§ Motion made, and Question proposed, That this House do now adjourn.—[Mr. Stallard.]
§ 12.46 p.m.
§ Mr. David Price (Eastleigh)
Before I deal with the topic of my debate, I must protest strongly about the Government coming to the House on the last day of term with a very important statement. I understand the frustration of hon. Members on both sides of the House who were unable to catch your eye, Mr. Deputy Speaker. The lesson is there for the Government; this is what happens when they bring forward such important statements on the last day of term. It is also a way of cheating hon. Members of the limited amount of private Members' time available to them.
I am grateful for the opportunity of drawing the attention of the House to the Treasury's macro-economic model Scenario II, and the statistical assumptions underlying it. In doing so, I inevitably raise the whole question of the Government's industrial strategy, because it is based on Scenario II.
I first drew attention to this matter and threw doubt upon the validity of Scenario II in a speech during the Third Reading of the Industry Amendment Bill on 28th October. I suggested that the kindest thing that could be said about it was that it put hope before experience. The Minister who replied to that debate made no attempt to answer my criticisms and did not even acknowledge the fact that I or anyone else had made them. Yet the Government strategy and Scenario II were and remain intimately connected with that Bill.
I am pleased to welcome the Minister of State, Treasury, to the Front Bench and the fact that he is to reply to the debate. That fact alone justifies my raising the matter, but I have more specific reasons. Since my criticisms in October, the economic situation has deteriorated further, new measures have been brought forward by the Government and the situation has been, to say the least, fluid.
Yet the Government have remained firm in their public allegiance to their industrial strategy and hence to Scenario II. It must be clear to everyone that 930 the highly optimistic assumptions upon which Scenario II was constructed last summer are no longer valid, so I am giving the Government an opportunity to get off the hook and finally to abandon Scenario II in favour of a more realistic model for the economy up to 1980—the so-called middle term.
I may be asking too much of the Government; we shall see when the Minister replies. I was interested to read in the Chancellor of the Exchequer's letter to the International Monetary Fund on 15th December a number of references to the Government's industrial strategy which had Scenario II overtones, although Scenario II was not specifically mentioned. Maybe I am a little too suspicious—maybe the Government are quietly sliding out of their Scenario II commitment. I sincerely hope so.
I am entirely at one with the Government when the Chancellor talks to the IMF ofAn industrial strategy through which the Government, trade unions and employers are seeking to improve the performance of our manufacturing industry and, in particular, its productivity and ability to compete successfully in world markets.My quarrel with the Government does not lie in disagreement over the aims of the national industrial strategy, but in the fact that they are seeking totally unrealistic targets, which will confuse and disappoint, rather than enlighten and encourage. Euphoric optimism helps no one and is denied daily by events.
Since October we have had the provisional results of the first year of the scenario story, and these results confirm all the fears about Scenario II optimism. I shall draw to the attention of the House replies which I have received this autumn from relevant Ministers to Questions which I put, about 1975–76 growth rate for individual industrial sectors on the same basis of statistical derivation as that used by the Treasury in compiling Scenario II. It is an unhappy story which justifies my taking up the time of the House on this terminal day before the Christmas Recess.
I take the House back to the birth of Scenario II. The object of the exercise was,To provide a coherent framework of explicit macro-economic assumptions so far as possible set out in quantitative terms.Into this framework sectoral working parties for various industries—the Little 931 Neddies—could slot their own studies and forecasts. There were two alternative models for the middle term—up to 1980—drawn up by the Treasury as the base line for sectoral discussion.
The Treasury made it clear that it regarded these alternative models neither as forecasts nor as national plans. As far as a national plan was concerned, I thought that the Treasury was rather rough on the memory of the former Secretary of State for Economic Affairs, who is now in another place, when it statedWe are not seeking to impose an inflexible set of macro-economic assumptions on 'national plan' lines. Equally, we reject a sterile numbers game.This raises the question of the purpose and status of these two models. I hope that the Minister of State will enlighten us when he replies.
The Treasury called the two models Scenario I and Scenario II probably because it could not make up its mind about the precise status. That choice of language was more appropriate to the Round House than to Great George Street, and is singularly misleading. I have looked up the word "scenario" in the Oxford Dictionary and it give two definitions. The first isa skeleton libretto of play or opera",and the second isa complete plot of film play, with the necessary directions for the actors and details of scenes etc.The word "scenario" is derived from the Italian word "scena" meaning "scene".
