BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 12 April 1976 vol 909 cc914-1060

3.31 p.m.

The Lord President of the Council and Leader of the House of Commons (Mr. Michael Foot)

May I first apologise to those right hon. and hon. Members who spoke earlier in the debate and whose speeches I did not hear? I have done my best to repair that deficiency in the last day or two, but there was an intervention in the normal processes and, therefore, I have not been able to be present at the debate as often as I wished.

Whatever other crimes I have committed, I hope that the crime of not listening to what other people say is not one of them. Some people are inclined to deride the House of Commons as a talking shop, but people outside the House do not always recognise that in order to be a talking shop it is also necessary to be a listening shop. Try as we may, it is impossible to survive long in the House without listening to what other people have to say.

That is a healthy process. I do not say that because I am in favour of searching for any muzzy, sodden consensus as a solution to our national problems. I detest the word "consensus". I am not sure that I know what it means and I am not sure that other people know what it means. I believe that the process of compelling hon. Members who are in the Chamber, or outside it in Committee Rooms, to listen to what other people have to say means that this is a place where we can hear how intelligent, formidable and considerable are the arguments of one's critics or opponents in other parties or in one's own party. That is what the House of Commons is for, and it discharges that function better than many people in the country sometimes acknowledge.

In continuing the debate on the Budget, I want to underline afresh what the Budget seeks to underline afresh and what have been the declared objectives of the Government. First, we are determined to beat inflation. We are determined to bring down the inflation rate, as we promised last July, into single figures and then to bring it down again as speedily as we possibly can. I hope that no one in any part of the House, in the country or anywhere else has a mistaken notion about our determination to proceed along those lines.

To double that assurance, I shall translate the economic situation into political terms, which is always a wise course. Anyone looking around the world can see that, electorally speaking, more Governments, including Left-wing or Leftish Governments, have been thrown out of office and from power through a failure to deal with inflation than through any other single cause. We have no intention here of being swept out of power and I hope for that reason, amongst others, that people will understand our determination to deal with the inflation rate.

Second—but not subordinate to the first objective because it goes hand in hand—we must do everything we can to reduce the still appalling level of unemployment. That is a concern which is uppermost in the minds of my hon. Friends, and I shall say something further about that later. I trust that there is no mistake about our determination to do everything we can to bring down the unemployment level.

The third objective of the Government—which is not always fully accepted and understood, but is one which we have pursued throughout our time in office particularly in the Department of Employment—is to protect the low paid. Rising prices impose their heaviest burden upon the poorest sections of the community, and we have therefore always sought to secure policies that will assist the low paid.

Those are the three objectives that we have had and should continue to have—to beat inflation, to bring down the unemployment level and to protect the low paid. The virtue of the Budget proposals is that they can assist us in achieving those three aims at the same time. No one can dispute that the proposal for securing the low pay limit will have a dramatic effect on the inflation rate. The proposal will have beneficial effects on the unemployment situation. It will enable us to have many other jobs that might be lost and to create new jobs in places where they can be most beneficial for the country as a whole.

Perhaps the House and the country do not fully understand how that objective or policy can also assist in helping the low paid. I do not say that it can protect them fully against the hazards which are involved in the present situation, because that is not entirely possible. I claim, however, that ever since March 1974 the Government and the Department of Employment have done everything in their power to try to protect the low paid. We are determined to continue with that policy in the future.

I can best express our policy in this way. Over the past two years—it began with the £30-a-week target in the first year and the £6-a-week limit in the second—a man on £30 a week with two children has increased his money income, whether gross, take-home or inclusive of social security benefits, one and a half times as fast as a similar man on average earnings and at least three times as fast as a man on £8,500 a year last year. That £30-a-week man's standard of living has been better protected than that that of others with higher pay. Under my right hon. Friend the Chancellor of the Exchequer's proposals he will continue to do better than the average man. That is the third advantage of proceeding in this manner. These three factors together should be taken into account.

Mr. Frank Allaun (Salford, East)

Is my right hon. Friend's last remark strictly accurate? While it is true that the low-paid worker may have had an increase proportionately higher than that of a man on £8,500 a year, the man at the bottom had a smaller increase in cash than the higher-paid man.

Mr. Foot

I do not think that he had a smaller increase in cash terms. The figures that I have given cover the whole of the two years. I agree that the fact that we have been able to protect the low paid comparatively does not mean that the low-paid have been protected absolutely against the consequences of inflation. I fully concede that, but one of the purposes of our policy is to secure better protection against inflation for all concerned, but especially the low-paid.

The facts are indisputable, and they are very important for Socialists in their approach to these matters. I am claiming that in the conduct of incomes policy over the past two years the Department of Employment has deliberately sought, after full consultation with the trade unions concerned, to provide as best we could special protection for the low paid, despite the difficult circumstances. I believe that that should continue.

One of the reasons why I emphasise this so strongly is that whatever is to happen in the new pay round—and I understand that this is a major feature of our debate and the debate that will continue in the country for quite a long time—there is a conflict of interest between those who say "we must relax the differentials" and those who say "we must sustain the flat-rate principle to protect the low paid." It is no use trying to disguise that conflict of interest.

A percentage figure alone, applied across the board and with nothing else, would certainly be extremely harsh upon the low paid. A percentage figure of 3 per cent. and nothing else would not sustain the assistance for the low paid that we have sought to provide over the last two years. That is why there are advantages, if we are not to have a full flat rate to protect the low paid, in seeking a combination of flat rate for some on the lower level and a percentage for those higher up, with a choice if one can provide it. But if one cannot provide it in that way one can provide some buttress for the low-paid through the relief of taxation proposed by my right hon. Friend.

In all our discussions about what is to be the future of the pay policy, we must seek not only to cut inflation and unemployment, which are the paramount objectives, but to be as fair as we can to the low paid. That is one of the purposes behind the policy as well.

Mr. Mike Thomas (Newcastle-upon-Tyne, East)

Is there not a paradox which makes my right hon. Friend's explanation rather more difficult? The Government have allowed those receiving benefits to have substantial increases in real income—15 per cent. to 17 per cent. for the pensioner, for example—while the increase for someone on the average wage is perhaps nearer 1 per cent., 2 per cent. or 3 per cent. in real terms. The incomes of the low-paid have appeared to come closer and closer to the incomes of those receiving benefit, particularly those on benefit with large families. Therefore, the Government are suffering from that bad contrast in their own good policy.

Mr. Foot

I am sure that there is some truth in what my hon. Friend says, out I am also sure that no one would therefore urge the Government to be more slothful in trying to increase the benefits. I am sure my hon. Friend is not arguing that, though it is true that the contrast has been emphasised by the measures that the Government have taken to improve security benefits.

It is not fully appreciated in the country that, despite difficult circumstances, the Department of Employment has sought for two years to make special provision for low-paid workers. We want to see further special provision made in the coming year.

Mr. Ralph Howell (Norfolk, North)

Is not the right hon. Gentleman aware that as a result of the Chancellor's proposals the tax thresholds will fall in relation to average earnings: that if the full concession is allowed they will still fall, and that the poverty trap has widened considerably in all respects as a result of the proposals?

Mr. Foot

I think that the hon. Gentleman has got it the wrong way round when he speaks about the thresholds. As for the poverty trap, I think he will find when he goes through the details that our proposals will assist, partly because of the other increased benefits being provided.

I am seeking to show that we are following the policy of trying to assist the low-paid as well as dealing with the other problems. That is not an easy thing to do, but we shall continue to try to do it throughout the operation of the policy in the future, as we have in the past.

Mr. George Rodgers (Chorley)

rose—

Mr. Foot

I give way to my hon. Friend, but I hope that hon. Members will then allow me to proceed with other parts of my speech.

Mr. George Rodgers

I am grateful to my right hon. Friend for giving way. I find it difficult to accept that, if the trade unions implement the formula which my right hon. Friend the Chancellor has put to them, those on enormous incomes—£10,000 to £20,000 and more a year—will not benefit considerably more than those on low incomes.

Mr. Foot

There are some aspects of the increase in higher incomes which I agree must be discussed further. I do not dispute what my hon. Friend said about higher incomes. We still have to deal with that matter.

If my hon. Friends compare those with average earnings and wages with those who are low paid, they will see that the low-paid would do better under our proposals than would those on average earnings or just above.

Mr. Dennis Skinner (Bolsover)

Not the others.

Mr. Foot

That is a further aspect of the matter. The Government have not been backward in the last two years in imposing a limit, as they did on the last occasion, and I am sure that limits will be imposed as a result of any discussions about the future.

There is another aspect which is very important for the country and the House to take into account if we are to secure a new pay settlement, which is what I want and the trade unions want and what the country requires. It is very important for us to learn from what has happened since July. It is remarkable in one sense. About 7 million workers have been covered by settlements within the £6 pay limit, more than half the major settlements that would be covered by the pay policy. There have been no major breaches of the policy. There may have been some minor ones, but there have been no major or minor ones condoned by the Department. The Department has been responsible to the House for the administration of the policy, and if we had been guilty of departures from it I am sure that hon. Members in different parts of the House would have raised the matter. There have been remarkably few cases brought to the attention of the House. The reason is that the policy has been carried out in the letter and the spirit to a remarkable degree.

Because that has happened, many commentators and some hon. Members, particularly Opposition Members, have drawn the wrong conclusions. The fact that there have been so few disputes and no breaches does not mean that it has been easy to operate the policy. It has been extremely difficult. It has meant that many awkward, difficult decisions had to be made by the Department. We believed that we had to make them because if we did not the whole policy could crumble. I do not need to instance what has happened in the past few weeks in British Leyland, perhaps the most striking example of the pressures on the pay policy, where the Department made the position quite clear.

There have been difficulties there, but much more difficult has been the position of trade unionists throughout the country, particularly those shop stewards and others in the trade union movement who have been assisting the Government, the country and Parliament in carrying through the policy. They have had to bear the greatest burden. I refer to regional officers, secretaries and shop stewards throughout the country. Conservative Members may smile, but the trade unions have had to tackle a difficult job. Trade union officials who may have opposed the policy, or whose unions may have opposed it have defended it. They have said "Parliament has passed it, the Labour Government have passed it, we shall seek to sustain it." They have enabled us to achieve the remarkable result of getting about 7 million people to carry through the policy.

It makes me both furious and contemptuous at the same time, if that is possible, when I contrast what has been achieved with the caricature of the relationship between the Government and the trade unions which is portrayed in many newspapers and in the House. The trade unions have not dictated to the Government. It has been a remarkable case of rank-and-file trade unionists, shop stewards and others being prepared to co-operate with the Government, often against their own desires and their own interests. They have chose to co-operate with the Government to carry through the policy.

That is where we must learn for the future. It is not only a question of getting a new policy that can be promulgated from 1st August, important though it is to get it; it is a question of having a pay policy that will stick next April, May and June. That is what we must secure. To achieve that, we must be able to secure the same sort of support, allegiance and co-operation from the trade union movement in the coming year that we have had over the past six or seven months. There is no escape from that except into the abyss of a full statutory policy.

We are as bitterly opposed to that concept now as we were in July when we discussed these matters in the House. A statutory policy is no escape from the problem. It would only arouse the trade union movement against the Government's policy even more furiously. I know that the Liberal Party, or a section of it, chooses to think that a statutory policy is the solution. I am not quite sure where the right hon. Member for Down, South (Mr. Powell) stands on these matters. I think that he is opposed to any form of statutory policy.

If we are not to have a statutory policy, and if we are to have any possibility of dealing with these problems, we must have the support of the trade union movement throughout the country. That is what my right hon. Friend the Chancellor of the Exchequer underlined on so many occasions during his Budget speech. For example, as reported at column 271 of the Official Report, he said: The Government's overriding purpose is to reach a fresh agreement with the trade unions on a voluntary policy for the next pay round".—[Official Report, 6th April 1976; Vol. 909, c. 272.] It is the Government's overriding purpose to reach an agreement with the unions on a voluntary policy. We believe that it is only a voluntary policy that can have any chance of success. It may be more difficult to secure such a policy in these circumstances than it was before, but that is no reason for not seeking it. It is no reason for being downhearted before we start. The right hon. and learned Member for Surrey, East (Sir G. Howe) is always despairing about any policy for dealing with these matters. The right hon. and learned Gentleman, who opened the debate for the Opposition, said that the policy was an abhorrent nonsense that would not work. That was what he had to say not about the policy that was announced in the Budget this year but about the one that was announced last July.

The House may remember our long and heated debates through those July nights. The Opposition, together with a few others, said that the policy would not work. Indeed, some of my hon. Friends said that it would not work for a specific reason. The Opposition Front Bench said that it would not work for a variety of different reasons. The right hon. Member for Down, South said that it would not work for classical economic reasons which he expounds so much better than all his colleagues on the Opposition Front Bench. None the less, I think that very often the right hon. Gentleman applies his logic too persistently and diligently.

The policy has worked so far. I agree that there are still difficulties with which we have to contend. I am not arguing that the policy is home and dry. That is why we must persist in arguing it. However, we command the support of the trade union movement in carrying it out. I believe that on that basis we can proceed to discuss what we should have in the policy next year.

We shall not be dissuaded from discussing with the trade union movement how we should apply a pay-round policy for the next year. We shall not be dissuaded by any prophecies of doom from the Opposition. We had those prophecies last July, and they were all disproved by what happened.

The Opposition have not been content to say that the policy will not work. They have looked for some reason to try to explain why it will not work.

Mr. Tim Renton (Mid-Sussex)

If sterling continues its present downward course and imported inflation becomes a real worry, will the right hon. Gentleman support a statutory wages policy?

Mr. Foot

We had all those "ifs" and "buts" last July. We have had problems with sterling ever since we entered into the inheritance of the Conservative Government. I recall that the hon. Gentleman's question was asked by others during the debates in July. In fact, the question was asked time and time again. His hon. Friends asked "If the policy does not work, when will you introduce the reserve powers?" I made it clear to the House that I was never going to introduce them. I was told that they would have to be introduced the week after next or the month after next. I have hardly heard the words "reserve powers" mentioned since last July. Who was right and who was wrong about the July prophecies?

The hon. Member for Mid-Sussex (Mr. Renton) has asked a highly hypothetical question. I replied to similar questions in July. It would be wrong for the House or the country to think that there is an escape from these difficulties in any statutory incomes policy. That is a policy which makes it a criminal offence for someone to pay above a certain figure-It is hopeless for the country to think that that is a solution. We turned our backs on it last July, and I hope that we shall not be discussing it again.

Mr. Skinner

I agree that there is something in my right hon. Friend's argument about the policy working, and especially about the consent that it has had from trade unions. To some extent it has received the consent of the great mass of trade unionists. But does my right hon. Friend agree that in two fundamental aspects the policy has not worked? It was introduced along the lines that a bargain would be struck to safeguard employment prospects and the possibility of a cut-back of public expenditure. In those two fundamental aspects the policy has not worked although it has received consent.

Mr. Foot

I am glad to hear the semi-concession made at the beginning of my hon. Friend's remarks, but in regard to the latter part of his comments it is not the case that there was any absolute condition about the other matters. Of course, I shall not conclude without referring to the unemployment situation, because the matter is of absolutely paramount importance. That is a paramount consideration in all these matters. If we are to secure further proposals for another round, it will feature prominently then. I do not deny that. On the topic of public expenditure, however, there has been an understanding and the Government have carried it out.

I return to the point made by the right hon. and learned Member for Surrey, East, whose words seem to be irrelevant in this House and in the country. Indeed, Conservative Front Benchers in general do not appear to participate in many of these matters. It must, however, be said that the right hon. Lady the Leader of the Opposition and the right hon. and learned Member for Surrey, East have discovered fresh ground for attacking the policy. They said that it was a constitutional outrage of some kind or other that we should have discussions of this kind and that the Government should expound this policy as did my right hon. Friend the Chancellor of the Exchequer. I do not know whether that is still the official policy of the Opposition. No doubt we shall hear this afternoon. We know the extraordinary development that occurred, afterwards—namely, that the right hon. Lady the Leader of the Opposition was not even able to carry her right hon. Friend the Member for Worcester (Mr. Walker) with her in her attacks. We know how difficult it must be to create any division between them.

There is also the Liberal Party's view to be considered. Perhaps the Liberal spokesman today, the hon. Member for Colne Valley (Mr. Wainwright), will tell the House on which side of the issue he comes down. The Leader of the Liberal Party supports the policy, but the hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) thinks it a constitutional outrage that any such proposition should be put forward. Nobody who considers the matter can believe that it is a constitutional outrage, because the final authority rests with the House of Commons. That is the fact of the matter. It will all come back to the House of Commons, it will be debated here and settled here, as it should be. For anybody to describe that as a new form of the corporate State is an absurdity of gigantic proportions. But that is how the right hon. and learned Member for Surrey, East and The Times see the matter.

To make exactly sure where it came from, I looked up the word "corporatism" in the latest volume of the New Oxford Dictionary. The first example of the use of the phase "corporate State" in that dictionary comes from The Times of 18th August 1927. The Times of that date said: The corporatist state offers greater opportunities than the liberal state. I wonder what kind of mischief The Times was up to in 1927 when it welcomed the corporate State, a few months after the murder of Matteotti and other persons in Italy. I hope I shall not be accused of being an advocate of the corporate State. Indeed, I am the very opposite. A corporate State involves as its central principle that trade unions should be "cabin'd, cribb'd, confin'd" as they were under the Industrial Relations Act 1971.

The crime I am supposed to have committed is to have liberated the trade unions. Whether I am accused by the right hon. and learned Member for Surrey, East, the author of the Industrial Relations Act, or by The Times newspaper of being an advocate of a corporate State, that suggestion is not merely a case of Beelzebub seeking to cast out Beelzebub or even of Satan rebuking sin but is more a matter of Satan rebuking the archangel Michael. Let us hear no more such nonsense.

Mr. David Lane (Cambridge)

rose—

Mr. Foot

I have already given way many times. I am about to come to two matters that I consider to be important.

There is no departure from any constitutional principle in what the Government have proposed. The supremacy of the House of Commons is sustained. I believe in the supremacy of this elected House. I believe that every other person and institution in the country must bow to it.

Mr. J. Enoch Powell (Down, South)

Or outside?

Mr. Foot

I shall come to the right hon. Member for Down, South in a moment. I was not ignoring him. There are some others who must bow to that supremacy. I refer to Prime Ministers, Cabinet Ministers, ex-Prime Ministers—if only they attended our proceedings—general councils and other places. I think that we have unanimity on that point because we have had trouble with them in recent months.

I also agree with the right hon. Member for Down, South, the House will be amazed to hear, on the subject of outside Commissions. The transfer of power from this House to an outside Commission stuck, and still sticks, in my gullet, as we remember from the passage of the European Communities legislation, and that wound is still there. We have not yet found a cure. It will be our main task in the House over the next two or three years to try to see how we can discover a cure which returns to this House some of the authority and control taken from us by that legislation.

When the supremacy of the House of Commons was established in the seventeenth century, some of the most far-seeing said "One cannot have two or three types of supremacy. One can have only one supremacy." I believe that it should be our purpose in this House to re-establish the supremacy of the House in all these matters. That is what I wish to see. It is not solely a matter of what we do in this House. It is also a question of how we enlist the allegiance and the affection of people in the country for this House of Commons.

I believe that there has been a deep estrangement in some degree over recent months or years, and indeed over a longer period, between this House of Commons and people outside. That estrangement must be overcome. In years gone by there was a deep affection among the British people for this House. If it has declined, it is our responsibility as much as it is anybody else's.

In the coming months and years I have not the slightest doubt that the first test whether the House of Commons will have done its duty—this is to return to the question put to me by my hon. Friend the Member for Bolsover (Mr. Skinner)—will be in seeing whether we are able to exert our authority sufficiently strongly and imaginatively to deal with people who are being thrown out of their jobs or who fear that they may lose their jobs. Of course, that is what we must do.

We have sought to deal with that matter in the difficult circumstances in which we have been engaged in recent months, and, indeed, in the past two years. I do not wish to base anything on the latest unemployment figures, because it would be cruelty carried to an unnamed degree of callousness to build too much upon them, but they show the first beginnings of an improvement. Those improved figures are partly due to some of the measures which we put through the House in September and October and at the beginning of the year. Our reckoning is that the measures introduced then—I know that some of my hon. Friends were not enthusiastic about them and required something much more, as I do—have already saved the jobs of something like 100,000 people, including people in training. The further measures, some of them included in the Budget, can add another 100,000 over the next 18 months to those figures. I know that that is not sufficient to deal with the problem. There will still be a severe problem left, even if all of those figures materialise.

I know also, as everyone can see by reading what is happening not merely in this country but in the whole of the Western world, that technological advance produces more, nor less, unemployment. All of that means that we must ensure that we get a much more imaginative series of measures for dealing with the whole issue. I want to see those policies in action just as much as any of my hon. Friends. I want to see the expansion of the whole of the British economy—as soon as we can do it safely, without plunging ourselves back in the same kind of inflation that has contributed to so many of our difficulties.

If the House of Commons is able to produce that expansion in these coming years, if we show that this is our passionate determination, we shall be starting to restore the authority of the House of Commons in the country. It will be an authority based not on demanding that people should bow down and worship some monument called the House of Commons but upon our being able to prove to people that ours is a better institution for overcoming these problems than any other in the world. I believe that it is so. I believe that this country, despite the derision which we get from some quarters, has a better chance, owing to its democratic institutions—with Parliament among the leading institutions but with others to assist—to do this. We have the most deeply-rooted democratic institutions of any country in the world and because of that we have a better chance of solving these problems than any other country in the world. It is in that spirit that I believe that the House should support the Government, the Budget and the policies I have sought to describe.

4.12 p.m.

Sir Keith Joseph (Leeds, North-East)

The Leader of the House has chosen to put the main argument for the pay policy component of the Budget in general terms. He has put the case elegantly—as perhaps no one else could. I submit that this pay policy component of the Budget cannot be considered on its own. I propose, therefore, to try to go a little more deeply in an analysis of what the Chancellor's proposals add up to in total.

We have a temporary Chancellor, a temporary Foreign Secretary, a temporary Home Secretary, a temporary and new Leader of the House—

Mr. Ronald Atkins (Preston, North)

And a permanent Opposition.

Sir K. Joseph

I begin by congratulating the Leader of the House on his notable appointment and wish him a short stay in the job. Although we have some temporary and provisional top Cabinet appointments, alas, the uncomprehending vendetta of Socialism against the wealth-creating, prosperity-creating, job-creating, poverty-destroying, social services-supporting, private sector continues.

It is true that the Chancellor has introduced into his Budget a few mitigations here and there. In comparison with the underlying forces in the economy—the delayed effects of money supply trends and the weight of borrowing, and, in comparison with the underlying attitudes of the people—fostered on anti-enterprise Socialism—this Budget is of minor importance. It is these underlying forces that are wrecking this country.

A common judgment of the Budget is that the Chancellor, perceiving rising demand for exports and for restocking, will, nevertheless, not make way for this rising demand by cutting public spending. Although it has proved practicable, with the help of foreign loans, to finance in a fairly deep recession the borrowing requirement of last year, to finance it this year as demand rises and savings fall, as business uses more of its own liquidity, will impose, we believe, intense debt management and money supply problems.

The formidable assessments of my right hon. and hon. Friends are on the record. I shall touch on some subjects already covered and on some new ones. In all—without taking longer than the right hon. Gentleman—I want to try to get in some comments on inflation, crowding out, so-called spare capacity, incomes policy, trade union responsibilities, public spending and what the country needs. I shall go as quickly as I can.

Inflation and jobs are rightly the Government's priorities. We can judge their strategy to deal with them only if we can identify the causes and cures. No one doubts that the cause of inflation is excess of demand over supply. No one doubts that rising costs can lead to higher prices—what is called cost-push. But while individual prices can be forced up by cost-push, there can be no general rise, which is the definition of inflation, unless demand—that is, the money supply—expands to allow it.

The pseudo-Keynesians and the Treasury focus on cost-push, claiming that Government have to accommodate the resulting price increases. The so-called monetarists deny that Governments are so compelled. The cure, say the pseudo-Keynesians, is to stop costs and prices rising. This, say the monetarists, is to tinker with the symptoms rather than tackle the causes. It will not cure inflation but will have damaging side effects. The cure, say the monetarists, is to control the level of demand, the money supply.

The pseudo-Keynesians assert that the level of inflation at the end of next year will depend on what wages and imports do over the next 18 months. The monetariests argue that the level of inflation at the end of 1977 will be determined by the trend of money supply during 1975 and 1976, because there are time lags involved. The money supply has appeared to be contracting recently, but in real terms, and taking into account the huge Treasury bill sales recently, the contraction has been dangerously slowed. As the rate of inflation decelerates later this year, the prospect of a real expansion of money supply increases.

The Leader of the House might well say that this is all very interesting. But it is more than that. I am sure that we all appreciate the presence of the Prime Minister listening to the opening of the debate. We take that as an encouraging sign. I hope that he will not dismiss this argument as boring or irrelevant. Upon the analysis of the cause of inflation and unemployment depends the likely effectiveness of the Government's policies for curing inflation.

The Chancellor of the Exchequer (Mr. Denis Healey)

The right hon. Gentleman has rightly quoted the monetarists as arguing that there is a two-year time lag between an excessive increase in the money supply and its full consequences for inflation. On the last occasion that we debated this matter the right hon. Gentleman conceded that there was at least one year and said that he was uncertain whether there was a second year. He now seems to be supporting the monetarists' analysis. It would be interesting to all of us—because the last great increase in money supply was in 1973 and its consequence upon this argument is still being felt—to know whether that is so.

Sir K. Joseph

I wish that the Chancellor would rise above these party points. The whole House will accept that I have been guilty to a fault of taking a share of responsibility for the impatience with which the previous Government tried to reduce unemployment in 1971–72—an impatience which the Chancellor is apt to castigate now but the results of which he may well be copying, inadvertently perhaps, with desperate consequences for this country in a year or two. No one can know the lag that works on the money supply. It is somewhere between one and two-and-a-half years. It is impossible to be more precise. There is a lag. There are consequences.

Treasury-watchers observe with anxiety the obstinate survival of what many people regard as the exploded pseudo-Keynesians' error in the analysis it gives to the Chancellor. The Chancellor seemed to have been ahead of the Treasury a few months ago. His speech of 2nd September to the IMF contained equal components of, admittedly incompatible, pseudo-Keynesian and monetarist analysis.

There was a brilliant and penetrating article by Peter Jay in The Times two days later pointing out the inconsistencies of the Chancellor's IMF speech. Alas, the Budget shows the Chancellor to have regressed. He is still using inconsistent arguments. His Budget speech was intellectually incoherent but, since September, he has come to lean more heavily on the pseudo-Keynesian side. Perhaps he is more monetarist in Washington and more pseudo-Keynesian in this country. He still pays lip service to money supply but his focus on incomes policy is expressed as if the money supply has no function. The Chancellor appears to have no clear, coherent, intellectually consistent grasp of the cause of inflation. Therefore, his policy, and that of the Government, lacks validity. I shall return to this point later after clearing some essential preliminaries.

