Chancellor has one job that is more important than any other it is that of bringing public spending under control. It is the key job for the economic future of this country and in the performance of that job this Chancellor has so far been a catastrophic failure. The Chancellor knows that he ought to be doing it. He knows that it will require a far more rigorous attitude towards pay in the public sector, a far more rigorous attitude towards allowing programmes to creep up here, there and everywhere, so that he constantly ends up by spending more than he intended. It will require courage, but it can certainly be done.

I remember how little support my right hon. Friend the Chancellor of the Exchequer got in 1973 when he came before this House to announce his intention to carry through cuts of £1,200 million. But he did it, and the present Government achieved the astonishing feat of having swallowed that up as though it had never happened. They had a period during which they complained about the impact of these cuts, but they took them into account, and although we made cuts which would amount in today's terms to almost £2 billion this Government have brushed them aside and raised public expenditure. But we did it, and one day, sooner rather than later, this Government will have to find the courage to do the same.

It will be difficult, of course, and the Prime Minister knows as well as anybody how difficult it will be but how necessary it is. He has been through this whole process before and the sooner he tells his Chancellor of the Exchequer to start making plans now, and the sooner a start is made, the less painful it will be. The Prime Minister has said—and he is undoubtedly right—that we cannot go on as a country borrowing our way into debt. If the Prime Minister wants to give some meaning to his plea for unity, to his plea to end the years of indebtedness of this country, he ought now to instruct the Chancellor to prepare plans on public spending. He ought to set about discouraging some of the Socialist commitments on which his colleagues and this Government still seem disastrously determined. Nationalisation of land, oil, aircraft, shipbuilding: is it not time for the Prime Minister, if he wants us to take his intentions seriously, to set about calling a halt to some of that, to the continued destruction of the remaining grammar schools at a cost of tens of millions of pounds, to the exclusion of private patients and, along with these, of private doctors from the National Health Service? Is it not time to put an end to them? All these things cost money. The Financial Secretary is interrupting and asking whether this is an economic policy. If he does not have the sense to see that each one of these disastrous and unnecessary measures of Socialism not only does harm in itself but also costs the Exchequer money he is far less well informed than I thought.

It must be understood that the cutting of public expenditure requires substantial cuts in programmes, the cuts that were planned to take place in 1979–80 being brought forward, the reduction of subsidies beginning to come forward, the abandonment of massive expenditure on expensive policies of Socialism and the willingness of Government to realise that they must abandon these highly damaging, destructive and harmful aspects of Socialist government. If the Government are not prepared to start governing in the interests of a united nation, it is high time for them to make way for a Government who will.

4.39 p.m.

The Paymaster-General (Mr. Edmund Dell)

I hope to give some answers to many of the points which the right hon. and learned Member for Surrey, East (Sir G. Howe) made, and I do so the more easily because we have heard much of his speech before. I must first do my duty, however, and refer to the fact that together with the Budget debate we are debating two EEC documents, R/606/76 and R/622/76, the second of which deals with the economic policy guidelines for 1976. The Scrutiny Committee recommended that these documents should be debated together with the Budget. The guidelines relating to the United Kingdom are in line with my right hon. Friend's Budget Statement and consistent with Government policy. The draft Decision, contained in R/622/76, stating that the member States pursue their economic policies in conformity with the guidelines, was accepted by my right hon. Friend at the meeting of Finance Ministers on 15th March subject to a waiting reserve to take account of the recommendation of the Scrutiny Committee. Following this debate, this reserve will be lifted.

I now come to the speech of the right hon. and learned Gentleman, and, in par- ticular, to his remarks about the commentators who have been writing about this Budget during the last 24 hours, and who, I might say, are a great deal less critical of and a great deal more favourable to the strategy that my right hon. Friend outlined to the House than was the right hon. Lady.

Remarkably, after considering the unprecedented structure of the Budget, the right hon. and learned Gentleman referred to the Report of the Expenditure Committee regarding economic miracles. I was pleased to see in this morning's Daily Mail a quotation from Mr. Terry Ward, who advised the Expenditure Committee. Speaking of the Chancellor's ambitious 5½ per cent. growth target for the next three years, he said—and this is what we said during the debate on the public expenditure White Paper—that It is not impossible, given the slack in the economy. I saw in the same paper that Mr. Frank Blackaby, of the National Institute, said: The £1,000 million of tax reliefs in exchange for 3 per cent. wage increases is a major and rather sensible innovation. It is a more logical way of running the economy, and if he can bring this off it will be a formidable coup. We have always made it clear, in spite of the public expenditure White Paper, that the major risk was a downside risk, but that what is proposed is far from impossible given the current slack in the economy.

I turn to what the right hon. and learned Gentleman said about public expenditure and the public sector berrowing requirement and, indeed, what the right hon. Lady said last night in her immediate response to the Budget Statement. I find it surprising, important though the limitation on borrowing is, that the Opposition should take the position that a public sector borrowing requirement of £12 billion overthrows the rest of the strategy. I understand the Opposition's sensitivity on this point, because, after all, it was their failure with the money supply that overthrew their incomes policy before 1974.

The right hon. and learned Gentleman tells us that our economic strategy is doomed to failure and he instructs us to exercise proper control over the money supply. He should show a little more sense of humour when he makes that sort of remark. He should compare the record of his Government with what my right hon. Friend is doing. To claim that this increase to £12 billion in the public sector borrowing requirement undermines the whole strategy seems to be entirely wrong. The right hon. and learned Gentleman said today, as he did during the debate on the public expenditure White Paper, that we must cut public expenditure. The proposals that he put forward during that debate for cutting public expenditure were not notable, and his specific proposals today were even less so.

I was amazed to hear that between 17th December 1973 and the end of February 1974, when the Conservatives went out of office, Lord Barber, as he now is, made all the public expenditure cuts that were proposed during December. That is an extraordinary claim and it would be impossible to justify. We have introduced further steps to improve control over public expenditure. Yesterday the Chief Secretary published the cash limits White Paper. There is nothing that the Opposition, on their record, have to teach us about control of public expenditure.

Mr. Nigel Lawson (Blaby)

I am sure that the right hon. Gentleman would not wish to mislead the House. Is he not aware that the Treasury gave evidence before the General Sub-Committee of the Expenditure Committee to the effect that the Barber cuts had been implemented and carried through and that subsequent increases were by the right hon. Gentleman's Government?

Mr. Dell

They could not have been implemented by the Government of which Lord Barber was Chancellor of the Exchequer.

The real key to the public sector borrowing requirement is whether we can finance it without crowding out other prior claims on national resources, without an undesirable expansion in the money supply, and without being forced by it into increases in interest rates. That is the test.

I now propose to say something about forecasts of the public sector borrowing requirement—something on which I suppose the Treasury, under various Chan- cellors of the Exchequer, is entitled to a little humility. The right hon. Lady said yesterday that my right hon. Friend's forecasts were always wrong in the wrong direction. That is not true. As she win see from the IMF letter, only three or four months ago we were expecting the figure to be higher.

As everyone knows, the public sector borrowing requirement, particularly in conditions of inflation and in conditions of depression, is extremely difficult to forecast. It includes borrowing by and for local authorities and for public corporations, that is, borrowing for productive enterprises. It is worth putting on record that the Government's forecast of the borrowing requirement for their own purposes was remarkably accurate, as will be seen if one examines the PSBR.

The Opposition put forward in this context what is in fact a "dig a hole" theory—dig a hole and then wait for investment and exports to fill it. The trouble with their theory is that there are strong political and economic reasons against it. It will increase unemployment in the short term if we cut the public sector borrowing requirement before the savings ratio falls, before investment in fact rises and before exports have risen more than they have already done.

I know that it is suggested by the Opposition—or by some members of the Opposition—that there is an alternative way of maintaining the level of unemployment—an alternative to maintaining it through public expenditure—and that is by making public expenditure cuts and compensating that by tax cuts. I explained during the debate on the public expenditure White Paper why we believe that in the short-term that would not work, and I have had no answer to the argument that I then deployed. If that course were adopted, the effect would be to increase the public sector borrowing requirement which the Opposition say they want to reduce.

The question is: can we finance the public sector borrowing requirement without increasing the money supply? I must draw the attention of the House to the fact that last year we did so, despite many forecasts to the contrary. The right hon. and learned Gentleman accused my right hon. Friend of economic illiteracy. It was he and others who said last year that the public sector borrowing requirement could not be financed without printing money, but my right hon. Friend achieved that. The question is whether we can do it without increasing interest rates, and I draw attention to the fact that last year we achieved falling interest rates. The question is: can we do it again this year? Can we finance it again this year?

The £12 billion is slightly lower than last year as a proportion of national income, and it is quite a bit lower than the public sector borrowing requirement that we estimated three or four months ago. We think that we can finance it this year, and for several reasons: first, because the savings level remains high. It is much higher than it traditionally is in this country. Indeed, this is a worldwide phenomenon. Throughout the industrialised world the savings ratio has gone up, and it is for this reason, among others, that throughout the world the borrowing requirements of central Governments are higher than they normally have been. Indeed, our Government's borrowing requirement is not out of line as a proportion of our national income. We believe that we can do it consistently with a fall in medium- and longer-term interest rates. We believe that at the moment, in the present economic conditions of the country, we can do it without crowding out other prior commitments on national resources because the rise in investment, which will come, will be gradual.

Conservative Members shake their heads, but I remind them mat they were shaking their heads on exactly the same matter a year ago. However, there is one proviso, and it is important in the context of the Budget—that is, to achieve a reasonable settlement on the pay front. Another among the many reasons for achieving a reasonable settlement is that only in this way can we hope to sustain the proposed public expenditure level in 1976–77. My right hon. Friend yesterday in his Budget speech drew attention to the fact that it was not only by monetary means that he might have 10 take action to avoid an explosion of the money supply. The implications will be clear to the House.

May I, as the Minister responsible for national savings, refer to the contribu- tion of national savings to the borrowing requirement? In 1975–76 national savings made a useful contribution to financing the borrowing requirement. Their direct contribution was some £460 million. In addition, the National and Trustee Savings Banks Investment Accounts financed a further £200 million by their take-up of public sector securities.

The two experimental index-linked savings securities have both met a social need and made an important contribution to the total. The elderly have bought some £250 million of the retirement certificate. Contracts under the Save-As-You-Earn Scheme now amount to £4 million a month. These two index-linked schemes appear to have achieved their aim of providing a degree of protection to two groups of savers who were particularly vulnerable to the effects of the very high rate of inflation which was experienced in 1975. Inflation is now falling, and our target is to bring the rate down to the level of that of our main competitors. Given this, the Government do not anticipate any further extension of the index-linked schemes.

I have one change to announce in the terms of national savings securities. In the past, Ministers have taken credit for announcing new issues with more generous terms, although those generous terms have been possible only because of the upward trend in interest rates and the rate of inflation over the last two decades. Today the position is reversed. Interest rates are generally lower now than a year ago, and significantly lower than two years ago, when this Government took office and when the present terms for most of the national savings securities were fixed. This fall in interest rates is a reflection of the success so far of our counter-inflation and monetary policy. But it has meant that we have had to look again at the costs of borrowing through national savings. We have decided to make a change in the terms of the British Savings Bond, which is the national savings security with terms most analogous to those of marketable securities. The next issue, to be introduced in mid summer, will have an 8½ per cent. coupon and a tax-free bonus of 4 per cent. on maturity after five years.

This next issue will be known as the Jubilee issue. The National Savings Committees for England and Wales and for Scotland are celebrating their sixtieth anniversaries this year. I am sure that Members on both sides of the House would wish to join me in paying a tribute to the work which has been done by the hundreds of thousands of voluntary workers who have contributed to the work of the movement over those years. During its history the movement has responded to a variety of challenges and demonstrated the essential flexibility which we have come to associate in this country with voluntary organisations. I hope hon. Members will join me in that tribute. Most recently, the movement has started to develop a new small savings scheme to replace the national savings stamp, which had outlived its purpose and was being abused rather than used. The stamp will be withdrawn from sale on 31st December 1976.

As the many hon. Members who concern themselves with the affairs of old-age pensioners will be aware, one use of the national saving stamps in the recent past has been as a means of enabling pensioners and others to save so that they could pay for their television licence. The Government have accepted that there is a need to provide some substitute when the national saving stamp is withdrawn, and the Home Office will today be making an announcement about the introduction of a new television licence stamp.

On behalf of the Government, I wish to express thanks to Lord Elgin and Sir John Anstey for their leadership of the national savings movement.

While I am dealing with these questions, it may be appropriate to refer to a proposal—which has come from many sources, such as the CBI, the Sandilands Committee and other bodies—for the establishment of a Royal Commission to review the tax system, an idea about which I believe that the Opposition are not enthusiastic.

Mr. John Pardoe (Cornwall, North)

We are.

Mr. Dell

I think that the Liberals are enthusiastic, but I was seeking some encouragement from the attitude of the Conservative Opposition.

It is some 25 years since the last Royal Commission—the Radcliffe Commission —was set up. Since that Commission reported in 1955 the tax system has greatly changed. A review of the system in its entirety would be a massive task and would take many years to produce results. Effort that might be used for improving the tax system over the short term would be seriously diverted. My right hon. Friend the Chancellor has, therefore, authorised me to say that, having carefully considered the case for a major review of the tax system through the means of a Royal Commission, he has come to the conclusion that it would be neither opportune nor the best way of bringing about improvements in the system.

That improvements in the system are required we do not question. However, we believe that it is better to continue to employ existing consultation procedures which have been developed since the Radcliffe Commission reported, such as Green Papers, publication of draft clauses, and Select Committees on specific aspects of taxation, as well as consultation arrangements with representative bodies. It appears to us that, taken together with the means that are already at the disposal of the Government in examining aspects of the tax system and which will continue to be developed, these other methods are more effective and probably more speedy than a Royal Commission would be.

I have now finished my text and I can return to the speech of the right hon and learned Member for Surrey, East. He recommends to my right hon. Friend higher profitability for British industry. There has been criticism that the Budget does not provide sufficient incentive for British industry. I must say at once that there is every sign in British industry of growing confidence at this moment and a growing determination to take advantage of the opportunities that exist.

In a mixed economy, the private sector has a rôle which it should perform without constant cries for assistance which existing constraints make impossible. I leave aside, without detailed comment, the various matters which my right hon. Friend referred to in his Budget speech such as the extension and improvement of the stock appreciation scheme, the promises of stability in taxation, the various selective schemes developed over the last 12 or more months and the encouragement which we are to give to provision of medium-term finance.

The main help to British industry would be encouragement to keep down industrial costs at a time of an expanding world market and to give it greater certainty about its costs, because one of the main difficulties and dangers from inflation is uncertainty about costs. If one can provide certainty in this respect, as the incomes policy—the £6 policy—is doing at the moment, and as the policies outlined by my right hon. Friend yesterday would do, this is the greatest possible assistance which could be given to British industry. Moreover, my right hon. Friend has ruled out any general reflation which would suck in imports and divert attention from export opportunities, which would end only in another stop. In short, British industry now has considerable opportunity and we are looking forward to export-led growth, which is the secret for the recovery of British industry.

I turn now to what was said by the right hon. and learned Gentleman about the constitutional issue and whether the Chancellor's proposals take away from the prestige or power of Parliament's right to legislate.

First, I assure right hon. and hon. Gentlemen opposite, were there any need, that Parliament will, as ever, determine the level of taxes. Parliament has two opportunities to debate these proposals. It can debate them now, and it will debate them in June when my right hon. Friend brings forward his final proposals.

There is nothing new in the fact that wage settlements affect economic management. They did so during the period of the Conservative Government under the right hon. Member for Sidcup (Mr. Heath). The incomes policy which he tried to work out with the unions should have affected the economic management policy of his Chancellor, because incomes policies have an effect on inflationary pressures.

My right hon. Friend's offer means that he is facing the country overtly with what has for years been the truth—that wage settlements are a vital factor in demand management. If my right hon. Friend had come forward with unconditional proposals and his assumptions re- garding wage settlements had proved wrong, he would have had to take corrective action. Would that have been regarded as detracting from the power, prestige or other quality of Parliament?

The real constitutional issue is whether the Government proceed by co-operation, which can mean lower employment, or by confrontation; in other words, by attempting to ignore the views and intentions of large and powerful sections of the community.

The real alternative to a policy of cooperation is the Phillips Curve—an attempt to reduce the power of organised labour through the mechanism of higher unemployment. Whatever justification there could be for such a policy—and we on the Government side of the House rule it out—there can be no justification for any such attitude given the co-operation of the TUC on the £6 policy and the success of that policy.

In the light of that success, the least that the Government can do is to show the TUC the facts as to what is required; to get inflation down, to get exports booming, and to get our industry revived and renewed. There is also the need to offer an incentive, as my right hon. Friend has done, to the adoption of an appropriate incomes policy.

I believe that the instinctive democratic reaction, as the Leader of the Opposition called it yesterday, was ill-advised. The right democratic instincts preach cooperation. I need only refer to one other notably democratic country—Norway—which last September, under rather different conditions, adopted a similar strategy.

Sir John Hall (Wycombe)

Does the right hon. Gentleman agree that for the Chancellor to make his decision on possible tax changes dependent on the decision of a minority of people in this country is likely to be socially divisive? Is it not likely to make a large section of the population antagonistic towards the trade unions if they give an unfavourable reply?

Mr. Dell

I think that the large majority of people will understand that wage settlements are a decisive factor in economic management. That cannot be escaped. It was not only the decision of the TUC which made the £6 pay limit a success, but the general co-operation of the population as a whole. That is exactly what we hope to achieve on this occasion as well.

Mr. John Nott (St. Ives)

Will the tax allowances be directly adjustable to the level which the Chancellor manages to agree with the TUC? If he gets £4 a week instead of £3 a week, will the tax allowances be directly adjustable to that amount? If by any chance the savings ratio changes between now and July, will that have any effect on the tax allowances which the Chancellor decides upon in July? Will the Paymaster-General enlighten us on that?

Mr. Dell

I am sure that the hon. Gentleman will remember a famous phrase which appears in the speeches of all Chancellors of the Exchequer and is the most relevant response to his question—namely, that my right hon. Friend will, as ever, stand ready to take any measures which the situation requires.

I come now to the question whether 3 per cent. is all that can be done if we are to meet an inflation rate target at the end of 1977 comparable with that of our main competitors. My right hon. Friend is not attempting to dictate either the amount of the pay increase or the structure of the policy for incomes—for example, how much should be by percentage and how much should be by flat rate or otherwise. He is saying what, in his judgment, is best for everyone.

First, I emphasise that 3 per cent. is the highest which can be conceded if we are to be able to rely on meeting our inflation target. Certainly 7½ per cent. or £5 will not meet the TUC objective of achieving a reduction in inflation well below 10 per cent.

Secondly, we do not achieve better standards of living—surely recent history proves this—if we go for larger settlements irrespective of increases in production and productivity. Last year, as my right hon. Friend said, income from employment went up 29 per cent. whereas real personal disposable incomes barely moved. In those circumstances, the only way of sustaining a higher standard of living is by borrowing abroad, and we cannot borrow abroad on the 1974 scale to sustain our standard of living.

As the House will realise, 3 per cent. will not be the only influence on end-1977 price levels. Many other influences will affect price levels at that time whether the figure be 3 per cent. or any other. The first factor is the overhang from previous wage settlements. The £6 pay limit, together with the transitional provisions and the effect of the Equal Pay Act, is expected to result in increased earnings of something like 13 per cent. That is bound to have a continuing effect on prices at a time of decelerating inflation until about a year after the end of the wage round.

Another factor which affects prices is exchange rate depreciation, which compensates for the fact that our rate of inflation has been higher than that of our competitors. That, too, must have an effect on prices in the United Kingdom not only now, but ahead.

Then there is the movement of commodity prices. In 1975 we benefited from a fall in world commodity prices and from a sharp improvement, from our point of view, in the terms of trade. This year commodity prices may move against us as the world economy turns up. It is no use trying to compensate for that by higher pay.

Mr. Peter Hordern (Horsham and Crawley)

The right hon. Gentleman cited the increase in past wage claims coming through. What does he estimate will be the increase in earnings from July this year to July next year?

Mr. Dell

That will obviously depend on the agreement which is made. The point I am making is that factors other than the nominal rate of pay limit will affect prices. Among them, in direct answer to the hon. Gentleman, are such matters as the amount of increasing overtime and the movement of people from job to job which becomes easier at a time of expanding economy. Such matters must have an effect on the working of the labour market and, therefore, on the actual result of any agreed pay limit. If we have a 3 per cent. pay limit, we should expect the final outturn to be more than that by 1 or 2 per cent. Indeed, even if we had a complete wage freeze there would be some earnings growth as people changed their jobs or worked more overtime. No doubt there will be long discussions regarding these figures, but I should like to make these positive points about the situation. First, my right hon. Friend's proposals regarding tax compensation mean that the majority of the working population will be better off at a lower limit than at a higher limit. Second, in this way, by accepting 3 per cent., we can at last release the forces of economic expansion from which we can all benefit, forces of economic expansion which will lead to higher exports and higher investment. This will make it possible for the economy really to take off into self-sustaining and faster growth, and that is the main interest of the whole of our working population. Moreover, thirdly, this is the way to get unemployment down and meet the 1979 target. If, on the contrary, we drift along at higher rates of inflation than those of our competitors, we shall never surmount our problems, even with North Sea oil, that exaggerated panacea. We shall have higher unemployment than we know now.

My right hon. Friend has opened up an opportunity, and I hope that the country takes it.

5.11 p.m.