Scenarios I and II do not fall within either of these descriptions, so why was that word used? I think that it was used because it is a vogue word current in the media and public relations. It is what that very distinguished civil servant Sir Ernest Gowers described as "a modish word". In his book he condemns modish writing and says:This is the sort of writing that forces its modernity on the reader by posture and display, like an incompetent model flaunting a new dress rather than a sensible woman wearing one. In modish writing the writer goes out of his way to parade his knowledge of the latest vogue word or to twist to new uses the vocabulary or modes of expression that have lately become current in other contexts—in short he is affected or pretentious, rather than fresh or lively.932 Even if the Treasury cannot preserve the value of our currency, I wish that it could be relied upon not to debase the coinage of the English language. Why is it necessary to have a first-class honours degree to enter the Treasury if not to protect the English language?
I remind the House that, according to the Treasury, Scenario I was based on extrapolating recent trends and, as it said in its paper:By historical standards, the average rate of GDP of about 3½ per cent. over a four year period is almost as fast a rate of growth as the fastest we have achieved in the past 20 years.This aim is by no means a modest one. Scenario II, according to the Treasury.differs from Scenario I in that sufficient improvement in industrial performance has been assumed to achieve an acceptable balance of payments and level of employment in 1979.As I have already pointed out, these changes would require an unprecedented rate of growth in manufacturing output of 8 per cent. on average from 1975 to 1979.
The clue to the adoption of Scenario II is given in the statement made after the NEDC meeting on 4th August when it was stated:The Council unanimously agreed that the first of the two scenarios presented in the current paper (based on no improvement in past performance) was unacceptable; and that only the second scenario provided for a sufficiently rapid return to full employment, based on the expansion of manufacturing industry through increased investment and higher productivity.It must by now be evident that Scenario II was highly optimistic in its projections of future economic performance.
It seems that the Council's statement was really the Government's rejection of Scenario I because the Government did not like the consequences. That is rather like any one of us receiving a bank statement, particularly if we have an overdraft, and rejecting it because we do not like what it says. That is why I have described Scenario II as putting hope before experience.
I believe that the implication of accepting Scenario II was to nulify the whole exercise of providing guidelines about the future movement of the British economy up to 1980 in order to help individual industries and firms to plan ahead. Scenario II has failed to do this because 933 it has made unrealistic and unwarranted assumptions about the rate of improvement in our economic performance.
When I raised this matter, on 28th October, I quoted figures from the chemical industry, with which I am quite familiar. I remind the House what I said on that occasion:Over the next four years, Scenario II involves an average growth rate in chemicals of 10.8 per cent. We are talking about a growth in chemical exports of 20 per cent. a year for each of the four years covered by Scenario II. That means in real terms a doubling of exports in four years."—[Official Report, 28th October 1976; Vol. 917, c. 815–6.]To me this is pure fiction. The growth would be more than twice the rate of increase in world trade foreseen either by the OECD forecast or by the Treasury in its assumptions. I give that example to show that even on their own terms the Government started Scenario II with basic internal inconsistencies. Now at the turn of the year, it seems an even more improbable model for the years up to 1980 than it did in August.
I hope that I am not being an economic Scrooge, an old misery-monger, in criticising Scenario II as being an act of mythology rather than one of serious economic forecast. We now have the first year's results, and they bear out again our mistrust of Scenario II.
With the assistance of statisticians in the Library, I have re- worked out the Scenario II targets. I wanted to table my findings as a document in the debate so that hon. Members attending the debate could have it before them and go through it as I spoke. That, however, is an improper practice, as I am told. I sought the advice of the Clerks, who told me that only the Government could do that. There was no way in which I as an individual Member could do that, but I have photographed the table I have produced and I should be delighted to give a copy to any hon. Member after the debate if he meets me behind the Chair.
I have calculated, first, the rates of growth of all the industries covered in the Treasury models and obtained the figures which were originally worked out. I then took the figures of the targets set in Scenario II and the figures for the first year, 1975–76, which I obtained through parliamentary Questions. On 934 that basis I have worked out revised Scenario II targets which it would be necessary to reach in order to achieve the desired result.
The average rate of growth for all manufacturing industry for the years from 1971 to 1975 was 0.4 per cent. The Scenario II target was originally 7.9 per cent. But the rate of growth for the first year of Scenario II was not 7.9 per cent., but 0.8 per cent. That means that if we drop one year and if the figures are to be on target by 1980, the rate of growth in manufacturing industry for the next four years will have to be 9.7 per cent. I shall let the Minister of State have these figures afterwards. I do not expect him to comment on them off the cuff.