We do not dispute that this should be virtually a standstill year in terms of overall consumption. The Chancellor said "a 1½ per cent. increase in consumption" but the Prime Minister at the weekend I think said "no increase in consumption." It could turn out to be anything from a further sharp fall in real incomes to a sharp rise, according to the Chancellor's grip on public spending, borrowing policy and the terms of trade.

However, the Chancellor's aim of minimal, if any, rise in real living standards must be right. The party is over—yes, but the party has to be paid for. If the money supply is to contract to abate inflation as the Chancellor says when he is wearing his monetarist hat, then anything but very modest pay increases or, rather, any increase in unit labour costs will squeeze already desperately low profits and will price people out of jobs. There will be no escape from such a standstill in consumption, or even a fall this year, if we are to abate inflation and cut unemployment.

The Government's Tribune critics could not escape such a result. We could not avoid it if we were the Government, though we would create more encouraging conditions for progress later. Our argument is not that the Government have been too stringent. It is that they are taking too many risks. The Chancellor hopes for, and expects, a strong revival in the private sector, exports, Stockbuilding and later investment. Yet he is already borrowing up to the hilt of the £12 billion borrowings he pledged in his IMF speech.

When the recovery comes, there is a real danger of a collision between the need for funds for the public sector borrowing requirement and funds for industry. The Chancellor may be forced to cut public spending in a crash stop or to abort the industrial recovery, investment and extra jobs by sharply higher interest rates or heavy special deposits to curtail bank credit to industry. The only other course for him would be to let the money supply rip, with new inflation following a year or so later on top of a much higher base than in 1972.

It would be a tragedy for the country and, incidentally, for the Chancellor, if after all his condemnation of the previous Government, that were to happen. Yet this is the scenario—much higher inflation in 1978—that many people fear. No doubt, my hon. Friends will perhaps reflect, an election would be called before the worst became obvious.

These fears are reinforced by the suspicion that the Chancellor is no longer so attentive to money supply. The Chancellor rightly forswears reflation because, after a lag, it would make inflation and unemployment worse. Yet he is, in fact, reflating. The public sector financial deficit, without the £700 million additional tax cuts—even reducing the debt interest to allow for its lower resource cost—is not down as much as inflation and is pumping money into the system.

Not only has the Chancellor left himself no room for manoeuvre; he has also deceived himself into thinking that there is much spare capacity.

I suggest to the Chancellor, and to the Government, that there is likely to develop quickly an acute shortage of vital skills in many parts of industry. This applies to technicians—draughtsmen, designers, industrial engineers and test engineers. It also applies to technologists—development engineers, systems analysts and software engineers. It applies to craftsmen in the engineering trades—toolroom skills, fitters, pattern makers, electronic wiremen, testers; and to engineering and science graduates.

These are very serious potential shortages. There has been a low intake of British students into university science and engineering departments because of poor teaching and anti-industry influences in the schools, and poor recruitment into industry from universities.

I have the speech by Lord Bowden, recently a Minister in the previous Government, pointing out those facts and I take my evidence from his speech. There has been poor recruitment by industry into training categories in recent years because of the pressure of inadequate profitability. There has been a loss of craftsmen to non-industrial employment, recently seriously exacerbated by the £6 pay policy. There has been a loss of technicians and technologists to the State sector which now offers significantly higher salaries than the private sector can afford without the pressures and risks of private industry. There has been a loss of experienced skilled people to other companies as employees move to circumvent pay policy.

Mr. Tam Dalyell (West Lothian)

Apart from Lord Bowden's speech, which was highly controversial, what evidence is there for the right hon. Gentleman's sweeping statement that there are anti-industry attitudes in the schools? It is simply not true.

Sir K. Joseph

One has only to ask most boys at school. One finds that the impression given them of industry is that it is relatively grubby and squalid. This is a widespread factor to be taken into account and it is doing this country great damage.

Moreover, the attraction and retention of able people in industrial management is undermined by this Government's actions against management. Graduates go to the professions and to the State sector. Some able graduates emigrate. Those who remain are demotivated. No other major country pays its managers net of tax so poorly both relatively and absolutely. Now, in the Budget, we have the mean victimisation of managers about their cars. I do not know whether the Chancellor has yet said that the users of cars in the State sector will be similarly treated. I understand that he confirms that he has said so, and in that case I withdraw that question.

Part of the spare capacity which the Government are taking for granted will be available to meet the upturn has been voting with its feet. Part has, as the Russians say, internally emigrated—that is, opted out. These self-imposed losses cannot be quickly remedied. They deserve a debate on their own. They should be considered when Ministers assess the scope for expansion and they should be borne in mind when considering incomes policy.

On incomes policy, very few hon. and right bon. Members in this House have consistent records. I am not included among those who have been consistent. Today I will not argue the case for or against incomes policy as such. [HON. MEMBERS: "Why not?"] Because I shall deal with those parts of the policy argument relevant to the Budget and the Government's policies.

Most people, including supporters of incomes policy, agree that incomes policies cannot last long and that the second stage is harder than the first. They agree that it is easier when it works with market forces than against and that differentials get squeezed and reassert themselves later. Trade union leaders are bargainers. Incomes policy has to be paid for. The question for the Government, the House, the country and the Leader of the House is not only whether incomes should be regulated in a free society, not only whether incomes can be regulated, especially in an upturn, but what the price of regulating them turns out to be. Trade union leaders are bargainers, and many, being political, bargain across a wide spectrum. They bargain about money, subsidies, more public spending or fewer cuts in public spending, rent levels and school meal prices. They bargain about the economy—import controls, price controls, dividend controls. They bargain about social issues—pensions. They bargain about political issues—salary ceilings, the closed shop and job protection.

I am not saying that the trade union leaders are not entitled to those views, but the pursuit of a voluntary incomes policy leads to bargaining on a far wider than incomes basis and the resulting package invades the sphere of many other interests and of Parliament. After all that, the TUC cannot guarantee results. We are, mercifully, still a free country to that extent. It can only try to persuade. Therefore, as my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said, Ministers may undertake to introduce policy changes which should not be made in return for promises which may never be fulfilled.

We must surely judge incomes policies, therefore, not only on the inherent sense, or nonsense, of them economically, but also on what is paid to obtain them. The Leader of the House leaned heavily in his argument on the acceptance on the £6 pay limit. But the House should remember that the Bank of England commentary pointed out that inflation had peaked before the £6 policy was articulated or accepted because of the lagged consequences of money supply contraction over the previous two years. Many obtained a £6 increase which they would not but for the norm have received, and it was paid for at a very heavy price in terms of public spending commitments, as the hon. Member for Bolsover (Mr. Skinner) reminded the Leader of the House, in legislative commitments such as the Trade Union and Labour Relations (Amendment) Bill, and in all sorts of other commitments which the public have had to pay for and which, in effect, in total have probably been far more inflationary than the £6 limit.

Moreover, many people feel that the Chancellor of the Exchequer should not contract out part of his Budget to any interest. My right hon. and hon. Friends have put it vividly. It is one thing for the Government to inform themselves or even to consult many other interests, but here there is more than information and consultation: here is bargaining, and bargaining over a wide political field. The Government should not bargain about the Budget with one interest group.

It was the hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) who, in an excellent article in The Times this morning, asked what hon. Members on the Government side would have said if the Chancellor of the Exchequer had announced that he would discuss the level of profits with industry and with the CBI and that, as a result of those discussions, he would in due course fix corporation tax. Would hon. Members opposite have been so happy? No. They would have said that that was bargaining and that it diminished the rôle of Parliament.

We must recognise, therefore, that, despite the examination by the Leader of the House of the origins of the word "corporatist", there is something in the corporatist flavour which many people have seen in this initiative by the Chancellor of the Exchequer, because what the people, and perhaps the Leader of the House, do not bear in mind is that trade union leaders bargain on many other matters than income when they discuss voluntary incomes policies.

Mr. Neil Kinnock (Bedwellty)

The right hon. Gentleman is a man of great intelligence and originality—[HON. MEMBERS: "Hear, hear."]—wait for it—but in the matter of the relationship between the trade unions and their power and the Government he is something of an ignoramus, because what the Chancellor of the Exchequer offered the unions was responsibility and no power. It is nothing like a corporate State, but it is making assumptions about the loyalty of the trade unions which they are not in a position to deliver. That is what is wrong.

Sir K. Joseph

I am coming precisely to that point.

Some will accept part or all of the analysis which I have given but may still commend the initiative of the Chancellor of the Exchequer because they think that he is, cleverly or wisely, depending on one's point of view, putting responsibility on the trade union leaders to match their power. I understand that thought. I am all in favour of putting responsibility on the trade unions for the consequences of their actions and policies. But are the trade unions responsible, as the Chancellor of the Exchequer appears to believe, for inflation? Surely they are not directly responsible. Wage controls and incomes policies will not on their own abate inflation.

The Economist—not a paper whose economic views I normally now admire— is strongly in favour of an incomes policy, but even that publication this week stated that incomes policy will work only if a sufficient control over money supply allows it to be enforced. As we are discussing a "voluntary" incomes policy, plainly the word "enforced" is inapt. But the indispensability of contracting the real money supply is the point. One could beat inflation by money supply alone. I am not arguing that today. One could certainly not beat inflation by incomes policy alone. To get a voluntary incomes policy, one must make concessions—financial, economic, social, political, or even, heaven help us, on defence—which either wreck the money supply control or do other damage to the country.

I understand the desire of Ministers to have the Trades Union Congress with them. I understand the desire of employers and managers to avoid bitterly disputed wage bargaining, often involving nightmare inter-union conflict. The Government want the unions to make sensible wage claims, and they want the unions to accept some responsibility. That makes sense. Employers and managers want sensible bargains with unions on pay, and also on productivity. But incomes policy is not the only, or necessarily the right, way to achieve those purposes.

I am not today arguing for or against incomes policy. I am stressing that there is always a price tag to be evaluated; and I am stressing that no pay policy makes sense without strong money supply control.

We aspire to being a free society. One of the freedoms is for workers and managers to seek the best bargains they can in the labour market, as they see it. I hope that the Leader of the House agrees with that.

In pay negotiations and productivity and manning discussions, all unions should take into account the condition of the employer, the state of the market, the employer's profit and profitability, and the risk of job loss. They should also know—and this is crucial—that the Government will not rescue jobs if the men concerned cripple their employers, nor expand the money supply to float their firms or employers out of trouble.

Unfortunately, the Government have taught precisely the opposite lesson. Look at British Leyland, Chrysler, and the sequence of rescue operations, not all of companies which have been crippled by excessive wage claims or lack of cooperation, but including some which have. Here is a responsibility that can legitimately be placed on trade unions. Some of them sometimes cause some unemployment when they price, or strike, or obstruct their members out of jobs. They are not directly responsible for inflation.

The Chancellor of the Exchequer should say to the TUC "We shall continue to contract the real money supply, to squeeze out inflation, so that we can revive prosperity and fuller employment. We shall not rescue jobs put at risk by wage claims or lack of co-operation. We shall pin on you, the trade unions, the responsibility for any such job losses". This is much more within the power of the trade unions to deliver. It is valid, and, far more than an arbitrary pay limit, it both is and is seen to be in the interests of trade union members that they should be warned of the risk of pricing themselves or others out of jobs.

So, the Government are running huge risks with inflation. Ministers are assuming spare capacity which, so far as many labour and management skills are concerned, just may not be available, and they are leaning more heavily on incomes policy hopes than on the more solid support of money supply control or of the workers' interest in not pricing themselves out of a job.

One of the main reasons that the Government have landed themselves and the country in this plight is that they will not cut public spending. The public sector borrowing requirement, even after adjusting for the lower resource content of debt interest, is 30 per cent. up on the estimate for last year. The public sector finance deficit is as high, at 8½ per cent. of gross national product, this year as last year, even though the rate of inflation has tumbled. The public sector finance deficit is pumping liquidity into the system just at a time when money supply should be contracting.

The Government have not shown that they can control public spending—now at 65 per cent. of GDP. Cash limits should help, but often in the past estimates have been exceeded. Despite this huge spending, there is virtually no relief in the Budget for the really hard-hit—the elderly living on small investment incomes or people caught in what will be a more severe poverty trap.

The Government answer to the plea to cut public spending is always that this will increase unemployment. I tried to explain to the then Paymaster-General in our debate on public expenditure that there were two aspects to cutting public spending and using the resources to reduce borrowing and cut taxation. One is the delayed revival of the private sector, which would certainly take time, before jobs were increased and the other is the diminished dismissal by the private sector of people they would have had to dismiss to pay the taxes to meet the public expenditure.

The Paymaster-General did not take that argument, so I shall put it again in one sentence. With public expenditure at its present level paying for overmanned steel works and other nationalised industry overmanners it is a case of keeping the public sector Peter at the expense of causing the private sector Paul to be sacked.

There is no legitimate argument that cutting public spending and using the proceeds half to cut borrowing and half to cut taxes would cause unemployment to the same extent. Even if some extra unemployment were to result, the consequences of not cutting public expenditure could be so catastrophic for inflation and could create so much extra unemployment later than it must be right to cut. As the Chancellor of the Exchequer well knows, it takes time to cut effectively. If he is to get the cuts when the recovery occurs, he ought to be starting them now.

Mr. William Molloy (Ealing North)

Does the right hon. Gentleman not agree that even if his plea for a massive slashing of public expenditure were carried out, this could have a grievous effect on private industry, so much of which, particularly in the construction of schools, hospitals and roads, depends on a large element of public enterprise?

Sir K. Joseph

The hon. Member is precisely right. Public expenditure cuts interact on the private sector and to that extent they release resources for export and import substitution within the market.

If the Government will not cut soon, some of us fear they will be forced to cut before long by events. As my right hon. and learned Friend the Member for Surrey, East said at the weekend, we shall have July measures and an autumn Budget for lack of Government action now and by then we shall unnecessarily have lost resources, time and more self-confidence.

If it is a case of my predictions against those of the Leader of the House, I would remind him of a television discussion we had in the October 1974 election. I predicted—and he denied—that if a Labour Government were returned to office, he would find himself presiding over the largest post-war upsurge of unemployment. That has been shown to be true.

The upturn may be faster. We may, because of the lack of skills, not be able to expand exports enough. The labour market is already giving faint hints of tightening. The reflation the Government have allowed by maintaining public spending will be exploding in home consumption and a swelling of imports.

Meanwhile, the Chancellor of the Exchequer has invited the world to watch the incomes policy negotiations which he has ill-advisedly put in the centre of his strategy. The world will react to every bargaining move and will distrust the Chancellor's no doubt genuine determination to control the money supply.

My right hon. Friend the Leader of the Opposition said last week that the pound had fallen a cent against the dollar every week between the Chancellor's 1975 and 1976 Budgets. Since the 1976 Budget, the pound has fallen not by a cent a week but by about a cent a day. The pound will continue to suffer. Leads and lags will continue to operate against us. If the fall continues we could find ourselves stuck at the bottom of a series of ever-worsening "J" curves.

Our position is not so desperate that it cannot be put right, but sustainably changed attitudes will be essential. My right hon. Friend the Leader of the Opposition has spoken of the feverish anaemia from which the country is suffering and my hon. Friend the Member for Henley (Mr. Heseltine) has said that tinkering with industrial intervention will not help.

The reality is that Socialism destroys wealth and puts nothing in its place. It makes bigger demands on the country's wealth than ever before while, at the same time, doing more than ever to destroy the wealth-creating process.

Who is to create the wealth and the jobs—Ministers, civil servants, nationalised industries, the National Enterprise Board, British Leyland, Upper Clyde Shipbuilders? This is laughable. All these will be consuming wealth. Who will create it? There are people of all backgrounds in all sizes of organisation who are good at creating wealth and jobs for the country. Other countries encourage such people. We scorn and denigrate them. Other countries send their wealth- and job-creators out like tigers—encouraged, well-fed and valued, but still hungry for more. We strait-jacket ours. The policies that this country needs would involve an acceptance by British Socialists—as their German counterparts have accepted—of the imperatives of freedom and prosperity.

We have to move, over a period, by cutting public spending to a balanced, full employment Budget. We have to restrain the growth of the money supply until it coincides roughly with our underlying rate of growth and adjust budgetary policy to match. We have to price ourselves into fuller employment with a rising share of the world market.

We have to drop further nationalisation, intervention and rescues. We have to facilitate mobility by changing housing policy and remove price and dividend controls to enable profits to rise and we must explain their indispensability for expansion and progress. We have to encourage enterprise, invention innovation, risk-taking and work by cutting taxes. We have to reform the relationship between taxes, benefits and earnings in order to reduce the poverty trap.

Above all—and this is a job the Government could put high on their agenda—we have to educate wage earners and trade unions on the links between pay, productivity and jobs. I think the Chancellor is making an effort to start this particular link.

These changes would involve undoing a century of Socialist error. On this side of the House, we have learned much and adapted—perhaps over-adapted. Why should not Socialists learn and adapt? Only such policies will truly raise the income of the low-paid, as the Leader of the House so seriously desires, without squeezing the others by more than they will be ready to endure.

The Leader of the House and his Friends have devoted their lives to sawing at the branches on which they and the country are sitting—the branches of the tree of freedom and free enterprise. They depend upon each other and upon them all the public services also depend. The branches are near snapping, but it may not be too late. Let the right hon. Gentleman learn what his Socialist colleagues in Germany seem to have learnt. Free enterprise in a competitive, but comprehending, climate is the best friend of all, including the workers. It is the ally of the social services, the destroyer of poverty and the decentralised source of real freedom.

Monetarism is not enough. Cutting public spending, more and sooner than the Government plan, is not enough. There have to be adequate profits and incentives at all levels of income. This country is suffering from Socialist anti-enterprise attitudes. Until they change, the underlying evils which this Budget intensifies rather than mitigates will continue to demoralise and debilitate us. I urge my hon. Friends to vote against the first Resolution tonight.

4.49 p.m.

Mr. Norman Atkinson (Tottenham)

The claim that the right hon. Member for Leeds, North-East (Sir K. Joseph) has a tiger in his tank does not ring true in the light of the theoretical contradictions to which he has treated the House.

He said that all economists were agreed that inflation was the result of demand exceeding supply. If his thesis is based on that theory, how is it that the Western world has suffered such enormous unemployment during a three-year period when demand has been so much in excess of supply? The right hon. Gentleman cannot have it both ways.

Sir K. Joseph

The hon. Gentleman forgets that the consequences of unemployment and inflation follow one to two-and-a-half years later and, therefore, unemployment can coincide with inflation.

Mr. Atkinson

That is not true. The right hon. Gentleman will see from the figures for the period leading up to August 1975—when we reached a maximum 27 per cent. rise in the price index—that there was an enormous increase in unemployment. Jobs were starting to spill out of industry rapidly as we moved towards that time. Indeed, the Chancellor and the then Prime Minister described inflation as being the mother and father of unemployment because the rise was so rapid. The right hon. Gentleman will have to go back to the Centre for Policy Studies to get his theory right before basing his whole argument upon it.

My right hon. Friend the Leader of the House told us what we can expect during his period of office. It sounds very exciting. He went on to say that the whole basis of the Government's policy was to defeat inflation. I am sure that all Government supporters will agree with him and totally endorse that basic purpose, that one overwhelming priority, which should motivate us all when coming to conclusions about the Budget and the policies to be pursued. All Government supporters will also endorse the proposals to protect the low-paid.

The Leader of the Opposition described imported inflation by the process of devaluation as the rest of the world sitting in judgment upon the Labour Government and their policies. She claimed that the fact that the value of sterling had fallen by one-third over six years lay at the door of the Labour Government. That is not a judgment taken by the rest of the world. It is the currency manipulators, currency speculators and currency dealers—most of whom are British and most of whom occupy desks in this country—who are pontificating about our industrial performance as though they had special knowledge of it, whereas they are totally removed from industrial experience and have no valuable comment to make. Those people in the essentially privileged position of being able to adjust exchange rates, because they disagree with what the Government, industry and the trade unions are doing, say that they have no alternative but to make money for themselves by reducing the rate of exchange and devaluing sterling to correct the performance of industry.

It is time we looked closely at the performance of currency manipulators in the City to see whether they have a valuable contribution to make.

Mr. Tim Renton

The hon. Gentleman seems to be speaking from the depth of abysmal ignorance. If Nigeria, Hong Kong or the OPEC countries sell some of their sterling reserves because they think that sterling will be lower in a few months' time than it is today, what has that to do with bankers or anyone else in the City or in Britain?

Mr. Atkinson

Because, as I suspect the hon. Gentleman knows, it is on the advice of the managers of their sterling holdings that such action is taken. The Arabs would take advice from the City of London on whether to dispose of their sterling. The disposal or otherwise of sterling holdings is directly related to discussions which take place in the City. I hope that the Leader of the House will set aside time in the not-too-distant future to examine closely the whole question of currency exchange.

For 10 years I have campaigned for the incorporation of the road fund tax in the price of petrol, and I am sorry that the Chancellor has rejected that proposal. The Chancellor says that he cannot abolish the road fund licence system at the moment and incorporate the tax into the price of petrol because that would create an enormous demand for small horsepower cars. There may be something in that argument, but the Chancellor has the responsibility to announce that the Government intends to bring about that change and to say when it will be done. He should say "Yes, we are concerned about this, and we want to shift the burden of the road fund tax from the block payment system and to include it in the price of petrol." If the Chancellor announced that as an intention, the manufacturers of small cars and engines would be able to adjust their future programmes accordingly. I hope that the Chancellor will go further and say that he will also incorporate the cost of third party insurance in the price of petrol. To add about 6p per gallon to the price of petrol to include those two payments would be a popular move.

The Chancellor dealt at some length with tax evasion. There is no way to overcome that problem except by decisive action. Many thousands of millions of pounds are lost in this way. There is no method of calculating the Exchequer loss from tax evasion by cash buying and selling, employing people on lump agreements, and so on. The only action which could be taken is for the House to decide to put an end to cash payments of amounts above, say, £50. There is no way to solve the problem of tax evasion other than by making it illegal to make large cash payments.

It is wrong for the Chancellor to say that he wants intrusion powers to examine accounts unless he also takes power to stop large payments in cash. Information on such payments will not be found in the accounts. The Chancellor does not need to inspect accounts which will not give him the information he requires. I ask the Chancellor to set up a study group to examine the consequences of making it illegal to pay in cash sums of, say, more than £50. That is the only way to overcome tax evasion.

I wish to put a point of view which I hope that my right hon. Friend the Leader of the House will take into consideration when continuing and possibly bringing to a conclusion the talks he has initiated with trade union leaders. What has happened to the purchasing power, earnings and standard of living of wage-earners in the period leading up to these discussions? I take August 1974 to August 1975 as a convenient period over which to look at these things. I take as an example the average wage earner, whose take-home pay was £44 in August 1975. He will have lost in that year about 3 per cent. of his purchasing power, leading up to the climax of a 27 per cent. rise in the retail price index in August 1975.

But the crucial year is August 1975 to August 1976. That provides the background against which the workers will judge the Budget policies. It has been one of disaster for them. Yet they have made a tremendous contribution—if that is what it is—towards our economic recovery.

Again taking the parabola and the rise of the Retail Price Index at 17 per cent. year upon year, rising by 27 per cent. in August last year, coming down to about 15 per cent. by August this year, the worker on an average of £44 take-home pay—about £2,288 a year—over the year ending next August will have to receive in take-home terms, in cash in the wage packet, about £470 in order to maintain his purchasing power.

Under the £6 flat-rate agreement, he will get nothing like that. Therefore, his take-home pay will be considerably less than the amount required to maintain his purchasing power in the year ending next August. No doubt my hon. Friend the Financial Secretary, who is good with a slide rule, will correct me if I am wrong, but he knows that, at the £6 flat rate level, that average worker will only get about £190 in take-home pay to offset an increase in the cost of living, albeit a decelerating rate in the rise from 27 per cent. to 15 per cent. To offset his need for £470 in order to maintain his purchasing power, he will get no more than £190.

That average worker, therefore, will have suffered a drop in his purchasing power of about 12 per cent. over the year—an enormous drop of nearly one-eighth. My right hon. Friend the Leader of the House is right to point to the difficulty of selling the policy, the difficulty that trade union leaders will have to get their members to accept it. If workers know nothing else about wages, they know the value of the money in their wage packets. They know precisely that a one-eighth drop in their living standards is of tremendous significance to them and their families.

Now, the Budget is trying to sell them a further decrease in their purchasing power on top of all that. The Government called upon the workers to give a year for Britain. They have done so. They have given up one-eighth of their purchasing power. It will be very difficult to sell them another such policy for the year August 1976 to August 1977 because, no matter how one looks at it, it means a further drop in their living standards.

That is the sort of situation which trade unionists and wage earners have to consider. They have to consider how they are to be able to help the nation and once again make a contribution to overcoming some of our difficulties, but in the year ending next August the average lad will lose something like £280. How will he face the Budget policy?

Let us look at the retail prices August to August. We assume that the rate of inflation will be about 15 per cent. this August, falling away to 9 per cent. 12 months on. That is the background against which trade union leaders will consider the situation. Let us again take the example of my lad on £44 average take-home pay in August 1975. Because of the £6 limit, he will be on about £2,500 in that year in take-home terms. What does he want, again with a decelerating price increase over the year? What does he need to maintain his living standards? He wants an average throughout the year of about £5.20 in cash in his wage packet each week. The discussions to be held must be against that background.

The trade unions may say "We will not recoup anything from the past—that was our year for Britain; it is water under the bridge". But one cannot say that once more a contribution in terms of a drop in living standards must be made. It is not "on" to talk in terms like that. It is estimated that a 3 per cent. take-home would be about £1.20 a week on average earnings, and obviously that is not enough. The Treasury says that the workers can make up the rest in tax allowances, but those allowances would have to be enormous—far more than the allowances spoken of in the Budget—for them to maintain living standards.

If what the Treasury says is the case, a lot more will have to be offered than he figures set out in the tables. I have not time to go into an analysis of the figures suggested by the Government, but they must be higher in order to give the take-home yield I am talking about before trade unionists will be prepared to discuss the matter seriously.

What is the weakness of offering tax allowances in lieu of wage agreements? We are taking pressure away from wholesale prices and manufacturing by doing it in this way and that must be good in itself. But the overall effect is regressive. It is against the interests of the Government and of trade unionists as a whole to allow it to happen. By its very nature, it cannot be redistributive and it must be regressive. We have always argued against that background.

If the Chancellor had chosen tax allowances instead of a £6 limit this year, he would have found that the effect was totally anti-redistributive in every sense and was regressive. Therefore, it must be against our interests to argue that it is possible to have an equivalent wage increase in the form of tax allowances when it has such damaging effects upon the remainder of our policies, whereby we hope to gain from tax collection a redistributive influence in the economy so as to help the lower-paid workers It is because it is against the interests of those workers that I object to the idea of using the tax method to make this money available.

