CLASS III VOTE 4, ECONOMIC AND FINANCIAL ADMINISTRATION: TREASURY

HC Deb 02 August 1976 vol 916 cc1217-351

Motion made, and Question proposed, That a sum, not exceeding £22,829,000 be granted to Her Majesty out of the Consolidated Fund to complete the sum necessary to defray the charge which will come in course of payment during the year ending on 31st March 1977 for expenditure by the Treasury on the management of the economy, the Paymaster General's Office and certain other services including grants in aid to certain Parliamentary bodies and others.—[Mr. Graham.]

3.55 p.m.

Sir Geoffrey Howe (Surrey, East)

I beg to move, That Subhead B1(1) be reduced by £6,500. The House has already learned something of the remarkable circumstances in which this debate comes before the House. The purpose of the Opposition motion is to halve the ministerial salary of the Chancellor of the Exchequer.

That enables the House for a moment or two to focus its attention on the right hon. Gentleman. He is a man of many faults, as he would be the last person to admit. Even his most critical admirers would not frequently accuse him of false modesty, undue diffidence, or lack of confidence.

Repeatedly, throughout the years when he has held his present office he has urged both sides of the House not to cast away what he is pleased to describe as his successes of the past two years. Even his hon. Friends must frequently have had great difficulty in recognising what successes he was speaking of as they sat wondering what creek they were up and what creek the Chancellor was about to paddle them up with enthusiasm in the next few moments.

Mr. Russell Kerr (Feltham and Heston)

A bit under-rehearsed.

Sir G. Howe

I am sufficiently well rehearsed to know that if the hon. Member for Feltham and Heston (Mr. Kerr) returns to his own country of Australia he will there find people who have had the opportunity and good fortune to return a Conservative Government to office. I hope that we shall soon have the chance of following their example.

Even as recently as Budget time the Chancellor was still proclaiming the duty of the British people to believe in the economic miracle which was shortly to overtake them. He was frequently accustomed to taunt the Opposition, even if we had tabled amendments making our opposition clear, by saying that when we failed to vote out of duty for his Government, we were, in his phrase, sitting on our hands.

It is no longer the Opposition who are sitting on their hands. It is the Chancellor and the Government who are choosing to do so today. The Government are apparently unwilling to bring these measures forward for debate. The truth is that the Chancellor has not only lost his sense of direction, but seems also to have lost his nerve. It is interesting to try to work out when this process of disintegration began to take place.

If we return to the public expenditure debate of 9th and 10th March, the Chancellor will remember only too well what happened at the end of that debate. When the motion tabled by the Government to approve their public expenditure White Paper was put to the House, 40 of his hon. Friends refused to support the Government. On the following day the Government scrambled back to security by bringing a vote of confidence before the House, thereby giving a totally new meaning to the word "confidence". Within a day or two thereafter the then Prime Minister, not uncharacteristically, chose that moment of glory to resign his high office. [HON. MEMBERS: "Where is he?"] The former Prime Minister does not have a seat in the House any more.

Since then the Chancellor has gone through periods of increasing disquiet and doubt and has displayed increasing anxiety symptoms. Before he decided to run in the race—if that is what we may call it—for the leadership of his party, he hesitated for two or three whole days. In retrospect his hesitation was well justified.

Mr. Robert Mellish (Bermondsey)

rose—

Sir G. Howe

So we—

Mr. Mellish

rose—

Mr. Speaker

Order. The right hon. Member for Bermondsey (Mr. Mellish) has been here long enough—indeed, as long as I have—to know that if the right hon and learned Member for Surrey, East (Sir G. Howe), whom I have called to address the House, does not give way, he must still have the Floor.

Mr. Mellish

Will the right hon. and learned Gentleman give way?

Sir G. Howe

No.

Mr. Mellish

Why not?

Sir G. Howe

I have hardly started my speech. Normally I am very willing to give way to the right hon. Gentleman, but not now.

So we come to the next point of the rather hesitant record of the Chancellor of the Exchequer. Apparently he once had it in mind to stand for the treasurership of the Labour Party, but for that he hesitated a number of weeks and very prudently decided not to run in that race at all.

During the months which have passed we have seen a change taking place also in what the right hon. Gentleman brings before the House. During his first two years or so he brought Budgets or budgetary statements before the House on about six occasions, so that about once a quarter we were accustomed to see him bringing new measures before us. But since this Budget, which was meant to bring about an economic miracle, not a month has passed without the right hon. Gentleman coming back to the House with some new statement, announcement, or piece of glory. It is interesting to see how well each of those has gone.

The Budget at the beginning of April followed on the public expenditure debate. Between the public expenditure debate and the Budget the pound had lost 9 cents in its value. From the Budget to the announcement of the pay deal, hastily cobbled together by people who saw themselves on the edge of the abyss, another 4 cents had fallen off the value of the pound. The right hon. Gentleman came along then saying that we should regard ourselves as the envy of the world and that other countries would give their eye teeth to endorse this tremendous success.

Unfortunately, the world did not see it like that. By 6th June the pound had gone down by another 8 cents to $1.72, and the right hon. Gentleman came to announce his standby credit—a "vote of confidence" by world bankers in his management of the economy. That again has not quite struck the world in that way. It is true that the pound has risen by about 6 cents since then, but it is still 6 cents below what it stood at at the time of the Budget. We know also, although the right hon. Gentleman will tell us no more, that a substantial part of the standby credit has already been drawn upon in defence of the pound.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

How much?

Sir G. Howe

I asked—and the Chancellor has proved curiously reluctant to say—how much of that standby credit had been spent.

Then within six weeks of that we had the announcement of this fresh round of cuts which we are debating today, and the pound remains unchanged. Meantime, it is worth looking—[Interruption.]

Mr. Speaker

Order. Interruptions from a sedentary position make it almost impossible for any hon. Member to give a coherent speech. I hope that hon. Members will allow the right hon. and learned Member for Surrey, East to be heard.

Mr. Eric S. Heller (Liverpool, Walton)

On a point of order, Mr. Speaker. I apologise for making an interruption from a sedentary position. What I said was that the right hon. and learned Gentleman's speech was a most irresponsible one.

Mr. Speaker

And, what is more, the hon. Member for Liverpool, Walton (Mr. Heifer) has been here long enough to know that that is not a point of order.

Sir G. Howe

There is no part of the House from which lectures in irresponsibility come with less conviction than from that Bench below the Gangway.

Meantime, we can look at the Government's attitude to the House. The Prime Minister proclaimed not many weeks ago, with great pride and with his chest thrown out, that he intended to govern on Labour votes. That was his boast. Yet when we came to consider the White Paper setting out stage 2 of the pay policy all that we had was a motion to take note of the paper. In view of what was said by Government supporters sitting below the Gangway on that occasion, that was not altogether surprising.

Now, on this package, whose importance is not in doubt and which represents a reversal of the declared intentions of the Government, stated and restated on many occasions, and which involves budgetary changes of more than £1,800 million—more than the Chancellor of the Exchequer has given away or raised in extra taxes in any one of the many Budgets that he has introduced—surely we were entitled to expect the Government to ask the House to debate their measures. Indeed, we were so led to believe. Hon. Members on both sides of the House were expecting such a debate until we heard on Thursday morning that the Cabinet had announced that it had no such intention.

We ask ourselves why on earth not, and we find the answer in Early-Day Motion No. 565 on public expenditure cuts, a motion in the name of the hon. Member for Paddington (Mr. Latham) and 81 other hon. Members, flatly denouncng the Government's policy as set out in these public expenditure cuts.

Mr. Arthur Latham (Paddington)

Will the right hon. and learned Gentleman give way?

Sir G. Howe

Yes. I will give way to the hon. Member for Paddington.

Mr. Ridley

On a point of order, Mr. Speaker. The hon. Member for Heston and Feltham (Mr. Kerr) is again interrupting from a sedentary position shortly after your recent rebuke, as he has throughout my right hon. and learned Friend's speech. If hon. Members continue to behave like this, reasoned debate becomes impossible.

Mr. Speaker

I know that this is the last week before the recess. At the same time, a very serious point has been raised. It is a serious matter that there are some hon. Members who seem to think that they have a right to conduct a running commentary during another hon. Member's speech. It is quite unfair and unworthy of the House.

Mr. Arthur Latham

The right hon. and learned Member for Surrey, East (Sir G. Howe) has just referred to the Early-Day Motion in my name. Will he also turn his attention to the Opposition's motion? Since he is critical of the Government for not tabling a motion, can he explain why the Opposition have deliberately avoided a motion making any reference to public expenditure cuts and denying those Government supporters below the Gangway who are critical an opportunity to express a distinctive point of view and to vote upon it? If the Government have sidestepped, the Opposition have run away.

Sir G. Howe

The hon. Gentleman's point requires this answer. We intended and wanted to have a debate on our motion and to vote on our motion. The only way in which we could do that was by tabling this motion. Otherwise we should have been faced by an amendment from the Government and we should have been obliged to vote on that.

If the hon. Member for Paddington has any complaint about his lack of opportunity to table an Amendment, it is a complaint which lies against his own Ministers. It was they who could have and should have tabled a motion on which he could have voted. The reason why they have not done so is that the Prime Minister knows that most members of his party outside his Cabinet and Government Ministers are harshly critical of Government policy and that the great boast of depending on Labour votes to carry his policy through Parliament has vanished like a puff of smoke in the face of the Early-Day Motion. It is a very strange way of depending upon Labour votes.

When the Chancellor made his statement I made it clear that we welcomed it. We do, as far as it goes, because it represents a belated partial recognition of a part of what is wrong with their policy and their economy and a partial recognition of the necessity to do some of the things that we have urged to put the economy right. But, like British industry outside this House like the rest of the world and like the Chancellor's creditors, we can have no confidence that the little the Chancellor has done will serve to put matters right.

His proposals are inept and inadequate. They come too late. They are bogus and may never happen. Above all, they are totally out of balance in imposing far too large a share of the burden which has to be borne not upon the public sector but upon the private sector. They do not do what should be done and they will do a great deal of damage which ought not to be done. Above all, they cannot be regarded as part of a coherent long-term strategy.

I want to tell the Chancellor of the Exchequer what that strategy should be. [HON. MEMBERS: "More unemployment."] Hon. Members below the Gangway may shout about more unemployment. Let them harken to the unemployment that these measures will create. Let them recognise that there is no escape from the disastrous situation into which the Chancellor has got us without rising unemployment.

First, the Chancellor should recognise that he and the Labour Party must make —they have so far not done so—an unqualified commitment to making the mixed economy work as such. Some members of the Cabinet undoubtedly want that to happen, and they say so. The Secretary of State for Prices and Consumer Protection said so the other day. But the Secretary of State for Energy, for example, wants no such thing.

If we harken to what is said by many hon. Gentlemen below the Gangway, it is clear that about half the non-Government membership of the Parliamentary Labour Party do not want the present mixed economy to work. They are more intent on overthrowing and destroying it. Until the Labour Party resolves that conflict at its heart, there is no prospect of getting good government from a Labour Government.

Secondly, there must be a determination on the part of the Government that the nation and the Government will live within their means. That is the importance of the size of the public sector borrowing requirement. There are other technical matters. It is not just the crowding out of the private sector that is important—although it is—the growing difficulty to the Government of borrowing what they need to borrow and the threat of inflation that poses—although that is important—or the interest rates that have to be paid by the private sector. The simple dominant overriding fact is that, as the Prime Minister has said on more than one occasion, no Government can go on borrowing £1 out of every £4 that they are spending. The day of reckoning is bound to come.

That is why we are deeply suspicious of the Chancellor's plans to replace the by now familiar public sector borrowing requirement with this new animal that he is busy manufacturing in his menagerie —the general Government financial deficit. For those who have not been following these fascinating matters as closely as the rest of us have, I should explain that the Chancellor is seeking to redefine the measurement of his borrowing requirement by excluding from it the capital that is borrowed by the nationalised industries and the loans raised and advanced by the Government to the private sector. Because the nationalised industry sector is so large, that has the effect of halving the public sector borrowing requirement—diminishing by a stroke this disturbing borrowing requirement burden and reducing it by a half. I can hardly believe that the Government, in seeking to redefine their statistics in that way—

Mr. Ron Thomas (Bristol, North-West)

Will the right hon. and learned Gentleman give way?

Sir G. Howe

—I will shortly—are simply concerned with the promotion of economic scholarship. I suspect that the Government, in seeking to make that re-definition—who can blame them in the light of this record—are out to fudge the books.

Mr. Ron Thomas

I thank the right hon. and learned Gentleman for giving way. Will he explain to me why if ICI borrows £100 million for capital investment that is applauded, but if the public sector does that he feels that it ought to be included in the public sector borrowing requirement, with all that that implies in the rest of his deliberations?

Sir G. Howe

Because on either side it must be recorded in the balance sheet and our creditors must decide, by studying the balance of the economy, whether the company or the country is creditworthy. ICI is creditworthy. This country manifestly is not.

Thirdly, we ask the Chancellor plainly to recognise, as the Prime Minister said in his first broadcast to the nation, that living within the nation's means inescapably means lowering living standards. How can the Government's record and commitment in that respect be creditable when we look at what they have been doing about food subsidies and school meals? They introduced food subsidies and, in their first heyday and pursuit of re-election, allowed them to soar. Last year the news was that they were to be cut. But, at the time of the pay deal announced in July 1975, that commitment was cancelled.

School meals charges were to be raised this September to begin restoring balance to that part of the economy. But that commitment was cancelled in this year's Budget. Now food subsidies, according to the statement last week, are to begin coming down at a faster rate. But how far can anyone believe that will happen?

Mr. Michael English (Nottingham, West)

Will the right hon. and learned Gentleman give way.

Sir G. Howe

Not at the moment. Looking at the document produced from Transport House last week—known as the Social Contract Mark II—we find that, within a week of the Chancellor proclaiming his intention to reduce food subsidies more rapidly, that document, cobbled together between Ministers, the trade union movement and the national executive of the Labour Party, states: The Liaison Committee reasserts its belief in the value of subsidies in helping to keep down the price of essential goods. … As part of its continuing review of public expenditure the Government should therefore —mark these weasel words— eriously reassess the shape and content of its food subsidy plans. How can any creditor have any confidence that the Chancellor means what he says when he says that he will begin clawing back food subsidies more quickly next year?

Mr. English

Does the right hon. and learned Gentleman realise that the Shadow Cabinet could agree with the words that he has quoted because, only a few weeks ago, they did not oppose the food subsidies Order? They merely suggested that the sum—the shape and content—should be different. The Government's majority at the beginning and end of that day was 40, and on that issue it was five. But the Opposition chose not to oppose the food subsidies Order. I suggest that the right hon. and learned Gentleman should ask himself whether that was done to reconcile internal contradictions within the Shadow Cabinet.

Sir G. Howe

We made our position clear in that debate and in others. We want an early reduction in food subsidies. The Chancellor has told our creditors that he also wants that. Yet he appears to be prepared to go along with this document which means all things to all men. That is no way to command confidence among our creditors.

Fourthly, we want a plain recognition —it is this towards which we are groping in the statement that we are debating—that public spending as a whole is massively too large and must be steadily, courageously and tenaciously reduced, not just by bits and pieces, but as part of a settled long-term strategy to restore the balance of the economy. What is needed—what we have not got—is a clearly announced programme for the reduction of the borrowing requirement over the next few years. We need similar resolution over the money supply.

But how can we expect that when we are dealing with a Chancellor who, throughout months and years, has denounced every suggestion for public economy and fiscal sense of that kind as cruel folly? How can we expect convincing programmes in that direction from a Government in which almost every member, including the Prime Minister, takes every possible opportunity of proclaiming belief in the virtue of public spending for its own sake?

When we listen to speeches made by the Prime Minister and the Chancellor we recognise that they cannot wait to get back to their old big spending habits. Last week's statement is regarded by them as at best a temporary awkward interruption in the rake's progress to which they have become accustomed. Is it any wonder that Labour-controlled local authorities, which are being urged by the Secretary of State for the Environment to cut back on public spending, go on spending as though money were still available without limit? They are practising only what the Chancellor for all too long has preached. How can they be blamed if they go on doing it?

How does the Chancellor propose to control the over-spending by local authorities? While many Conservative-controlled authorities are making tremendous efforts to cut back on expenditure in accordance with the Government's instructions, Labour-controlled authorities go on spending as though the Chancellor's policies do not matter at all. How can that carry any conviction?

How can businessmen, who have been pruning their expenditure programmes to the bone and seeing people laid off as jobs disappear, have any confidence in the Government's record? The number of jobs that have disappeared altogether since this Government came into office is 1,070,000. There are 1,070,000 fewer jobs than in March 1974. There is only one exception to that trend. That is, as the Chief Secretary recently said, in the public sector in central Government and in local government. While more than one million jobs have disappeared, 158,000 people have been taken on to the public sector payroll. Therefore, for every seven jobs lost in the private sector, in manufacturing and trading industry, one job has been created in the public sector. How can one accept the Gov- ernment's commitment to cut public spending if that goes on?

Above all, the Government must give a clear commitment that they will take action to encourage the growth and to restore the dynamic of the tradable private sector. I would not quarrel with the estimate that 1 million new jobs are needed in the private sector, but how does the Labour Party suppose that they will come into existence? What is the Labour Party doing to make them come into existence, to generate the capital that will create new investment so that new jobs can happen?

The Labour Party does not know or understand the answer to that question. Half of its members, on their good days, at least mouth a commitment to the creation of vigorous, profitable private industry. They do not do very much about it. [Interruption.] The other half—

Mr. Peter Tapsell (Horncastle)

On a point of order, Mr. Speaker. Despite your two appeals to the hon. Member for Feltham and Heston (Mr. Kerr), he is still maintaining a running commentary from a sedentary position.

Mr. Russell Kerr

Further to that point of order, Mr. Speaker. It was quite unintentional. I had just heard some most grievous nonsense and, unfortunately, I was provoked.

Mr. Speaker

Order. I hope that the hon. Gentleman will not be provoked any more, because it is not fair to hon. Members who are addressing the House to have these interruptions from a sedentary position.

Sir G. Howe

As I was saying, the other half of the Labour Party, the half represented—sitting down or standing up —by hon. Members below the Gangway, have been all their lives denouncing investors and industry for lack of patriotism, pointing to investment overseas and talking with foolish phrases about an investment strike. The question that they ought to ask themselves is why companies that have the opportunity of investing in this country or overseas choose to invest overseas rather than here. They do not choose, of course, to invest in the Soviet Union [An HON. MEMBER: "Why?"] I shall tell the House why. They choose to invest in other countries rather than here because they know that elsewhere they can get a good profit and a fair return on their investment, and they know that their management and skilled work people who go overseas to work will get reasonable pay and will not be clobbered by penal taxation of the kind that commends itself to Labour Members.

The only reason why companies do not invest more here is not that they are staging an investment strike, but that the philosophy and attitude of the Labour Party have combined to create an investment lock-out. Labour policies have created an investment lock-out which makes it very difficult for people to invest here with confidence. Those are the standards by which the House should judge the latest package.

While we can regard what the Chancellor has announced as no more than a first reluctant step in the right direction, the cuts themselves, a reduction of more than £1,800 million in the borrowing requirement altogether, should be set alongside the fact that there has been a £344 million increase in public spending since the White Paper was introduced. If we consider them as public expenditure cuts, we find that they are very largely an optical illusion. Only £550 million of these cuts actually represent a reduction in the resources of manpower, goods and services absorbed by Government. If we count in the payroll tax as well, we find that £1,300 million of the £1,800 million that the Chancellor is seeking falls upon profits, incomes, spending, production and jobs in the private sector. Only an Irishman could describe that effecticely as cutting deeply into the public sector.

The cuts are concentrated, moreover, very largely on capital expenditure. They leave the bureaucracy unscathed. Of the £550 million falling on resources of the public sector, only £136 million comes out of the current account and a large part comes in reductions in the capital spending programmes of the nationalised industries. That is not a very sensible choice when one considers the problems facing the steel industry. If that is a choice that must be made, why in heaven's name should the capital spending programme of the British National Oil Corporation be immune from cuts when that is the one sector in the public sector for which private money would be available to do anything required? We suspect that the exemption for the BNOC is far too high a price to pay for the sullen, reluctant presence in the Cabinet Room of the Secretary of State for Energy.

We are deeply concerned as well about the proposed cut of £100 million in defence expenditure. A Government who are prepared to cut at this stage another £100 million off the defence budget while at the same time spending £25 million on aid and sustenance to terrorists in Mozambique are not a Government who deserve the support of this House. If the Government say "Where else should expenditure be cut?", I say that the answers cry out to anyone who approaches this question and who is not dominated by politics first and last.

Where is the sense in cutting the capital spending of the National Health Service by £20 million while spending £40 million on abolishing pay beds in that service? Where is the sense in cutting expenditure on the education budget by £30 million while spending the same amount on extinguishing our grammar schools? Where is the sense of adding £900 million to the burdens on industry while borrowing and intending to use the same amount on the nationalisation of land, aircraft and shipbuilding? Where is the sense in cutting the general aid to industry in the regions while planning to increase selective spending by the National Enteprise Board and other agencies?

The real area of neglect in Government spending which the Chancellor has still to tackle is that over which he presided in 1974–75. In his first Budget he set out to achieve a borrowing requirement of less than £3 billion, but at the end of his first year at the Treasury he came back to report a borrowing requirement almost £5 billion larger, and there was a huge explosion of public sector pay and payrolls and a huge increase in subsidies of over £1 billion. The Chief Secretary only a few weeks ago was saying—we thought hopefully—words to the effect that only 43 per cent. of public sector housing costs were borne by tenants of public sector houses, yet nothing to reduce those subsidies, nothing to reduce that vast increase in expenditure, has been proposed by the Government.

The last feature in the package which causes us concern is what we must call the payroll tax on employment. Let us hear less of this "Newspeak" description of it as the employers' increased national insurance contribution. It has nothing to do with national insurance. A payroll tax could make sense at the right time and if everything else in the tax system were moving in the right direction. That is the situation in which the Chancellor can point to the European parallel. However, in this context a payroll tax alongside a failure to make real cuts, even when the Government are trying it a year ahead, is the most stupid and damaging feature of the whole package.

We cannot help but reflect that Lord Kaldor who was, so we all understand, the architect and designer of the selective employment tax, celebrated his resignation from office as special adviser to the Chancellor at midnight last night. We must regard this payroll tax as represent-Lord Kaldor's last laugh over Denis Healey.

If we look at the declared objectives of the Chancellor in this part of his statement, we find that he was setting out that —I quote from the statement of 22nd July— Our overriding priority is to restore the prosperity of the British economy through the regeneration of our industry and to provide the essential conditions to bring down, and to keep down, the intolerable level of unemployment. To do this we must ensure that manufacturing industry has sufficient resources available to take advantage of the exceptional opportunities now open to us."—[Official Report, 22nd July 1976; Vol. 915, c. 2010.] That was his objective. In fulfilment of that objective he takes £900 million out of the coffers of British industry.

What will the effect be? It will be lower profits, less investment, higher prices and fewer jobs. Prices, as the Chancellor says, will rise by 1 per cent. He prefers this to VAT. One cannot imagine why, because the payroll tax will directly add to the cost of food, housing, fuel and transport, all of which would have been exempt from VAT. Of this £900 million, how much will come from profits that would have been available for investment? Above all, how much of it will come out of jobs in the private sector? By how much will unemployment be increased as a result of these proposals?

When the Chancellor made his statement, he said that he expected unemployment to rise by 60,000 as a result of all his measures. But how much larger is the figure of jobs that will be destroyed by these measures? Is it 115,000, as the Secretary of State for Employment was reported to have told the Tribune Group? Is it 150,000, as Mr. Michael Posner, from the Treasury, is reported to have told the Public Expenditure Committee? Whatever the number—and the Chancellor should tell us what it is—almost all will come from the private sector.

It is clear that the effect of the Chancellor's attempt to delay the onset of the recession, which has struck the rest of the world, now means that unemployment in Britain is higher than it is in other European countries. Unemployment in Britain has increased more than in any other country in the European Community. On the Chancellor's own statement, it will go on rising until the end of this year and, on the statement of Mr. Posner to the Expenditure Committee, it will go on rising until the end of 1977. [HON. MEMBERS: "Re did not say that."] Yet the Chancellor is setting about the deliberate destruction of at least 100,000 jobs in the private tradable sector. That is a direct consequence of his failure and refusal, even now, let alone throughout the last two years, to take effective control of public spending.

As for the effects which will arise as a result of what the right hon. Gentleman is doing, we have some pretty impressive forecasts. When selective employment tax was introduced by the Labour Government in 1966, the then right hon. Member for Southwark, later Lord Gunter, said: In the longer term it has the additional aim of making more manpower available for manufacturing industry by encouraging economy in the use of labour in the services." —[Official Report, 23rd June 1966; Vol. 730, c. 933.] Lord Diamond, on 25th May 1966, talking about selective employment tax, said: —"It has been most gratifying to note that only a minority of employers appear to be taking the view that they should automatically pass on the whole of the increased cost and that, therefore, there is no need for them to consider the efficient deployment of their labour."—[Official Report,— 25th May 1966; Vol. 729, c. 481.] The Government, when the present Prime Minister was Chancellor of the Exchequer, when introducing selective employment tax, were taking credit for the fact that the tax would reduce jobs and destroy employment and would not be passed on in prices.

It is no wonder that the former Prime Minister, the right hon. Member for Huyton (Sir H. Wilson), when attacking the proposal to have a payroll tax, in 1961 said: … it would have intensified the depression and the growth of unemployment which was already on the way. The idea amazes me."— [Official Report, 18th April 1961; Vol. 638, c. 986.] Yet because the Chancellor has failed to take hold of the size of public spending because of this tax that he is choosing to introduce at this time for no good economic reason save that it might be easier to concealing its true nature from his hon. Friends below the Gangway.

Far from switching resources, as the jargon goes, and giving encouragement to industry, the Chancellor has done exactly the opposite. Confidence in industry, a very tender plant, began to come into some form of life about a fortnight after the so-called agreement at Chequers in the autumn of last year. But within a fortnight the Government had repudiated that. Last month they repeated exactly the same performance. There was a well publicised reconciliation after the NEDC meeting—this was to be "the acid test of the Government's good will", Lord Watkinson said—yet within a fortnight the Government had committed a clear breach of the strategy which had been agreed. Every time the representatives of industry have come within range of this Government, the Government have turned round and given them a good hard kick in the teeth. It is a disgraceful and total failure to understand what the duty of Government should be.

On closer examination of this package we find that it only just deserves the guarded welcome which I gave when it was first announced.

Mr. Frank Allaun (Salford, East)

On a point of order, Mr. Deputy Speaker. Is it not usual in these debates for the opening speaker to take 30 minutes?

Mr. Deputy Speaker (Sir Myer Galpern)

The hon. Gentleman knows full well that there is no time limit upon speeches, even for Back Benchers. How- ever, one would hope on this particular occasion—I am not referring to the Front Bench speaker—that at least Back Benchers would observe a reasonable time limit.

Sir G. Howe

I have given way a great many times, perhaps too many, Mr. Deputy Speaker.

The package, on further examination, hardly rates better than two marks out of 10, because, from their point of view, working people were persuaded to accept the pay deal on terms that the Chancellor has forthwith set out to nullify by taxing pay, destroying jobs and raising prices. Industry was likewise persuaded to accept the industrial strategy on terms that the Chancellor forthwith has again set out to destroy by reducing liquidity and destroying profits.

