Commons Sitting of 11 October 1976

Preamble
The House met at half-past Two o'clock
PRAYERS
[Mr. SPEAKER in the Chair]
ORAL ANSWERS TO QUESTIONS
  PRICES AND CONSUMER PROTECTION

    National Insurance (Employers' Contribution)
    Mr. Giles Shawasked the Secretary of State for Prices and Consumer Protection what is his estimate of the effect on the Retail Price Index of the increased employers' contribution to national insurance.
    The Under-Secretary of State for Prices and Consumer Protection (Mr. Robert Maclennan): My right hon. Friend the Chancellor of the Exchequer told the House on 1st August that the estimated effect would be to add about 1 per cent. to the RPI by early 1978.
    Mr. Shaw: Does the Minister agree that to add anything to the RPI at this
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    time is retrogressive? Why not bear in mind small businesses and industrial costs in areas such as that from which I come? If the Government want to regenerate British industry, why not cut expenditure instead of taxing jobs?
    Mr. Maclennan: I presume the hon. Gentleman will accept, because his party has been pressing for it, that the public sector borrowing requirement must be reduced at this time if the rate of inflation is to be contained. It is an important part of the Chancellor of the Exchequer's strategy to bring that about. Secondly, the hon. Gentleman will appreciate that the immediate impact of that will not be felt until May, and therefore to some extent his point is taken.

    Manufacturing Industry Costs
    Mr. Sainsburyasked the Secretary of State for Prices and Consumer Protection what has been the increase in the price of materials and fuel purchased by manufacturing industry over the past 12 months.
    Mr. Maclennan: The Wholesale Price Index for materials and fuels purchased by manufacturing industry rose by 29·1 per cent. in the 12 months to September 1976.
    Mr. Sainsbury: Does the hon. Gentleman agree that that is a rather alarming increase? Will he tell the House how much of it is attributable to the decline in the value of sterling, and therefore tell the consumer how much he is paying for

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    the excessive Government expenditure that has contributed so much to this depreciation of sterling?
    Mr. Maclennan: The decline in the value of sterling is certainly a major factor, and the unacceptable trend in the figure, in so far as one month's figure can be expressed in that way, is due largely to changes in the price of food.
    Mr. Heffer: Will my hon. Friend also indicate to the House how much of this is due to our entry into the European Community? Secondly, will he indicate how much this has been the result of the floating of the pound, which was introduced by the Tory Government?
    Mr. Maclennan: The further one gets from the date of entry into the Common Market, the more unrealistic it is to seek to quantify the impact of membership on food prices. The floating rate is a matter for my right hon. Friend the Chancellor of the Exchequer.
    Mr. Norman Lamont: Why will not the Minister give my hon. Friend the Member for Hove (Mr. Sainsbury) the facts for which he asked? Is it not the case that the Economist commodity indicator has risen by nearly 50 per cent. during the last 12 months in sterling terms but in dollar terms by less than 20 per cent., and that this gives a real picture of the lack of confidence in the Government?
    Mr. Maclennan: It is true that during the past 12 months the exchange rate of sterling has gone down by about 17 per cent, and world commodity prices are up by 23 per cent., according to the dollar index of the Economist. Those are the facts, and they are a measure of the seriousness of the situation that the country faces.
    Mr. Skinner: Would it not be sensible to tell the Opposition that one reason—not the only one—why this problem is with us is the intense speculation against sterling by their friends and, perhaps more importantly, the constant hoarding of commodities and the buying-in of commodities that has pushed up prices during the past nine months?
    Mr. Maclennan: I have no evidence of the hoarding of commodities to which my hon. Friend refers. Questions about
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    speculation against the value of sterling are more for my right hon. Friend the Chancellor of the Exchequer, but my hon. Friend will have noted the words of the German Chancellor that the £ sterling is seriously undervalued.
    Sir John Hall: Would the hon. Gentleman regard it as speculation if an investor withdrew his funds from a company in which he no longer had any confidence?
    Mr. Maclennan: That is a hypothetical question and does not relate directly to the one that I have answered.

