HC Deb 15 December 1976 vol 922 cc1536-57
Mr. Healey

The Government are releasing today and placing in the Vote Office the first economic forecast published under the provisions of the Industry Act 1975, and this will give the House a picture of the economic prospects following the measures I have announced.

Over the next 12 months, I expect a growth in total output of about 2 per cent., though this may be higher if our export performance improves further. The 2 per cent. increase in growth would include an increase of 5½ per cent. in manufacturing production and 19½ per cent. in manufacturing investment.

I do not see a prospect of a fall in unemployment; indeed, I fear that there is likely to be some further rise, but a smaller rise than would have been likely without the adjustments I have described. If unemployment does rise, this will be the consequence not of today's measures which, in sum, will increase employment next year, but of the lower growth now expected all over the world and of other factors I have previously described to the House.

The current account deficit, which has totaled £1.7 billion in the first 11 months of this year, is likely to fall next year, and there is good hope of reaching a substantial surplus in 1978–79—perhaps as high as £2 billion to £3 billion. Given continuing moderation in the increase in wage costs, the rate of price inflation should start falling again next summer. The measures I have announced will add less than 1 per cent. to the RPI by the end of 1977.

Next year will be a difficult year of transition. I believe that the policies I have announced, reinforced by the next Budget and further progress on the industrial strategy, will ensure that it is a transition to a much more firmly based prosperity.

Part of this prosperity will be due to the development of North Sea oil production, but our economic strength will depend critically on the use we make of the benefit this brings. We must use it not only to resume the growth in our living standards, but—and in the long run this is more important—to rebuild the capital base of our manufacturing industry.

I believe that the late 1970s and early 1980s should be a period when a steady increase of output, employment and living standards is combined with the repayment of our external debt. We shall at last be standing on our own feet, with an economy more healthy and efficient than we have seen at any time since the war.

It is in that belief that the Government have decided these measures and that I commend them to the House.

Sir G. Howe (Surrey, East)

The House has become accustomed to hearing statements of this kind from the Chancellor. I am sure that I speak for the whole House when I say that we are deeply anxious that, at this attempt, for the sake of the nation as a whole, he has indeed got it right. It is the last chance.

I hope that the House will allow me a little more latitude in questioning the right hon. Gentleman because of the length and importance of his statement. The House has heard many of the promises and prospects described by the Chancellor at the end of the statement from him many times before and we must hope that in his ninth Budget they will be more credible than they have been in the past, if only because this Budget has been introduced under instructions from the IMF and, indeed, is an IMF Budget. We have a sense of relief because it seems that Labour Governments can be prevented from steering the economy towards disaster only when they are under the firm surveillance of the IMF.

May we have an assurance that we shall have two days to debate this important statement and can the Chancellor assure us that he will tell the House as soon as possible about the arrangements to which he referred for the support of the sterling balances?

We welcome this further evidence of the Chancellor's conversion, however reluctant and belated, to the views which we have been putting forward over the past two and a half years about the importance of money supply and achieving a substantial reduction in public expenditure.

Can the Chancellor confirm the scale of what he has in mind? Is it correct that in the public expenditure White Paper in February—which was not supported by some of his hon. Friends—the right hon. Gentleman proposed a reduction for 1977–78 of £1,000 million, that in his July statement he proposed a further reduction for 1977–78 of another £1,000 million, with additional tax revenue of £1,000 million, and that in today's statement he proposes a further reduction of £1,000 million for the same year and further tax increases of £500 million? Am I correct in welcoming what he has said because it means that by three bites this year he intends to reduce next year's public sector borrowing requirement by £4,500 million? If so, will he cease denouncing those of us who have been urging reductions on that scale for the past two years?

Does the Chancellor recognise that his refusal to take our advice until the economy is stagnant and unemployment is clearly rising means that the consequences in lost jobs and a delayed return to prosperity will be far worse than they need have been?

There are some aspects of the statement which we can welcome. We welcome the recognition of the need to reduce food subsidies more quickly and of the desirability of phasing out the regional employment premium.

We also have some sympathy with the Chancellor's desire to reduce the size of the stake holding in the successful BP company. But to whom does he propose that this holding should be sold? Does he believe that the sale of these assets, as part of a sort of Socialist clearance sale of assets whose ownership is in doubt, will restore international confidence? Does he not recognise that it makes a nonsense of the argument previously advanced by the Government that nationalisation has no adverse effect on the public sector borrowing requirement? Does it not also make it doubly foolish to press ahead with the immense cost of taking into public ownership yet further industries as the Government still intend to do?