No wonder that the people of Britain no longer have confidence in the Chancellor of the Exchequer. No wonder that his policy, as he moved from expedient to expedient, totally fails to inspire confidence among the creditors of this country.

By now it is probably impossible for any Chancellor who may be selected from the ranks of this Government to draw together the totally divided warring factions which make up the Labour Party and to produce an economic strategy which makes any kind of sense at all. Certainly this Chancellor has long since demonstrated that he has not got the capacity to do so, and the time has come for him to go.

4.41 p.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

We have just listened to a speech of quite stupefying triviality from the right hon. Member for Surrey, East (Sir G. Howe). It was stupefying except for those many moments when it was being cheap and nasty. It was well suited to the motion which the Opposition have nut down which seems to be more concerned with an aspect of incomes policy than with the measures which I announced the other day.

I shall deal with the speech and the motion later, but I suspect that the House is mainly concerned with the measures which I announced on 22nd July and will want the answer to two questions. First, is the objective at which they aim the necessary objective, and, secondly, are they rightly constructed to achieve that objective?

As I made clear in my statement on 22nd July, now we know that the economy is growing faster than I expected at Budget time, it has become essential to ensure that the public sector borrowing requirement comes down sharply as a share of our gross domestic product. The target which I have set, in the light of the prospects as I now see them, is that it should fall by a third in the year from April 1977 compared with the current financial year. In money terms this would mean a PSBR of about £9 billion. If we take as a measure of our fiscal deficit the general Government financial deficit, which is directly comparable with the measure used by most other countries, then we should be cutting the share which it takes of our GDP by a half. These reductions are in line with those planned by our major competitors like the United States and Germany.

The mixture we have chosen, of reductions in public expenditure amounting to just over £1 billion and an addition of two percentage points to the employers' national insurance contributions amounting to about £900 million in the next financial year, ensures that this will be achieved in a way causing relatively little damage to output, employment and the price level. By the eud of next year the economy is still likely to have grown faster and unemployment to be lower than we expected at Budget time last April. Moreover the measures will not begin to affect employment until the middle of 1977, when the peak of unemployment will be far behind us.

It had become necessary to aim at this adjustment in our earlier plans as we warned it might in the Counter-Inflation White Paper two months ago, in order to avoid excessive strain on our productive capacity and to ensure that financial constraints on manufacturing industry do not stop our recovery in its tracks.

With great respect, I do not need lectures from the Front Bench opposite on this matter. It is above all the practical example of fiscal and monetary profligacy which they set when they were last in power which is the conclusive argument for what I have done now. If I may quote Mr. Freeman, of the OECD Economic Department on the BBC the other day: Britain now has the best opportunity since the Second World War to achieve … export-led growth … The important thing this time is to ensure that public and private consumption don't get out of hand. This is what happened in 1972 and 1973 and this limited the scope for investment and exports This time round exports are leading the recovery and we hope that investment will soon start to pick up. Those were his words, not mine.

The truth is that the policies of the Opposition, when they had the power to practise what they preach, led to such overheating in industry that production seized up completely in 1973, the balance of payments deficit was rising at a terrifying rate when they left power, and the country was moving into the hyperinflation which the present Government have now brought under control.

Mr. Peter Hordern (Horsham and Crawley)

The right hon. Gentleman will appreciate that his analysis of the monetary position is extremely important and will be widely read. Has he recognised that the general Government deficit to which he refers is about half the size of the public sector borrowing requirement, as my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said, but he is comparing next year's Government deficit with the current year's deficit of the leading countries, and the present general Government deficit is twice that of the United States and of Western Germany and is 50 per cent. higher than that of France? Further, as for expansion of the money supply, is not the right hon. Gentleman aware that the expansion of M1 far exceeds the rate of increase in M1 during the last Conservative Administration's period of office?

Mr. Healey

The hon. Gentleman is wrong on all points. I advise him to read the article in the latest Economic Survey, which shows that in this year the general Government financial deficit in Western Germany is quite substantially higher as a percentage of GDP than in Britain and the United States deficit is only just a little lower, although, I concede, that of France is substantially lower. But the point is that Germany and the United States, which have deficits comparable with ours, are planning cuts in the deficit between this year and next year of roughly the same size as we are now planning. The hon. Gentleman must know that to be true.

I believe, Sir Myer, that the measures which I announced on 22nd July—

Mr. Deputy Speaker

Order. One or two hon. Members have been addressing me by name. My wife is in the Gallery, and I do not wish her to know that I am here. Perhaps right hon. and hon. Members will address me as Mr. Deputy Speaker.

Mr. Healey

We all note your wise and prudent words, Mr. Deputy Speaker.

Mrs. Barbara Castle (Blackburn)

Before my right hon. Friend leaves his present analysis, will he answer one question? He referred earlier to unemployment. What is his current forecast for the level of unemployment by the end of 1977?

Mr. Healey

I shall deal with unemployment at some length later, if my right hon. Friend will allow me.

I believe that the measures which I announced on 22nd July, added to the measures we had previously taken to limit domestic demand, will enable us to maintain steady and continuous progress towards full employment without refuelling inflation and without producing a balance of payments deficit which would compel us, as so many Governments have found themselves compelled in the past, to slam on the brakes just as recovery is getting under way.

Financing arguments further strengthen the case for reducing our fiscal deficit. At the present time, when the recovery in output is not yet reflected in a fall in unemployment, it makes good economic sense for us, like other countries, to accept an exceptionally high PSBR. We have succeeded in financing it without denying funds to industry and without printing money, because industry has been borrowing little from the banks and people have been saving an exceptionally high proportion of their income.

Now that recovery is under way, there are signs that the savings ratio has begun to fall somewhat and industrial borrowing is picking up. Further evidence of the improving prospects is given in today's Financial Times. The paper's July survey of business opinion shows a balance of companies now expecting to employ more labour in the next 12 months and a marked increase in companies expecting to invest more in plant in the same period. Therefore, we, like others, must bring our PSBR down to a normal level over the next three years. Otherwise, we shall be unable to finance it without either raising interest rates to a level at which industry cannot afford to borrow or printing money, as our predecessors did, with the appalling consequences from which we are only just emerging.

Again, I do not need lectures from the Opposition Front Bench on controlling the money supply. Under their Administration, M3 rose 26 per cent. in 1972 and 28 per cent. in 1973. I have kept its growth to under half those levels. As I told the House in my statement, M3 has been growing at an annual rate of about 10 per cent. so far in this financial year. Over the year as a whole, it should grow about 12 per cent., a level fully consistent with our objectives for reducing inflation, and if inflation and output move as now forecast, I should expect the growth in money supply to be lower next year than this. If I consider that the money supply is growing too fast, I shall take whatever steps are most appropriate to reduce its growth.

Mr. Tapsell

The right hon. Gentleman is comparing the rate of expansion in M1 and M3 in 1972 and 1973 with more recent periods of industrial stagnation. Would it not be fairer to point out the rate at which industrial production was increasing during those two earlier years?

Mr. Healey

In 1973 industrial production did not rise at all. As I have pointed out many times in the House, overheating in the economy due to profligate increases in the money supply and profligate Budgets in 1972 and 1973 produced a total seizure in the economy in 1973. The hon. Gentleman watches these matters carefully. If he looks at the statistics, he will find that that is so.

No one on the Government side can feel happy about the need to make these reductions in public expenditure. We do not regard public expenditure as a crime—I accept the strictures which the right hon. and learned Member for Surrey, East laid on me in this particular regard—but I do not believe that there is any alternative policy which would have made them unnecessary, given the rate of growth of manufacturing output which we must achieve if we are to get unemployment down to 3 per cent. in 1979.

Those who quote economists from the Cambridge Economic Policy Group to justify the introduction of large-scale import controls should recognise that those economists argue for even greater reductions in the fiscal deficit than I do. I gather that the author of the paper to the General Sub-Committee of the Expenditure Committee last week suggested that, cuts in the fiscal deficit should be made in this financial year when unemployment is still rising, and his colleagues in the Cambridge Economic Policy Group in their March report argued that under their policy of protection, fiscal action through increases in taxation or cuts in public expenditure amounting to £3,000 million in all would have been needed in 1977. Indeed, it should be obvious that since demands on domestic output are increased by excluding imports and there are physical limits to the rate at which output can expand, the potential increase in domestic demand could only fuel inflation and divert exports to the home market unless special fiscal measures were taken to offset it. I hope, therefore, that none of my hon. Friends will argue that import controls are a soft option as regards public expenditure and the PSBR.

As it is, since recovery is proceeding somewhat faster than we expected in April, some fiscal action to reduce the deficit next year had become essential on any hypothesis. I believe that the particular mix of reductions in public expenditure and increases in taxation which I have chosen was the least damaging that could be devised if we want to preserve our social and economic priorities.

Too often, when such measures have been necessary in the past, Governments have chosen to make indiscriminate percentage cuts across the board. We have not. We have left completely untouched the main social benefits, such as pensions. We have not cut current expenditure on schools or the sick. We have not cut as much as £1 off the programme for aid to those less fortunate than ourselves in the Third World.

But this does not mean that we have gone back on our commitment to give priority to the needs of manufacturing industry. We have actually increased our provision for industrial training, and my right hon. Friend the Secretary of State for Employment in the next day or two will be announcing a number of further measures to deal with unemployment, especially among young people. Within our industrial programmes as a whole, we are making some reduction in automatic aid to industry in favour of selective aid. I believe that this will be welcomed much more widely than some hon. Members opposite may believe. Indeed, I notice that the Chamber of Commerce and Industry in Leeds, part of which city I have the honour to represent, has argued that there should he no further addition to regional incentives and for a tapering off of the present system. It said: A more selective approach is required", and it pays special tribute to the selective approach under Section 7 of the Industry Act 1972, saying that the Department of Industry has administered its responsibilities in Yorkshire and Humberside extremely well. I agree. I think that the right hon. Member for Sidcup (Mr. Heath) and the whole of the Opposition Front Bench, in so far as its members were in his Government, deserve credit for providing the present Government with the powers for selective intervention in industry, even if the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) does not agree.

Mr. Heffer

My right hon. Friend has quoted with approval the Leeds Chamber of Commerce. Will he note that the construction employers and construction unions have also issued statements to the effect that the cuts will be absolutely devastating for the construction industry and that they will lead to greater unemployment among construction workers? The fact that the cuts will lead to further unemployment in the industry is, in my view, a condemnation of them.

Mr. Healey

I understand very well my hon. Friend's deep concern about the effect of the measures on employment in the construction industry, particularly as he is a member of a trade union in the industry. I shall come later to the point which he has raised. I shall not deny at any point in my speech that all the measures which I have taken will have some painful effects for somebody. All I am seeking to argue is that, given the need to cut the PSBR next year, because output in manufacturing industry is growing so much faster, there was no other mixture of measures which would have done so little damage as the set of measures I have chosen.

When the Public Expenditure White Paper is published, the Government will be showing the increased provision to be made for programmes for selective aid to industry, both through the Department of Industry and through the National Enterprise Board. These increases will be provided either out of the contingency reserve or from offsetting savings in other parts of the industry programme.

In the industrial field, the other main saving is the reduction of £157 million, or under 5 per cent., in the planned capital expenditure of the nationalised industries other than the British National Oil Corporation. The practical consequences of these savings will be less than appears since the electricity boards and the Post Office have been reducing their investment programmes in any case compared with the provision made in the last White Paper because the forecast of demand is now lower.

Mr. Michael Heseltine (Henley)

The right hon. Gentleman has said that he will be giving an indication of the extent to which further resources will be diverted to industry. As it is a very important part of his strategy, and as the Secretary of State for Industry could not help us at Question Time, will the right hon. Gentleman indicate the scale of money to be diverted in this way?

Mr. Healey

I am not sure what the hon. Gentleman is talking about. cannot give an indication now. It will certainly be under £500 million and it will be over £50 million. Perhaps that will help the hon. Gentleman, otherwise he will have to wait for the detailed results for the White Paper in the autumn.

Mr. Heseltine

The White Paper forward figures for the National Enterprise Board show a budget of £250 million a year. Can the right hon. Gentleman indicate the percentage charge which might be implied in that?

Mr. Healey

No, I cannot. [HON. Members: "Why not?"] Because I am not in a position to do so. The hon. Member for Henley (Mr. Heseltine) will have to contain himself. He should count himself lucky that he has information on the broad magnitudes of departmental expenditure next year in the middle of the summer rather than at the end of the year, as is normally the case.

As I was saying, the electricity boards and the Post Office have been reducing their investment programmes in any case, and their main plans and objectives should therefore not be disrupted by the reductions. The British Steel Corporation will still be increasing its total investment both by comparison with the current year and with its original forecast for next year.

I must tell the House that the traditional treatment of the nationalised industries in the public expenditure figures is most misleading. The bare capital expenditure figures, making no distinction between investment financed from the internally generated resources of the industries themselves and that financed by borrowing from the Government and from other sources, give an unbalanced picture of the capital demands made by these industries, and one unrelated to their contribution to the economy. Therefore, as I told the House in my statement, this is a matter which we now have under review with the object of bringing our practice more closely into line with that of other countries, but but we shall, of course, consult the Expenditure Committee before making any general change in presentation.

The financial situation of the-nationalised industries is, of course, very different today from the situation which I inherited when massive Government subsidies were required to finance their operations because the previous Administration refused to allow them to charge a fair price for their products. The House should know that gas, electricity and the Post Office, the three biggest nationalised industries, are reporting profits totalling nearly £200 million this year compared with losses of over £600 million last year. Moreover, the British Steel Corporation—although, like steel companies in many parts of the world, it is likely to show a substantial loss in the last financial year—is now heading towards the break-even point.

This year will show continued strengthening of the financial position of most of the major public enterprises. And many of these have agreed to operate a standstill on their prices until next April.

I have been asked for some examples of our achievements. This is one which the Opposition should welcome more than most, because it was their misdeeds in the last Administration which were responsible for the tangled mess I inherited just over two years ago.

Some commentators have criticised the measures because they do not affect the current expenditure of local authorities. But the standstill in local authority current spending embodied in the last White Paper already imposes a painful adjustment on them. It would not have been right to add to this. In 1973–74 the rate of increase in local authority current spending jumped to between 8 and 9 per cent., involving an excess over the limits laid down by central Government in those years of 3 to 4 per cent. in real terms.

I am not surprised that the right hon. Member for Leeds, North-East (Sir K. Joseph) has chosen this moment to leave. He might have chosen a more suitable time. Ah, here he is. I was referring to the excessive expenditure by local authorities in 1973, the increase in expenditure of between 8 and 9 per cent., and an excess over the central Government limits in those years of 3 to 4 per cent. in real terms. I cannot help recalling the words of the noble Lord, Lord Barber, the other day, that, in the days when the right hon. Member for Leeds, North-East was in a position to do something about his views, he was one of the most extravagant of all the spending Ministers and one of those who fought the cuts most vigorously.

Sir G. Howe

I should like the right hon. Gentleman to answer a question about what took place when he was in a position to do something. Does he recall that the reductions in public expenditure made by Lord Barber in May 1973 and in December 1973, which were opposed by the then Opposition in which he was the spokesman on economic matters, had the intention of reducing the growth in local government spending in 1974–75 to an increase of 2½ per cent. in real terms but that once he arrived at the Treasury and abandoned control there was an increase in 1974–75 of 10 per cent. in real terms?

Mr. Healey

If the right hon. Gentleman wants me to agree that the Government in which he served was a Government of good intentions but appalling performance, I share his views.

There was a similar increase in local authority expenditure in 1974, for which I shared responsibility. I will not deny, as I told the Association of County Councils last week, that some of this growth was the fault of central Government under both parties. Too often, we passed legislation which compelled them to spend money which otherwise they might not have chosen to spend. We are determined to see that this will not happen again, but to adjust rapidly from rates of increase on the scale of recent years to a standstill is difficult and painful. The Government have made clear that for 1977–78, the year with which my measures are concerned, the rate support grant settlement will be made on the basis of expenditure figures in the last White Paper. We shall assume that excess resources received in 1976–77 above those necessary to finance the levels in the last White Paper will be put to balances and be available for rolling forward to finance expenditure in 1977–78. This means that the percentage figure for RSG in 1977–78 must come down. The House will know that despite the difficulties involved, representatives of 100 Labour-controlled councils in England and Wales have, since I announced my measures, accepted the need to halt the growth in council expenditure, and have congratulated the Government on not imposing further cuts in their current expenditure.

Mr. Stan Crowther (Rotherham)

Does my right hon. Friend agree that much of the increased local government expenditure since April 1974 has been due to the incredibly wasteful system imposed on local authorities by the last Conservative Government?

Mr. Healey

I have often referred to that fact in the House. Apart from his general profligacy, the right hon. Member for Leeds, North-East was responsible for the reorganisation of the National Health Service, just as his right hon. Friend the Member for Worcester (Mr. Walker) was responsible for the excesses in local government generally.

I now turn to the tax component of my measures—the addition of two percentage points to the employers' national insurance contribution which has been so fiercely criticised by the right hon. and learned Gentleman, though I should point out to him that it was Mr. Selwyn Lloyd, rather than Lord Kaldor, who, by his action in 1961, suggested that I should adopt this measure. I do not believe that it would have been possible to bridge the remaining gap of about £700 million in the reduction of next year's public sector borrowing requirement by further reductions in public expenditure without putting at risk some of the Government's most important objectives. But as I have made clear on many occasions, to have sought to bridge it by increases in direct or indirect taxation of the conventional type would have undermined the counter-inflation policy on which the success of the Government's economic strategy depends. It would have meant a big reduction in real take-home pay at a time when working people are already pledged to limit pay increases to a level below that expected in any of the countries which compete with us.

No increase in taxation or reduction in expenditure can be painless, but the 2 per cent. addition to the employers' national insurance contribution will be widely spread over the economy and will have a relatively delayed effect on demand for real resources. It will do less damage than other forms of tax increase—not only to living standards and the Government's counter-inflation policy, but to the interests of business itself. Business of course has a very strong interest in the continued success of the counter-inflation policy, and in the reduction of the PSBR if it wishes to prevent interest rates from rising.

I suppose it is natural enough that the CBI should have complained about the 2 per cent. addition, but the CBI has insisted on the need to reduce the public sector deficit next year and to go a great deal further than the stabilisation of public expenditure programmes embodied in the last White Paper. It has asked for further public expenditure cuts. What perhaps the CBI has not fully appreciated is that any further action, whether by tax increases or by other cuts in public expenditure, would necessarily have depressed demand and reduced both the activity and the profitability of industry.

In fact, the 2 per cent. addition to the employers' contribution which I have chosen will have little, if any, more effect on industry's prospects than any other tax option that I might have chosen. The addition to total labour costs will be no more than about 1½ per cent. and the initial effects on industrial costs as a whole will be smaller still. Of the total full year revenue of £1,030 million, about £900 million will be payable by employers in the private sector. Of this, only about £400 million will be payable by manufacturing industry, and this is likely to be less than 1 per cent. of manufacturers' costs. It will, of course, temporarily affect liquidity and profits. But it will take effect at a time when company profits are improving and the domestic economy is more buoyant. Moreover, the financing prospects for manufacturing industry have been vastly improved by the lower taxation resulting from stock relief and the relaxations already announced in the Price Code.

Now that we have increased investment relief to 50 per cent., as against 20 per cent. at present and the 35 per cent. that we proposed in the consultative document last month, and have introduced a depreciation adjustment factor of 1.4, compared with 1.3 in the consultative document, there should be no net effect on industry's ability and willingness to invest. Indeed the changes in the new price code by themselves will more than offset the effect on manufacturing industry's profits of the addition to national insurance contributions. All firms will have had the opportunity to take full advantage of the new code for over eight months before the national insurance contribution increase comes into force.

If a firm's prices are constrained by the Price Code, then it can immediately pass the increased charge through to higher prices. But the effect on prices will build up only gradually—adding about 1 per cent. to the RPI by early 1978—far less than the effect of an increase in VAT with a similar effect on the PSBR in 1977–78.

In fact, I find it most unlikely that industry would have preferred a 4 per cent. increase in the standard rate of VAT, which would have been required to achieve the same effect on the PSBR. Moreover, we could not have announced an increase in VAT now to take effect in April 1977 without disrupting production schedules and encouraging forestalling.

The plain fact is that if the same amount were raised by VAT or income tax, demand for the products of industry would be cut at least to the same extent. To have achieved the same result by further expenditure cuts along the lines of the billion pounds already announced would have had much the same effect on company liquidity and profits in the next financial year as the addition to the national insurance contribution, and possibly a larger effect thereafter.

Mr. Richard Wainwright (Colne Valley)

The right hon. Gentleman has several times given figures of the estimated yield of increases in national insurance contributions. Are these net of the reduction of corporation tax revenue which will result as they will be regarded as expenses?

Mr. Healey

They are net, but the corporation tax effect comes in only a year later.

Mr. Nigel Lawson (Blaby)

Is the right hon. Gentleman trying to tell us that industry is better off with an increase in the payroll tax than with further cuts in public expenditure? If so, why did he not carry out the entire exercise on the payroll tax and not cut public expenditure at all?

Mr. Healey

I am not saying that industry is better off. I said that it is little or no worse off than by further public expenditure cuts along the lines which I announced on 22nd July.

Mr. Brian Sedgemore (Luton, West)

I do not dissent from the suggestion that if one is to do this at all, this is as good a form of tax as any by which to do it, but in view of the difficulties to which my right hon. Friend has just referred, will he comment on what has happened to the patriotism of the CBI and the investment strikers?

Mr. Healey

I must be cautious in my response to my hon. Friend's invitation. I shall be moving to that point in a moment.

Before I do so, however, I must say how surprised I was to see a report carried on the front page of The Times that the Retail Consortium, in making a forecast of increases in food prices by the end of this year, says that the Government's decision to put up employers' national insurance contributions is "a contributing factor". That really is screaming before you are hit, because the increase does not take effect until next April. I understand that the Retail Consortium has got the food price forecast wrong, too. Some mothers do have them!

I believe that once industrialists have a chance to reflect on the points I am making they will realise that it would have been impossible to reduce the public sector deficit by the amount they themselves have called for by means which would have had significantly less effect on company profits. Even if they find it impossible to accept this conclusion I hope, at least, that they will show the same common sense and patriotism as the trade unions. The leaders of the TUC have found the public expenditure cuts quite as unwelcome as the employers find the addition to the national insurance contribution. But they are not allowing their feelings on this issue to affect their support for the counter-inflation policy, or their support for the improvement in industrial relations, which means that we have had fewer strikes in the last year than in any year since 1953. I hope that those on the other side of industry will show similar powers of leadership and similar patriotism. I suspect that they will, and that, despite some of the words spoken recently in haste, we shall find investment rising at an unprecedented rate in the coming year.

Mr. Ron Thomas

Would my right hon. Friend be good enough to explain what he feels the impact of the increased national insurance contributions will be on employment in the public sector?

Mr. Healey

The effect on employment in the public sector will be very small indeed. It does not affect the non-trading public sector and, as I explained a moment ago, £900 million of the £1 billion total of the NIC contribution will be paid by the private sector.

Now let me say a word on the effect of the measures on unemployment, which I know is the main concern both of the TUC and of my hon. Friends. As I said in my statement the week before last, I expect that, as a result of the measures I then announced, the fall in unemployment at the beginning of 1978 might be about 60,000 less than it would otherwise have been, in theory. Very roughly, 50,000 of this 60,000 would be due to the public expenditure measures, and 10,000 to the addition to employers' National Insurance contributions.

I said that in theory unemployment might have been 60,000 lower at the beginning of 1978 without these measures. But in practice, if these measures had not been adopted, then over-heating of the economy, or a balance of payments deficit which we were unable to finance, or the pre-emption by the Government of money industry needs to finance its activities, or all three of these consequences would have brought our growth to a halt as they did in 1973 and caused a far greater increase in unemployment than is likely to follow from these measures.

There have been suggestions that the figure of 60,000 grossly underestimates the effect on unemployment. I do not believe this is the case.

First of all, the increase in national insurance contributions will affect unemployment with a considerable delay. I have therefore agreed that by, say, early 1979—that is nearly three years from now —the effect could be bigger. But by that time I would expect the period of high unemployment to be behind us anyway. That is certainly the objective of our policies.

Secondly, the unemployment effects are estimated on the assumption that the reduction in demand from the public sector and consumers is reflected in lower output. However, to the extent that investment and exports increase in response to the fall in public sector and consumer demand—after all, this is the whole purpose of the exercise—the effect on unemployment will be less than I stated on 22nd July.

Thirdly, I do not deny—this point was raised by one of my hon. Friends—that employment in the construction industry will be hit. But the measures as a whole create the best opportunity of replacing construction work in the public sector with construction work on the new factories which will be built as industrial investment gets under way, and that is worth more to the economy as a whole.

Mr. John Mendelson (Penistone)

My right hon. Friend knows that for a good many of his own supporters this is the crux of the whole problem. As he has indicated, he hopes that some of the fears felt by many hon. Members will be outweighed by a general recovery before the three years are up. However, if his optimism is misplaced and the more pessimistic predictions, for instance, on the OECD level prove to be true, will he revise his policies so that a higher level of unemployment in the construction and other industries will not take place?

Mr. Healey

In answer to that pertinent question, of course if the rate of growth proves to be much lower than I am aiming at, I shall have to revise my policies. But I do not want anybody to be under the illusion that it will make it possible for us to have a higher level of public expenditure. Indeed, the reverse might be the case. I think the problem is that to achieve a level of full employment at which we are aiming for 1979 means an exceptionally high rate of growth in GDP in the next three years, particularly in manufacturing output. If we fall short of that, we shall face a whole range of very worrying problems in many fields. I do not deny that that is the case. But I cannot say that the answer to the problem which we would then face would be increases in public sector employment which were not financed by increases in taxation. The fact is that we would all face a very substantial lowering in our living standards is an inevitable consequence.

Mr. Ridley

rose—

Mr. Healey

With respect, I have already given way a good deal. The hon. Member has not been here throughout the whole of my speech. He has only just returned to the Chamber.

Mrs. Castle

rose—

Mr. Healey

I must get on. I have already given way to my right hon. Friend, and other hon. Members have intervened.

Mrs. Castle

rose—

Mr. Deputy Speaker

Order. If the Chancellor does not give way, he must obviously be allowed to continue speaking.

Mr. Healey

The fact is that without these measures the chances of a steady return to full employment would have been far smaller. With them we have the best chance since the war of basing full employment on sustained growth led by exports and investment.

Of course, the recent measures are unwelcome to all whom they directly affect. They are unwelcome to the Government themselves. But they are a necessity, however painful, if we want to permit a steady return to high employment without inflation and without unacceptable damage to our balance of payments. The measures in themselves—I return to the point raised by my hon. Friend the Member for Penistone (Mr. Mendelson) can only make it possible for Britain to reverse her post-war economic decline. They do not make it inevitable that she will do so. That depends, above all, on achieving the improvement in the performance of our manufacturing industry which it is the purpose of the industrial policy to carry out an industrial policy to which employers and unions alike have pledged themselves. I was glad to see that Lord Watkinson made this point the other day. The Government have expressed their commitment to a vigorous and profitable private sector and have pledged themselves, with the TUC and the CBI, to work towards the objective we all want—a high wage, high profit economy based on high output, and full employment. We shall be addressing ourselves collectively to the next stage of our strategy for achieving this when we meet the NEDC on Wednesday.