Mr. Jeremy Thorpe (Devon, North)

The right hon. Gentleman the Paymaster-General devoted the latter part of his speech to the question of the bargain that the Chancellor of the Exchequer has proposed in regard to the trade union movement about taxes and wages. I happen to think that this is the most important aspect and factor in this Budget. Not only is it the basis of this Budget; whether one agrees or disagrees, I think it is fair to say that the whole management of our economy depends upon the outcome of these negotiations.

I say straight away that I accept that constitutionally it is without precedent to have the budgetary decisions awaiting the subsequent approval or rejection of a non-parliamentary group. To that extent I am not altogether happy about it as a constitutional departure, but I say straight away, without equivocation, that I hope that it succeeds, and I think that it deserves to be supported. I say that because, whether or not we like it, it is a recognition of the present balance of power in our society. The fact remains that this is the power balance in which industry is now organised. I happen to believe that that power should be transformed. I should like to see ownership and management power more widely spread and shared at both shop floor and plant level. However, that is not the issue in this debate.

The fact remains, however, that other Governments, such as those of Norway, Sweden and West Germany, have entered into agreements with the trade union movements in their countries, to the benefit of not only the trade union movement but the country at large. Therefore, I believe that we should be very hesitant before we accept the almost automatic rejection of this policy by the official Opposition, because if this agreement could be reached it would be of immense value to our economy.

What the Chancellor is saying is that in return for about £1,000 million in tax rebates he would expect wage increases to be limited to 3 per cent., or £2. Without going into the details, I regret—if I am wrong, perhaps I may be corrected—that those tax rebates which are conditional include the single-parent family rebate. I should have liked that to be unconditional, but that is a point in passing.

This approach by the Government is a very different story from the approach of the Chancellor in his first 16 months of office. Then a Labour Government dismantled the apparatus of the Relativities Board, set up under phase 3, which might well have made an award within phase 3 that the miners were prepared to accept. Instead, the present Secretary of State for Employment, the right hon. Member for Ebbw Vale (Mr. Foot), entered into a settlement with the miners which was an indication to everyone else that the social contract meant just whatever one happened to want it to mean. We saw wages rise by 30 per cent. in one year, and we saw prices rise by 20 per cent. over the same period.

Therefore, we have had wage inflation coupled with inflated Government expenditure, which has now produced a sky-high level of unemployment, high inflation, an unparalleled balance of payments deficit and an enormous debt burden. In a sense, therefore, however difficult the case that the Government will have to argue to the TUC, the stringency of the case that they will have to put forward has been largely self-inflicted by the results of their initial period of office.

If anyone is in any doubt about the adequacy of the Government's economic policies, he need look only to an external commentary—namely, the fact that since February the pound has been devalued by a weighted average of about 7.3 per cent., which probably represents £800 million of real disposable income, or eight-tenths of the tax rebates that the Chancellor is now offering. Again, if one takes any account of the J curve, much beloved of economists, one finds that even that devaluation will have every little effect until about 18 months hence.

However, for the Government, this represents a dramatic change in their approach, and it is to be welcomed. I believe that the £6-a-week policy has given us a chance of surviving. I do not put it higher than that. It was an important start. The right hon. Gentleman the Paymaster-General said that the figure of increased earnings, in real terms, is not the 10 per cent. represented by the £6, which is £6 on wage rates, but something nearer 13 per cent. on earnings. I accept that figure. That is why I think that even if we achieve the 3 per cent., as the right hon. Gentleman said quite fairly, one cannot take into account what the percentage increase will be overall because one does not know how much uptake there will be in the economy, and how much people will be working more overtime. However, I should have said that it would be nearer 5 per cent.

I also deduce from what the Chancellor said, as it was being stated as negotiable, that if he was asked what he would like in the best of all possible worlds, it would be virtually a nil norm, and that clearly 3 per cent. is as far as he could possibly go in the current state of the economy. That should be made clear at the outset.

What I find interesting is that what the right hon. Gentleman proposes to do is to shell out tax rebates in return for a low norm as opposed to having a tax clawback, probably through an inflation tax on those who go beyond the norm. But even if he is successful or partially successful in the first objective—namely, using tax rebates for the purpose of achieving a low norm—he will still need some form of clawback either for those who breach the policy or for those who do not accept it.

The second problem that the Chancellor has to face is timing. He says that he wants this matter to be determined by June. I am not certain that he will be successful. I hope that I am wrong and that he succeeds. Len Murray has already said that the matter must go to the TUC. Even after a special conference of the TUC I think that we should find many individual unions wanting to put the matter to their members first. If that situation were to arise and there were a real chance of getting agreement, my advice would be not to be in too great a hurry, because the backdating of the rebates to the date of this Budget would still stand.

Then we must ask the question, what would happen in the interregnum between the expiry of the £6-a-week limit at the end of July and the possible agreement in September or October to the £2 or 3 per cent.? This will be a very difficult transitional period, and we must face that problem. What would happen? Would the £6-a-week limit be extended and would those who were in breach of that policy find that the only penalty was that which exists at present—namely, upon employers? If so, there would be a great risk of a rush to settle at £6, with the probability that by October one could settle for only £2. Those who got a settlement of £6 when the rest agreed to £2 could gain retrospective enjoyment of tax rebates as if they had settled for £2. This is a difficult problem. It may be that for that period of two or three months there will have to be a nil norm. It is certainly something that the Chancellor must think about.

However, let us suppose that the TUC agrees and that there are one or more unions that are out of step. What will be the position then? Will the Chancellor claw back the extent to which the rebate has been absorded in increased wages, and if the increase goes beyond that figure—which is highly probable, because we are not talking about immense sums—will he then have an inflation tax to claw back the surplus? Unless he does that it will be unfair to those who have settled under the TUC agreement and a further Finance Bill will be required in the autumn.

If the Government fail to reach agreement with the TUC the decision will rest with the House. The House will have to determine a norm, which may be the 3 per cent. or £2 mentioned, or a higher norm, with clawback powers through an inflation tax. If that happened the Government would, in effect, be introducing a statutory prices and incomes policy, however much they may wrap it up. I hope that when that happens the attitude of the two Front Benches will not be as automatic as it has been in the past. For instance in 1966, when the Labour Government tried to introduce control, the Tories automatically objected, and in 1973 the rôles were reversed. In 1975 there was a minor difference, because the Tory Front Bench merely abstained.

I can envisage a situation in which the Government of the day may not only find that they are faced by the opposition of the TUC, but will fail to get a majority of members of the Parliamentary Labour Party to support such a statutory prices and incomes policy. That would not be a new experience. We saw it last month, over public expenditure policy, and before that on the European issue. If that happens it will be the responsibility of the House try to agree a prices and incomes policy which may not have the majority support of the Labour Party but is one which will work. Nothing would give greater confidence to industry than for the House to agree on some form of control which would last.

If we fail to get an agreement along those lines, wages and prices will escalate. Higher wages and prices will increase demand and suck in imports. The balance of payments will worsen, with a further downward trend in the value of the pound. The outcome of the discussions is critical and the Government should be supported. I hope that they are successful.

The Chancellor of the Exchequer said that his first priority is to tackle inflation this year and public sector borrowing requirement the year after. We know what his objectives and targets are. He admitted that it would be a miracle if they were achieved. He has a greater belief in miracles than I. I regard his targets as wildly optimistic. The Chan- cellor has dismissed the view of the Cambridge economists—the Economic Policy Group. The Government are right to believe that they are likely to get growth in the first two years. But can it be sustained thereafter and can the Government keep their nerve and realise that the key to curing unemployment is to cure inflation first? In Germany, workers are more frightened of inflation than unemployment because they live in a society where there is some provision for unemployment, and there are historic reasons for fearing inflation.

The Cambridge group took the view that even if we were to reduce unemployment by one-third by 1980 we would require a 4 per cent. to 5 per cent. growth rate up to 1980 and that that would require a 20 per cent. cost advantage to the United Kingdom producers—equivalent to a nominal devalution in the pound of 40 per cent. with wages pegged at 7½ per cent. a year.

The Chancellor has rejected that strategy but has, understandably, been coy about the pound itself. How much is he prepared to tolerate a devalution? Are we to see the pound going to S1.50 by December or perhaps $1 in three years' time? The Chancellor has only three options. The first is to cut expenditure—I agree that this would have no immediate effect—the second is to increase taxation which has a disincentive effect, and the third is to print money. In two years under a Tory Government the money supply increased by about 60 per cent.—partly because they refused to cut expenditure—but finally in December 1973 the then Chancellor, now Lord Barber, got after the present Leader of the Opposition and the right hon. Member for Leeds, North-East (Sir K. Joseph), who were the great money spenders of that Administration. The tax cuts were regarded as a virility symbol of the Tories, and they therefore printed money.

The present Government have kept the money supply under close control. So long as the borrowing requirement is not financed by printing money, and comes out of savings, they deserve support. Although savings are high, at about 15 per cent., it has been possible to borrow money partly because there has not been much investment in industry. Industry is now running down its stocks, but when we get investment money again, the first thing we shall see is restocking followed by re-equipping. The Government will then find it more difficult to finance borrowing, and when that happens they must tell the House frankly what they are going to do about it.

The most important issue in the Budget is the result of the wage-tax bargain. The rest of the Budget is cosmetic face-saving, and the result of the zigzag political system in this country. It used to be a zigzag between the incoming Government and the outgoing Government, but now it is becoming a more refined process. It is now contained within one Government, between one Budget and the next. When a Tory or Labour Government went out of office they were promptly surrounded by academics, who were usually lunatics of the Left or the Right, and dictated lunatic policies which became part of the manifesto and therefore Holy Writ. We always expect Governments to bring in all the nonsense in the first two years and to bring in more sensible policies towards the end of their term of office. For that reason Professor Brittan said that a Labour Government deserved to lose in 1966, but of course they won, and that they deserved to win in 1970, but they lost.

We have had most of the stupid policies out of the present Government. They now recognise that the social contract cannot control inflation, and that is to be welcomed. The zigzags between the Budget this year and previous Budgets have been apparent. We all know that if the Chancellor knew last year what the effect of the 25 per cent. rate of VAT would be on the television tube industry he would not have introduced it. He was told what the effect would be in Committee debates on many occasions. He is now moving it down to 12 per cent., at a cost of £175 million. I do not see why he cannot bring it down to 8 per cent. for an extra £60 million. The television tube industry has sustained 41 different changes in taxes and hire purchase rates since 1960. No wonder there is uncertainty in the industry.

The Chancellor made changes in the higher rates of tax in March 1974. He moved the higher rate down from £5,000 to £4,500 but now he is moving it up to £5,000. It must be a nightmare to work in the Inland Revenue. He has given relief to small businesses, which we welcome. In March 1974 corporation tax was increased by 2 per cent., to 42 per cent., for small businesses. The Government have now seen the error of their ways and are saying that the profit level, for the lower rate of tax, should be increased from £25,000 to £30,000.

The Government have accepted as logical, fair and desirable every argument about capital transfer tax and farmers. They are now accepting the arguments which, a year ago, they rejected as totally impractical.

The Budget is a gamble to get an agreement. I hope that it succeeds. If not, Parliament will have to introduce some tough measures, and I doubt whether there will be a majority in any one party to carry the measures through the House.

I believe that what the country probably needs more than anything else is continuity, stability and certainty. A move in that direction on the questions of level of taxation and wages, incomes and prices would do more than anything else to restore confidence in our ability to expand and invest.

Sir Ronald McIntosh has suggested that policies for the NEDC should go beyond a single Parliament. I should have hoped for economic guidelines to go beyond not only a single Parliament but a single party. That would make people have some confidence in continuity and stability, as they have in West Germany, where whatever Government come in, there are basic economic guidelines which are certain and upon which people may bank and invest. If we have plenty of money to invest, there is little confidence at present to do so. That is what is required from the management of the economy.

I hope that in the short term the Government, in trying to fix the £2 or 3 per cent. wage limit in return for tax concessions, will meet with success.

5.31 p.m.

Mr. John Horam (Gateshead, West)

If I had some difficulty in understanding my right hon. Friend when he delivered his Budget Statement, I am in even more difficulty after the speech of the Leader of the Opposition, such was the complexity of the various hypothetical situations he described.

Mr. Thorpe

I thank the hon. Gentleman for referring to me as the Leader of the Opposition. I take the point gratefully. I have always been told that if someone makes a speech on economics that no one else understands it must be good.

Mr. Horam

There is probably truth in that. However, I shall not follow the right hon. Gentleman down that path.

To the accompaniment of the usual massive support from the Labour Benches, nicely balanced between the Manifesto Group and various non-aligned Members, I should like to make a few observations, first, on personal taxation and, secondly, on the various strategies that the Government might have adopted to deal with the more fundamental problems.

We are all aware of the effect of inflation on the real burden of taxation. It affects everyone, but it it affects most harshly those at the bottom end of the income scale. The statistics show that the combined effect of inflation and taxation on the poorest members of our society is horrifying. At present, £750 million a year is collected from people earning less than supplementary benefit levels, that is, people who are below the poverty line. Many pensioners who have only a tiny pension in addition to their basic national pension are already paying tax, to their horror. Many war widows with pensions are now on the brink of paying tax for the first time. Thousands of families are the so-called poverty trap. The number may well be increasing despite the Budget.

Given all that, I am bound to support the general view of my right hon. Friend the Chancellor that we must restrain expenditure in order to hold down taxation. Some of my hon. Friends, not here now, argue differently. They say that we should accept the increased tax burden in order to pay for the increased public expenditure that they regard as essential. I disagree. I believe that the benefit accruing to an individual, particularly at the bottom end of the income scale, from a certain amount of extra money in his pocket is greater than the benefit he would receive from the social provision supplied by withholding that money and providing extra public services. All my experience in my constituency supports that view.

Therefore, I support the general reliefs that my right hon. Friend has given in personal taxation. I also like the way in which he has tried to link his policy with that of the counter-inflation policy. It is a mistake to believe that ordinary working people will not understand the trade-off between a higher wage award and extra taxation. They talk of nothing else in Gateshead, and probably in other parts of the country.

The only argument against the sort of personal relief which my right hon. Friend has granted is that he is possibly taking a slight risk in giving them, as the economy is, anyway, clearly on the upturn, especially as all the evidence suggests that the upturn may be rather fast. It is a familiar mistake—one which has plagued us throughout our post-war history. I think that my right hon. Friend was well aware of it when he referred to his Budget as "almost neutral", using that expression to try to discount the possibility that some might regard it as excessively reflationary.

I do not believe that that is a reason for not giving the amount of relief that my right hon. Friend is giving. However, it may be a reason for restraining public expenditure rather earlier and more quickly. That may be water under the bridge now. I made the point last year and it may be too late to do anything more now. I prefer to have these reliefs even if offset by earlier restraint of public expenditure, accepting some risk on the side of demand management.

I turn to the question of personal taxation over the longer period. I think that my right hon. Friend the Chancellor has shown himself well aware of the difficult area of taxation paid and benefits received, which has become wholly muddled under the taxation and benefits policies of successive Governments. I am aware of my right hon. Friend's other burdens, and I know that he is always being asked to do a great deal, but I should like him to reconsider negative income tax. I was opposed to the tax credit scheme that the previous Government worked out in some detail, and I made my reasons plain. It was excessively inflexible, and the arithmetic was suspect. But its general approach, which has wide support in my party as well as in the Conservative Party, is fruitful, and I think that the Government will ultimately have to return to it, if they are to sort out this messy area at the bottom of the tax scale, where benefits and taxation are so hopelessly muddled.

In the short term, I hope that my right hon. Friend will continue to give priority to the wage-earners on the lowest incomes. On the whole, the Government have done very well by those who are not earning—the pensioners and other people receiving benefits. Now they need to turn their attention—for the rest of this Parliament—to the wage earner, particularly at the bottom end of the scale.

I should like next to say something about alternative economic strategies. Across-the-board import controls constitute such a strategy. Given the plight that the country faces, we must examine any alternative economic strategy very seriously. I have carefully examined that strategy over the months since it was first advocated by members of my party, the trade unions, the Cambridge Economic Policy Group and others. It is deficient in three respects. First, even acknowledging the very poor performance of the British economy, I must say that the latest report of the Cambridge Economic Policy Group is excessively gloomy, partly because of the methodology that the group adopts. For example, the way in which it calculates future wage trends seems to me extraordinarily suspect. It is totally statistical in its orientation, leaving out entirely any effect of the incomes policy, which we are now pursuing rather sucessfully.

Secondly, even disregarding that, I cannot see how import controls can make us more efficient. The essence of our industrial problem is that we are too slow to change. By its nature, protection will make us even slower to accept change. We are also too insular. One of my favourite newspaper headlines is a famous one from the 1930s, when The Times is said to have had the headline: Fog in Channel Continent isolated We have not gone much further, even in the 1970s. The likelihood is that protection would make us even more insular.

Finally, a policy of massive, across-the-board import controls is not ultimately one that we can sustain, given our position as a free trading nation within a Western world of mixed economies. I do not think that we should have the political will to maintain it. Therefore, it is useless to go down that avenue except as a final, desperate last resort if the Economic Bulletin prognostications are proved correct. It would be a policy of despair.

We do need, however, a much more tough-minded trade strategy. I very much agree with my hon. Friend the Member for Norwich, South (Mr. Garrett), who made a very good speech on the subject in the debate on the White Paper on Public Expenditure. We have let industries be severely mauled by suspect foreign competition, almost at will. We have been too slow in reacting to the obvious and clear-cut foreign threats, which go well beyond any normal meaning of fair competition. We have damaged industries ourselves by our tax policies. There is some small recognition of that in the Budget, in the reduction of the higher rate of VAT. This is simply traditional British foolishness and it cannot go on. It has gone on for far too long. At least I welcome this small concession to reality in the Budget.

We are at last managing to operate our exchange rate policy sensibly. We were at one time constantly caught out in this area. At one time the French were smarter than we were. For once we have got ahead of them, much to their annoyance, and I am glad. It is time that we started to pursue a trade policy with far greater ruthlessness and regard for our own self-interest. Although we cannot carry this too far in a free trade world, there is room for a greater element of coherence and consistency in the way in which we approach our total trade policy.

I reject calls for a total siege economy, with all that means, but at least it is a clear strategy. What worries me about the present approach of the Labour Government is that, although there is much to be said for all individual items in the package, there is, I fear, beneath it a lack, not so much of strategy but of philosophy.

Our national problem is one of excessive resistance to change, as I have said. What we take five years to do, our major competitors seem to manage in two or three years. It has much to do with what Willy Brandt recently called "our damned class system". We have deficient business management, over-defensive trade unions, decrepit institutions—indeed we are now sitting in one—and a fatal tendency to settle for the easy fife. These are the elements of the British disease.

If that is the truth, or near it, one of the best ways of shaking up this whole damned business is to expose as many people, companies and institutions as possible to competitive market environment. That sounds like a splendid Tory sentiment. But before I admit to that, I should point out that I have with me a pamphlet written by V. I. Lenin, written in 1917 and called "How to Organise Competition"—not all the best tunes are Tory!—in which he said: Far from extinguishing competition, socialism, on the contrary, for the first time creates the opportunity for employing it on a really wide and on a really mass scale, for actually drawing the majority of working people into a field of labour in which they can display their abilities, develop the capacities, and reveal those talents, so abundant among the people whom capitalism crushed, suppressed and strangled in thousands and millions. Now that a socialist government is in power our task is to organise competition. Those are splendid sentiments.

I believe that there is great truth in the cross-party argument about the need for competition, but the problem of a return to competition by conventional means—in other words, within the conventional ownership framework—is that it is bound to stir up those very class antagonisms which are the albatross around our necks and the source and origin of many of our economic problems. Therefore, we must combine moves towards a more competitive environment and a more rigorous use of our resources with moves towards a wider ownership of industry, and to greater participation, whether one calls it workers' control or something else.

The revisionists in the Labour Party may thus have been wrong when they said that ownership was not the central issue in the Socialist debate. In addition to changes in ownership we also need a proper planning framework to handle the increased competition which I see as part of the regenerative process.

All this is an over-simplification, and of course there are many difficulties. It will take a long time to cover the ground, and we must proceed slowly. But market Socialism, which is what I am essentially talking about, has within it some elements that will contribute to a creative solution of the problems Britain faces.

Here I find myself agreeing with many of the sentiments and actions of my right hon. Friend the Secretary of State for Energy when he was in the Department of Industry. When we examine the three experiments he conducted—at Kirby, Meriden and Glasgow, with the Scottish Daily Express—despite all the Opposition said about those experiments at the time, we must agree that they achieved manning levels and wage restraint that would have been inconceivable in a conventional private or public ownership situation. That happened because the workers in those organisations felt that they were working for themselves. They felt that spirit that arises from a type of organisation where there is no longer the traditional kind of ownership.

There are possibilities in this respect, which clearly must be explored over a great length of time. We are only at the beginning of an intellectual understanding of the problems that arise from this pattern of ownership. But therein lies the possibility for uniting all the elements of British society—a society which at the moment is divided—so that they may contribute creatively towards a solution of our problems and perhaps even set an example to the Western world.

5.47 p.m.

Dr. Alan Glyn (Windsor and Maidenhead)

I agree with the hon. Member for Gateshead, West (Mr. Horam) about the importance of competitive industry, although his remarks, judging by the quotation he made from Lenin, may have been based on a false premise. The hon. Gentleman also made a good point when he referred to the restriction of expenditure. Unfortunately, the Government have not achieved enough in that area.

The hon. Gentleman referred to negative income tax, and that comment will find agreement on the Opposition Benches as well as among some Labour Members. The hon. Gentleman also mentioned the difficulties involved in import controls and referred to the implications that would follow. I agree. We must rely on our competitiveness and not on import controls.

The Leader of the Liberal Party made an important point when he said that he hoped the Government's strategy would succeed, adding that if it did not succeed he anticipated that it would be necessary to make adjustments in an autumn Budget.