    Prices
    Mr. Rookerasked the Secretary of State for Prices and Consumer Protection if he will make a statement on the rate of price increases at the latest convenient date.
    Mr. Mike Thomasasked the Secretary of State for Prices and Consumer Protection what was the annual rate of inflation at the latest available date.
    Mr. Durantasked the Secretary of State for Prices and Consumer Protection what has been the increase on the Retail Price Index over the last 12 months.
    Mr. Canavanasked the Secretary of State for Prices and Consumer Protection what is the latest monthly rise in the Retail Price Index; and if he will make a statement.
    Mr. Tim Rentonasked the Secretary of State for Prices and Consumer Protection what is his current estimate of the increase in the Retail Price Index during 1976 to date.
    The Secretary of State for Prices and Consumer Protection (Mr. Roy Hattersley): The monthly increase in the Retail Price Index to August 1976 was 1·4 per cent., giving an annual increase of 13·8 per cent., just over half the increase at August 1975, and 7·2 per cent. since January 1976.
    Mr. Rooker: I thank my right hon. Friend for that answer and congratulate him on his appointment to the Cabinet, but will he say why, having given that figure which is still 13·8 over 12 months, the Government are proceeding with the

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    abolition of food subsidies when their retention was a main plank in the election manifesto on which we came to power?
    Mr. Hattersley: An essential element in the programme for economic recovery is, and must be, a reduction in some element of public expenditure, and the announcement that my right hon. Friend the Chancellor of the Exchequer made in July about food subsidies is part of that. I am sure that the people whom my hon. Friend and I represent have much to gain from the progress of economic recovery, and this is all part of the plan for bringing that about.
    Mr. Durant: By how much does the right hon. Gentleman estimate that the lowering of the value of sterling will affect the RPI in future months, because we have not yet felt the full effects of this?
    Mr. Hattersley: It is impossible, and were it possible it would be reckless, to make estimates which would be guesses about future movements, particularly if they were as specific as that. Perhaps our overwhelming obligation is to stabilise the relationship between the pound and the dollar. That is as important to people who buy their shopping and purchase goods and groceries every week as it is to every other section of the community, because it reflects in the RPI. I promise that later this afternoon my hon. Friend will hear a robust account of how we are carrying out policies that will defend the rate.
    Mr. Thomas: Has my right hon. Friend seen the effect of this rise on the social contract and the development of pay policy?
    Mr. Hattersley: The first thing to say about the figures I have given and pay policy is that the spectacular improvement in our inflationary situation—the reduction in the rate by 50 per cent. in a year—is almost entirely attributable to the sacrifices made by the trade union movement in signing the social contract. I believe that the trade union movement is wise enough to realise that, as long as the Government go on doing what they can to limit inflation, it has a duty to itself, its members and the nation to go on co-operating with the Government. I am sure that it is wise enough and
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    public-spirited enough to go on doing that.
    Mr. Renton: Will the right hon. Gentleman give my hon. Friend the Member for Reading, North (Mr. Durant) a rather more specific answer? Is it not a fact that the Wholesale Price Index is beginning to rise again very rapidly with a recent increase to an annual rate of 17 per cent. and that this is reflecting the fall in sterling? Will he give us some guidance? For example, if the rate of exchange is one dollar to the pound by the end of the year, what will be the effect on the RPI?
    Mr. Hattersley: I shall not hypothesise about a proposition as wildly improbable as that, but I am prepared to agree with the hon. Gentleman on the obvious point he has made already. The depreciation of sterling clearly affects the prices of imported raw materials and, therefore, has an adverse effect on the cost of living index. It is one of the reasons why we are doing all we can to stabilise it.
    Mr. Canavan: Does my right hon. Friend agree that it is not good enough for the Labour Government to expect trade unionists to make all the sacrifices to defeat rising prices? Is it not about time we imposed stricter price controls on big business, especially in view of what we have learnt recently about the sharks in television rental businesses making excessive profits from working people and their families?
    Mr. Hattersley: My hon. Friend the Under-Secretary is talking to the television rental companies this week, and I hope to make an announcement towards the end of this week or at the beginning of next week. I agree about how cooperative the trade unions are in responding to what we think to be the needs of the nation.
    My hon. Friend made a wider point about the extent to which prices policy should cut into this matter. The present policy is only at its beginning. This evening I shall commend to the House the new Price Code, which has hardly begun. What follows is determined by a number of factors, including the progress of the economy and the response of private companies when it is put to them that they need to make a voluntary gesture in limiting their own profits and meeting the needs of the consumer.
    Mrs. Sally Oppenheim: First, on a purely personal basis, may I congratulate the new Secretary of State on his appointment and, still on a purely personal basis, wish him well.
    Having said that, may I ask the right hon. Gentleman whether he was aware last week, when he was indulging in soggy euphemisms about being on course but the journey taking a little longer, that nobody believes anything that this Government say about inflation or anything else any more, and that for the Government journey's end is just around the corner?
    Mr. Hattersley: I am personally very grateful for the hon. Lady's personal congratulations. I hope she will take it from me that if the occasion arises when she asks me questions with any content I shall do my best to answer them.