Let us then look at the key industrial sectors. Let us take mechanical engineering, the heart of industrial Britain. The rate of growth in that industry in 1971 to 1975 was 0.5 per cent. The Scenario II target as originally set was 7.4 per cent. The first year's result is not a rate of growth, but a reduction. It is minus 4.1 per cent. That means that the revised target will have to be 10.5 per cent. The situation is that mechanical engineering from 1971 to 1975 achieved a growth rate of 0.5 per cent. and it is expected from 1976 to 1980 to achieve a growth rate of 10.5 per cent. I do not think that I am being unfair when I insist that this is putting hope before experience.
Let us look now at electrical engineering. From 1971 to 1975 the growth rate was 2.7 per cent. The original target was 10.7 per cent. In the first year the rate of growth was minus 2.6 per cent. By simple arithmetic one can rewrite the target for the growth rate over the next four years to 14.3 per cent. This takes us into the world of mythology.
We move on to motor vehicles, another of our key industries. The rate of growth from 1971 to 1975 was minus 3.3 per cent. The Scenario II original target was 11.1 per cent. The rate of growth in the first year was 1.1 per cent. Therefore the revised target must be 13.8 per cent.
I hope that I have said enough to show how deceptively unrealistic these targets are. My conclusion is borne out very much by independent sources. The 935 December issue of the Bank of England Quarterly Bulletin bears out my view. Looking ahead to 1977 it says:All in all, growth during the year ahead is now likely to be heavily dependent on exports and, to a much smaller extent, on stockbuilding and manufacturing investment; output can thus be expected to expand fairly slowly.But Scenario II requires sensationally rapid expansion.
The National Institute has also produced some modest forecasts for the expansion of industry in 1977. However, this figure is of a growth rate of 3 per cent. I admit that it calculates this on the basis of the whole of industrial production, not simply of manufacturing output. The Minister and I know the distinction between the two.
If the Government really wish to help individual industries, and more especially individual firms, to increase exports and productivity, they should be prepared to offer advice on likely trends in three areas. These are the rate of inflation, the movement of sterling, and movements in interest rates. Individual firms have absolutely no control over these three variables, but they are vital in determining whether a firm makes a profit or loss in the export market. Without that knowledge a firm is in grave difficulty.
On the Friday before last I visited a firm in my constituency with an export record of more than 70 per cent. and expanding. I was asked just these questions. The firm was in the process of negotiating a fixed-price contract for equipment to be delivered to the Middle East, and some of it will not be delivered for two years. These are three areas of economic movement on which it wanted information and advice.
I suggest that if the Government and the Treasury wish to help industry on future predictions, these are the areas on which they should be giving advice. If things are going right, industry is perfectly capable of working out its own plans for expansion.
The other message that one gets loud and clear—I speak as someone who retains working connections in industry and commerce—is the constant plea for stability in the general environment set by the Government. Industry wants stability in taxation and, above all, in 936 general legislation. Without going into the merits of things, they plead for the Government not to keep changing the ground rules. Sometimes they put it rather bluntly, saying "Please get off our backs and let us get on with the job".
In the Government's efforts to effect national recovery, to work with the TUC and the CBI, will they please remember middle management? I speak as a middle manager. Please will they remember the works manager, the sales manager and the staff manager? They are at the sharp end where the action is. They have to implement all the decisions entered into at high level by the Government, the TUC and the CBI, even when they find that the decisions are either impracticable, unintelligible or sometimes simply nonsense. They take the can. but they are not consulted and they are taken for granted. To coin a phrase, they are the Third Man in industry. I invite the Government this Christmas to bring the Third Man in from out of the cold.
Finally, I return to the two models of Scenario I and II. I believe that it will take all our efforts and a run of good luck to achieve the Scenario I targets. Indeed, if world economic growth remains sluggish, or if our position in the world market deteriorates, as it so easily could, we may not be able to achieve even Scenario I.
It does not help our national recovery to persits in the illusion of Scenario II simply because life would be a great deal more comfortable for us, including above all the Government, if the Scenario II targets were achieved.
In my earlier speech on Scenario II, I described it as Tinkerbell in Peter Pan. The House will recall that Tinkerbell continued to exist only as long as boys and girls continued to believe in fairies. I was too kind and gentle in that analogy. Scenario II is not Peter Pan. It is the end of Pagliacci—"La Commedia é finita".