I thought that the Paymaster-General was extremely optimistic. He spoke of savings of £400 million. Savings comprise one of the most efficient and important ways of maintaining our growth, but they are very small compared with the figures—£12 billion—which we are discussing today. The Minister also mentioned wages, and nobody would dispute the importance of control in that area of the economy. He also referred to the astronomical rise in prices of commodities.

In a short contribution, I wish to deal with the question whether the Budget will lead to increased production and the future expansion of industry. I do not believe that it will. The Budget will have significant meaning not only to people at home but to people abroad. I believe that if its provisions do not succeed, it may affect future generations as well as ourselves. We must increase production and our export performance.

Let us examine the background of the situation. We are discussing the Government's strategy at a time when the economic climate of this country is serious. We are probably facing a more difficult and dangerous economic situation than existed in the 1930s. We also have a level of unemployment which is regarded as unacceptable by both sides of the House.

We must not keep saying what the Conservatives did in the past and what the Government are doing now. We have problems which are so immense that they require a national effort to solve them. I get slightly bored, as do other hon. Members, with the repeated invidious comparisons that we hear in the House. They may be necessary on occasions, but the crux of this debate is how to get out of an extremely dangerous situation. We were discussing the same problems last year, except that the pound was worth more than $2 then and it is now worth $1.8 and the balance of payments position has got worse. Twelve billion dollars has been borrowed, but not to finance a programme of increased production. Production is only fractionally higher now than during the three-day working week. This borrowing has not achieved the production increases for which we are all looking.

My right hon. Friend the Leader of the Opposition made some very important points yesterday and laid emphasis on the cardinal criminal in the current situation—public expenditure. If we continue to allow this monstrosity to increase, we shall be feeding one of the most danger-our animals in our society. We have allowed it to override everything else while also extending nationalisation. Neither of these actions can possibly help our productive capacity.

Of course we welcome any benefits in the Budget, but they are too small and they do not touch on the most vital issues.

It has been claimed that the Chancellor has handed over responsibility to the unions. My hon. Friends and I believe that we should have a working agreement with the unions but that we should always recognise that union members are not the only people in this country. I fear that the Government's proposal lays the foundation for control of our affairs to be taken away from Parliament.

The Paymaster-General said that Parliament retailed the right to control taxes. I agree, but I am not happy about the way in which the Government are handling the situation. We have put the cart before the horse. We should have an agreement with the unions, but it should be for Parliament to decide how our affairs should be conducted. Trade unions are an important element in this country and should be recognised as such.

Mr. J. W. Rooker (Birmingham, Perry Barr)

Would not the hon. Gentleman agree that it is absolutely vital that trade unions are brought into the central management of the economy? It was the constant boast of the right hon. Member for Sidcup (Mr. Heath) that he had got trade unions more involved in the management of the economy than any previous Prime Minister. That was probably so. If the previous Labour Government had done the same, the right hon. Gentleman would probably never have been Prime Minister. The Chancellor of the Exchequer is proposing an extension of what was started by the right hon. Member for Sidcup.

Dr. Glyn

I am glad I gave way. My right hon. Friend the Member for Sidcup (Mr. Heath) and my right hon. Friend the Leader of the Opposition adopt the same attitude as I adopt. We have to live and work with unions. They are an estate of the realm. We should negotiate with them, but we should not allow our affairs here to be dictated by them. The Government's policy is a tremendous gamble. If it does not work, the dangers to the country and the economy could be disastrous.

Reference was made earlier to the fact that an unemployed man with two children could be better off in our society than a man at work. I know of many such instances in my constituency. This is the sort of thing that this House should be considering and tackling. When an hon. Member opposite suggested that there were abuses, he was howled down. Of course there are abuses, and it is our job to stop them. There is nothing more frustrating than for a man at work to find that his unemployed neighbour is receiving more money through unemployment benefit and, possibly, working on the side as well. We know this happens. I do not think hon. Members would quarrel with me. I am sure that Labour Members would never be a party to this situation, and it is the job of the Government to ensure that abuses are minimised and, if possible, cut out altogether.

This is the Budget of a big spender. We are mortgaging our future, not only with capital but also in the servicing of the debt we are incurring because of Government policy. The Government will be dependent on the future possibilities of North Sea oil. Let us hope that it works, but it is a tremendous gamble. That is why I say that this is a gambler's Budget, and it is a very dangerous one.

The first thing we must do is to cut public expenditure, stop nationalisation, make it more attractive for people to save and work—with overtime if they wish—and create a situation in which working overtime and building up a business is laudable. This Budget does not do that. There are some reliefs for small farmers and small businesses, but they are not enough. Initiative and enterprise built up this country. If we lose these qualities, we lose both a great heritage and future.

The Government have overspent and should tell the country squarely that, as Lord Hailsham once said, we are in debt. The pound is in hock. The country faces severe economic dangers, and we cannot afford many of the schemes we would all like to see. I am convinced that we must take the people of the country into our confidence. If we want more hospitals, roads and schools, as my right hon. Friend the Leader of the Opposition said yesterday we must realise that they have to be paid for. We must adjust our expenditure according to our means.

That is not to say that this country has no future. We have the resources, the power and the initiative. It will take a long time to pay off the debts, but let us work together, let us have no factional discord, let us build up our production and our capacity, ensure our defences and go forward with free enterprise, showing the rest of the world that we are still a great country.

6.0 p.m.

Dr. Jeremy Bray (Motherwell and Wishaw)

I am sure that the whole House shares the sentiment expressed by the hon. Member for Windsor and Maidenhead (Dr. Glyn) in wishing to encourage enterprise. That sentiment is shared by business men and trade unionists, and the Budget is concerned with the nation as a whole. I was interested in what the hon. Gentleman said about the powers of Parliament in relation to the proposals made by the Chancellor of the Exchequer in the Budget, and I shall return to that subject.

I congratulate my right hon. Friend the Chancellor on a remarkable Budget which contained some notable innovations. The courage and imagination of his conditional offer of tax reductions deserve to succeed, and in everything I say I shall try to help it to succeed. The proposition that the smaller the wage increase the bigger the rise in real take-home pay will take some putting across. The Chancellor did better in eight minutes on television last night than he did in two and a half hours in the House. I am told that the Cabinet spent rather less time than did the House on the Budget but understood it better than did hon. Members after the Chancellor's speech yesterday.

The first reaction of trade union leaders last night showed how wide of the mark was the Leader of the Opposition's criticism, echoed by the hon. Member for Windsor and Maidenhead, that the Chancellor was removing from Parliament the decision on taxes. The right hon. Lady made a remarkable speech, and that was perhaps one of the weaker passages in it. No one who saw and heard Len Murray, Hugh Scanlon and Jack Jones on television last night could mistake them for barons who had just been given control of the country's finances. A more perceptive remark was made by an Opposition Member who, when we were watching television upstairs, said he could not think why the Chancellor had not first squared the trade union leaders. I suggest that he did not do so out of respect and out of their respect for Parliament and our traditions, whether or not those traditions are unduly stuffy as my hon. Friend the Member for Gateshead, West (Mr. Horam) believes.

The real decision rests more firmly with the House now than it did before. It is not possible for the House to determine both the level of taxes and the effect on real demand. If we want to influence real demand, we want to know first the pay rises to which the nation will help itself, so that we can set the taxes accordingly. This increases rather than diminishes the control which Parliament exercises over the economy.

When we made our tax decisions previously, the Government, the Bank of Engand, the unions and industry made them mean something different from what we intended, whereas now the Chancellor has proposed that we should say what we intend to be the effect of the tax changes. Our final decision on the means we adopt follows after others—in this case at present the trade unions—have said what they will do. It is a principle, a recognition of realities which is bound to be extended, and it increases rather than diminishes the authority of Parliament in a democracy. It could be said to diminish the authority of Parliament only if Par- liament were assumed to be the absolute power in a totalitarian or authoritarian State, a view which the House would utterly reject.

Undoubtedly, the trade union leaders have been put on the spot—not perhaps in the Edgar Wallace sense of the word, but in a very real sense. I believe that they have the dexterity to use the situation to strengthen the unions and the country, as the Government are also seeking to do in ways which I shall suggest.

The trade union leaders have been put on the spot because 3 per cent. offers very little room for manoeuvre on differentials or productivity after a year of flat-rate increases. Workers as a whole may do better the smaller the wage increases. This year, most benefit will come in lower price increases and lower tax payments, neither of which will be seen as being directly achieved by the unions to which the workers belong or by the activities of their union leaders. There will be little scope within a 3 per cent. limit for any adjustment to the rate of pay of the miners relative to the average industrial wage, or to the differential between tool-room workers and production workers in motor car factories. The position of productivity deals, which have virtually been brought to a halt, will be difficult. Either the rules are lax, in which case everyone will drive a coach and horses through them, or they are tight, in which case productivity increases and necessary changes in working practices will be held up, as they are currently being held up.

I suggest that the situation is containable if the very respite which the Chancellor is in effect proposing on company-level wage bargaining for yet another year is used for putting plant, company and industry level bargaining on to a much more solid basis for next year and subsequent years, with a greatly extended scope for the subjects covered in collective bargaining.

The prize of conquering inflation should not be underrated. The persuasive powers of the Government, which I am sure they will bring to bear, will be effective in putting across the deal in the nation and on the shop floor, but the realities of industrial life and collective bargaining still call for other steps if the Government are to succeed. I suggest that the unions should be put in the position of saying to firms what the Chancellor is now saying to them—"If we do this, will you do that?" That should apply across the whole field of company policy, including investment, distribution, of dividends, marketing policy, new products, research and development and so on.

The unions, the Government and a great many employers are all trying to extend the scope of collective bargaining. To this end the Employment Protection Act requires employers to disclose to unions information without which, in the words of the Act, they would be impeded in collective bargaining. The Act does not say what that information is, still less does it say what use the unions or employers should make of it. I have suggested to a number of unions that the information they should ask for is not simply the management accounts, which they would find rather indigestible and which relate only to the past, but a financial model of the company which gives them the sort of choice at company level which the Chancellor has offered at national level in the Budget. It should relate alternative wage settlements and working practices to the prospects for employment and incomes in six months', a year's and two years' time and bring in the wider aspects of company policy. The response from the unions I have talked to has been remarkably enthusiastic.

It is far too early to say how it will work out. In normal circumstances I would hesitate to ventilate the proposal until we have gained more experience. But because it might just help in the present situation I shall venture to suggest how the Chancellor might offer the unions a realistic prospect of tackling differentials and productivity problems and give them a job to be getting on with now in preparing for the re-entry phase into free collective bargaining at the end of the second year. The re-entry phase is always the most difficult in incomes policy and it has often had least preparation when it should have had the most.

The negotiating unit, whether at plant, company or industry level, should produce on its own realistic assumptions—not assumptions dictated by the Government or by trade associations—figures for the next three years showing the effect of alternative wage settlements on the fortunes of the company. The alternatives should include one case giving a 3 per cent. per annum increase, the rate of increase of national productivity, in the average income per worker, and other cases giving higher or even lower rates of increases in incomes, in all cases giving their total effects on the well-being of the company.

Provided that the deal eventually agreed by unions and management met standards set in the particular industry and in relation to the firm's past, the firm would qualify for a grant or a tax allowance large enough to be difficult to ignore which would be divided appropriately between the employers and the enterprise. Management and unions would be free to seek the best deal they could get. By this means the Chancellor would be applying at the level of the particular enterprise the proposal that he is now seeking to apply in enormously difficult circumstances to the nation as a whole. At the enterprise level it would be a great deal more manageable.

The proposal still entails endless problems, the most obvious of which would be the treatment of non-commercial services and of the public sector. We already have a movement towards cash limits, and I see no reason why, within that framework, there should not be some scope for initiating agreements between management and union sides in putting forward proposals for wages and productivity jointly. That is a way of using management and unions as far as possible to monitor their own differentials and productivity changes while widening the scope of collective bargaining.

In an ideal world, I should like to see the experience of wider collective bargaining grow steadily, as indeed it will. But even initially it will offer greater scope and less rough justice than any alternatives I can visualise. It would certainly give the unions a great deal more immediate leverage at plant, company and industry levels.

Whether the unions in their own interest should accept the 3 per cent. which the Chancellor put to us yesterday will depend on how firmly the price and investment consequences will follow, in addition to the consequences of the tax proposals which are all that the Chancellor can guarantee. The price consequences affecting workers come mainly from other firms, and that calls for economy-wide measures which the Government will in any case be discussing with the TUC under the Price Code. But the investment, security of employment and future earnings prospects depend on actions within the workers' own firms which we on this side of the House feel that the unions should be in a better position to influence. That can be a part of this year's policy and negotiations, as soon as the unions can build up their interests in these matters at company level. I see no alternative to this widening of the scope of collective bargaining at plant, company and industry level which offers the flexibility needed to match, to succeed and to make a success of the Chancellor's remarkable Budget.

Dr. Glyn

Throughout the hon. Member's speech I have agreed with what he said about the importance of the unions and the workers. Surely it would be better to talk about the workers on the shop floor and the management, because there is a misunderstanding here. It is necessary that the ordinary man at the bench should understand what he is doing, rather as every soldier did under the late Field Marshal Lord Montgomery, and should appreciate the decisions. Those decisions should not be undertaken only by the unions and management.

Dr. Bray

The hon. Member is making the point that the basis of consultation and joint decision-making should extend throughout the whole structure of the company and right down to shop floor level. This is an important point which is advanced constantly by the trade unions and employers engaged in the actual business of industrial relations.

In defence of the Budget, may I say that I would have liked to see the Chancellor using much heavier guns than were used by the Chief Secretary in defending the Public Expenditure White Paper when he appeared before the Expenditure Committee, and by the Chancellor in the economic review at the beginning of his speech. I would not, and the Chancellor did not, minimise the importance of monetary factors in economic policy. But it is going far too far to say, as the Leader of the Opposition said, that the public sector deficit is the key to our future, and the size of the deficit dominates everything the Chancellor can do."—[Official Report, 6th April 1976; Vol. 909, c. 284.] It is a factor certainly, but it is not the only factor, and precisely how it should be treated is a matter for the most searching examination.

There are rumblings in the foundations of economics of which I am sure the right hon. Lady herself must be aware because she takes an interest in these matters. The prescriptions of fashionable economics correspondents cannot always be relied upon to summarise the debate on policy or analysis, and the wise politician looks deeper into history and contemporary events.

In a book which has been fluttering the economic dovecots, perhaps more in the United States than this country, in recent months—"On Keynesian Economics and the Economics of Keynes"—Leijonhufvyd, who felt uneasy about the treatment of monetary factors by latter-day Keynesians, and looking for an analysis with which to compare them, found it in Keynes himself by going behind the "General Theory" to his earlier "Treatise on Money". He suggested that Keynes's main contribution to economics was that prices, and in particular the price of money—namely, the interest rate—could not be relied upon to convey information and to measure and compare values in the condition of disequilibrium in which, of course, the economy always is.

Leijonhufvyd argues that the flow of information needs independent analysis and suggests that the introduction of control theory, or the analysis of information on which decision is based, is the true Keynesian revolution which did not come off. Keynes was blocked from pursuing this development himself—and I know your long-standing interest in Keynes, Mr. Speaker, and I hope that you will not take it amiss if I pursue the argument a little further—by a curious irony in his own background. In his earlier book "A Treatise on Probability" he committed himself to a view of scientific method in economics which 20 years later led him to make a slashing and illiterate attack on the first recognisably modern analysis of the trade cycle by the economist Tinbergen. So Keynes was cut off from the line of Popper, Tinbergen, Theil and Phillips which has opened the way to the contemporary analysis of economic policy-making.

Unfortunately, the literature is rather technical and is, alas, not in the Library. Most British applied economists have simply not read the half-dozen rather highly mathematical books and the couple of dozen papers which form the core of modern work. So the debate has polarised at a rather superficial level into monetarists, Keynesians and neoclassicists without any coherent underlying logic. If one wants a good argument on economics these days, one has to go to the United States, Warsaw or Belgrade.

The occupants of the Opposition Front Bench dance around on that rather flimsy stage of the popular debate proclaiming at fourth or fifth hand that the public sector borrowing requirement is the key to economic policy. In more modern vein, my right hon. Friend the Paymaster-General announced last Friday in a Written Reply to myself that Professor Ball of the London Business School is to be chairman of a committee on policy optimisation which will advise the Treasury on its whole approach to the making of economic policy. Only in that framework is it possible to give a coherent treatment of the testing of economic theory, the uncertainty of forecasts and the pursuit of consistent priorities in face of uncertainty; and within that framework, as a particular case, of course, due consideration of monetary factors.

I cannot anticipate what Professor Ball's committee will recommend, still less the conclusions of any policy analysis that may result. From the work that has been done, however, it is difficult to sustain a general money-rain theory of the relationship between aggregate money supply, current price gross domestic product and the rate of inflation, of which one hears so often from the Benches opposite. As for more local theories, my hon. Friend the Member for Gateshead, West has already questioned the methodology of Wynn Godley's "Economic Policy Review". Having followed his work over the years, when I read in Appendix B in Section 2 on Economic Methodology that the parameters are assigned a priori I fasten my seat belt for a bumpy ride. [interruption.] I assure you Mr. Speaker, that you are quite safe.

Mr. Speaker

I apologise. I did not intend to interrupt the hon. Gentleman. I merely said that I was putting on my own safety belt.

Dr. Bray

In Chapter 6, appositely entitled What is left of New Cambridge? Wynn Godley introduces a new variable—prices—into the balance between the public sector's borrowing and the deficit in the balance of payments. He can keep this theory going indefinitely by introducing a new explanatory variable each year, but he will not persuade many serious economists to listen to his analysis or advice.

By this time next year the House will have an opportunity to examine seriously the policy-making apparatus that the Treasury uses, because under Schedule 5 to the Industry Act, passed by this House at Report stage and redrafted by the Government in another place, the Treasury will be obliged to publish economic forecasts on alternative assumptions and to provide hon. Members—and, in fact, any person—access to the Treasury model, to make their own forecasts naturally on their own assumptions. I am sorry that we have not yet had any anticipation of that in the Budget this year because I myself am persuaded that, had we had that access, the job of the Chancellor in putting across his Budget would have been easier than it has been.

I am satisfied from what I know that the Budget reflects the priorities and takes the risks that I would regard as justified. But I would certainly conclude by saying that those risks contain a very large element of judgment on how the trade unions and our constituents will react to the remarkable proposals that the Chancellor has put.

I plead with hon. Members on both sides of the House, since this is very much a matter of public opinion across the country, to lend their weight to the proposals, which will enable the Chancellor to make the substantial cuts in personal taxation to which we all look forward.

6.24 p.m.

Mr. Peter Walker (Worcester)

We always listen with interest to the speech of the hon. Member for Motherwell and Wishaw (Dr. Bray). I was particularly interested in the first part of his speech in which he referred to what he considers to be the future relationship between employers and employees in negotiation. That was very important. Unlike those works not available in the Library, the hon. Gentleman's own work on worker control in industry is available there. Some may have read it, benefited and been very interested. The hon. Gentleman has now given evidence to the Bullock Commission on employee participation. If it was on the lines suggested in the early part of his speech, I hope that the Commission pays careful attention to it.

The hon. Gentleman referred to the public sector borrowing requirement and its relative importance. That is his view. If he shares it with the Chancellor, the Chancellor is a convert to that view, because we all remember the Chancellor's first Budget in which his most passionate passages about the wicked legacy he had inherited from the previous Government expressed his deep distress at having the enormous burden of £4 billion public sector borrowing requirement that he had inherited from the past Government and pledged his determination to reduce it. In the following year he had increased it to £7 billion, he is now increasing it to £10½ billion and he is predicting a figure of £12 billion for the coming year. Obviously, if the Chancellor treats that with some complacency he is a convert to the hon. Gentleman's view.

The interesting thing about this debate is the very considerable contrasts between it and the debate of last year, because last year, apart from my hon. Friend the Member for Leek (Mr. Knox) and myself, not one hon. Member on either side of the House, nor anyone on the Front Benches, was in any way advocating the importance of an incomes policy. Apart from one or two speeches, the subject was left out of the debate. The Government considered that they would obtain a tolerable relationship with the unions and that perhaps the social contract on restraint would work. I am not sure now, in an uncertain position, whether the Opposition Front Bench was against or for an incomes policy and, therefore, was in any way critical of the Government for not having one, whereas this year, 12 months later, the whole theme of the Budget—in my view, quite rightly—is the importance of continuing with an incomes policy.

There has been an interesting reaction. The constitutional reaction is interesting. I disagree with those who consider it wrong to make this type of approach to the unions. I was a member of the Government, as was my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), who talked with the unions and endeavoured to come to a voluntary agreement with them in those many hours of discussion that we had with them. We certainly put forward concessions that we would make against policies in which basically we believed—for example, the question of council house rents. I was personally responsible for the Housing Finance Act that we agreed to bring in as a measure to ensure that during a period of wage restraint, adverse effects of any increases in council house rents would be tackled in a different way. It is interesting that the present Government have increased council house rents and there is no similar proposal so far in their package offer to the TUC.

Quite rightly, we as a Government endeavoured to come to an agreement. Having listened to the various approaches of the trade union leaders we were near to coming to such an agreement, and but for one or two of those leaders who were hostile, doubtless for perfectly genuine reasons, we would have reached agreement.

Personally, I am deeply critical of the Chancellor of the Exchequer. He is, in my judgment, by far the worst of all post-war Chancellors. He has done immense damage to the British economy. The legacy with which he is dealing in this year's Budget is primarily a legacy not of the previous Conservative Government but of the past two years, when we have had a Government who were willing to sit back and allow a 54 per cent. increase in earnings during a period in which there was a 4 per cent. fall in production. We cannot have a period in which earnings increase by 54 per cent. and production drops by 4 per cent. without very difficult and tough adjustments having to be made thereafter.