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

I fully understand the point and accept the work that my hon. Friend has put into establishing it. However, although it is true that in the past tax cuts tended to be regressive, when most of the people to whom my hon. Friend refers are now paying income tax at the same standard rate, any increase in allowances benefits them all. Therefore, the regressiveness of increasing tax allowances has been substantially avoided.

Mr. Atkinson

I am sorry, but I cannot accept the Financial Secretary's arithmetic. My evidence is the social security reports of investigations of benefits available to wage earners, in whatever form. Some of the figures from the last survey, although it was a couple of years ago, show, on no matter what examination that this cannot be other than a regressive move. I am sorry that I cannot go into detail, but perhaps at some stage I could take the Minister through the calculations and the reasons for them.

If we are serious about the decrease in unemployment that we want, over the next four years the public sector will have to provide about a million extra jobs. If we achieve the suggested rate of investment in manufacturing industry, most of it in private ownership, over that period, this must mean a small labour content. There must be a shift towards capital intensiveness in manufacturing industry, so it will not provide a substantial number of extra jobs. The same applies to public service industry. If we are to have the 600,000 extra jobs, the public sector will have to provide another million.

How will it be done? I know that some price increases in manufacturing will be offset, which may be a good thing, but if we start to decrease the revenue and resources available to create those extra jobs, we run up against a contradiction. It cannot work. We have the everlasting problem faced by Socialists when increasing the public sector—that of achieving the shift of resources to make the expansion possible.

Trade unionists will carefully consider the effect of the shift into taxation to maintain living standards against the need to create a million new jobs in the public sector. I am sure that they must conclude that it is against their interests to accept this shift of policy when they consider the consequent decline of prospects in manufacturing industry as it becomes much more capital-intensive.

I have tried to set out some of the reasons why wage negotiators and union leaders will examine the proposals put to them by this Government. Their conclusions at the end of the day must be a thumbs-down to this innovation of trying to use tax allowances as a substitute for wage increases.

5.15 p.m.

Mr. Julian Amery (Brighton, Pavilion)

I was abroad last week and in the circumstances would not normally have presumed to intervene in this debate. I feel impelled to do so only because of the contrast which I sense between the view of our economic situation taken abroad, particularly in Europe, and the complacency of Ministers and the Labour Party as a whole about the dimensions of our economic crisis. Perhaps they are too close to the trees to see the wood, but this is an alarming situation—illustrated by the emptiness of the Labour Benches, not just when I am speaking but during other speeches today and, I am told, last week as well.

I have tried, when abroad, to defend the Government by pointing out that the Prime Minister in Cardiff and others elsewhere have talked about the gravity of the situation. But the reaction I received was that it was all just words; people smelled a climate of phoney war in Ministers' statements. As they see it, we are near the brink of disaster, we are at war—not military or civil war, but a war for the survival of what Britain has meant to them for years past.

Their attitude to sterling is the key indicator. The hon. Member for Tottenham (Mr. Atkinson) took the City to task for the advice he thought it was giving to foreign holders of sterling. That is rather a chauvinistic and superior view. Foreigners are not fools. They are perfectly capable of working out for themselves the pros and cons of holding sterling at present. Of course they understood that an inflation rate which grew from 9 per cent. in 1974 to 26 per cent. in 1975, with wage settlements at 35 per cent. or over, an inflation rate which on a year-on-year basis is still nearly 20 per cent., would lead to a downward drift in sterling. They did not have to be told by British advisers in the City to take that on board.

The anxious thing for us to have in mind is that their confidence in sterling has been shaken, not only by their memories of the past but by their forecasts of the future. In an unaccustomed statement, the Treasury has said that there is no justification for the present downward drift of sterling, but it does not look that way, on economic or political grounds, abroad.

People abroad have been interested by the Chancellor's proposals for a deal with the trade unions over wages and taxes. While I naturally share the reservations which some of my hon. Friends have on the constitutional implications of all this. I hope that the unions will accept the deal. But very few people think that they will. On the other side of the Channel, they do not think that it is "for real". With some experience of bargaining, with Archbishop Makarios and the like, I think it unfortunate that the new Secretary of State for Employment should have indicated so quickly that the 3 per cent. target was a flexible opening gambit. It was too soon.

In the same way, there is grave doubt across the Channel about our forecasts of growth and export opportunities. I know that the Chief Secretary has said that we must be optimistic, but in Europe, and I think in the United States, we were respected previously because we went in for understatement. Our present prospecting is thought a little wild. When they look also at the fears of the dislocation, or cartelisation on OPEC lines, of raw materials, no wonder our friends abroad are a little exercised and concerned.

But their main concern stems from the size of the borrowing requirement. They know that there is no magical exit here. How will it be financed? There is clearly little likelihood that gilts can be sold to the domestic public on the same scale as last year. The only way they could be sold would be by a steep rise in interest rates, and this would conflict with the hopes of the Government of improving our industrial performance.

Another possibility is retrenchment-cutting back public expenditure which in the year 1976–77 is to run at 65 per cent. of the gross national product. But to cut this back to the level to which it should be cut would be a hard task for a Government of national unity. It will be near impossible for a Labour Government on their own.

There might be another loan from the International Monetary Fund. This would entail the acceptance of obligations which a purely Labour Government could hardly hope to fulfil. Foreigners see this clearly, so they fear that at the end of the day once again the Government will resort to the printing press in preparation for an early General Election.

These are straightforward economic calculations into which foreign holders of sterling have to enter. But we must add to those the political factors. It is very hard for serious men abroad to understand the timing of the last Prime Minister's resignation. They could not help feeling that he was leaving the ship in good time. They find it very hard to understand the exclusion of the Home Secretary from the Foreign Office to which he was so eminently suited not only by his concern for Europe—it is only through Europe that we shall get out of our present problems—but also because of his experience at the Treasury in the past which would have stood him in good stead today. They are concerned that there will be a rise in the influence of the Left wing of the Labour Party.

If we add all these together, we find ourselves facing a crisis of Italian proportions. It is very similar to the crisis which the Government in Rome face today. But the consequences could be much more serious here because, unlike Italy, half our food and most of our raw materials come from overseas and, as the world economy begins to recover, the price of those raw materials will increase and the decline in the value of sterling will add to our problems day by day.

What should be done? We ought of course to cut the borrowing requirement and to cut it now. I am one of the older members of the trade union of sons-in-law, so perhaps I might draw the attention of the Prime Minister to what Mr. Peter Jay has written: If the Government and all of us are to have better than a choice of dooms a year from now, then before the summer recess it is indispensable that the budget deficit for this financial year be cut well below £10,000 million, an unshakable strategy laid down for eliminating it by 1978–79 and a tight 10 per cent. growth ceiling put on the money supply". We ought to cut back now before what is still just a floating pound sinks for good.

The alternative will be to go to the International Monetary Fund, and strings will be attached to the loan which it will be very difficult for anyone in this House to swallow, and especially difficult for the Labour Party. What is worse is that those strings by their very nature will be deflationary in character. We shall have a deflation imposed upon us while others are beginning to reflate again, and the gap between this country's economy and those of our neighbours in Europe will widen again to our disadvantage. The knife is at our throat.

The choice is whether we cut the deficit ourselves or have it cut for us. I do not believe that the Government will do it. I fear that they are heading for the greatest crisis since 1931—a greater crisis in many ways because in 1931 we were still the leaders of a great Commonwealth trade and payments area. I do not believe that there is any alternative to begging for another loan. I do not think that there is much chance of acceptable terms or of fulfilling the obligations unless confidence abroad can be restored.

How is confidence to be restored? It will call for a measure of humility on the part of the Government which they have not yet shown. They have to realise that they are a minority in this House and in the country, and they have to devise a national policy which will command the broad support of this House of Commons—of the Opposition parties as well as the majority of their own supporters. This cannot be done on the basis of their manifesto. It has to be done on the basis of a new pragmatic programme to ensure our national survival in this year before it is too late.

5.25 p.m.

Mr. Kenneth Lomas (Huddersfield, West)

This is the first opportunity that I have had, Mr. Speaker, to speak under your guidance. I offer you my sincere congratulations on your appointment and my thanks for the valuable work that you performed before it.

I have been away from the House for some time because of illness, but I have read the debates which have taken place here. All that I can find from the speeches of Opposition Members is that they want to slash or to cut public expenditure, yet they are not prepared to say where. All that I understand from their arguments is that they wish to increase the amount of money that we spend on defence, without saying where the economies should be made.

I am one of those who had the opportunity to serve for some time in the North Atlantic Assembly. I appreciate our obligations under the NATO Alliance, and I understand the problems with which this country is faced. I am not in favour of cutting our defences more than we should. On the other hand, I believe that statements by the Chancellor of the Exchequer and the Secretary of State for Defence have made it abundantly clear that we are now at the bone and that we can get no nearer. In other words, we must maintain our present level of defence expenditure.

The right hon. Member for Brighton, Pavilion (Mr. Amery) again spoke about the need for cuts in public expenditure. Like others before him, he did not suggest where they should be made. I happen to believe that, if we are to have services which the nation wants, we must be prepared to pay the price for them whatever form they take.

The right hon. Gentleman also said that we were heading for a crisis. I believe that that was true between 1970 and 1974 and that this Government had to pick up the pieces in February 1974 which were left by the Conservative Government and try to resolve the problems that they had posed.

There is no doubt that the greatest achievement of the present Labour Government in the course of the past two years has been to have a dialogue with the trade union movement, which is a vital part of our economy. The Government have gone in for consultation instead of confrontation. But if we are to obtain the support of the great majority of the people—whether or not they are trade union members they are affected by what happens—it is necessary for the Government of the day to have the co-operation of the TUC. If we are to face the problems of inflation and those of the lower-paid worker, we need the support of the trade union movement and, as has been said by Opposition Members, we need the understanding and support of the CBI and of industry in general.

We all welcome the fact that, because of the way in which this Government have established this dialogue and liaison with the trade union movement, we have already seen in the past two years a dramatic change. In a Written Answer I received on 15th March from the now Secretary of State for Employment I was told that stoppages of work due to industrial disputes during the period of the Conservative Administration in 1972 resulted in almost 24 million day lost. Yet in 1975 under a Labour Government the figure was less than 6 million. This is because the Labour Government have taken the trade union movement to heart and have decided to act in concert with it in order to look after the people as a whole.

I welcome the pension and benefit increases in the Budget. They are in line with the proposals put forward by the trade union movement, but we must be prepared to pay for them. We have to resort to measures to find the cash to meet our obligations—not only to the old, but to the sick, the unemployed and the disabled. The whole House will welcome the Chancellor's proposed increase in pension and social benefits.

I have a small point to make on the question of value added tax arising from reactions from my constituents. Electrical repairs could have been zero-rated. They put at risk old people and many others who might tamper with electrical equipment rather than taking it to a contractor.

The level of unemployment at the moment is unacceptably high. The economic blizzard of 1974 and 1975 was not of our making. It was a world-wide economic reccession. Nevertheless, we should take pride in the fact that the Government have spent money to assist job creation and to provide work. They want to reduce the rate of unemployment.

I only wish that the Chancellor could have found it in his heart to impose some kind of selective import controls. In the woollen industry in Yorkshire, particularly in my constituency of Huddersfield, we are concerned with the problems of the dumping of goods in this country at prices very much lower than they should be. I would have hoped for a more constructive attitude from the Chancellor about import controls. The country is emerging from the world depression and is beginning to see the upturn in the economy, but we have to face the facts of life. We have not been able to compete in world markets mainly because of a lack of investment in industry, but also because we have not sold our goods abroad in a forcible enough manner. But the terms of trade are beginning to turn in our favour and unemployment is falling, and there is hope for the future.

I turn to the offer made by the Chancellor in his Budget Statement. It is unique in my experience as a Member of this House for 12 years for the Chancellor to say to an outside body "This is what I am prepared to give if you will give in return." The facts are simple. Because we were able to obtain links with the trade union movement last year, the £6 limit worked and was fair. That has enabled the Chancellor to be on target with his declared aim of reducing the rate of inflation to 10 per cent. by the end of this year.

Mr. Victor Goodhew (St. Albans)

We are delighted to see the hon. Member back and we hope he will continue in good health, but we do not wish him to mislead the House. When he talks about links with the trade unions, consultation, and success on the wage limits he should remember the constant consultation carried out with the trade uions by my right hon. Friend the Member for Sidcup (Mr. Heath). He should bear in mind also that at that time counter-inflation measures of a similar type were imposed by the Conservative Government and opposed by the Labour Party. In contrast we are supporting the Government.

Mr. Lomas

I accept some of the hon. Member's points but he should remember that the right hon. Member for Sidcup (Mr. Heath) was responsible for the 1974 election because he decided on confrontation with the trade union movement. We have decided on consultation rather than confrontation.

The important thing is not the size of the wage packet but what the wage packet will buy. There is no point in giving a £10 or £20 a week increase if the increase is overtaken by inflation. That is why I hope that the trade union movement and all workers will try to understand what the Chancellor is attempting to do.

The Chancellor must, however, do something positive on prices and ensure that there is sufficient control over them. He should ensure, if possible, that the suggested increase in the price of school meals does not take place. We must try to look after one-parent families and the lower paid.

My union—the National Union of Public Employees—would prefer a flat-rate increase rather than a 3 per cent. increase and threshold agreement because it represents lower-paid workers. These people will benefit very little from the Chancellor's proposals. Nevertheless, the Chancellor has, I believe, adopted a negotiating position before the Finance Bill becomes an Act. I believe that between now and the end of June these negotiations should take place. I hope that efforts will be made to persuade both sides to accept that the fact that they must agree on a reasonable norm that will ensure that we keep inflation down and, at the same time, that we do not let the lower-paid worker suffer as a consequence.

There is no doubt that the trade union movement must look at the proposals that have been made very carefully indeed. There is no soft option in the problems that face this country. There is no easy solution. It would be idle of the Labour Party, the Tory Party or the Liberal Party to pretend that it could come up with an instantaneous solution ao the problems. However, I believe that, given good will on both sides, we can ensure that the unions will back the Government in their efforts and that we shall obtain the support of the people, and that as a result of that and of the measures that we are taking to alleviate the suffering and hardships that are endured by many people, people will say that the present Labour Government have tried desperately hard to fulfil their obligations to those who are in need. I believe that the present Government will go on record as being successful in that attempt.

5.42 p.m.

Mr. Ralph Howell (Norfolk, North)

Before starting my criticism of the Budget, I want to mention two items in it that I welcome. First, I welcome the cut in the 25 per cent. VAT rate, which will be of great benefit to the boat-builders in my constituency. Secondly, I welcome the cut in capital gains tax on agricultural land. Both of these measures will be very much welcomed. It is a pity that the cuts were not greater. It is a particular pity that the Chancellor did not see fit to return to the standard rate of VAT at 10 per cent. It would not have been a case of eating humble pie. The Chancellor would have endeared himself to the country if he had done that. It would have been a great help to all small traders. I hope that even at this late stage he will reconsider his decision.

This Budget is no answer to our problems. It will not be an answer to our problems if the 3 per cent. sticks or if it is agreed at a higher rate, or even if there is a nil increase in wages. The problem in Britain cannot be solved until we have recognised that most of our trouble is due to an absurd taxation and welfare system, which is completely uncoordinated and which is dragging the country down. Until some Chancellor, either Labour or Conservative, has the courage to alter the whole of our taxation and welfare system, Britain will continue to decline, and decline rapidly.

The present system is destroying incentive to work. We are over-taxed and over-governed to a tremendous extent. Somehow we must create conditions whereby it pays to work. Nearly half the population are either worse off or only marginally better off if they work than if they contract out and leave it to the State to take care of them. This must be changed.

I am particularly disappointed that the Chancellor did not see fit to cure the huge number of anomalies which have been caused by a small mistake made by the Attlee Government in 1949 which has developed into a vast mistake. In 1949 it would probably have amounted to a mistake of a few hundred thousand pounds. Now it has developed into a mistake of £500 million a year. The people of Britain who work regularly and pay their taxes year in and year out are wrongfully being taxed to provide tax rebates for those who work spasmodically. This has created a most absurd situation, in which, on last year's figures, in the first few weeks of unemployment people can be £14 a week better off out of work than in work. In some cases this can continue for 22 weeks a year. This must be altered.

It is in everyone's interests that we should make all income taxable. All income, whether from earnings or benefits, should be classified as income for taxation purposes. By so doing, a saving of £500 million a year could be made. If only the Chancellor had had the sense to do this and to use that £500 million to lift up the tax thresholds, he would have gone a long way to bring a bit of sense into our taxation system. It would not have done it all, but it would have helped considerably.

I want now to discuss tax thresholds generally. This is not a party matter. I welcome the support that I had from the Liberal Benches in the Liberals' debate a few weeks ago. The tax thresholds are absurd. In 1950 no one earning less than the national average wage was taxed. By last year the tax threshold had fallen steadily throughout Conservative and Labour Governments—and there is no difference in this respect—so that we were taxing people earning 48.8 per cent. of the national average wage. What a ridiculous state of affairs. Now, as a result of the Budget, if the agreed conditions apply, the threshold will have fallen to 47.9 per cent., and if those conditions do not apply, it will have fallen to 44 per cent.

Something must be done here, because whatever income tax is for, it certainly is not intended for taxing the lower-paid into increased poverty. That is exactly what it is doing.

Let me give a few figures to show what will happen under these proposals to a man with a wife and two children. If the conditions are not approved, the tax threshold will be £28.90, and if they are approved it will be £31.40. When the social security level for such a family is £35.85, what sense is there in taxing a man who is earning less than the poverty line level that we fix for social security? Surely this must be altered. I ask the Government to reconsider this matter. Although I want them to do much more in this matter than merely go up to social security levels, to tax people below the level of social security is totally absurd.

Even more absurd is the family income supplement level. Again, for a family of a man, wife and two children, the maximum level at which family income supplement can be received is £43.50, and this must be compared with a tax threshold of £28.90. The absurdity in this matter is that we actually pay people benefit and tax it at the same time, so that the benefit and the tax cancel out.

We must do something about this. It simply cannot continue. I believe that this is something that everyone on all sides of the House recognises. It is recognised in particular by Mr. Frank Field, the director of the Low Pay Unit and the Child Poverty Action Group. I pay tribute to the work that he has done in the matter of trying to bring this to the attention of the Government and the country. We cannot go on acting in this totally idiotic way.

My next point concerns subsidy. We are borrowing an extra £12,000 million—that, I understand, is what is expected—yet, strangely enough, we are giving ourselves in subsidy £12,000 million. At least, that was so last year, though there it will probably be even more this year.

Thus, we are just about balancing our books apart from subsidy, and then we have the audacity to borrow from other nations £12,000 million and to hand it out to all and sundry in subsidies. We should all think on this matter very carefully, since everyone is the recipient of subsidy in one form or another.

A great deal has been said about how we should correct the system and cut Government expenditure. In my view, there is only one way by which we can cut Government expenditure, and that is by reducing the number of spenders. We are now employing 1,100,000 more people in local government than we were in 1960, and, if we take into account the extra number in the Civil Service as a whole, the total is 1,350,000 more-doing today what was being done by that number fewer in 1960 and, in my opinion, doing it much worse.

We must stop recruitment, and we must cut out unnecessary services. There is no other way. The truth is that we are taking people from the wealth creation sector and putting them into the wealth spending sector, leaving the many fewer wealth creators to carry an impossible load. That is what is causing so much of our trouble in over-government and over-taxation.

With specific reference to our level of taxation, I draw attention to what I was told in a Written Answer—col. 247 of Hansard—on 25th March. This demonstrates just what we are doing to ourselves. It is my opinion that we have the highest taxation in the world, certainly in the Western world, according to these figures. Our starting point for taxation is 35 per cent., and our highest rate is 83 per cent. In France the starting point is 5 per cent. and the maximum is 53.5 per cent. In Canada the starting point is 6 per cent. and the maximum is 47 per cent. For Sweden the respective figures are 7 per cent. and 56 per cent. For the United States they are 14 per cent. and 50 per cent. For Germany they are 22 per cent. and 56 per cent.

Thus, our taxation is just about double the average of the rest of those countries taken together. Until we recognise that we must lower taxation, that we must allow people to spend their money in their own way and allow them opportunities to save, we shall never get out of our difficulties.

I reiterate the point with which I began, that until we scrap completely our taxation and welfare system and start again, we shall never get out of our difficulties, under any Government. I hope that my own Front Bench recognises that, too.

Mr. Molloy

I am following the hon. Gentleman's remarkably interesting argument, and I have a good deal of sympathy with some of what he says, but will he not agree that, if his right hon. and hon. Friends share his views on public spending, they ought in all honesty to be prepared to say where they consider the large cuts in public spending ought to come? They ought not just to refer to them as a whole and then hide behind the idea that they are opposed to public spending, without having the courage to say where the cuts ought to come.

Mr. Howell

I shall not be led too far down that path. In my view, the time has come for us to spell out in more detail what we should cut, and I have just tried to spell out some of it myself. First, we should cut the massive number of civil servants and local government personnel, which is growing at 150,000 every year—and every year, indeed, growing by a greater number than in the past. We must put a stop to that.

As I say, the answer is to scrap completely our present taxation and welfare system and start again. We should have a system under which all income is classified as income for tax purposes. We should then raise the tax thresholds to at least two-thirds of the national average wage in the first instance, and eventually to the national average wage. We should unify social security benefits so that there is one payment only, and that should be limited to a reasonable figure. At present, an almost limitless amount can be paid in some cases.

Mr. Brian Sedgemore (Luton, West)

Limitless?

Mr. Howell

We should, as I say, cut the numbers employed in local government and the Civil Service, and we could then as a result cut taxation generally.

Mr. Atkinson

What about those on the dole?

Mr. Howell

Also, we should make a dramatic and massive switch from direct taxation to indirect taxation. The sooner we recognise that by going to indirect taxation and allowing people to make their own decisions on how much they pay as a result of their purchases, the better it will be generally.

I believe there to be no other way out of our problems. Until we recognise the need for a real change of attitude and a real change of system, and act on that realisation, the country will continue to decline.

5.57 p.m.

Mr. Brian Sedgemore (Luton, West)

I hope that when the hon. Member for Norfolk, North (Mr. Howell) next lectures us in the authentic voice of Conservatism he will not confuse income tax with total taxation. In fact, we are not the highest taxed country in the world. The figures have been spelled out. They can be found in Economic Trends and several other documents. We are less highly taxed than Sweden and Norway, almost certainly less highly taxed than Germany, and probably taxed similarly with France. The hon. Gentleman's figures were income tax figures, and it is therefore not quite honest to talk about taxation in those terms.

Mr. Ralph Howell

I was reading out the income tax figures, which can be seen in Hansard of 25th March.

Mr. Sedgemore

But the hon. Gentleman kept talking about total taxation, not about income tax, and that was the difficulty.

At a time of low output and high unemployment the Chancellor presents us with a neutral Budget and refuses to do anything about certain imports. This means that, for the future, effective demand, output and employment in this country will be determined by forces wholly outside the Government's control. It means, in effect, that the Keynesian era is coming to an abrupt end, with a total abdication of responsibility by the Government over those sectors which most affect people's livelihoods and prosperity. It means also that certainly some of the forebodings of the London Business School, the National Institute of Economic and Social Research, Phillips and Drew and the Cambridge Economic Group will come true over the next few years. I say that not to be alarmist but simply because the reality is alarming.

One is bound to have mixed feelings when looking at the constituent parts which make up the Budget. My own view is that the social priorities are broadly right and that the trade and industrial policy behind the Budget is broadly wrong. Everyone is pleased that there is help for pensioners, but no one can be pleased at the prospect of economic growth by hunch, by guess and by God, and a taxation policy which virtually says that in perpetuity the corporate sector will not pay tax is hardly to be welcomed on this side of the House. Sandilands may be good for capitalism but it is certainly not good for Socialism.

Moreover, we have a pay policy which, in my view, is not wholly to be welcomed in so far as, stripped of all the mumbo jumbo and all the tables in the books, and taken in conjunction with the rest of the Budget, it means lower living standards for the bulk of working people. I suppose that one could say that the Prime Minister almost admitted that a couple of days ago. My right hon. Friend the Chancellor of the Exchequer has eschewed fine tuning many times in the House but he has presented a Budget which is nothing but fine tuning. He has made it clear that if there is so much as a hiccough in the savings ratio, or the build-up of stocks, or a deviation from the pay policy, he will come scuttling back to the House and give us yet more fine tuning. That suggests that he is speaking from a position of weakness rather than strength and that he does not believe in his own strategy.

Since I do not believe in the Budget we are at least what the lawyers would call ad idem in that. I give the Chancellor four marks out of 10 for his Budget. Some of my hon. Friends might say that that is an excessively high mark, but one can be generous because there may not be another Budget from this Chancellor, and not much in the Budget is irreversible. We can, therefore, carry out the right policies if we persuade the Treasury mandarins to change their minds.

The central part of the Budget is the pay policy and I have several points to make about that. I do not know if the Archangel Michael is right to say that the pay policy is not corporatist, but a sin is worse when it is committed by an archangel. It certainly is not a Socialist policy. It is a bungled piece of mismanaged capitalism. From the moment it was announced the foreign exchange market inevitably shuddered and it has continued to shudder over the past four days. The Treasury must be kicking itself for cocking up the presentation of the Budget.

I do not like a pay policy which is likely to bring odium on the trade union movement. It is presented in such a way that if it is not accepted pensioners will feel bitter about price increases, and others who are not trade unionists will be confirmed in their dislike of the trade union movement. The media will label trade union leaders as bully boys who take away concessions from the women and kids. The odium for bad and wrong economic policies belongs to the Government and not the trade union movement.

The pay policy is unfair because we have heard nothing about limits on the pay policy, and particularly because of the tax relief for those on a taxable income of over £4,000. To be in that band one would have to have an income of over £6,000. It is absurd to call fair a policy which means that a married man with two children on £8,000 a year gets a greater tax concession than the same man earning between £2,000 and £3,000. I can understand the Chancellor of the Exchequer presenting the CBI with such a pay policy and claiming that it is fair, but I cannot understand how he can present it in that way to the trade union movement.

There is something of the conjuring trick in this pay policy. Tax concessions, which should have compensated for last year's inflation, have been added to next year's wage bill. That is a double-counting fraud. The Budget does not provide for tax reductions on personal earnings but a real increase in taxation.

The Chancellor has spelt out only two parts of the pay policy—pay settlements and conditional tax concessions; but there are three sides to the policy. In addition to wage settlements and tax concessions there is the series of devaluations we have had since the end of February. A combination of those three things means a lower standard of living and a fall in real income in the coming year.