§ Mr. Deputy Speaker (Mr. Bryant God-man Irvine)
As the Adjournment debates started late, the timings have had to be slightly altered to be fair to hon. Members who have later Adjournment debates. I hope that this debate will finish at 1.30 p.m. The second debate will take place from 1.30 p.m. to 2 p.m., 937 and the third will take place from 2 p.m. to 2.30 p.m. The rest will remain as on the Order Paper.
§ 1.12 p.m.
§ The Minister of State, Treasury (Mr. Denzil Davies)
May I first of all congratulate and thank the hon. Member for Eastleigh (Mr. Price) for raising this subject on the day the House rises for the Christmas Recess. It is an extremely important topic, as he recognised in his speech, and there are considerable implications for British industry in general in getting these matters right.
I am grateful to the hon. Member for suggesting that perhaps I should not have to comment in detail on the figures he mentioned. We shall look at them and we shall try to get our economists with first-class honours degrees to look at them. I shall write to him and I shall do as much justice as I can to the figures he has mentioned.
Towards the end of his speech, the hon. Member said that what we need is stability. The Government do not deny this. This is part of the reason for our industrial strategy, for sitting down with the CBI and the TUC to create some stability in planning for industry. We recognise that the constant chopping and changing, whether in rates of taxation or methods of taxation—such as corporation tax—whether in the case of investment grants or allowances, constitutes a whole range of matters which disrupt industry. Constant changing does not help anyone to plan industry, whether public or private. I accept that entirely, and I hope that we have gone some way to try to create more stability.
The hon. Member asked if we could tell industry what would be the rate of inflation in one year's or three years' time or what would be the movement of sterling or interest rates. We accept entirely that these are important matters for any company which has to plan for two or three years and has to deliver orders during that period. I think the hon. Gentleman will be the first to recognise that no Government—especially with an economy such as the United Kingdom economy, which is so subject to the whims of world events and world trade and commodity prices—could possibly try to give target figures for these factors. It would be irresponsible to try to do so. The Government's policy is to try to 938 stabilise and bring down the rate of inflation. We consider that that is one of the most important tasks facing us.
The movement of sterling is governed to some extent by the rate of inflation, as the hon. Gentleman will appreciate. Again, it is our desire to stabilise that movement, because we recognise that industry, especially those who have to export, must as far as possible have certainty in regard to import costs. Interest rates are part of that package and follow from the rate of inflation and the movement of sterling. The Government's desire is to see a gradual reduction in interest rates. One reason why my right hon. Friend the Chancellor of the Exchequer introduced his package last week was to try to create situations in the financial markets that would gradually reduce interest rates. As the hon. Gentleman will recognise, interest rates are governed by the rate of inflation, and the Government cannot entirely control their movement.
§ Mr. David Price
The Minister of State will appreciate that it is really no good for the Press and Members of Parliament and the Government to lecture industry about not investing sufficiently when one has to borrow at 16 or 17 per cent. against a currency that is deteriorating at 14 or 15 per cent. a year. If we can get more stability, I think that we shall see the investment.
§ Mr. Davies
I accept the hon. Gentleman's point entirely. I think he also referred to a dismal scenario. Some might refer to it as a dismal silence. There is a school of economics which says that interest rates do not matter all that much. I always believed that they did matter, especially for medium-size and small companies. Maybe the multinationals are not affected by interest rates.
§ Mr. David Price
I confirm that the Minister is absolutely correct. Whatever may appear to academic economists, the fact is that in the real world, particularly in a medium-size company, one has to borrow. The rate at which one borrows is part of the cost of investment. It is as simple at that.
§ Mr. Davies
We always thought so as well, but there are theorists who argue differently.
939 At the beginning of his speech, the hon. Gentleman said that he thought the scenario was wrong and was far too optimistic and that we should not have put forward these figures in the first place. I remind him that Scenario II is not a target but a statistical exercise, although we have to have figures to try to carry out the underlying exercise. It is an attempt to get British manufacturing industry out of the "red" in which it has been since the war.
The basis of putting forward figures of acceptable balance of payment levels and acceptable rates of employment for 1979 was to try to sit down with industry and to say "If you want to achieve that situation, which we all want to achieve, this is what will have to be done". It is an exercise in realism. It is no good thinking that we shall arrive at the desirable situation of improving productivity in industry by fiscal or monetary measures or by fiddling around with exchange rates. The whole basis of Scenario II was to sit down with the TUC and the CBI and to say that we had got to get to that point.