The reason why this Budget is described as crucial is that it is a different Budget because it is the first in which the Chancellor has started to agree to pay the price for allowing a period of two years in which incomes went up by 54 per cent. while production dropped by 4 per cent. In terms of industry, he is right to take the action he has taken on stock appreciation. That is a most important measure.

I would like to make a suggestion as a former Secretary of State for Trade and Industry, I hope that he will see that his total package of measures together with the advantages of free depreciation and the obvious advantages of the stock appreciation proposals will be conveyed to individual firms and industries. One of the sad realities—this might be regrettable to those who have a passionate belief in the total efficiency of free market forces—is that many firms do not realise the many benefits and advantages they can obtain regardless of what the existing pattern of taxation might be.

As regards stock appreciation, we are now in a period in which, on taxation grounds, there are considerable advantages to be gained by industry if it invests. As someone who had the difficult task of trying to encourage industry to invest prior to the large consumer demand taking place, I give my support to those who seek to persuade industry to invest.

One of the reasons why the Government find it more difficult to persuade industry to invest now is that industry remembers the ghastly period of 1974, when, as a result of the Chancellor's first Budget, it suffered considerable cash flow problems. Those difficulties created conditions of alarm. The likelihood is that industry will be extremely cautious for a long time about putting itself in any danger of cash flow problems

Those of my right hon. and hon. Friends who want to see an increase in the profitability of British industry, a reduction in the public sector borrowing requirement and a decrease in public expenditure must recognise, as the Government have done belatedly, the immense impact of an incomes policy on all those factors. If the Government are successful in achieving their 3 per cent., that will do more to in- crease the profitability of British industry this coming year than any other measure in the Budget, or in any Budget for some years past.

Industry will have calculated the prices that it has quoted for the coming year not upon the basis of a 3 per cent. increase in wages but in the expectation of a far greater increase. If the Government are successful in achieving 3 per cent., their success will have an important impact upon profitability in wide sections of British industry.

I remind the House that we might well be alarmed that the public sector borrowing requirement is now £6½ billion more than when the Government came to power. Strangely enough, public sector wages and earnings are £6½ billion more than when the Government came to power. It is the massive 54 per cent. increase in incomes and earnings in the public sector which has had such a considerable effect in increasing the public sector borrowing requirement and the whole public sector problem.

I look upon the incomes policy as being of paramount importance. For any Government, Conservative or Labour, there are only four alternatives. The first is free collective bargaining. That is a concept which my Government supported when in office and which the present Government supported when they came to power. Both Governments discovered that they could not continue with it.

The power of the trade unions in negotiation is such that they negotiate not upon the basis of what a firm can afford but frequently upon the basis of what another powerful union has succeeded in obtaining. If the AUEW gets a 20 per cent. increase for its members, the Transport and General Workers' Union does not want to be seen getting only 10 per cent. for its members. That has been the reality. During the period in which the Government tried to operate the social contract there was a massive escalation of wages, but the unions are friendly towards the Government and union leaders are closely in association with the Government. The same thing happened to my Government. I argue that the first alternative has not succeeded because of the current power base of the trade unions.

The second alternative is that of collective bargaining after the power of the trade unions has been diminished. A number of my right hon. and hon. Friends advocate that approach. In a recent article in the Observer, my hon. Friend the Member for Aylesbury (Mr. Raison) advocated it. He said that, if we diminished the power of the unions by taking away social security payments from strikers' families, varying the law on picketing and perhaps ensuring that there were alternative work forces to man key industries in the event of strikes, we could bring about a balance in negotiations that would make collective bargaining mere sensible.

I reject that proposal. Any Government who endeavoured to do that would enter a period of tremendous conflict with the unions. Nor do I believe that it would be fair to weaken the negotiating power of the unions by withholding social security payments from strikers' families. If that policy were adopted, we should be treating in exactly the same way the chap who voted against a strike and the man who voted for it. We should be acting against those who had a perfectly legitimate reason for striking as opposed to those who had a rather bad reason for doing so.

The third alternative is to have an incomes policy. That is what the Government are doing and that was what my Government did. I argue—there can be very few Labour Members who argue differently—that phase 1 and phase 2 of the Government's incomes policy are less fair, less lenient and less flexible than the latter phases of the incomes policy introduced by my Government. If the Chancellor offered the unions the same tax cuts and switched his proposals to phase three of our proposals, most of the unions would happily accept phase 3. Both Governments discovered the necessity for an incomes policy.

The fourth alternative is to pursue policies that enable the Government gradually to return to free collective bargaining in the confidence that when it is achieved we shall have entered a period when responsibility is exercised by the negotiating parties. There would be a greater degree of rational decision-taking and we should achieve sensible decision-taking.

For those who believe in a free enterprise system and a mixed economy, a permanent incomes policy has colossal disadvantages. One disadvantage is the lack of flexibility. Another disadvantage is that differentials are not treated correctly. That means a positive discouragement to acquire skills and to apply effort. In the longer term, there are few in the House who want to see a permanent incomes policy.

We shall shift from the present position only when we show greater responsibility and logic in individual collective bargaining. That is why some of my comments and some of those of the hon. Member for Motherwell and Wishaw are closely allied.

If we are to shift to free collective bargaining after emerging from an incomes policy, we must have a range of policies that bring about a comprehension and understanding of both sides of industry. I should like to see my party pursue policies such as encouraging the moderates in unions by the facility of postal ballots.

I should go in for a statutory form of profit-sharing, as has been done in France. I should try to make genuine progress along the road of employee participation. If we want the free enterprise system to survive and if we want a responsible organisation, the reality is that such a situation will come about only if both sides of industry are operating not in conflict but in unison.

The nature of free enterprise in capitalism has changed over the past 100 years. In the main there is no longer a proprietor-employee relationship but a management-employee relationship, management being the employer. It should be possible for the House to pursue policies that create an understanding and comprehension of industry. That is what we have lacked as a result of the perpetuation of the nineteenth-century conflicts.

Mr. Douglas Jay (Battersea, North)

Do I understand that the right hon. Gentleman broadly supports, as I do, the incomes policy and the Government's approach to the trade union movement?

Mr. Walker

I said that I not only support it but believe that it is vital for the country that it should be accepted. I shall do all I can to persuade my constituents and any other quarters in which I have influence that it is the correct thing to do at present. I only regret that so much damage has been done because the policy was not pursued much earlier. We had the tragic period when incomes rose by 54 per cent. while production fell by 4 per cent. That is still and will remain an enormous burden. At last, however, the Government have faced reality.

Nothing could be more beneficial to the future progress of the economy than the Government's success in maintaining a 3 per cent. limit. If they fail—this is the real constitutional issue and threat to democracy—and we find, in the summer, that a number of unions are asking for 10 or 15 per cent., or whatever it may be, as the minimum, and the Government decide that such is their link with and dependence upon the unions that they will not advise Parliament to take action, democracy will be undermined, and Parliament with it. The attempt by the Government to offer benefits to the unions if they carry out what will be a tough policy on their part is a sensible and correct approach, and I wish it every success.

6.42 p.m.

Mr. J. W. Rooker (Birmingham, Perry Barr)

The right hon. Member for Worcester (Mr. Walker) never spoke more truly than when he said that if the 3 per cent. limit on wages were accepted it would be better than all the other measures for increasing the profitability of British industry. No one on this side would disagree, however, that what is the crunch is our concern about what happens to the profits. It is all very well my right hon. Friend the Chancellor of the Exchequer talking about shifting resources to manufacturing industry. I support such a shift, but there is no mechanism whereby the 3 per cent. limit will be translated into investment from profits. As the right hon. Member for Worcester said, industry would not invest even when he was Secretary of State for Trade and Industry.

I recall a meeting in Birmingham one morning in 1973. Ten Ministers were going round the country. They got together 4,000 or 5,000 so-called investors, managers and owners of industry. They told them that the fall in the value of the pound was such that exporting was now profitable and that they should go out and get business. At that time, the right hon. Gentleman was talking about the problems of success. That seems a long time ago, and the fact is that they still did not invest. I have no confidence in their capacity to make use of any spin-off from the incomes policy.

That is not to say that I am knocking the Budget. I support my right hon. Friend in getting the unions involved in detailed objectives, but at the back of it all must be the criticism that the Budget has not brought forward any means which give me confidence, in supporting its measures in their totality, that investment will take place at the end of the day. I want to see more detailed work on that aspect.

Last year the Government told my constituents that the £6 limit would be a means of stopping the rise in unemployment and of securing jobs. Those who are now unemployed, who were not unemployed then, do not see a lot of benefit from that policy. Other measures have to be taken so that any incomes policy, voluntary or quasi-voluntary, is seen to have a direct effect on unemployment levels. My right hon. Friend has moved forward a little on the issue of import controls.

Yesterday my hon. Friend the Member for Newport (Mr. Hughes) referred to the delegation of his constituents from the Hoover factory at Merthyr Tydfil about the situation caused by the dumping of Italian washing machines on our market. Firms in the West Midlands which manufacture washing machines know that the Italians are dumping, but it is extremely difficult to prove. Some action has to be taken in the selective areas which are identified.

The washing machine situation pinpoints the lack of investment. A few months ago, I wrote to the Chairman of the Midlands Electricity Board about the level of imports of foreign washing machines. He told me bluntly that three years ago the Board wanted to put its own brand into its showrooms to generate increased sales. It wrote to all the leading British manufacturers asking them to produce an "own brand" machine for it. Not one of them was interested. The Board then bought from Common Market countries. There has been a disastrous effect on our industry. Our managers and entrepreneurs, as they still like to call themselves, still failed to see the opportunity for business, simply because they could not put their own names on the product. That is an antiquated attitude. The consequent loss of business and jobs has been enormous.

The greatest criticism of the Budget in the media and by the Leader of the Opposition has been the so-called transfer of power to the trade unions. I do not accept that criticism. Of all the parts of the Budget, the part that pleases me most is the involvement of the unions. It is a great step forward. Those who argue that it is taking away the rights of Parliament fail to realise that Parliament does not control wage levels anyway. If we did control wage levels and were involved in collective bargaining and the rest, it could be argued that this proposal would be taking away our rights; but we do not possess such rights in any event. One may disapprove of the fact that Parliament is not so involved, but it is a fact of life. Therefore, it is only right and proper to use the wealth of experience and the willingness to co-operate on the shop floor in order to bring about what I hope will be irreversible changes in the economy.

In the attempt to involve organised labour by Governments of both parties since the war, we have paid the price for constant chops and changes. We in the Labour Party paid the price of four years in Opposition. The right hon. Member for Sidcup (Mr. Heath) used to boast of how much he was involving the unions in running the economy. That was also true of the Fast Labour Government, until they came into conflict with the unions in the late 1960s. The right hon. Member for Sidcup would probably not have become Prime Minister if we had not had that conflict. The country is still paying the price for it.

I welcome the moves towards a more planned economy. I do not accept that we have even a mixed economy in the general definition of the word, but we are moving towards a more planned economy. The TUC has identified many bastions of power and privilege that still remain. If we start at the level of wages and prices, we should involve representatives of organised labour and the workers themselves at a very early stage right at the centre where the decisions are to be made. It is no good our saying that here is a certain policy and that other people can sort it out.

By and large, there is a degree of flexibility in what the Chancellor said—at least, I hope there is. I hope that he will not hang himself on the figure of 3 per cent. Anyone who has experience knows that, in the psychology of collective bargaining, a manager never begins by putting his final offer on the table, and the shop steward never asks first for what he thinks he may have to settle. I hope that there will be flexibility on the 3 per cent. figure. The National Coal Board showed us in December 1973 how to hang ourselves by going into a negotiating situation and saying "This is it, this is the maximum, there is nothing else to come". What does that do to the other side of a negotiating team?

Dr. Bray

The Chancellor has made the very important point that in fact the lower the increase the bigger the real value of the take-home pay. This raises the curious situation that we might find the unions of the lowest-paid workers pushing down the rate of increase, because the lower the increase the better they will do.

Mr. Rooker

I understand that, but I think that we have to move in stages.

We have brought about considerable changes since we debated the last Budget a year ago in terms of management of incomes and prices. I am not saying it has been wholly successful, indeed, the £6 policy has in many ways been disastrous for some quarters of industry. I think there has to be a degree of flexibility because of the psychology of the situation. The National Coal Board proved that it was an absolute nonsense to hang oneself with a figure, because it takes away from the other side, however reasonable the consequences may be in terms of taxation changes, any chance of being able to be seen to achieve things. I do not want a cosmetic bargaining situation, because that would be a total nonsense, but it must not take away from the other side the feeling that it has made a meaningful contribution to the situation.

There is the consequence, of course, that involving the trade unions to this extent—my hon. Friend the Member for Motherwell and Wishaw (Dr. Bray) said "putting them on the spot", but I do not think that is quite the situation—and asking them to share the responsibility, and the consequences of it, no doubt, may be that some of them will shy away from that, because it is no part of the trade union movement's task to get itself tied up in having to sell the Government's total policies, which they might well feel that they have to do because of having to sell the issue of restraint on wages and the consequences of cuts in social services, and other matters. They may feel that all these things are getting tied up together and that, therefore, they have to withhold any criticism of other aspects of policy. I do not think they should be tied to that extent.

The real issue will be if the Government only talk in this very detailed way to the TUC on the question of wages. That would be totally wrong; and it would be counter-productive, because they would never do it twice. The TUC would not bite a second time. The TUC has a well co-ordinated, well thought out, total economic policy. It may not be totally in agreement with the Government's policy—in fact, it obviously is not—but the TUC has thought it out and it has a right, if it is to be asked to share the responsibility and all the consequences of the 3 per cent. and what is involved in that, to be heard and to be listened to, where it is reasonable and where it has a damned good case, such as on the issue of selective import controls, and on the specific areas that can be identified. It has a right to be involved to that extent as well. If it is not, it will not be there next year for the Chancellor, whoever he may be, to talk to about stage 3 or about a return to free collective bargaining because the unions will say "We will have none of it because you are not prepared to listen to us on the other aspects".

The shop stewards I spoke to last night resented being used for selling the £6 policy. While the Chancellor was speaking yesterday—because I said last year that I would never sit through another Budget Statement as long as that—I went and listended to some of the pundits on television upstairs. They had cameras at a factory at Greenwich, and it was extremely useful. There were shop stewards and other workers commenting on the details, and, no matter what sort of a gloss Len Murray put on it, it came across quite bluntly that the shop stewards, while they understood that there were economic problems, resented having to sell the rigid £6 policy because of the things happening in industry and the need for flexibility.

An hon. Gentleman opposite referred to free collective bargaining a while ago. Many of us on this side of the House and many trade union leaders have used this in the past as an excuse for a policy. In my view, by and large really free collective bargaining has not existed in this country since the war, and probably not since before then.

I am not happy about a return to a free-for-all in which the rules of the jungle prevail, as may be advocated by some hon. Members opposite. I am fearful that we have not passed enough legislation since I have been a Member of this House to protect the 3 million workers within the wages councils, who have been there for the past 50 years because they are in a weak bargaining position and are low paid. They are still at the bottom of the pecking order after 50 years, and I am not satisfied that we have passed enough legislation through this House to strengthen their position, notwithstanding the Employment Acts, or that they should have to go out into the market place, or be sent back like wild animals into the jungle, to survive as best they can. Quite frankly, I do not think they would. So if this is what is meant by free collective bargaining it would not be too good for those 3 million workers.

Nevertheless, whatever figure is arrived at, and whatever arrangements my right hon. Friend and his Government team come to with the trade unions, it is absolutely vital that two aspects be considered. The first is the need for flexibility. We should not tie ourselves to 3 per cent. and say it is that or nothing—that, or the whole thing is a failure. And, even so, does it have to be 3 per cent. for everybody? The £6 limit is easy to manage, some people in industry have said, and it cuts out all the day-to-day arguments, but all these things have been bottled up.

We have seen the problems of British Leyland in the past few weeks, with the strike of the 32 toolmakers. It was said that if they ran out of carburettors the whole factory would come to a halt, but supplies never did run out, although stocks were getting low. The 32 tool-makers said they wanted the £10 which had been promised to them last April to bring their pay into line with that of other toolmakers. But it was never written down; that was their problem.

Unlike the educational advisers who have just had £40 to £50 a week and £1,500 back pay because it was written down, tied up, the "i's" dotted and the "t's" crossed, men on the shop floor are not working with precise agreements such as one tends to have in the public sector, where there are incremental pay scales neatly codified. What happens in industry is that by and large wage negotiations go on every day of the week in tight little pockets of the factory. Problems arise and have to be solved. They cannot be put on one side, because, if they were, at the end of the day the work would not be done. I was asked once why the lorries were not loaded, and it was because the production lines had stopped because we had not solved one of those little problems.

If they were asked to stick to all this for a year or six months, or, worse, for two years, the whole thing would explode. I have to tell my right hon. and hon. Friends on the Treasury Bench that it would explode before the Government had a chance to change their policy. It would explode in the form we have seen in the past few weeks at British Leyland. Therefore there must be an understanding with manufacturing industry. It is not run like the Civil Service and local government, with everything codified. This is what is missing in the policy that is being put forward by my right hon. Friend, and this must be recognised.

Let me give one further example of the situation at British Leyland. This might be regarded as a fringe benefit, because I am a referring to the purchase of cars at a reduced rate. A white collar worker, a staff employee, gets a 19 per cent. discount on the basic price, but a blue collar worker, the chap who works in the press shop pressing out the body panels, gets a discount of only 16½ per cent. That sort of situation causes dissatisfaction and things blow up into a row, but if there is a move to put that right there might be difficulties in pay policy.

Will a change in that 2½ per cent. difference be stopped by anything that the Government are proposing? If the answer is "Yes", the workers on the shop floor will want no part of it because the result will be nothing for a few months, but then the situation will fester and other things will happen. The whole situation will blow up, and before we know where we are the supply of cars will dry up and everybody will be asking what has happened to British Leyland. Statistics will be produced about the number of days lost, and there will be a denigration of the British car worker and the industry as a whole. That is the situation that we have reached now, and that is a specific matter on which I should like the Financial Secretary to comment when he replies to the debate.

Another factor that we must bear in mind is the psychology involved in a bargaining situation. I have not mentioned the employer. One could argue that the individual employer is redundant in a wage bargaining situation. He certainly will be if the Government deal with the TUC on wage matters, and in many ways that will be no bad thing, because when the individual employer sits down to negotiate in a free collective bargaining situation he has no means of taking into account the requirements of the economy as a whole. He is concerned with the survival of his business; he is concerned with whether it means paying more to stop workers from going up the road to another factory because there is a wage fight. I was once faced with the situation of a new factory coming into operation. We had employers from other factories ringing up to ask whether we were paying over the odds. Of course we were, because we wanted to cream off the best people from other factories, and one gets the best people only by paying the best money.

As I said, the individual employer when taking part in wage negotiations, cannot take into account the requirements of the economy as a whole. Therefore, I disagree with Wilfred, Lord Brown, a former chairman and managing director of the Glacier Metal Co. Ltd., who has advocated the setting up of a national forum for trade unions or an industrial parliament alongside political and economic parliaments. Those are fine ideas, but I do not think that we should move to anything like that in the present situation. The change would be too abrupt. Lord Brown puts the argument that the employer is redundant in the real situation of the national economic state of affairs, and in the Chancellor's proposals for negotiation I do not see any room for the CBI or the Engineering Employers' Federation. I applaud that idea, with the proviso that the trade unions must be involved and listened to, and that much of what they say must be acted upon because they represent the interests of the majority of those who are generating the wealth of this country.

Differentials are a dodgy matter. The 3 per cent. provision contains no room for manoeuvre on differentials. I am not prepared to say that the present differential structure in industry is sacrosanct, but the politicians are not the people to change the pecking order. In every company in which I have worked, read about and heard about, the best job evaluation schemes—those that work and are practical and realistic—are not those imposed by the management but those that have been assembled and put together by the people working in the enterprise. Let them decide their own pecking order. I am not prepared to say that the pecking order of the differential structure is right and proper and should continue for ever, but it is difficult to change, and I ask the Government to make it clear that they and the politicians will not be involved in this matter. It should be left to the trade unions, the shop stewards and people in industry, who are best able to decide these things, to bring about a practical and realistic change in the differential structure of wages in industry.

7.5 p.m.

Mr. Peter Hordern (Horsham and Crawley)

The hon. Member for Birmingham, Perry Barr (Mr. Rooker) gave the House some interesting examples of the difficulties of assessing differentials and of evolving a new wage policy.

The right hon. Gentleman the Paymaster-General indicated a further difficulty—the way in which the incomes policy will evolve after the £6 limit, the first phase of the incomes policy, has been completed. I thought I heard the right hon. Gentleman say that the whole question of differentials would have to be dealt with now that the flat-rate scheme had been completed. I thought I heard him say also that that may mean that the average increase from next July to the following year would be as much as 13 per cent., allowing for the payment of differentials and wage claims that had been held up by one means or another during the year, quite apart from the increase of 3 per cent. that the Chancellor has suggested. We need to know from the Financial Secretary what the effect of those increases will be, because I do not believe that we can make any assessment of it unless we know what the Government think will be the total effect of the increase in earnings that have been held up because of the rigidity of phase 1.

I enjoyed the hon. Gentleman's speech and some of the examples and difficulties to which he referred. Any incomes policy must, by its very nature, be rigid. It means that the problem of differentials is a difficult one. It means also that the ability of firms to introduce new processes and different scales of pay is very telling. The hon. Gentleman gave an extremely good example of what happened—I do not know whether this was during the period of the pay pause—in the case of a company that set up new processes and, because it required skilled men, paid over the rate for the job. It may have been paying far in excess of anything that the pay policy allowed. That is another example of the kind of difficulty with which we are bound to be confronted if there is a pay policy.