After the Budget I read The Guardian, which said the whole policy was equivalent to a real income rise of between 6.5 per cent. and 10.5 per cent. God save us from the economists on The Guardian. Those percentages have nothing to do with real income, but relate to the rise which is necessary to achieve the same standard of living if taken together with the tax concession proposal.

The 3 per cent. figure is interesting. If that is accepted there are likely to be declining labour costs. Opposition Members will have to invent a new theory for the causes in inflation in a situation where there would be negative labour costs. But negative labour costs in conjunction with productive economic growth, which the Chancellor spelt out, can only mean a substantial shift of resources from labour to capital.

It is legitimate to ask an hon. Member what his attitude is towards the incomes policy. My attitude does not necessarily square with that of all in the Tribune Group. I do not believe that free collective bargaining is the ark of the covenant. If the incomes policy were seen as part of a more interventionist industrial policy, if it were part of a policy linking planned, as opposed to unplanned, growth of imports to investment and the pricing policies of our major companies, and if it had a centrally-based Socialist concept of planning rather than a corporatist concept of planning I would support it. I would have supported a strategy involving an incomes policy which would allow for complete revalorisation of the tax system in line with inflation, bigger concessions on personal earnings, and wage settlements at least three times as generous as those proposed.

I basically object to the strategy behind the Budget. We are in for trouble. The Treasury policies are calculated to create a series of currency wars within the next 12 months and to bring about European disintegration. Pro-Europeans should think carefully about that. The policies threaten the whole basis of the international payment system. Traditionally, Treasury mandarins have been regarded as high-minded and conservative, but we must realise that they are putting in jeopardy the future of the country and the future of a particular Government and political party.

The warnings are sounding loud and clear. There was a substantial devaluation at the beginning of March, a further devaluation 10 days before the Budget, and the devaluation since the Budget. The signs are that this will continue, that with the proposed policy there will be more devaluations, and that the Stock Exchange will become more jittery because the Chancellor of the Exchequer has put the economy into disequilibrium. The chances are that as the economy picks up imports will be sucked in and the balance of payments will turn sour and there will be further trouble on the foreign exchange market.

Working people will suffer, because they will be squeezed between what the IMF and our partners will allow and what the trade unions con bring back in wage settlements, thus permanently depressing living standards. I say two things about that. First, if the existing payments system does not work, change it. Secondly, rather than approach the problem of inflation through real wages, let us try to increase output in the fight against inflation. But that will not work unless we are prepared to plan foreign trade as a basis for planning the British economy.

I believe that my right hon. Friend the Chancellor was right when he said—and one of his colleagues quoted Mr. Terry Ward—that we have the capacity in this country, given the deep recession we are in, to grow by about 5 per cent. a year for the next five years; but we shall be able to achieve that growth only if we get round the balance of payments constraint. I do not believe that we shall be able to do that unless we can plan the growth of imports over the next five years. If we are prepared to have import growth of 5 per cent. a year during the next five years, rather than a projected 10 per cent. a year, how can anyone on either side of the House call that a siege economy?

If we could work out a policy on those lines, which did not damage the interests of our European partners any more than it damaged our own, we might have much greater political and economic cooperation with Europe. It may be strange that those in the Tribune Group are now the only people who can, perhaps, bring about some serious European political integration.

I invite my right hon. Friend to introduce, as I dare say he will before the autumn is out, a licensing system for imports which seeks basically to hold them at their present level during the next 12 months, unless particular firms can argue that it would be in the interests of the economy to increase their imports. Next year, we should then see increases in imports of capital investment goods which we cannot produce very quickly. We should probably see increases in imports of steel, but should probably have to cut back projected imports of cars, textiles and certain other consumer durables. Thereafter, we could have a flexible licensing system, taking into account the interests not merely of this country but of some of our European partners.

In order to prevent retaliation, which desperately worries the Opposition, we could link the import licensing system with our planning agreement system, agreements on investment and the carrot or stick—whichever it is called—of controls on the prices of the goods and services of our major companies. If we were prepared to do that, no Conservative Member could complain that we were injecting vast sums of money into the economy and risking massive inflation through increasing the money supply. Effective demand would provide the sort of take-off we want. If the take-off were too slow we could reduce taxes, and if it were too fast we could increase them. We could get rid of the Budget with that sort of policy. For the next five years it could be just minor tinkering and fine tuning.

We could concentrate on our basic industrial strategy, and if we were prepared to announce that that strategy would be effective for five years we could create the magic confidence which Conservative Members always talk about. We could give industry that five-year run and increase not only private investment but public investment. We could set about our planning by using the NEB and the planning agreements system, ensuring that firms would remain viable at the end of five years, and build up the whole ethos of the public sector.

I do not believe all the gloom in the Cambridge economic report, but I believe that the underlying basis of the report is true, and that the planned growth of imports is a better policy than currency wars. Wynne Godley, a former adviser to the Chancellor and presumably someone who is not out of his tiny Chinese mind, says: Not only is unemployment in 1980 likely to be higher, and real take-home pay (for those who still have jobs) lower than today; but also give existing arrangements for managing the economy, there is no prospect of recovery in the longer term and there is no reason to suppose that underlying trends in international trade would improve. Existing arrangements are likely to produce a chronic deteriorating recession, probably combined with two-digit inflation…. Prosperity can only be achieved only by changing these arrangements. I add one sentence. Prosperity can be achieved only by changing those arrangements and through a Socialist industrial strategy.

6.15 p.m.

Mr. David Hunt (Wirral)

In this, my maiden speech, in accordance with what I understand to be the conventions, I should like first to pay tribute to my predecessor, Lord Selwyn-Lloyd. In doing so, I am aware that many words have recently been spoken about his career as a distinguished Member of this House, as a statesman of considerable ability, and as Speaker.

My tribute is to my predecessor as a constituency Member. For 31 years he served our community in Wirral, and he had and still has a great reputation for a lifetime of service. His work in Wirral is well known, in particular in connection with cancer research, the provision of homes for the elderly, the Abbeyfield Society, Shelter, his efforts to preserve Caldy Manor Hospital, and his work in many charitable organisations both inside and outside the constituency. We in Wirral praise and respect Lord Selwyn-Lloyd for his service not only to the country but to our community.

One great example which Lord Selwyn-Lloyd has set and which I shall find it very difficult to follow is that in the constituency he has a reputation of replying to all letters by return of post. When he was Speaker he received 7,000 letters in his first two years and still maintained his reputation.

The name "Wirral", as many eminent historians in the area have told me from their researches, dates back to the year 895, when it was first mentioned as Wirheal in the Anglo-Saxon Chronicle. It forms part of the peninsula between the River Dee and the River Mersey. On the Dee side are the villages of Hoylake, West Kirkby, Caldy and Heswall. On the same side, taking in part of Cheshire, are the villages of Parkgate, Neston, Burton and Willaston. The constituency also moves close to the Mersey on the other side, taking in a large part of Birkenhead, Upton and Prenton.

It is a large constituency, with more than 94,000 electors. On behalf of my constituents, I can say that we are concerned not only about our own conditions but very much about conditions in the whole of Merseyside. As one who was brought up in Liverpool and whose family is part of the Liverpool shipping heritage, I am very sad about the decline of industry in Merseyside. The present high level of unemployment there is a tragic waste of human resources.

In Wirral we suffer an unemployment rate of 10.3 per cent. In some parts of my constituency it is as high as 25 per cent., and in some industries it is even higher. I was told this morning by the National Federation of Building Trades Employers that in the construction industry within a 10-mile radius of Birkenhead and Liverpool there is 33.6 per cent. unemployment among operatives.

It is very worrying to contemplate the amount of social and economic damage done by such widespread unemployment. To be without the opportunity of work is an affront to human dignity. Therefore, I welcome the Chancellor's extension of the job creation programme, which I support, although many representations from constituents lead me to suspect that not all the money is being spent on the provision of jobs. Some may be being wasted in meeting surplus administrative costs. As long as the money is spent to create jobs I praise the scheme.

It is youth unemployment that must have the concern of us all. For school leavers to move from the classroom to the dole is for them to understand, in accordance with the education that they have been given, that they have failed completely and utterly. We must do more to alleviate youth unemployment, but job creation can be only a temporary palliative. It is the far more serious long-term youth unemployment that we must tackle urgently. We must increase the facilities for training. We need a new skillcentre in Wirral. At the moment we do not have sufficient facilities. Training must be increased, but it must be relevant. In many ways the training that we are giving our youngsters does not prepare them sufficiently for the jobs that we all earnestly hope will be available for them in the years to come.

It is, however, for those who are socially and physically disabled that the present situation has the most serious consequences. Therefore, I welcome the Chancellor's decision to extend further the Community Industry Scheme. I supported the Scheme during the three years that I was Chairman of the British Youth Council. I believe that it is invaluable in the help that it gives to socially disadvantaged young people.

Even more serious is the prospect that is faced in Merseyside of substantial further increases in unemployment. Many of the industries on which we depend are facing difficulties. I believe that there is a vital need to preserve the Shotton Steel Works. If we were to lose that industry we should lose the benefit of its excellent industrial relations record. If the works are to be closed there will be extremely depressing consequences, including a desperate situation for the Birkenhead docks.

Cammell Laird also needs more Government support. Surely one of the strong arguments for the Government to site the headquarters of the British Shipbuilders on Merseyside, if the present legislation succeeds, is the impressive record and tradition of our area in the industry. On Merseyside we need special and urgent help unless we are to slide further into increasing unemployment and depression.

I respect the traditions of the House, but I hope that on another occasion I shall have an opportunity to enter into more controversial matters. I am privileged to have become a Member of the House of Commons.

Some have described how they believe that the power of Parliament has diminished, but I do not share that view. The Government may seek to limit the power of the Executive, but it is in this place that we still have the opportunity to defend individual freedom. The individual needs protection of his rights more than ever before. I shall seek to play my part in safeguarding basic human freedoms, one of the most important of which I regard as the right to employment.

6.23 p.m.

Mr. George Rodgers (Chorley)

I congratulate the hon. Member for Wirral (Mr. Hunt). He made a most interesting and constructive maiden speech. I look forward to hearing him frequently in future. I was involved in the campaign to try to prevent him reaching this place, but his victory was overwhelming. I warmly congratulate him on a first-class contribution.

I am grateful to have an opportunity to speak on the Budget proposals. In one area they are unique, as they offer us propositions. Therefore, I take them as being subject to genuine consultation and possible variation. I hold no resentment that the trade union movement is to be directly involved in decision-making. As a constant advocate of worker participation I welcome the rather cautious recognition that the real wealth of the nation emerges from the efforts of those who are employed in industry.

It is absolutely right that those who develop our wealth should be concerned with the nature of its distribution. I should like to see the area of participation extended—extended even to Members of Parliament so that we may be allowed to influence the course of events rather than merely commenting upon it.

One astonishing feature of the Budget is a recommendation that the long-cherished myth, that the contents of the Budget should be delivered, swallowed and digested, should be disposed of for ever. It may be that we shall soon recognise that this annual rigmarole is obsolete—a relic of more leisurely economic eras.

Despite my approval of the Budget's novel approach, I gravely doubt whether the options made available to trade union leaders will leave sufficient room for sensible and meaningful negotiations and manœuvre. I have long held the view that an incomes policy is an essential ingredient in our overall policy. However, the regulation of wages and salaries cannot be taken in isolation; there are many other factors in the mix that demand equal attention, not least a more vigorous control of prices and a wider distribution to the community of whatever resources are currently available.

It seems ludicrous that the man on the factory floor should be expected to accommodate a deal that asks him to approve a system under which those on substantial incomes in excess of £5,000 or £6,000 a year, and well above that, should benefit more from a formula than he does himself. A settlement of that nature would widen the gap between those who are poor and those who are prosperous.

The trade unionist is being asked to negotiate on behalf of those who, generally speaking, are not only non-contributors to trade union funds but are frequently actively opposed to the whole concept of organised labour. We must remember constantly that the prime purpose of a trade union is to protect and, wherever possible, enhance the living standards of its members. If the Trades Union Congress is prepared to participate in policy-making on behalf of the community generally, so as to advance that cause, we should welcome the gesture. But the movement must not be trapped by being lured into a position in which its members are placed at a disadvantage.

I have no doubt that the Government's programme will effectively combat inflation. It is recognised that inflation is one of the main problems facing the nation, the others being unemployment and the lack of adequate investment in manufacturing industry. I list the problems separately because I fear that the assumption that by ridding the country of the curse of inflation we shall automatically cure unemployment is too prevalent a fallacy.

We are all aware that there have been periods of sustained unemployment when the problem of inflation has not existed. Those of us who remember the 1930s will recall that there was massive unemployment at a time when prices were dropping.

It is desperately important that we recognise that it is insufficient to leave these matters to those who have failed to respond to the incentives to invest that have been offered by this Government and previous Governments. To make funds available is merely to fly in the face of all previous experience.

If we are to achieve the desired result it will be necessary to direct investment. The sooner we face that position the sooner we shall be able to clamber out of the present economic quagmire. I accept that it is only by investment in industry that we shall create the wealth that is necessary to advance our social programme. However, I do not believe that the action to which I have referred will cure the misery of unemployment. Employment is a separate issue, which requires separate remedies.

All the evidence demonstrates that the greater the capital investment in manufacturing industry the smaller the subsequent labour force. Between 1964 and 1973 the gas, electricity and water industries increased output by 57.5 per cent. In the same period the number employed in those industries fell by 16.2 per cent. Engineering in the same spell improved output by 46.6 per cent., with 13.2 per cent. fewer workers. Coal, petroleum and chemicals stepped up production by a staggering 71.5 per cent., with an 8.5 per cent. smaller work force. In textiles output increased by 30 per cent. and the number of workers was reduced by 29 per cent. I have quoted only four examples, but the same process applies across the whole spectrum of industry.

Although it is true that some slack would be taken up in the event of an uplift in world trade, the broad process would inevitably continue to accelerate in the coming years. I fear that those who believe that we can meet the problem of unemployment by the traditional method of absorbing workers in industry are living in a world that has long since vanished.

Let me add one more sombre statistic. Within nine years our working population—that is, the number of people between 16 and 65, excluding students—will increase by more than 1,600,000—in other words, by more than the total who are unemployed at present. Surely nobody can believe that we can absorb a number of that nature into manufacturing industry.

In face of this situation we should seriously re-examine our attitude towards public spending. In the coming years we must aim to improve and expand public transport and the hospital and social services. Perhaps, too, we should review our rather Victorian and puritanical attitude towards work itself, much of which is plain drudgery. We should be looking towards a shorter working week, a shorter working life-time, and greater opportunities for education and travel for all age groups.

Led by a Labour Government we should be prepared to apply these principles. I am confident that from our present difficulties we can provide a brighter future. I realise that those difficulties exist on a formidable scale. Some of our difficulties are small compared with those facing the Opposition. We now hear outraged cries from Conservative Members, because the attitude of the trade unions will affect financial policies that have previously been the prerogative of Parliament, yet when we look outside this Chamber we see the allies of the Tory Party, in the CBI and in the City, approving the Chancellor's ploy and praying that an understanding will soon be reached between the Treasury and the TUC. Those of us on the Government side of the Chamber might be accused of possessing a multitude of polices, but nothing of substance has been delivered in policy form from the Conservative ranks.

I conclude by reminding Treasury Ministers that inflation does not affect people in a consistent fashion. It is quite feasible that the overall rate of inflation will be curtailed, but separate groupings within the community will be adversely affected. The soaring costs of gas, electricity and coal, as well as of public transport, hit those on low or average incomes much more than they hit the more prosperous. Similarly, the cut-back in food subsidies hits those on low incomes more because a greater proportion of such incomes must be spent on food. The Government have done remarkably well in stabilising mortgage interest rates. Indeed, for the first time in years the rates are beginning to fall. Unhappily, during the same period council house rents have increased considerably and at a much faster rate than was forecast by Government spokesmen. It was anticipated that the rate of increase in 1975–76 would be in the region of 60p per week, but the information that has become available recently indicates that many local authorities are imposing increases far in excess of that figure. I believe that a policy that is damaging to those in greatest need will not and does not deserve to succeed. I hope that my right hon. Friend the Chancellor will bear this aspect carefully in mind when he discusses these matters with the TUG.

I wish my right hon. Friend well in the talks and I trust that good will and common sense will prevail, so that those who represent the broad working population are not bound too rigidly by the restrictions implied in the formula originally conceived by the Chancellor of the Exchequer.

6.35 p.m.

Mr. Nigel Lawson (Blaby)

It falls to me from the Opposition Benches to perform the happy task of congratulating my hon. Friend the Member for Wirral (Mr. Hunt) on an outstandingly able maiden speech. [HON. MEMBERS: "Hear, hear."] He follows a man whom I have known personally for 15 years. Selwyn Lloyd will be a difficult man to follow, but my hon. Friend has made a good start. He spoke feelingly about unemployment, a matter which unites hon. Members on both sides of the House, although we have differing views about the best way in which to deal with the situation. We look forward to hearing my hon. Friend again at an early date.

This has been, as is customary with Budget debates, a wide-ranging discussion. I wish to confine myself to what appear to be the three central themes running through it, that is to say, the miracle, the borrowing requirement, and the deal.

The projected economic miracle of 1976–79 represents the Chancellor's medium-term economic strategy in the context of which we are being asked to judge the Budget for the coming year. The public sector borrowing requirement, the resultant of the Budget and the public expenditure decisions which preceded it, represents the inflationary potential in the economy, which, as is agreed on all sides, must be rooted out before it overwhelms us. The proposed deal with the TUC is in political terms the counter-piece of this year's Budget.

Before discussing this unique triad of follies, let me give praise where praise is due. The new system of cash control of public expenditure set out in the Budget-day White Paper on "Cash Limits on Public Expenditure", coupled with the promised, much more effective and stricter monitoring of the Contingency Reserve, that modest conjuror's hat from which an immodest number of expensive rabbits are customarily extracted, together represent the most important attempt to regain control of public expenditure since the disastrous introduction of the PESC system several years ago. However, they do not go far enough, and there is not enough parliamentary accountability written into the proposals as they stand, nor can any system of improved Treasury control overcome a lack of political self-control. None the less, the new system represents an important step forward, on which the Chancellor is to be commended.

My regret is that there is little, if anything, else on which I find it possible to commend him. The arithmetic of the alleged imminent economic miracle was set out in the Fourth Report of the Expenditure Committee. On Thursday night a somewhat chastened Chief Secretary—and I do not think that he was chastened merely because he had been passed over in promotional terms—tried to maintain that the figures were purely illustrative. But they are very much more than that. That was made abundantly clear by the Chancellor during the recent, but never-to-be forgotten, public expenditure debate when he said: Of course, no Government can give a firm guarantee that these targets will be achieved But if they are not achieved, there will be less, not more, scope for public spending…. If we should fail, for any reason, to get that improvement, we shall have to cut public expenditure programmes further, rather than increase them."—[Official Report, 9th March 1976; Vol. 907, c. 256–64.] It is hard to imagine anything more irresponsible than to have agreed, as the Chancellor has done, massive public expenditure programmes which, on his own admission, can be justified and paid for only on the assumption that our economy will perform in future in a wholly different way from anything we have known in the past. Nor indeed has the Chancellor given any indication of the mechanism by which this miraculous transformation of our economic performance in terms not only of growth but of export, investment and, above all, import propensity, is to be achieved.

His critics on his own Benches below the Gangway—and we heard one very articulate and interesting example in the recent speech of the hon. Member for Luton, West (Mr. Sedgemore)—maintain that the only hope is a siege economy, direction of investment and the full panoply of Socialism, red in tooth and claw—or [...]ed anyway. The Opposition, or most of us, believe that success can be attained only by rolling back the suffocating frontiers of public expenditure, by reducing the burden of taxation, by allowing a massive regeneration of profits and, above all, by setting market forces free to work. Here are two intellectually coherent prescriptions. They are positive. Each is an intellectually coherent prescription for the economy.

The Chancellor rejects them both. What does he put in their place? He relies on an exhortation designed to produce a national change of heart, what might be termed, metaphorically, the Christian Barnard school of economic thought. Unfortunately it can be expected to enjoy about the same degree of lasting success.

As for the public sector borrowing requirement, the fact that the Chancellor has given up any attempt to cut back and is actually planning an increase from £10¾ billion last year to £12 billion this year is horrifying enough and fully explains the further collapse in confidence in sterling which is the sombre backcloth to our debate this week. The true picture—and I did some homework over the weekend—is even worse. It looks to me very much as if the Treasury has, if I may use a phrase which has been used before in a different context, "cooked the books".

The borrowing requirement, after all, is made up of two items. First, and by far the larger, is the financial deficit of the public sector. The second is the basket of other financial transactions, not part of the financial deficit, but which still have to be financed by borrowing.

Table 7 of the Red Book, which I am glad to see the Financial Secretary is just about to look at, shows that this year the public sector financial deficit is scheduled to rise by very nearly 30 per cent., from under £8¼ billion to over £10½ billion. A financial deficit of this size might have been expected to imply a borrowing requirement of at least £13 billion. In fact the official forecast—surprise, surprise—turns out at £11.96 billion, very nearly, as my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) pointed out, within a stone's throw of the Chancellor's £12 billion limit which he set out in his letter to the Managing Director of the International Monetary Fund. This has been achieved, we see when we look into it, by forecasting a reduction of well over a billion pounds, or nearly half, in the second component of the borrowing requirement, the other financial transactions.

This component has, interestingly enough, been rising steadily ever since 1971. Moreover, on further inspection, it emerges that the great bulk of this unexpected reduction is to be contributed by two items in particular. The first of these is cash expenditure by Government on the purchase of company securities, which will, it is forecast, fall from £481 million last year to £125 million this year. Pleasing as it is to imagine the National Enterprise Board's wings clipped in this way and the Industry Act put back on the shelf, one is bound to feel a trifle sceptical.

One possible explanation may be that the Government's plans are in future that their share acquisitions, as is intended with the nationalisation proposals for the aircraft and shipbuilding industries which are before the House, will be made entirely by an offer of Government securities. No cash will change hands—in which case they do not, funnily enough, enter into public accounts. This fact is itself a useful reminder that the size of the borrowing requirement seriously understates the likely increase in the national debt and the problems and burdens of managing that debt in a non-inflationary manner. All of this money for the nationalisation of the shipbuilding and aircraft industries and every form of nationalisation financed by issuing Government paper might amount to another £1 billion. That is not in the books.

The other category which is forecast to fall by a comparable amount is somewhat mysteriously listed in the Red Book as "Miscellaneous capital transactions (net)". The only further enlightenment which is provided, in a footnote, is that it "includes unidentified items". Quite how the Treasury sets about the metaphysical task of forecasting unidentified items I am not quite sure. Clearly, and hardly surprisingly, it is not very good at it. At the time of the last Budget this item "Miscellaneous capital transactions (net)" was forecast to yield a net revenue of £45 million. In the event it turned out to have involved a net expenditure of £619 million. Yet it is on this flimsy basis that this year's borrowing requirement has been, notionally at any rate, kept to within the £12 billion limit.

It is this huge borrowing requirement which represents the inflationary, money-creating potential in the system. It is like a huge weight of snow high up on the mountain, at present suspended there, but which at any time may descend like an avalanche and engulf us all in inflation.

Incidentally, before I go further, I hope that the Chancellor will directly answer the points I am making about the miscellaneous financial transactions. These are important questions for the confidence of sterling.

While it is correct that, whatever its true size—and we shall, no doubt, hear this again from the Chancellor, as we have heard it so many times—so long as the public sector borrowing requirement is financed by genuine borrowing and not by printing money inflation will not ensue, the point is that how it is financed is to a terrifying extent outwith Government control. The Chancellor may genuinely intend—I am sure he does—irrespective of everything else, to borrow enough to pursue a non-inflationary money supply policy, but in practice that may mean pushing up interest rates to levels which, politically, the Government would find intolerable and unacceptable and which, even if they were accepted, would totally kill any hope of private investment long before any physical crowding out were to occur.

That is why I think it was the height of absurdity for the Secretary of State for Trade, much as I admire him in many ways, to argue the other night, in his last speech as Paymaster-General, in effect "We did it last year. We shall do it again." Last year was a year of recession, as my right hon. Friend the Member for Leeds, North-East pointed out. This year is a year of recovery. What was even worse was to hear the right hon. Gentleman adding that last year the trick was pulled off with falling interest rates and this year there is no reason why the same could not be done again. This is not merely nonsense; it also reveals that the Government have two dangerously conflicting monetary objectives.

Whatever else in monetary policy may be unclear, and I accept that much is unclear or obscure, one thing is absolutely clear. It is possible with some difficulty to control the money supply or interest rates, but what cannot be done is to control both. If there is any hope of avoiding hyper-inflation in future, the borrowing requirement must be cut dramatically now. For non-monetary reasons this must be done, I am sure my right hon. and hon. Friends would agree, by making immediate cuts in public expenditure rather than by putting up taxation still further.

I was surprised to hear the Chief Secretary try to argue on Thursday night that for technical reasons cuts could not be made this year, in 1976–77. It was precisely in 1976–77 that the cuts which the Chancellor announced in the last Budget were to fall. These were cuts, understandably, which covered capital and current expenditure on goods and services, as well as transfer payments. What the Chief Secretary was saying really boiled down to the fact that the longer we wait the harder it becomes and ultimately it becomes impossible, because we cannot cut yesterday's expenditure. This is precisely the reason for not waiting, and for starting now. It has got to come. Meanwhile I would offer the Chancellor one guideline—make economies all round but concentrate the cuts on those areas where the private sector is best placed to fill the gap. Housing and industry are two obvious examples.

I confess I may have given the Chancellor too much credit, because I was forgetting that, having failed to get the borrowing requirement down, the Chancellor has evidently lost all interest in it. In a key sentence in his Budget Statement, which I believe will return to haunt him on many occasions in the future, he declared that … I believe it is well worth accepting some increase in the PSBR in order to achieve a lower rate of inflation".—[Official Report, 6th April 1976; Vol. 890, c. 281.] He says "PSBR". He cannot bring himself to use the phrase "public sector borrowing requirement". This is of some psychological interest, even if it is of little economic significance.

Everything once again is to be sacrificed on the altar of incomes policy, this time in the shape of the Chancellor's controversial deal with the TUC I do not want now to go into the interesting and knotty question of the constitutional implications of the proposal. I have no doubt myself, as time goes on, that the instinctive reaction of my right hon. Friend the Leader of the Opposition will be seen to have been the correct one. Instead, I would like to analyse the economic folly—I welcome the Chancellor to the Chamber at this late hour—amounting almost to lunacy of the proposed deal. It is a very rum deal, whichever way one looks at it.

The Chancellor says workers will be better off by accepting it, and then produces little sums to demonstrate it, which he does by treating all tax reliefs, not just the conditional reliefs, as if they were part of the bargain, and tops it up by claiming credit for a purely arbitrary reduction in inflation which he confidently says will occur as a result of his lower pay limit without explaining the mechanism.