    Hire Purchase
    Mr. Adleyasked the Secretary of State for Prices and Consumer Protection what effect the Consumer Transactions (Restrictions on Statements) Order will have upon the availability of hire-purchase facilities on domestic goods.
    The Minister of State, Department of Prices and Consumer Protection (Mr. John Fraser): I do not consider that the Order will have any effect on the availability of hire-purchase facilities.
    Mr. Adley: As the Order will undoubtedly increase the cost of credit to shoppers, will the hon. Gentleman say whether that is the Government's intention or whether it is merely another example of the accidents which unfortunately seem to continue to befall this Government?
    Mr. Fraser: I do not accept the hon. Gentleman's premise that the Order will increase the cost of finance. It will increase protection for the consumer, and I think that the whole House will welcome that.

    Price Control
    Mr. Gowasked the Secretary of State for Prices and Consumer Protection whether he will make a statement about future Government policy towards price control.
    Mr. Hattersley: The present statutory powers to enforce a Price Code will expire on 31st July 1977, and I am considering what should follow.
    Mr. Gow: Will the right hon. Gentleman take the House into his confidence and tell us whether it is a permanent feature of this Government's policy to have price control? Does he recognise that the present system of price control is preventing the creation of precisely those profits in industry which the Chancellor of the Exchequer says are essential for the country's recovery?
    Mr. Hattersley: The main permanent features of price control which are existing law are those passed into law by the Conservative Government in 1973. It is my duty to decide between now and next summer what the future of price control should be. I think the hon. Gentleman will concede that we must clearly look at this matter with the greatest care and realise our obligation to do what we can to maintain the social contract and limit the rate of inflation. This is an overwhelming obligation, and clearly the Government have some rôle to play.
    Mr. Raphael Tuck: Is my right hon. Friend aware that in Malta Mr. Mintoff has instituted a system whereby every resident is allowed a certain quantity of basic commodities, such as sugar, at rock-bottom prices and that above that quantity he is charged a very much increased price? This has kept prices generally down. Will my right hon. Friend consider that system for this country?
    Mr. Hattersley: I used to deal with Malta in my previous job. I think that I am entitled to be spared that now.
    Mr. Norman Lamont: Is the right hon. Gentleman aware that with interest rates at their present level a firm must make 16 per cent. before it can break even on an investment? If the firm then makes 16 per cent., according to Sir Arthur Cockfield's view of the television rental business it is making excessive profits. What are poor business men to do?
    Mr. Hattersley: We shall have the opportunity to debate the code in general this evening. If the hon. Gentleman is saying on his own behalf or on behalf of his party that he thinks that Sir Arthur Cockfield is wrong, and that television

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    rentals are not too high and should not be stabilised, I hope he will make it absolutely clear here and now.

    Investment Relief
    Mr. Neubertasked the Secretary of State for Prices and Consumer Protection what is his estimate of the effect on prices of the additional investment relief announced in the consultative document and the additional relief announced by the Chancellor.
    Mr. Hattersley: It is not possible to make accurate estimates of the effect of individual Price Code changes on the overall price levels. We estimate that the total effect will be an increase of about 1 per cent.
    Mr. Neubert: What will be the effect on consumer prices of the £1 million a day extra cost to industry which the CBI believes to be the result of raising the minimum lending rate to a record 15 per cent.?
    Mr. Hattersley: It depends on many imponderable factors, such as how long the minimum lending rate continues at that level and the effect of the depreciation of sterling, or—as I hope and believe—the rate of appreciation of sterling. Because of these difficulties, it would be unwise to make arithmetical estimations.
    Mr. Giles Shaw: Does the right hon. Gentleman agree that when that concession was introduced in the Price Code the intention was to stimulate investment? Does he agree that, in view of today's interest climate, that intention will not be realised? Will he therefore revise the provision in the Price Code on interest relief?
    Mr. Hattersley: I cannot agree, and I shall try to express my disagreement at greater length tonight. For the moment, I remind the hon. Gentleman of something said on television by the Director-General of the CBI, I think on Thursday evening, that industrial investment decisions will depend far more on companies' views of stability, and the success which I believe last Thursday's measures will certainly have, than on a couple of points on the minimum lending rate. I am sure that that is a correct analysis.