During my speech I shall revert to the excellent speech of my right hon. Friend the Member for Worcester (Mr. Walker) and the importance that he attaches to an incomes policy. I hope to follow his remarks, but to deal with the matter in a somewhat different way by referring to issues to which he did not refer, one of which is the looming shadow of the public expenditure borrowing requirement and the problem that this is bound to cause once the economy picks up.

Before I do that I should like to put to the Financial Secretary one or two presentational points about the control of public expenditure, because it is this control that is the most important feature in dealing with inflation and getting the economy right. I hope that in future we shall have the Budget presented at the same time as the public expenditure White Paper, and that we shall be able to compare like with like by comparing revenue with public expenditure proposals and by having available a number of details that are not at present shown in the public expenditure White Paper. I refer in particular to the level of charges for such things as school meals, milk, and health services, so that everybody can see the different ways of financing public expenditure.

Yesterday the Government produced a White Paper on cash limits. I welcome this innovation of cash limits as a means of putting at least some measurement on the level of public expenditure. I noticed that the cash limits referred to were about 60 per cent. of public expenditure. I noticed also that there is a difference between the cash limit treatment of nationalised industries, which are to produce figures every mouth, and the cash limit treatment of the various Departments—the block expenditure system. I understand that what the Departments have been asked to do is to present profiles of what their expenditure will be during the year, and that at the end of the year the Government will publish an outturn.

This is quite unsatisfactory. I hope that the Government will reconsider this and publish the cash limit outturns at least quarterly, if not monthly, so that we can see what is going on. The Public Accounts Committee has a right to call for this arrangement in any case, and I hope that it is something we shall also consider. I know that it is the rôle of the Opposition to oppose and criticise the Government, and that the Government must carry responsibility for their actions. However, they have recently been doing the job of the Opposition a great deal better than we could ever hope to do.

The greatest indictment of this Government is not the extraordinary increase in the cost of living, or the level of taxation or, indeed, the sorry state of the pound at present. Rather, it is that they have had to depend upon a wholly spurious set of economic forecasts for the future in the public expenditure White Paper. If we are to believe and understand the White Paper correctly we are about to have a period of unexampled economic growth and a vice-like control of public expenditure. It reminds me of Batman, who, with one bound, can break his chains and go free. That is the kind of extraordinary change that is to come over Government control of public expenditure.

I do not recall any Government White Paper being greeted with such universal derision. Apart from the well-justified views about the public expenditure forecasts themselves, we have good reason to doubt the capacity of Government Departments to monitor and control their own expenditure. Therefore, while the cash limit system is admirable, it will have to be supported by regular publication of profiles. Whether this is done on a quarterly or monthly basis does not much matter. I understand that this is an experimental period, but the House is entitled to see how that expenditure is being carried on, because in that way we shall be able to exert proper parliamentary control.

This leads me to the most significant part of the Chancellor's Budget Statement, which said, in effect, that the TUC is to set our income tax levels. We have already seen this Government's definition of democracy in terms of its legislation affecting the closed shop and the Dock Work Regulation Bill. That definition is "Government of the people by the trades unions and for the trades unions". However the prospect of changing the taxes of all our people and using Parliament as a rubber stamp carries to a new level the notion of a corporate Government. It is, as the hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) said yesterday, a constitutional outrage, but that is not what the leader of his party said today. However, I suppose one should not be surprised at differences within that party.

I am particularly concerned with the economic aspect of trying to control inflation by wage control alone, with or without the help of the TUC. I would refer to the remarks of my right hon. Friend the Member for Worcester, who, I am sorry to see, is not in his place at the moment, because he is a known exponent of the efficacy of incomes policy and he speaks a great deal about it. We have been down this path before. I recall that when Lord Barber was Chancellor we were told that every family in the land would be a pound a week better off and that that was all part of securing the cooperation of the trade unions.

We all know what happened, in retrospect. We can recall the endless negotiations and discussions between the Government and the trade unions, and the whole reshaping of Government policy under the advice of Lord Armstrong. All that time, during the period between 1972 and 1974, we had a growing Government deficit to finance. In 1972 we had a public sector borrowing requirement of £2,000 million, and in 1973 we had a PSBR of £4,000 million. The deficit was financed, but not by saving. There was not much saving, because the level of economic activity was growing very fast—about 6 per cent. a year. There was a lot of money chasing too few goods.

I would say that if this money exists in the economy already no incomes policy will be able to correct the rapid rise in inflation. The Labour Party opposed any form of incomes policy when their Members were in opposition. They supported every strike. The social contract was simply the final surrender on the Labour Government's part to the trade unions, as promised. While it has been in Government the Labour Party has allowed public expenditure to roar ahead and the public sector deficit to grow to an unimaginable figure.

It is the company sector which has suffered. That is why the PSBR is so low at present. The Chancellor was rather selective in his figures about company profits. I shall give him one of mine. The gross trading profits of companies before stock appreciation was 13.8 per cent. in the first quarter of 1974. Since the Labour Party has been in government it has fallen to 9.3 per cent. in the third quarter of 1975.

The Chancellor said that the level of imported manufactured goods increased during the period of the Conservative Administration. I am sure that it was entirely inadvertent. I looked at the figures for imported manufactured goods and noticed that between 1966 and 1968 the volume grew by 31 per cent., and grew by a further 24 per cent. in 1967–69—an unexampled growth for any four-year period. I forbear to mention the party that was in power at that time. However, with company profits so low it is no wonder that the money supply has not grown very much, or that the level of personal savings has become so high. The private sector of the economy has been quite demoralised by the Chancellor and has simply not been in the market for funds.

Now, we are told, all this is going to change. We are to have a growth rate of 4 per cent. this year; manfacturing output will increase by 8 per cent. and there will be an increase in manufacturing investment of 16 per cent. This, or something like it, will go on for the next three years, but if it does not we shall not get the growth we need to pay for the huge burden of public expenditure. If it does not come about we shall have an enormous increase in the demand for funds. Money will be needed to finance the growth of exports, which are to grow by 9 per cent. this year. It will also be needed to finance the growth of investment of 16 per cent. and to finance the inevitable high level of Stockbuilding. All this has to be financed at the same time as the Chancellor has to finance a PSBR of £12 thousand million.

I notice that the Chancellor gave a very useful concession by abolishing altogether the stamp duty on the issue of debentures and loan stocks for manufacturing companies. What does he imagine that concession will do? It means that it will be much easier than it has been—if it has not been entirely impossible before—for companies to finance themselves in this way. It is the way in which they would prefer to do it. But whom does the Chancellor think they will be taking money from, if not from the Government? Therefore, this concession, admirable though it is, will mean that people will be allowed to lend their money to anybody. If the choice lies between ICI and the Government, the Government must not be too surprised if, in the event, investors choose to lend their money to ICI and other companies rather than to the Government.

That cannot be done without increasing the money supply generally. If it was a difficult problem when we had a growth of output of 6 per cent. between 1972 and 1973, when we had a public sector borrowing requirement of £2,000 million, a lower rate of manufacturing output, a lower rate of private fixed investment and a lower rate of growth output generally, how much more of a problem will it be when we have to sustain a growth of manufacturing output of 8½ per cent. each year for the next three years with a public sector borrowing requirement of £12,000 million? It is a horrifying prospect. That is the real problem.

It is all very well to say that the public sector borrowing requirement is a much smaller proportion of GDP than it was the year before. But it does not alter the fact that £12,000 million has to be raised in the capital markets in this country. That is a problem in itself, besides the problem of raising money for manufacturing industry.

I do not know whether the Chancellor will succeed with his negotiations with the trade unions, but I suggest that they are totally irrelevant to the main issue, which is the problem of financing the public sector borrowing requirement without using inflationary means.

How long does the Chancellor think that a 3 per cent. limit will last once the upturn in the economy starts to grow well beyond our present productive potential? How will he control wage drift and plant settlements? The hon. Member for Birmingham, Perry Barr (Mr. Rooker) made that point earlier.

I am astonished that the Chancellor has apparently been taken in by the Treasury's arithmetic. I thought that Lord Armstrong had left the Civil Service, but somehow his influence lives on, and the Treasury builds, in his memory, ever more elaborate models which have no correspondence with the real world.

The Chancellor is like the captain of a ship at sea, tossed by tempests, the ship tilted to an almost impossible angle, buffeted from every side, calling for a meeting of the crew to consider a reduction in their rum ration. That is the position. His proposal will not and cannot work on its own. I am amazed that the Chancellor should refuse to take further action on public expenditure.

Nobody can be certain how the figures will turn out. It may be that the economic recovery will be much slower than we think—in which case there will not be so much competition for funds with the public sector—but I think that is unlikely. We are asked to suspend all our experience and turn faculties to thinking that output and investment and Government expenditure can grow every year in the next three years without increasing the supply of money by an intolerable amount.

I think that I detect already the smell of singeing scapegoats. I do not doubt the good will of the trade unions towards this Government. They will do their best. But it is quite wrong to ask them to do what no body of men can do, whether in Parliament or in the trade unions—to curb their wages while prices rise because of the supply of money injected into the economy by the Government and because of the fall in the value of the pound brought about almost deliberately by the Government. I say "almost deliberately" because, instead of cutting public expenditure and thereby reducing the borrowing requirement, the Government have gone on talking about our rate of inflation being so much higher than that of our competitors and doing nothing to restore the situation.

What action do the Government expect of overseas holders of sterling who can choose whether to invest in this country? It is the most obvious thing in the world that, if the Chancellor says that our rate of inflation is higher than that of other countries and that the pound may depreciate, those abroad who are intending to pay for goods in this country will delay payment and those who are seeking to pay for imports will advance payment and produce all the problems involved in that.

I am astonished at the commercial ignorance of the Government, and of the Chancellor, in particular. I am sure that some people will derive much comfort from the spectacle of the Government in earnest negotiations with the unions. Of course, it is essential to have a policy to help employment. I have always believed that it is right and useful to have continuing discussions with the trade unions, but the unions have not got the key to the door of inflation.

Which countries have the best record against inflation? They are the United States and West Germany. West Germany has never had an incomes policy of any kind. But for two short periods, the United States has not had an incomes policy. Both the United States and West Germany rely predominantly on monetary control. In the United States monetary policy is run by the Federal Reserve, which is entirely independent of the Government. The same is true of West Germany.

Why do we not set the growth of money supply and, for that matter, domestic credit expansion, now, for the year ahead? The Chancellor said that he expected M3 to grow more in line with money and GDP this year. I suspect that that figure will be about 15 per cent. too large. But let us have a figure, whatever it is, and stick to it.

That is what we shall have to do in any case if we have to borrow much more from the International Monetary Fund. Would it not be much better to put our own house in order before the IMF does it for us? It can be done. The IMF did it for us between 1968 and 1970. We can cut back inflation, reduce the public sector, and encourage the private sector, so that the economy can grow. We are not dependent on the TUC or any other body for this. It is a matter of political will and courage to take, on our own, the steps that are necessary. We need neither the TUC nor the IMF; we need a new Government, and that is all.

7.27 p.m.

Mr. Stan Thorne (Preston, South)

The hon. Member for Horsham and Crawley (Mr. Hordern) in his closing remarks rejected the Trades Union Congress as being relevant to the problems facing Britain today. I do not wish to pursue that matter. I reject it completely as a way of approaching this problem.

What I am concerned about now and have been in the past is to contribute something to this kind of debate. I am aware that there are those in this Chamber who are far more expert than I in economic matters.

My hon. Friend the Member for Motherwell and Wishaw (Dr. Bray) trotted out the usual economic cliches associated with Keynes. I do not know whether Riccardo and Adam Smith came into his reckoning, but I suspect that they did. It seems that all that is reduced to naught when we reflect upon the recen statements made by economists about the whole problem of inflation. They all seem to be of one kind—that there are many explanations and many variables—and few have a ready answer to the problem.

I suggest that inflation is directly connected with the nature of our economy. We live in a capitalist society. It must be emphasised that, when the situation in a capitalist society, such as Britain, is contrasted with another country with a Socialist economy, we see no inflation within that other country's economic management. Therefore, it seems right to start by saying that inflation here stems from the nature of our capitalist system.

When we hear talk, as we heard earlier today, about the question of negotiations with trade unions, collective bargaining and so on, it is necessary to recall yet again that within capitalist society we are bound continuously to be in a conflict situation, in which, on the one hand, the private employer is purchasing labour power, and, on the other hand, labour power is seeking to sell its skill in a market that is at least able to provide a worker and his family with a reasonable standard of living.

It is precisely the high cost of living to which the Budget ought to have addressed itself. However, it seems yet again that it is a question of getting tougher with the workers.

The whole problem of our economic management in Britain is placed firmly on the backs of the workers, on the backs of the wage slaves who feed our capitalist system. We talk about unemployment but we make no real attack upon it, in spite of the fact that that, too, contributes to the inflation about which we are talking. Even Treasury Ministers have to reveal this in replies to Questions, as they did very recently when asked by one of my hon. Friends what was the cost of unemployment for a man with two children whose average income when in work was £3,000 a year. The Treasury's calculations, taking in the question of benefits, loss of tax and so on, revealed that the total was £3,187 a year. In other words, the cost can be and has been assessed, and it suggests that about £3,000 million a year is required to meet the tremendous unemployment figure that exists at present.

The 3 per cent. norm will further reduce the purchasing power of workers and their families. It will, therefore, diminish the demand for goods—and this in a situation in which the Government are talking about expanding manufacturing industry.

As a Socialist, I take the view that the only real way in which we shall expand manufacturing industry is to have it totally in the hands of the Government, through public ownership, when we can apply a set of Socialist principles in terms of people's needs and, on determining needs, plan the resources. Unhappily, we are obviously not in that situation at present.

In the short term, the steps taken by the Chancellor to expand manufacturing are far from clear. In fact, it was during the debate on cuts in public expenditure two or three weeks ago that the Chancellor was challenged to indicate how we would get this shift of resources from the public sector to manufacturing industry. It seems to me yet again that although the Chancellor, grudgingly perhaps, has indicated some preparedness to look at the question of import controls, to talk about expanding manufacturing without a firm, across-the-board control of imports is also something of a nonsense. The high cost of imports is a contributory factor to the whole problem of inflation. In the event of our establishing real controls on imports, we would necessarily be involved in getting tough with the multinationals. We would probably be involved in doing something about transfer pricing. There is no mention of that sort of issue in the Budget.

When one looks at the Budget Statement closely, one can reasonably say that, on balance, big business has done rather well. This contrasts with the offer that is being made to the trade unions, which includes reference to lowered prices. Outside the areas of reduced VAT included in the Budget, however, prices will continue to rise. Food prices will certainly rise to some degree through the continuation of the common agricultural policy, for example, which emanates from Europe, and other EEC decisions will affect prices. This will produce an upward pressure on inflation. Therefore, we need some really effective price controls.

The Budget, and, indeed, the whole of the Treasury's economic policy over recent years, is based upon what I consider to be the false assumption that the inflation in which we are involved is primarily, almost entirely, a cost-push inflation, with wages and salaries being the main basis of that cost-push. No one seeks to argue—I do not think that Labour Members argue this in their contributions on this question—that wages do not have an effect on cost. Clearly they do. Recent analysis has shown, however, that wages represent about 40 per cent. of the problem. That leads us to look at the other 60 per cent., which includes the cost of raw materials, the cost of imports and of other inputs, the cost of servicing capital and so on.

Also relevant here are the restrictive practices pursued by monopolies and oligopolies in Britain, which determine in certain circumstances to restrict supply as a deliberate attempt to control the price mechanism. From a position of influencing supply and demand, they move across frontiers with this sort of concept in mind, the main purpose being to maintain higher prices as a basis for continuing high profits.

The right hon. Member for Worcester (Mr. Walker) let the cat out of the bag earlier this evening when he indicated quite firmly that low wages helped to improve profits in industry. I hope that the trade unions which will be involved in considering the Government's present offer will bear that factor in mind.

It is useful to recall that during the period from 1964 to 1970 the Labour Government held wages down and high profits were made in certain industries. But that did not result in any real investment in those industries which could have contributed to expanding our manufacturing base throughout Europe and the rest of the world. As was said in the past by my hon. Friend the Member for Bristol, Northwest (Mr. Thomas), the money was put into property investment and used in other ways for earning a quick buck.

In the previous debate on cuts in public expenditure, one of the aims stated by the Chancellor—the aim to which I have already referred—was to increase manufacturing production. I return to my previous point. If we reduce the power of the people to purchase the goods, in what way shall we get this so-called expansion?

It is claimed continually from the Government Front Bench that higher wages mean inflation. But why should this necessarily be so? If we have really effective controls of prices, if we seek to be tougher with the big business operators in Britain instead of with the lower-paid workers, if we establish controls of imports and if we restrict overseas investments, we can really begin to get to grips with the problem of inflation. Real governmental control of our financial institutions would have a part in such a plan. The type of investment that we need from our commercial and other banks is likely to emerge only when they are subject to Government control. The best way of establishing that control is to take all financial institutions into direct public ownership.

My hon. Friend the Member for Motherwell and Wishaw said that if £1.30 or some smaller sum was accepted under the Government's package of proposals the workers would be better off because they would improve their financial position by about 9.5 per cent. I suspect that, as in the past, trade unionists will be sceptical about that kind of arithmetic. There is a growing recognition of "con" tricks, and this emerged from comments on television last night.

I hope that trade unionists will read the statement by the right hon. Member for Worcester, because his analysis of the situation showed that we live in a capitalist society, in which the owners of the means of production pursue one aim—that is, of maximising their profits at the expense of the workers. Some say that that is not so and that a type of paternalism operates. It does, when it might lead to higher profits. Anyone who believes that what I have said is an unreal statement of the position cannot have had experience of working in the pits, on building sites or in engineering factories or had to sell his labour in that kind of competitive situation. It is not an equal struggle between capital and labour. It is an unequal struggle, because capital has the right to close doors, declare workers redundant and determine their rate of pay.

Happily, however, it has sometimes been possible for some trade unions to rally forces and to wring improved wages from the hands of capitalists. For wor- kers to relinquish the ability collectively to bargain with employers within our capitalist society is to invite disaster for the future of themselves and of their children.

7.44 p.m.

Mr. David Knox (Leek)

The hon. Member for Preston, South (Mr. Thorne) will not be surprised that I disagree with almost everything he said. I hope that he will follow the logic of his argument and vote against the Government. He claimed that conflict was inevitable in a capitalist economy. I do not know where he has been in recent years, but he should know that we do not have a capitalist economy. We have had a mixed economy for many years. The kind of Socialist society he is talking about exists in those Eastern European countries in which there is no overt conflict, because it is kept under control by sheer, naked, military force.

Mr. Thorne

I did not say that there was no conflict; I said that there was no inflation in Socialist societies.

Mr. Knox

There has been inflation in many Socialist countries from time to time. The hon. Member said that conflict was inherent in capitalist societies but not in Socialist societies. That is clearly wrong.

I was in considerable agreement with the contents of the outstanding speech by my right hon. Friend the Member for Worcester (Mr. Walker). Like him, I welcome the concept of conditional tax relief in return for economic restraint which the Chancellor of the Exchequer announced yesterday. There are difficulties in such a concept, and, of course, one has reservations about handing over power to the TUC in this way. But it is arguable that that power is already vested in the TUC and that the Chancellor's proposals make no difference to the real situation. As the Leader of the Liberal Party said earlier, the Chancellor's proposals merely reflect the balance of power in today's society.

The Chancellor's concept is imaginative. It has a reasonable chance of providing a basis for an effective second phase of the present incomes policy. We must all realise that the successful implementation of phase two of the Government's incomes policy is of greater importance to the success of the Chancellor's strategy and to the country's economic recovery than anything else in the Budget, or anything else he may do outside the Budget.

It is only fair to give the Government some credit for the success of their £6- limit incomes policy. Wage and salary settlements in the past nine months have been lower than in the previous nine months, and consequently the rate of inflation has been brought back from the terrifying rate of nine months ago. I do not accept that that happened because of other measures, whether or not they involved the general deflationary policy of the Government or control of the money supply. The fact that so few people have settled for less than £6 is clear evidence of the relative ineffectiveness of market forces in the determination of wage increases.

If, as some claim, market forces do work, in the circumstances that exist today—with well over 1 million people out of work and the money supply under control—increases in wages and salaries in the past nine months would have been nil and not, as most have been, £6 a week. Nor is it consistent to argue, as some free market critics of incomes policy do, that the £6 limit has been inflationary on the grounds that if it had not been fixed at £6 many settlements would have been lower. I accept that there might be some truth in that, although I do not regard it as significant. If arguments about the market are correct, surely the market would have ensured settlements of less than £6. It has not done so, because the labour market does not work in that way.

In recent years the most significant factor in determining income increases has been the monopoly power of trade unions and professional bodies. That exists whether the demand for labour in relation to supply is high or low. That is why I believe that an incomes policy is essential if some control is to be exerted over inflation. That is why I welcomed the £6 limit last summer. It was not perfect, but incomes policies never are. It was a muddied compromise, but it achieved considerable success and it would be churlish to deny that. The Government are entitled to claim some credit for this success, but not as much as they claim—first, because the rate of inflation is still in double figures and we still have a long way to go before it is finally conquered, and, secondly, because the Government waited for far too long before they introduced this incomes policy.

Instead of presiding over and, indeed, encouraging the wages and salary explosion of 1974 and early 1975, the Government should have continued the incomes policy of the last Conservative Government. Had they done so, we should still have had inflation during the past year, but on nothing like the scale we have. Not only would a continuation of the Conservative Government's incomes policy have spared the country the hyperinflation of the past year; it would have spared us the consequences of withdrawing from that hyper-inflation.