The response to our measures from our friends abroad has already been encouraging. I have quoted the views of OECD economists. The House will have seen that a leading official of the American Government has described our strategy as one with which we can win. I think that the average man and woman in Britain recognises the measures to be necessary and will agree with the views expressed in the Daily Mail—namely, that the Government deserve on this issue, which is central to Britain's economic revival, the uncarping support of the Tory Opposition in Parliament. If so, I fear that they have been disappointed.

I have said before in the House that the Opposition have lost their power to surprise. However, I expect that some of their supporters must have felt a little disappointed when they read the terms of the motion tabled by the Opposition for this debate. It is a final demonstration of their political bankruptcy. They have been afraid to commit themselves to any policy or to say what they would do in my position. Instead, they have taken refuge in a motion to cut my salary, although they are asking for me to resign. At least that is a little better than last week's attempt to prove their virility by refusing pairs to men who were seriously ill, thereby forcing them to risk their lives to do their duty to Parliament.

I am not in the least surprised that the Opposition Front Bench declines to say what it thinks we should do. We have had the usual crocodile tears about unemployment from the right hon. and learned Member for Surrey, East, and the Centre for Policy Studies of the right hon. Member for Leeds, North-East has just published its latest fantasy claiming that unemployment is really only 816,000, or 3.1 per cent. of the working population. I wonder whether he has reconciled his figures with those of his right hon. and learned Friend. Perhaps they can have a word about it behind the Chair. The right hon. Gentleman can tell us what conclusions they reach when he replies. The fact is that all the policies that the Opposition have been urging on us are calculated deliberately to increase unemployment on a far larger scale than anything that the Government are doing.

Sir Keith Joseph (Leeds, North-East)

The Chancellor of the Exchequer has today spelled out to the House precisely the argument about which we have been warning him, his colleagues and the country for two years—namely, that rising public spending strangles the private sector and does not reduce but increases unemployment. Public spending under this Chancellor has nearly doubled, and so has unemployment. It is the private sector to which the Chancellor is now beginning, falteringly, to give some scope for expansion. That alone provides hope for this country and for full employment.

Mr. Healey

The right hon. Gentleman—

Several Hon. Members

rose—

Mr. Deputy Speaker

Order. Opposition Members complained about some interruptions from the Government Benches during the speech of the right hon. and learned Member for Surrey, East (Sir G. Howe). I hope that Opposition Members will not interrupt the Chancellor. Mr. Healey.

Mr. Healey

I was going to say that the right hon. Gentleman makes a far better fist of representing the real views of the Opposition than does his right hon. and learned Friend. I think that we are all perplexed that the Leader of the Opposition keeps the right hon. Gentleman immured in a think tank, the Centre for Policy Studies, instead of allowing him to preach the pure gospel in which he truly believes. I am sure that if we had the right hon. Gentleman representing the Opposition in these debates he would not hesitate to say that he wants to cut public expenditure by £3 billion. He would tell us, but at the moment we are not allowed to know the Opposition's real views.

I read in The Times recently that the Conservative Shadow Ministers were meeting for detailed discussions on the midterm policy programme. Documents had been prepared, which it is understood put forward proposals for public expenditure cuts of £2,000 million and £3,000 million. But we understand that no precise figure is likely to appear in the document to be presented before conference this autumn. I wonder why.

I noticed that when the right hon. Member for Leeds, North-East, the pale shadow of the read Shadow Chancellor of the Exchequer, was interviewed by—[HON. MEMBERS: "Trivia."] I agree that the antics of the Opposition Front Bench can rightly be regarded as trivia, but so long as they persist in asking the country to treat them as a potential Government, we have the right to have some precision from them as to the nature of their poli- cies. We do not know by how much they want to cut public spending. All they say is that what we have proposed is inadequate. We do not know where they would make cuts. Certainly they would not cut defence spending. The Leader of the Opposition, for the second time, has declared war unilaterally on the Soviet Union.

When the right hon. and learned Member for Surrey, East was asked by Mr. Robin Day whether he would cut mainstream social benefits—he was asked these questions on television on the night of the cuts—he said "No". Then he said "Or at least not significantly." He was then asked question after question. For instance, he was asked whether he would cut overseas aid and he said that he would look at it. He was asked whether he would cut nationalised industries. He replied that he would look at it. He was asked whether he would cut the housing budget. He said that that was another area that they would look at. He was asked whether he would cut the housing grammes and he said "Well, we shall have to look at all the programmes." The right hon. and learned Gentleman is a political voyeur. He just looks at it and never does anything.

The right hon. and learned Gentleman has elevated impotency into something more than an economic or political principle. It has become a way of life for him. On those grounds we should reject the Opposition's trivial and irresponsible motion with the contempt that the right hon. and learned Gentleman and it deserve.

5.28 p.m.

Mr. Edward du Cann (Taunton)

I shall not follow the Chancellor in the knockabout farce that he has introduced us to. Surely the House of Commons is dealing with the most important subject that it can possibly discuss at this time. The subject is to be treated vastly more seriously than it is treated by the right hon. Gentleman.

There is much in the package of measures announced 10 days ago to criticise and to question, as did my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) with commendable effect. However, Mr. Speaker has asked that we should all be brief. I am only sorry that the Chancellor did not see fit to follow that advice.

One particular question arises from his speech on which I hope the Chief Secretary will be good enough to comment when he replies. When my hon. Friend the Member for Henley (Mr. Heseltine) interrupted the Chancellor with a question about the expenditure or, as some might say, the extravagance of the National Enterprise Board, the Chancellor seemed very uncertain. But leaving that for the moment, perhaps the Chief Secretary will be good enough clearly to describe to the House what he sees as being the arrangements for proper parliamentary scrutiny of the work of the NEB in future. That is a matter that concerns us all greatly, and one about which I believe the House should be more concerned as time goes on.

I come to the single point that I shall make in this debate, and I shall put it in this way: when I was first elected to the House of Commons in February 1956, to within one minute of my taking the Oath and shaking hands with Mr. Speaker I took my place in the Chamber to listen to the Chancellor of the Exchequer of the day announcing a programme of cuts in public expenditure. Over the years, it has become a tediously repetitious process. Perhaps a dozen times—I have not counted: it may be 20 or more—in 20 years, one has had to listen to such a list.

All these lists have been irrational. All, like the list that we are debating today, have consisted largely of trivia. As my right hon. and learned Friend said, they are matters which have been hastily cobbled together. Each list has been more unconvincing than the last, and this list is the most unconvincing of all.

Each in its way has been a token of failure—failure of the Chancellor of the day to control Government and local authority expenditure and, in consequence, our national economic failure.

How over these years public expenditure has grown! Early in this century, combined central and local government expenditure was the equivalent of between 10 and 15 per cent. of the gross national product at factor cost. By 1964, it was 41 per cent. Now, as right hon. and hon. Members opposite are only too painfully aware, it is over 60 per cent. And it has all, let us note, been unplanned.

The economy now contains a built-in bias in favour of the public sector. Increasingly, as my right hon. and learned Friend so rightly said, it becomes urgent if the economy is to re-establish its dynamic potential that Parliament should seek once and for all to decide what should be the proper relationship between the supply of privately-produced goods and services and those of the State. If confidence is to be restored at home and abroad, that must be attempted or done. We cannot shirk answering that question much longer. I thought that the right hon. Member for Huyton (Sir H. Wilson) was entirely right to say at Chequers a year ago: Confidence demands that a clear frontier be defined between what is public and what is private? As I go about the country, it seems to me that the disunity of the main political parties in this House at what we all know so well is a critical time in our nation's economic fortunes is a source of growing cynicism among the electorate. They say—I agree with them—that instead of divisive arguments over whether there should be cuts in expenditure, this House would be a more admired place if Members of it united to enforce an effective control. That is precisely what we do not have at this time.

The first argument should be about how to control expenditure, which methods would be the most effective and the like. Arguments about priorities in expenditure, of which this House is so fond—the Labour Party in particular—can and should very much come second.

Listening to the arguments across the Dispatch Boxes today, I am less concerned with arguing which is blacker, the Conservative pot or the Labour kettle, than with pointing out that it is high time for a general spring clean. The Chancellor would be much more effective if, instead of pouring continual scorn on private enterprise, he did something to understand the point of view of those who have the responsibility of management in industry and whose job he seems almost deliberately to make more difficult.

What should be the criteria for judging the acceptable size of the public sector? Certainly any judgment must be arbitrary, and, I acknowledge, politically controversial. But if a control system is to be established, Parliament in the end will need to prescribe the parameters. We must debate and decide what level of borrowing requirement is acceptable in any year—at the moment, we are obliged to accept what the Chancellor ordains—and Parliament must estimate the likely growth in total resources and the proportion to be allocated to the public sector. That, surely, is a more logical method of proceeding than allowing the public sector first call on resources, quite irrespective of their size.

It is to these practical questions that we should address ourselves instead of the sterile political feuding in which we mostly engage and of which the Chancellor is such a miserably undignified proponent. I make the point again—as Plowden once suggested, public expenditure should be surveyed in the light of available resources. That recommendation, alas, has been quite forgotten. My reason for wishing to restate and re-emphasise it is simply that too large a public sector will in the end destroy the economy which is supposed to support it.

I am therefore impatient of these cuts. Indeed, more: I am contemptuous of them. All the same, I argue' that public expenditure should take a smaller proportion of GNP. It is now the greatest inflationary force in our economy. Additionally, it is a huge discouragement to personal and corporate endeavour. It is out of hand and has been out of hand for a long time.

The way to reduce the figure is not by hastily-arranged cuts such as these but, first, by definitions of the sort that I have described, supported by the establishment of a proper machinery of control by this House—or, if Ministers will argue that it already exists, then by enhancing it. Perhaps I can make some suggestions.

First, let us agree that the annual forecasts of expenditure henceforward be sacrosanct. Let us agree that the PESC commitment be specific, not a mere academic discussion of what has taken place or what might.

Second, let us lay down that spending Departments may no longer adjust their budgets for price increases. I regard the proposals for cash limits as being a most exciting experiment. The House will do well to insist upon their maintenance and few exceptions to them. In particular, they should apply to local authorities also.

Third, let us instruct Ministers that no new policy commitments involving expenditure may be undertaken by them without prior authorisation by Parliament or compensatory savings elsewhere.

Fourth, let us ensure that henceforward all open-ended commitments must fit the forecasts on which they are based.

Fifth, let us recast the British budgetary system to provide that decisions affecting taxation and expenditure are considered together. Costs and benefits surely are or should be indivisible and if Parliament has a duty it is to emphasise to the electorate their interdependence. We fail people rather than serve them if we pretend that there is a bottomless pit from which all welfare can automatically be paid.

We all know that we cannot go on any longer as we are. In my time in this House, I have watched the standard of living of the British people continuously decline in relative terms. There is not one of us who does not know examples in his constituency of people at the bottom end of the scale who are not receiving welfare fully adequate to their needs. I dare say that each of us has, in his constituency a long waiting list for non-emergency operations in inadequate hospitals. These failings—one could lengthen the catalogue, but every hon. Member knows them—are the measure of continuous failure by Governments. We need a new emphasis on value for money.

People outside the House laugh openly at the list of cuts that the Chancellor introduced 10 days ago. There is not a citizen who cannot provide, for the interest and information of us all, his own examples of profligacy in public expenditure—and if he cannot, the Public Accounts Committee and the Expenditure Committee can. Since the Chancellor mentioned the Daily Mail I shall also. Andrew Alexander was at his best in that newspaper this morning in putting forward examples of his own.

The individual Member of Parliament is no longer an effective guardian of the public purse. He is no longer the effective guardian that the public trusts him to be. As a House of Commons we are no longer playing effectively our traditional democratic rôle as controller of the Executive through control of the public purse.

By what machinery should that be done? Views might vary and hon. Members may have their own solutions. I put forward my own, for example, in an article in The Parliamentarian and I shall put them further to the new Select Committee on Procedure.

Machinery is one thing. There is a second condition and that is simply stated. It is just the question—so easy to put. and not so easy to answer—whether Parliament has the will to do what in its heart of hearts it knows has to be done in the interests of all. For, make no mistake, the restoration of full parliamentary control—that is to say the control of Back Benchers, the peoples representatives, over Ministers—in these days of strong party disciplines, will not be a universally popular proposal. It is unlikely to recommend itself to Ministers or to their party apparatchiks either—for is it likely that they will approve in any way a situation where the (-Ole of the individual hon. Member is enhanced? That seems to me the best of all possible reasons why it should be done, or at least attempted.

5.42 p.m.

Mr. Douglas Jay (Battersea, North)

The right hon. Member for Taunton (Mr. du Cann) attempted to make a serious speech about public expenditure. But I found the speech by the right hon. and learned Member for Surrey, East (Sir G. Howe) singularly mischievous and irresponsible. It was calculated to do harm to sterling and to the national economy generally. I also found unconvincing the sweeping demands for economies in public expenditure and for better parliamentary control, because we know that the Conservatives want to spend more on defence and every week at Question Time they demand further increases in expenditure. Some of us also remember that it was the previous Conservative Government who decided to spend £800 million on Maplin, £800 million on the Channel Tunnel and between £1,000 million and £2.000 million on inner London motorways. All those wildly extravagant projects would be swallowing up money and resources now if the Conservatives had remained in power. They were all cancelled by the present Government, and I support those cancellations.

I also support the present Chancellor's decision to reduce public sector borrowing from £10½ billion to £9 billion—not a very dramatic change in the present situation. I have two reasons for supporting my right hon. Friend the Chancellor. First, I do not believe that it can be right to go on borrowing £10 billion a year at 13 per cent. or 14 per cent. interest year after year and mortgaging both our future Budget and balance of payments thereby limiting our opportunity to spend on other objectives.

Secondly, many people seem to forget that the more the Government borrow, the higher interest rates will be; and that the higher interest rates are, the less industrial investment and the less employment there will be. We cannot expect private firms to borrow at a rate of 14 per cent. or 15 per cent. to invest when they get a return of only 5 per cent. or 6 per cent. That clearly will not happen. Therefore, there is a gain in employment here from less borrowing to set against any loss of employment from less spending.

I also support the decision not to make a sweeping percentage cut across all programmes which I have always thought to be a most irrational method. But I cannot altogether agree with the Chancellor's individual priorities.

He should, I believe, have made a major cut in the excessive tax relief on mortgage interest payments and thereby could have halved the increase in employer's insurance contributions. Mortgage relief is now running at £1,020 million a year and it goes mainly to people who are moderately well off. That relief is also one main cause of the decline in the number of privately rented houses and is therefore bad housing policy. The Chancellor could have found £450 million from this and the other £450 million, no doubt, from insurance contributions, which industry could more easily bear.

Next, I would have left new house-building alone and made a larger economy in new road building. Does the House realise that we are now spending £1,200 million a year on roads and that £725 million of that is spent on new road construction over and above maintenance? Much of the road building, although no doubt desirable, has a low priority, and in some cases it is strongly opposed by considerable sections of public opinion. The Chancellor could have saved £350 million by economy there. Has he incidentally noticed that the Department of Environment has largely destroyed the case for motorway building based on industrial and export grounds with one candid and truthful sentence in its own transport policy document? That reads: Lorries are and will remain a relatively small percentage of the total traffic, and their contribution to the case for justifying new roads is correspondingly modest. That is a most remarkable admission from the Department.

At the same time, those who claim that there is some painless alternative way out of our present difficulties fail in my view to understand how we got into them. There are two basic reasons for our present balance of payments and Budget difficulties. The first and most fundamental is that if pay rates right up the scale rise much faster than output—as they did here and in most industrial countries in 1974 and 1975—prices must rise; and if the Government then expand demand to employ everyone at the higher rates, the economy will lurch towards faster and faster inflation.

If the Government do not do that, if they refrain from increasing demand and the money supply, we are then bound to bear some temporary unemployment until productivity and the upswing of the trade cycle in the outside world have caught up with the excessive pay rates prevailing. That is to put it rather summarily, but I believe that it is the root of the matter. Just because this process of getting back into balance is so painful, the real moral of the story is—do not let it happen again.

Unless one is brave enough—and I do not think that many people here are—to advocate risking South American inflation, one must be honest enough to admit that the real cause of present unemployment was the unprecedented pay increases in 1974 and 1975. I believe that to be the basic truth. [Hon. Members: "Hear, hear".]

But there is a second cause of our present economic difficulties which Conservative Members may not be quite so glad to admit. This is more gratuitous and more peculiar to Britain—the huge burden on our balance of payments already inflicted on us by our membership of the EEC. It is remarkable that those who urged us to join the EEC on economic grounds now never mention the EEC in an economic debate. We do not now hear much in Tory speeches about the great home market which would save us.

Therefore, let us look briefly at some of the hard figures, first for food and secondly for non-food trades. The prices of virtually all the main foodstuffs imported by this country are now higher in the EEC than in world markets. Figures were given by the EEC Commission in its agricultural report for 1975 showing that on average grains were 10 per cent. dearer in the EEC, meat products 60 per cent. or 100 per cent. dearer, and dairy products about 200 per cent. dearer.

It is a simple calculation to show, from the actual volume of United Kingdom food imports in 1975, and the Commission's own price statistics, that it would have cost the United Kingdom in that year about £800 million extra on the balence of payments to import food at EEC rather than world prices. We are not yet bearing that full burden, because of temporary devices such as the green pound and the transitional period. But we shall soon have to do so, and the figures suggest that the burden on the balance of payments on account of food alone must have been about £500 million in 1975.

On non-food trade, the figures are even more remarkable. When one points out our enormous visible trade deficit with the old EEC Six countries, which is so contrary to what was predicted, one is told by the propagandists that we have also got into deficit with the rest of the world, and that it is nothing to do with the EEC. The truth is very different. Let us omit food, the figures for which I have already given, and oil, which would distort the picture. Let us then see how our trade balance in other goods, mainly manufactures, has moved since we joined the EEC. [Interruption.] I am sure hon. Members can see that if we include food the picture is unfair to the EEC, and if we include oil it is unfair to our trade with the rest of the world, because of the exceptional price increase.

With the non-EEC world, the United Kingdom had a visible trade surplus in 1970 of £1,186 million and in 1975 of £3,220 million, an improvement of about £2,000 million. But with the old EEC Six we had a small surplus of £195 million in 1970 and a deficit of £990 million in 1975, a deterioration of nearly £1,200 million over the same period. Those figures show that, apart from oil, the worsening of our visible trade is almost entirely with the old EEC Six, the great home market which we were all told would save us.

Therefore, if we take into account both food and non-food trade, there is no doubt from the figures that EEC membership is already costing us between £1,000 million and £2,000 million a year on our balance of payments. To ignore this or to conceal it is to deceive the public about what is happening and about the causes of our economic difficulties.

My practical conclusion is as follows: I agree with my right hon. Friend the Chancellor of the Exchequer that export-led recovery is within our grasp. But to realise its full possibilities we must still do two things. First, we must maintain next year and thereafter a clear and agreed but more flexible long-term restraint on money incomes. Secondly, we must extricate ourselves from the monstrous follies of what my right hon. Friend the Prime Minister himself rightly called last week the "just plain daft" working of the common agricultural policy of the EEC.

5.57 p.m.

Mr. Peter Emery (Honiton)

I have seldom heard from a Chancellor of the Exchequer a speech with so much spleen and spite as that of the Chancellor today. At the slightest sign of criticism he showed a refusal to believe that any point could be made by the critic, to the extent that he even refused to give way to his right hon. Friend the Member for Blackburn (Mrs. Castle), when he had palpably refused to answer her question and had postponed dealing with it until later in his speech. That was an illustration of how the right hon. Gentleman believes that no criticism is to be made of him.

Of the Chancellor's measures to improve the economy, I would say only that it is better that they have been done than that they should not have been done. When one has said that, one has said everything favourable that can be said about the cuts. The right hon. Member for Battersea, North (Mr. Jay) said with great courage that the basic truth was that a major reason for unemployment was the size of pay awards in 1974 and 1975.

I should like to follow the example given by my right hon. Friend the Member for Taunton (Mr. du Cann) by trying to make concrete suggestions about ways in which we can benefit the nation as a whole, rather than take part in a party charade across the Floor of the House. Most economists, business men and even politicians have known for months—many have known for a year or so—that profligacy in public expenditure had to be brought under control. The tragedy of the Government's refusal to act, their postponement of a reduction in public expenditure, is that for each month that passed without action the greater became the need, and the bigger had to be the cuts that we are now suffering.

In an analysis three things clearly emerge. Were the cuts early enough? My answer is an emphatic "No". Are the cuts adequate? Again the answer is in the negative. Certainly some public expenditure should be pruned from the financial expenditure this year. International reaction to the Chancellor's statement is absolute and continued proof of that fact. The pressure on the pound continues, and it would not do so if the levels of cuts were sufficient. Thirdly, are the overall effects of the package pointed in the right direction? Again, I believe that the answer is in the negative.

What worries me is that in face of a golden opportunity to put the country economically in the right direction, the members of the Treasury Bench are so obviously turning their backs on the real problem. It is to that aspect of the matter that I wish to draw attention in my brief remarks.

Treasury officials have produced the right analysis of the problem. They believe that it is only by productive industry that we shall get our nation out of its downward inflationary spiral, and Ministers have accepted that. The Treasury believes that it is only by productive industry and the efficiency of the wealth-creating industries—nearly all of them within the private sector—that a cure can be found to our problems. Therefore, when the Prime Minister and the Chancellor of the Exchequer appear to propound this policy themselves, why is the overall effect of this package another massive attack on the profitability of the private sector? That is the very area from which the Chancellor is begging for greater and greater investment.

I wish to discuss two aspects of the package—first, the madness of the Left wing—perhaps it is not madness but cunning—and, secondly, alternative steps that could be taken. The Tribune Group and the 70 hon. Members whose names appear on the Order Paper advocate no reduction in Government spending, unless by way of defence cuts. Some Labour Members have even gone into print advocating increases in public commitments. Their argument is that the level of unemployment is so high that nothing must be done to decrease public expenditure which, in true Keynesian fashion, creates jobs. Theoretically that is correct as far as it goes, but the greatest creater of unemployment is inflation itself. As money values fall so does the job level that public expenditure can maintain.

Let me cite as an example the subject of education. The average amount of money spent on education has increased by £84 million on 1970 survey prices, but this year the number of teachers who can be employed by education authorities for each 20 pupils is likely to fall by as much as 1 per cent.—not because the education authorities do not want to employ teachers, but because inflation has ensured that there will be fewer jobs in the vital task of education. Fewer jobs and a worsening of public services is the inevitable outcome of galloping inflation. Unless inflation is brought under control, the situation is bound to get worse. Unemployment figures will rise and industry will not be able to proceed fast enough, and we shall find our industrial markets at home being squeezed, inevitably leading to fewer jobs for Britain's workers.

Is that a situation that some hon. Members would like to see—namely, an ever weaker private sector, with industry having to call for more and more Government aid and support? Do they envisage larger sections of private industry falling into the net of public ownership? That is the dream of the Marxist Socialist. He envisages more and more turning to the State economy rather than the mixed economy. The nation needs to wake up to the truth.

I wish to try to expose the facts which I believe have for too long been thrust aside or conveniently forgotten because they are thought by politicians to be unpopular, to lose votes and to run contrary to the way the electorate thinks.

However, at this time of financial crisis, I believe that ordinary people will not give a "Thank you" to any of us for being misled. What the average elector wants is the truth, with all its unpleasant realism—and he wants to be told with absolute clarity so that he can understand the real situation, even though it hurts. The more I move round the country the more I find that the average person does not understand what the Labour Government are doing.

The people are constantly told that we are living beyond our means. I believe that fact is understood by most workers wherever one may go in industry, and indeed that situation is understood by the people. Everybody says that we must do something about the situation, but it always appears that in most instances it is the other chap who is tightening his belt. Likewise, I believe that politicians, because it does not win popularity contests, do not like telling the nation what it does not want to hear.

It seems to me that the facts speak for themselves. Only through the efforts of private industry are we likely to reduce inflation to a realistic level. Only by the profits of private industry shall we achieve real investment to embrace the new growth that will lead to more jobs, which in turn will reduce the ghastly level of unemployment that is so wasteful and so soul destroying.

Mr. Martin Flannery (Sheffield, Hillsborough)

The hon. Gentleman is leaving one vital factor out of his remarks—namely, the lack of investment on the part of the supporters of many Conservaive Members who should be investing in industry to bring about the much-vaunted recovery about which the hon. Gentleman spoke. Will he tell the House how he believes the CBI should act to persuade industry to invest more? I am talking about the concept of patriotism at a time when a policy involving lack of investment seems to be the aim of the Conservative Party.

Mr. Emery

I did not get on to the aspect of patriotism. My point is that industry will invest only if it can sell the goods it manufactures. If it cannot sell those goods, it is no use manufacturing them. Industry wants to make profits. It wants a business climate in which it can operate successfully, but that climate is being destroyed by the Labour Party.

Mr. David Price (Eastleigh)

Does my hon. Friend agree that if industry has a likely return on its investment of 12 per cent. and then has to borrow at 15 per cent., as the right hon. Member for Battersea, North (Mr. Jay) pointed out, there is no deal—and sweetly-worded letters from the CBI do not change the situation?

Mr. Emery

I agree entirely with my hon. Friend. Indeed, the next sentence in my speech is most relevant on that point. I was about to say that an economic package that looks like reducing industrial profits by over £1,170 million must be madness—and that will be the result of the Labour Government's policy. We must think that the Chancellor has lost his cool. How can he begin appealing to industry to invest and to carry forward with the job creation programme which Labour Members want while at the same time taking drastic swipes at the profitability of companies in the private sector?

What do I believe must be done? How would I structure the reduction in Government expenditure so that it helps industry, relieves unemployment and assists the stability of sterling which today is grossly undervalued because of the financial and fiscal policies of the Government? In terms of the dollar, sterling is worth much more than the international money markets seem to believe. How can we help? We can assist only by a drastic change of policy. We can change things only by realising that no nation can for ever finance a higher standard of living and a higher level of social security on borrowed money. We must restore Government expenditure in the areas of industry which will produce industrial expansion and assist in creating profits, thus ensuring that the wealth- creating aspects of the nation are unhampered and encouraged. This is not Marxism, nor is it the policy of the Tribunites, the Manifesto Group or the Government. Nor, I am afraid to say, do we Conservatives spell out clearly enough how this can be achieved, even though we may strongly advocate the end result.

There must be a major change in policy, a change not advocated at the moment by either Front Bench. If we are not to cut Government expenditure which helps wealth creation—and in the nationalised industries this means that there must be no cuts in investment in steel, certain transport facilities, research, certain areas of education, all of which are investments for the future—we have to cut the non-productive elements of Government expenditure. This means a major re-think of expenditure on our social services. It means a cut in some areas, a reduction in capital expenditure in others, and a major cut in aid to overseas nations. If we do not make a positive step in these directions, events and inflation will do the same thing for us. They will cut the purchasing power of these facilities and we shall be worse off than if positive steps had been taken.

We can pay the levels of social benefits and pensions that we would like to pay, we can give the aid to all and sundry which we would like to give, only when the nation is not borrowing abroad to make such payments but is producing the wealth that can be taxed to make such payments possible.

What are the cuts that I would advocate? In social security, there should be a 5 per cent. cut across the board. Expenditure, calculated at 1975 survey prices, is £10 billion and my proposed figure would mean a reduction of £500 million. There should be a cut of 15 per cent. in unemployment benefit. All too frequently today many people are quite happy to stay on unemployment benefit rather than take up jobs which are open to them. I had an illustration of this. I had been attempting to have certain jobs done in London and had make approaches to the Employment Exchange, asking for people interested in building and decorating. I had suggested the rates which the building industry recommends and yet I could not get people to do the work.