Does the Chancellor agree that the cuts in defence expenditure since he began dealing with this matter amount to £8,000 million overall and that the three cuts announced this year amount to a reduction of £400 million on defence next year? Does he not recognise the grave risk that, by making these cuts, he will be endangering our national safety beyond an aceptable level?

We welcome the signs which the Chancellor has given that he recognises that new jobs and new prosperity can come only from renewing confidence in the private sector. Is he aware that we welcome his intention to reverse some of the damage done to overseas earnings and those who work overseas by his own 1974 Finance Act?

Is he also aware that we are bound to be concerned that almost half the spending cuts announced today fall on the private sector through reductions in capital spending programmes? The private sector, on which recovery depends, will continue to languish until effective action is taken to restore incentives at every level. The Chancellor would do far better to concentrate less on doling out money to this or that board or organisation and to concentrate more on motivating our people by restoring incentives.

Finally, is the Chancellor aware that the House is unimpressed by the belated attempt to pose as Father Christmas in postponing the increases in taxation until New Year's Day and that today's taste of bitter medicine is a direct result of his own reckless and incompetent mismanagement of the economy during three wasted years at the Treasury?

Mr. Healey

I should thank the right hon. and learned Gentleman for the typically gracious way in which he welcomed my statement. At the beginning he spoke about his hopes that the package would be successful, but the tone of his speech reflected a deep political fear that the package would succeed.

I have no doubt that the right hon. Lady the Leader of the Opposition will take up through the usual channels the suggestion of having a two-day debate.

I shall report to the House in full as soon as a final agreement on sterling balances has been reached.

The right hon. and learned Gentleman then treated us to yet another stale recitation of his threadbare party piece which we have heard so often. When he talks about what he and his right hon. and hon. Friends said during their two years in Opposition, he might occasionally reflect on what they did during three and a half years in office.

When the right hon. Gentleman talks to us about controlling public expenditure, he might reflect on the remarks of his erstwhile colleague, the right hon. Member for Down, South (Mr. Powell), in a recent debate. The Conservative Party and the nation would benefit if the right hon. and learned Gentleman showed a little more of the dignified objectivity displayed by his hon. Friend the Member for Oswestry (Mr. Biffen) who, when discussing these problems on television on Sunday, was unable to conceal either his contempt for his party's record in office or his distaste for their opportunism in opposition.

Sir G. Howe

I want confirmation that the Chancellor, who opposed the Chancellor in the last Conservative Government when he announced expenditure cuts almost three years ago to the day, now acknowledges to the House that he has to introduce proposals, either by cutting expenditure or by raising taxes, to reduce the public sector borrowing requirement by £4,500 million. Is that right, and is it not what we have been urging on him and what he has previously refused to do?

Mr. Healey

I shall respond to the rather tremulous attempt by the right hon. and learned Gentleman—[HON. MEMBERS: "Answer the question."] I shall be able to answer when the right hon. and learned Gentleman tells us why he refused—[HON. MEMBERS: "Answer the question."]—consistently at any time over the past two and a half years to tell us what cuts in public expenditure he would accept.

Mr. Grimond

Many hon. Members will agree that the Chancellor's speech today marks the fact that not just over the past two years but over the past four or five years public expenditure has got entirely out of control and has greatly damaged the economy. Is the Chancellor aware that the most important thing is to find some common ground on which the country can unite instead of indulging constantly in party bickering. I think that many people would agree with the Chancellor when he puts more emphasis on production and less on unproductive public expenditure.

The most frightful part of the Chancellor's speech was when he spoke of a transition to a more firmly based prosperity. What is it to be based on? That seemed to be lacking in his speech. Are we now at the end of the very damaging proposals contained in the Labour Party's last manifesto? Are we going forward to a situation in which private industry, profit-making industry and productive enterprise will be fully and properly rewarded?

Mr. Healey

I agree with the right hon. Gentleman's remarks when he says that there is a great deal of common ground both in the House and the country about the nature of our economic problems, which the Conservative Party fairly stated in its recent policy statement, and about the nature of the remedies which must be sought for that problem. On his last question, however, all I can tell the right hon. Gentleman is that the Government's industrial strategy and the social contract command the support of all our friends abroad and of both sides of industry in Britain.