Among those consequences should be included prominently the intolerably high level of unemployment. In terms of unemployment, we are paying the price for the absurd attitude adopted by the Labour Party—particularly its left wing, led by the Secretary of State for Employment—towards an incomes policy when they were in opposition and during their first 16 months in government. I ask them to search their consciences on that score today, for there is no doubt that the excessively high level of unemployment is one of the prices that the ordinary people of this country are paying for the abandonment of the Conservative Government's incomes policy and for the wage and salary free-for-all that continued from March 1974 until last July.

It is high time that the principle of an incomes policy was accepted by all political parties. After all, the last three Governments have been forced to introduce one, even though when elected they were opposed to doing so, and were pledged not to do so. The 1964–1970 Labour Government did it in 1966; the 1970–74 Conservative Government did it in 1972, and the present Labour Government did it last year. They were all forced to do it by absolute necessity, not because they wanted to, and not because they did not recognise that there are arguments against incomes policies and difficulties inherent in them. They introduced an incomes policy because the situation forced them to do so.

Unfortunately, an incomes policy is an issues that Opposition parties can take up and make cheap party political capital out of it, and try to undermine it. It is not in the national interest that that should happen. It was not in the national interest for Members of the Labour Party to attack and undermine the incomes policy or the Conservative Government as they did. It would not be in the national interest for the Conservative Party to attack and undermine the Government's policy now. I am happy that, thus far, at least, my party has refrained from doing so.

If, as I believe, a national consensus is necessary to get an incomes policy accepted—this is particularly true in the second, third, and fourth phases of the policy—I hope the Government will widen the area of consultation about its current and future phases. I should like to see them include employers as well as trade unions in the negotiations about phase 2 of their present incomes policy. I should like to see them include consumer and tax-paying interests. They might also extend their consultation to include Opposition parties or, if that is going too far, individual non-Labour politicians. If we are to have continuity of incomes policy when there is a change of Government, it is necessary that there should be continuing involvement of politicians of all parties.

If that were done now it might help to some extent to meet the criticisms that have been made of the conditional tax reliefs. It might also help to convince the whole electorate that the incomes policy is fair. It is not enough to say that the £6 policy has worked, with consultation with the trade unions alone. It is the second and subsequent stages of an incomes policy that become more difficult, and for which an even greater degree of consensus is required than in the early stages.

I return to the question of unemployment. About 1,300,000 of our fellow citizens are out of work. I believe that before the next Budget this will be recognised as the major economic problem facing the country. I believe that ordinary people already think that it is. It is not fashionable to say this. It is rather more fashionable to say that the public are no longer concerned about unemployment.

That has not been my experience in my constituency in the past few months, nor was it in 1972, when there were about 1 million people out of work, and it was not the finding of the survey undertaken by PEP, whose report was published last July. That showed that 77 per cent. of the population rejected the proposition that higher unemployment, which was then at 750,000 was preferable to inflation, then at an annual rate of 25 per cent., and that 61 per cent. strongly disagreed with that proposition. The survey also showed that whereas 57 per cent. in the South-East strongly disagreed with the proposition, the figure in the Northern Region was as high as 74 per cent.

The fact that most people who, in the media, comment on the public reaction to unemployment tend to come from London and the Home Counties may well explain why they think that people do not now care about unemployment. Most of us who represent constituencies north of Watford are aware that the reality is very different.

Of course, it is true that the material lot of the unemployed is much better than it was. The unemployed are no longer faced with the absolute grinding poverty of the 1930s. No one would wish those days to return. But the fact that unemployment benefits are rightly so much better today does not mean that the unemployed do not suffer materially. The great majority suffer a substanial cut in their living standards when they lose their jobs, especially if they are out of work for any length of time. This is always unpleasant. Their plans for the future have to be scrapped, and their savings are eaten into. Debts are accumulated.

It is always unpleasant and uncomfortable to have to live on less, but, however unpleasant and uncomfortable unemployment is materially, what is most offensive about it to the individual is the affront to human dignity. It is still a dreadful thing for a man to have to go home to his wife and children and say that he has lost his job, or to tell his mates in his club or pub. It is still a dreadful thing for a man to feel that he is no longer wanted, or needed.

Although that becomes worse the longer a person is out of work, we should always remember that it is bad even for the person who is out of work for only a few days, for until he is offered a fresh job he has no idea how long he will be unemployed. There is the uncertainty and worry associated with his not having a job, and there is still a stigma, however unfair it may be, about being unemployed. Let no one be under any illusion that it is unfair. Unemployment has more to do with the level of demand than anything else. It affects the good worker and the bad worker, the skilled worker and unskilled worker, the hard worker and the lazy worker alike.

Unemployment is ruthlessly unfair. It does not discriminate. It makes no moral judgments on the qualities of men, nor are its social effects short-term. Of course, we all hope that what is happening now will not be so bad as in the 1930s. We must never forget the ravages of unemployment at that time—not so much in material terms—although they were bad enough—or even in terms of the immediate affront to the human dignity of millions—although that, too, was bad enough—but in the respect that its effects and the fear that it might return have remained with many of those affected all their lives. It has dominated their attitudes and has had an adverse effect on the whole quality of their lives.

That experience and its consequent attitudes have been passed down to children and grandchildren, and have affected them in the same way. Unemployment in the 1930s left a terrible scar on British society. It would be tragic if that scar were again to become an open wound.

Despite what the Chancellor of the Exchequer said yesterday, his Budget does nothing about unemployment, other than to apply a few cosmetics. I believe that he will be forced by public opinion to do something within the next year. Certainly all the precedents point that way. The Government were forced to take action on unemployment in 1963 and also in 1972, when it reached levels regarded by the public as intolerable. The Chancellor took some cosmetic action last autumn, and he has again done so this spring, because the public again have become restive. I believe that in the coming year the public will become even more restive and that the Chancellor will have to take action.

If the Chancellor is forced to act, as I believe will happen, it is necessary to emphasise the importance of an effective incomes policy. This underlines the importance of the acceptance of the package outlined yesterday by the Chancellor Long-term unemployment is not politically acceptable as a means of controlling wage and salary cost inflation. Before the next Budget I believe that the Chancellor will have to take more decisive action than he has taken thus far to deal with this serious social and economic problem.

8.6 p.m.

Mr. Ron Thomas (Bristol, North-West)

I welcome the fact that the hon. Member for Leek (Mr. Knox) finds unacceptable, and indeed deplorable, the present level of unemployment. I also welcome the fact that he puts it so high in his priorities. However, I find it a little strange and schizophrenic the attitude of Members on the Opposition Benches. Ever since I came to this House I have heard Conservatives clamouring for cuts in public expenditure, and I have then seen them vote against the Labour Government when they have tried to save jobs. In other words, the Tory attitude appears to have been aimed at supporting measures that will increase unemployment. Tory Members appear to shed crocodile tears over these matters, although I am not suggesting that that applies to the hon. Member for Leek.

Ever since I became a Member of the House, Conservative policies appear to have been weighted against any attempt by the Labour Government to defend jobs. The main plank of the policy of the Tories appears to have been based on their continual clamour for more and more cuts in public expenditure—cuts which clearly would lead to a much higher level of unemployment.

I shall deal with the subject of the incomes policy a little later in my remarks. I wish first to deal with the economic strategy on which the Budget is based and on which the Chancellor of the Exchequer had a good deal to say yesterday. I wish to deal with the question of how far that economic strategy will make any realistic contribution to reducing the unacceptable level of unemployment or to halting the dramatic and serious fall in the level of capital investment and how this relates to the situation in which manufacturing industry is caught in a spiral of contraction and decline.

Some would argue that the contraction and decline of our manufacturing industries flows from some unique, transitory and, indeed, temporary factor. When my right hon. Friend the Chancellor of the Exchequer presented his Budget a year ago, he placed most of his hopes on a strong recovery in world trade. Indeed, his remarks were punctuated by his belief that in a very short time there would be a strong recovery in world trade. The whole purpose and strategy of his Budget last year was aimed at ensuring that exports from Britain would take advantage of what was described as a sharp and strong recovery in world trade. Later in the year, when that strong recovery in world trade did not materialise, we were told that some kind of movement in the economy would result from the very depresion that we were experiencing because, it was said, companies would begin to restock.

However, we see from the statistics that the June 1975 figures were unique and that the amount of stocks held by companies naturally declined as the level of demand and production fell. To round off this economic strategy, we then had a White Paper calling for cuts in public provision. The strategy behind the White Paper meant that we should be expected to cut back on public expenditure and the social wage in order to release economic resources for exports and capital investment.

But we have been given no indication whatever of how those resources will find their way into exports or capital investment. We are asked to accept some undefined hidden mechanism within the capitalist system which will pick up these resources and direct them into exports or capital investment. This does not appear to be based on any priorities on planning as laid down in our manifesto. If that was the case, those resources so released would be given to the National Enterprise Board to be directed into capital investment or into export-earning industries.

That basic economic strategy has failed lamentably in the past. Time and again Chancellors of the Exchequer have said that we must cut living standards and public expenditure to release resources to deal with the balance of payments or with capital investment. But we hoped that, in line with our election manifesto, the NEB and planning agreements would be the mechanism by which we should achieve planning priorities on a Socialist basis.

Once again, we are offered in the Budget the forlorn hope that a recovery in world trade, increased stock-building and an undefined brighter outlook will bring about an economic environment in which we can increase our gross domestic product by 5½ per cent. a year in 1977, 1978 and 1979, increase our manufacturing output by 8½ per cent. a year over the same period and reduce unemployment to 3 per cent. in 1979.

We already have between 1¼ million and 1½ million people unemployed, about 200,000 on short-time working and another 600,000 who will join the labour market in the next year or two. We have to create 2 million new jobs to get unemployment down to 3 per cent., and there is considerable doubt on these Benches that these figures can be achieved with the policies now being advocated.

Unless resources are directed in a planned way, based on Socialist priorities, those figures are likely to become an absolute nonsense and we are likely to see unemployment rising in the next few months. Many people who have studied the problem suggest that it could reach 2 million.

The only thing we have heard from the Opposition Front Bench is a demand for higher profits to be allowed for the innovating entrepreneurs of industry. But they had that from 1970 to 1974, and all the higher profits and various tax reliefs found their way into obscene forms of property, land and commodity speculation and capital investment overseas. Many of us on the Government side believe that the growth rates forecast by the Chancellor can be achieved only if we adopt a totally different economic strategy.

There is no doubt that we would benefit to a certain extent, though the precise extent is a matter of argument, if the promised resurgence in world trade materialised. But I have asked Ministers many times for an indication of how much benefit will accrue to our exporters from this increase in world trade and what it will mean in terms of jobs. Will it create an extra 100,000, 200,000 or how many? Most of British manufacturing industry is working well below capacity and could increase production quite substantially tomorrow without taking on another worker.

During trade depression in Western capitalist countries, British exports have held up pretty well. There has been no dramatic fall which could be suggested as a significant contributory factor to the present levels of unemployment.

As my right hon. Friend the Chancellor of the Exchequer has pointed out, United Kingdom exporters increased their share of world trade during the first half of 1975. It is a fact of economic life that we tend to increase our share of international trade when there is a depression in that trade, but also that we tend to lose part of that increase when an upturn comes. One could argue that when the upsurge in world trade comes our competitors, who are now working below capacity utilisation will, unless we institute import controls, be exporting increasing amounts to the United Kingdom and that our exporters will come under severe competition in other markets.

The Chancellor of the Exchequer referred to the improving balance of payments position and said that, in volume terms, imports had fallen between 1974 and 1975. However, a table in the Trade and Industry Bulletin of 19th March this year shows a different picture. It shows that throughout 1975 there was a continual increase in the volume of imports of finished and semi-finished manufactured goods, especially road vehicles and motor cars.

Taking 1970 as 100, imports of semifinished manufactured goods had increased by 35 per cent. by 1975 and imports of finished manufactured goods rose by 83 per cent. Within that total, road vehicle imports increased by 103 per cent. but the imports of food, fuel and basic materials fell and, taking 1970 as 100, were recorded as 98, 89 and 78, respectively in 1975.

In 1975, semi-finished and finished manufactured goods accounted for almost half our total import bill of £24,000 million. If one takes out fuel, which distorts the statistics, these finished and semi-finished manufactured goods represented almost 60 per cent. of our import Bill. Ten years ago the figure was nearer 30 per cent. That is an indication of the situation we now face.

Due to a very large extent to the failure of British manufacturers to plough back capital investment—we all know the statistics about the amount of capital investment available in this country compared with our competitors—there has been a rapid and disastrous increase in imports, of finished and semi-finished manufactured goods. This has been a main contributory factor to the contraction and decline of our manufacturing industry and the level of unemployment.

The Chancellor of the Exchequer and other Ministers continue to insist that import controls will lead to retaliation. Many of us refute that. We have a crude trade deficit with most of the countries of origin of the bulk of the finished and semi-finished manufactured goods. We get almost £1,600 million worth of those goods from the United States, and in 1975 our crude trade deficit with that country was £600 million. From West Germany we imported £1,700 million worth of those goods, and we had a crude trade deficit with that country of over £700 million. With each of the countries from which we get the bulk of our finished and semi-finished manufactured goods—France, Japan, Italy, the Netherlands and Canada—we have a trade deficit. We are buying far more from those countries than we are selling to them. It is nonsense to think that those countries would cut off their noses to spite their faces if we had an import control mechanism.

We were told recently by my right hon. Friend the Secretary of State for Trade that visible and invisible payments account for about 30 per cent. of our gross national product. It was suggested to us at the Labour Party annual conference that it was the red badge of Socialist courage to plan wages. Is it suggested that we should turn our backs on 30 per cent. of the gross domestic product and say that we cannot control and plan it but must leave it to multinational companies, agents, international brokerage firms, importers and exporters? We reject that and point to the fact that France, the United States and Italy have all used import controls.

As a first essential of a different economic strategy it is necessary to have a planned trade policy. Linked with that, something will have to be done about the level of profit repatriated from capital invested overseas, the amount of capital investment overseas—which was almost £2,000 million in 1975—and the amount of military expenditure overseas. We need, in essence, a planned trade and international financial policy.

The only alternative is devaluation and deflation, which is happening at present. The pound is being manipulated in the hope of increasing exports and producing deflation, with the result that economic and human resources are being wasted. At the same time, capital investment must be directed into manufacturing industry. It has been estimated that during the lifetime of the present Labour Government about £7,000 million in investment allowances, stock relief and other assistance has been given to private industry. In our manifesto we promised to end the expenditure of millions of pounds of public money, year in and year out, without any public accountability.

Many of my hon. Friend are unhappy about the section of the Budget Statement which deals with the extension of the stock relief system, the financing of industry and selective support for investment, using Finance for Industry and private business. We thought that we had a mechanism for doing that—the National Enterprise Board linked to planning agreement.

We all welcome the increase in pensions and the decrease in VAT on certain items although I do not know why it was necessary to reduce VAT on luxury items such as boats and yachts. We welcome the measures for reducing tax avoidance, tax evasion and fringe benefits. We are getting sick of seeing in the financial newspapers advice on how to pay for private schooling and private hospitalisation at the taxpayers' expense and of being invited to attend conferences to learn how to pay less tax. I regret that the child allowance is not linked to the Child Benefit Bill. I also regret the changes in capital transfer tax and capital gains tax, because we still have a long way to go in the distribution of wealth and it is high time that we had a wealth tax on the stocks.

I find the proposals for the 3 per cent. wage increase and the change in tax thresholds disturbing. In the past, tax thresholds have been increased because of inflation. In the previous Budget several hundred million pounds was given to push up the tax thresholds. It is sleight of hand and a "con" trick to hold back a legitimate increase in the tax threshold because of the inflationary pressure. Table 4 of the information sheet shows that when allowances are increased the rich get rich and the poor get far less out of it. A man earning £2,000 a year gets £87. A man earning £25,000 a year will get £300, plus his 3 per cent., no doubt, and plus an increment.

I do not accept that working people and trade unions are responsible for inflation. I wish that some Opposition Members would take on the job of shop steward and have to argue with management. Workers have to produce a case which is based on previous inflationary levels. They have to show that prices have gone up by so much since the last pay increase, not that they might go up. No employer would give an increase on that basis.

I am opposed to incomes policies for a number of reasons, but basically because there is no mechanism in the capitalist system to transfer the wage claims that are given up by one group to the lower-paid in our society. Lower wage claims simply mean bigger profits for the firms concerned. They have not helped the low-paid workers, as every study of every incomes policy has shown.

There are some areas of the Budget which I welcome and others which I do not, but unless we change the economic strategy on which the Budget is based we will never come to grips with the fundamental problems of Britain's economic and industrial society.

8.30 p.m.

Mr. John MacGregor (Norfolk, South)

Time now forbids my dealing with all the arguments put forward by the hon. Member for Bristol, North-West (Mr. Thomas), which is a pity because I am diametrically opposed to almost all of them. But might I just say to him that all Conservative Members share the same view of the tragic human impact of unemployment, put so eloquently by my hon. Friend the Member for Leek (Mr. Knox), and it is because of our concern about what might happen in this respect in even greater unemployment in the manufacturing sector if it is not given the slack for finance when the upturn comes that we have, among other reasons, been advocating public expenditure cuts.

Moreover the hon. Member for Bristol, North-West objected that VAT on boats and boat building had been cut. That higher rate had a catastrophic effect on unemployment in small rural areas where these industries are located. The hon. Member might consider the effects of VAT on unemployment in my constituency, where boat building of this sort is carried on, when he talks of unemployment.

The hon. Gentleman referred to the direction of capital investment. If he is talking about the direction of normal investment funds in pension funds and of bank deposits, he must realise that these belong to millions of working people who would not wish to see their hard-earned savings concentrated on nonviable new investments. All the investments which have been directed by the Cabinet against the advice of the experts on the Industrial Development Advisory Board since the Government came to power have been a disaster. He should be aware that the real reason for the lack of investment is that after tax and inflation there is practically a nil return on new capital at present. That is the real problem that must be tackled.

In the interests of other speakers, I shall not go over the major arguments about public expenditure and the public sector borrowing requirement, much as I should like to do so. It is sufficient to say that as a member of the General Sub-Committee of the Expenditure Committee I entirely subscribe to everything that was said in its recent Reports and therefore I support all that has been said in that respect from my side of the House. In view of the time, I wish to concentrate on two subjects which have not been much commented on today.

But first I give a modified welcome to the VAT and capital transfer tax changes—modified because the Chancellor is only correcting past mistakes. The Financial Secretary will recall from our long VAT debates in the hot summer of last year that we warned him repeatedly of the precise effects that would be created by the higher rate. I only regret that he did not go back to the straight 10 per cent. rate, which would have been much more sensible. The Financial Secretary was not present for our long and even more arduous and more critical debates on the CTT. Here he has belatedly taken on board the strong warnings we gave about the impact of that tax. Although it is to early to assess the effects, he has taken a step in the right direction.

On the wages strategy, I believe that the Chancellor is right to set 3 per cent. as the target as against the 5 or 6 per cent. which the National Institute and the Bank of England have recently advocated. But with the mistake of basing the present pay policy on a flat rate of £6, it is clear that the Chancellor will run into difficulties with the unions over this, especially on differentials. From the public relations point of view, I welcome too the fact that he has put over so clearly the case that net take-home pay could be maintained or even increased through tax reliefs as well as through heavy wage increases, not least because that has a more beneficial effect on exports by keeping down industrial costs.

I recognise the point made by the Paymaster-General this afternoon that there is an economic management effect in the negotiations with the trade unions which to some extent justifies what the Chancellor is trying to do. I am, however, still worried about what I regard as the sad development of shifting too much of the economic strategy of the Budget away from this House and concentrating it with the TUC. It means that many things that the Chancellor feels are fair for other non-TUC sections of the community will now depend on the TUC General Council. That is unfair to the many millions of self-employed, to the managers and to those not in unions, or not in unions which count.

The managers are now heavily dependent on the TUC's decision. The Chancellor rightly recognised that they have carried a greater share of the burden over the last two years. They are a small but vital group on whom we depend but who do not have much bargaining power. What worries me is that in this situation the TUC will bargain down the small reliefs given to the management groups, and this would be disastrous. It should be for Parliament to decide what should be given to these groups, and I hope that the Chancellor will stick to his package as a whole and not allow it to be negotiated.

The Chancellor showed a blinding flash of self-revelation in all the arguments he put forward yesterday on his wages strategy which directly contradicts all he has been trying to do in the last two years. It is a condemnation of the social contract which has failed, of the higher taxes he has imposed and of his failure to control public expenditure.

The first of the two main subjects on which I wish to concentrate is the unfair treatment of savers and the total lack of incentives for savings, about which this Budget has done absolutely nothing. I am not talking about savings for short-term rainy days. We all know that short-term savings in building societies and national savings are at present at a high level. A recent Bank of England study demonstrated that this is happening because people want some reserves, because of fear of unemployment or some other short-term bad effects on their total income. I am talking of the need to give incentives for long-term savings because I am a passionate believer in a capital-owning democracy and in people having more than just their own home as basic savings, having some capital which they can build up and on which they can rely in their old age.

The Chancellor, in looking first at capital gains tax, said that because he had not fully insulated incomes from inflation it would not be right to do so on capital gains tax. That is a fallacious argument. Income tax is about incomes and capital gains tax is about capital gains, and if someone is not making capital gains there is no reason why he should be taxed. At the present time, however, because of inflation many so-called gains regarded as capital gains are being taxed when they are not capital gains at all.