I believe that there should be a 10 per cent. cut in overseas aid which would amount to £44 million. The school meals service should be financed entirely by the parents' contributions. That would produce a saving of £301 million. Office and Government services amount to £243 million at the moment. There should be a 10 per cent. cut giving a £24 million saving. According to the Government's Blue Paper the Civil Service is costing £182 million. A 10 per cent. cut would save £18 million. A 25 per cent. cut on housing subsidies, currently standing at £1,323 million would bring in a saving of £331 million. Environmental services should be cut from £2,062 million to about £65 million. This, with Supply expenditure, would produce about £1,297 million.

Turning to the capital side, in electricity I would order a cut in capital expenditure of 10 per cent.—greater than that which the Chancellor is advocating—which would produce a total saving of £88 million. In the health services, a cut of 10 per cent. would produce a saving of £38 million while in the road programme, currently running at £378 million, a 10 per cent. cut would produce about £38 million. In local and central Government expenditure on education, a 10 per cent. cut would bring in a saving of £95 million.

Lastly, while I do not think that the British National Oil Corporation can be abolished immediately, I would ensure that its capital structure spending of £250 million was reduced by 80 per cent. to £50 million. All of this would bring in a capital saving of £459 million, producing a total saving of £1,756 million—all of which would in no way limit the productivity or productive potential of the nation, whether in the public or private sector.

I am sorry if I have taken some time to set this out but someone has to get up and spell out clearly that social service expenditure is not a sacred cow which can- not be touched. It can be afforded by the nation only if we are creating the necessary wealth. My suggestions would produce a reduction in the public sector borrowing requirement of about £1,284 million.

I would wish to do two other things. There would have to be an increase in certain social security benefits. If those were at the rate of 10 per cent. of the total of the cuts I am advocating of £1,146 million, we would have to make an increase of £115 million. To show industry that we wished to encourage investment I would want to see a cut in corporation tax from 52 per cent. to 47 per cent., which would mean a total extra expenditure of £357 million a full year.

What I am seeking to bring about, therefore, is a cut in public sector borrowing of 78 per cent. in addition to that which the Chancellor of the Exchequer is himself advocating. I know that what I say is controversial and that probably it will be scorned by many Government supporters. However, someone in this country has to tell the people the truth.

Several Hon. Members

rose—

Mr. Deputy Speaker

There are 36 hon. Members who still wish to take part in this debate. Unless we have a drastic cut in the length of speeches, the result will be a drastic cut in the number of hon. Members able to participate.

6.20 p.m.

Mr. Arthur Latham (Paddington)

I accept what you have just said, Mr. Deputy Speaker, although I am sure that many hon. Members on both sides of the House will feel that it would have been a pity if the latter remarks of the hon. Member for Honiton (Mr. Emery) had not been addressed to the House. It is something of a nightmare to hear his prescription for the future. At the same time, however, we should be worrying that he might be speaking not only for himself, and that perhaps there are many right hon. and hon. Gentlemen on the Opposition Benches who think in similar terms.

One extraordinary feature about the sums put forward by the hon. Member for Honiton which struck me was that, apart from taking £1,756 million out of community services and giving back £357 million in corporation tax, he forgot to add on the £1,000 million which he and his right hon. and hon. Friends want to spend on defence. Taking account of that, the hon. Gentleman's proposals represent merely a transfer from community resources to defence expenditure and, presumably, to profits.

Mr. Norman Atkinson (Tottenham)

It might become known as an Emery paper.

Mr. Latham

That is a very neat epithet to describe the contribution of the hon. Member for Honiton.

Mr. Alan Clark (Plymouth, Sutton)

If in some happy circumstances another £1,000 million were to be spent on defence, would not that be reflected immediately in the country's employment position?

Mr. Latham

I shall deal with that in a moment. I intend to come to it presently, and I am sure that you, Mr. Deputy Speaker, would prefer me to make my remarks in the order which I had intended originally.

I shall have no hesitation in voting against the Tory motion and, so far as I know, no hon. Member on the Government Benches will fail to go into the "No" Lobby at 10 o'clock. To vote with the Opposition would be like turning aside a bad meal and taking a dose of arsenic instead.

My right hon. Friend the Chancellor of the Exchequer was generous enough to refer to the good intentions and appalling performance of the previous Administration. Many of us will not feel especially charitable towards the Opposition in the light of what we have just heard from the hon. Member for Honiton. I think that many of us feel that the intentions are likely to be appalling as well. It is clear from what the hon. Member for Honiton said and from various pronouncements made by Opposition Front Bench spokesmen that their alternative policy would be to butcher public expenditure and put up unemployment by between 1 million and 2 million. In addition, we have their defence commitment.

I wish to make it clear, however, that in supporting the "Noes" tonight against the Tory motion, those of us who do so will not be voting for the cuts which the Chancellor announced on 22nd July. It needs to be underlined that there is a real debate being conducted on the Government side of the House.

I also wish to repeat what I said in my earlier submission to Mr. Speaker. It is deplorable that it is not possible for a distinctive point of view to be tabled in the form of an amendment which would have been called and could have been voted upon. If that opportunity had presented itself, there well might have been not merely the 70 hon. Members who have subscribed their names to the amendment on the Order Paper but 100 or possibly 120 Government supporters who would have wanted to express their support in the Lobby for the terms of the amendment on the Order Paper not called and ruled out of order by Mr. Speaker.

The fact is that the Opposition chose to revert to the old form of Supply debate instead of adopting the newer form which would have enabled them to put down an amendable motion. They have jeered at the Government for not submitting a motion in support of their proposals for public expenditure cuts, but they themselves have denied many hon. Members the opportunity to express an alternative view in the Division Lobby. I do not understand whether it is ineptitude on their part or some deliberate act which leads them to use a procedure which makes sure that there will not be any expression of an alternative view by many Back Benches.

Mr. Heseltine

If the Government had had their way, there would have been no opportunity to debate these cuts at all. It is unprecedented for a Government to come to the House with a financial statement of this kind without giving any opportunity for debate. It is only because the Opposition, in their own Supply time, have made time available that the hon. Member for Paddington (Mr. Latham) and his hon. Friends have an opportunity to utter a single sentence in this House.

Mr. Latham

It is also unprecedented for a Chancellor of the Exchequer to announce in July what he proposes to do in his Budget of April the following year. Therefore, when the Prime Minister wanted to argue that there was time, there may have been some truth in that. But certainly many of us will have the opportunity—and will take it—after the Recess to vote against specific Orders implementing certain of the cuts, especially those relating to health charges, higher school meal charges and such other matters as may require specific parliamentary authority.

What the hon. Member for Henley (Mr. Heseltine) says does not detract from the validity of my point that the Opposition deliberately chose a form of motion which was unamendable and, therefore, denied us the opportunity to express our own opposition from this side of the House.

Over the weekend, my hon. Friend the Member for Tottenham (Mr. Atkinson) has been quoted as making some reference to the alternatives facing people like him who are on the Left in this argument about cuts and the debate in this House. Obviously, my hon. Friend will speak for himself if he is successful in catching your eye, Mr. Deputy Speaker. However, I wish to make it quite clear that none of us who are associated with my hon. Friend the Member for Tottenham accept either in principle or in detail the cuts which have been announced by the Chancellor of the Exchequer. I have no doubt that my hon. Friend will have an opportunity to make his position quite clear later in the debate—

Mr. Atkinson

Since my hon. Friend has raised the matter, perhaps he will allow me to do so now. I have devoted the whole of my adult life to arguing the case for increased public expenditure. I hope that no one will misunderstand anything that I may say as advocating the acceptance of any cuts in public expenditure, and certainly not those now proposed.

Mr. Latham

From time to time in recent weeks the Chancellor of the Exchequer has justified his intention to propose cuts at times on the grounds of continuing the economic strategy set out in the White Paper earlier this year, at times in relation to the size of the Budget deficit, and at other times in relation to issue bearing upon confidence in sterling. Today, he concentrated again on the argument about the Government's economic strategy. It is well-known that many Government supporters question the whole of that strategy, which is that it is possible to achieve some stimulus in private manufacturing industry simply by reductions in public expenditure and the provision of community services.

First, that makes the assumption that all or any manufacturing is better than service. But I argue that what we should be asking ourselves is manufacturing for what and for whom and relating that in terms of priorities to what service and for whom should that service be provided.

The argument about the desirability of transfer is plausible if it is seen in the context of a balance of payments problem. But, despite many questions and challenges, at no time has the Chancellor or any of his colleagues answered our question—by what mechanism is that transfer to be achieved. There is no evidence which we can find that, despite the assertions of the Chancellor—we have had a series of assertions rather than arguments or evidence—there is any indication that this has happened so far.

This month, we have an unemployment level of 1.4 million. There appear, therefore, to be plenty of human resources available. No evidence has been produced about a shortage of materials, and we all know that money is available for investment but not being invested, as was corroborated by an intervention just now from an Opposition Member. So again, ever hopeful, I ask the Treasury Bench to suggest to us by what mechanism the transfer of resources is expected to be achieved. Specifically, and with a strong eye on constituency problems, what possible advantage can be achieved at this time by worsening unemployment in the construction industry, which will rise from 200,000 to more than a quarter of a million?

Mr. Frank Allaun

Is my hon. Friend aware that the figure is now 260,000 if we include the related trades of brick, glass and timber?

Mr. Latham

What my hon. Friend said makes the situation even worse. We shall have to add the unemployment consequences of building fewer roads, cancelling new hospitals, not building new schools and building fewer houses. This is a contradiction arising out of the system which a radical Labour Party should be seeking to overcome rather than succumbing to, as is evidenced by the cuts which have been submitted, because the new hospitals, schools, and particularly houses, will still be needed whenever the upturn comes.

Judging by the social contract, we are not thinking of unemployment going to what the Government might regard as a more acceptable figure in less than about three years. That means three more years without the hospitals and the schools that we need and three more years on the waiting list for those in need of housing accommodation. It is extremely difficult to explain to constituents that somehow accepting those hardships will contribute to future national prosperity.

It may be argued that the Chancellor has announced that housing will not be cut in stress areas. But the local housing situation is affected by the overall position throughout the country. A reduction in the size of the building programme must clearly have adverse effects and bring greater pressure on stress areas.

I wonder whether it is being argued that the construction industry is too large. We know that it is not the most efficient industry, but surely the cuts being proposed will do the opposite of helping. It would be far better if those destined to be unemployed in that industry were able now to build the hospitals, schools and houses that we need rather than to be on the dole. This is one of the major contradictions in the financial and economic system under which we live.

Similarly, we are to have fewer teachers employed. Are those teachers to give up teaching? Are they to be lost to the profession? Are they to remain unemployed meantime? Are the Government abandoning as a long-term objective improvements in education, particularly reductions in class sizes? If not, the idea that we can contribute to future national prosperity by transferring teachers from teaching to some other kind of occupation is clearly a nonsense. That seems yet another contradiction in the strategy that the Chancellor now claims to be following.

I should like to ask the Government Front Bench a specific question about the borrowing requirement. If the arguments that the Chancellor was using previously about confidence in sterling and the size of the borrowing requirement are correct, the fact that it is reduced by £2,000 million out of £12,000 million still leaves £10,000 million as the public sector borrowing requirement.

What do the Government regard as an acceptable and permissible size of budget deficit? Is there not a distinction to be drawn between borrowing to re-lend and the financing of capital rather than of revenue expenditure? I am unable to establish from the public expenditure tables published thus far what proportion is for re-lending and for the financing of capital expenditure, and, therefore, could be justified by borrowing in terms of a budget deficit

The Government knows that, because the issue of confidence is imprecise, because it is not specific and because it relates to feelings rather than to facts, many Labour Members see no reason why, within a few months, there should not be further demands and pressures so that the Chancellor will have to come along with an even more unacceptable package than that which has just been presented. In some of the earlier consultations leading to this package the Chancellor referred to borrowing to finance the balance of payments deficit. I wonder about that.

On the face of it, we might have supposed that, certainly in the short and medium term, a deficit on the balance of payments could have been self-financing in that it would result in large sterling holdings being held in the capitals of those countries with which we were in trade. The Chancellor has argued that it is necessary to borrow for that purpose. I should welcome an explanation of how he adduces that argument. I certainly seek confirmation that if for any reason it is thought necessary to borrow abroad to finance the balance of payments deficit, that borrowing will not be additional to borrowing for the public sector borrowing requirement, but will make a contribution towards the budget deficit at the same time.

What is broadly called "the Left" has been asking for controlled reflation. Instead, we have got what is, in effect, a £2 billion deflation. Part of the argument for the regulation of imports relates to the call for at least some controlled reflation, because without control it would be like trying to fill a bath from a running tap with the plug out.

I put three specific questions to the Government. First, do we, as a Labour Party and Government, still believe in planning? If so, why are imports to be excepted from that general plan?

Secondly, what efforts are being made regarding import substitution which, I should have thought, could make a far greater contribution to relieving the balance of payments problem.

Thirdly, if we were to set limits on imports country by country, why should we fear retaliation? If we sought not to reverse but to reduce the balance with those with whom we are in deficit and they still remained in surplus in their trading accounts with us, why should that lead to retaliation from them?

Broadly, those of us who have supported the amendment on the Order Paper object to the methods being used and also believe that they will not work. We think that eventually the Chancellor will have to take steps to determine the size of the import bill, to ensure that investment is made, and in the right places, to limit the flow of capital abroad and to mobilise overseas assets in the interests of the British people as a whole.

Clearly, there is a limit to the forbearance of the ordinary Labour voter. We believe that the Chancellor will again feel the need to act within a few months. We urge him to use that time to make up his mind to introduce and resort to positive alternative Socialist measures.

6.39 p.m.

Mr. Richard Wainwright (Colne Valley)

The hon. Member for Paddington (Mr. Latham), speaking no doubt as the voice of more than 70 hon. Members, has drawn the Government's attention to the savage way in which many of their cuts have borne on capital expenditure—for example, the replacement of worn out hospitals and antiquated schools. I hope that the Government have noticed that, by going for the soft option of allegedly cutting capital schemes, they have attracted serious criticism from their own supporters.

However, surely the most notable feature of the debate so far, which I suspect will continue for most of the evening, is that not one Back Bench speaker has spoken in support of his own Front Bench. Every speech has been dissenting in that way. This surely adds point to the very proper and timely protest of the hon. Member for Paddington at the way in which the debate has been structured. It is a great disservice to parliamentary democracy that on a matter of this consequence to all of our people the debate should be so structured, as the hon. Gentleman pointed out, that none of the various parties and groups sitting below the Gangway, on both sides of the House, is able to have a vote to express its point of view.

I can speak only for Liberal Members. However, there are at least 120 Members who are members of either quite separate parties or increasingly separate groups. That figure takes no account of developing schisms in the official Opposition, which have been so clear today, as expressed by the right hon. Member for Taunton (Mr. du Cann) and the hon. Member for Honiton (Mr. Emery).

This surely demands that the Leader of the House should take care that a matter of this consequence is debated in a manner that allows at least one minority group the opportunity of expressing by a vote its own point of view. None of us has ever asked for more than one at a time. The Liberals are prepared to take turns in these matters.

The complaint of the Liberal Party about these cuts and the way in which they have been framed is not so much one of inhumanity or of breach of faith with the CBI. It is the fact that to the rest of the world, from which we have borrowed fantastic sums of money and which is already very distrustful of us, our Government now appear manifestly incompetent. The index of that is not entirely the continued weakness of sterling—which, although important, has been overdone a little in some comments—but the appallingly high rates of interest which have to prevail in order to sustain our credit at all. Historians will think it ludicrous that earnest parliamentarians have spent so much of this summer discutting the desperate need to invest when the cost of the money that we are borrowing to invest is fantastic.

I have found no one in Britain—although I have found a few American industrialists, for reasons of their own—who is willing to invest seriously in my highly industrial constituency so long as interest rates are at the present absurd high. That is the direct consequence of the low standing of our credit overseas. This is a worse symptom of the Government's incompetence than the nervous state of the pound. It is no good propounding remedies for that which would take five years to unwind. We are in a position now in which we desperately need to invest. Therefore, we must take measures to reduce the prevailing rates of interest.

Our incompetence, as seen from abroad—and that is what matters here—comes under various headings. First, we are known abroad as the country of the zigzag Government. It used to be thought that the zig was one party and that the zag was another party. However, this is no longer, alas, the whole of the mischief. There is now zigzag within one Government and between one season and another, because the zig that was in the Budget and the Government's famous Chequers strategy and so on—a prospering mixed economy and having a pact with the CBI—has suddenly, during the same summer, before even the drought had begun, become the zag of placing a hastily improvised new tax upon employers. This gives us a reputation abroad for extreme instability.

Then there is the much advertised lack of control over public spending in both the Whitehall sector and the town hall sector. The Government are struggling to get control of their own expenditure. I am very willing to pay tribute to Treasury Ministers for an effort long delayed. They are doing this by bringing matters down to a basis of cash, rather than indexed costs.

However, local government expenditure is still wildly out of control and the Government have not yet hit upon any method of penalising the spendthrift local authorities and giving a fair deal to those diligent local authorities—no matter which party controls them—that have conscientiously and efficiently reduced their expenditure in accordance with national demands. I have a great fear that some of the thriftiest and most well-administered local authorities will suffer just as much as the well-known spendthrifts when the Government start to apply their medicine.

Then there is the Government's conspiracy with Whitehall to resist outside independent efficiency tests. Most depressing evidence has been given to the Expenditure Committee during the last few days about how the Inland Revenue behaves towards the suggestion of outside efficiency experts—with just the same narrow, parochial jealousy as an old-fashioned board of directors, when asked to introduce outside consultants, saying "Our affairs are so complicated and the whole thing is so ramified that our own people know how to put us in order and it would not be much good asking people to come in with the cold light of an independent stance."

We must submit every branch of government to the discipline of outside efficiency audits, even though sometimes, as with all such independent investigations, some of the criticisms may miss the mark. But many will strike home and could save a great deal of money.

Another disreputable habit of the Chancellor which is bound to damage our credit-worthiness abroad is his habit of throwing off commitments, in the most irresponsible way, on to the shoulders of other people. There was a classic example of this. Hon. Members will remember that in the Chancellor's statement about the cuts, having dealt a devastating blow to mortgage chances for people able to afford only a modestly priced home, he calmly threw the whole burden on the shoulders of the building society movement without having the slightest idea whether that movement was willing to take it on. That is an irresponsibility that has caused comment. Before long it will cause a great deal more. In the meantime, it will have raised, only to disappoint, the hopes of many people of getting a modest home of their own.

The underlying theme of these cuts and the big question behind them is how much unemployment they will add to the already wretched total. I am bound to say that today and in his earlier comments the Chancellor has been either woefully complacent or deliberately deceiving. It seems clear that the Government are relying more and more upon the crude weapon of unemployment to enforce their policies on pay and so on, and that beneath the facade of great concern for the unemployed they are ensuring that the weapon shall remain potent throughout the rest of this decade.

Their target—it was their target—was 700,000 registered unemployed by 1979. However, if we are to believe half of what we are told by the Expenditure Committee's expert, Mr. Ward, there is no chance of unemployment being significantly reduced from its present figure by the end of 1977. That means that if the Government's proclaimed target is to be achieved, over 1 million new jobs will have to be created in the incredibly short space of time of the years 1978 and 1979.

The Government may have an answer to Mr. Ward. They have not always had one in the past. This is a major point on which he should be answered during the Government winding-up speech this evening.

However, the greatest failure, which we on the Liberal Bench would wish to press home if we had the opportunity of a vote tonight, concerns the total lack of leadership in the whole of our circumstances. After all, what prevents the Government from giving a great lead? They are not worried or harassed by a powerful official Opposition. They no longer appear to be very worried by the Tribune Group—perhaps they have not much reason to be. They have certainly no need to be worried by the petulance of the CBI, because industry does not give a damn whether it gets a letter from Lord Watkinson. Many of my industrial constituents do not even bother to belong to the CBI. It is a very expensive organisation. Unencumbered by any kind of hindrance why do not the Government give the nation the lead for which it is waiting?

During the weekend I met in my constituency a very well known public servant on the leisure side of things. She was an admirable woman. She was talking about the difficulty of the cuts and said to me that Colne Valley was not built by, and would not be rebuilt by librarians. She is one herself. She was indicating that, admirable though her profession is, we have to transfer a majority of people into manufacturing before we can hope to rebuild our national wealth.

This is an opportunity for the Government to have announced a major retraining scheme. It is no good encouraging that lady to get into manufacturing if there is no one to train her. We want a major retraining scheme, not just for school leavers but for a large number of our bureaucratic population, to get them into the manufacturing drive. Until that happens, we shall be bound to oppose the Government.

6.52 p.m.

Mr. John Horam (Gateshead, West)

There has been a tendency to justify the Chancellor's measures on the ground that they are necessary to placate our foreign creditors. I have even heard a whisper to this effect from the Treasury Bench itself during the last few weeks. However, I would have regarded the measures as prudent even if we had no foreign creditors at all. The plain fact is that while a public sector deficit of the size we have been running is justified in terms of recession, it is bound to lead to all sorts of damage to the economy, both in the short term and in respect of our longer-term hopes for improving it, if we carry that deficit on into a period of rapid upturn—even though I doubt that the upturn will be quite as rapid as the Chancellor has suggested.

In addition, but for the cuts, I hazard a guess that we should have had increases in taxation at a time when we are taking no less than £750 million a year from people who are on supplementary benefit level, that is, below the official definition of poverty. Also, I believe that private consumption would have risen only slowly, if at all, in the immediate future if we had not had the sort of rein back in public consumption. We have heard a great deal of the "social wage", but surely it is the "real wage" which must still be our primary concern. I therefore support the Government's approach.

Other countries, which have not got our problems on the balance of payments front, and which have ample reserves, such as West Germany, are cutting back their public expenditure deficits at a rate that we are now beginning to approach. They see the damage to the economy, whatever their particular brand of politics, that could occur from allowing this sort of situation to carry on in the way that we were proposing before these cuts. The cuts are, therefore, justified.

I am also glad that the Government have adopted a rather more discriminating approach than has often been the case in the past. However, in one respect the Government have made a serious mistake, which has been referred to repeatedly since the cuts were announced, and it is in cutting back local authority mortgages. That is a classic example of the way Whitehall thinks it has solved a problem, in this case by passing the buck to the building societies, when in fact nothing on the ground has actually changed.

I believe that houses that could provide decent first homes for low-wage people will continue to stand empty until the building societies are pushed into doing something serious about the matter. If they will not do something serious, some measure must be brought in to control the lending policy of building societies. In other words, the Government must make this a high priority over the next six months or gratuitous social damage will have been done.

Having declared my view on the cuts, I would make a few remarks on the alternative strategies which have been advanced both by the hon. Member for Honiton (Mr. Emery) and my hon. Friend the Member for Paddington (Mr. Latham). I remember my hon. Friend the Member for Paddington with much respect because when he and I were both on the Housing Finance Bill Committee he made a speech for four and a half hours, stretching from about 10 o'clock at night to about 2 in the morning. He spoke considerable sense on that occasion. However, I cannot absolutely follow the logic of his argument today. I hope that the Chief Secretary will answer some of my hon. Friend's specific comments.

The thrust of the alternative strategy is the policy of import controls. My hon. Friend put various questions to the Chief Secretary. I should like to pose some questions to my hon. Friend. If we advocate import controls, we have to ask ourselves, first, whether the total that we could cut would really be sufficient. Total imports are now running at about £25 billion a year. About £12 billion of this accounts for essential foodstuffs and raw materials that could not be limited by import controls. Another £7 billion account for semi-processed goods and finished machinery required by industry and we could not impose import controls on these without producing bottlenecks.

We are therefore left with roughly £5 billion—about one-fifth or 20 per cent. of our total imports—that we could effectively control. Is this amount large enough to have the sort of effect on the balance of payments situation that we want in the future without imposing Draconian controls that would certainly cause international uproar?

Mr. Sedgemore

Will my hon. Friend explain what he thinks about the current policy in relation to increased depreciation of the pound? If the Government are serious about export led growth and if they are to deal with the balance of payments problem through their economic policies, the likelihood is that they will have to allow the pound to depreciate by between 20 per cent. and 25 per cent. over the next three years. What is that if it is not a policy of import controls?

Mr. Horam

Import controls and devaluation have always been alternatives. The fact is that we have had a massive devaluation in the last six months and it remains to be seen whether it is sufficient to carry through the Government's strategy. It may well not be enough. Most forecasters are now indicating that, post cuts, we should expect some reasonable balance in sterling in the foreseeable future, but I cannot answer my hon. Friend's question, simply because it is hypothetical.

The second question is whether we have the physical capacity to supply the markets that would open up if we imposed controls. If I remember rightly, the car industry resisted even quite small budgetary measures on the ground that it could not supply the markets, especially in the case of many of the smaller cars, and that that would lead to larger imports. Even the NEDC sectoral studies, discussed recently, have indicated that supply constraints will occur at a very early stage in the recovery. There are bound to be shortages and queues and even higher prices as a consequence.

Thirdly, if we have import controls, have we a guarantee that at the same time we shall attack our central problem, that is, the problem of efficiency and enterprise? This also is a matter of judgment—indeed, most of the matters raised or implied by my hon. Friend the Member for Luton, West (Mr. Sedge-more) are matters of judgment—but I think that most historical experience suggests that protected economies are not, by and large, efficient economies.

Fourthly—perhaps this is the most crucial and it was referred to by the Chancellor today—if we impose considerable extra demands on industry because of the enhanced demand to which import controls would lead, should we not have to cut public spending even more to avoid the inflationary consequences that would otherwise follow? I believe that we should. Obviously, the Chancellor thinks so too, and he said so today. As a matter of fact, so do the eloquent advocates of import controls at the Department of Applied Economics at Cambridge. Indeed, when they originally advocated import controls last year they said that their policy would necessitate public expenditure cuts even larger than those which have since flowed from the Government's hands.

If import controls are advocated as part of a strategy of that kind, I should not necessarily disagree. I think that import controls have a rôle, as in effect my hon. Friend the Member for Luton, West suggests, as a subsidiary part of a strategy in which one fears that the economy may not be strong enough to stand the medicine which one thinks it necessary to give it. That is why we used the import deposit scheme under the last Labour Government and why we may have to resort to measures of that sort again. No one can be sure.

However, that is not what the Left wing of the Labour Party is arguing. Its argument is for import controls and no cuts in public spending. Indeed, before that it argued for import controls, no cuts in public spending and no restraint in collective bargaining. And that is the flaw in its argument—it wants a soft option. Those on the Left are not prepared to face the hard realities of Britain at this time. So, although they argue their case with sincerity, with conviction and with a good deal of admirable energy, I remain unconvinced.

Mr. Bob Cryer (Keighley)

Will my hon. Friend accept that the Left of the party, as he graciously calls us, have been arguing strenuously for cuts in defence expenditure, which is part of public expenditure? Also, will he accept that there is a variety of views about incomes policy and some of us believe that some form of incomes policy is necessary?

Mr. Horam

Yes, and I acknowledge—I am sorry to refer to him again—that my hon. Friend the Member for Luton, West has argued that in one of the original Tribune pamphlets—it was deep in the heart of it: it was difficult to search it out, but there was some sort of advocacy of an incomes policy. I wish that at the time—we were discussing voluntary restraints—he had spelled the matter out rather more clearly. One had the impression that others were against it, but I accept none the less that there is some such strand of argument in the policy of the Left.