I was interested when my right hon. Friend asked the Chancellor whether he thought that the trade unions were the cause of inflation. We are still waiting for an answer from the Chancellor. At any rate, the Chief Secretary seems to be singing a different tune altogether. At the end of Thursday's debate he said that: if the Government are successful in achieving the 3 per cent. pay limit, they will do more to increase the profitability of British industry in the coming year than any other measure in the Budget or in any Budget for years past."—[Official Report, 8th April 1976, Vol. 909, c. 766.] Evidently, as the Chief Secretary sees it, it is profits which will do better as a result of this deal. Perhaps the two should get together and decide what it is. I am sure trade union leaders themselves asked for some explanation of this.

Of course it is desirable that there should be a lower round of wage increases. It is desirable—and here I go back to what my hon. Friend for the Wirral said—because it is the only way of bringing down unemployment. That is why we need a lower level of wage increases in the next round. The Chancellor himself accepted this point. He said that: for a country in Britain's present economic situation, the number of people who have a job will depend directly on the level of pay received by those in work."—[Official Report, 6th April 1976; Vol. 909, c. 270–1.] This is absolutely right, but to go ahead and use the further bribe that if unemployment falls for this reason, and if the economy expands that much further, he will then reduce taxation is not merely unnecessary; it is inflationary, economic nonsense.

It is worse than that because it undermines one lesson which the people of this country must learn again and again, and that is the fundamental relationship between the levels of taxation and the levels of public expenditure. For too long Chancellors, on both sides, have been inclined under tuition from the Treasury to make it appear as if there were no link between the two. By divorcing the two and by showing there can be a tax change wholly divorced from public expenditure changes the Chancellor is hindering that lesson from being brought home and taken in. It has to be taken in if there is to be any national awareness of the nature of our problem.

The trouble with the Treasury is its obsession with the short term and fine tuning, which is the only way in which, for a very short time, one can divorce the level of taxation and the level of public expenditure.

Again it is all very well when taxes are going down—in real terms they are going up, but at least in money terms they seem to be going down—to tell trade unions that it is take-home pay which matters and, therefore, they should claim less. But what happens when taxes go up as they may do when the Chancellor introduces his autumn Budget? The trade unions will say "We must claim more" because this is the logic of what the Chancellor is saying.

Another big error which the right hon. Gentleman has made is that this kind of deal inflates the importance of trade union leaders, irresponsible as well as responsible. When trade union leaders make some extravagant statement hostile to the Government about having nothing to do with the pay deal, the pound is in greater jeopardy. If the deal is agreed, and there is some breach of it, as, no doubt, there will be, the people outside will think the end of the world has come, that the economy is on the rocks, and again the pound will be worse. The Chancellor is giving a most extraordinary hostage to fortune by placing this kind of sovereignty in the hands of trade union leaders, the irresponsible and responsible alike. It seems incredible. Why on earth, when it is a very difficult job, make it even harder?

As my right hon. Friend the Member for Leeds, North East said, with an incomes policy, there is a price to be paid and it is a very big price. The Budget is only a few day old, and yet look at what we have heard already. We heard on Thursday from the Chief Secretary that he cannot cut subsidies as much as he would like to because the unions would not like it and it might jeopardise the deal. He could not do away with the Price Code or relax it as much as he would like because the unions would not wear it. He said he could not reduce the tax on higher incomes as much as he would like because the unions would not wear it and he had to get their agreement on the 3 per cent. Mr. Len Murray has said that reflation must be part of the deal; he says food subsidies have to be part of the deal. Yesterday Mr. Jack Jones was saying import controls have to be part of the deal as well as the direction of investment.

The trouble is that whatever benefits an incomes policy may bring the price is always too high, and it usually undermines the very economic policy it is intended to buttress—in this case the anti-inflation policy. It also has the great psychological drawback of creating and perpetuating the obsession with relativities which sours the entire political and social climate of this county and is one of the curses of our time.

It is true that it may also bring the political advantage for the Chancellor of providing a scapegoat. Some of the trade union leaders are a little afraid of this and, indeed, some of them are responsible for many of our national difficulties. But it is very odd for the party whose watchword, so we were told, was co-operation not confrontation, to prepare the ground for this sort of political scapegoating.

There is only one way in which confrontation can be avoided, or at least the likelihood of it reduced, and that is for the Government to stick to their own last. By getting close to the trade unions, they are making confrontation more likely What is the difference between a bribe and a threat? There is no difference between saying "If you are good, I will lower taxes" and "If you are not good, I will raise them". It is the same thing. Threatening is not the best posture to adopt to avoid a confrontation. But is it even worth it? Even if he establishes this convenient political scapegoat for his own errors, when the right hon. Member for Grimsby (Mr. Crosland) plays Jenkins to his Callaghan after the disaster has struck, I do not know whether it will come in handy.

Much as I should like to see taxes lowered this year for my own benefit, the only way in which confidence can be restored is for the Chancellor of the Exchequer to say "The trade unions are asking too much and, therefore, very sadly, I must say that the deal is off". He will not say that, but if he does I shall support him. In that way, and in no other, can he regain confidence.

The Chancellor of the Exchequer opened his Budget Statement by saying: The Budget I am presenting today is likely to prove the most crucial of the present Parliament."—[Official Report, 6th April 1976; Vol. 909, c. 232.] Indeed it is, for it represents the act of abdication which spells the death knell of the Government.

Several Hon. Members rose—

Mr. Deputy Speaker (Sir Myer Galpern)

Order. I remind the House that, unless succeeding speeches are briefer, at least half the number of hon. Members who wish to take part in the debate will not be called.

7.1 p.m.

Mr. Les Huckfield (Nuneaton)

I, too, congratulate the hon. Member for Wirral (Mr. Hunt) because, although I did not hear the whole of it, the part of his speech that I did hear was illuminating, and showed great concern for the problems of his constituents. I am sure that hon. Members on both sides of the House will welcome many more of his contributions to our debates.

The hon. Member for Blaby (Mr. Lawson) was right in one respect, because he said that there was a fundamental difference between the philosophies espoused by him and by my hon. Friend the Member for Luton, West (Mr. Sedgemore). Unfortunately, the empirical evidence is not on the hon. Gentleman's side. When the Conservative Government last tried out policies of that kind there was a shift of resources to the private sector. The trouble was that those policies did not produce the results that the hon. Gentleman has listed. They gave much momentum to the building of office blocks, property speculation, and the like. The increase in investment in manufacturing capacity which the hon. Gentleman and I agree our economy needs did not take place. The track record of the hon. Gentleman's party does not support what he has said.

The judgment made by my right hon. Friend the Chancellor of the Exchequer in his Budget was just about right. His neutral tone, which was neither reflationary nor deflationary, was more or less on the right lines. I welcome the doubling of the temporary employment subsidy. I welcome the increase in old-age pensions and the increase to be given to widows. I am intrigued by my right hon. Friend's offer of a carrot to the trade union movement. It looks very much like a carrot with a hard end, but it is a proposal worthy of serious consideration by the trade union movement, the House and the country. However, I doubt—this is where I have some criticism of my right hon. Friend—whether the transfer of resources to the private sector will produce the result that he estimates and which I think the economy demands.

I was a member of the Tribune Group that first accepted the £6 wage limitation and the White Paper on public expenditure limitation. I believed that the £6 agreement with the trade union movement, and the White Paper, were essential preconditions to growth. Working people are prepared to make sacrifices provided they see something coming out of them. They will be prepared to make sacrifices if it can be demonstrated to them that they will be made by the whole country and that they are fair. It is on the fairness of his proposals, apart from their results, that my right hon. Friend will be judged.

Unfortunately, the success of the £6 policy has already been overtaken by the fact that many of our continental competitors have been able to reduce their inflation rates to less than half of the rate current in this country. That is a pity, because the £6 policy has been successful in keeping unemployment slightly lower than it would otherwise have been and in maintaining confidence in this country and in its currency at a higher level than would otherwise have been the case. The trouble is that its success has been obscured by the even greater success of many of our major competitors in reducing their inflation rates.

There is a growing consensus in this country, in the trade union movement and in the Labour Party, that without economic growth we cannot have increased public expenditure and a return to completely free collective bargaining. As long as we have minus rates of economic growth and a diminishing manufacturing base, we cannot carry on with 60 per cent. of the gross national product going to the public sector. We cannot resume completely free collective bargaining in those circumstances. It would be desirable to achieve an even bigger transfer of resources to manufacturing capacity—I should be prepared to see that transfer made from some of the social projects cherished by the Labour Party—provided it takes place in the public sector. If we wish to maintain our manufacturing capacity, we shall have to choose increasingly between the building of schools and hospitals and the building of factories. That choice is increasingly staring us in the face.

It is clear from many of the speeches made by the general secretaries of trade unions in the past two or three weeks that they, too, share the sense of realism about the need to regenerate manufacturing capacity. They have shown that manufacturing industry and economic growth must have priority. I say to my hon. Friends and to Opposition Members who have tried to give them advice that we should leave the trade union leaders to do the bargaining. Trade union general secretaries and members of the TUC have spent their working lives bargaining on behalf of their members and we should leave them to do the negotiating with the Chancellor of the Exchequer. They know what their members want and what their members will accept. It is essential that they and their members accept the bargain. The silly talk of some Conservative Members about the proposals of the Chancellor of the Exchequer being unconstitutional is far less relevant than the argument that my right hon. Friend's undertaking must be successful.

Perhaps the issue to which we should be turning our attention is whether we should allow the expansion of the economy to be determined by extraneous forces. Ought we to allow growth in the British economy to be determined by the expansion in the West German and American economies? That is basically the policy that the Chancellor of the Exchequer has chosen to pursue.

I do not believe that an even more generous reflation than my right hon. Friend proposes would enable an increase in employment of the magnitude that some of my hon. Friends have been proposing. I do not believe that a faster general reflation would automatically mean more jobs. We are now approaching the situation in which many manufacturers have rationalised their production and manning techniques, and because many are operating well below capacity it would be possible for them to increase output by as much as 50 per cent. without taking on additional labour.

I do not accept the import controls advocated by some of my hon. Friends as a universal panacea. This retreat into a fortress Great Britain, complete with moat and drawbridge, surrounding ourselves with import controls, living off our fat and liquidating our overseas portfolio of longer-term investments, is a recipe for complacency and even further industrial decline.

When the Cambridge group of economists advocated import controls it was not as a panacea for all our problems but as a specific answer to a specific problem. They thought the British economy was not capable of the 5½ per cent. growth and the 14 per cent. import increase which they thought would be necessary to accompany that, because we could not get the percentage export increase to support that percentage import increase.

Those economists put forward import controls in a specific and not a universal way. However, I am glad that the Chancellor of the Exchequer has kept his options open, because in some cases, including television tubes and certain parts of the textile manufacturing industry, there may be a need for short-term import controls. I am conscious of the fact that there may be retaliation and that some of our traditional trading arrangements may be upset. That is why I regard import controls only as a short-term expedient that is necessary in some cases.

Let us suppose that we were successful in bringing about a significant reduction in imports through controls. I am not sure whether all his calculations are correct, but Mr. Sam Brittan, in the Financial Times, has worked it out that because of increases in competitive goods in this country an import reduction of £4 billion could mean the equivalent of an increase in income tax of 10p on the standard rate or in combined income tax and national insurance contributions of well over 50 per cent. It is not true that import controls are painless. Some of my hon. Friends seem to think that the controls can be imposed without any loss of real income or without hardship to working people.

Despite the fact that we have had a depreciation of the pound of more than 35 per cent. since the Smithsonian Agreement in 1971, manufactured and semi-manufactured goods to the value of £13 billion are coming into this country every year. Trying to stem that kind of import flow would be bound to involve a cut in real income for some people and there would have to be a cut in the real incomes of working people.

No adjustments to our terms of trade and balance of payments—whether depreciation of sterling, deliberate devaluation or import controls—can be entirely painless.

I do not believe that most of British manufacturing industry's problems would be solved by import controls, because most of those problems are structural. These are the kind of problems outlined by the CPRS Report on the car industry and the Boston consultancy report on the motor cycle industry. They are the kind of problems that will have to be rectified, in no small measure, by the nationalisation of the aircraft and shipbuilding industries. We have an industrial sector with largely structural problems, with large sectors of traditional industries weighed down by outdated and outmoded production techniques. This would not be helped by import controls.

We have to move forward by much more specific and selective intervention in these industries. What worries me about the Budget is that my right hon. Friend is still relying on the private sector to bring about structural reforms.

We now have a situation in which concessions for stock appreciation have already cost the country £2 billion in the past year. Despite generous concessions to the private sector, the investment response has not been forthcoming. When I see that very sluggish investment response I am reminded that since the war we have tried all kinds of investment sticks and carrots and virtually every device tried in any other country, but we have still not got the investment response.

In his general strategy, in the White Paper on Public Expenditure and in his approach in the Budget, the Chancellor is right to try to get an even bigger shift of resources into manufacturing industries. Until we get economic growth and an increased percentage of GNP into investment, we shall not be able to carry out many of the cherished projects to which the Labour Party is committed. Until we get that growth I shall be very concerned, because of the response that the private sector has shown in the past—and its track record diminishes with each trades cycle. The Chancellor may be relying on a private sector response that will not come.

We needed more selective intervention and more structural reform. I hope that the Chancellor of the Exchequer will turn increasingly to these kinds of policies in the future.

7.18 p.m.

Mr. Maurice Macmillan (Farnham)

I join in the congratulations to my hon. Friend the Member for Wirral (Mr. Hunt) on his notable maiden speech. I am sure that the whole House will look forward to hearing him again when he can give greater freedom to his known talent for controversy. I am glad that my hon. Friend ended on a note of defending individual liberty. This is one of the concerns that haunt so many of us and is of overriding importance in our society.

I want to be as brief as possible, and I shall therefore try to deal with only one aspect of the Chancellor of the Exchequer's proposals—the nature of the wage and tax deal that he is trying to make with the trade union movement.

Not for the first time, I agreed with much of what was said by the hon. Member for Luton, West (Mr. Sedgemore), and share his view that the deal is ingenious, but not quite fair, nor altogether real. I am pretty certain that the mirror was there to do the trick, though one cannot quite see it.

I am not quite sure of the constitutional implications of the Chancellor of the Exchequer's proposed deal. Many of my hon. Friends have referred to this aspect, but this is not the first time that this type of consultation has been initiated. The tripartite consultations started by my right hon. Friend the Member for Sidcup (Mr. Heath), when he was Prime Minister, were different in kind and timing but essentially the same in purpose.

In the first election that I contested, in 1945, I suggested that the industrial future of the country lay in closer consultation between management, strong trade unions and the Government. As long ago as 1929, Sir Winston Churchill first suggested a "Council of Industry". There is nothing basically new in the concept, but I am concerned whether, in the form in which it is put forward now, it is likely to be effective, and what economic and political dangers are likely to arise.

The Chancellor's proposals show that we are moving towards a corporate State by force of circumstances. It is a movement that is unacknowledged, to some extent unknown and certainly unmeasured. That makes it likely to produce the maximum problems and achieve the minimum effectiveness. The whole tenor of the Government's policy is collectivist rather than individualist. Some Labour Members below the Gangway would like to see it even more collectivist, but they imply a certain economic nationalism. I entirely agree with the hon. Member for Nuneaton (Mr. Huckfield) that to go for import controls generally—a form of protectionism—would provide a soft option for uncompetitive British industry. But I would not altogether rule out the value of specific controls for specific purposes.

The system put forward by the Chancellor clearly prefers order to the market place—an ordered economy rather than an economy responding to the needs of the market. We live in an international market and we must respond to it. The tendency to go towards an ordered rather than a market system, regardless of efficiency and questions of responsibility, has led to increasing nationalisation, an increasing desire to put money into the private sector through the National Enterprise Board, and devices such as planning agreements. That is corporatism.

When I listened to the Secretary of State for Industry recently speaking on these lines about the Government's policy as it affects industry, I felt I should perhaps substitute "Fascist" for "Socialist" when he referred to "Socialist industry". I use both terms in a technical and not a pejorative sense. The Leader of the House spoke of The Times leaders in 1927 and castigated their approval of the corporate State in its then manifestation in Italy. I am tempted to remind him that Mussolini was once a Socialist journalist.

The great weakness of this corporate system, and going for order rather than market, is that it does nothing to create new capital. It results in a larger and larger public sector and greater public intrusion into the private sector, with no new capital formation, and without any real sense of urgency or innovation on the part of those who carry out these policies.

In this planned corporate effort there is a need to control investment. All Governments have shown that it is almost impossible successfully to control investment in nationalised industries in the sense of controlling their price structure and investment policies in such a way as to produce an economic activity that does not require to be subsidised. I believe that it is useless to attempt to control the investment of the private sector. The hon. Member for Nuneaton said that a great many incentives had been given to investment by successive Governments without much effect. I do not believe that that is true. Successive Governments have tried to help people with finance for new investment, but that is not what is required. The hon. Member for Nuneaton referred to the report on the motor car industry, which showed that it was not lack of new equipment that was making the industry unproductive compared with its competitors abroad, but the failure of our management and work people to use comparable equipment to produce the same amount of goods to the same standard. There is little incentive for anyone to invest in new machinery if manning scales are not reduced as a result. That is one of the major problems that has affected all industry since the war.

There has been a considerable misconception by successive Governments as to what is required. What is needed as a true incentive to invest is a profit. Companies need to be assured of a continuing gross profit before tax, and a taxation system that allows them enough net profit for proper re-investment. For individuals what is needed is to remove the present disincentive to investors inherent in our tax structure. That is specially true—and here I declare an interest—of the unquoted sector.

All the debates to which I have listened have been based on the assumption that new investment and the transfer of resources to the private sector have to go to massive and large-scale industries. I remind the House that about 40 per cent. of the GDP comes from firms which employ 500 people or fewer, and that about half the total employment in the private sector is in unquoted companies. If that is not taken into account in providing investment incentives it will be worth no one's while to invest in these firms. That misconception is shown in the balance of the CBI and in the composition of the National Economic Development Corporation. It would be better if more of these genuine entrepreneurs were represented on those bodies.

The Government are following corporate State policies which seek an economic end rather than trying to use economic means to allow individual citizens to pursue their own ends. They are seeking to go for efficiency at the expense of liberty, and that is disliked by both sides of industry. It cuts right across the unions' belief—shared by most managements—in free collective bargaining as the most efficient system of deciding wage levels.

The Chancellor has made a grave tactical error in presenting his package to a bargaining and negotiating body such as the TUC by making it appear so little negotiable at 3 per cent. Had he started by saying 7½ per cent. and suggesting 3 per cent. in wages and the rest in tax cuts, that would be a different matter. He has been a little unwise, both in suggesting that there is a great deal to give way on the 3 per cent. and in not making plain to all concerned that the total he is offering is 7½ per cent.

The Chancellor is taking an enormous risk in the circumstances of the day. The Government's policies have eroded capital formation, discouraged innovation and provided no incentive for investment. There is no attempt in the Budget to encourage the creation of new wealth. Most speeches we have heard from Labour Members have concentrated on a more equal division of a diminishing stock of wealth, whereas what we need is the creation of new wealth.

The Chancellor is taking this risk in circumstances in which public expenditure programmes are at a level at which they are bound to compete for resources when there is an expansion of productive industry; his figures are more appropriate to a sales brochure than a serious Treasury document. Public expenditure itself is becoming increasingly concentrated on non-productive things.

We have a very shaky pound. We have a public service borrowing requirement that I doubt he will be able to finance, when real investment in industry increases without either an inflationary increase in the money supply or an increase in interest rates to a level that would endanger investment itself. We have the pound at risk by the permanent temperature-taking involved in the public negotiations for the Chancellor's package with the trade unions.

We end with two possibilities. Either we enter into a near siege economy voluntarily because we are determined to move through it into prosperity; or we are forced into a real siege economy, with imposed deflation leading to poverty and an enforced borrowing abroad with strings attached which we shall all find unattractive.

We all know what has to be done. Resources have to be moved into the private sector, and primarily into exporting. This Budget will not do very much to accomplish that. We must hope for the best, but we had better be prepared for the worst. Obviously we must try to bring home to people that we have been living in a sort of dream world. Perhaps that is more apparent to those who have recently returned from abroad. Having listened to the debate over the last few days, I have begun to wonder whether we, too, are not living in such a dream world, because it seems to me that we are approaching potential disaster with the foolish complacency of the lemmings, who rush over a cliff—but we do not have the biological necessity that drives them to do it.

We in this House must really tell the truth about the action that may be necessary. We have to stop nationalisation and stop supporting dud industries; we have to stop subsidising uneconomic jobs. We may need to take direct emergency action, such as cutting down price subsidies and perhaps increasing consumer taxation. We may have to consider selective import controls, and even rationing.

We have to say that we are prepared to do such things if we are to give people the hope that we have a programme for recovery. It will involve the closest possible consultation with the trade unions and with private industry, including the smaller businesses and the self-employed, who are all concerned, because any programme for recovery based on the need for emergency action has to be acceptable to those who work and live in this country. If we go for a soft option, the country will blame us most severely.

I hope that we shall vote against this Budget by voting against the first Resolution. I hope that we can do a great deal more. I hope that we—I mean not just the Tory Party but the House as a whole—can show the country that we are prepared to tell it the truth. To say how rough it may get, but that we have full confidence in the ability of the British people. This will not be a decision for any outside body, or, indeed, for any Government or Opposition. In the end, it will depend upon what is said and done and voted in this House.

7.35 p.m.

Mr. Douglas Crawford (Perth and East Perthshire)

As a parliamentary veteran of two years' standing, I associate the Scottish National Party in congratulations to the hon. Member for Wirral (Mr. Hunt) on his maiden speech.

This has been a "phoney" debate about what is largely a "phoney" Budget. The Budget is a compound of an inordinate amount of "ifs" and "buts". The debate has tended to concentrate on the "ifs" and "buts" and not on the main issues in the countries comprising the United Kingdom. It contains very little proper macro-economics.

Mr. John Nott (St. Ives)

I have been present for the four days of this debate. I think that the hon. Gentleman has hardly been here. It is an insult to the House of Commons for someone who has not participated in our debates to say that they have been "phoney".

Mr. Dalyell

The hon. Member for Perth and East Perthshire (Mr. Crawford) is a "phoney" himself.

Mr. Crawford

The hon. Members for St. Ives (Mr. Nott) and for West Lothian (Mr. Dalyell) do not know the reason I was not here on Thursday. I suffered a bereavement—that was my reason.

I shall not offer criticisms about the Budget as it affects England. Mr. Micawber said: Annual income twenty pounds, annual expenditure nineteen nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery. The Chancellor may be given some credit for a little tinkering with England and at last admitting that England is living beyond her means. Having read "David Copperfield", he should re-read Adam Smith. I reserve my muted plaudits that I have for the Budget to the effects it has on England. But I am not here to speak for England. I am here to speak for Scotland. England is not the United Kingdom and the United Kingdom is not England. The Budget is not good enough or relevant enough for Scotland, which continues to get a raw deal from the Union of 1707. The sooner that Union of Parliaments is dissolved, the better.

Mr. Dalyell

Rubbish.

Mr. Crawford

I am interested that the hon. Gentleman is shouting from a sedentary position. I shall explode one or two myths about what his party says about the Scottish economy. First, Ministers say that wage rates in Scotland are at almost the same level as in England. That is an irrelevant comparison. The relevant comparison is between the net family income in Scotland and the net family income in England, and the latter is considerably larger than the former.

Secondly, we are told that Scotland is benefiting from the Union—that for every £100 per head of Government money spent in England, Scotland is getting £120. We are told that we are getting more than our fair share of identifiable public expenditure. It depends on what one means by "identifiable public expenditure". Ministers conveniently miss out of these calculations that only 40 per cent. of Government expenditure is technically classed as identifiable. Defence, for example, is not classed as identifiable public expenditure. Scotland gets a minuscule amount of Government spending on defence.

Mr. Dalyell

It is not true.

Mr. Crawford

I am sorry that the hon. Gentleman is obviously feeling rather ill just now. In general, there is a difference between public spending on Scotland and public spending on Scotland's behalf. Far from Scotland getting £120 per head as a share of Government public expenditure compared with England, the figure is nearer £105. But even that is not relevant. The touchstone for Scotland is not the comparison with England but the comparison with other small European countries. The whole suggestion that Scotland should have to prove the viability of her economy in the context of self-government is absurd.

I remind the hon. Member for West Lothian that a recent Scottish Council Report said that Scotland exported 14 per cent. more per worker in manufacturing industry than the United Kingdom average. The Edinburgh Junior Chamber of Commerce in a document "Ha'e we meat?" recently said that the output of the Scottish farm worker was 60 per cent. more than that of the English farm worker. Scotland can feed herself.

Mr. Dalyell

What evidence is there to suggest that the output of our farm workers is 60 per cent. above that of the English farm workers? What is the evidence to substantiate these allegations?

Mr. Crawford

I have more faith in the economic ability of the Scottish Council and Edinburgh Junior Chamber of Commerce than I have in the hon. Gentleman's economic ability.

Mr. Dalyell

That is not evidence.

Mr. Crawford

Myth No. 3 is the unemployment myth—

Mr. Dalyell

The hon. Gentleman is talking drivel.

Mrs. Winifred Ewing (Moray and Nairn)

So are you.

Mr. Crawford

We are told that unemployment is as serious in the English regions as it is in Scotland. But one should either compare a nation with a nation or a region with a region: one cannot compare a region with a nation or vice-versa.

Mr. Dalyell

Why do we have to put up with this?

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

Order. I think that the hon. Member for West Lothian (Mr. Dalyell) should contain himself.

Mr. Crawford

It is false logic to say that Scotland is benefiting because one or two English regions are worse off when it comes to unemployment. On a regional basis, within Scotland, four regions—Dumfries and Galloway, Highlands, Strathclyde and Western Isles—have unemployment as high as or higher than the worst-affected English regions.

But the real touchstone should be a comparison not with England but with other small European countries. The Scottish people have been brainwashed for decade after decade into thinking that their country's economic performance should be measured against the touchstone of England.

Mr. Dalyell

Will the hon. Gentleman give way?

Mr. Crawford

No, I must finish this speech.

Mr. Dalyell

Who has done the brainwashing?

Mrs. Winifred Ewing

You are out of order. Behave yourself.

Mr. Crawford

We have been brainwashed into thinking that our country's performance should be measured against that of England—

Mr. Dalyell

Who brainwashed us?

Mr. Crawford

If the hon. Gentleman catches your eye, Mr. Deputy Speaker, perhaps he can make his point.

Mr. Dalyell

I certainly will.

Mrs. Winifred Ewing

On a point of order, Mr. Deputy Speaker. Is it in order for the hon. Member for West Lothian (Mr. Dalyell) to speak from a sitting position so repeatedly after having been rebuked from the Chair?