After the rather demeaning display by the Shadow Chancellor there should be a serious attempt by Opposition Members, from whichever Opposition parties, to join in the national effort for recovery, for which we have now laid the fiscal foundations.

Mr. Atkinson

In view of the delayed phasing of the Chancellor's statement, could he give some assurance to the House that he has not been absolutely rigid in presenting these in total and that there is some degree of flexibility in his statement? Will he say that it is not a threat to the existence of the Government for some hon. Members to try to change some aspects of the Chancellor's statement, bearing in mind that he has placed on the trade unions and on wage negotiators an almost impossible burden? If we take from his statement his prediction that prices, by the start of phase 3 of the social contract, will be rising at about 14 or 15 per cent. year on year—when the workers will already have taken a drop in living standards by the time we reach mid-1977—may we ask for an assurance that there is some flexibility in the delayed taxation proposals, which he said will depend on whether we can successfully conclude a wage arrangement, which does not directly affect prolonging inflation from a wage source? I ask the Chancellor for some assurances of that sort.

Mr. Healey

I am grateful to my hon. Friend for asking that question. I know how deeply he will regret, as do the Government, some of the measures which economic circumstances have compelled us to take.

On the question of a two-year programme, I can assure him that he will see, in the Letter of Application which is now in the Vote Office, that the Government will reconsider the targets for 1978 and 1979 before the end of next year in the light of prospects as they develop. I gave an example of that in my statement.

I am very grateful to him also for what he said about the forthcoming discussions with the Trades Union Congress on the next round of pay policy. I can tell him that I know from long talks with leaders of our trade unions that they are as deeply concerned as anyone in the House or in the country to gain control of the two elements which have produced such disastrous inflation since the pay policy was introduced. The first is to recover control of our sterling exchange rate and to stop the disastrous plunge that we have seen this year, and the second is to produce a situation in which there is a firm prospect of falling interest rates in view of the fact that high interest rates have damaged housing and investments. If we approach the talks in this spirit we are bound to succeed.

Mr. Powell

Will the right hon. Gentleman confirm that these measures would have been equally necessary even if the IMF had not existed and that the decision to borrow from the IMF, whether right or wrong, is unconnected with the necessity of what he has put before the House? But why is he so sure that it is only the last £1½ billion of the prospective £10½ billion borrowing requirement in the coming financial year which imports the threat of continued inflation and a decline in the value of sterling? It is on that proposition that he is resting the economic prospects of this country.

Mr. Healey

I shall confirm, as I told the House in the debate the other day in which the right hon. Gentleman spoke, that the Government have taken decisions because they believe them to be necessary. I do not mind saying that it took some time to persude the IMF team that these decisions were the appropriate ones in that situation. They are Government decisions. They would have been more necessary if we had not been able to count on the endorsement of our policies by the IMF and on the assistance to our resources which we shall get from IMF borrowing.

The right hon. Gentleman asked how I could be certain that the reduction of the PSBR to £8.7 billion from £10½ billion, as it would otherwise have been, will be adequate to enable us to recover control of the sterling exchange rate. Of course no one in the world can be certain about what will be adequate in these fields, but the fact that the world's established international monetary authority and all the world's strongest economies are endorsing our policy and these measures and are supporting their judgment with their money should give the House and, indeed, the world confidence that these measures are rightly judged.

Mr. Mellish

My right hon. Friend has proposed cuts in new housing starts in the coming year. Will there be any exemptions concerning special stress areas, because this would mean so much to them?

Mr. Healey

Yes, Sir. There will be exemptions, particularly for areas of housing stress. My right hon. Friend will be giving more details of the implications later.

Mr. Maurice Macmillan

The Chancellor has indicated that these are measures for financing an interim period, during which he hopes to deal with the problems of sterling and inflation. Will he be good enough to tell the House now, and to give it an assurance, that in whatever speech he may make in the debate on these measures he will refer to one of the main causes of our difficulties, which is the failure to use existing investment properly and the low output per man that is obtained throughout most of our industry as compared with that obtained by our competitors?