The hon. Member referred to a person receiving his overdraft figures from the bank. That is a good analogy. However, if one receives high figures on a high overdraft, the right thing to do is to ask how those figures can be reduced by 1979–80. What can be done to reduce them? Instead of living in the hope that the figures will be reduced, Scenario II is an attempt at realism in industry and the country. There is a question of public education. This desirable situation will not be achieved by fiscal measures, by Keynesian economics. monetary economics or all the other theories of economics. It will be achieved only by sitting down and planning, in the sense of planning at the lowest level and not the highest, talking to both sides of industry, which want to improve and to get British industry back on its feet so that it can compete with the Germans, the French and the Japanese where it has been failing in the past.
I remind the hon. Gentleman that those figures were agreed and that the targets—if they are to be called targets; I do not like using that word—were 940 worked out with the chemical and the mechanical engineering industries. They are not arbitrary figures brought down from on high by the Government but are figures agreed with the sector working parties and with the particular industries, and the sector working parties are operating on that basis.
§ Mr. David Price
I think I am correct in saying that the targets for the chemical industry in the original copy of the scenario of 4th August were not agreed with the chemical sector working party.
§ Mr. Davies
I do not dispute what the hon. Gentleman has said. Obviously, he knows more about it than I do. My point was that these figures were not produced by the Government from on high to put before industrialists who were to be told "You have to get on and achieve this rate of growth." We said that this rate was desirable in the interests of achieving a proper balance of payments situation and an acceptable level of unemployment in 1979. We need to look at the problems of industry and the difficulties of arriving at that point.
It was always recognised that world trade might grow differently. I accept that when the medium-term industrial strategy was drawn up it was thought that world trade would increase at a faster rate than it has done. These matters are almost entirely outside our control. What is within our control—this is why the industrial strategy is important—is that many non-price factors are involved in the constraints on British industry. Why have we not been able to produce more? Why are our goods not competitive with those of Germany and Japan? What are the non-price elements involved? That is the important part of the industrial strategy, not the figures in Scenarios I or II. We need to sit down and work out at ground level, not on high, how we can improve the constraints which have inhibited British industry in the past from competing successfully.
I appeal to the hon. Gentleman not to put the figures first, as it were, but to look upon the statistics as a background or framework within which to work. It seems to me that this is the only way that we shall get British industry back on its feet. We cannot do it by a return to the completely free market system 941 which has been advocated by many Conservative Members. We may not be able to do it by having rigid planning from above in the way that the French did and were successful after the Second World War, because our national temperament and everything else are not equipped to do that. But, given that fact, I think that the only way to remove the constraints and improve the competitiveness of British manufacturing industry is by sitting down together in groups and considering product by product the quality of the goods which we are producing and putting on world markets. That is the object of an industrial strategy.
We accept that world trade will affect us. Inflation and all the other factors must be taken into account. But we should not be deflected from carrying on. There will not be a dramatic improvement next year. There will not be a dramatic announcement in three weeks to the effect that we have sorted out and solved the problems of British manufacturing industry. Part of people's impatience with the industrial strategy is that they expect dramatic announcements. It is all very well to announce a dramatic improvement in the balance of payments, but that does not mean that we have solved the problems of the British economy. They are more deep-seated than that. That is why the Government are embarking on this industrial strategy.
I hope that I have said enough to satisfy the hon. Gentleman on these matters. I do not know whether there are any other points that he wishes to raise.
§ Mr. David Price
There is one point which ties up with what the Minister said about trying to get a down-to-earth view product by product and sector by sector. Will he bring in the third man—middle management—from out of the cold? Middle management has a different view from the directors of companies whom he meets with the TUC at the NEDC.
§ Mr. Davies
I do not accept that the third man is out in the cold. We are well aware of the problems of middle management and of all sections of industry. There is the problem of incentives for skilled workers in industry. My right hon. Friend the Chancellor of the Exchequer said that we wished to assist in creating greater incentives for people in 942 the middle bracket, whether they be called middle management or not, who may have been overlooked in the last few years. The Government give the highest priority to manufacturing industry because 80 per cent. of our exports come from that sector. Many people are employed in manufacturing industry. If our manufacturing industry goes downhill as fast as it has done over the last 10 years, there will be little hope in future of creating the kind of competitive growth economy which we all want to see.