Mr. Deputy Speaker

I have drawn the attention of the hon. Member to that matter and I am sure that he will obey the rules of the House.

Mr. Dalyell

Further to the point of order, Mr. Deputy Speaker. Is "brainwashed" a parliamentary term?

Mr. Deputy Speaker

As far as I know, there is no objection to the word "brainwashed".

Mr. Crawford

Perhaps the trouble is that there are not too many brains in one or two political parties in Scotland.

This slavish following of the theories of an economy which is centrally managed will not do. It is not good enough. It is economically illogical and illiterate. Its effect on life in Scotland—not only industrial but social and cultural life—has been demonstrated and it must stop.

My party is concerned about two Resolutions on which we may be voting tonight. The first is Resolution No. 2, affecting whisky, which will have serious effects on employment in the industry. To raise duty once again—if it is successful, the duty on a bottle of whisky will have risen by £1 in the last 13 months—is bad enough. I should have thought that the £380 million or so, at 1975 figures, which the Exchequer gets in duty was sufficient.

Perhaps more important than what is in the Resolution is what is not—that is, any help to the whisky companies to allow them to pay duty when the whisky-is sold and not when it comes out of bond. My hon. Friend the Member for Banff (Mr. Watt) went into this matter in great detail and with great perception in an Adjournment debate a month or two ago but got no assurances from the Minister who replied.

We are also concerned about Resolution No. 6, affecting hydrocarbon oil. The increase in the rate of duty proposed is totally unacceptable. It is a pretty irony that, just as oil is beginning to flow from the Scottish sector of the North Sea—as defined in the Continental Shelf (Jurisdiction) Order of this House—some of its prime potential beneficiaries should be deprived of its benefits in practice. Something similar could be happening to Scottish oil as has been happening for years to Scotch whisky—in other words, tax on a Scottish product is being used to finance schemes that a London-based Government propose. All this will have serious implications for those in rural areas. I am sorry that the hon. Member for West Lothian does not particularly care about those people.

Resolution No. 10, reducing the top rate of VAT, is to be welcomed, but there is still a problem with multi-rate VAT. Small traders have to spend many hours preparing their returns. Whatever the rationale behind multi-rate VAT. perhaps the burden on the small trader could be lessened if the threshold at which VAT is paid in terms of the size of business could be raised from its present level of £5,000 to £15,000. I have been told in a Parliamentary Reply that the cost would be £75 million. Thtat is not a large price to pay. It would be more than made up by the creative and entrepreneurial energies released among those small traders.

It is a pity that the levy on the self-employed has not been abolished. I know that this was proposed by the Conservative Government in the 1973 Finance Act, but it is a pity that a Labour Government have not only not seen fit to abolish it but have actually raised it. I understand from another reply that the cost of abolishing that would be £68 million—

Mr. Dalyell

Tell us what it would cost.

Mrs. Winifred Ewing

He is at it again.

Mr. Crawford

I just did—I said, £68 million.

To achieve prosperity in Scotland, this House, this Treasury and those who were described in the House at Question Time today as the "long-haired Oxbridge economic advisers"—

Mr. Norman Buchan (Renfrewshire, West)

You are Oxbridge yourself.

Mr. Crawford

And I am proud of it—but I do not have long hair.

The United Kingdom economy cannot be looked after by central economic demand management. I agree that there might be a tendency for the £Scots, if unchecked, to be revalued too quickly and that that would lead to many problems. But there is no doubt that the £Scots would be one of the healthiest currencies in Europe and no one can doubt that the problems created by a strong currency are far preferable to those brought about by a weak currency.

I was amazed by the statement of the Paymaster-General in the constituency of the hon. Member for West Lothian that, if a Scots pound were revalued, industry would have great difficulty with exporting—

Mr. Dalyell

You say the same.

Mr. Crawford

I suppose that we should all write to the President of France to congratulate him on the franc having been devalued.

Mr. Buchan rose—

Mrs. Winifred Ewing

Do not give way. He has only just come in.

Mr. Crawford

Until we have self-government in Scotland, Scotland will be the prey of tinkering, fiddling Budgets like this, which continue to give us medicine for illnesses we do not have It has been said that the English economy is in a free fall and it is important for Scotland not to be affected. The Budget is irrelevant for Scotland. It will mean a cut in living standards, which are already low enough. Perhaps the hon. Member for West Lothian is happy about that.

A Westminster-prepared Budget is a damaging irrelevancy for Scotland. The political exemplification in Westminster of these theories of central economic demand management, elevated to a religious level and defended by its protagonists, in England and Scotland, with almost religious fervour, should be stopped, and the sooner the better for Scotland. Scotland should be free to formulate her own Budget and to realise her own prosperity, taking into account her industrial and economic resources and aspirations.

7.47 p.m.

Mr. Eddie Loyden (Liverpool, Garston)

I do not want to follow the speech of the hon. Member for Perth and East Perthshire (Mr. Crawford). I am sure that an hon. Member from the Government side with a Scottish constituency will, if he catches your eye, Mr. Deputy Speaker, be able to take up the points that the hon. Member raised.

Nor do I want to follow the speech of the right hon. Member for Farnham (Mr. Macmillan), because I am sure that it has been made regularly since the time of Disraeli. The pronouncements of the right hon. Gentleman about the economic situation and the remedies that he proposes are a long-standing central feature of Tory Party policy. The people of this country have been frustrated by the inability of succeeding Governments to resolve our problems—not necessarily and exclusively those of Governments, but emanating from the system.

In these days Budgets cover a far wider range of our social and economic life than they did in the past. Budgetary policies are becoming more and more important from the point of view of industry, social progress and all the things that Governments exist to do in the name of the people.

My right hon. Friend the Chancellor of the Exchequer said that the period that we are in at the moment did not begin in 1969 or in 1970 but was part of a longer-term economic and industrial decline that had been going on for 30 years and more. We have seen succeeding Governments, by all sorts of ingenious means, such as national plans, guiding lights of incomes and prices and other fiscal measures, attempting to deal with the major problem that has faced this country, namely, the continuing and increasing decline of British industry and its consequences upon social progress. It is a problem that brings in its wake mass unemployment and the attendant difficulties that we see today.

Government supporters believe that Government intervention is necessary from time to time, whereas Opposition Members argue that we suffer from too much Government intervention. I remind the Opposition that had it not been for Government intervention in the post-war years, with the nationalisation of our basic industries, the British economy today would be not in a terribly bad state but bankrupt and probably nonexistent. What is more, there has been no attempt by successive Conservative Governments to remedy what they consider to be the central problem by denationalising those industries and thrusting on to the private sector the responsibility of providing the country with the services that it requires.

What many Government supporters criticise is not State intervention but the form that it takes and the formulae being used by the State in that intervention. It can be argued that budgetary policy extended into a very complex industrial society can mean the continuance of State intervention. However, in 1973, when the Labour Party's Green Paper on industry was produced, many of us saw the first winds of change that were blowing through the minds of the leadership of the party about not wanting continually to repeat the mistakes of the past but to look again at policies so that they could be set out in more exciting terms and could tackle the problems of the country in the post-war years. That Green Paper said that although the fiscal policies that previous Governments of both parties had carried out had some marginal effect in dealing with the areas of difficulty at which they were aimed, in the final analysis there had been no real restructuring of industrial power and, therefore, inevitably we fell into the same sort of morass that every preceeding Government had after carrying out their so-called provisional and immediate steps for some sort of social reform.

It was against that background that many people in the Labour movement recognised that the 1973 Green Paper provided a different set of conditions under which the changes that we intended to bring about could best be achieved. That was mainly through tackling industry by means of planning agreements and the National Enterprise Board. No one suggested for a moment that of themselves they would create a situation in which the problems of British industry could be resolved over-night. However, we were convinced that unless steps of that kind were taken British industry would continue to decline, unemployment would continue to rise and, no matter what carrot or sugar was used—I have never seen any real sticks being used—there would be no guarantee that the resources would find their way into the sections of British industry that were starved of capital investment.

At the peak, when about £2 million of public money was being pumped into the private sector each day, there was no evidence to suggest that it would result in a revival of British industry and that those resources, drawn from the wealth created by working-class people, would find their way back into industry for investment and for the purpose of helping British industry to expand. It is nonsense to suggest that all that we have to do is to make profitability certain for British capitalists to react in a gentlemanly fashion and see that the contents of their money bags are invested in areas where it is needed.

It was for that reason that to Government supporters the National Enterprise Board, linked with planning agreements and the need for resources, came as a welcome and positive change. The Labour Party had fought both the 1974 General Elections with industrial recovery as the central theme of its manifesto. We expected budgetary policy to play a large part in seeing that the necessary resources were made available to the NEB and that, linked with planning agreements, it could begin the process of planning our industry and ensuring that the resources necessary to refurbish it were available.

From 1974 onwards, we have seen a weakening of the concept of the NEB and a ridiculous situation in which about £1,000 million has been made available. That has now been cut to £950 million. Subtracting the demands of Rolls-Royce and Leyland, there remains about £500 million available for the NEB to bring about the miracle of reviving British industry. I do not believe that anyone can accept that as a serious effort to establish a National Enterprise Board in a meaningful way, or that it will begin, in the transitional period between now and the fulfilment of the promise in the Labour Party manifesto, to take irreversible steps to gain the fullest advantage for those who produce the nation's wealth.

In this and other debates, the Opposition have argued that any suggestion of planning agreements and their linking with State-owned banks is full-blooded Marxism, which should be rejected by the House. I remind the Opposition that in France the central banks are already linked to the planning units. I am sure that no one would attempt to argue that the French Government were carrying out full-blooded Marxist-Socialist policies. The Opposition often applaud other European countries for their economic performance. Among others, Italy has accepted planning agreements and the concept of a national enterprise board of the kind that the Opposition resist constantly in this House.

I should have thought that in this Budget the Chancellor would have put resources into the National Enterprise Board and the planning boards instead of their being ploughed into the private sector. There is no evidence to show that once those resources have been made available to private enterprise they will be used for the purposes that the Chancellor intends.

I am disappointed with the Budget. One of the things that my hon. Friends and I are concerned about is the level of unemployment. Until we tackle the basic problems of British industry we shall continue to have high unemployment.

We expected from this Budget, as part of the social contract, resources being directed to the recovery of British industry. It is unfortunate that the necessary steps have not been taken. The steps that have been taken will not succeed and, therefore, we shall continue to have high unemployment, with all of its serious consequences on the future of the nation and its people.

8.2 p.m.

Mr. Robert Adley (Christchurch and Lymington)

I congratulate my hon. Friend the Member for Wirral (Mr. Hunt) on his outstanding speech. I hope I will not embarrass him by saying that we have been friends for many years. Despite the pressures on him during the recent by-election he was due to speak in my constituency and kept his commitment. This is a tribute to the character of a man who will play a notable part in our proceedings in the future.

I take a rather different tone in looking at this Budget from that of some of my hon. Friends. This is the first time I have spoken in a Budget debate. I thank the Chancellor for listening to the representations he received from a number of MPs about the effect of that 25 per cent. rate of VAT on a number of industries and particularly on employment. In my constituency many jobs were lost in the boat-building industry, and I am very grateful to the Government for listening to the pleas showered upon them. Even in the last few days some of the boatbuilding companies in my constituency have told me of a marked upsurge of business interest, and the companies which were laying off people hope to reverse that trend shortly.

When my right hon. Friend the Leader of the Opposition opened the debate she said the Budget might possibly cure the nation's influenza, but would no nothing to cure the cancer. It is reasonable to hope that the cure my right hon. Friend discerned in the Budget might possibly prolong the life of the patient until new ideas or a new Government come along to tackle the cancer before it is too late.

As my right hon. Friend the Member for Worcester (Mr. Walker) said, the last two years have seen a 54 per cent. increase in earnings and a 4 per cent. decline in production. This cannot go on. The problem of an ever-accumulating international debt cannot continue and the drastic decline in the value of sterling must alarm us all.

I wish to examine what my hon. Friend the Member for Blaby (Mr. Lawson) called the Chancellor's deal with the trade unions, because in the last few days, since I first heard it, my instinctive reaction, which was the same as that of my right hon. Friend the Leader of the Opposition, has been modified by talking to people who, like myself, are not blessed with the wisdom and understanding of all the economists who surround us in the House. Nevertheless, I offer the Minister a warning which I hope he will take in the spirit intended. Millions of our people are affronted, offended and confused by the way in which the Chancellor has presented his proposed package of tax cuts, subject as they are to agreement with the TUC. A constituent wrote to me saying: I've no wish to be a member of any union, and completely fail to see what right a union, or Healey for that matter, has to decide the level of income tax I will have to pay. The Chancellor must explain in more detail, therefore, the proposals he is presenting, because not everybody understands them.

I have the temerity to believe it is as a result of the way in which the nation voted in February and October 1974 that we now find ourselves in the position where the Government are unable to introduce the Budget they think is right without the acquiescence of an outside body.

In another letter I received today from Leamington Spa, the writer confirms my views by saying that we have got used to putting comfort before principles". If that is true, it is sad. It is also an acknowledgment that in the 1974 elections the people of this country voted to allow the trade unions partly to dictate this country's economic policy. That is not the best way to run a democracy, but it is a fact of life.

I accept and appreciate the arguments about constitutional monstrosities: but there are two ways of looking at the proposition—the Oxford Union attitude and the bus-queue attitude. In the bus-queue attitude I discern rather less hostility to the Chancellor's proposals than has been shown by a number of hon. Members.

If an incomes policy helps to control inflation, it is not a weapon we should toss aside. I am not fanatically pro or anti an incomes policy, but inflation is the most serious problem and if the Chancellor's propsals can help to control it I wish them good luck.

Our inflation is being escalated very badly by the depreciation of our currency. The remarks by the Leader of the House this afternoon about the depreciation of sterling being an inheritance from the last Conservative Government are untrue and do not bear any relation to the statistical facts. The hon. Member for Cornwall, North (Mr. Pardoe) produced another of his historical statistical inaccuracies. He said, at column 689 of the Official Report on 8th April, that when the Conservative Government came to power in 1970 the pound stood at $2.80. In fact, the pound stood at $2.39 at the time of the change of Government from Labour to Conservative in 1970. The pound was $2.39 in June 1970. It climbed to $2.61 by May 1972. We then had the oil crisis, but in spite of the oil crisis and the three-day working week, the pound was at $2.22 when the Conservative Government left office, and when that Government left office that was the pound's lowest point during the Government's lifetime. In other words, the £ fell when it seemed that the Conservative Government might leave office.

The fact is that Stafford Cripps devalued the pound from $4 to $2.80, the present Prime Minister, when he was Chancellor, devalued the pound from $2.80 to $2.40, and the pound fluctuated and floated during the period of the Conservative Government but it declined only marginally as compared with the situation under previous Labour Governments and it was certainly a long way from the way in which the pound has since been devalued from $2.22 to $1.85 under the stewardship of the present Chancellor.

The Labour Party is the party of devaluation. It is quite unable to escape that title. It seems to indicate that if that $2.22 was the lowest point at which the currency stood, at the end of the Conservative Government's time in office, as a result of the three-day working week, the implication is that the National Union of Mineworkers, Mr. Scargill and Mr. McGahey were those who knocked the value of the pound down to its lowest point under that Government.

As my right hon. Friend the Leader of the Opposition said in her reaction to the Chancellor's speech, the world assesses and decides what the level of our currency should be. My right hon. Friend said: That is the best barometer of the world's confidence in the right hon. Gentleman's stewardship."—[Official Report, 6th April 1976; Vol. 909, c. 284.] The world has indeed assessed the value of the currency under the present Budget. For the present Chancellor of the Exchequer, Mr. 8.4 per cent., now to tell us that he is curing inflation is rather like a man who has gone around the countryside for 18 months behaving like an arsonist suddenly trying to behave like a fireman. Notwithstanding his previous behaviour, if he is now behaving like a fireman he needs some support.

If, as a result of his Budget, he is successful in what he is seeking to do, namely, to ensure that the unions add to their power the responsibility which many of us feel they have never been willing to take on their own shoulders, he will be doing a service to this country and he will be helping, perhaps slowly, to change the rôle of the trade unions in our society. That is why I suspect that many Members of the Tribune Group are so totally opposed to the Government's proposals.

I should like to ask the Minister whether or not he thinks this is feasible: could he find some way of encouraging rank and file trade unionists actively to participate in reaching a decision. Perhaps he could provide a State-funded postal ballot for trade union members so that they could tell their union leaders what their views were on the acceptability or otherwise of the Government's proposal. It could well be that the Government find themselves pleasantly surprised at the degree of support which this proposal commands on the shop floor. The fact that the Chancellor's proposal is contrary to the wishes of the Left-wing extremists of the Labour Party will surprise no one who is a student of the current British political scene.

I conclude by repeating the words of the hon. Member for Luton, West (Mr. Sedgemore). He described this Budget as "a bungled piece of mismanaged capitalism". In the parlance of today's politics, capitalism, for the left wing of the Labour Party, means the mixed economy—because what they are really after is total Marxism. I am sure that the hon. Gentleman is right and that there is much to commend him for saying that. I leave it to those more eloquent and versed in economics than myself to dissect the Budget for its economic content.

However, a Budget that proposes to cut direct taxation, to reduce value-added tax on non-essential items and to raise the level at which cash gifts become taxable may not be the worst thing that has happened to this country since the present Government took office. I understand why the hon. Member for Bedwellty (Mr. Kinnock) came out so strongly against the Chancellor's proposals. It would not be the first time that I have said that what is good for the hon. Gentleman is not too bad for the rest of us.

Without any control of inflation the pound will fall further. As my right hon. Friend the Member for Farnham (Mr. Macmillan) said, we must face the impending disaster of a collapsed currency. I fear that the near future could indeed bring us face to face with a disaster, where the pound fell to such a level that our overseas suppliers of food would say "Enough is enough. We refuse to be paid in pounds." The end of that story would be trouble in the streets, and that, surely, none of us could remotely want.

Therefore, in spite of all the criticisms that I have of the Budget's underlying failure to tackle our economic problems, particularly the point about cutting public expenditure, which my hon. Friend the Member for Blaby put so eloquently, I believe that the Chancellor has shown a glimmer of understanding of what he has to do to try to control inflation, and I wish this particular aspect of it well.

8.16 p.m.

Mr. Richard Wainwright (Colne Valley)

In the view of Liberal Members, the grave defects of the Budget flow inevitably from the posture into which the Chancellor and the Government as a whole were driven many weeks before the Budget speech was delivered. The Government had got into the position in which, financially, they had to spend so much to buy the £6-a-week policy that they had very little left with which to bait the hook for another year's policy. They had practically nothing left, as the Budget so lamentably shows, to offer any incentive to the various groups that have suffered so dismally under inflation and who badly need something to get them back on the dynamic path.

Administratively, the picture is even worse. I, for one, having been elected to this House in 1966, have never sat through a Budget in which so many failures to advance have been attributed to lack of administrative apparatus. For instance, let us consider the appalling rate of marginal tax at the crucial point of a young business executive's career or, indeed, the career of a professional scientist or anyone else approaching a responsible stage in industry or the professions. That flows from the fact that the Chancellor is unable to follow his proposals for taxing perks realistically right down the income line, and the fact that on his own admission the Inland Revenue was not in a position to apply that new stringent taxation to anyone earning less than £5,000 a year, unless he happened to be a director of a company. That sort of administrative hiatus—that failure simply to provide reasonable administration for the country—creates a marginal blow in the tax structure that will, I am sure, deter some people from accepting advancement to directorship.

When I was practising as an accountant, even with the former comparatively mild taxation on perks, I had cases on my files—not many, but two or three—of people who said "No thank you" to a directorship, so long as they could continue as a manager, because they did not want to get into that band. How lamentable it is that now, at long last, the Chancellor is catching up with some people's perks but has to stop at this totally arbitrary limit of people earning £5,000 a year or those who are directors.

Similarly, the sheer lack of administrative apparatus—or, as I believe, the lack of will—to impose the Chancellor's policies prevents his going back to those splendidly equitable devices, the reduced rates of income tax for those whose incomes first hit the income tax threshold. It is crazy that we, alone of all the countries in Western Europe, should insist that once a taxpayer reaches a threshold that has been greatly dimished in value by inflation he should hit the income tax rate at its full standard level. Every other Western European country has a devise for softening the blow for the first £100 or £200 of income, or their equivalents, but we cannot do so because, apparently, we do not command the administrative apparatus for that comparatively simple task.

Then—I need not take up the time of the House on this for more than a moment, since others more expert than I have already put the point on record—there is the disgrace of the widening of the poverty trap, with the astonishing state of affairs that it is necessary to extend family income supplement up to a personal earnings level of £39 a week when there is only one child in the family, yet tax for such a person starts in some cases at a mere £1,500 a year gross income.

The final item out of many which I could cite as attributable to sheer administrative malaise and sheer lack of good government is the appalling comedy of stock appreciation relief for corporation tax. Of course, the great mass of industry and commerce will not look a great big gift cart-horse in the mouth. People will not complain about its manifest lack of intellectual basis or manifest crudity—the "banana republic" aspect of the sheer lottery of stock appreciation relief, depending, as it does, on chance as to whether one qualifies—because, from industry's point of view, it is such a massive relief in quantity.

Neverthless, it should be put on record that this relief, the total cost to the Exchequer being over £2 billion a year, will be distributed among corporate taxpayers according to the level of their stock on one particular day in a whole year. Moreover, it is a figure which can undoubtedly be manipulated far outside the detective range of the Inland Revenue, and, indeed, it is in many cases a figure which will indicate a built-in inefficiency in the business concerned, showing a maintenance of stock far above what is really justified.

That all these incidental matters should affect the distribution of a huge portion of taxation is a grave reflection on a country which was once able to pride itself on having the most refined and most equitable tax system in the world. But there we are. It is all due to the strain past to a point at which, apparently, it put on the administrative machine in the can take no more.

Since I wish to be brief, I come quickly to what most hon. Members have acknowledged to be the crunch item in the Budget, the offer to the TUC. Here, I should point out that Government spokesmen have missed the case which has been made by some of my colleagues in the Liberal Party about the nature of the constitutional outrage. What we regard as the real constitutional outrage—the point at which impropriety becomes outrage—is that the Chancellor of the Exchequer is telling the TUC that, if it does not like the idea of a 3 per cent. norm, it can refuse the option, and, according to the Chancellor, all that will happen is that his particular offer of tax reliefs will be partly withdrawn. The child allowance reliefs will stay in any case, but the others will be withdrawn, and the implication is that, if the TUC will not play, the country will sail on with just a little more inflation, rather more unemployment and a lower growth rate.

It is that which is utterly "phoney" and a betrayal of the way in which the House of Commons is supposed to look after the nation's affairs. The truth is that if the TUC is not prepared to accept something pretty close to 3 per cent. as a norm, the alternative will be ferocious. It will certainly involve submitting to fierce conditions imposed by foreign lenders who will have to be approached if our wage payments get out of control. Also, it should mean—this is where the Liberal view especially comes in—a reversion to a statutory policy.

During the past few days, when some of my right hon. and hon. Friends have said that they will be willing to support a policy of that kind, they have spelled out what they mean. In particular, my right hon. Friend the Leader of the Liberal Party said that by support we Liberals mean support for a Government who will have the guts to say that, if a voluntary policy cannot be satisfactorily negotiated, Parliament must enact a statutory policy.

We learned today from the ex-Secretary of State for Employment, now Leader of the House—he put it quite categorically—that he is in no circumstances prepared to introduce a statutory pay and prices control policy. Since the Government are taking that line, it is clear that they do not want support from the Liberal quarter, and it is equally clear that they will not get it for a policy which is now revealed to be so manifestly phoney.

I repeat that if, as a result of the ill-phrased and ill-conceived Budget speech, there are trade unionists who think that they have the soft option of saying "No, on the whole, we do not like the Treasury's arithmetic, we think that it is all very niggling and problematical, so 'Thank you very much', we shall not accept your tax reliefs and we shall not have anything to do with the 3 per cent. norm", and they imagine that all they will have to put up with is some minor discomforts as a consequence, they are grossly misled, and they have been misled by the Government themselves.

For that principal reason, I shall recommend my right hon. and hon. Friends to vote against the first Resolution tonight.

8.26 p.m.

Mr. John Watkinson (Gloucestershire, West)

I associate myself at the outset with the remarks of the hon. Member for Colne Valley (Mr. Wainwright) about the effects of our present fiscal arrangements with respect to the poverty trap, but I join issue with him on the constitutional question of the pay policy and the impropriety which he sees engendered by the Chancellor's novel proposal.

In fact, the Chancellor has merely stripped away the secrecy which normally surrounds such negotiations and has had the courage to present to the House and the country at large the proposals which he is prepared to put to the trade union movement. The alternative to that, the hon. Gentleman seemed to be saying, is that he should have come to the House and said "This is the Government's policy. You will like it or lump it". That seems to me to be a return to the era of confrontation which we had under the previous Tory Administration. In my view, it is far better to approach the trade union movement—no one doubts the importance, power and significance of that movement—and to present it with an offer as a negotiating start to what will be the next pay round. If co-operation involves, as the Opposition say it does, the creation of a corporate State, I have no objection to it and I support the Chancellor's novel proposal.

Mr. Adley

Does the hon. Gentleman not agree that in February 1974 the Conservative Party went to the country and said that it believed that Parliament alone should ultimately be the determinator of policy? It is because a large number of people could not make up their minds whether they were Socialists and finished up voting for the Liberal Party that we are now in this position.

Mr. Watkinson

I do not agree. The Prime Minister of the day involved himself in a form of confrontation, which the right hon. Member for Down, South (Mr. Powell) said at the time was totally unwarranted, unnecessary and arguably unconstitutional.

Most reasonable people are agreed upon the necessity for a pay policy in the sense that we should attempt to achieve some form of agreement with the trade union movement on the levels of pay increases over the next period. That will be to the advantage of the country because the alternative—as spelled out by the Yorkshire miners' leader, Mr. Scargill—is that if he has his way there will be a 33 per cent. increase in wages in the next year. We know the tremendous power of the miners' union and we know about the effects of its previous action. Supposing the miners' union decides to go for 33 per cent. and gets it, every union leader worth his salt will be in there fighting for a similar amount for his members. Such an alternative implies a test of virility and we would be faced again with spiralling wage inflation. I have to accept that increased wages are an element in inflation and that they must have an effect on the level of prices.

It is necessary for the Government to engage in these negotiations with the trade union movement and for them to reach some form of agreement—whether it is 3 per cent. or some percentage higher is not for me to say. The only alternative is the policy advocated by the Opposition Front Bench involving a crude monetarist approach.

The Government and any Government, have an obligation to bring inflation under control. If it cannot be done through agreement with the trade union movement, the only recourse left is strict monetary control, which is part of the Opposition's thinking. I do not kid myself that the Government are not pursuing money control at present. It is quite clear that they are, because they boast of controlling the money supply. But the Opposition's kind of monetary policy would be of a stricter variety.