However, surely it is clear from the views of my hon. Friend the Member for Keighley (Mr. Cryer) and others that they are against a total cut in public expenditure. They may want a cut in defence expenditure certainly, but overall they are against any total cut in expenditure.

Mr. Atkinson

We want an increase.

Mr. Horam

My hon. Friend wants an increase. Well, that would offset the cuts which others of my hon. Friends want to make in defence expenditure, so they cannot sustain their argument on expenditure, although they may be able to sustain an argument for some voluntary restraint on the wages side as a quid pro quo for import controls.

The other strategy that we have had advocated in the debate is that set out by the official Opposition, elaborated at some length and in more extreme form by the hon. Member for Honiton. Here also there are some questions to be posed. First, for all their espousal of a tough monetary and fiscal policy, would the Opposition implement it in practice? Neither of the last two Conservative Governments—not even the Macmillan Government, let alone the Government of the right hon. Member for Sidcup (Mr. Heath)—was exactly a paragon in this respect. In the last economic debate, the right hon. Member for Sidcup said that if one took M1 alone one could show that his Government were not quite so fiscally profligate as we have always contended. But that is not the only piece of evidence, and I do not believe that he entirely convinced his listeners at the time.

When his Government first took office in 1970, there was a good deal of talk about cutting public expenditure, and I remember thinking to myself that, if they cut Concorde, I should really believe them. I was quite safe: they did not cut Concorde despite an eloquent speech by the hon. Member for St. Ives (Mr. Nott), who subsequently joined the Government, whereupon even M1 leaped to new heights.

Mr. Lawson

Will not the hon. Gentleman agree nevertheless that under the last Conservative Government public expenditure never rose higher than 52 per cent. of gross domestic product, whereas it is now over 60 per cent.—a substantial difference?

Mr. Horam

I agree, but the point is that, in spite of what they said at the time, they did not subsequently follow their policy through. After their panic reaction to the high unemployment figures in the winter of 1972 there were extremely high levels of public spending, according to the standards of the hon. Gentleman and his hon. Friends at that time. In fact, it is difficult for all Governments to resist calls for higher expenditure, and this ought to be admitted by the Opposition in view of what they did in office and what they say now about their Draconian measures.

Next, even supporting that the Opposition carried through their cuts, what would be the implications for unemployment? The right hon. Member for Leeds, North-East (Sir K. Joseph) made a dramatic intervention in our debate today, saying that they would restore confidence to such an extent that the consequence of their cuts would be higher employment, not higher unemployment. I concede that there is something in that argument, but they did not do it last time. There was higher unemployment, resulting eventually in the sort of panic-stricken measures to which I refered in reply to the hon. Member for Blaby (Mr. Lawson). That is what happened last time, and the Conservatives were not able to create the kind of confidence which they blithely talk about as a result of their extreme approach to this situation.

The official Opposition ought to tell us more about their policy. They offer no guarantees. They ought to spell out far more often and more clearly precisely what they would do about the disastrous unemployment situation which we now face whichever party is in power. They ought to tell us far more. We hear very little from the right hon. Member for Lowestoft (Mr. Prior) about that.

Thirdly—I regard this as fundamental—would the Opposition, if they did follow through their policies, be able to hold the country together? Could they provide the sort of united leadership which the country needs? Have they enough insight into all the various social groups which compose the nation and which need to be taken into account? Again, they failed last time. Everyone knows that. They have a serious problem of confidence within themselves, and a problem of credibility to overcome if the measures which they have in mind have any hope of being accepted.

That leaves us with the approach adopted by my right hon. and hon. Friends in the Government. In my view, it is viable, but as I have said before, and as I have no doubt that I shall have to say again, they will need to pursue their policy with boldness and with radicalism. The boldness has increased dramatically in the past six or 12 months. The radicalism is still rather thin. To mention but one area where radicalism will certainly be needed, I instance unemployment. I do not believe the Government's forecasts for unemployment. I believe that it will continue at a higher rate, not higher than it is now, but higher during a boom than we have even so far experienced.

That is the central problem, and the Government will not be able to solve it by orthodox demand management measures. As the hon. Member for Colne Valley (Mr. Wainwright) hinted, it will require intervenionist policies of some kind. Obviously, one cannot spell them all out in a 15-minute speech, but it will require the sort of planning approach which has been advocated by my hon. Friend the Member for Paddington and the the hon. Member for Colne Valley. I believe that that is the only way we can meet the sea change, as it were, which faces our mixed economy at present. I urge my right hon. and hon. Friends to consider that problem seriously. It should have the highest priority in the thoughts of my right hon. Friend the Secretary of State for Employment as well as of the Chancellor and the Prime Minister.

7.9 p.m.

Mr. Donald Stewart (Western Isles)

Time does not allow me to take up many of the points made by the hon. Member for Gateshead, West (Mr. Horam), and for that I offer him my apologies, but I wish to associate myself strongly with the protest made by his hon. Friend the Member for Paddington (Mr. Latham) and the hon. Member for Colne Valley (Mr. Wainwright) about the difficulty facing minority parties or groupings in having selected any motion or amendment. Ours is no longer a two-party system in the House, and it is time that the appropriate Committee recognised that. Let us hope that, when we resume the next Session, that difficulty will be overcome.

In passing, I must express entire agreement with the right hon. Member for Battersea, North (Mr. Jay) in what he said about the deafening silence on both his and the Tory Benches about the effect of EEC membership on the position of the United Kingdom today. If we had stayed out of the Market and it had been a booming Market we would have been reminded of it every day. Those of us who are against it would have been reminded about it in every speech.

My hon. Friends and I have tabled an amendment which will not be called. It deals with the Scottish context, and I shall deal mainly with that in my speech, for which I do not apologise. We repudiate entirely the need for cuts in public expenditure in Scotland. However, there were certain measures announced at the same time which the SNP could welcome, and indeed for which we have been pressing for some time.

We are glad to see that the Government have been more selective in regional development grants and will no longer be boosting the profits of the multinational companies at the taxpayer's expense. We welcome the equalisation between men and women of the regional employment premium. It should have been levelled up to the male rate of £3 instead of down to £2 as proposed. This could have serious effects for certain firms in Scotland and, no doubt, elsewhere in the United Kingdom. I know of one Scottish firm which has more than 2,000 workers of whom only 100 are female which will have a reduced regional employment premium. It must also pay the new payroll tax. This will create a serious cash flow problem in the months ahead.

We welcome especially the commitment to increase the funds of the Scottish Development Agency. However, we reserve judgment until we hear what the amount will be. The Secretary of State for Industry was very coy about that in the House this afternoon. I shall quote from the latest economic quarterly of the Fraser of Allander Institute which illustrates how necessary it is that increased funds are made available to the Scottish Development Agency. It states on page 20: Present circumstances pose a challenge for the Scottish Development Agency. It is the only instrument available with which the Government can bring about a sustained increase in the level of productive investment in Scotland. If it succeeds it will make possible a higher level of employment in the future. If it fails the outlook for the next two or three years is bleak. If the Scottish Development Agency is to be as successful as this quotation indicates it could be, funds of £2 million or £3 million per annum must be released to it.

The rest of the Chancellor's package is an affront to every Member from Scotland with a social conscience. Certainly no SNP Member is in Parliament to accept calmly cutbacks in geriatric care, reduction in housing expenditure, the deferment of pensions for disabled housewives, hitting low income groups through phasing out food subsidies and increases in the cost of school meals, to mention a few of the retrograde and reactionary proposals.

The effects on Scottish industry could be very serious indeed. How will the cuts and deferments in grants and loans to the fishery and forestry industries help investment there? How will the disappearance of lime subsidy—of special importance to Scottish farming—increase food production? Long-term damage is being done for minimal current saving.

What about the impossible obstacles for young married couples in the restrictions on local authority mortgages? The Government say that building societies have promised to help, but they promised to do this last October and nothing or very little has been done about it.

The cuts in the social services are the cruellest of all. Britain, after Ireland, spends least on social services of all the EEC countries. Housewives are worried about the rising food and fuel costs and when the green pound is adjusted food prices will inevitably rocket. The doubling of the charge for dental treatment is barbaric. Bad teeth are responsible for a lot of ill health. A country is bankrupt not only of money, but of ideas and consciences, that can waste its substance on Concorde and put dental treatment out of the reach of many citizens.

Government's underestimate the contribution that the working population is willing to make to ensure a decent life for old-age pensioners, the disabled and other needy members of the community. However, they have to be certain that their sacrifices will be used to that end and do not disappear into the kitty to pay for circuses of various kinds.

The Government's reasons for the cuts were to impress their creditors, to free resources for industrial investment, and to restore confidence in sterling. None of these has been achieved. The creditors remain unimpressed and the Government will inevitably have to turn to the International Monetary Fund and to borrow on its stringent conditions. The CBI is telling its members not to invest and foreign banks are still refusing to buy sterling.

The outlook for the United Kingdom is grim. A different picture can be painted in Scotland. The growth rate in Scotland is two to two and a half times the growth rate of the United Kingdom as a whole. Oil will be worth £3,000 million per annum in a few years' time. We are weighted down by England's bankruptcy. In a free Scotland it would be different. We oppose the cuts and we shall vote for the Opposition's motion.

7.17 p.m.

Mr. Norman Atkinson (Tottenham)

In the debate and in the Press we have been treated to a great deal of fictitious theory about the money supply and other unsubstantiated theories. The monetarist leadership of the Opposition still indulges in these theories as though they are an explanation for the difficulties from which we suffer.

Before I make some comments about unemployment, about which I am most concerned, I point out that it has been our experience that money supply in no way influences demand. Although the monetarist leadership of the Conserva- tive Party has always claimed that excess money supply has been responsible fin inflation, our experience has proved the opposite. Prices have not risen as a result of excess money supply. There has been no increased demand in the economy. No price increase can be traced to that source. Increased monetary supply has not affected wages, because the level of demand has not been raised.

Likewise, money supply has not influenced profit. Therefore, the whole thesis on which the Opposition base their case is fallacious, and our experience proves it.

The effect of money supply on the economy has been to increase imports, and that I readily concede. That is part of the case which we have advanced for the imposition of import regulations to prevent the transfer of excess money supply to increase imports beyond that which the economy can support.

Likewise, there has been a boom in property investment as a result of excess money supply. However, it is certain from our experience in recent years, that money supply is not at the core of or basically responsible for some of the things attributed to it by the Opposition. The Chancellor of the Exchequer and other leading members of the Government have claimed that it is their intention to increase the number of new jobs by 1 million over three years. It is pertinent for us to inquire how that can be done. From where will the jobs come?

The Chancellor and other members of the Government, including the Prime Minister, do not face up to the fact that the public sector, and particularly the local authorities, will not increase their work force in the next three years. It is implicit in the figures produced by the Government that there cannot be an increase in the work force of local authorities. All of the great public corporations are talking about reducing their work forces. The greatest work force reductions of all are to take place in the steel industry. Therefore, in aggregate, the Government are saying that there will be no work force increase in the next three years, and the local authorities, in particular, must accept that there is a freeze on the number of people employed. In fact, it is expected, as a result of the new restrictions, that the total local authority work force will decrease.

If we analyse the NEDC reports on manufacturing industry and consider carefully the comments made by employers throughout the country, we find that all of them seem to be backing the claim of the Opposition that, in the main, manufacturing industry is over-manned. If that is so, the challenge to the Government is much greater than we thought and the problem is much greater than is acknowledged by the Government. Much of the promised investment is such that it must reduce the labour content of those industries in which it is scheduled to take place. I am thinking particularly of manufacturing industries which produce capital goods. Every employers' report that I have read suggests that they will increase their output but with a smaller work force over the next three years.

It is a massive challenge to the Government and to ourselves to say where the increased number of jobs will be found. I am sure that we would all be fundamentally opposed to the idea of jobs in bingo halls and in other inessential activities and the suggestion that by carrying out tinsel operations of that sort we shall create more jobs. That would be totally wrong in terms of the recovery of the economy and of the Labour Party's programme. Therefore, where will the extra jobs be found if they are not to be found in the public sector?

I base my case on increasing public expenditure so that we can make provision for increasing stocks and to enable manufacturers for the time being to put essential goods on the shelves until the upturn comes in order to avoid obvious bottlenecks. The Government should intervene in the economy to ensure that areas of manufacture which are capable of producing additional jobs have the resources to do it and, if necessary, should put the finished goods to one side until they can be slotted into the upturn. That is the way to start the essential planning.

Mr. David Mitchell (Basingstoke)

rose—

Mr. Atkinson

I shall not give way because I have agreed to be brief. I do not like refusing to give way because this place is about debate.

We can solve our immediate problems by the use of public resources. That leads me to the attitude of the CBI and its refusal to circulate its members with a call for additional investment. That is tantamount to direct sabotage of our whole industrial situation. If the CBI is serious in what it says, the Government have no alternative but to devise ways of directing capital. They cannot do other than that. That is the fundamental issue which the CBI must face. If it continues to say that it is not prepared to intervene to ensure that manufacturing industry has adequate capital to do the job that we want it to do, the Government have no alternative but to direct capital to those areas which must develop so that we may fulfil the programme on which the Government were elected.

Mr. Tom King (Bridgwater)

rose—

Mr. Atkinson

I shall not give way because I wish to finish in a few minutes.

Incidentally, the proposal to transfer resources from the public sector to private manufacture is not possible. The Government have not the power to intervene in that way or to be selective about a shift of that sort. Furthermore, the most effective argument against it, is that the cuts go across the board. If there were to be some selectivity and if public expenditure were to be reduced so that manufacturing investment could be increased, there would be some substance in a Minister saying that the choice was between a hospital and a factory. But that is not the case. Expenditure as a whole is to be reduced and therefore there can be no shift.

Mr. Tom Litterick (Birmingham, Selly Oak)

There is no scarcity of resources.

Mr. Atkinson

There is no scarcity of resources. There is so much money sloshing about in the economy that manufacturers are now becoming institutions offering resources to other manufacturers. They are becoming lenders and almost secondary banks. It is known that such organisations as GEC have £100 million or £150 million at their disposal which they have refused to use. This is a remarkable situation.

Let me make one or two comments about the vote and some of the remarks credited to myself. The Government have rejected the alternative economic strategies which have been proposed by many of us over quite a long time and have come to the conclusion that if those strategies are unacceptable to them they have no alternative but to pursue the policies that they have outlined. They have rejected import controls and much stricter exchange controls, together with currency regulations. They have also rejected the idea of adopting a much more rigorous approach to a pricing strategy.

Therefore, the whole of what has been described as the Left's case has been rejected by the Government and they are right to say that once it has been rejected they are left with no alternative. There is no third way. Therefore, the Government have said, through the Prime Minister and the Chancellor of the Exchequer, at meetings of the Parliamentary Labour Party, that they can survive only by accepting international credit. It has been acknowledged by leaders of the Government that if we go for international credit the Government must of necessity accept the terms laid down by the international creditors. That is what they are now doing.

It follows that those of us who have decided that we shall sustain this Government because the alternative is far worse must face the reality of the Government's present policies. If it is our fundamental purpose to sustain the Government in office, we are saying that, in principle, the conditions laid down by our creditors will be applied. The conditions laid down by the international creditors will start to affect our economy, and this is the policy that the Government, who are being sustained in office, are bound to pursue. That is the tragedy of the situation. I am sure that most of my hon. Friends totally reject the banker's conditions. In no circumstances would I accept them.

I recognise the problems that we shall suffer in the immediate future and that clear political leadership is needed to overcome them. It cannot be done in this place. I do not think that it is possible for a parliamentary decision to be taken that can reverse this Government's policies. The leadership of the Government have admitted that they cannot say that they have reversed their policies because that would mean resignation.

We must consider how we can successfully change the direction in which the Government are travelling while maintaining them in office. This job has to be done in the TUC and the National Executive Committee of the Labour Party. That is the only way that we can bring about the change in direction without compelling the Government to go to the country.

That is our way ahead. We must make it possible for the TUC and the NEC together to bring about a shift in the direction in which the Government are going. Our work as Back-Bench Members of the Government should be directed towards that end. I hope that we can all play a part in achieving that aim.

7.34 p.m.

Mr. Kenneth Lewis (Rutland and Stamford)

I wish to follow the hon. Member for Tottenham (Mr. Atkinson) only on his comments about the CBI. I am involved in a small business, so I do not think that the CBI could be regarded as one of my great supporters. The hon. Member said that the CBI was involved in sabotage because it had not sent to its members a letter about investment which it had previously proposed to distribute. But may I remind him that the Secretary of State for Industry wrote in the journal of the Institute of Directors recently that in order to get leadership from our managements, for the benefit of the country, we needed less secrecy and more consultation? Does the hon. Member for Tottenham realise that the Chancellor of the Exchequer imposed the 2 per cent. surcharge without any consultation with the CBI? This is exactly the opposite course to that which the Government take with the TUC. It was only to be expected that the CBI would have to take the views of its members before making a final decision on its attitude. It is doing this now before coming back to reconsider—in October.

It is highly appropriate that the Opposition should be proposing to cut the salary of the Chancellor of the Exchequer. If the right hon. Gentleman were financial director of a public company and had got his company into a financial state similar to that of the country, he would be given the sack.

The Chancellor has achieved the almost impossible. He has given us a £11 billion overdraft and 1½ million unemployed at the same time. I always thought that one could solve unemployment by the Government priming the pump. The pump has been primed as never before, but we still have this level of unemployment.

The rest of the world is inclined to judge a country on the basis of that nation's view of its Chancellor of the Exchequer and his Budgets and financial statements. The country will decide whether the Chancellor is a deliverer or a devil. Now it can be said that, His jacket is red, he is trying to make his breeches blue, but there is still a hole where his tail comes through". The world is doubtful whether the right hon. Gentleman is the devil that we on this side of the House believe him to be.

When a country is living on tick, it must expect to be judged by its creditworthiness. When a Government come into office, their duty is to consider policies on the basis of how things are and not how they or their friends would like them to be.

I am the first to admit that when the Government came into power they had problems left over from the previous Administration. Every Government have problems left over from their predecessors, but this Government not only ignored the problems but multiplied them.

They increased the deficit by £7 billion, multiplied the problems of the country by continuing with irrelevant and costly legislation. When a country increases the external debt while increasing internal overspending, those are signs of a lack of grip and slackness and weakness in government.

To rectify this situation requires action to test the fibre of the people. The Government have tenatively moved in that direction. There is a feeble sign in the recently-announced cuts, but they are too little and too late. Industry and business generally do not think very much of what has been done by Parliament in the last couple of years or of the tentative steps that have just been taken.

I have a foot in both camps. I run a small business. Nobody provided it for me; I built it up myself. I know what unemployment is—my family and I were involved in it. Labour Members do not seem to realise that industry does not want unemployment. There is no future for business, whether it is small business or large business, in unemployment. If a business is having to shed its employees, apart from the sadness involved—if it is a small business and the employer knows the employees intimately, there will be sadness—it means that the business is not making any progress. It is either standing still or going backwards.

There is now a lack of investment because there is a lack of confidence. Once the unemployment figure begins to fall, there will be the beginnings at any rate of a return of confidence.

This Government have piled mistake upon mistake, prejudice upon prejudice, ill-advised concession upon ill-advised concession, and Left-wing policy upon Left-wing policy. Those involved in business—the little acorns, the grains of wheat that grow and multiply and become the bread that we have upon our table, the growth sector of industry—say "We have to pay for all the mistakes and all the overspending of this Government." It is like asking a racing driver to win a race when he is handicapped by having linked to the back of his car a lorry full of wasteful impedimenta. Such a race cannot be won.

Industry is also beginning to wonder whether we have a Civil Service with any emphasis on service. Britain used to have a Civil Service that was there to serve the Government. Labour as well as Conservative Members may listen from time to time to people on the television or radio who represent the Civil Service unions. They are no longer concerned about serving the Government. They are concerned to tell the Government what they should do, to dictate policy to the Government.

The Civil Service unions now tell the Government that they should spend more money, that they should increase the remuneration of civil servants, or inflation-proof their pensions, or that there must be no manpower cuts. Civil servants are now paid at the same rates as other poeple, but according to civil servants others can have the unemployment but civil servants cannot.

All this arises because civil servants are no longer controlled by decent individuals in the service who do a hardworking job. They are controlled by the unions. Those on the Labour Front Bench are supposed to be the political masters who dictate policy and say to the Civil Service "You will carry out our policy." Instead, they are now hidebound by the unions which are controlling the Government themselves. It may be that the Government will get control in the next week or month or two, but this has been the situation until now. This is one reason for Government expenditure running ahead, and why business and industry have found their bills increasing. The Government have lost too much control over their own diktat of policy. The House of Commons and the Government, not the Civil Service, should dictate the policy for running the country.

Industry also sees the taxpayer trying to help not only those who are the lame, the halt and the blind. On both sides there would be a consensus that we should help the truly lame, the halt and the blind. Industry sees the taxpayer having to provide for people, who through pressure groups, pretend that others are lame, halt or blind when in fact they art not lame, halt or blind. In other words, the social services have now spilled over to provide assistance for large numbers who could well look after themselves—all at considerable expense. There is plenty of scope for cutting the amount that goes out in the social sector, which is very wasteful.

Mr. Cryer

Tell us what.

Mr. Lewis

The fact is that the Government are spending more than industry can earn. It is industry that earns the money by which we pay for Government expenditure. The Treasury published some figures a few weeks ago which showed that losses on the nationalised industries were now balanced by the profits, so that all the nationalised industries were paying their way in total. Two or three of them were losing money and the rest were making money. A year ago, the nationalised sector was very largely losing money. The only profitable sector of activity in Britain, is the private sector.

If the pianist is knocked on the head the result is bound to be an indifferent tune. If industry is knocked on the head we shall get neither money nor output. Then, there can be no complaint if the Secretary of State for Employment has to announce that the unemployment figure is going up beyond 1½ million.

It is time that Labour Members began to talk realistically in public as well as in private. The Prime Minister is a moderate in private. He is by experience and inclination a realist. He is a realist but at the same time, as with many other Labour moderates, he goes along with much of the extremism which is given expression in Government policy. He talks about and supports the Chancellor in cuts in Government expenditure but at the same time puts through two or three Bills which will increase Government expenditure and further depress the private sector of industry.

No man can suck and blow at the same time. It is time that the Prime Minister and the moderates in the Labour Party decided where they stand if their Government are to survive for many months longer and if under them the country is to survive. It does not much matter whether Labour Members survive, but we are concerned about the country. The Government have to face the fact squarely that it is not good enough merely to talk in moderate terms. They will have to control those in the Labour Party who until now have been calling the tune through the legislative programme.

Only one thing will improve the performance of British industry, of the country, and of any Government. That is confidence. If there is confidence in industry, there will be growth and progress. There is no confidence in industry under the present administration. The Government are living on borrowed money and borrowed time. They will go out in due course. Then we shall have a change.

What does industry expect from my party if and when it is returned? Quite a number of research groups have been considering policy. I am always a little concerned about the findings of research groups, particularly when those findings are put into effect in this House. I believe that most of the findings of those research groups should be left on the files. The next administration will have the duty to legislate as little as possible, to let industry and the people settle down. It would be better for the people if Parliament could have the maximum amount of time in recess and an economy of time spent in this Chamber. The longer our holidays, the better off will the people be. We have had a surfeit of indigestible legislation from the present Government.

The next thing that will be needed, with a new Government, is an ability to communicate, and that will be a mattes for my Front Bench, because although one may have the policy right, it is still necessary to communicate it. My advice to my hon. Friends on the Front Bench is that when we get into government they will need to prove to hon. Members opposite and to the country as a whole that we can present a Conservative Administration to the British people which is fully representative of them, not only in policies but in personalities.

7.52 p.m.

Mr. John P. Mackintosh (Berwick and East Lothian)

I look forward to the prospect of the next Government communicating with the people from the holiday resorts of the country, and I only hope that they make the sort of musical noises that the hon. Member for Rutland and Stamford (Mr. Lewis) wants. The speech that we have just heard is natural in the sense that hon. Members ought to appear to represent a certain point of view, and I accept that the hon. Member for Rutland and Stamford represents the small business men, with their attitudes to the Civil Service, to the Government and to the House, whose task is basically to protect and defend the community. However, I want to turn from that interesting speech to what seems to me to be the subject of tonight's debate. How often have speeches drifted from the subject of debate. We are concerned tonight with this last round of expenditure cuts, the reasons for the cuts and whether this round of cuts will make any profound difference, or whether we shall be back in the same situation in two or three months' time.

Do not let us forget that we went through this whole exercise in the spring. We have a massive review. We have heard all this stuff about "the most searchnig" and "the deepest" review of public expenditure since the dawn of time. We produced an enormous Blue Book. We have been through all this exercise before. Why did we have to have another lot cobbled together, desperately running round the Departments picking up £1 million here and £1 million there? It happened because of the run on the pound, which took place in June when the Government teetered on the verge as the pound went down from $2 to $1.90, to $1.80, to $1.70 and then rose to $1.71.

Then there was this putting together of the package and the obtaining of the $5.3 billion standby credit, and things held. I do not think that many Members were deceived into thinking that the reason this package was cobbled together at breakneck speed and announced so quickly before the recess was the fear of the same thing happening again before the House reassembled in the autumn. It is in that light that we have to consider this package.

The reason why the debate and the discussion in the country have tended to go off at so many tangents has been that the Chancellor of the Exchequer, in defending these public expenditure cuts, has used a variety of arguments—at least three separate arguments. As soon as he got to grips with one, he shifted to another, and from that he shifted to a third. Tonight he is back again on to his first.

One is what I call the "make room" argument. It is the rather happy argument that he started off with three weeks ago—that we are headed for a boom and that, in order to make room for exports, we have to cut back on public expenditure. A different argument, advanced upstairs at a meeting but widely reported to the Press, was that we had to make the cuts because otherwise we could not finance next year's deficit. It was the financing of the public borrowing requirement that made the cuts necessary. That argument was quietly dropped when we were told that the cuts were necessary in order to maintain confidence in the pound.

We must ascertain the real reason and decide whether the policy will meet the situation. Let me deal with the "make room" argument. This argument was never seriously advanced, although it crept back a little tonight. I refer to the argument that we have a scarcity of resources, so that if we are to have an export-led boom, we must cut back on public expenditure, as though economic forces would drive unemployed school teachers into becoming export sales managers, unbuilt roads would become extra motor car production, or unbuilt schools would lead to advance factories and a development of exports. I agree that in the long run we may need to re-expand our manufacturing industry at the expense of our service industries, but I doubt whether anyone thinks that it is necessary to do this in haste in July.

In more candid moments it was admitted by the Government that the "make room" argument would not apply until 1978–79. Only then would the British economy be sufficiently under pressure for it to be necessary to cut expenditure on the domestic front to make room for exports. That is a long-term argument. It did not require the kind of operation which has taken place in this country in the last six months.

I turn to the second policy argument—that it was necessary to have these cuts because otherwise a public sector borrowing requirement of $10 billion, $11 billion or $12 billion next year could not be financed. We all know the arithmetic which has been done on so many occasions. We were told that if employment went up, public expenditure would decline because we should need to spend less on unemployment relief and the requirement would decrease by $2 billion.