To a Question I asked in February I was given the answer that if someone had had £1,000 of assets in April 1965 and relinquished them in January 1976, to preserve their real value the figure would have had to be £2,533, on which, for no capital gain whatever, he would be taxed at a level of £460. The case for tapering our capital gains is clearly established and I hope that perhaps even this Chancellor will have second thoughts, as he indicated last year he might. Certainly, some future Government must do something about it.

The other worry is the return on savings. I am particularly concerned about the pensioner. The second Diamond Report showed very clearly that the vast majority of people with savings in stocks and shares were not rich people but were pensioners with comparatively small incomes. I find it most difficult when pensioners in my constituency with modest savings from hard earnings over a lifetime tell me that they do not see why they should have as an impost on those savings a tax of 50 per cent. annually when others who have not saved at all during their lifetime and have unfortunately become unemployed are getting much higher untaxed benefits and when young school leavers, for perfectly understandable reasons, are getting untaxed benefit at a fairly high rate.

I do not object to the latter, but there is a question of balance and justice and today we have not got it right for the pensioner living on a retirement income and on hard-earned savings. One other consequence is that children who see the effect on the pensioner parents will not themselves save. This could be dealt with by abolishing the investment income surcharge impost on pensioners and by the removal of dividend control, which would have a more beneficial effect for pensioners than for most.

For other savers the marginal tax for a person on a comparatively modest income with savings from a modest legacy is up to 75 per cent. With this combined with inflation as well as a negative real returns on savings even before tax, it hardly makes sense to save. It is no wonder that many people with savings feel that the only logical thing to do is to spend, spend, spend. To finish on the savings point, the main thing is to get inflation under control because it is that most of all which is eating into savings and the return on savings. Equally, however, more realistic returns on savings must be brought about through further tax relief on them.

A second theme to which I wish to draw attention is the burden on direct taxation and the balance between direct and indirect taxation. The Chairman of the Inland Revenue himself said the other day that the balance between direct and indirect taxation had shifted from a ratio of 45:55 to a ratio of 65:35 within the last few years. That very clearly shows just how the balance has shifted. I recognise that much has been said in the past about the burden of direct taxation, but the facts now present an irrefutable case.

I would say to hon. Members on the Government side, and especially those of the Tribune Group, who in recent debates have called for more public expenditure and honestly said that more money must come from direct taxation, that they must recognise that there is now much more resentment, particularly among low-income groups, at the burden of direct taxation on them, especially vis-à-vis those with unemployment benefit and social security benefits which are untaxed, than there has ever been in the past.

The demands and political pressures now are for less direct taxation and not more public expenditure. At least the Chancellor has recognised that political reality. Yet the truth of this Budget is that the Chancellor has not only increased indirect taxation, as everyone recognises, but when the effects of inflation of 25 per cent. over the past year are taken into account he has also increased direct taxation as well. Practically every income group, except those who have been taken out of tax at the bottom end of the scale, will have to suffer an increased burden of direct taxation.

The relief which the Chancellor has given by way of personal allowances falls a long way short of what it should have been over the past two years of it had increased in line with inflation. That is a problem that manifests itself throughout all income scales.

Those in the lower income groups suffer the poverty trap, a problem which is now fully recognised and well known. For example, a person earning £35 a week finds that with a £6 pay increase his marginal tax rate becomes extraordinarily high and he loses the benefit of his increase. But the problem also exists the other way round. The person earning £45 per week who receives no benefits or FIS rebates and who pays a fairly high level of tax resents very much that someone earning £10 less than himself is taking home at least as much. He is resentful that many of those who are out of work or receiving social security benefit are better off than he is.

My postbag indicates that the main complaint about tax and social security does not involve abuses but concerns the fact that benefits are so high. They are unfair to those who are in work and who wish to remain in work. There is not a great deal of incentive for the lower income groups to work. The effect of high inflation, the indexing of all benefits and the failure to index the threshold point of tax and allowances means that the balance has shifted notwithstanding the changes that the Chancellor has introduced in his Budget.

I calculate on the basis of today's announcement that a man with two children under the age of 11 and on average earnings will be only about £4 better off in take-home pay than someone with a much lower income or someone who is out of work and relying on benefits. That must be nonsense. It is certainly unfair to the person who is in work.

At one time I thought that the right way to deal with the anomaly was to tax benefits. That would have dealt with tax clawback. However, I have now come to the conclusion that that would not make a great deal of difference. The answer must be to raise significantly the threshold—namely, the personal allowances for those who are in work. That is what the Chancellor has failed to do.

I turn to the average income group. As many of us now know only too clearly, the tax take from the national average income group has increased enormously over recent years. Yesterday the Chancellor used the argument that he could not impose any additional burden on indirect taxation because of the effect on the retail price index. But the effect of direct taxation on the average income earner is having a significant effect on the retail price index. That must be so with a marginal tax rate of over 40 per cent. on every extra pound that is earned. The average income earner naturally demands much higher wages. That subsequently has a direct effect on prices. The Chancellor can no longer use the argument that tax increases can be imposed on direct taxation but not on indirect taxation because of the effect on the RPI.

I am worried, too, because the average income earner regards the marginal tax rate that he now has to pay on each extra pound that is earned not only as burdensome but unfair. We are now beginning to see tax evasion throughout the income scale at a level which I believe has never been reached before. I do not like the way in which we now run the risk of widespread fiscal immorality because of the high burden of direct taxation.

I conclude by referring to the higher income group. I recognise that it is a group which does not command much support on the Government Back Benches, but I think that at least the Government now recognise that it is vital to economic recovery. The conditional reliefs which the Chancellor has given are nothing like enough to keep pace with inflation even over the past year. If the thresholds for the higher rates were increased appropriately, they would be well above the levels now existing under the right hon. Gentleman's proposals.

I give one or two figures to illustrate how the failure to increase thresholds for the higher rates of tax has had a dramatic affect on the higher income group. In 1961–62, the then Chancellor raised the starting point of surtax to £5,000. I asked the other day what level it should be at now—it is back, under the present proposals, to £5,000—to give that group of people the same net take-home pay in real terms as in 1961–62. The answer was the staggering figure of £15,750. One can argue about where the line should go in the scale between the two figures, but there is no doubt about the general effect of the failure to raise the tax thresholds for the higher income group in a time of rapidly-rising inflation.

The Chancellor referred to the third Diamond Report, which clearly demonstrated that over the past few years those in the group above the £5,000 a year level have not just not kept pace with inflation but have suffered a severe drop in living standards. I take a case at the extreme end of the scale. A person on £20,000 a year two years ago would now have to have a gross salary of £64,000 a year in order to maintain real living standards—and who has gone anywhere near that?

Apart from the unfairness, the other problem is that, on international comparisons, we are out of line for this group of people. Therefore, we see all too clearly so many of our hospital consultants, doctors, managers and engineers looking not just for temporary jobs but for permanent jobs abroad on a scale that we have not seen before. Even more dramatically, many recent cases have arisen where men serving overseas have refused promotion and an increase in salary to return here because the net take-home pay would have been lower. There are other examples of people who have refused promotion or to move around this country itself because it is not worth taking on extra responsibility.

The Chancellor recognised the problem yesterday when he said that the higher rates were the most he now felt able to propose. If the report in The Times of 26th February is to be believed, he put many of these arguments to the Parliamentary Labour Party. But then he says one thing one day and another thing the next. Only two years ago he said that he would tax the middle management groups until the pips squeaked. The pips have long since stopped squeaking, and the Chancellor is only slowly beginning to recognise the damage he has done.

To return to the main theme of excessive Government expenditure, the Chancellor was totally unable to deal with the problem of the impact of direct taxation in this Budget because he is boxed in by the ever higher levels of public expenditure and public borrowing. The result is that throughout all income scales there is great unfairness and indignation, which is bound to boil over unless some future Government very quickly do something about it.

8.49 p.m.

Mr. Russell Fairgrieve (Aberdeenshire, West)

I rise only to make two brief comments, but before I make them I would like to refer to the speeches of the hon. Members for Bristol, North-West (Mr. Thomas) and Preston, South (Mr. Thorne), who were here until recently but have now departed. Their speeches would have been quite good were the date 1876, but this is 1976 and there are not all that many bare-foot people running round Britain today. They should be reminded also that the nationalised industries also need capital. It is not just the prerogative of private enterprise; it is required by the publicly-owned sector as well. But, of course, so long as they and other Opposition hon. Members remain concerned only with the distribution of wealth and are not the least bit interested in its creation, so long will this country remain poor and our problems remain with us.

The first point I wish to make concerns value added tax. We know from what the Chancellor proposes to do that he knows he was wrong to introduce the 25 per cent. rate. There is one fundamental argument against multi-rates of VAT—that they go back to all the old stupidities of purchase tax. If there is one rate, it is left for the consumer to decide what is essential and what is a luxury. The minute multi-rates are put on we are back to the question of the man in Whitehall knowing best and deciding what one should buy. One of the main objects of the change from purchase tax to VAT was to have one rate, and a zero rate.

So what does the Chancellor do? He brings his gross 25 per cent. rate down to 12½ per cent. He says that 12½ per cent. is easy to calculate. On that basis, should not the 8 per cent. rate have been reduced to 7½ per cent.? There is a little difference between the new rates, but had the Chancellor gone back to a 10 per cent. VAT rate, which would be the simplest of the lot for retailers to operate, he would also have brought in more revenue.

My second point concerns the right hon. Gentleman's decision to increase the duty on Scotch whisky. This industry is at present going through a difficult period because of having to finance stocks at increased prices and increased duties, and there is some unemployment in it today. Apart from this not being in Scotland's interest, the Scotch whisky industry is one of our country's biggest export earners, and the one thing we are continually doing by putting up this duty is encouraging the people to whom we sell this commodity to do the same—and that always tends to mitigate against sales. The more we raise the duty in this country, the more we encourage the people to whom we sell to do the same in their own countries.

I therefore hope that when this Bill is considered in Committee these two points—bringing VAT back to one rate of 10 per cent. and a reconsideration of the duty on Scotch whisky—will be given earnest attention by the Committee and the Chancellor, with a view to changes being made in these two sectors.

8.53 p.m.

Mr. Ted Leadbitter (Hartlepool)

I have already made known my general views about the Budget. I have described it as the annual political tribal dance. It does not achieve anything but frustration. It amazes me that in the twentieth century, particularly in the 1970s, when we are supposed to be enjoying the white heat of technology, we should try to solve our national problems on one Budget Day followed by a most excitedly well-attended House of Commons debate. It seems to me that the country should become aware that we just cannot go on pretending to do our national business in this way. It is quite impossible. It has nothing to do with philosophies; it has nothing to do with Conservatism or Socialism; it has something to do with an archaic tribal custom which we do not, for some reason or other, want to get rid of. Therefore, I want to put a few pertinent points arising from this remarkable annual ceremony.

The first is that not a single man in my constituency who is worried about his job is affected by anything that has happened today or yesterday. Not a single man in my constituency who is worried about his job in the next two years is affected by what has been said today.

The House may be interested to know that in my constituency of Hartlepool, 3,313 men and women are out of work. By July, redundancies totalling 1,300 will have been announced in the oil rig construction industry. About 3,000-plus people will lose their jobs if the local steelworks closes, which is the proposal of the British Steel Corporation. In my constituency I have a net redundancy figure of 500 per annum, and therefore I am very much concerned with the problem of between 8,000 and 9,000 jobs in the next two years.

I say to the Government that they should try to stop this nonsense of headlines which give those who do not smoke a sense of euphoria because they are not caught by the extra 3½p on cigarettes, or give those who smoke a pipe a sense of enjoyment in their retirement because they will not pay any extra for their tobacco, or give those who drive a few miles less per year a sense of relief because they will not be affected by the increase in the cost of petrol, or give those who hope to enjoy the benefit of the cut in VAT from 25 per cent to 12½ per cent. the idea that they will get something for nothing. Let us get down to dealing with things in a commonsense way and realise that when the need arises in any period in the year the Government have the instrument and the power to deal with that need.

The fits, starts and spasms that emanate from the House of Commons——

Mr. Nick Budgen (Wolverhampton, South-West)

Will the hon. Gentleman tell the House what he is proposing the Government should do now?

Mr. Leadbitter

I indicated that some time ago, but in the short time that is left to me to make my speech I shall indicate it again. We should not deal with the problem in the way that we have been doing so far. We should not deal with it in the way that previous Governments, including the hon. Gentleman's, have done. We should get away from fits, starts and spasms. During recesses the Government should not do what the House of Commons does not want them to do.

We should try to adopt a new kind of general strategy. That phrase is used in a general way, for all sorts of reasons, by hon. Members, but if I may give a thumbnail sketch of what I mean by a new strategy, it is simply that we ought not to make cuts in public services without putting into industry the investment that is necessary to produce the wealth that can be directed to the public services. We do things the other way round. We say that we shall cut public services, cut the finances of public utilities, deal with social services and introduce a wages policy, and we then expect the working man to forgo the processes and principles of collective bargaining for the sake of a 3 per cent. carrot-and- stick philosophy that will be difficult to work out by the end of June.

We should make it clear that this country has the power, and we should use it—if it does not have the will to do that it should find it—to inject into industry the kind of generating forces that result in the productivity that is needed to make us competitive, to increase exports and to limit imports.

I shall not say a lot about imports because we heard a long speech on that subject earlier, but I suggest that the Government should consider how best to approach the problem facing us. The answer is quite simple: let us have less nonsense talked about profits. It is a word that seems to frighten some of my colleagues for some reason, but I want companies to have profits. I want companies to have a competitive edge in order that we can have flexibility in our society. Whether we like it or not we need an approach to industry that promotes and encourages profits and gives the trade union movement, politicians and management the conditions in which to produce the sort of economic climate which is essential.

In other words, we must remove the "them-and-us" situation inside this House in the same way as we seek to remove the "them-and-us" situation in industry.

I do not believe that this country is in the state of depression in which many people have tried to make it out to be. We have more cars per 1,000 families in the United Kingdom than any other country in Europe. We have more telephones per 1,000 families than any other country in Europe. We have more houses with hot water systems and inside toilets than any other country in Europe, and we have more electrical appliances and domestic labour-saving devices per 1,000 families than any other country in Europe. We are a country of great genius, drive and expertise. We are an inventive country. We should use these assets to tell the rest of the world that Great Britain is not in a state of decline. For too long we have been talking about depression rather than success.

I hope that my constituents will be able to read in the Press tomorrow not a note of despondency or division but one of complete unity in the House so that we show for once that Great Britain does not want us to talk nonsense or engage in the tribal dances that I have described. We should give the country the cutting edge it needs in order to face the world with success.

9.03 p.m.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

I suppose the reason why the Government Benches have been almost totally abandoned thoughout the day is that so many hon. Members have been waiting near telephones and keeping close to the notice boards on this admittedly awkward and embarrassingly difficult day for so many of them. I would like to wish them all well and to congratulate the Prime Minister. No Prime Minister has ever had such a terrible task as to be sworn in at 5 o'clock on the Monday and to have his Budget done for him at 4 o'clock on the Tuesday. This seems, to me, a handicap and a hazard, and I hope he survives it.

The Chancellor has received his little compensation prize—he is the first to get an extended lease for his job. The Employment Secretary has been given a little sop and will open the debate on Monday. No doubt that is promotion for him. The Home Secretary will probably go in dudgeon to Europe. Now that 60 per cent. of the gross national product is taken by the State, which he said would be intolerable, I dare say he will leave us for more private enterprise shores.

The Budget has not been much discussed. I should like to make two points about its detail before coming to the two main themes that we have been debating today.

I must draw attention to the Chancellor's idea of motoring. The right hon. Gentleman believes that large cars must be taxed more when directors drive them. Incidentally, I am glad that Mr. Arthur Scargill's car has been included in this way. We thought last year that it was overdue for inclusion. The Chancellor has come down firmly against large cars owned by firms being driven by private individuals. Indeed, he has put a penny on the price of petrol to discourage the use of large cars. I appreciate that with our fuel policy it is sensible to get people to use less petrol and therefore to use smaller cars.

The Chancellor said that he would keep the motor licence because, if he did not, we would all go for smaller cars and that would be bad for British Leyland. The right hon. Gentleman cannot have it both ways. He wants to force us into smaller cars and at the same time to force us to order bigger cars, according to his theory. The right hon. Gentleman said that this is so important that he must consult the Secretary of State for Industry on the industrial implications for the car industry. Is our economic miracle under State ownership progressing so well that these tinkerings will cause the car industry serious problems? Is that the confidence that we are to have in these measures?

I turn now to VAT. My hon. Friend the Member for Aberdeenshire, West (Mr. Fairgrieve) made the point, as did my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe), that it is silly of the Chancellor not to go back to the 10 per cent. rate. I know that it would have involved him eating his hat, and he is the kind of man who can never do that. But why can he not swallow his pride for once and admit that he has made a mistake? If he did that, he would achieve the lasting thanks and congratulations of traders all round. He would also achieve a certain increase in his reputation as a man who could occasionally admit that he was wrong. I do not want him to do it all the time, but he might do it once. It would improve his public standing if he did.

The Chancellor has missed his opportunity and has ended up with two complicated rates of 8 per cent. and 12½ per cent. It will mean less revenue, thoroughly rumpled feelings all round, and a great deal more complication than civil servants ever needed.

My right hon. Friend the Leader of the Opposition yesterday gave a brilliant diagnosis—that the nation is suffering from both influenza and cancer and that there is no need for the Government to get too encouraged if the patient is recovering from the influenza when the cancer runs on.

First, I want to talk about the influenza. The patient's temperature should be 98.4, and not just 8.4. I make that point in advance. We welcome the Chancellor's brave words on the question of money supply. If we are coming out of our influenza, it must in some degree be because he has had success in holding money supply. I do not think that it has all been good management. I believe that there has been a large element of luck, in that the economy was so stagnant that people preferred to lend to the Government than to invest in wealth producing assets. That is not a good thing in itself, although it has helped the Chancellor to control money supply.

The time must come—this point was made with considerable authority by my hon. Friend the Member for Horsham and Crawley (Mr. Hordern)—when the conflict with rising activity will cause the Government to have a problem over controlling the money supply and financing their deficit. My hon. Friend the Member for Windsor and Maidenhead (Dr. Glyn) was right when he said that the Government are gambling that they can do it again. Indeed, the Paymaster-General said that they did it last year and they can do it again this year, as though it were some great athletic feat, like climbing a mountain or jumping the high jump. It is not like that at all. The pressures upon available resources will be greater.

I do not know whether the right hon. Gentleman has realised it, but the link with the conditional reliefs in income tax and the money supply is a very real one. Will the Government have to find another £1,000 million in income tax reliefs, or not? This will make it an even more difficult financing problem.

Mr. Dell

I am grateful to the hon. Gentleman for telling me how to control money supply. I wonder how he knows.

Mr. Ridley

I do not follow that intervention. I do not quite see what it was about—unless it was made because I was suggesting that there might be difficulty in the future. I think that there will be difficulty. I want to know whether the right hon. Gentleman will be sticking to the Chancellor's insistence on the control of money supply, or whether demand management, lower interest rates and other considerations will predominate. In the Treasury's evidence to the Sub-Committee we could not get an answer to that question. It would be nice if, one day, the right hon. Gentleman would answer it.

I come now to the deal itself—the conditional reliefs. I have one or two preliminary questions to ask before discussing the main issue. This has been the main subject of the debate today. One of the worst aspects of this matter, apart from that of constitutional propriety, is the fact that we do not know our tax rates for the coming year. We are now well into fiscal 1976–77, and I do not know what tax rates I shall be paying; nor does anyone else.

Mr. Hordern

Guess.

Mr. Ridley

"Guess", says my hon. Friend—but it is not quite the same as knowing. It is quite wrong that citizens should be asked to conduct their financial affairs without having the slightest idea whether or not they will have a bigger personal allowance or married allowance, or whether the £5,000 band will be extended to £5,500, or whatever it may be. This is getting near to retrospective taxation, because if the change is made later in the summer it will affect people's plans very considerably.

There are some nasty questions to be answered. If we suddenly get refunds in the middle of the year because the bargain has been fixed up, the most enormous amount of money will suddenly be poured into the economy, because it dates back to yesterday—to the Budget. Presumably, about £500 million will suddenly be released in tax refunds to citizens. Is that how it will work? It does not seem to be a very clever idea. Many people may have assumed that they would get a refund and will have spent an extra amount. Whatever happens, it will not be a very easy situation for those, such as myself and everyone else in the House, who do not know what the outcome will be. It means a great deal of extra administrative nonsense to have two different codings for all taxpayers during this year.

Hon. Members have made the point that the unfairness of this proposal is quite considerable. This is not a major point, but it is pretty difficult to explain to middle managers, to widows, to those unable to get large pay rises, and to those who for some reason—perhaps being self-employed, or whatever it may be—do not come in within the main collective bargaining arrangements, that their tax arrangements will be entirely subject to the bargain between the Government and the TUC.

I have so often heard Labour Members talk about "our people" and about "ordinary working people". They talk about the population as though it consisted almost entirely of their supporters and friends, and as though the rest of the population were complete layabouts and parasites. It is extraordinary the way that Labour Members believe that the population consists only of trade unionists. The great bulk of the working population are not members of trade unions, and are not members of the Labour Party by any means, either. Everyone is useful. It must be remembered that They also serve who only stand and wait. Everyone who performs a rôle in society has just as much right as anyone else to be consulted.

That is a serious criticism of the arrangements but, worse still, the poverty trap will deepen. If we have unconditional relief, a family earning £30 a week, with two children, will have 82p less tax to pay, and if the conditional relief arrangements come through there will be a further 86p a week less to pay. But that will not be enough to pull that family out of the poverty trap. The extra benefits will make the trap deeper. I have not had time to work out precisely what will happen as a result of the Secretary of State's announcement today, but it appears that far from alleviating the poverty trap the Government have made it worse. The House must be concerned about that when there are more people now who find that it does not pay to work, and others who would like to work more but are discouraged by the kind of figures we have had today.