Mr. Healey

The right hon. Gentleman will know that I have referred to inadequate use of existing capital in almost every speech that I have made on the economy over the last two years. He should also be aware of recent studies, notably one published by the British Institute of Management, which make it clear that the inadequate use of existing capital is due, above all, to inadequacies in management. Some of the figures quoted in the recent study by Dr. New show the amount of time for which in most companies polled the average component stands idle, and they should be of deep concern to both sides of the House.

Mr. Crawford

I have one or two brief questions concerning Scotland. Is the Chancellor aware that his comments on increased unemployment will condemn more and more Scottish workers to a further spell in purgatory? On the question of Scottish housing, is he aware that his comments on the cut back in the construction industry will increase urban deprivation in the West of Scotland? On the question of whisky, is he aware that it may be a happy Christmas but it will be a hellish New Year, and that he cannot go on killing off that industry? Finally, will he confirm or deny rumours circulating in the City that the Bank of England is considering printing a new bank note which shows the Queen with her fingers crossed?

Mr. Healey

I congratulate the hon. Gentleman on producing that chestnut with such aplomb—if that is the right word. I assure him that it was particularly with his own constituents in mind that I made certain that the new prices for drink would not apply until after Hogmanay, as well as after Christmas.

Mr. Cant

Far be it from me to import the mad monetarist from Chicago into the discussion. However, does not my right hon. Friend, on reflection, consider that he would have been wiser to listen two years ago to some of his hon. Friends—who shall be nameless—who suggested that he might attach some importance to money supply aggregates and that he might even resurrect domestic credit expansion? May I briefly ask whether it is an implication of what he said about economies in public expenditure that all negotiations in the public service sector must be in terms of no redundancy in the Civil Service or in local government?

Mr. Healey

I do not know quite how my hon. Friend relates his last question to his earlier question. My feeling is that it would not be possible to relate the two. However, I think that he will know that, for good or ill, I have paid far more attention to money aggregates than did any of my predecessors in this office. I have kept the money supply under far more effective control than it was under the previous Conservative Administration. As I have said, I expect money supply this year to be broadly within the target that I set for it in July.

Mr. Higgins

If the Chancellor expects the increase in money supply to be less than the rate of inflation, why does he suppose that the net effect of his measures will be to reduce unemployment? Can he confirm that the amount for which he now proposes to ask the IMF will be greater than the amount available from the IMF following the ratification of the second amendment of the Articles and the Sixth Quota Review, as suggested in the Queen's Speech?

Mr. Healey

On the second question, the IMF has agreed to make available to us, by way of standby, all our remaining credit tranche plus the 45 per cent. temporary increase which is available in theory only until the new distribution of quotas comes into effect, so from that point of view we are being very generously treated by the IMF. We shall be drawing $3,900 million in all over the next two years.

The hon. Gentleman's earlier question has strayed from my mind. Perhaps he could shout one word, when I would no doubt recall it.

Mr. Higgins

My question was this: if the increase in the money supply is expected to be less than the rate of inflation, why does the right hon. Gentleman think that the net effect of his package will be to reduce the level of unemployment?

Mr. Healey

First, the rate of the increase in money supply is enormously affected by, among other factors, whether one has a balance of payments deficit. For that reason it is a very poor proxy for the rate of domestic credit expansion, which we have chosen to adopt instead. However, in either case it is possible to have a rate of increase in money supply lower than the rate of increase in money GDP without necessarily increasing inflation.

In final reply to the hon. Gentleman's point, the measures that I have announced this afternoon will generate more jobs than they remove. [HON. MEMBERS: "No."] Yes, because the redundancies and unemployment following from the cuts that I have announced will be more than offset by the jobs generated, first, by the employment measures I have announced—£120 million each year; secondly, by additional industrial aid; and, thirdly, by increased activity in demand generated by a fall in interest rates.

Mr. Cronin

As his proposed public expenditure cuts will free immense resources for manufacturing industry, will my right hon. Friend indicate what steps he will take to induce manufacturing in, dustry to take advantage of the situation? Having brought the horse to water, how will he induce it to drink?

Mr. Healey

I fully accept my hon. Friend's main point, which is that the success of these measures will depend critically on British industry taking advantage of the priority that it is now being given. However, I can point to some evidence that the switch towards industry has already begun. For example, as I think I said in my last speech to the House, employment in manufacturing industry rose by 60,000 between the second and third quarters of this year when employment in other parts of the economy was falling. Similarly, while investment as a whole in Britain has not yet begun to increase, investment in manufacturing industry rose in both of the last two quarters.