    Trade Descriptions Act
    Mr. McCrindleasked the Secretary of State for Prices and Consumer Protection if he proposes to introduce legislation amending or extending the Trade Descriptions Act 1968.
    Mr. John Fraser: The report on the review of the Act carried out under the chairmanship of the former Director General of Fair Trading will be published very shortly. The Government will give careful consideration to its recommendations before announcing their intentions regarding possible amending legislation.
    Mr. McCrindle: If any review of the Act is likely to include clarification of the position of airlines on overbooking, will the Minister take into account the decision of the American authorities, who recently declared that such a practice was no longer to be considered illegal provided the intending passenger was told of the possibility in advance? In view of the great difficulty that airlines would experience if overbooking were declared a malpractice under the Act, will the hon. Gentleman approach the matter along those lines in this country too?
    Mr. Fraser: What the Act prohibits is false statements about the provision of services generally. It does not make the practice of overbooking illegal. I am sure that the hon. Gentleman will have welcomed the provisions announced by another Department for compensation arrangements. For the rest, I ask him to await the report. We shall be pleased to receive representations and recommendations from the travel trade.

    Food Subsidies
    Mr. Gwilym Robertsasked the Secretary of State for Prices and Consumer Protection what are the latest figures available for the weekly benefits provided by food subsidies to the average family and typical pensioner; and if he will make a statement.
    Mr. Corbettasked the Secretary of State for Prices and Consumer Protection if he will estimate the current weekly savings in food expenditure due to food subsidies for: (a) a single retirement pensioner, (b) married retirement pensioners,

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    (c) a married couple with two children, and (d) a married couple with four or more children.
    Mr. Maclennan: The current weekly savings on food expenditure due to food subsidies are estimated to be: (a) for a single old-age pensioner, 20p; (b) for a married couple with two children, 58p; (c) for an old-age pensioner couple, 32p; (d) for a married couple with four or more children, 94p.
    Mr. Roberts: Will my hon. Friend accept that some Labour Members are not all that impressed by the argument of the Secretary of State in regard to the direct relevance to economic revival of the phasing out of subsidies? Does he not agree that, in view of the important stress laid by the Government on the redistributive effect of these subsidies, the phasing-out operation will have the effect of transferring money from the pockets of the poor to the well-lined pockets of the rich?
    Mr. Maclennan: The Government have always accepted, although the Opposition have not done so, that food subsidies are redistributive. Their value is about four times greater for the lowest income households than for the highest income groups. That is why they have been regarded as an important contribution to social assistance during the time when the Government have been phasing in the new social security benefits. We shall make the fourth uprating in these benefits in November. I believe that any further redistribution should be done through the tax system and through social security.
    Mr. Peter Bottomley: Will the Minister say how the value of these food subsidies compares with the increase in the cost of food, especially to poor families, in the last two and a half years?
    Mr. Maclennan: Not without notice.
    Mr. Corbett: Will my hon. Friend accept that when the Chancellor of the Exchequer made a statement about the phasing out of the food subsidies in July the inflation rate was falling, whereas that is not now the case? Will he tell his right hon. Friend the Secretary of State for Prices and Consumer Protection that he has the responsibility to go back to the Chancellor of the Exchequer and underline the extreme importance of these
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    food subsidies for lower income families and pensioners?
    Mr. Maclennan: The mportance attached by the Government to food subsidies is mirrored by the fact that we are spending more than £400 million on them this year. The major contribution which the Chancellor of the Exchequer wishes to make in bringing down the rate of inflation, which has at present reached a plateau rather than falling, must be through stabilising our currency. It was with the objective of reducing the public sector borrowing requirement that my right hon. Friend announced measures in respect of food subsidies.
    Mr. Adley: As the cost of food to the pensioner, and, indeed, to everybody else, is directly related to the depreciation of our currency, will the Minister explain why the three major post-war depreciations in our currency have come under Chancellors of the Exchequer Cripps, Callaghan and Healey? What is so special about Socialist Governments that they always destroy our currency?
    Mr. Maclennan: What is so special is that they followed Conservative Governments.
    Mr. Norman Lamontasked the Secretary of State for Prices and Consumer Protection where he intends to make cuts in food subsidies in the year 1977–78.
    Mr. Hattersley: Decisions on the rate and level of subsidies are taken from time to time in the light of current circumstances.
    Mr. Lamont: In regard to the earlier reply about the average saving of 58p to a family with two children, does not the Secretary of State agree that the fall in sterling in September alone added 90p per week to the average family's household budget? Since public expenditure is such a major contributor to sterling's weakness, would it not be of much greater benefit to the average family to announce today that food subsidies were to be cut?
    Mr. Hattersley: If the hon. Gentleman wants me to say again that the depreciation of sterling has an adverse effect on the Retail Price Index, I shall repeat it for the fifth time if that gives him any satisfaction. As for subsidies, or indeed the entire public expenditure issue, he