The Treasury table in yesterday's Press release contains information about the new pay packet arrangements that will operate if the Chancellor's option of a 3 per cent. increase is accepted. It says that there will be an approximate gross pay value of a 2 per cent. price saving, which is put at £2 or £2.20 for a family with two children. The Chancellor is trying to tell people that the scheme will produce more money for them because their costs will be £2 less than they otherwise would be.

What evidence is there that prices will increase by 2 per cent. less than they would without the scheme? How can the Government justify that claim? It is like the Chancellor saying that he planned to buy a Rolls-Royce in 1979 and then decided against it, and claiming that he has thereby made a large saving. It is like saying that shop prices were to go up in the autumn but now they are not, so people are £2 a week richer. That £2 does not exist. It is a fraudulent prospectus. The Chancellor knows damned well that the £2 is not there and never would have been there. He knows that the rate of inflation is not determined solely by wages and that some people believe that wages have no effect at all on inflation. He will remember last year—that disastrous year—when wages were not controlled and when they rose by less than the increase in prices. It is false to argue that all that one has to do to make prices fall is to control wages. Last year prices rose by 25.9 per cent. and wages by 21 per cent.

The Chancellor of the Exchequer (Mr. Denis Healey)

Earnings went up by 29 per cent.

Mr. Ridley

The Chancellor says that earnings went up by 29 per cent., but perhaps he is talking of a different year.

Mr. Healey

I am astonished by the hon. Member's argument, which I shall hang round his neck like a millstone for many debates to come. Earnings last year rose by 29 per cent., and prices went up. The result was that real living standards did not rise at all.

Mr. Ridley

The Chancellor is not the most reliable statistician. Many hon. Members still remember his 8.4 per cent. and now I always like to check his figures. The truth is that last year wages went up by less than the rise in prices. Commodity prices are bound to go up in the coming year—they are going up now. The fall in the value of the pound will put them up still further.

We know that the pressures will be heavy next year. They will exist if one believes that inflation is caused by high import prices and world events. If one believes that inflation is caused by increases in money supply, the pressures on the available resources are likely to send money supply up again. So, whichever way one looks at it, the chances are that there will be a return to inflation, perhaps not immediately but within a year or so.

The Government have to an extraordinary degree based their whole strategy on the assumption that because inflation is now going down—we welcome that—it will go on doing so for ever. We have the strange phenomenom that if the trade unions will accept a very small increase—3 per cent.—the Government will spend another £1,000 million, eventually creating more inflation. But if they fight for a higher increase and get it the Government will not spend so much. They will not remit the £1,000 million in tax allowances, thereby causing lower inflation. When the options are put plainly—a low wage increase and high inflation or a bigger wage increase and lower inflation—the answer is to reject the Chancellor's offer. That is carrying it ad absurdum, but he has got into rather an absurd position.

I do not believe that on an occasion like this one can solve the philosophical dispute about whether there should or not be compulsory control of pay and prices. My right hon. Friend the Member for Worcester (Mr. Walker) and my hon. Friend the Member for Leek (Mr. Knox) believe that it is an essential part of the economical apparatus that there should be. The hon. Member for Birmingham, Perry Barr (Mr. Rooker) made a most telling speech, describing the problems of differentials, due to the need for flexibility, which are the reality of industrial life in factories. What he said went a long way to explain why incomes policies have always got into trouble.

I could not help thinking that memories are a little short about the events leading up to February 1974 and the problems that brought that incomes policy to an end. Without going into that, I believe that there will be growing resentment in the country if people, whether they are for or against control of incomes by statute, think that it is really the trade unions and not this House and the Government which will be controlling them. That makes a subtle difference, which may make it much more difficult for the idea to be accepted. I hope that in their whole handling of the deal the Government will be very careful to make clear that the ultimate authority is this House, not the TUC. I do not want to overstress the point, because there has been some support for what the Chancellor is doing, but it seems to me that a vital part of the argument is that respect for the power of this House should remain.

I should like to mention briefly what my right hon. Friend described as a cancer—the deep-seated British industrial problem represented by the borrowing requirement of £12 billion and the ever-growing size of the public sector. In 1973–74 total spending was £33 billion, in 1974–75 it was £44 billion, last year it was £56 billion, and in the coming year the Chancellor expects to spend £64 billion. The amount has very nearly doubled since he became Chancellor. The feeling that public spending is totally out of control is perhaps the most depressing feature of the whole of our problem. It is not as if we are getting anything more for it, as it inexorably climbs to 60 per cent. of our gross national product.

Mr. Nicholas Winterton (Macclesfield)

We get less.

Mr. Ridley

I should like to give the Chancellor one or two interesting figures from a Government publication called "Priorities of Health and Personal Social Services in England". I see from this document that real spending in the National Health Service in the last four years has risen by 10 per cent., the number of cases has risen by 4 per cent., and the length of stay has fallen by 7 per cent. That is a considerable drop in productivity. But when one looks at maternity—the oldest industry in the world, not capable of modern technological change, and, indeed, an industry in which technology has not changed at all—one sees spending in real terms has increased by 14 per cent. but the number of births has fallen by 14 per cent. That is an increased cost, per birth, of 33 per cent.

Why do not the Government examine these matters? Are they not aware that this situation is to be laid at the door not of deteriorating standards in the National Health Service but of ever more people going into administration. For example, in 1959 there were 36,000 administrators but by 1973 that figure had grown to 71,000. That means that a further 35,000 administrators joined the NHS to preside over 50,000 occupied beds per day.

I do not know whether I heard the Chancellor of the Exchequer cheering at that point. I do not know whether he thinks it a good thing that the number of administrators has increased from 36,000 to 71,000. I am talking not about doctors or nurses, but about administrators. Does the right hon. Gentleman think that the answer to all our problems is to load bureaucracy on top of bureaucracy?

Mr. Healey

I was cheering because I always enjoy an occasion on which the hon. Gentleman attacks his own Front Bench. He must be aware that the right hon. Member for Leeds, North-East (Sir K. Joseph) was personally and wholly responsible for the administrative increase mentioned by the hon. Gentleman. Furthermore, is he aware that in attacking the approach of the Government towards a voluntary incomes policy, he is attacking the policies of his own Front Bench colleagues, who have undertaken a U-turn on this matter?

Mr. Ridley

I was wrong to give way, because I wanted to stick to the point that the Chancellor's responsibility lies in controlling the public service. He should take a little more interest in the swelling ranks of the bureaucrats who are beginning to suffocate this nation. The sooner he takes his responsibility seriously, the better.

Finally, I turn to the economic miracle which has been such a feature of our debate today. I am tempted to quote the Chancellor. Indeed, I shall do so. He said: I have learned in my political career never to express pessimism or optimism, but only determination. That was said in the context of a slightly different matter. It related to whether the right hon. Gentleman could turn 37 votes into 300 votes. This is the reverse of what the Chancellor is seeking to do about the economic miracle. He expresses extreme optimism, but shows no determination. The right hon. Gentle- man will not achieve that economic miracle in the small but welcome reliefs he has announced in respect of small businesses, capital transfers and stocks for depreciation. That will not be the key to unlock the economic miracle. It will certainly take more than that.

I turn to the speeches made by the hon. Members for Motherwell and Wishaw (Dr. Bray) and Gateshead, West (Mr. Horam). They dealt with the subject of how to get the private sector going. I agree with a good deal of the remarks made by those hon. Gentlemen, in the sense that there must be competition on the one hand and incentives and rewards on the other. I must tell the hon. Member for Motherwell and Wishaw that I am not a great planner. He plans much too much for me. However, the hon. Member for Gateshead, West is not such a planner. He understands the importance of incentive.

If ownership is to be diverse, who am I to be anything but delighted? If ownership can be spread widely in cooperatives, that is admirable. One thing is clear. The present arrangements are not working. The sort of regime erected by the Government is not working. Increasingly, it does not pay to work and, increasingly, trade unions are restricting output and proper manning schedules, and causing overmanning in all sorts of industries.

The taxation of managers, investors and those who take risks has become intolerable. One does not need to ask whether capitalism is failing. We know that it is not failing in Germany, Japan and the United States. The question is: why is capitalism failing in Britain? The Chancellor asked a similar question yesterday. He asked why we could not emulate the economic miracles that had been achieved in many other countries. The answer is that those countries do not have him and his right hon. Friends.

When the Chancellor of the Exchequer goes—which will not be long—and my right hon. Friends take over the Government, they will last for five years, or perhaps more, but they will have hanging over them the shadow of the Chancellor and his Friends. As long as there is a chance of further Socialist measures, the actions which even a Tory Government can take are restricted.

The Chancellor has a very grave responsibility. If he were to give guarantees that he and his right hon. Friends would behave in a responsible fashion, he would get the investment he needs. If he said that the Government would not turn the screws of taxation but would rather unturn them; that they would not insist on price controls that squeeze margins; that they would not pass any more stupid Socialist laws interfering with the right of managers to manage; that they would not go on nationalising industries; and that they would behave in a less doctrinaire way, we would get some confidence going in this country.

The guarantees needed are the guarantees against Socialism beyond and through the next Tory Government.

9.33 p.m.

The Financial Secretary to the Treasury (Mr. Robert Sheldon)

We have heard two particularly distinguished speeches from the Opposition Benches today. The speeches by the right hon. Member for Worcester (Mr. Walker) and the hon. Member for Leek (Mr. Knox) were distinguished not because they had doubts about the wisdom of the policy being pursued by their party but because they understood, in a way the Leader of the Opposition did not understand, the reason why my right hon. Friend the Chancellor of the Exchequer is pursuing the particular package and split which is the main innovation of the Budget.

Other hon. Members opposite also expressed doubts about our proposal, but those two speeches understood and appreciated what the Government are doing. The hon. Member for Cirencester and Tewkesbury (Mr. Ridley), in expressing his unease about the relationship of pay and prices, did not reflect much of today's debate.

One thing which has become abundantly clear in the House and the country is that when any Chancellor makes his Budget judgment there are many factors which he has to weigh and consider in deciding the levels of taxation for the year ahead. Chancellors must, and do, take into account pay settlements for the year ahead and the inflation which will result from them.

In the past, Chancellors of the Exchequer have sat down with their advisers and made these calculations in the dark. They have presented them as matters of fact received from on high, and have then expressed them in the legislation which subsequently came before the House. My right hon. Friend said that there is this direct relationship, and in the past Chancellors frequently complained that they had not the power of foresight. My right hon. Friend accepted that and produced a package which is dependent in part on an outcome that has yet to be determined rather than attempting to make a very difficult assessment.

The hon. Member for Cirencester and Tewkesbury asked what evidence there was for this relationship between wages and prices. All hon. Members understand that direct relationship. It is not a one-to-one relationship, but it is a relationship which we know to be valid and on which economic policy is determined. When my right hon. Friend the Member for Huyton (Mr. Wilson) said that one man's wage increase was another man's price increase he was loudly applauded by Opposition Members. That is exactly what my right hon. Friend the Chancellor of the Exchequer is saying.

I grant that the relationship is determined by several factors, but one critical factor is the decision taken by the Trades Union Congress on the level of pay increases that it will demand in the normal course of its duties on behalf of its members.

Mr. Nicholas Winterton

What about the other 60 per cent.?

Mr. Sheldon

The hon. Gentleman asks about other employees who do not determine the way in which the TUC conducts its affairs. That those people exist is true, and it has always been true. There are those who determine their pay increases in a different way, but the main determinant for pay increases is now, has been in the past and almost certainly will be in the future the general policy that is agreed by the bulk of trade union leaders. Chancellors of the Exchequer, whether Conservative or Labour, have made their Budget judgments implicitly upon that understanding.

The right hon. and learned Member for Surrey, East (Sir G. Howe) asked what representation widows have on the TUC. The answer is that they have the same representation as they have always had. The Chancellor of the Exchequer pitches his levels of tax to take into account what is required in equity for widows and other less fortunate people, but those levels are based on the level of inflation and the level of pay increases which he foresees.

The Chancellor of the Exchequer is absolutely right. Having reached this level of understanding with the trade unions for the first time in our history, we can arrange these matters not in a room in the Treasury with a handful of advisers but openly and publicly with the people who will create the conditions in which success is possible.

Mr. Nicholas Winterton

Will the hon. Gentleman give an assurance that in all future negotiations, in addition to negotiating with the TUC, he will consult the self-employed, small businesses, widows and all the others who are included in that 60 per cent.?

Mr. Sheldon

Perhaps the hon. Member is unaware that one of my functions is to meet representatives and delegates from the kind of bodies he has mentioned. I welcome these meetings in the Treasury. I hear representations and I offer further advice to the Chancellor on how these interests can best be met. However, the main point about the levels of pay is largely one for the trade union movement. The Chancellor is doing exactly what has been done by his predecessors, but he is doing it more openly and more rationally.

Mr. Budgen

In view of the wide-ranging changes that the Government are making, have they any plans for introducing legislation to give statutory authority for the abandonment of parliamentary democracy and the imposition instead of the corporate State?

Mr. Sheldon

The hon. Member may not fully have grasped my right hon. Friend's Budget Statement yesterday. He said quite clearly that he would be coming to the House with proposals in the usual way. They would be based on the understanding which would be reached so that, instead of the proposals being based upon guesswork, which has always been the way in which these matters have been undertaken, they would be based upon a better understanding of the future level of inflation.

Mr. Michael Heseltine (Henley)

I understand the relationship between the 3 per cent. limit and the tax allowances which the Chancellor has offered. If the TUC suggested that it could not meet the 3 per cent. figure, would the tax allowances be scaled down proportionately?

Mr. Sheldon

My right hon. Friend mentioned this clearly in his Budget Statement yesterday. He said that, if the conditions were not met in the form he was suggesting, I would then move amendments to the Finance Bill at the appropriate stage so as to seek Parliament's authority for the second group of reliefs, either in whole or in part depending on the pay limit which is agreed."—[Official Report, 6th April 1976; Vol. 909. c 279.] That is the situation.

Mr. Heseltine

Do we take it, therefore, that if the 3 per cent. figure were to be exceeded there would be a proportionate reduction in the allowances on offer?

Mr. Sheldon

I have nothing to add to what my right hon. Friend said yesterday. He was as clear as he could be at this stage of the negotiation. [Interruption.] The hon. Member for Henley (Mr. Heseltine) is smirking. Perhaps I may say something partly to remove that smirk. His right hon. Friends' performance in the last Conservative Parliament was hardly creditworthy. They tried unsuccessfully to create an accord with the trade unions; it was not available to them because of what they had done before. My right hon. Friend is conducting these relationships in a way which has every possibility of success. The main decision in this country about the level of pay increases sought by most working people lies with their trade unions. The way in which the economy is subsequently managed is a matter for the Chancellor, subject to the approval of Parliament.

We have altered the timetable so that those matters about which more will be known at a subsequent time will have their legislative implementation at that time. I very much regret that the right hon. and learned Member for Surrey, East and the Leader of the Opposition have not understood the way in which these matters come together. If they understood it, perhaps they might be a little less optimistic about the way in which Budget judgments are made in the absence of agreements of the kind we are currently seeking.

The relationship which has existed in the past between estimates of pay increases and of inflation and the requirements for tax allowance which form the Budget judgment is not a simple one but is one that can be made and which the Chancellor each year has to make. It is a great problem to make it comprehensible to Members of the House. My right hon. Friend is showing the relationship that exists in the normal Budget judgment between levels of pay settlement and changes in taxation, and is explaining to the people who have great responsibilities—namely, the trade unions—the mechanism that links the two. Instead of these decisions being made in the absence of an understanding of how economic policy is formulated and how tax changes are instrumental in economic policy, the trade unions will have the advantage of understanding this relationship and taking part in it.

I shall now say something on the higher-rate value added tax, because right hon. and hon. Members opposite will know that last year I set in motion the monitoring of this higher rate. I announced that I was doing this in the interests of industry to see was effect the introduction of the higher rate would have on industry. I said that I owed it to the House to provide this monitoring and that I would explain its scope and findings when these were finally produced. The main parts of British industry subjected to the higher-rate VAT were domestic electric appliances, radio and television, caravan building and boat building, and it was here that the monitoring report largely concentrated.

It was very difficult to distinguish the effects of the higher rate from the cyclical fluctuations occurring over a period of years as well as various aspects of seasonal fluctuations to which many of these industries are susceptible. As a result, some of our conclusions are a little more tenuous than others. Following the first results of the monitoring exercise, however, my right hon. Friend announced on 17th December last a number of relaxations in credit controls on goods to which the higher rate applied. These were largely electrical goods and television equipment. Under the relaxation, these goods could be purchased on 20 per cent. deposit with 30 months to pay. Boats and caravans were removed altogether from hire-purchase restrictions, and these relaxations were valuable and were widely welcomed in the industries concerned.

I grant to hon. Gentlemen that this followed a number of representations made to me personally to which I tried to be as receptive as I could. The monitoring exercise subsequently showed that there was considerable spare capacity in the higher-rate industries, and following meetings with a number of delegations it was pointed out that there were abnormally high levels of stocks in manufacturers' and retailers' premises, along with widespread short-time working and, in some cases, redundancies.

The boat-building and caravan industries also made representations to me through hon. Gentlemen opposite, and the difficulties, particularly of small firms, were explained to me in forceful terms. The larger boat builders did very much better. They had considerable export potential. They had it before and they continued to export satisfactorily. The caravan builders had a good export record, but following the oil crisis of autumn 1973 they have had a depressed market both at home and abroad from which they have been recovering only very slowly.

Following the introduction of the 25 per cent. rate, the industries explained to me personally that they were not in favour—neither are the Government—of frequent changes in the rate of any tax. The situation last year was exceptional because the Chancellor found himself with the need for considerable increases in taxation owing to the problem he then had of financing the deficit. Other factors were involved.

Another point that was put to me by a number of manufacturers—it was not put by many Conservative Members—was the need to avoid too great a stimulus. In 1971, under the Conservative Government, restrictions were relaxed too readily and too widely. There was a consequent flood of imports. Importers obtained a foothold which was maintained long after the industries received their stimulus.

My right hon. Friend had to strike a balance between over-stimulus and the need to assist firms with their redundancy problems, with the problems of clearing unsold stocks and with maintaining, and even increasing, the scale of their operations. I noted as a result of various representations that I received from some of my hon. Friends that much of that assistance was necessary as a result of the Conservative Government's policies of dispersal and redevelopment in development areas. Problems arose in the assisted areas, especially Wales, the South-West and the North-West.

I now turn to the industrial strategy, to which much reference has been made. Any Budget and any economic policy that is founded upon an industrial resurgence rightly demands some considerable increase in assistance to industry to enable it to plan over the long term. We have provided a range of such assistance to industry from which it should be able to take considerable advantage.

For example, stock relief was introduced. It is now to be available for at least another two years. The principle of stock relief is now established. The clear understanding has been given by my right hon. Friend that there is no question of a clawback of tax relief for those firms whose stock valuations and rates of investment are maintained. There is a change in the profits deduction which is to be calculated after the deduction of capital allowances. The consequence is that relief will be concentrated more and more on the companies that are expanding and investing.

The Sandilands Committee on inflation accounting recommended that 100 per cent. capital allowances should be continued. The Chancellor has given a commitment to continue the present system of capital allowances. The small companies rate increased from £25,000 to £30,000 with marginal relief increased.

Mr. Nicholas Winterton

Not enough.

Mr. Sheldon

I hope that at some stage it will be possible to go further. We have also the growth of medium-term finance for industry, and it will be made available more fully. We have had the loan capital changes and the assistance to exports through ECGD. The export assistance operated by our embassies and the realistic exchange rate give further opportunities to industry to export. [Interruption.] Opposition Members may laugh, but there are very few industrial countries in the world that have the range of possibilities that are open to companies in Britain. Scarcely any other country offers companies so much freedom from corporate taxation. Manufacturing companies which are investing and expanding are almost free of corporation tax. It is difficult to find that situation duplicated anywhere else in the world. As a result of that situation and of the commitment for such a long period ahead, our industrial companies are well placed to seize the opportunity open to them.

Many times in the past, Governments have criticised industrial companies for not expanding when those Governments thought that the conditions for such expansion existed. As a result of the Government's actions, through various incentives—for example, stock reliefs and capital allowances—for the first time a manufacturing company which reinvests its profits, whether it be in fixed or working capital, will be effectively relieved from corporation tax. The Budget allows industry to plan confidently upon that basis. This is something new. If Opposition Members say that industry will not take advantage of it, they are being much more pessimistic than anyone in industry itself or people overseas.

I want to say something about the introduction of cider duty. A number of Members from the South-West are particularly concerned about the Resolution that will bring cider into taxation for the first time since the First World War. The hon. Member for St. Ives (Mr. Nott) has a particular interest. The position of cider is rather different from what it was 10 years ago. Its marketing and consumption patterns have changed; it has become a nation-wide drink; and it is manufactured by the largest of companies. The promoters themselves are marketing cider as a competitor to beer in a way that it was not previously. The Chancellor has therefore undertaken to bring into duty this main new competitor of some of the more widely-established alcoholic drinks.

At the end of it all, the solutions to so many of our problems will not only be discovered in this House. What we can do is to set the standards by which changes can be made, but the main changes and the main successes are to be found on the factory floor and in the day-to-day production decisions, which will affect the future of the country much more than most of the decisions we take here. My right hon. Friend has established the framework for controlling inflation, for establishing and renewing the pay policy which is the basis of the Government's economic policy, and for allowing industry to make its crucial contribution to the sources of economic growth on which we all fundamentally depend.

Debate adjourned.—[Mr. Coleman.]

Debate to be resumed tomorrow.