The argument is that if more money is required through Government borrowing, the rate of interest will have to be put up and we do not want the rate of interest to go up because that will strangle money going into industrial investment. We are left with the alternatives, either of printing money or increasing taxation to make up the difference. Therefore, the only way of financing the public sector borrowing requirement is to cut its total magnitude. That argument was powerfully advanced by my right hon. Friend in front of members of his party.

That is an important argument, but I do not think that anyone imagines that financing the public sector borrowing requirement in 1977–78, beginning in April, requires this sort of package. It has been produced before the Summer Recess, but it could have waited until a Budget decision next April when it could have been done with much more care and precision.

In any event, the argument is not addressed to the niceties of financing the requirement. At this point it cuts into the third argument—namely, that our foreign creditors could do their sums and could well fear that there might be a resort to increasing the money supply and returning to inflationary pressures rather than adopting other methods of financing the public sector borrowing requirement. There is the fear that that will occur.

If that were the case, the whole discussion would spill into the third argument, which is one of confidence in our currency and in our economy. Whose confidence? At least three different groups are involved. There are the central bankers from whom the standby credit was obtained, which will have to be renewed in September. The second group is the IMF, whose agreement will have to be obtained if the standby credit is to be paid back or renewed. Thirdly, there are the holders of sterling.

We should remember that those are different groups. The IMF is the American and German Govenments. The sterling holders are a vastly different number of people. They include those who earn sterling in this country, British companies, and foreign companies. They include individuals of all sorts who make the choice of whether they hold their money in sterling or in foreign currencies.

It is my guess that the primary purpose of this public expenditure package was to fulfil a promise, or an indication, that was given to the central bankers by the Chancellor when he obtained the loan or standby credit. I imagine that he gave a promise or undertaking that he would make cuts of this sort. It may not have been an explicit promise; it may not have been anything like the 1969 letter of intent to the IFM; but can anyone imagine that this package was cobbled together to nudge slightly over the £1,000 million margin if there had not been some specific word of that kind? The object of the exercise is to build up the confidence of those who had to be involved in the standby credit arrangement. Surely it was done in the knowledge that the IMF would have to sanction any renewal of the credit.

There is nothing wrong or dishonourable in that. That is how we shall have to survive. However, to please the people to whom I have referred does not necessarily mean that the great variety of sterling holders will have their confidence built up in the process. On watching the country in this week and after the House rises will they feel a vastly greater confidence in the future of sterling than they did a month ago? Are they likely to make a different judgment? I doubt whether that is likely.

From the history of sterling it is clear that in recent months and years we have had cough after cough and hurdle after hurdle. I can remember when we were told that without the first expenditure cuts we should not get the confidence of overseas holders of sterling. We were told that if we did not have a large public expenditure exercise, there would be no confidence. The exercise was held, but there was no great change.

Opposition Members may remember that we were then told that we should not regain public confidence in sterling unless the TUC accepted an incomes policy. We went through that trauma and we hurried up the progress. The trade unions were chased around and agreement was reached. We thought that everything was all right, but we were told that we must wait until the agreement was passed by the special meeting of the TUC as only then would confidence be restored. Then there was the run on the pound and we were told that this extra package was required.

Is the package likely to produce a change in attitudes? For the vast group of sterling holders—they are not only the gnomes of Zurich but British people who earn money abroad and who choose how to hold that money—this package will not represent a complete answer. Holders of sterling include authors, artists and others who earn royalties. Do they bank sterling abroad, or do they bring it back? Will their confidence in sterling be restored?

The fundamental problem—it is one that we are not facing adequately tonight—is that the confidence of sterling holders abroad and our own confidence will not be restored until the British economy is more competitive, until it can deliver the goods when they are wanted and in the quality that they are wanted. We shall not get confidence in sterling if we drift from one crisis to another and if the Government's economic policy is not coherent and clear cut. It is when people abroad begin wailing in their own parliaments that they must have import controls to keep out British Leyland as it is flooding their countries with cars and they cannot hold them back that confidence in sterling will be restored. It will be restored when everyone who orders goods that are British will get them the moment that they are ordered, or when he wants them. There will be confidence when others say that they cannot stand or meet our competition.

The background is not only governmental; it is a combination of trade union activity, industrial leadership and Government policy. However, the Government must offer a coherent economic policy. That would do more for confidence in sterling than any public expenditure package that can be dreamed up and put before the people.

A public expenditure package was introduced last autumn, but within three weeks of its introduction it was decided to bail out Chrysler. A policy is put forward by the Government and no sooner is it presented than the Government issue a circular instructing local authorities to spend money on job creation. The local authorities are told that the money must be spent not only on important things that they have just cut. Nothing does more to demoralise than when we tell local authorities to cut building programmes, for example, which means a contraction of the construction industry, and then tell them in the next circular that there is a job creation programme which means that they must take on a certain number of jobs, although they should not build any schools or roads or encourage the building industry as something else is required.

That is a cosmetic operation. It is another twitch in policy which renders confidence in our economic policy weaker both internally and externally. This is the real reason for the lack of confidence in sterling. So long as that continues, no amount of these cosmetic cuts will heal the breach. I am worried, as are some other hon. Members, that during the Summer Recess or in the autumn there will be another run on sterling.

If there is, what will happen? My knowledge of the Labour Party—I have known it all my adult life—tells me that, despite the views of my hon. Friend the Member for Tottenham (Mr. Atkinson), who wants to change matters only from within the trade union movement, we have come to the end of public expenditure cuts. I do not think that the Chancellor can do this exercise again.

There is a point at which those who have supported these measures—I am in agreement with the leader of the Scottish National Party, the hon. Member for Western Isles (Mr. Stewart), who cited the damage that has been done by cutting certain services— will come to the end of the line. What will the Chancellor do next? What will be the next cough in the downward slide of sterling?

I fear that the Chancellor will return with some of the policies advocated by my hon. Friends below the Gangway, either partially or fully adopted. I feel that he will return with a mixture of import controls as part of the policy. I agree that no other policy has been advanced, and that it is a policy spelt out clearly by the Cambridge Economic Group. I fear such a policy for several reasons. I shall outline them briefly, for Mr. Speaker has asked us to be short.

First, if import controls are to have a substantial effect on our balance of payments and allow this country to assert its independence from foreign bankers, as my hon. Friend the Member for Gateshead, West (Mr. Horam) has said, we cannot put heavy charges on imported food or on imported raw materials for manufacture. Therefore, we are limited to applying controls to a limited range of industrial goods that we import.

If we are limited in the application of import controls, it means that the controls that we can introduce will have to be Draconian. It is clear that they will have to be swingeing. The immediate effect would be to increase the prices of those products enormously. The second effect would be to encourage British industry to substitute for those imports and not to export. That is why the Cambridge school pointed out with clarity that if exports are to be maintained at anything like the required level, import control policy requires either cuts in public expenditure or taxation increases totalling £3 billion. My hon. Friends below the Gangway must face the fact that their policy would involve a reduction of the standard of living of our people which would be quite as drastic as or more drastic than anything that the Chancellor has proposed—unhappy though I am about what he has done.

The major point is that we are a trading and commercial nation. If we cannot compete with the world and make our living at our present standard of living, we cannot maintain our standard of living by putting on import controls and retreating into a sheltered economy. We shall drop to a lower standard. There is no way out for a country which cannot sell its goods in the world market and earn its living at its current rate.

If in the autumn I have to choose between an attempt once again to put British economy policy on a coherent strategic basis, to get it competitive and effective and in a growth-oriented pattern and an import controls strategy of retreat, of acceptance of a second-rate level of economic activitity and a much lower standard of living, I shall not vote for that second policy. I shall not wait to put my case through the TUC: I shall not vote for it on the Floor of the House—and I hope that we do not have to face it.

8.11 p.m.

Mr. D. E. Thomas (Merioneth)

I shall not follow the hon. Member for Berwick and East Lothian (Mr. Mackintosh), save to say how much I welcomed the forthright nature of his remarks. I only wish that the same kind of forthrightness could have been forthcoming in all our economic debates—particularly on public expenditure—from the Treasury Bench.

I endorse what the hon. Member said about the need for both short-term and medium-term economic planning. Those of us who are avid readers of Tribune—as no doubt many hon. Members on this side are—will have noted the interview in last Friday's issue in which the major matter exposed was the total failure of the Treasury civil servants to undertake any medium-term economic planning whatsover.

However much we may differ as to the nature of that planning, as to the mix between private and public investment, private initiative and public control, within that planning, we must certainly all be agreed upon the need for rational economic planning. This hits us particularly in the case of development areas such as Wales, the North of England and Scotland.

I have been concerned in the Chancellor's rushed package about the effects of the proposals for REP equalisation, for example, on the Welsh economy. I welcome REP equalisation in principle in terms of restoring equality between male and female labour, but when there is a low female activity rate because of the failure of successive Governments to provide the potential female labour reserve in Wales, for example, with the jobs that women would like to take up, the REP equalisation will result in a net reduction of regional policy resources within the Welsh economy rather than a maintenance of those existing resources.

I am also concerned about the impact of the payroll tax in creating further unemployment, when Wales already has an intolerably high level of 8 per cent. unemployment.

Mr. Horam

Does not the hon. Gentleman agree that a switch from indiscriminate subsidies like REP towards more selective help could help his region and regions like mine, the North-East, just as much as we should with a higher rate of REP?

Mr. Thomas

I am grateful for that intervention, because that is precisely the point I intend to develop—that although we have had an indication of where the switch is to be made, or at least where the initial switch is to be started, we have not had a clear indication of precisely where that switch is going and how much the total switch entails. What I am asking for is an indication of how much is going in addition to the Welsh and Scottish Development Agencies to provide selective assistance for development.

Mr. David Mitchell

Would not the hon. Gentleman accept that selective assistance can never help the large mass of small firms in the way that is necessary if they are to survive and prosper?

Mr. Thomas

We need both the broad range of incentives which are available and also selective assistance, particularly in the form of equity participation for larger projects in development areas. We need to know whether resources are being transferred in regional policy from REP, which is in effect a regional devaluation, into more selective financial assistance. We need to know how much is being channelled and for what specific purposes it will be used.

One other aspect which has not been stressed so far in debate which has tended to centre naturally on the issue of wage inflation and its relationship with public expenditure as a policy to contain wage inflation is a real discussion of the impact of these cuts on the social wage. The Chancellor has always avoided discussing these issues in detail. His right hon. Friend the former Secretary of State for Social Services, the Member for Blackburn (Mrs. Castle), talking about the social wage last year, said that the most important part of the standard of living of most people depended on the great complex of services we call public expenditure. She said that they were not only the key to the quality of life but the key to equality. She said that the great advances had come from better education, health services, housing, care of the old, the disabled and the handicapped.

As we know, the social wage as a percentage of total public expenditure is now up to 60 per cent. In one of his Budget speeches, the Chancellor said that the social wage had been increasing much faster than ordinary wages and prices, but what he failed to take into account was the fact that the social wage is paid mainly for the benefit of the greater part of the population which does not receive a working wage or a salary. Wage earners are already outnumbered by the totals of dependent children, the elderly, the sick, mothers rearing children, the later school leavers, the unemployed and so on.

We must have from the Treasury Bench tonight an analysis not only of the potential effect on international creditors—on the IMF—but of its effect in terms of the level of the social wage on families. We have already seen, in the Government's failure to implement their programme of social policy—particularly their income maintenance programme—that we are facing a real reduction not only in take-home pay but in the relative position of the social wage and the overall services provided through out public expenditure.

My specific concern, naturally, is with the £12 million reduction in the budget of the Secretary of State for Wales—a reduction in money spent on roads, on the health and social services, on education and on local authority services. I am concerned about the effect of these cuts not only on the statutory services themselves but on the back-up services and the replacement services which so often have to be provided by voluntary bodies.

Any further cuts in statutory social services, any erosion in the social wage through the statutory provision, places additional huge financial burdens on organisations whose voluntary work props up the inadequacy of Government policies. Whenever there are public expenditure cuts by statutory authorities, both central and local government, an additional burden is placed on the resources of voluntary bodies.

I am particularly concerned here with those voluntary bodies involved with one-parent families, with the homeless and with housing needs—I am thinking particularly of groups that I know well in Cardiff—which operate replacement services for those which are not provided by the local authority, and which will have to face an additional 2 per cent. on the payroll of all their staff. This is added to the cuts in expenditure on social policy and will provide an additional burden on the voluntary sector. The Government should consider whether it is not appropriate to have a policy of exemption, or perhaps a lower level of any payroll taxation that they impose on those persons who are employed by voluntary organisations which are making up for the deficiency of the statutory provision of the Government themselves.

I shall concentrate the time left to me on an area of expenditure which is causing severe problems in Wales—housing. About 48 per cent., or nearly half, of our houses are pre-1918 as compared with just over 30 per cent. in England. Not only is the housing older in Wales but it follows that the condition of our housing is far worse.

Surveys conducted in 1968 and 1973 indicate that one house in six is unfit. The number of unfit dwellings in Wales increased from 92,000 in 1968 to 147,500 in 1973. Of the unfit dwellings 65,000 were in the central and eastern valleys of Wales and 33,000 in the remainder of industrial South Wales.

We face a major housing crisis, yet, the reaction of the Welsh Office is to reduce public expenditure on housing in real terms. For 10 years we have declared that there should be a planned programme for housing to deal with the housing crisis. The view of the Plaid Cymru research group is that over 25,000 houses a year should be cleared or improved to deal with that crisis. That is the need if we are to overcome the problem. It represents a target of nine per 1,000 population. The present level of achievement is six per 1,000 population, which compares badly with other countries. Our record is far below that of Switzerland, Japan, Finland, Australia, Holland, Iceland, Sweden, Spain, France, Norway, Germany, Denmark, Canada, Greece, and even Ireland.

The reaction of successive Governments—and here the Conservative Government have much to answer for—has been to fail to face the mounting housing crisis which becomes worse each year. Because of the age and poor conditions of housing in Wales, the number of unfit dwellings can be expected to increase at a rate of about 10,000 a year for the next 20 years. That means that at least 16,000 houses need to be improved or replaced each year. Not only do we need a programme of massive rebuilding but one of improvement. It is in that context that we look at the cuts.

According to the White Paper housing is to receive £20 million less in real terms in 1979–80 than in 1975–76. But last year the Secretary of State for Wales boasted of a 20 per cent. increase in spending on housing in Wales. That was a freak and we shall not see that level of house building maintained. The 17,000 houses that were built last year will fall far below the level of the Conservative Government's achievement in the early 1970s.

The Secretary of State said of housing in Wales in an oral answer on 26th July that he had been able to obtain an additional £20 million to £30 million for house building in Wales out of the Contingency Fund. That figure represents only a partial restoration of the cuts introduced by the earlier White Paper. In real terms the Government are far short of a realistic target if we are to bring the housing stock of Wales up to the British average, which is no marvellous objective. We need an additional £80 million a year and not just the £20 million. which is merely a partial restoration of an earlier cut.

We should not only look at the need for an increased public sector house building programme but at improving the rôle of local authorities in providing loans. I criticise the Government for the way in which they have passed the buck to building societies in that respect. Local authorities are of particular importance in Wales where a high proportion of houses are old and where people are relatively lower paid. The level of personal wealth per capita in Wales is only 72 per cent. of that of the United Kingdom and there is therefore a particular need for local authority loans.

Building societies in Wales and the rest of the United Kingdom have failed to provide the borrowing that is required. The importance of local authority funds to potential house buyers in Wales is shown by the fact that in 1974, when there were no ceilings, just over 5,000 advances were made by local authorities in Wales compared with about 23,000 by building societies. It is therefore clear that local authority advances play a vital part in housing policy.

I am anxious lest the decisions to cut back on local authority lending pre-empt what is supposed to be an inter-departmental review of housing finance. In that respect the one hand does not know what the other is doing. The Treasury cuts back on local authority lending at the same time as another Department looks at housing finance. That is intolerable.

I seek an assurance that any decisions on reductions in local authority mortgages will not pre-empt the housing review, which I hope will start to switch resources from the upper end of the market to where they are needed—for the improvement of housing stock in areas such as Wales. I stress that if the Government are not prepared to restore the level of housing expenditure in Wales and are not prepared to restore local authority loans, they will be resisted from all sides.

After our debate on the Aircraft and Shipbuilding Industries Bill, no debate would be complete without a question from the South Wales Echo. In its edition of 28th July we read that the leader of Labour group on Merthyr Borough Council, the Rev. Bill Morgan, said: Housing is not an area where cuts should be made—what about defence? Labour councillors have attacked the circular from the Welsh Office. Labour councillors on other authorities in Wales, such as the Cynon Valley Borough Council and the Rhymney Valley, support the lead taken by Plaid Cymru councillors in resisting the cuts, and particularly what is described as "Government by telephone". Late on Friday afternoons the Welsh Office rings up chief executives and says "Stop your council house building programme for anything which has not been finally approved." That kind of government by telephone call and circular, that restriction on local authorities' freedom of action to decide their own priorities in their own areas, is being resisted by Labour councillors.

This final round of cuts—in my view it must be the final round—is the end of the road for Labourism in Wales. The cuts will not be tolerated by the Labour movement in South Wales. In the late 1960s it was conned into tolerating Wilsonism, into tolerating the cuts in public expenditure made then and the policies of unemployment of that Labour Government. The Labour and trade union movement in South Wales will not tolerate the present round and the implementation by a Labour Government of Tory policies.

The people of Wales will increasingly turn to the only radical alternative on the Left in Wales. We shall see my party in control not only of Merthyr District Council and the Rhymney Valley District Council but of Mid-Glamorgan County Council next May.

8.30 p.m.

Mr. Frank Allaun (Salford, East)

I wish to speak in support of the amendment tabled by 71 Labour Members. If I were a clergyman, which manifestly I am not, I should choose as my text for tonight "The Government should cut the dole queues, not social expenditure". This happens to be the slogan of the AUEW technicians' section but is none the worse for that.

Recently a North-West bus engine maintenance factory advertised three vacancies for apprentices. Four hundred unemployed boys queued up for those three vacancies. I know one young man who has never had a job and who spends his days writing letters in reply to advertisements, letters to which he never receives an answer. What a discouraging, heartbreaking, way to start industrial life!

The tragic figure of 209,000 unemployed school leavers will go up with a jerk in the next few days. For the current figure, whilst including Scottish school leavers who broke up a month ago, excludes those in England and Wales who have left school since.

The total out of work is already 1.45 million, plus those who, although out of work, have not registered. At such a time, for the Government to embark on measures which are bound to increase those numbers still further is unforgivable. The number of additional jobs lost will not be 70,000, as estimated by my right hon. Friend the Chancellor of the Exchequer, but at least 160,000, as stated last week by the Treasury's Deputy Chief Economic Adviser, Mr. Posner.

We on the Left have always said that if unemployment should reach a total of 1 million, racialism would spread. Now that has come about. It is so easy for the Fascists to blame coloured men and women, using them as a scapegoat for the justifiable anger with a society which has put 1 million out of work. That was Hitler's tactic. To defeat it we must defeat unemployment.

If the unemployment total rises to 2 million, which is not impossible—it is moving in that direction—we shall hear voices saying that we cannot afford this deficit in public spending and we must cut the dole. Shades of 1931, which I remember very well.

My right hon. Friend the Chancellor has given in to the combined pressure of the bankers at home and abroad, the IMF, the City, the CBI, the Press Lords, the Tory Party leaders and some top officials inside the Treasury. It is their policy which is being implemented. Some of us warned of this danger 18 months ago. Against that we shall have to mobilise the counter-pressure of the Labour and trade union movement. If we do not win, reaction, having tasted blood, will soon be back again, demanding a further series of cuts.

The Cabinet threatened us two months ago with a cut of £1,000 million in public spending, but on top of that they have imposed a 2 per cent. increase in employers' national insurance contributions. That will, of course, be passed on to the consumer. Therefore, not £1,000 million but £2,000 million is being taken out of purchasing power. To do this when there is already massive unemployment is so deflationary as to create inevitably still more unemployment. One might think that the Cabinet's message to the nation is "Keynes is dead. Come home, Sir Keith, all is forgiven."

The Chancellor has argued that he must cut the public sector to release resources for the export industry, Unfortunately, with 1,500,000 unemployed and firms working at only partial capacity, there are more than enough resources to cover both spheres.

It may be asked "What do you consider to be full employment?" I would reply—I do not think everybody would agree with me but this is my strong view—that full employment means not more than 260,000 unemployed, the number recorded in 1966. Therefore, there are 1,250,000 workers—a mighty number—who require to be absorbed.

Consider how this policy will affect the housing shortage, which is causing a mass of human misery—and, as I wish to make clear to the hon. Member for Merioneth (Mr. Thomas), not only in Wales.

The Chancellor announced last month a cut-back of £150 million, but that is in addition to a cut of £284 million in projected expenditure announced in the White Paper in February. Together this constitutes an extremely heavy double blow.

We have been told by the Chancellor that his cuts will not apply until next year. I regret to say that this is not the case in regard to housing. A complete three-week freeze on all local authorities is now in force. Some say that it will last three months, but whether or not that is the case, immediately that freeze ends there will be drastic cuts imposed on house-building programmes in many, if not most, local authorities.

This is occurring because it is argued that local authorities are building more than was planned for this year. But up to now they have been free, and indeed were encouraged, to build as many new homes as they could. Now the brake is on. Every new house built will have to have Government sanction. Outside the stress areas the numbers sanctioned will be reduced or even ended.

I hope that my right hon. Friend the Chief Secretary in replying to the debate will answer the question—what reduction in the number of public sector starts is envisaged and will be required in this financial year, let alone the year 1977–78? Although I represent a stress area in the Greater Manchester conurbation, I do not forget that even in towns such as Bournemouth council houses are essential. A bus driver in Bournemouth, if his family is to find a home, is as dependent on a council house as is a bus driver in Salford. It is criminal folly to cut housing. There are so many building workers out of a job.

If we include those in the related trades, such as bricks, timber and glass, unemployment in the construction industry now totals not 200,000 but 260,000, as official Ministry figures will confirm. It costs more to keep these people out of work than to keep them fully employed, building what our people need. Consider an average family of father, mother and two children, with the breadwinner earning £60 a week. If he loses his job it costs £61 a week to keep him and his family in unemployment and other benefits and in loss of tax which would otherwise have gone to the Chancellor. How stupid can we get?

There is a second housing cut of £146 million in the amounts local authorities can lend to those who cannot get mortgages from building societies, because they wish to buy older type houses, because they are on low incomes or because they cannot raise the deposit. It must be remembered that many local authorities give 100 per cent. mortgages. We have been told by the building socie- ties and by the Government with infuriating complacency that the societies will make good this deficiency. They promised last year to make good the earlier £100 million cut by the Government. The Government entered into an arrangement with them with the best intentions. Yet 12 months later the societies report that only one-third of this sum—£34 million—had been made available.

Many cities found that only a fraction of the applications they had sponsored had been granted. In Salford, it was 11 out of 88. And probably these were people who would have got mortgages from the building societies in any case. I propose to give new evidence of red lining—that is, the process of starving the old inner-city areas of mortgages by the building societies, in an Adjournment debate tomorrow night. I warn the Government that the same thing will happen again unless they require the societies to make 10 per cent. of their total advances, now running at a rate of £6 billion a year, available to local authorities for the purpose of helping the poorer half of the community to buy a home.

I conclude by saying this to the Government: it is easy to cause unemployment but it is not so easy to stop it. Therefore they must cancel the cuts before irreparable damage is done.

8.44 p.m.

Mr. Wyn Roberts (Conway)

There is deepening concern about our future in all parts of the country. Nowhere is this concern more acute than in the assisted areas where unemployment is heaviest. Wales is no exception. We have 81,000 unemployed, representing 8 per cent. of the working population. This is in midsummer. What will the position be like next winter? It is bound to be grave.

When I look further ahead, to next year, I can see little consolation. The rapid expansion in the United States since mid-1975 seems to be waning. If its recovery peters out, the prospect of a significant upturn in the British economy is bleak. I do not share the Chancellor's optimism. He seems to be gambling on an upturn which may never happen. That is the realistic background against which I view the Government's measures.

The Chancellor of the Exchequer would have us believe that his measures were designed primarily for industrial recovery next year. Since his announcement, the whole country has learned that his package had very little to do with industrial regeneration, and that has been pointed out by Government supporters this evening. The package was virtually forced upon him by our foreign creditors and the fact that the Government must seek further credit before the end of the year.

The Chancellor of the Exchequer apparently is unwilling to say how much of the $5,000 million standby credit arrangement has been consumed. I can well understand his reluctance to answer that question in view of the rumours currently circulating about the proportion of that standby credit which has been used up even in two months and with four months still to go.

There was a lack of candour in the right hon. Gentleman's statement which seems to characterise the whole Government. When I questioned the Secretary of State for Wales on Monday of last week about the effect of the public expenditure cuts on Wales, he said that they would amount to about £12 million, and he went on: On the other hand, an extra £20 million has been made available for housing in Wales and in addition extra resources will be made available to the Welsh Development Agency. There is no reason to believe that employment in Wales will be more adversely affected by these changes than elsewhere in the United Kingdom."—[Official Report, 26th July 1976; Vol. 916, c. 14.] I do not think that that is a frank and complete answer. Anyone would think that we were to gain by the right hon. Gentleman's changes, but everyone knows that that cannot be true.

The combination of reduced REP, delay in the payment of investment grants, a more selective approach to assistance, the cutback in investment by nationalised industries on which we are heavily dependent for employment in Wales, coupled with the increase in employers' insurance contributions will have a very serious adverse effect on the Welsh economy.

I am not attacking the Government's policy of cutting public expenditure, although I believe that many of their cuts are misplaced. My right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) was right when he intervened earlier to point out that under this Government public expenditure had doubled and so had unemployment. The Government have taken the first gingerly step in the right direction. I am attacking their lack of candour. I am criticising them for not being more honest with us and with the people and telling the truth about our present desperate situation, rather than trying to bluff their way out and blinding people with false optimism.

We in Wales know, as well as Mr. Posner who appeared before the Committee on Public Expenditure, that the Government's estimate of 60,000 more unemployed in the United Kingdom as a result of these measures is very conservative and that the real increase may be anything up to three times as many. We know, too, that the brunt of the increase will have to be borne by areas such as ours. They will be the worst hit.

What does the Secretary of State for Wales propose to do about it? He will secure additional resources, undefined as yet, for the Welsh Development Agency which is not yet equipped to do anything except carry on the work of the Derelict Land Unit and other bodies that it has taken over as going concerns. I warned the Secretary of State at the inception of the agency that he was wrong to expect it to be our salvation in Wales and to have a significant effect on unemployment.

The first essential is to encourage industrialists and business men to have the will to invest. Apart from lack of resources, the will to invest is not present in industry and business today. It may be, as some of my hon. Friends have pointed out, that high interest rates are sapping the will to invest.

The Government, in their dealings with the CBI, have failed miserably to provide such encouragement to industrialists. Now they positively discourage investment by increasing the employer's insurance contribution. It is a tax on employment and, coming after the Employment Protection Act—another serious deterrent to employment—it is bound to cause layoffs and redundancies.

We are all agreed that investment is essential, but it is difficult because the Government, as the Prime Minister pointed out, are pre-empting a large proportion of the national resources. That proportion must be reduced probably more than the Government have reduced it now.

Investment is best made by those who make the profits and enable investment to take place. What evidence have the Government that they can do it better? All the evidence surely points the other way. Yet the Labour Party clings to its ideas about nationalisation and intervention with nothing short of crazy persistence. The Government are changing the mix in the mixed economy, as has been pointed out, in favour of the less profitable nationalised elements in it. They seem to feed the gander and starve the goose which lays the golden eggs, and then complain when the goose is too under-nourished to lay.