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    must understand that the people I represent are net gainers from much of the public expenditure that takes place in our nation. The people who are in the lower 10 per cent. or 20 per cent. of the income bracket have much to gain in their own personal everyday lives from what the Government provide through public expenditure. The Government's duty is to balance expenditure levels against overall economic necessities, and that is what we are doing.
    Mr. Ioan Evans: Before my right hon. Friend phases out food subsidies, will he seek to phase out the common agricultural policy of the EEC, which is effectively harmonising our prices with the high prices of food which persist on the Continent? Does he not appreciate that British housewives believe that it is crazy for the EEC to be contemplating an increase in the price of margarine in this country because of the butter surplus? When will this crazy system stop?
    Mr. Hattersley: Even when I was more responsible for EEC matters than I am now, I was always prepared to say that I regarded the CAP as an unacceptable system which should and could be changed. I believe that that will increasingly be the Government's policy. I said publicly last week, and I am happy to confirm today, that the idea of a tax on margarine to compensate for the butter surplus is unacceptable to the British Government and cannot become the policy of the EEC. Furthermore, the British Government are committed to doing whatever we can to limit price increases within the EEC. I refer my hon. Friend to the stand taken by my right hon. Friend the Minister of Agriculture in Brussels last week in rightly refusing to increase the rate of the green pound. I believe that that must continue to be our position.

    Cost of Living
    Mr. Jesselasked the Secretary of State for Prices and Consumer Protection by what percentage the cost of living has increased since February 1974 to the latest available date.
    Mr. Hattersley: By 55·9 per cent.
    Mr. Jessel: Will the Government apologise to the British people for that appalling performance?
    Mr. Hattersley: I think the British people understand that the Government have taken decisions that are necessary in the circumstances. We have taken them in the light not only of economic necessities but of the obligations of compassion and social understanding on which we were elected. I hope that we shall go on doing exactly that.
    Mr. Tebbit: If that is compassion, God save us from cruelty.
    Mr. Cormack: What is the difference between the figure the Minister has just announced and the figure of 8·4 per cent.?
    Mr. Hattersley: My arithmetic is not sufficiently good other than to say that it is more than 40. I hope the hon. Gentleman is not falling into the common, if not vulgar, error of assuming that two periods of inflation can be compared. They cannot.
    Mr. Skinner: Does my right hon. Friend recall that many Labour Members were cajoled into supporting the Government's policy of keeping down the rate of inflation and the cost of living on the basis of backing the pay policy, with its subsequent effect in reducing purchasing power? Why is it that on the basis of those concessions trade unionists must now suffer an enormous increase in the cost of living? What is the Government's strategy to get down the cost of living in future?
    Mr. Hattersley: The trade unions, their members and their wives and other consumers have to face the present situation because there are some immutable economic laws that neither trade unions nor the Government can defy. I believe that in responding to those immutable economic laws the partnership of the trade unions and the Government is working. The trade unions and the Government have to realise, as in general I believe they do, that this is a long haul. Although we have begun the process, there will yet be some period before we can claim the success that we hope to achieve.
    Mrs. Sally Oppenheim: Does not the right hon. Gentleman agree that during the latter part of the period about which he is answering questions the so-called Price Check Scheme was in operation,