Mr. Graham Page

Will the Chancellor accept congratulations from the Opposition side of the House for saying that he is going to reduce expenditure under the Community Land Act? In order that central and local government staff shall not be retained unnecessarily, in case someone revives the Act, will he come clean and scrap the Act altogether?

Mr. Healey

I fear that I am never ready to accept congratulations from the Opposition side of the House without inspecting them most carefully for explosives. I would certainly not consider repealing the Community Land Act. The Act has already been of immense value in denying to land speculators the profits which under the previous régime they were able to get from buying and selling land. Secondly, I am glad to say that even after these reductions in the amounts of money made available for purchase, there will still be a steady increase over the next two years.

Dr. Bray

Since the question of wider long-term support for sterling will fall to the next United States Administration, who take office next month, and since they are neither monetarist nor simpleminded, will my right hon. Friend assure the House that he is taking steps to present our case to President-elect Carter in the form most likely to appeal to him?

Mr. Healey

First, all the negotiations in relation to the IMF and the sterling balances will be carried out with existing Governments all over the world, including the existing American Administration. My hon. Friend will know that I am familiar with a number of possible and appointed members of the next American Administration, and I have no doubt that my right hon. Friend the Prime Minister will be taking an early opportunity of meeting President-elect Carter. However, I think that it would be a mistake to describe or to treat President-elect Carter as President until he in fact assumes that office.

Mr. Emery

Will the Chancellor accept that much greater international banking and financial confidence would have been restored if he had announced his measures today and had not applied for the standby credit, since what many people fear is that the standby credit will only be frittered away on more Socialist measures?

Mr. Healey

With respect to the hon. Gentleman, I think it possible that I have been in closer touch with the more important parts of international financial opinion in recent weeks than he has. What we know is that the amount of money provided by the IMF is quite small in relation to the magnitudes of foreign exchange spending on both capital and trade purposes, but it is nevertheless of great value to us to have this standby available over the next two years. Although, as I said in reply to the right hon. Member for Down, South, I should have wished to take these decisions even without the assistance from the IMF, if we had not been able to count on that assistance we should have had to make larger, not smaller, cuts in the public sector borrowing requirement and public expenditure.

Mr. Baker

Is it not an extraordinary indictment of his record that a Labour Chancellor of the Exchequer has even to consider disposing of such valuable assets as the BP shares? To whom does the Chancellor expect to sell them? Whom has he in mind? If they go to overseas interests, and if the Bank of England loses its action, is it not possible that control of this company will escape not only from the Government's hands but from the country's hands? If the Chancellor sells them to United Kingdom residents, will not those United Kingdom residents buy these shares instead of buying gilts, and will not his object of reducing the public sector borrowing requirement in this way thereby be thwarted?

Mr. Healey

I am afraid that the hon. Gentleman has been misled by some newspaper article which he read. Whoever buys these shares, there will be a fall in the PSBR in consequence. The effect of the fall in the PSBR, on the money supply and DCE—which is what I suspect the hon. Gentleman was vaguely fumbling after—will depend on the extent to which these sales displace possible purchases of gilts, but that is quite another matter. As for who buys the shares, this will depend on who comes along and attempts to buy them. But in any case Her Majesty's Government—even on the worst conceivable hypothesis, that they totally lost control of the Burmah shares and therefore their holding fell to just 30 per cent. in BP—would still have a blocking holding, which would be 25 per cent, of BP; and, of course, they have never sought in a constructive or positive way to use the majority holding in order to determine the policy of British Petroleum.

Mr. English

Are the measures which my right hon. Friend proposes more or less severe than those originally suggested by the IMF for the British economy? Second, why on earth does the Chancellor think it desirable to sell off productive assets such as those referred to in the last question? Would it not be better to sell off unproductive assets, such as the Crown Jewels, rather than something like the most valuable shares in the world?

Mr. Healey

I shall consider my hon. Friend's suggestion about selling the Crown Jewels, but I am not absolutely certain that they are the property of Her Majesty's Government.

Mr. Tebbit

The shares are not, either.