My right hon. Friend the Member for Taunton (Mr. du Cann) was right to say that when public expenditure increases beyond 60 per cent. of GDP we have reached the limit and just cannot go on. Yet there is no sign of any abatement or change of heart on the part of the Government and the Labour Party.

Wrong-headed, spendthrift Government policies lie at the root of our troubles and the economy will continue to deteriorate while these policies are pursued. The Government must begin by being more honest with themselves and with the Labour Party and then perhaps they will be more honest with us and with the public at large. Alas we are faced with the bluff of a blustering Chancellor, which impresses no one but himself.

8.53 p.m.

Mr. Julius Silverman (Birmingham, Erdington)

In the short time at my disposal I should like to make a few comments which I hope will help to bring the subject of public expenditure into better perspective.

First, among Western European developed nations we are comparatively low in the public expenditure league. When we talk about the strength of government and so on, we should bear that in mind. The difficulty is that at present we do not have the resources to pay for that public expenditure.

Secondly, when we talk about public borrowing requirements we should always remember in the days when it is assumed that Keynes is dead and gone that if it were not for public borrowing and deficits over the last 30 post-war years, the whole of the Western world would have faced an enormous unemployment crisis. Therefore, public borrowing and deficits have become an essential part of our economic make-up. It is the system that demands it. Otherwise, the system is self-defeating.

The third point about unemployment is this. The hon. Member for Conway (Mr. Roberts) and, indeed, the right hon. Member for Leeds, North-East (Sir K. Joseph) have said that under the present Government public expenditure has doubled and that employment has also doubled. However, it is really the other way around, because nearly half of our public expenditure borrowing requirement is due to unemployment pay, as my hon. Friend the Member for Salford, East (Mr. Allaun) said, and to loss of income tax and the increase in various other items of social benefits that are necessary. I think that a calculation appeared in The Times recently that nearly half of the present rate of public expenditure was due to unemployment. That must be borne in mind.

Therefore, one ought to inquire—and not sufficient time has been given to this—why this unemployment exists. It is due partly to the great world recession, which has affected us as well as other countries. We, however, are in a situation that is worse than that of other countries, because for this country it has been traditional that we export our industrial goods and import our raw materials. We are an exporter of industrial goods. We use those goods to finance our purchases of raw materials. For this country that has always been assumed to be one of the facts of life.

The pattern has now changed dramatically. I notice that in the first half of the current year alone, we have been importing manufactured goods at the rate of £16,000 million a year. We cannot do it. Well over 75 per cent. of the value of what we export in manufactured goods we import in manufactured goods. In relation to the EEC, for instance, we have a net deficiency in our balance of trade in manufactured goods of well over £1,000 million. In regard to West Germany alone the rate of deficiency is £900 million a year.

We then go to these other countries, including West Germany, and say "Will you please lend us the money in order that we can continue this crazy arrangement of spending our resources on importing manufactured goods that we ought to be producing ourselves?" That is the present ridiculous situation. The same applies to Japan and other countries. This results in not only our balance of payments deficit but the enormous unemployment, which is the most important and significant part of our public borrowing requirement at present.

I should have thought that the major defect in the strategy outlined by the Chancellor today was the complete absence of any discussion of the essential point in our industrial position—what we are doing about import substitution. What planning can be done with industry and the unions to effect this substitution, whether by import controls or any other arrangement? That is the major problem of the Government's strategy. That is the point that one has to bear in mind.

I would refer to one particular aspect of the cuts before drawing my remarks to a close—it has already been mentioned, but it is worth while mentioning again—the disappearance of £146 million from local government borrowing for mortgages. This will create a serious housing deficiency because local authorities cater for a certain sector of housing —the older houses and houses in the less desirable districts—which, so far, the building societies have either been unable or unwilling to tackle. I am told that one can enter into agreements with building societies about this but that the building societies cannot transmit the matter to branch level because branch level will refuse to give mortgages in those districts or for those particular houses.

I should have thought that the sensible proposal would be to tell the building societies "Lend your money, or part of it—say, £150,000 or £200,000—to the local authorities and they will do the sorting out. They will see that your security is maintained and that you get your interest. They will ensure, for they have the experience to do so, that this section of the housing market is adequately catered for."

One or two points in the cuts, apart from the broad strategy, call for reexamination by the Government, and I hope that they will be considered.

9.2 p.m.

Mr. Nick Budgen (Wolverhampton, South-West)

In the very few moments which may be left to me—I am not sure how many—I would like to deal with the points raised by the hon. Member for Salford, East (Mr. Allaun) about housing expenditure.

The hon. Gentleman spoke as one who represents an area of high housing stress and an area which has been affected by the many mistakes of many Governments in spending so much, and devoting so many resources, to housing which has unhappily resulted in a dreadful sense of failure and despair. I would suggest that the price which the hon. Member for Salford, East will have to pay, if he is to see a continuing high level of council house building, is a very substantial increase in the rents paid by the tenants of council houses. That is the bullet upon which the Government will have to bite and they will have to do so fairly soon.

The declining proportion of the rents which go towards the cost of providing council houses is quite ridiculous. From page 68 of Cmnd. 6393 it is plain that the amount by which rents cover the cost of housing has declined from 82 per cent. in the early years of the decade to 43 per cent. this year. It is plain that the two main factors have exercised the Government's mind since they came to power. During the first period of power they could not raise council house rents because it was necessary to bribe the electorate in order to win the second election. During the period after that rents could not be raised by more than 60p a week because that was the indispensable condition to a form of wage control. It was part of the social contract and part of the price that this Government, indeed any Government, have to pay if they are to have any form of statutory control of wages. The result has been a doubling, no less, in the amount of central Government subsidy paid to council house tenants.

This cannot go on, for the price which is being paid in Salford, in Wolverhampton and elsewhere is that council houses are now not being made available to those who ought to have them, to those who are in need, to exactly the people who ought to be in council houses. The subsidy is going to the rich, to those bringing into their homes £100 a week or perhaps even more than that. The subsidy is indiscriminate.

It is no good the hon. Member for Salford, East and others like him wringing their hands and saying how dreadful it is that the housing budget has been slashed, how dreadful it is that the building societies do not act as though they were arms of the State, as though we had already nationalised the building societies. It is dreadful, says the hon. Gentleman, that the building societies do not lend in the way the Government direct.

The price which must be paid, and paid soon, is that council house rents will have to rise. I know that many hon. Members on the Government side recognise that, but they then say that it is not possible to free a market once it has been rigged. There are political difficulties. They will argue that the Tories introduced the Housing Finance Act, and did so in a doctrinaire and aggressive manner, with the consequence that it is no longer politically possible to raise rents.

There may be an argument there, but I remind hon. Members of one fact. The previous Government rigged the market in the price of the goods and services provided by many nationalised industries, but those prices have been raised. A number of nationalised industries are now beginning to show a profit—not a large profit, but at least a profit—and what that demonstrates is that, in spite of the need to bribe the electorate, in spite of the need to try to explain necessities of wage control, it is still possible for the State to allow some prices to rise.

In these circumstances, my advice to the Government is this. They have done quite well in that respect. Let them be reassured, let them be brave, let them recognise that it may still be possible to allow council house rents to rise. If they do allow them to rise, more money will be available for those who need council houses, for those in real need—not for the rich, not for those who happened to get a council house through historical accident 20 years ago. Housing will be available for those who need it, for those towards whom we ought to feel a sense of compassion, those for whom a caring society ought to feel real concern.

We are not interested in hereditary tenants. We are not interested in those who, perhaps 20 years ago, were in need. We are interested in those who are in need today, and we ought to make resources available, even if it be at the cost of offending those who for many years have had very cheap housing.

9.3 p.m.

Mr. Michael Heseltine (Henley)

The debate has ranged widely, as the House must have expected, and the many-sidedness of the various approaches to its subject matter has shown up the inevitable problems facing the Chancellor in reaching the conclusions which he put to us. I think that the House would, however, have felt that the right hon. Gentleman was being fairer with it if he had been less prepared to put figures before us which do not stand up to investigation.

First, I believe that the Chancellor did not present either to his own supporters or to the House the full international comparison on unemployment within which context the Government's record must now be judged. It has been one of the Chancellor's oft-repeated statements that unemployment may be bad here but, of course, it is a great deal worse elsewhere, or at least no better. The reality, on the other hand, is that the internationally adjusted comparisons show that the United Kingdom now has a higher rate of unemployment than that in most of our main competitor countries. The figures are dramatically worse in this country.

When the Chancellor says that he is now introducing measures, albeit belatedly, that are intended to reduce public expenditure and that he is anxious about the effects of unemployment, it must be realised that he is doing some two years late what other countries already have done. They took on the burden of doing so and told their people the truth and have now seen the worst of unemployment put behind them, whereas in this country we have the worst of unemployment yet to come. The second inaccuracy in what the Chancellor said today—

Mr. Litterick

We understand the point, but we should like to hear the factual basis for it.

Mr. Heseltine

I will willingly give the factual basis. The unemployment percentage in the first quarter of 1976, seasonally adjusted, for the United Kingdom is 6.2. For Italy it is 3.6, for France 4.8, Germany 4 and Sweden 1.6. Those are the adjusted internationally comparable figures. I realise that it makes the case harder for Labour Members who are trying to suggest that things are not as bad in this country as people know them to be. Those are the internationally comparative figures and if the Chief Secretary would like to produce other figures on a genuinely internationally comparable basis we should be very interested in them.

My hon. Friend the Member for Horn-castle (Mr. Tapsell) intervened in the Chancellor's speech to make the point that the money supply increases under the Government of my right hon. Friend the Member for Sidcup (Mr. Heath) were rising at a time when production was rising in 1973. The Chancellor replied that production was not rising in 1973—I think the words he used were that the economy had seized up. If we look at the statistics for production output and cost we find that in 1973 production for all industries rose by 8 points over 1972. The Chief Secretary shakes his head. I would be happy to pass him the Monthly Digest of Statistics and he can then quote alternative figures. If he is talking not on an all-industry basis but on a manufacturing industry basis the same applies. In 1972 the figure was 102.4 and in 1973 it had risen to 110.8. The only figures that the Chancellor might have had in mind when he talked about the economy seizing up came later. Having peaked in 1973, industrial production was down to 106 in 1974 and to 101 in 1975. There has been no sign of an improvement. Any seizing up of the economy that has taken place has followed the election of the Labour Party and particularly the activities of the Chancellor of the Exchequer.

The general approach on this crisis round of the Chancellor of the Exchequer is that he has worked out a very careful strategy which he has brought to Parliament to readjust by a certain amount of fine tuning the economic management of the economy in order to keep us on a safe and steady course. In other words, the whole activity is carefully conceived and planned to provide the right background against which the public sector borrowing requirement might be used in an orderly way to release resources for the private sector.

One gets the impression that the Chancellor genuinely believes in the sense of order and purpose with which he puts the scene before us. The reality is totally different. The reason, as my hon. Friends have pointed out consistently, as have hon. Members opposite, is not that the Chancellor had planned to come to the House and to cut public expenditure. The reason that he has come to the House is that, having negotiated the $5.3 billion stand-by which expires on 9th December, he must either renegotiate the stand-by or find another method of replacing the funds. To do that, he must go to the creditors and offer them a new economic strategy for this country.

That is the time imperative which hangs over the right hon. Gentleman's head. The idea that there is any sense of order about it is completely to misrepresent the situation. He has no choice but to put forward a new economic strategy and that is the reason for the series of much discussed and much leaked Cabinet interviews in the last few weeks from which anyone who is interested enough to watch what goes on knows broadly the nature of the proposals and of the decisions. We know broadly which proposals the Cabinet supported and which it rejected.

But the proprosals which the Chancellor originally presented to the Cabinet were not those which emerged. They were not even the proposals in total sum. Originally the Cabinet discussed reductions in public expenditure of about £1 billion in the following financial year. By the time the discussions were over it had been made clear to the Chancellor and to other members of the Cabinet that that level of public expenditure reduction would not be sufficient. That was why towards the end of the discussions an extra £1 billion had to be found quickly and in a wholly random way, without going back over any of the previous deals which had been done by spending Departments and members of the trade unions fortunate enough to be consulted.

Therefore, a rapid deal was done in the closing days of the time available before the House rose for the Summer Recess and the Chancellor produced his public expenditure cuts. We all know that in facing the Cabinet and the House the right hon. Gentleman had an impossible task from the start. He wanted to persuade our creditors that we would bring a degree of economic control to the management of our affairs. At the same time he wanted to persuade the Left wing that no essential ideology would be challenged. He wanted to persuade industry that the Government were genuinely interested in backing success and increasing profits. He wanted to persuade the trade unions that he was in no way going back on the tax reduction deals made at the time of the last Budget.

All those things are totally incompatible. There was no way in reality by which the arguments could stand up and remain all on one side. That is why hon. Members below the Gangway opposite have gone to extraordinary lengths to get a debate on this issue. It is the first time that I can remember—indeed I understand that it is the first time that it has happened—that the House has been presented with a budgetary adjustment of £1.8 billion without the Government making any attempt to debate the issue in the House. We are having a debate only because the Opposition found time for it in their Supply allocation. Hon. Members below the Gangway should be complaining not because their motion has not been called but because the Government tried, by every devious means at their command, to deny them the debate that is their full and legitimate entitlement.

When the Chancellor of the Exchequer made his statement today there was an interesting intervention by the hon. Member for Penistone (Mr. Mendelson), who raised the question of the growth projections on which the strategy was based. The interesting point about the Chancellor's latest posture is that, despite the cuts and the hardship that they will cause, the bulk of independent observers do not believe that they will be the last. They do not believe that he has got his strategy in line with what is likely to happen in the next two or three years.

The hon. Member for Penistone said "Let us suppose that unemployment gets worse. Let us suppose that it is not contained within the 60,000, 100,000 or 150,000 predicted, depending on which expert one listens to. Will you turn up the steam so that we can get reflation going earlier? "The Chancellor replied that there was no question of that—that if he got it wrong this time, the cuts in living standards that he would have to impose would be of a magnitude little dreamt of by his hon. Friends but talked about consistently by my hon. Friends ever since the Chancellor introduced his first highly inflationary Budget in 1974.

The Chancellor is taking the risk that he can maintain a growth rate of 4½ per cent. in the domestic economy. In his view, that will sustain the level of the public sector borrowing requirement which is still built into his calculations.

Have hon. Members opposite stopped to think what prospects there are and what expert outside evidence there is for thinking that the 4½ per cent. growth rate will be achieved? What is the summary of outside statistical evidence? The OECD, the London Business School, Phillips and Drew and the National Institute do not agree with the Chancellor. The only summary published since the right hon. Gentleman's last statement shows a figure that is only half the growth rate of GDP upon which the Chancellor has pitched his whole strategy.

As always, the Chancellor is taking a last extreme risk with the British domestic economy. Doubtless he will be back to explain how the next adjustment is part of an overall strategy—unless his hon. Friend the Member for Berwick and East Lothian (Mr. Mackintosh) is right and there is no coming back because the tensions in the Labour Party are now so great that any further downward adjustment of public expenditure or the borrowing requirement will persuade them to face what they have never faced before —that half the party has nothing in common with those on the Front Bench except the platform they share at election time.

The issue that has been most frequently discussed in the debate is the attitude of British industry and whether it can reasonably be expected to play a greater part in Britain's recovery. Let us start from a basic principle which will not be challenged, even by hon. Members opposite. The purpose of being involved in free enterprise activities is to seek profit. Hon. Members opposite may not like it, they may regret it or regard it as immoral, obscene or a massive misuse of national resources, but as long as there is the opportunity of profit, that is the free enterprise system and it is necessary to understand that basic fact. As long as there is the prospect of profit, it is reasonable to assume that the free enterprise system will invest, provided that it can see markets in which it can sell at prices which earn adequate returns on capital.

This is a harsh lesson to which the Treasury Benches have come to pay lip service time and again. It is intriguing to listen to abandoned Ministers coming to the Dispatch Box and using words in support of the free enterprise system and seeing the solemn faces on the Back Benches. Then late at night, in a momentary lapse, an escaped member of the Tribune Group, who has somehow found his way into Government, comes to the Box and lets fly at profit and his hon. Friends metaphorically cheer themselves red because someone is satisfying their wilder instincts.

Mr. Sedgemore

Give him some bromide.

Mr. Heseltine

I know that hon. Members opposite do not like it, but they will just have to sit there and take it for another 10 minutes. Any physical activity of mine is as nothing to the singing that we expect from them at the end of the debate.

Given that the private sector will pursue profit if it has the opportunity, is it in a position to see that prospect and, if so, to pursue it with the resources over which it has control? As part of the package introduced at one minute to the hour—just as the Cabinet was about to agree the rest of the items— the Chancellor has taken £1,000 million in a full year out of the free enterprise economy. In other words, he has reduced its ability to invest, to respond to any market opportunities that exist. His argument is that it does not matter so much because it will all be passed on in higher prices to the consumer.

This is the Chancellor whose profound understanding of the capitalist system is such that when he first came to power in the Budget which started the reverse trend—that of hostility towards the capitalist system—he said I see no reason why the mass of British business should find itself short of money for investment in the coming year. That was his statement in the Budget Speech of 1974.

Anyone who thinks that it was the Government of my right hon. Friends that acted in a way inimical to the free enterprise system should remember the Chancellor's other comment in that speech: Business is in a uniquely favourable position today."—[Official Report, 1st April 1974; Vol. 871, c. 1007–08.] Since that time, as a result of the activities of the Labour Government—in the social contract wage explosion, in increased taxes, and in the tightening of the Price Code—the corporate strength of free enterprise companies has been destroyed. Any one who wants to see the figures needs to look only at the periods and the company liquidity figures published at the end of last week which showed that in the aggregate of four years from 1974 to 1977, on the assumptions the Chancellor has put before the House, the entire corporate sector of Britain will be short of £1 billion in cash. How on earth after four years is the corporate sector supposed to be rising with enthusiasm to new investment when, as a result of the policies of this Government and nothing else, it has lost £1,000 million of its cash resources?

The second opportunity which the Labour Party would argue is that in fact the markets are now improving. I would be the first to say that overseas markets are improving. First, world trade is improving. However, the fact is that, as a result of the decline in sterling arising from inflationary policies at home, Britain must export about four units for every three that it had to export when the Chancellor came to power. So the British working people must work one-and-a-third times as hard to stand precisely still after two years of Labour Government.

The next argument is that the home market may do a little better. So it will. The surveys issued in today's Financial Times make clear that there will be a pick-up in the course of the next few months, but it is a pick-up from levels which the Secretary of State for Prices and Consumer Affairs has herself described as being worse than anything since the end of the 1950s.

As a non-pick-up situation would have been catastrophic. British industrial investment may well rise, and will rise, because profits have risen slightly, but it will not make up for the damage of the past two years and the next two years. Industrial investment has fallen and a higher proportion of investment will have to go to repairs and renewals and not to new capital accretion. More and more Government legislation of a social nature has repercusions for the capital budgets of investment in industry, and this is a wholly non-productive addition to their capital.

The fact is that the home market is being depressed by the Chancellor, and I do not complain about that. It is a necessity—I accept it at once—but the Chancellor is doing it and therefore the private sector will have no alternative but to respond to that situation.

Those are the overwhelmingly significant issues which will influence the private sector in reaching decisions about investment. It is a complete misrepresentation of the situation for Labour Members to talk about there being a strike of capital, about the industrial sector having decided not to co-operate with the Government. That sector of the economy will respond to profits and nothing else. Unless hon. Members opposite decide to accept that situation, they must put in its place another system which can work more effectively.

Hon. Members on the Treasury Bench are moving to what they call selectivity. Their latest view is that, provided that the Government clamp down on the broad budget of British industrial companies, impose price controls and dividend restraints, and determine invest- ment, they can make up for the harm they do by looking for the bottlenecks, by looking for the companies which with a little aid here and help there will step up their investment programme, thus enabling us to get a new regeneration of British industry.

As anybody who takes an objective look at the activities of politicians in this country knows, selective aid for industry has led to the least efficient investment of national resources anywhere in the industrial spectrum, and nowhere more than in the nationalised industries, but now increasingly where politicians have intervened in private industry. How much better Leyland Motors would be today if they had not been persuaded by the Minister to join with a company which was losing money. How much better today would Norton Villiers be if it had not been persuaded to become involved in the Meriden problems. I am not suggesting that that was a failure of the Labour Government, although I would say that the then Secretary of State for Industry doubly compounded the problems which were already being created.

How much of the constituency interests of hon. Members opposite has been prejudiced by the commitment of £162 million to rescuing Chrysler? How is it that a Government who can use all the language about backing success and earning profits, within days of doing so be told, and have recorded by an all-party Select Committee of this House, that what they did on that occasion was the worst way of rescuing an industrial company which could ever have been devised? These are the reasons why increasing selectivity is a much doubted concept within the industrial world.

May I quote a letter which has been sent to the Chancellor of the Exchequer by a company, whose name I cannot give because figures which I now intend to quote could, if made public and associated with the company, be damaging to the best interests of that company. In fact, the letter has gone to the Chancellor of the Exchequer. [HON. MEMBERS: "Read it."] Oh yes, I shall read it. It comes from precisely the sort of enginering company on which we depend if the country's economy is to get off the ground again.

The Chancellor was sent the following letter: We calculate that the direct effect of your measures upon our company will be to take £660,000 per annum out of our cash flow, an amount equal to about 12 per cent, of our profits, by increasing insurance contributions and reducing regional employment premiums… We know that increasing capital investment and sustaining employment are two of the Government's principal aims with regard to the manufacturing industry. How can this move of yours be anything except directly contrary to these objectives? Surely this crippling blow must be reconsidered. That is the attitude of a company which would want to try to co-operate in restoring the health of the British economy.

We come to the question posed in all sincerity by the hon. Member for Tottenham (Mr. Atkinson) when he put before a deserted House the fundamental dilemma which faces Labour Members They have not got it within their gift to creatae the framework within which the free enterprise system can flourish. It is not within their gift because too significant a part of their power base in the trade unions and in the constituencies has no interest in seeing the free enterprise system succeed in this country. So long as we have the faltering compromises which the Chancellor brings to this country in default of an economic strategy, so he will continue to debilitate the prospect of our recovery.

My right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) was right when he made it clear that the one way in which we can get the country's standard of living in any way comparable with the standards of living enjoyed by our competing economies is to back the free enterprise system. Until we adopt measures wholeheartedly to do that, we shall be left with a compromise, the consequences of which are vastly debilitating to the British economy and have succeeded in the last couple of years in holding back any reasonable prospect of a restoration of the upward movement of the British standard of living.

9.35 p.m.

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

A glance at the facts would expose the emptiness of the speech of the hon. Member for Henley (Mr. Heseltine). Not one constructive point was made in the whole of his speech. It was wholly irrelevant to the industrial problems that we face.

A glance at one or two of the facts makes the position clear. Manufacturing production between 1955 and 1973 showed an average annual growth in the United Kingdom of 2.8 per cent. That was a period when there was some responsibility in the hands of Opposition Members. In the same period the average annual growth in Japan was 13.7 per cent., in Italy 7.1 per cent., in France 6 per cent., in Germany 5.9 per cent., and in the United States 4.3 per cent. The facts are clear and there should be some humility on the part of those who were in successive Governments during that period.

That is the background, and I hope that we can at least agree that those trends have to be reversed. That is one of the central problems about which the hon. Gentleman said nothing. He showed not the slightest recognition of the serious problems. The country desperately wants to hear rather more constructive arguments than we have had from the hon. Gentleman this evening, although we understand the pressures he is under from his right hon. Friend the Leader of the Opposition and some of the wilder elements in his party, sometimes not excluding himself.

I shall come later to the hon. Gentleman's criticism of the national insurance surcharge, but there are few responsible industrialists who will recognise any reality in the hon. Gentleman's general criticism of the Government's industrial policy. He overlooked, for example, the stock relief scheme, which has been widely welcomed. The total benefit of that to industry in reduced tax will be about £3,145 million in the years 1974–75 to 1976–77.

Mr. Heseltine

Taking into account all the actions of this Government, those they have just announced and those taken since they came to power, the corporate deficit will be £1 billion.

Mr. Barnett

The hon. Gentleman is remarkable. He spent the whole of his time saying nothing and then intervenes to do the same. It is absurd.

The hon. Gentleman tells us constantly of his contact with industry, but he does not seem to talk to those who are really involved in industry [An HON. MEMBER: "He is involved."] I hope, for the sake of the country, that he does better than when he makes speeches in the House.

The hon. Gentleman talked about the Price Code and the need to abolish it. That, in effect, is what he said. But industry has shown rather more sense than the hon. Gentleman. It knows that its opposite numbers on the trade union side have shown a unique sense of responsibility in accepting a pay deal under which their members will suffer a cut in personal living standards. They know that that deal, with all that it means for industrial peace, could not have been achieved if the Price Code had been abolished.

I am sure that industry and the country recognise that whichever economic strategy is adopted—I shall say something about employment and what has come to be known as the alternative strategy later—they will have to improve the relatively poor performance of industry under successive Governments. Any strategy has to start from the regrettable fact not that public expenditure has grown too fast but, as some of my hon. Friends have indicated, that the growth has not been matched by the growth of GDP.

As fast as the growth in public expenditure has been in some areas, I know that there are many programmes to which many of my hon. Friends would like to devote even more public expenditure. However, as my hon. Friend the Member for Birmingham, Erdington (Mr. Silverman) pointed out, we must earn it first. I hope that we shall not forget that there has been substantial growth in programmes that are of top priority for the Labour Party. Social security expenditure has increased by nearly 25 per cent. in real terms from 1973–74 to 1976–77. There has been an increase of over 20 per cent. in housing expenditure over the same period.

Unfortunately, whatever strategy is adopted, we cannot allow public expenditure to grow at that pace. As I have said elsewhere, it would require impossibly high levels of borrowing or unacceptably large increases in taxation or both.

My hon. Friend the Member for Paddington (Mr. Latham) asked me a number of questions. He asked whether the borrowing would not be different if it were for capital rather than for revenue matters. Of course it would be different in economic terms, but when we are borrowing as much as we are at present, it is no use saying to the people from whom we are borrowing money "Now we want it for this or that purpose." We have already been borrowing far too much.

But even if the borrowing were available and the tax increases acceptable, the growth of public expenditure at recent levels could not be financed without serious consequences for industry. This will especially be the case in 1977–78, when all the signs are that manufacturing output will be growing very fast. Even the hon. Member for Henley had to concede that there were some signs of that. If we are to make room for this growth, particularly for industry to take advantage of export opportunities, which now exist as never before since the war, it is essential that finance should be available both for increased working capital requirements and for new investment without an excessive increase in money supply.

The hon. Member for Henley talked about the period 1972–73 and quoted his right hon. Friend the Member for Leeds, North-East (Sir K. Joseph). He cannot have heard his right hon. Friend's many other speeches in which he told us the consequences of that Government in the years 1972 and 1973. But the hon. Gentleman always forgets these little matters.

We have therefore made it clear that it is our intention to bring down the borrowing requirement to £9 million or less in 1977–78, if the economy develops as we expect. I must tell the right hon. and learned Member for Surrey, East (Sir G. Howe), with the greatest respect, that we heard a better speech in one minute from the right hon. Member for Leeds, North-East than he himself made in over half an hour. He seemed, surprisingly, never to have heard of the general Government financial deficit, which will be reduced from just under 6 per cent. of GDP this year to 3 per cent. next year.