The operation of such a monetarist policy would be uncertain, arbitrary and impartial it would mean that there would be a given amount of money injected into the economy. Firms which might agree to pay wage increases would find that they could not afford them and would become bankrupt. Crude monetarism would apply to firms which wished to borrow money but could not extract it from the banking system because it had been pre-empted. Such a form of monetarism would be arbitrary and would create mass unemployment. It should be rejected in favour in some form of co-operation with the trade union movement, and that is why I support my right hon. Friend the Chancellor in this respect.

I turn now to the problem of investment. We have often argued the case for increasing the level of investment, and yet we are witnessing a fall in the level of investment. Everyone agrees that it is vital to expand the manufacturing base of our economy. The Government were right to take the decision in the public expenditure White Paper because it is an attempt to cut back on the borrowing requirement and to transfer resources to the manufacturing sector.

I share with some of my hon. Friends doubts about the viability of that proposal. Mere verbiage in a White Paper does not necessarily ensure an injection of investment into the economy. I should like to see a counter-cyclical investment policy hammered out by the Government, to be imposed when the so-called upturn comes, ready for use when we experience the next downturn. We all are subject to the trade cycle. It is necessary to grapple with that problem now. The Government might look at the system in Sweden, where investment funds from private enterprise are channelled into a fund during the upturn and kept there during it. In the downturn they are released at a favourable rate of interest to encourage firms to invest.

We need to inject more capital into our industry. There is no shortage of funds. They are available, but are not being taken up. We need an added incentive to encourage firms to take up investable funds. If that means intervening in the money market to ensure that firms can borrow at a lower rate of interest, I would support that, too.

I turn to the problem of the balance of payments, which seems to be crucial to to the country's long-term future. We have produced a marked improvement in the trade balance over the past two years. Even so, we are running a deficit of more than £1,700 million. That is in slump conditions. What would the deficit be if we had full employment? I am interested in the observations of the Cambridge school, which suggests that in that situation the balance of trade deficit would be more than £4,500 million.

We all agree that it is our aim to produce fuller employment, yet we have a propensity to import which, unless we are prepared to take action, will have the effect of dampening any upturn or boom which may be generated in this country, as it has in the past. As the upturn comes and we suck in more imports, we shall have to face the prospect of borrowing abroad, and if we cannot do that we shall have to impose deflationary measures.

I note with interest the figures in the TUC document, which are generally accepted. The TUC points out that, on past trends, for every 1 per cent. expansion of GDP we increase our imports by 1.8 per cent My right hon. Friend the Chancellor has said that we must aim at a 5.5 per cent. expansion of the domestic economy over the next few years. If that is achieved, and if the figures I have given are correct, there will be an increase in imports of more than 10 per cent., which means an added bill of over £2,500 million to the balance of trade.

How do we finance that? Can we finance it? We know that North Sea oil is now coming in and we know that it will have beneficial effects, but it is not coming in rapidly enough to ensure that we can finance the sort of balance of payments deficit which the growth targets the Chancellor has set may cause.

We must face the fact that there has been a massive import boom. It could be said to have been engendered since we entered the Common Market. There are those who hopefully say that the trend was established only two or three years ago, and that it will evaporate. I have doubts about that. At least we should prepare for the situation. It it does not evaporate, if we continue importing at the present level, we must face the fact that the balance of payments problem, as in the past, will again retard growth and the return to full employment.

It is important that we at least consider the possibility of some form of imports control, whether it be of temporary or permanent nature. I should prefer some form of temporary control. Unless that control is introduced, and unless we take within our own hands the ability to control the balance of payments imbalance, any prospects we have for sustained economic growth will, as in the past, be impaired.

One of the basic problems which confronts the Government in their long-term growth aim and the return to full employment lies with our balance of payments. It is a matter of the greatest concern. The Government should be considering their plans and proposals, for unless we are prepared to deal with the balance of payments problem, and unless we can solve it, we shall not return to the full employment and growth which we all want.

8.42 p.m.

Mr. Michael Shersby (Uxbridge)

I join my hon. Friends in congratulating my hon. Friend the Member for Wirral (Mr. Hunt). He spoke movingly, bringing to mind the terrible problems of unemployment which exist in his constituency and the concern for the future in his constituency which is felt by local industry. I hope very much that we shall often hear from him.

I listened with great interest to the hon. Member for Gloucestershire, West (Mr. Watkinson). Perhaps he will forgive me if I do not take up all his points.

This is the first time that I have spoken in a Budget debate. I have been in the Chamber for a good deal of the debate and it seems that the success or otherwise of the Chancellor's Budget strategy depends, first, upon an acceptance by all sectors of the population of a continuing incomes policy. Secondly, it depends on the reduction of public expenditure. Thirdly, it depends on real growth in the economy. Only if those three conditions are achieved can inflation be brought under control and unemployment reduced.

It seems that the prospects of the Chancellor succeeding in achieving those conditions are somewhat remote, to say the least. They are remote because, first, it seems less than likely that the unions will accept the deal as it is proposed and as it stands. Secondly, the Chancellor is not proposing any substantial reduction in public expenditure. Thirdly, there appears to be little prospect of achieving the growth that is so desperately needed.

It is of very little use for the Chancellor to specify conditions for increasing growth and reducing unemployment when they depend upon unrealistic targets, such as increasing GDP by 5½ per cent. and manufacturing output by 8½ per cent. over the next three years. Despite all the fanfare accompanying the launching of the Government's industrial strategy last November, little progress has been made during the recession in tackling Britain's underlying structural weakness. We are still baling out lame ducks instead of backing winners.

The problems of restrictive practices and overmanning are worse than ever. The opportunities for major retraining have been almost completely missed. It has been said that it requires an economic miracle to achieve the Chancellor's targets. In my opinion it requires something much more. It requires the Government to tell the people the truth about Britain's sorry plight. It requires immediate measures to cut public expenditure and the public borrowing requirement.

How can the Chancellor expect the population to believe that there is any real chance of success when he is prepared to saddle it with a public sector borrowing requirement of £12 billion? How can he expect everyone in industry to give of their maximum effort, whatever changes he makes in the level of taxation, if they know in their hearts that they and their children are to be in debt for such a massive and staggering sum? How can the young of Britain feel that there is a real future for them while public expenditure goes on rising and at the same time we are plunged deeper and deeper into debt? These are the central points of this Budget that transcend almost everything else.

I accept that it would be difficult and painful to cut public expenditure, limit pay increases, and endure continuing unemployment. But at least that approach to our problem would give people the one thing that they lack at present—that is, a real hope for a better future under this Government. If people see public expenditure being reduced and a shift of resources to industry, they can have hope for the kind of economic miracle that Britain so badly needs.

I believe that the people would much prefer to support clear and honest policies than that we should continue as we are now doing. The public do not believe that once we have achieved agreement on wages and salary limits, that will get us out of our present troubles. There is a feeling shared by many people that by this time next year we shall be no further forward and that the pound will continue to slide and our debts will continue to mount. I ask the Chancellor to appeal to the patriotism of British people to meet the task that lies ahead.

I turn to the Chancellor's proposals on a continuing incomes policy based on a low pay limit coupled with increased tax allowances. I support the concept of the lower pay limit on the basis that the real value of incomes would be higher and prices lower than they might otherwise be. But we can support this idea only if it applies irrespective of the level of income. It would, for example, be unrealistic to expect acceptance by all sectors of the public if the upper limit on pay increases were to be continued.

I accept that it is right and proper for the Chancellor every year to have consultations with the unions and with industry on the levels of pay. It is right for the Chancellor to take the temperature of the trade union water and to see what the traffic can stand. I have reservations about the proposals he makes whereby tax concessions will be conditional upon the approval of the TUC. Not only could this proposal weaken parliamentary control of the economy but it could exclude from participation in discussions on wages policy the majority of the work force, who are not trade unionists.

Moreover, it will place the Chancellor and Parliament in a very difficult position if the pay limits are broken either by unions or even by a large and powerful group of workers after Parliament has passed the Finance Bill. It could also lead to the TUC attempting to attach other conditions to any pay deal and the suggestion of import controls. This could lead to drift and could result in the whole policy broadening out in a way the Chancellor cannot at present foresee.

To me perhaps the worst prospect is a possibility which I hope will not occur—namely, that there will be no deal with the unions. If that should happen, the situation will be grim. Inflation would increase rapidly by next year and would be accompanied by increasing social and political tensions.

For all these reasons, while not particularly liking the way in which the Chancellor is approaching the problem, I believe that it is in the interests of the country that, if a deal is to be struck, it should be struck quickly. I believe that this House should not accept unreasonable delay or any unnecessary prevarication by the unions which would put at risk the lives of our working population—people whom we all represent in this House.

8.50 p.m.

Mr. Tim Renton (Mid-Sussex)

Unless thunder or lightning strike me down within the course of the next 10 minutes, I shall be the last Back Bench speaker, I believe, in this debate. It is hard, at the end of a four-day debate, to think of something that is notably different from the situation as it prevailed at the beginning. But in this case there is a difference—the pound is approximately 4 cents, lower against the dollar. Viewed against a Budget, the initial reaction to which was that it was quite favourable for the City and industry and that the gilt-edged market and the equity market might improve, it is fair to ask why sterling has fallen consistently during this debate.

The answer lies in one simple fact. The Chancellor has still refused to deal with the problem of the public sector deficit and the ensuing borrowing requirement. It is from that one fact that my right hon. Friend the Member for Brighton, Pavilion (Mr. Amery) was moved to remark earlier today that we stand on the edge of a catastrophic situation.

I have always wondered at what point in time people realise that they are falling over the precipice, at what point in time inflation turns into hyper-inflation.

I suppose that even for those living in the Weimar Republic it was difficult to nail down the precise moment. But with the continuing decline in the value of the pound, the fact that a number of vital imported commodities have gone up in price by 20 per cent. in just one month, from 9th March to 9th April, we cannot be far away from that moment of catastrophe. Yet the Chancellor does nothing about it. I feel that as a good classical scholar he may see himself in the role of Ouintus Fabius Maximus the famous general who, it will be remembered, restored the State of Rome by delay, by doing nothing. It is much more likely that history will cast the Chancellor in the rôle of Nero, worried about tax fiddles while the sterling rate burned.

I hope that when the Chancellor replies tonight we shall hear far more about how he proposes to tackle this ongoing deficit and the borrowing requirement than we heard in the almost odiously confident speech made by the then Paymaster-General on Wednesday when he drew the analogy that, because the Government had been able to finance the deficit in a year of world-wide recession, they should be able to finance it in a year in which the Government are seeking an unparalleled increase in economic activity. The paradox is so obvious that I am amazed that the Chancellor has not already felt it necessary to deal with it.

When the right hon. Gentleman replies tonight I hope that he will tell the House in particular what figure he forecasts for domestic credit expansion in the year ahead. As the House knows, DCE is the volume of bank credit to the private and public sector. In January the Chancellor and the IMF forecast that DCE would expand at the rate of about £9 billion. That figure will have to be much reduced.

Because of exchange support operations in the past few months the Government must, by now, have acquired about £1 billion sterling which will have flowed through the exchange equalisation account into the public sector. I hope that the Chancellor will be able to tell us that the DCE figure he forecasts for the year ahead is a lot lower than that £9 billion; hopefully it should be of the order of £6 billion or £7 billion. It is only on that basis that some confidence can be restored to the gilt-edged market and to the sterling exchange rate. Without that confidence the whole strategy of the Government for the year ahead must come to nought.

The idea of linking tax concessions to pay policy is imaginative. I hope that it succeeds. However, it is clear that the final decisions must be taken here, in this Chamber, and not by debate through articles in the News of the World such as that which appeared yesterday.

I should like, last of all, to deal with the problem of the young talented executives—the research chemist, the production engineer, the man in his late twenties or early thirties who has not yet any children at school. The world is his oyster and he is beckoned by international companies from all continents. He is the pearl which companies must retain, or win, if they are successfully to develop new plants and to export all over the world. What is the current pay for a research chemist in this country compared with what such men can earn abroad? Here he is likely to be receiving a salary of about £6,000 a year gross. Before the Budget this would have been about £4,200 net, after tax. In the United States he would get £8,200 after tax; in Belgium £7,650; in France £8,950; in Holland £7,000 and in Germany £8,130—in each case approximately double what he is getting in this country. Yet all the Chancellor has been able to do in his Budget is to promise these key individuals an after-tax rise of about £125 to £150, and even that is conditional upon the agreement of the TUC.

This problem of reward to key management was well illustrated in the annual report of ICI, which showed that the number of people in its company earning £10,000 a year or more gross had risen from 55 in 1967 to 1,377 by 1975. However, that is gross. The charts which the company produced showed that taking into account the effect of increases in the cost of living but ignoring tax, the number of 55 had become 60 by 1975. But taking into account taxation as well as inflation, the number has been greatly reduced. In terms of equivalent take-home pay, 55 in 1967 has become two—just two—in 1975. Yet these are the key people whom this country must keep if we are to push productivity, investment and manufacturing output up and up as we all wish. Let fringe benefits be fairly taxed. I have no great objection to that. However, there must in years to come be a flattening out of the higher tax rates on earned income far beyond anything which the Chancellor has yet proposed.

This country will never succeed as long as we hamstring the best among us. "The tallest nail invites the hammer" is the Chancellor's motto. My God, how he has hammered them in the past two years! But it is the tallest nails which bind bridges and unite buildings. Let this Government cease the politics of envy and start to give back incentive to those who create the profits out of which the corporate taxes, which the Chancellor desperately needs, will be paid.

8.59 p.m.

Mr. John Nott (St. Ives)

The debate has been characterised by rather empty Government Benches, three excellent maiden speeches, and a Cabinet reshuffle. One of the performers on the Government Front Bench was plucked, fresh and still squawking, from the Dispatch Box and, although the Chief Secretary is still with us, determined, as he has told us a hundred times, not to be provoked, we shall miss the Paymaster-General. The Chancellor of the Exchequer is still with us, bottlenecks and all, and I shall have more to say about him and his policies.

At one stage I was a little concerned that the squatters might move into the empty premises here, but one or two hon. Members who left after the vote last Monday returned today after an arduous week in their constituencies. Things have livened up a little compared with the situation over the first three days of our debate.

I wish to congratulate the Secretary of State for Trade on his appointment. It is unusual for a Minister to be promoted after saying so many sensible things; it would not have happened under the old regime. It seems that after what I call the hokey-cokey, the leadership election, the new Cabinet has taken a decisive shift to the right; that is the fear of the hon. Member for Tottenham (Mr. Atkinson). No doubt this will increase the feeling of unity in the party. We shall have to see.

My hon. Friend the Member for Wirral (Mr. Hunt) made an outstanding speech. None of us would have expected any less from him. He spoke with feeling about the grave unemployment problems on Merseyside, particularly among school leavers. It was encouraging to hear his view, which was echoed by the Leader of the House, that the power of Parliament has not diminished and that Parliament's importance as the protector of individual freedoms grows daily. We agree with that. If my hon. Friend does not hold every one of the high offices held by his predecessor, he must not be disappointed, but I expect that he will achieve at least one of them, and that in itself will be remarkable. We welcome him, and I know that we shall hear many more excellent speeches from him.

The two other maiden speches were very interesting. The hon. Member for Coventry, North-West (Mr. Robinson), who was rather busy on the day on which he spoke and could not be present for the concluding speeches, talked about industrial democracy. Equally interestingly, he talked about Coventry. As he was speaking, I wondered why, when this country can boast the skills and engineering excellence which is represented by Coventry, we are in this frightful mess. For all our troubles, I still find it impossible to believe that England—and I say England deliberately—with good sense and good government, is not capable of recovery.

My hon. Friend the Member for Carshalton (Mr. Forman) may have partly answered the question why we are in a mess. He talked of the wishful thinking which pervades our attitudes, the heroic targets which the Government have set themselves, and the 5 per cent. a year rise in the GDP for the next three years anticipated by the Government. I remember well what the Chancellor of the Exchequer and his colleagues used to say to us when we were seeking to achieve a 5 per cent. growth out of a downturn. My hon. Friend said: I shudder to think what such heroic target would almost certainly mean for the balance of payments and hence our ability to go on borrowing from abroad. The House and the nation are being invited to go on yet another of the Government's miraculous mystery tours, the final destination of which is all too likely to be economic ruin. In that uncontroversial spirit which so marked my hon. Friend's maiden speech, he said that the sooner the people of this country have the chance to get rid of this Government, the greater will be their chances of saving themselves by their own exertions."—[Official Report, 8th April 1976; Vol. 909, c. 674.] That is true.

Before commenting on the major strategy of the Budget, I wish to say a few words about its details. The hon. Member for Ince (Mr. Maguire) sounded the most authentic note of exasperation we have heard in the debate. I hope that the hon. Member will not mind my repeating the sad case of his own disabled son who receives £120 in interest from a small sum subscribed by the men at the pit in which he worked before his accident. The hon. Member for Ince told us that the Inland Revenue claims that this interest is taxable and he added: as the law was designed to catch those who were giving money to their sons to avoid tax, I was ensnared. He went on: I have a deep suspicion about any proposed changes in the tax law, the efficacy of which will only be known later, because others are often dragged in and have to pay the penalty."—[Official Report, 6th April 1976; Vol. 909, c. 299.] That is the point which we have repeatedly made from this side. It is all very well taking measures against tax avoidance to catch one or two prominent people who have been avoiding tax, but social justice is more important.

If the hon. Member for Ince could get his colleagues to support a Conservative Administration, which did not happen the last time around, we would so something to remove that kind of anomaly under which a disabled young man has to pay this tax.

Mr. Healey

The hon. Gentleman's Government did not do so last time.

Mr. Nott

We most certainly tried last year. If the Chancellor is going to remedy the problem—and he has the power to do so—perhaps he will say so in his winding-up speech. But we debated this matter last year and the Chancellor opposed the minor amendment we put down to deal with this situation.

The hon. Member for Ince spoke of how the 25 per cent. rate of VAT had accelerated the closure of a television factory in his constituency which employed 1,350 workers and he wondered why, now that the Chancellor of the Exchequer has halved the higher rate, he had not recognised his mistake fully and brought the rate back to 10 per cent.

Obviously we welcome the concessions on CTT and the raising of the limits on annuities for the self-employed, but, as my right hon. Friend the Member for Wanstead and Woodford (Mr. Jenkin) pointed out, the increase in earnings-related contribution limit to £4,900, which will cost the self-employed £104 a year for no extra benefit, will more than wipe out any reduction of tax achieved by courtesy of the TUC.

This whole area of the relationship between tax and benefits was admirably covered by my hon. Friends the Members for Wells (Mr. Boscawen) and Norfolk, North (Mr. Howell).

What is astonishing about this Budget is not that the Labour Government have been forced to abandon the principle of compensating pensioners for past price increases—we understand why they have had to abandon that principle, though I have with me a whole feast of ministerial statements about what the Government intended—but that the Chancellor has grossly widened the poverty trap in his Budget. In an intervention in the speech by the Leader of the House today, the hon. Member for Newcastle-upon-Tyne, East (Mr. Thomas) made this point very clearly. According to the Child Poverty Action Group, the increase in FIS will probably ensnare another 25,000 people in the poverty trap. If they take home £2 or more, in most cases they will get less than before.

If the Chancellor's plans go through, a working married man with two children earning £40 a week will get an extra £1.58 a week while the man who is out of work will get an improvement of £3.88. In other words, in this Budget a man on £40 a week who is out of work, no doubt for reasons which are not his own fault, will get almost double the increase of a man in work. This widening of the poverty trap, as my hon. Friend's pointed out so clearly, will bring disaster to this country.

This brings me to pay policy and the central strategy of the Budget. I have always understood that if one were lucky enough to occupy a bijou residence in Downing Street, there were great temptations to pander to the self-importance of the TUC. As one sat there with one's predecessors scowling down from the walls and surrounded by the trappings of power, in the form of one's colleagues and sycophantic civil servants, one must long to pull a real lever. I am not referring to the Chancellor of the Duchy of Lancaster, the right hon. Member for Manchester, Central (Mr. Lever). I am referring to a lever that actually works.

There must be an almost irresistible urge to cast around for allies, for fixers, real men like Mr. Scanlon who, for all their protestations to the contrary, are the only real instrument for smothering the messy process of free collective bargaining and making the corporate State work.

The TUC is there for Ministers. It is the flat bottom of an inverted pyramid, the narrow base of which rests upon a small minority vote of the minority of working men in this country. Nevertheless, the TUC is there and—it being tangible—I can understand why the Government seek to use it. Not long ago The Times used to advertise the lists of the season's engagements at which eligible young ladies were matched off with gorm-less men. The TUC has usurped this freedom, like many others. The pages of The Times are now filled with lists of the hectic round of dinner parties and engagements undertaken by the members of the TUC as they flit from one social event of the pay season to another.

This year the Chancellor has ratted on the TUC. He has put it on the spot, and the prima donnas of modern politics upon whom the spotlight shines—all glamour but little political responsibility—have had responsibility thrust upon them. It is not surprising that the first reaction of the TUC has been a nervous one. As the hon. Member for Bedwellty (Mr. Kinnock) said today, the whole approach is making assumptions on trade unions' power which they may simply not be able to deliver.

Indeed, The Times on 7th April carried a leader on this subject, and I suspect that that leader will live up to the high reputation of its predecessors by getting its predictions almost precisely wrong. It said: this constitutional innovation"— the leader writer was describing the Chancellor's trade-off— must increase the authority and prestige of the TUC". I very much doubt it. I suspect that it will make the TUC look ridiculous. That may be the Government's intention—I do not know—but if the TUC is to deliver the goods it will certainly have to negotiate a margin of safety for itself, and I do not doubt that the Chancellor will give away more to the TUC than he would have needed to give away to working people. I hope that the Chancellor will not be deluded by the supreme danger of this approach. He has had a good weekend Press, and no doubt that will make him very cocky. Apart from the constitutional improprieties—I do not wish to touch on them—the Chancellor is taking major risks and the omens are not promising.

The hon. Member for Luton, West (Mr. Sedgemore) described the Budget as a bungled piece of mismanaged capitalism. That would not be my description, but I agree with much of what the hon. Gentleman said, as I do with the arguments put forward by my right hon. Friend the Member for Brighton, Pavilion (Mr. Amery).

Because the Chancellor's strategy is seemingly dependent on a promise from the TUC, every statement against the norm by a union leader will be studied with concern, not just in the gilt-edged market but in New York, Zurich, Jeddah, Lagos and Hong Kong, and this period of instability will last until July. As the Leader of the House said, the debate will continue in the country for a long time, and each day those who hold sterling balances will be able to read headlines such as that in The Times today: Mr. Jack Jones rejects 3 per cent. limit on pay rises". I confess to having lost track of the size of sterling balances—I suspect that the Chancellor has as well—because they change as we sit here in the House, but our reserves are minuscule beside the potential flows. We are not far off having to borrow on the most humiliating conditions. Hon. Members on the Government Benches seem to be blissfully unaware just how close we are to a visit from the brokers' men of the IMF.

Maybe the more sensible union leaders will understand the problem and be circumspect. But what happens then? They are being asked not just to promise that figure but to put their weight behind it and to deliver it, not at the beginning of the pay round but at the end. I do not see how members of the TUC General Council are going to prove their virility as negotiators to their own members unless they show the wider world that they have wrung concessions from the Chancellor. All round the world, in the salubrious climes where bankers are wont to have their being, the bankers will be watching. They will not just watch through many months of negotiation between the Chancellor and the TUC. They will also be watching what is going on in British industry to an even greater extent, and the jolly old goings-on in British Leyland will have an even greater spotlight than up to now.

The Government will have to grasp this nettle. The British Leyland situation is what the Leader of the House described as a "striking" example of the difficulty of making a pay policy work. How right he was.

It is a major disadvantage of British economic management that the Economist and the Financial Times, good publications as they are, are read in every banking parlour in the world. The Financial Times is on the desk of every bank in the country every morning. If 3,000 men go on strike in Wisconsin, it merits perhaps some headlines in the Milwaukee Gazette, but the news does not travel all round the world. But if 10 men have an extended tea break in Wolverhampton, the Shahanshah of Iran, His Imperial Highness, His Majesty the King of Kings, has kittens in the morning. That is the problem with the circulation of the British Press.

It is still not clear at the end of this debate what happens if 4 per cent. replaces 3 per cent. What happens if there is to be a 4 per cent. norm instead of 3 per cent.? Presumably it is intended that the tax allowances are adjusted downwards. The Red Book will be torn up and we shall start all over again. Last week, I asked the then Paymaster-General about this and he replied that the Chancellor … will, as ever, stand ready to take any measures which the situation requires. But in practice, of course, the situation will be much worse if the world thinks that the Chancellor has been forced to 5 per cent. than if he had chosen it and stuck to it in the first place. The then Paymaster-General went on to say: I emphasise that 3 per cent. is the highest which can be conceded if we are to be able to rely on meetng our inflation target."—[Official Report, 7th April 1976; Vol. 909, c. 407.] The next day, the Treasury rushed out a statement saying that the proposal was infinitely adjustable in almost every direction one would care to choose.

I suspect that the eventual victims of this negotiating process will be public expenditure on the one hand and the Price Code on the other. It is impossible to imagine negotiations with the TUC to agree a 3 per cent. norm without something damaging coming out of it. It will be either more subsidies or failure to relax the Price Code, probably both, and so the basic structural weakness of our economy will be intensified, more resources will be channelled into the public sector, and the wealth-creating private sector, whose profits have already fallen to zero, will be further clobbered.

We are accustomed to, if not happy with, the Public Expenditure White Paper, which tells us all we want to know, and more, about public expenditure, but nothing about how it is to be financed. Hitherto, we waited for the Financial Statement, which corrected all the figures in the Public Expenditure White Paper and then gave us provisional forecasts of Government revenue for the current year. Now it seems that there is to be almost no point during the financial year when Parliament will be able to say with any certainty how the Government intend to close the circle of expenditure, revenue and borrowing. The domestic and international markets are going to be in a continual state of uncertainty while this process goes on.

Contrary to what the hon. Member for Luton, West said, I do not believe that the Treasury mandarins advised this course. I think that it was a political decision and I think that the Chancellor in the end will regret—and will certainly be wholly responsible for—the decision that he has taken to negotiate in the open in this way. The Government will no doubt win their vote tonight and the Chancellor will not be called upon to abuse his colleagues. He is a ready learner and I know that he has learned some lessons from his language the other night in the public expenditure debate.

The Prime Minister—I must say that it is a great privilege to have him here for so much of this debate, and I mean that genuinely—at the time he was Chancellor used to rush up to Nuffield College, Cowley, and get lessons in economics and have books sent in to him in an attempt to understand the subject. He would have been a much better Chancellor if he had had no understanding of economics at all.