Mr. Healey

On the question of IMF proposals, to which my hon. Friend referred, I thought that I had made clear beyond doubt in our last debate that the IMF does not make proposals. It does not see that as its duty. The IMF considers the prospects and circumstances of the economy in any country with which it has dealings, and it then waits for the Government of the country concerned to put proposals to it. It then offers money if it regards the proposals as adequate, or does not if they are not adequate. But it is not for the IMF to make proposals to Her Majesty's Government or to any other Government, and nor has the IMF team done it in this case.

Mr. Ian Gilmour

The Chancellor did not answer the question put by my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) on defence—or, indeed, anything else—so will he now confirm that it is the view of the Chiefs of Staff that his latest defence cuts, following on the £8,000 million which his Government have already cut, imperil the nation's defence and undermine the Western Alliance?

Mr. Healey

I hope that the right hon. Gentleman, who, I believe, at some point in his career was Secretary of State for Defence, is not seriously suggesting that any Minister should retail to the House views put to Ministers by the Chiefs of Staff. That would be a most extraordinary suggestion, and totally contrary to the practice of the House and the British Government.

Hon. Members

Answer.

Mr. Skinner

Does the Chancellor of the Exchequer realise that one of the reasons why, during certain passages of his speech, the cheering came in the main from the Opposition was that he was making a statement closely in line with what the Opposition have been putting to him over the past two years, and this Government have in fact not been carrying out the Socialist measures to which they have referred? Where is the economic miracle now? If after this period of time the Chancellor is unable to tell us where the economic miracle has gone, on the basis of the strategies which he has put forward in the past for cutting public expenditure, why on earth do the Government not consider the alternative strategy which has time and again been put forward by some of us on these Benches, along with the TUC and the Labour movement generally?

Mr. Healey

I think it fair to tell the House that the Government have on many occasions in recent years considered what my hon. Friend has called the alternative strategy, but they have never succeeded in persuading themselves that the alternative strategy offers this country anything like such favourable prospects as does sticking to existing strategies. Moreover, I think that my hon. Friend will be well aware that the views which he holds on, for example, the siege economy and import controls are very far removed from those put forward by the Trades Union Congress—

Mr. Skinner

This is a siege economy.

Mr. Healey

Let me tell my hon. Friend also, as I have said previously, that the Trades Union Congress and, I believe, ordinary trade unionists would regard it as of absolutely capital importance for any British Government to take measures which will enable the Government to control the sterling rate to produce some stability in the value of sterling and to get interest rates moved down, not up. It is far from clear to me that the strategy which my hon. Friend personally espouses would have a favourable effect in those two respects.

Mr. Hugh Fraser

Instead of selling the British Petroleum shares, why did not the Chancellor look at the list of other Government shareholdings and dispose of them? The list includes Appledore Shipbuilders, Cammell Laird, Govan Shipbuilders and Harland and Wolff. I have the official list here. It seems quite ridiculous at this stage to dispose of one of the best growth assets which this country possesses rather than dispose of other assets here listed and acquired by the present Government.

Mr. Healey

I am rather puzzled by the attitude of the right hon. Gentleman and various other hon. Members who put questions about Burmah. For half the time, they argue that we should not nationalise anything, and for the rest of the time they argue that the accidental passage of Burmah shares into the hands of the Bank of England and within the orbit of the Government should on no account be reversed. When the right hon. Gentleman has made up his mind in which direction he wants to move, perhaps he will send me a letter.

Mr. Alexander W. Lyon

Does my right hon. Friend recollect that two months ago he told the Labour Party Conference that he would negotiate with the IMF on the basis of current policy and that last year in the Budget he expected a borrowing requirement of about £10 billion, which he now expects it would be even without these measures? Is it not correct that, in addition to selling BP shares, what we are now selling by this statement is all the Labour Party aspirations and that we are doing this for a squalid little loan of less than £150 per family in this country which we would have got in any event if we had stood up to the IMF and said that we were not willing to accept any conditions at all?

Mr. Healey

I appreciate the strength and depth of my hon. Friend's feelings, but he must face the facts about the position of sterling and the level of interest rates. If he can explain to me how it would be possible for the Government to finance a deficit of the size which was in prospect without these measures without crippling the industrial strategy and without seeing living standards collapse with the fall of sterling, I shall pay more attention to the views which received such a boisterous cheer from the Conservative Benches.