Some of my hon. Friends feel that we might have gone too far, that the borrowing requirement might fall too fast, with too serious an effect on employment. I understand their concern, but if they are right, that is a much easier problem to deal with quickly than what might be called the downside risk if resources are not available because too much is being taken to finance the Government deficit. We are committed, with the TUC, to ensuring that that will not happen. That is why, in addition to the other steps to emphasise our industrial priority, we have taken additional steps to direct bank lending to priority areas.

But I know that each of the expenditure cuts will of course be unpalatable to some people—not least, in certain instances, to those who are pressing us hardest to make even bigger cuts.

Mrs. Castle

Will my right hon. Friend now answer the question that I put to the Chancellor but that he refused to answer? What is the Treasury's current estimate of the level of unemployment by the end of 1977?

Mr. Barnett

It is funny that my right hon. Friend should ask that, because I am coming to the whole subject of unemployment during my speech. As it happens, my right hon. Friend the Chancellor dealt with the matter: he spent a long time on it.

Mr. Heffer

Following the question put by my right hon. Friend the Member for Blackburn (Mrs. Castle), could the Chief Secretary also give the estimate of the borrowing requirement as the result of the high level of unemployment at the moment? Is it £2 billion or £3 billion? What exactly is the cost, including, of course, loss of production?

Mr. Barnett

As I said, I shall be dealing with the whole subject of unemployment in a moment.

But I was dealing with the expenditure cuts themselves. I was saying that I understand that some of my hon. Friends find them unpalatable. But a number of Opposition Members have complained bitterly about the defence cuts. They did so while supporting demands for even bigger cuts in public expenditure.

On previous occasions they made it clear that they could not support defence cuts then made. We were told by the Leader of the Opposition at the weekend that she "Will fight the cuts all the way". She obviously was not speaking for her right hon. and learned Friend the Member for Surrey, East because in "Panorama" on 22nd July he was asked by Robert Mackenzie about defence cuts: So you would not have made those cuts? The right hon. and learned Gentleman replied: I would again look at that because even there there may be administrative tails and areas that can be cut without cutting the real teeth of the defence forces". Perhaps he and the Leader of the Opposition will get together and tell us what they are proposing to do about defence expenditure.

Some of my hon. Friends want even bigger cuts in defence expenditure, and I appreciate the views of my hon. Friend the Member for Salford, East (Mr. Allaun). But I know that it is easier for some of my hon. Friends who are pacifists or are prepared for major unilateral disarmament, but we have to take a balanced view and there is £100 million worth of defence cuts in the package.

Another part of the package which has come under fire is the nationalised industries capital programmes—although the right hon. and learned Member for Surrey, East has ruled out cuts even in that area. We are talking of a total of about £3,310 million and there has been an increase in that capital expenditure of 40 per cent. between 1973–74 and 1976–77. It is impossible to be precise about figures of that magnitude and, as will be known, this is an area of public expenditure where there is frequently a shortfall. A total of £157 million savings within all the nationalised industries will not harm the basic capital programmes, a growing part of which will be self-financed in future.

There are two areas of public expenditure savings which I hope will be generally recognised as right even if we had not been concerned to cut public expenditure. I hope that my hon. Friend the Member for Paddington, who said that he was against all cuts, will also recognise them as right. I refer to the levy on insurance companies to offset the full cost to the National Health Service of treating road accident cases at a provisional saving of £40 million in a full year and the saving of about £10 million from restricting the entitlement to unemployment benefit of certain occupational pensions. The latter is an attempt to deal with a well-known abuse whereby occupational pensioners who have no intention of genuinely seeking work are nevertheless drawing unemployment benefit.

Another programme which I know troubles some of my hon. Friends is school meals. Hon. Members should be aware that by September 1977, when the 10p increase takes place, the charge will have been unchanged for two and a half years. I know that the increase will be hard on some large families, but even after the increase the subsidies will amount to 50 per cent. of the cost, and of course we shall be protecting parents with the lowest incomes.

Given our limited resources, it is not only essential but right in terms of our priorities to direct our help to those in greatest need rather than to give indiscriminate subsidies at high cost, so ensuring that there is less available for other programmes which are of high priority to all of us on this side of the House.

My right hon. Friend the Member for Blackburn (Mrs. Castle) and my hon. Friend the Member for Liverpool, Walton (Mr. Heffer) have expressed anxiety about unemployment. I understand their concern, but it should be recognised that the cuts that we are talking about are not in this year, when unemployment is sadly rising, but in 1977–78—that is, they will come when the economy will have been moving out of the recession for some time.

There are, as ever, conflicting forecasts from many economists who help us—if that is the right word—with their advice. I always envy the certainty some hon. Members have about one set of forecasts over another. [HON. MEMBERS: "Unemployment forecasts."] Conservative Members should not even be commenting on unemployment, as every policy they suggest would add to its level.

I prefer the view expressed recently to the General Sub-Committee of the Expenditure Committee. It has been quoted, incorrectly I believe, in this debate. It is that whilst it was possible to use a credible rule-of-thumb method to calculate unemployment figures from a particular set of measures, the rule was much less appropriate when one was looking far ahead, when, apart from other factors, time lags distorted the picture. We are talking about a period into 1978 and 1979, when the economy will be well on the upturn.

The differences of opinion among economists will be of little consolation to those directly affected. I know of the great concern of my hon. Friends, and I take their criticism much more readily than that of Opposition Members, who propose bigger public expenditure cuts and increases in VAT. The consequences for employment would be much more severe than the national insurance surcharge. Compared with other taxes, it has a smaller and delayed effect on prices, employment, or real take-home pay. It does not come into force until April 1977, when company profits will be rising substantially, as the hon. Member for Henley knows very well. Therefore, I have much more sympathy with my hon. Friends, who at least put forward an alternative strategy that they hope and believe would reduce unemployment.

I believe that they are mistaken in that belief, for a failure to cut public expenditure—indeed, an increase in it, as many of my hon. Friends want—would have very serious consequences both for interest rates and the exchange rate, which in turn would have very serious consequences for prices and employment. I know that my hon. Friends want a much more fundamental change than merely to increase public expenditure. They want import controls. I understand that view and sympathise with the reason for it, but if we had a policy of import controls we should have to assume things that are, to put it mildly, unlikely to happen.

We should have to assume that there would be little or no retaliation and, despite the huge international pressure to remove the controls as quickly as possible, that manufacturing industries would have sufficient certainty to invest and increase employment. It is extremely unlikely. It is already clear that our manufacturing industry will be growing as fast as is technically feasible next year, so that the reduction in imports would simply lead to a diversion of exports to the home market. Therefore, import controls would be of little help in dealing with the problem of unemployment in the short term.

Nevertheless, I understand my hon. Friends who find public expenditure cuts unpalatable desperately searching for an alternative that they hope will avoid the necessity of making cuts that we all find unpleasant. I recognise their alternative as a serious strategy. As my hon. Friend the Member for Tottenham (Mr. Atkinson) was quoted in The Times today as saying, One thing is absolutely clear: neither the left nor the right can promise jam, either today or tomorrow. I turn to the Opposition motion. [Interruption.] I am surprised that the Opposition do not want to hear about it.

Mrs. Castle

rose—

Mr. Barnett

I am—

Mrs. Castle

rose—

Mr. Speaker

Order. The right hon. Lady knows that if the Minister does not give way, she must resume her seat.

Mr. Barnett

I am extremely surprised that the Opposition do not want to hear a little about their motion. [HON. MEMBERS: "Answer Barbara."] I should like to deal briefly with what the Opposition would have done. I understand that they want larger public expenditure cuts.

Hon. Members

Answer.

Mr. Speaker

Order. I cannot hear the Minister, and I want to do so.

Mr. Barnett

The right hon. and learned Member for Surrey, East was asked on the programme to which I have referred—[HON. MEMBERS: "Not again."] Oh yes, the Opposition are going to hear this. According to the transcript, the right hon. and learned Gentleman was asked: What would be the size of the cuts the Opposition want? Are you aiming at £2

million, £3 million or £4 million? (Sir Geoffrey): It is difficult to put it that way. (Mackenzie): I still want to get an answer. Could you give us a figure? But nothing was heard from the right hon. and learned Gentleman for a little while, until he said: Getting on for twice as much.

Unlike my hon. Friends, who at least put forward an alternative strategy, all we get from the Opposition is a policy that will lead to increased unemployment as the inevitable consequence of the massive cuts they propose. The Opposition want to increase unemployment. Industry may not like the 2 per cent. increase in national insurance surcharge, but its effect on costs will be less than the Opposition are proposing. They do not offer a real alternative.

I ask the House to reject their motion. They are seeking to reduce my right hon. Friend's salary. They could not even find a motion that would unite their own supporters. The fact is that they have nothing to offer. They have no real alternative. They offer a recipe for disaster, and I ask the House to reject their motion.

Mr. Victor Goodhew (St. Albans)

Will the Chief Secretary now answer his right hon. Friend the Member for Blackburn (Mrs. Castle) about the level of unemployment in 1977?

Mr. Humphrey Atkins (Spelthorne)

rose in his place and claimed to move. That the Question be now put.

Question, That the Question be now put, put and agreed to.

Question put accordingly, That Subhead B1(1) be reduced by f6,500:—

The House divided: Ayes 283, Noes 295.

Division No. 306.]	AYES	[10.00 p.m.
Adley, Robert	Berry, Hon Anthony	Buchanan-Smith, Alick
Aitken, Jonathan	Biffen, John	Buck, Antony
Alison, Michael	Biggs-Davison, John	Budgen, Nick
Amery, Rt Hon Julian	Blaker, Peter	Bulmer, Esmond
Arnold, Tom	Body, Richard	Butler, Adam (Bosworth)
Atkins, Rt Hon H. (Spelthorne)	Boscawen, Hon Robert	Carlisle, Mark
Awdry, Daniel	Bottomley, Peter	Chalker, Mrs Lynda
Bain, Mrs Margaret	Bowden, A. (Brighton, Kemptown)	Channon, Paul
Baker, Kenneth	Boyson, Dr Rhodes (Brent)	Churchill, W. S.
Banks, Robert	Brains, Sir Bernard	Clark, Alan (Plymouth, Sutton)
Beith, A. J.	Brittan, Leon	Clark, William (Croydon S)
Bell, Ronald	Brocklebank-Fowler, C.	Clarke, Kenneth (Rushcliffe)
Bennett, Sir Frederic (Torbay)	Brotherton, Michael	Clegg, Walter
Bennett, Dr Reginald (Fareham)	Brown, Sir Edward (Bath)	Cockcroft, John
Benyon, W.	Bryan, Sir Paul	Cooke, Robert (Bristol W)
Cope, John	Jessel, Toby	Rawlinson, Rt Hon Sir Peter
Cordle, John H.	Johnson Smith, G. (E Grinstead)	Rees, Peter (Dover & Deal)
Cormack, Patrick	Johnston, Russell (Inverness)	Rees-Davies, W. R.
Corrie, John	Jones, Arthur (Daventry)	Reid, George
Costain, A. P.	Jopling, Michael	Renton, Rt. Hon Sir D. (Hunts)
Crawford, Douglas	Joseph, Rt Hon Sir Keith	Renton, Tim (Mid-Sussex)
Critchley, Julian	Kaberry, Sir Donald	Rhys Williams, Sir Brandon
Crouch, David	Kellett-Bowman, Mrs Elaine	Ridley, Hon Nicholas
Crowder, F. P.	Kershaw, Anthony	Ridsdale, Julian
Davies, Rt Hon J. (Knutsford)	Kimball, Marcus	Rifkind, Malcolm
Dean, Paul (N Somerset)	King, Evelyn (South Dorset)	Rippon, Rt Hon Geoffrey
Dodsworth. Geoffrey	King, Tom (Bridgwater)	Roberts, Michael (Cardiff NW)
Douglas-Hamilton, Lord James	Kirk, Sir Peter	Roberts, Wyn (Conway)
Drayson, Burnaby	Kitson, Sir Timothy	Rodgers, Sir John (Sevenoaks)
du Cann, Rt Hon Edward	Knight, Mrs Jill	Ross, Stephen (Isle of Wight)
Durant, Tony	Knox, David	Rossi, Hugh (Hornsey)
Dykes, Hugh	Lamont, Norman	Rost, Peter (SE Derbyshire)
Eden, Rt Hon Sir John	Lane, David	Royle, Sir Anthony
Edwards, Nicholas (Pembroke)	Langford-Holt, Sir John	Sainsbury, Tim
Elliott, Sir William	Latham, Michael (Melton)	St. John-Stevas, Norman
Emery, Peter	Lawrence, Ivan	Scott, Nicholas
Ewing, Mrs Winifred (Moray)	Lawson, Nigel	Scott-Hopkins, James
Eyre, Reginald	Lester, Jim (Beeston)	Shaw, Giles (Pudsey)
Falrbairn, Nicholas	Lewis, Kenneth (Rutland)	Shelton, William (Streatham)
Fairgrieve, Russell	Lloyd, Ian	Shepherd, Colin
Farr, John	Loveridge, John	Shersby, Michael
Fell, Anthony	Luce, Richard	Silvester, Fred
Finsberg, Geoffrey	McAdden, Sir Stephen	Sims, Roger
Fletcher, Alex (Edinburgh N)	MacCormick, Iain	Sinclair, Sir George
Fletcher-Cooke, Charles	McCrindle, Robert	Skeet, T. H. H.
Fookes, Miss Janet	Macfarlane, Nell	Smith, Dudley (Warwick)
Forman, Nigel	MacGregor, John	Speed, Keith
Fowler, Norman (Sutton C'f'd)	Macmillan, Rt Hon M. (Farnham)	Spence, John
Fox, Marcus	McNair-Wilson, M. (Newbury)	Spicer, Michael (S Worcester)
Freud, Clement	McNair-Wilson, P. (New Forest)	Sproat, Iain
Fry, Peter	Madel, David	Stalnton, Keith
Gardiner, George (Relgate)	Marshall, Michael (Arundel)	Stanbrook, Ivor
Gardner, Edward (S Fylde)	Marten, Nell	Stanley, John
Gilmour, Rt Hon Ian (Chesham)	Mates, Michael	Steel, David (Roxburgh)
Gilmour. Sir John (East Fife)	Mather, Carol	Steen, Anthony (Wavertree)
Glyn, Dr Alan	Maude, Angus	Stewart, Donald (Western Isles)
Godber, Rt Hon Joseph	Maudling, Rt Hon Reginald	Stewart, Ian (Hitchin)
Goodhart, Philip	Mawby, Ray	Stokes, John
Goodhew, Victor	Maxwell-Hyslop, Robin	Tapsell, Peter
Goodlad, Alastair	Mayhew, Patrick	Taylor, R. (Croydon NW)
Gorst, John	Meyer, Sir Anthony	Taylor, Teddy (Cathcart)
Gow, Ian (Eastbourne)	Miller, Hal (Bromsgrove)	Tebbit, Norman
Gower, Sir Raymond (Barry)	Mills, Peter	Temple-Morris, Peter
Grant, Anthony (Harrow C)	Miscampbell, Norman	Thatcher, Rt Hon Margaret
Gray, Hamish	Mitchell, David (Basingstoke)	Thomas, Dafydd (Merioneth)
Griffiths, Eldon	Moate, Roger	Thomas, Rt Hon p. (Hendon S)
Grimond, Rt Hon J.	Monro, Hector	Thompson, George
Grist, Ian	Montgomery, Fergus	Thorpe, Rt Hon Jeremy (N Devon)
Grylls. Michael	Moore, John (Croydon C)	Trotter, Neville
Hall, Sir John	More, Jasper (Ludlow)	Tugendhat, Christopher
Hall-Davis, A. G. F.	Morgan, Geraint	van Straubenzee, W. R
Hamilton, Michael (Salisbury)	Morgan-Giles, Rear-Admiral	Vaughan, Dr Gerard
Hannam, John	Morris, Michael (Northampton S)	Viggers, Peter
Harrison, Col Sir Harwood (Eye)	Morrison, Charles (Devizes)	Wainwright, Richard (Colne V)
Harvie Anderson, Rt Hon Miss	Morrison, Hon Peter (Chester)	Wakeham, John
Hastings, Stephen	Mudd, David	Walder, David (Clitheroe)
Havers, Sir Michael	Neave, Airey	Walker, Rt Hon P. (Worcester)
Hawkins, Paul	Nelson, Anthony	Walker-Smith, Rt Hon Sir Derek
Hayhoe, Barney	Neubert, Michael	Wall, Patrick
Heath, Rt Hon Edward	Newton, Tony	Walters, Dennis
Henderson, Douglas	Normanton, Tom	Warren, Kenneth
Heseltine, Michael	Nott, John	Weatherill, Bernard
Hicks, Robert	Onslow, Cranley	Wells, John
Higgins, Terence L.	Oppenheim, Mrs Sally	Welsh, Andrew
Holland, Philip	Osborn, John	Whitelaw, Rt Hon William
Hordern, Peter	Page, John (Harrow West)	Wiggin, Jerry
Howe, Rt Hon Sir Geoffrey	Page, Rt Hon R. Graham (Crosby)	Wilson, Gordon (Dundee E)
Howell, David (Guildford)	Panhaligon, David	Winterton, Nicholas
Howell, Ralph (North Norfolk)	Perclval, Ian	Wood, Rt Hon Richard
Hunt, David (Wirral)	Peyton, Rt Hon John	Young, Sir G. (Ealing, Acton)
Hunt, John (Bromley)	Pink, R. Bonner	Younger, Hon George
Kurd, Douglas	Price, David (Eastleigh)
Hutchison, Michael Clark	Prior, Rt Hon James	TELLERS FOR THE AYES:
Irving, Charles (Cheltenham)	Pym, Rt Hon Francis	Mr. Spencer Le Marchant and
James, David	Raison, Timothy	Mr. Cecil Parkinson.
Jenkin, Rt Hon P. (Wanst'd & W'df'd)	Rathbone, Tim
NOES
Abse, Leo	Fernyhough, Rt Hon E.	McNamara, Kevin
Allaun, Frank	Fitch, Alan (Wigan)	Madden, Max
Anderson, Donald	Flannery, Martin	Magee, Bryan
Archer, Peter	Fletcher, L. R. (Ilkeston)	Mahon, Simon
Armstrong, Ernest	Fletcher, Ted (Darlington)	Mallalieu, J. P. W.
Ashley, Jack	Foot, Rt Hon Michael	Marks, Kenneth
Ashton, Joe	Ford, Ben	Marquand, David
Atkins, Ronald (Preston N)	Forrester, John	Marshall, Dr Edmund (Goole)
Atkinson, Norman	Fowler, Gerald (The Wrekin)	Marshall, Jim (Leicester S)
Bagier, Gordon A. T.	Fraser, John (Lambeth, N'w'd)	Mason, Rt Hon Roy
Barnett, Guy (Greenwich)	Freeson, Reginald	Maynard, Miss Joan
Barnett, Rt Hon Joel (Heywood)	Garrett, John (Norwich S)	Meacher, Michael
Bates, All	Garrett, W. E. (Wallsend)	Mellish, Rt Hon Robert
Bean, R. E.	George, Bruce	Mendelson, John
Benn, Rt Hon Anthony Wedgwood	Gilbert, Dr John	Mikardo, Ian
Bennett, Andrew (Stockport N)	Ginsburg, David	Millan, Bruce
Bidwell, Sydney	Golding, John	Miller, Dr M. S. (E Kilbride)
Bishop, E. S.	Gould, Bryan	Miller, Mrs Millie (Ilford N)
Blenkinsop, Arthur	Gourlay, Harry	Mitchell, R. C. (Soton, Itchen)
Boardman, H.	Graham, Ted	Moonman, Eric
Booth, Rt Hon Albert	Grant, George (Morpeth)	Morris, Alfred (Wythenshawe)
Boothroyd, Miss Betty	Grant, John (Islington C)	Morris, Charles R. (Openshaw)
Boyden, James (Bish Auck)	Grocott, Bruce	Morris, Rt Hon J. (Aberavon)
Bradley, Tom	Hamilton, W. W. (Central File)	Moyle, Roland
Bray Or Jeremy	Hardy, Peter	Mulley, Rt Hon Frederick
Brown, Hugh D. (Provan)	Harrison, Walter (Wakefield)	Murray, Rt Hon Ronald King
Brown, Robert C. (Newcastle W)	Hart, Rt Hon Judith	Newens, Stanley
Brown, Ronald (Hackney S)	Hattersley, Rt Hon Roy	Noble, Mike
Buchan, Norman	Hatton, Frank	Oakes, Gordon
Buchanan, Richard	Hayman, Mrs Helene	Ogden, Eric
Butler, Mrs Joyce (Wood Green)	Healey, Rt Hon Denis	O'Halloran, Michael
Callaghan, Rt Hon J. (Cardiff SE)	Heffer, Eric S.	Orbach, Maurice
Callaghan, Jim (Middleton & P)	Hooley, Frank	Orme, Rt Hon Stanley
Campbell, Ian	Horam, John	Ovenden, John
Canavan, Dennis	Howell, Rt Hon Denis (B'ham, Sm H)	Owen, Dr David
Cant, R. B.	Hoyle, Doug (Nelson)	Padley, Walter
Carmichael, Neil	Huckfield, Les	Palmer, Arthur
Carter, Ray	Hughes, Rt Hon C. (Anglesey)	Park, George
Carter-Jones, Lewis	Hughes, Mark (Durham)	Parker, John
Cartwright, John	Hughes, Robert (Aberdeen N)	Parry, Robert
Castle, Rt Hon Barbara	Hughes, Roy (Newport)	Pavitt, Laurie
Cocks, Michael (Bristol S)	Hunter, Adam	Peart, Rt Hon Fred
Cohen, Stanley	Irvine, Rt Hon Sir A. (Edge Hill)	Pendry, Tom
Coleman, Donald	Irving, Rt Hon S. (Dartford)	Perry, Ernest
Colquhoun, Ms Maureen	Jackson, Colin (Brighouse)	Phipps, Dr Colin
Concannon, J. D.	Jackson, Miss Margaret (Lincoln)	Prentice, Rt Hon Reg
Conlan, Bernard	Janner, Greville	Price, C. (Lewisham W)
Cook, Robin F. (Edin C)	Jay, Rt Hon Douglas	Price, William (Rugby)
Corbett, Robin	Jeger, Mrs Lena	Radice, Giles
Cox, Thomas (Tooting)	Jenkins, Hugh (Putney)	Rees, Rt Hon Merlyn (Leeds S)
Craigen, J. M. (Maryhill)	Jenkins, Rt Hon Roy (Stechford)	Richardson, Miss Jo
Crawshaw, Richard	John, Brynmor	Roberts, Albert (Normanton)
Cronin, John	Johnson, James (Hull West)	Roberts, Gwilym (Cannock)
Crosland, Rt Hon Anthony	Johnson, Walter (Derby S)	Robinson, Geoffrey
Crowther, Stan (Rotherham)	Jones, Barry (East Flint)	Roderick, Caerwyn'
Cryer, Bob	Jones, Dan (Burnley)	Rodgers, George (Chorley)
Cunningham, G. (Islington S)	Judd, Frank	Rodgers, William (Stockton)
Cunningham, Dr J. (Whileh)	Kaufman, Gerald	Rooker, J. W.
Dalyell, Tarn	Kelley, Richard	Roper, John
Davidson, Arthur	Kerr, Russell	Rose, Paul B.
Davies, Denzil (Llanelli)	Kilroy-Silk, Robert	Ross, William (Londonderry
Davies, lfor (Gower)	Kinnock, Neil	Rowlands, Ted
Davis, Clinton (Hackney C)	Lamborn, Harry	Sandelson, Neville
Deakins, Eric	Lamond, James	Sedgemore, Brian
Dean, Joseph (Leeds West)	Latham, Arthur (Paddington)	Selby, Harry
de Freitas, Rt Hon Sir Geoffrey	Leadbitter, Ted	Shaw, Arnold (Ilford South)
Dell, Rt Hon Edmund	Lee, John	Sheldon, Robert (Ashton-u-Lyne)
Dempsey, James	Lever, Rt Hon Harold	Shore, Rt Hon Peter
Doig, Peter	Lewis, Ron (Carlisle)	Short, Rt Hon E. (Newcastle C)
Dormand, J. D.	Lipton, Marcus	Short, Mrs Renée (Wolv NE)
Douglas-Mann, Bruce	Litterick, Tom	Sillkin, Rt Hon John (Deptford)
Duffy, A. E. P.	Lomas, Kenneth	Silkin, Rt Hon S. C. (Dulwich)
Dunnett, Jack	Loyden, Eddie	Silverman, Julius
Dunwoody, Mrs Gwyneth	Luard, Evan	Skinner, Dennis
Eadie, Alex	Lyons, Edward (Bradford W)	Small, William
Edge, Geoff	Mabon, Dr J. Dickson	Smith, John (N Lanarkshire)
Edwards, Robert (Wolv SE)	McCartney, Hugh	Snape, Peter
Ellis, John (Brigg & Scun)	McDonald, Dr Oonagh	Spearing, Nigel
Ellis, Tom (Wrexham)	MacFarquhar, Roderick	Spriggs, Leslie
English, Michael	McGuire, Michael (Ince)	Stallard, A. W.
Ennals, David	MacKenzie, Gregor	Stewart, Rt Hon M. (Fulham)
Evans, Fred (Caerphilly)	Mackintosh, John P.	Stoddart, David
Evans, loan (Aberdare)	Maclennan, Robert	Stott, Roger
Ewing, Harry (Stirling)	McMillan, Tom (Glasgow C)	Strang, Gavin
Strauss, Rt Hon G. R.	Wainwright, Edwin (Dearne V)	Williams, Alan Lee (Hornch'ch)
Summerskill, Hon Dr Shirley	Walden, Brian (B'ham, L'dyw'd)	Williams, Rt Hon Shirley (Hertford)
Swain, Thomas	Walker, Harold (Doncaster)	Williams, Sir Thomas (Warrington)
Taylor, Mrs Ann (Bolton W)	Walker, Terry (Kingswood)	Wilson, Alexander (Hamilton)
Thomas, Jeffrey (Abertillery)	Ward, Michael	Wilson, Rt Hon Sir Harold (Huyton)
Thomas, Mike (Newcastle E)	Watkins, David	Wilson, William (Coventry SE)
Thomas, Ron (Bristol NW)	Watkinson, John	Wise, Mrs Audrey
Thorne, Stan (Preston South)	Weetch, Ken	Woodall, Alec
Tierney, Sydney	Weitzman, David	Woof, Robert
Tinn, James	Wellbeloved, James	Wrigglesworth, Ian
Tomlinson, John	White, Frank R. (Bury)	Young, David (Bolton E)
Tomney, Frank	White, James (Pollock)
Torney, Tom	Whitehead, Phillip	TELLERS FOR THE NOES:
Tuck, Raphael	Whitlock, William	Mr, Joseph Harper and
Urwln, T, W.	Willey, Rt Hon Frederick	Mr. James Hamilton.
Varley, Rt Hon Eric G.	Williams, Alan (Swansea W)

Question accordingly negatived.

Original Question again proposed.

It being after Ten o'clock, the debate stood adjourned.

Notice of objection having been given to a total amount on which the Question was to be put, Mr. SPEAKER proceeded, pursuant to Standing Order No. 18 (Business of Supply), to put forthwith the Question thereon.