I intercepted in the Treasury the other day a document on the way to the Chancellor and I was interested to know what it was. It was a book on etiquette by Emily Post, the definitive book on how to behave. A marked page on language was headed " Phrases Avoided in Good Society." It said: It is difficult to understand why well-bred people avoid certain words and expressions. people of position are people of position the world over and by their speech are most readily known. A showgirl may be lovely to look at as she stands in a seemingly unstudied position and in perfect clothes, but let her say, 'My Gawd', and where is her loveliness then? That was exactly the position with the Chancellor when he let himself go the other night.

My right hon. Friend the Member for Knutsford (Mr. Davies), in an outstanding contribution, pointed out the critical situation of the size of the borrowing requirement. My hon. Friend the Member for Blaby (Mr. Lawson), in an excellent speech today, and my hon. Friend the Member for Horsham and Crawley (Mr. Hordern) the other day, spoke on this subject too. In fact, the borrowing requirement is 10 per cent. higher than the outturn last year and 30 per cent. higher than last year's estimate.

We should like the Chancellor to answer the point of my hon. Friend the Member for Blaby. He made the charge that the Treasury had sharply reduced the non-public sector financial deficit items in order to get below £12 billion. I have been studying the Financial Statement since my hon. Friend spoke and what he said looks remarkably true. Perhaps the Chancellor would confirm that the items on pages 14 and 15 of the Red Book have not been sharply reduced from any previous year in order to get his borrowing requirement forecast below 12 per cent. If the right hon. Gentleman confirms that, I am sure that we shall accept that as his undertaking.

To the whole world, of course, Government expenditure is just out of control. We understand that the Chancellor cannot do anything about it. His party will not let him touch it, so the Government have no option but to attempt a savage reduction in living standards, and they are trying to use the TUC as their instrument. They are hitting the lower income groups the hardest, widening the poverty trap and probably now undermining savings, making it even harder to finance their borrowing requirement next year. The point of interest is whether the Government in the end will take the Sri Lanka route or the Argentine route.

I hope that the Prime Minister has read the Cambridge Economic Bulletin which he dismissed with a quip at his first Question Time the other day. I think he said that the authors were not living in a real world. I wish they were not. It may be that the authors of that Bulletin are a little potty, but they are not in the advanced stage of lunacy of the National Executive of the Labour Party. I do not think that one has to advocate import controls to see the dreadful inevitability of what is in the pages of the Cambridge Economic Bulletin unless something firm and decisive is done to arrest this country's economic decline. After all, the diagnosis in that Cambridge paper is not much different from the Report of the Expenditure Committee of the House of Commons which was signed by Members on both sides and which rightly ridiculed the targets in the White Paper.

"The reality is alarming", was the comment made by one Government supporter today, and I agree. Sterling has already declined 10 per cent. since the Cambridge Economic Bulletin was written, and in fact the only alternative suggested, which no one in this House, in his right mind, would wish to see—import controls—was a 40 per cent. devaluation. Sterling has fallen 10 per cent. since that Report was written, and since the Budget the exchange market has shuddered and continues to shudder.

The Leader of the House said today that the more Leftish Governments had normally been thrown out of power through inflation—certainly more often through inflation than any other cause. Yet this morning we read in our newspapers that tonight the Home Policy Committee of the Labour Party was meeting. I mention it. It may not be a vitally important Committee, but it is certainly more important that the Bow Group to which the Chancellor of the Exchequer devoted the whole of his speech on public expenditure. It is in fact a major Committee of the Labour Party Executive, and we read this morning that guidelines for a new social contract between the Labour Party and the trade unions were to go before that Committee tonight. Evidently this document supports more food subsidies, a more progressive income tax and additional expenditure of £3,000 million.

The leaders of our nation are expected to waste their time, in the midst of a crisis for our country, listening to this drivel. It is almost unbelievable. The Chancellor of the Exchequer reduced VAT from 10 per cent. to 8 per cent. just before the last General Election, cooked the RPI and made the boast during the election that inflation was running at 8.4 per cent. If he gets agreement on a percentage norm which allows him to reduce tax allowances retrospective to 5th April of this year, every wage packet in the country will contain a bonus in the summer or autumn of up to £20. That is looming up as the Chancellor's next little electoral trick.

If the summer is warm, inflation just temporarily abates a little and the Prime Minister is still basking in his honeymoon, why should not the Chancellor of the Exchequer use the bonus—that extra chunk in the pay packets in the summer and autumn of this year—just as he used 8.4 per cent. last time, to fool the British people?

During his recent public engagement in his constituency, the Prime Minister spoke of a Welsh legend, which we read with great interest, whereby a king of ancient Britain on a punitive expedition against the Irish lay prostrate across the River Shannon to provide a bridge for his troops to cross—

The Prime Minister (Mr. James Callaghan)

I did not go into all that.

Mr. Nott

I know, but this was the background briefing which the Press picked up very well.

If the summer is hot, the pay packets contain an unexpected £20, inflation is a little lower and the Prime Minister is still basking on his honeymoon, I suggest to him that he should cut and run. Let the Labour movement clamber on his back and get ashore before the bridge collapses, because it will not stand up under this strain for long.

9.29 p.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

This has been an interesting and, as the hon. Member for St. Ives (Mr. Nott) demonstrated, at times witty and irrelevant debate. We have heard his speech many times before, and it is not surprising that he polishes it a little more each time that he makes it.

We had three excellent maiden speeches. The hon. Member for Wirral (Mr. Hunt) showed his deep concern for unemployment and was not ashamed to say how much he welcomed the measures to deal with it which I announced in this Budget. The hon. Member for Carshalton (Mr. Forman) made a somewhat more controversial maiden speech, but I suppose that that befits the Caesarean origins of his constituency, as he described them. My hon. Friend the Member for Coventry, North-West (Mr. Robinson) gave the House a most impressive argument for industrial democracy and it deserves special attention, coming, as it does, from a man who, despite his youth, has a record of outstanding success as an industrial manager in Britain and abroad. This record clearly excited awe and envy on the Opposition Front Bench, which cannot match it.

I pay particular tribute to the speech of my hon. Friend the Member for Huddersfield, West (Mr. Lomas), who returned to the House after a long absence and showed us how much we have missed during his illness.

The right hon. Member for Leeds, North-East (Sir K. Joseph) delivered himself of another instalment of his intellectual Odyssey. The House has come to watch these exhibitions of tortured self-castigation with the same sort of embarrassed fascination as that with which one watches a fakir on a bed of nails. I apologise for making fun of his disarming honesty, but it is not without importance when a Front Bench Opposition spokesman admits that inflation in the last two years was caused largely by the profligacy of the Government of which he was a member. I do not believe that I should be criticised for pointing out that important fact.

I do not want to discourage the right hon. Member in his exploration of modern economic theories, but he should ask himself whether the totality of economic wisdom must lie with one or the other of the two economic theories at present fashionable with British City journalists. He should ask himself whether either monetarism or what he calls neo-Keynesism is likely to have a monopoly of economic wisdom. Both offer valuable insights into our current predicament. But in laying such stress as he did on the size of the public sector deficit as the root or the sole cause of our present troubles, in suggesting that it is directly and wholly responsible for unemployment and inflation, he should consider three undeniable facts.

The first fact is that the United States has a much lower public sector deficit than Britain, yet has much higher unemployment. On the right hon. Gentleman's argument, its unemployment should be lower than ours. The second fact is that Germany has a higher public sector deficit but much lower inflation than ours. On his argument, the German public sector deficit should make inflation higher there. The third fact is that between 1969 and 1971 Britain had an overall public sector surplus, largely due to the efforts of my right hen. Friend the Member for Birmingham, Stechford (Mr. Jenkins), yet during that period there was a steady acceleration in the rise of average earnings from 6½ per cent.—a figure at which it had been steady for five years—to 10½ per cent. On the right hon. Gentleman's argument, there should have been a fall in wages.

I ask the right hon. Gentleman to consider his theories against these facts because he spends all his time in these debates—and so, at least, did three of his right hon. Friends who spoke in the last few days—in claiming that the size of the public sector borrowing requirement is totally inconsistent with adequate control of the money supply. They all argued this in exactly the same terms last year, and their argument would have been more impressive had it been proved right. But none of the disasters they predicted came about, nor will they this year.

Perhaps I can deal with the two points raised by the hon. Member for Blaby (Mr. Lawson) to which the hon. Member for St. Ives referred. The hon. Member for Blaby, with his usual felicitous choice of phrase, said that we were cooking the books to reduce the public sector borrowing requirement, and he drew attention to the two items in Table 5 of the Red Book.

First, the hon. Gentleman said that cash expenditure on company securities was, as forecast for 1976–77 at £125 million, substantially lower than the 1975–76 outturn of £481 million. That is true. But the answer should be obvious enough to him. It is that in the current year we had special factors, such as the problems of British Leyland and Alfred Herbert, and we had to increase the capital base of Rolls-Royce, and those are not expected to recur next year.

Secondly, the hon. Gentleman referred to miscellaneous capital transactions. Here the drain on revenue for 1976–77 of £258 million is again below the 1975–76 figure. But the answer to that is that this item was abnormally high last year because of an exceptionally high level of local authority borrowing, and we are expecting that to return to more normal levels this year.

The hon. Member may well not be satisfied with the explanations that I have given, but they are the explanations that I believe to be true, so I hope that he will at least withdraw the rather silly remark that we were cooking the books in putting those figures in the Red Book.

As I made clear in my Budget Statement last week, it certainly will be necessary to reduce the public sector's demand on resources as recovery in the private sector proceeds. However, as I have argued again and again in the last year, to make large reductions in the public sector borrowing requirement immediately would simply be a prescription for a very large increase in unemployment. The right hon. and learned Member for Surrey. East (Sir G. Howe) finally admitted that in a speech in Surbiton not so long ago. As my right hon. Friend the then Paymaster-General—who has now, I am glad to say, been translated to a higher place, though not to another place—said on Wednesday, it would mean digging a hole that we know will not be filled.

I said last week that I expect monetary growth to be rather higher in the year ahead than it was in the last two years, but, of course, money GDP will be substantially higher, so the money supply should remain at a rate that is consistent with my overall strategy. As I said last week, if I find that it looks like not being so consistent, I shall take any action, monetary or other, which may be necessary to correct it.

However, where the right hon. Member for Leeds, North-East so much disappointed both his hon. Friends and us on the Government side of the House was that at the end of a long lecture about what he claimed were the implications of an incomes policy, he was totally obscure about his own position on incomes policy. All that he told us was that what he had said was not an argument either for or against an incomes policy. However, incomes policy is a matter of some importance whether one is for it or against it. The Opposition have a duty to tell us where they stand.

The right hon. Gentleman was coy and modest enough, but not so those of his hon. Friends who spoke from the Front Bench in the debate. The hon. Member for Blaby was quite open, as he always has been, in his total rejection of incomes policy as being positively damaging to the management of the economy. The hon. Member for Cirencester and Tewkesbury (Mr. Ridley), in so far as we could detect any thread of meaning in the speech that he made the other day, seemed to take the same view. Incidentally, when the hon. Member for Blaby was speaking, I noticed the right hon. Gentleman—as so often and so charmingly—nodding vigorously in agreement with him in every attack that he made on incomes policy.

The hon. Member for St. Ives spent much of his speech attacking the very concept of an incomes policy, root and branch. I did not find it perhaps quite so attractive as some hon. Members that the hon. Member should take such pleasure in fouling the nest in which he lived so comfortably up to February 1974. I do not mind his fouling his own late nest and talking down the Heath Government of which he was a member—I apologise to the right hon. Member for Sidcup (Mr. Heath)—but I must say that I found it profoundly unattractive to find the hon. Gentleman talking down Britain to the extent and in the detail that he did in those disgraceful passages in his speech tonight.

To return to the right hon. Member for Leeds, North-East, at the end of his speech he at least enlightened us a little about his own views on the economy. He told us—I quote his words—that we must redress a century of Socialist error, a century initiated, I suppose, by that great Bolshevik, Disraeli and carried forward by a mixed bag of Trotskyists and Maoists, such as Campbell-Bannerman, Bonar Law, Chamberlain and Baldwin, to name but a few.

Of course, when the right hon. Gentleman came to his moving and rather baroque peroration, he made it clear that his real objective is to return to the world of Mr. Gradgrind, to the full horror of early Victorian industrialism, a horror from which, I am glad to say, wiser and more humane leaders of his own party helped to rescue us during the past 100 years. While as rhetoric what the right hon. Gentleman said at the end of his speech may, I suppose, serve to rally some of his party's extremists, those of us who were sitting here at the time could see how much it appalled others of his hon. Friends on the Back Benches.

We listened today, as we have listened so often in the past, to find out how the right hon. Gentleman proposes to turn this early Victorian rhetoric into economic policy—to learn where the great cuts in public expenditure will come, and to hear how much extra unemployment, and for how long, will be engendered thereby. But, of course, answer came there none. There was a vague suggestion that some of the money would go to reduce the PSBR and perhaps some to reduce the burden of taxation, but there was no indication whatever of where the right hon. Gentleman would put the balance.

It is a fact that we have a major problem of adjustment in our economy. It is a problem to which many hon. Members on both sides have referred again and again in the debate. In part, it is a problem inherited by this Government from their Conservative predecessors—an economy gravely distorted, with a large and growing deficit on the balance of payments and a large and growing public sector deficit as well—but on top of that the increase in the price of oil and other commodities cut our real national income in 1974 by nearly 5 per cent.

To have attempted to adjust immediately to that double blow at a time when the world was already moving into recession would have meant unemployment in Britain far above the levels that we have had to endure in recent months. But now that the world recovery is under way, we must make that adjustment, painful though it may be.

My hon. Friend the Member for Tottenham (Mr. Atkinson) today gave some figures about the movement of real take-home pay for a particular individual in particular circumstances, but I think that the House will get a better idea of what has been happening and what is needed if we look at the movement of real take-home pay for the working population as a whole. In spite of the impact of the oil price increase on our real national income, real take-home pay rose sharply at the end of 1974, and that was a rise which simply could not be sustained.

The big fall came in the second quarter of 1975, before the £6 limit took effect. There was then a drop of about 5 per cent. But since that big drop there has been relatively little net change. Although the prospect for 1977 is for a further small fall, perhaps between 1 per cent and 2 per cent.—and less, under my proposals, for relating the low pay limit to tax relief than under the higher pay limit without tax reliefs, to which I referred to my Budget speech—the actual outcome will depend very much on the performance of the economy.

I think that my hon. Friend should understand, however, that since 1974 there has been a great increase—about 15 per cent.—in the real value of old-age pensions. That improvement has to be paid for by the working population, and that improvement has itself meant that real take-home pay is now about 2 per cent. lower than it would have been if pensioners' living standards had been static. I believe that all my right hon. and hon. Friends think it right that the working population should make this sacrifice to support the growing proportion of the population that is retired, but, in so doing, they must accept that it inevitably has a consequence on the movement of take-home pay for those who are in work.

As I made clear last week, the fall in real take-home pay is part of the price the nation has to pay for getting unemployment down, because the number of people out of a job will depend largely on the earnings of those in work.

I now turn to the issue which has dominated much of the debate—

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

The right hon. Gentleman has just said that wages went down by 5 per cent. at the beginning of 1975. How did that result in a massive increase in unemployment?

Mr. Healey

That did not result in a massive increase in unemployment. The increase was building up, as I explained in my Budget speech, as a result of an enormous fall in world trade which led to a heavy fall in British exports—in fact a collapse in export demand. It was also due partly because of a heavy fall in industrial stocks.

I shall now turn to the issue that has dominated much of the debate—my proposal for relating reliefs in personal taxation to the pay limit in the next wage round. My right hon. Friend the Leader of the House made a devastating reply to those who argue that my approach is, in some cases, unconstitutional. I am glad to see that as the week has worn on this argument has been used less and less, even by the Opposition Front Bench. At the end of the day, when I have decided on the appropriate changes in personal taxation, they will be put to the House, which will be perfectly free, as always, to accept or reject them.

It has also been argued that the Government have no right to discuss these matters with the TUC before taking a final decision. In this case the Archangel Michael was joined by St. Peter because the right hon. Member for Worcester (Mr. Walker) crushingly answered the complaint made by his Front Bench. He said that the Government are acting exactly the same as the Government led by his right hon. Friend the Member for Sidcup.

The likely level of wage settlements is always a major element in determining the likely rate of inflation. Any Government worth their salt will try to ensure that those who try to negotiate wage settlements do so in full knowledge of the economic needs and the likely effect on jobs and taxation of levels of earnings. The only difference between the present Government and the Conservative Government is that in the past Governments have carried out the necessary consultations in private, without letting the whole nation know what is involved. This Government have taken the other course; they have stated frankly, in public, what they believe to be the right inflation target for the coming year and what wage increases there can be to achieve that. That is a more democratic and constitutional course. The last week has shown that the nation shares my view, but, as usual, the Conservative Front Bench have oscillated between the conditioned reflex of instant opposition and a sort of feverish opportunism which seeks to exploit any momentary discontent. Yet the Opposition Front Bench hope, in the end, to share any credit there is for success by the Government.

As my right hon. Friend the Leader of the House reminded us, the right hon. and learned Member for Surrey, East said nine months ago that the £6 limit was abhorrent in any sense, but now he never misses a chance to tell us how he and his party support it. His Back Benchers have been more honest. The overwhelming majority of hon. Members who have spoken from either side have endorsed the Government's approach to the problem and have wished it well. That was as true of the majority of Conservative speakers as of my hon. Friends. I have no doubt that this year, like last year, the Conservative Front Bench will come into line with majority opinion as soon as it is clear that the Government's policy will succeed.

But what is more impressive to me even than the extraordinary degree of consensus in the House about this approach is the growing evidence that the great majority of people outside, including the great majority of trade unionists, understand the Government's approach and believe that it offers the best answer to the nation's need. Last week, many people were arguing that the complexity of my proposals would in itself rule them out, but once again they have been proved wrong about the common sense of the British people and the ability of ordinary men and women to understand the facts of their own economic lives. Ordinary people know that what matters is how much money they receive after the Inland Revenue has taken its share, and what that money will buy in the shops. They know that it is crazy to repeat the sort of experience we had last year, when earnings went up by 29 per cent. but living standards hardly rose at all. Their trade union representatives know it too.

As Mr. Jack Jones wrote in a notable article last weekend—[interruption.]—Conservative Members must decide whether they are engaged in a honeymoon courtship of the trade unions or are reverting to type and insulting them in every aspect of their behaviour. Mr. Jones said: We are concerned over jobs and the value of our pay, not the number of notes in the pay packet. I believe that in that he spoke for all his members.

I do not deny that there are many difficult problems still to be discussed and overcome before the trade union movement can reach agreement on a policy for incomes in the coming round which will meet the nation's needs. But we are already at one about the objective. The Government and the TUC agree 100 per cent. on the need to achieve a pay policy that will reduce inflation still further in the coming year—to well under 10 per cent. to quote the TUC Economic Survey.

I agree with Mr. Len Murray when he said the other day—[Interruption.]—I only wish that trade unionists could hear the sneers of Conservative Members and throw back in their teeth the sort of flabby courtship of the unions by the right hon. Lady and her right hon. Friend the Member for Lowestoft (Mr. Prior) in recent weeks. Mr. Murray said: I believe that we will get there in the end, and by 'we' I mean that the TUC will find a formula that will be acceptable to the unions and the membership. I have stated again and again in recent months that what the Government want this year is what they got last year, an agreement worked out by the trade unions, for the trade unions, in full knowledge and acceptance of the unions' needs—in other words, a voluntary agreement freely entered into on both sides.

I am not trying to dictate a policy, but it is my duty as Chancellor to make clear what I think would be best for Britain, best for jobs, best for living standards, and best for the welfare of the weaker members of our society.

I said in my speech last Tuesday, and I say again tonight, that what we need is a pay limit that will enable us to get our inflation down at least to the level of our main competitors. I do not believe we can rely on achieving this with a pay limit that is beyond the area of 3 per cent. I have shown how the combination of lower inflation and tax cuts will guarantee that the majority of working families will be better off with a lower pay limit than with a higher one. Moreover, the 3 per cent. limit with the tax reliefs would make pensions worth more during 1977 than a higher limit, because of lower price increases. Most important of all, the whole country would be better off. Our industry would be able to invest more, we would be able to sell more both at home and abroad, and unemployment would fall faster. That is why I hope and believe that in the end those who do not yet accept the advantages of my proposal will come to accept them.

I well understand the difficulties that may arise with so low a limit after a year in which all workers have been restricted to a flat £6 a week increase. If, in the end, the trade unions feel that they cannot make a limit as low as I have suggested stick for 12 months on the shop floor, we may have to be satisfied with second best.

Mr. Peter Walker (Worcester)

Surrender within a week!

Mr. Healey

As my right hon. Friend the Leader of the House stressed over and over again, our overriding purpose is to achieve a new voluntary agreement with the trade unions which will carry forward the progress we are now making in the fight against inflation. To fail in that overriding purpose would be to set all our achievements at risk and to rule out any chance of reducing unemployment.

If we have to settle for second best that will not relieve me of my responsibility of helping to guide the economy by managing demand. I shall not be able to run the economy at a higher level of demand if incomes rise more than I believe they should. On the contrary, a higher pay limit must mean that I have less room for tax relief.

The conditional tax reliefs that I proposed in my Budget speech require a pay limit of about 3 per cent. if the economy is to sustain them. I hope that in reaching their decision the trade unions will take into account what I have already done in the Budget to meet their aspirations—namely, an improvement in pensions larger than is needed to fulfil our manifesto commitment, the increase in short-term benefits and family income supplement, the cut in the 25 per cent. rate of VAT, the new measures to promote investment, the doubling of the temporary employment subsidy, the new action to deal with tax evasion and avoidance through fringe benefits, the tax help for widows and the pensioner with extra means. The additional package of tax cuts, which are conditional on the pay limit, will give further help to the poor and, through its effect on prices, to all who are not working, such as pensioners, the sick, the disabled and the unemployed.

That is one way in which we can approach the solution of our nation's problems, and in the real world there is only one other approach. I am sorry to say that it is not the approach put forward by my hon. Friend the Member for Luton, West (Mr. Sedgemore). My hon. Friend made an excellent and persuasive speech but, if I may say so, I think that my hon. Friend the Member for Nuneaton (Mr Huckfield) answered it with total conviction and most convincingly. The only real answer to the policy that I have put forward is that put forward by the right hon. Member for Leeds, North-East, namely, the policy of Mr. Grad-grind. That is a policy that is certain to lead to prolonged and massive unemployment and to a dreary repetition of the confrontation with the trade unions which led the last Government to disaster.

We offer a better way—a way of cooperation with the trade union movement that is based on common principles and common objectives. By accepting the hard facts that such a policy implies, I believe that the trade union movement will do yet another great service to the nation. On those grounds, I ask the House to endorse the proposals that I set out in my Budget speech last week.

Question put:—

The House divided: Ayes 295, Noes. 274.

[For Division List No. 108 see col. 1105.]

Questions accordingly agreed to.

Resolved, That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but, without prejudice to any authorisation by virtue of any resolution relating to value added tax, this Resolution does not extend to the making of amendments with respect to that tax so as to provide—

1. (a) for zero-rating or exempting any supply;
2. (b) for refunding any amount of tax;
3. (c) for reducing the rate at which tax is for the time being chargeable on any supply or importation otherwise than by reducing that rate in relation to all supplies and importations on which tax is for the time being chargeable at that rate; or
4. (d) for any relief other than relief applicable to goods of whatever description or services of whatever description.

Mr. Speaker

I am now required, under Standing Order No. 94(2), to put successively without further debate the Question on each of the Ways and Means motions numbered 2 to 35 and on the motion on Procedure (Future Taxation) all of which the Finance Bill is to be brought in. I propose, instead of reading out each motion in extenso, to follow the procedure used in recent years—that is to say, I will first state the title of a motion and then put simply the Question "That the motion be agreed to".

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1. 2. SPIRITS 106 words
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2. 3. BEER 541 words
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3. 6. HYDROCARBON OIL ETC. 46 words
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4. 4. WINE 4 words
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5. 5. MADE-WINE 79 words
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6. 7. CIDER 281 words
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7. 9. SURCHARGES AND REBATES IN RESPECT OF REVENUE DUTIES 51 words
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8. 10. VALUE ADDED TAX (REDUCTION OF HIGHER RATE) 133 words
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9. 8. TOBACCO PRODUCTS 64 words
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10. 11. VALUE ADDED TAX (MINOR AMENDMENTS) 137 words
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11. 12. VEHICLES EXCISE DUTY (SPECIAL REQUESTS FOR REGISTRATIO MARKS) 63 words
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12. 13. VEHICLES EXCISE DUTY (DISABLED PERSONS) 232 words
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13. 14. INCOME TAX (CHARGE AND RATES FOR 1976–77) 286 words
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14. 15. RELIEF FOR INTEREST (LIMIT FOR 1976–77) 52 words
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15. 16. INCOME TAX (ALTERATION OF PERSONAL RELIEFS) 171 words
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16. 17. INCOME TAX (HUSBAND AND WIFE) 763 words
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17. 18. TAXATION OF BENEFITS FROM EMPLOYMENT (INCOME TAX) 49 words
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18. 19. TAXATION OF CASH VOUCHERS (INCOME TAX) 45 words
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19. 20. CORPORATION TAX (CHARGE AND RATE FOR FINANCIA YEAR 1975) 38 words
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20. 21. ADVANCE CORPORATION TAX (RATE FOR FINANCIAL YEAR 1976) 36 words
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21. 22. CORPORATION TAX (SMALL COMPANIES) 68 words
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22. 23. CORPORATION TAX (AUTHORISED UNIT TRUSTS AND INVESTMEN TRUSTS) 69 words
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23. 24. CAPITAL ALLOWANCES (INCOME TAX AND CORPORATION TAX) 41 words
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24. 25. CLOSE COMPANIES (CORPORATION TAX AND INCOME TAX) 47 words
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25. 26. APPRECIATION IN VALUE OF TRADING STOCK (INCOME TAX AN CORPORATION TAX) 75 words
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26. 27. DOUBLE TAXATION (IRELAND) 51 words
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27. 28. FOREIGN INTEREST AND DIVIDENDS (INCOME TAX AND CORPORATION TAX) 53 words
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28. 29. FOREIGN UNDERLYING TAX ON COMPANY PROFITS (INCOME TAX AND CORPORATION TAX) 35 words
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29. 30. CAPITAL GAINS 113 words
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30. 31. CAPITAL TRANSFER TAX 37 words
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31. 32. ESTATE DUTY 50 words
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32. 33. STAMP DUTY (EXEMPTION FOR TRANSFERS OF LOAN CAPITAL) 375 words
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33. 34. STAMP DUTY (JOBBERS) 38 words
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34. 35. RELIEF FROM TAX (INCIDENTAL AND CONSEQUENTIAL CHARGES) 54 words
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35. PROCEDURE (FUTURE TAXATION) 169 words