I can tell my hon. Friend that there is no future for the working people of this country or for the aspirations that he and I share unless we recover control of the sterling rate, get interest rates down, and create the conditions in which British industry can make its proper contribution to the national welfare. Unless we do that, we can achieve none of our objectives. We have now created a base on which we can achieve the objectives of our industrial strategy and so pay for all the social advantages which my hon. Friend and I both seek.

Mr. Ridley

May I congratulate the Chancellor of the Exchequer on a considerable slaughtering of Socialist sacred cows this afternoon? May I ask him why he always said that Conservative demands for public expenditure cuts would result in massive unemployment whereas when he makes public expenditure cuts they increase employment? Is the right hon. Gentleman aware that no one believes him and that he would be more respected in the country if he would occasionally stop trying to paint the picture rosier than it is?

Mr. Healey

The hon. Gentleman, who on the occasions when he attends our debates makes very valuable and often witty contributions, will recognise that I said in my speech that unemployment was not likely to fall next year and is likely to rise, but it will not rise as a result of these measures because of the £200 million that the Government are simultaneously injecting into industrial investment and employment.

When I attacked the Conservative Front Bench for asking for cuts of £5,000 million, I did so because I believed that those would totally wreck the economy and the social consensus on which our polity rests today. I would agree with the hon. Gentleman that his leaders on the Opposition Front Bench always ran 1,000 miles when they were asked to say which cuts they would make, and even today the only clear statement we have had from the Conservative Front Bench is that the Conservatives would oppose the cuts in defence expenditure which are an integral part of the Government's current measures.

Mr. Gould

When will my right hon. Friend turn his attention away from irrelevant cuts in public expenditure and deal, instead, with some of our real problems which are amply illustrated by yesterday's disastrous trade figures? Will not my right hon. Friend accept that the cuts in public expenditure that he has announced will do nothing whatsoever to promote the export-led growth he has talked about for so long but which cannot manifest itself until we stop kidding ourselves about the exchange rate?

Mr. Healey

I am well aware of my hon. Friend's views on the exchange rate. I could hardly fail to be so, because the last time he expressed them sterling fell by, I think it was, three cents.

Mr. Gould

Two cents.

Mr. Healey

I think that my hon. Friend is mistaken if he really believes that our disappointing export performance is due to the fact that the pound is over-valued. This is not the view of any industrialist involved in exporting whom I have met. The real problem in Britain is the sluggish response of industry to changes in its market environment. That sluggish response cannot be improved by the Government alone. All the evidence that we have had from the trade figures and from investors about our disappointing export performance suggests that we are highly compeitive on price at present. The real problem is that the bulk of individual firms are not taking full advantage of their price competitivity to increase export volumes.

Mr. Cormack

Is the Chancellor of the Exchequer aware that hitherto his forecasts have been less reliable than Old Moore's? If on this occasion he has the figures roughly right—we must hope that he has—does he not consider that he has his priorities wrong? Why is he taking steps that could cripple the construction industry when he could have raised money from prescription charges and such things?

Mr. Healey

Any Government would have been faced with this problem. If there were ever a Tory Government again, they would face this problem. They would face the problem of retaining the confidence of the working people, which we have won and on which we have built such progress as we have made in the fight against inflation in the past two years. In their choice of measures to adopt, a Conservative Government would forfeit that confidence and return this country to the conditions which it had to endure for so many months under the previous Conservative Government. I am sure that this Government were right to take some account of social considerations in deciding on the distribution of their cuts.

Mr. Heffer

Would not my right hon. Friend agree that, despite his comments about more assistance and job creation schemes, this package will mean higher unemployment? How we can talk about continuing the support of working people when we are putting more and more of them on the dole, especially construction workers, I do not understand. Is my right hon. Friend aware that many of us on this side will regard this as a very depressing day for the Labour movement? He really ought to consider his position.

Hon. Members

Hear, hear.

Mr. Healey

That last remark got a good deal of a cheer from the Conservative Benches, but I do not know what conclusions I should draw from that. I share my hon. Friend's feelings about the level of unemployment in this country and particularly about the outlook for the construction industry. However, I can assure my hon. Friend, and I hope to persuade him of this in the debate next week, that a failure to take measures to reduce our public sector borrowing requirement to the extent to which we have reduced it would have had effects on inflation and employment far more severe than anything that he could possibly attribute to the measures that I have announced this afternoon.

Mr. Tapsell

While the Chancellor is considering his position, will he also reflect on the fact that when I told him in the House two months ago that I had reason to believe that the IMF, as a condition for granting the standby credit, would require a reduction of £3 billion in our public sector borrowing requirement, he said that there was absolutely no truth in that? Yet this afternoon, in the opening passages of his statement, he exactly confirmed that figure. Is it not the fact, wholly contrary to what he said in reply to the right hon. Member for Down, South (Mr. Powell), that the Government's prolonged and wholly unsuccessful attempt to persuade the IMF to reduce that demand has still further damaged the credit of this country, which had already suffered such appalling damage during his stewardship?

Mr. Healey

The answer to each of the questions which the hon. Member has asked is "No, Sir".

Mr. Conlan

Does my right hon. Friend not agree that the ending of the regional employment premium is bound to lead to increased unemployment in regions where the level is already excessive? Are not the savings disproportionately small?

Mr. Healey

I understand my hon. Friend's concern about the ending of the REP, but at £2, which is the current level, it represents only 3 per cent. of average male earnings. The temporary employment subsidy, which we are now bringing in at £20, is 10 times higher. It is difficult to believe that an REP of £2 will make any difference to an employer's decision to take a man on or to make him redundant.

The temporary employment subsidy is likely to be far more effective in this regard. I am comforted to see that my view on this is confirmed by a recent study of the Department of Applied Economics in Cambridge, which is often quoted against me, which concluded that even at the earlier level it was very doubtful whether any net advantage was to be derived from the continuation of REP.

Mr. Younger

If the Chancellor cannot listen to the views of the Chiefs of Staff, how does he feel about the views of the previous Secretary of State for Defence who said in a letter to the National Executive Committee that any further defence cuts would be catastrophic?

Mr. Healey

I am not privy to correspondence with the NEC any more. There are reasons for that. But I certainly do not take that view myself. As the hon. Gentleman will know, I had the honour of holding that office for six years—[HONS. MEMBERSS: "Disastrous years!"]—during which the planned expenditure on our Forces was continually reduced and the consequences which Conservative Members said would flow never took place.

Several Hon. Members

rose——

Mr. Speaker

Order. I intend to take two more supplementary questions from each side. We have spent nearly an hour on this subject.

Mr. Fred Evans

Will the Chancellor give the House his estimate of the saving in public expenditure during the period in question if, by some happy inspiration at this late hour, the Government were to drop their plans to foist on this country schemes of devolution which are not believed to be necessary and which many people believe will lead to the break-up of the United Kingdom?

Mr. Healey

I appreciate my hon. Friend's feelings about devolution, with which I was not unfamiliar. I think that he would do better to express them in the debate that is to follow.

Mr. Grylls

Will the Chancellor say how much extra money will be allocated to the National Enterprise Board? Will the Board be told to back winners, in line with the Chequers industrial strategy, or will it go on backing companies which are unable to raise finance anywhere else?

Mr. Healey

I said in my statement that there would be £50 million extra for the NEB in each of the next two years.

Mr. MacFarquhar

In view of the cutback in school building announced by my right hon. Friend, will he confirm that this will not affect school building required under comprehensive reorganisation programmes already agreed?

Mr. Healey

I think I made it clear that basic needs would be protected but that otherwise the exceptions would be very few.

PUBLIC EXPENDITURE SAVINGS
£ million at 1976 Survey prices
Programme Expenditure 1977–78 1978–79
1 Defence Budget … 100 200
2 Overseas Aid … 50 50
3 Food subsidies … 160 57
4 Regional employment premium … 150 170
Refinancing of fixed rate credits … 100 200
Capital spending at CFEs* for industrial training … 10 10
5 Nationalised industries† … 110 130
6 Road construction … 75 50
7 Housing … —20 300
8 Regional water authorities etc. construction … 75 130
Local environmental services: construction and other capital … 50 50
Community ownership of development land … 35 35
9 Courts—purchase of sites … 2 —
10 Education—construction … 22 11
Other education expenditure, including school meals … 20 30
11 Health and personal social services—construction … 10 20
Other NHS expenditure … 5 5
15 Northern Ireland … 5 10
various Property Services Agency … 27 45
various Expenditure on the Civil Service … 30 10
TOTAL … 1,016 1,513
* Colleges of Further Education.
† Savings in requirements for Government finance.