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    and that within the four months of the ending of the scheme the prices of most of the main items in the scheme have risen by over 10 per cent., as I predicted? Therefore, will he confirm that the scheme was a short-term confidence trick?
    Mr. Hattersley: I confess frankly to the hon. Lady that when I took on my new job I had some scepticism about that scheme, but, having examined the scheme during the first days in my new office, I discovered that there had been real tangible and substantial price benefits. If the hon. Lady wishes to table a precise Question on the matter, I shall endeavour to give her a precise answer.
    Mr. William Hamilton: Has my right hon. Friend made any calculation about the increase in the cost of living that would result from the abolition of council house subsidies and free school meals, as advocated at Brighton last week?
    Mr. Hattersley: We have not yet made an arithmetical calculation because it does not seem to us that the circumstances will come about which would allow such policies to be put into operation. Two things are clear. The first is that there would be an enormous increase in the cost of living. The second is that such policies would destroy the social contract, on which the success of the last two years has been built and without which I believe this country.—[HON. MEMBERS: "Success?"] Right hon. and hon. Members on the Conservative Benches must decide whether they believe that a cut in the inflation rate of 50 per cent. is a substantial achievement. If it is, it has come about because of the social contract. The policies to which my hon. Friend has referred would result in the social contract being abandoned.
    Mr. George Rodgersasked the Secretary of State for Prices and Consumer Protection what will be the overall impact on the cost of living as a consequence of the Chancellor's statement on public spending restrictions, the relaxation of the Price Code and the common agricultural policy during the years 1977 and 1978.
    Mr. Hattersley: It is not possible to make meaningful forecasts over such a long period.
    Mr. Rodgers: Does my right hon. Friend agree that a policy that restricts wages and salaries in isolation is not adequate and is certainly unfair? Does he agree that greater emphasis should be placed on the control and restriction of profits and prices if the social contract is to survive?
    Mr. Hattersley: No one could support a policy which placed the burden of economic recovery solely on wage earners by limiting their wages. As well as having an effective and socially just wages policy, we must ensure that we have a prices and profits policy that meets our social requirements. That does not mean an all-out attack on profits no matter what their use may be. It means an attempt to ensure that when profits are made they are properly used for new investment and for creating new jobs. That is our policy.
    Mr. William Hamilton: As regards the latter part of the Question—namely, the common agricultural policy—will my right hon. Friend give a further assurance that the Government will resist the pressure coming from the Opposition via the National Farmers' Union for a devaluation of the green pound, which would mean a substantial increase in the cost of living for the very poor people whom we are out to protect?
    Mr. Hattersley: I said publicly last week that if we were to accept a total revaluation of the green pound it would result in a 7 per cent. increase in the food index. Clearly, in present circumstances that is unacceptable. I have no reason to believe that the Government will change their mind on that.
    Mr. Giles Shaw: Will the Secretary of State give an indication of what the Government believe should be an adequate level of profit, in view of the Price Commission's recent statement that 16 per cent. is excessive? What is the Secretary of State's view on the average level of profit?
    Mr. Hattersley: That clearly varies from industry to industry. Even then it is calculated not on one but on two rather complicated economic formulae. We shall have an opportunity to debate those formulae this evening. That will be a better opportunity than to do so in 30 seconds at Question Time.

    Margarine
    Mr. Ronald Atkinsasked the Secretary of State for Prices and Consumer Protection if he will redistribute the total subsidy now paid on butter equally between butter and margarine.
    Mr. Maclennan: No, Sir. It would be inappropriate to extend the coverage of the subsidy programme at this stage.
    Mr. Atkins: Would not my hon. Friend agree that there is a case on egalitarian and health grounds, there being no cholesterol in some margarines, for this equal subsidy? Can he assure us that the Government will not be talked out of rejecting the proposals which are currently being made in the Common Market for increasing the price of margarine?
    Mr. Maclennan: My right hon. Friend has already made clear the Government's firm opposition to this proposal and, therefore, the impossibility of its coming to fruition. The health point was in my right hon. Friend's mind when the rate of subsidy on butter was adjusted earlier in the summer. It is too late in the subsidy programme to seek to set up the apparatus of control that would be necessary to introduce a new subsidy.
    Mr. Marten: Is it true that if the green pound were devalued to its right level the increase in the cost of food in this country would be 7 per cent.?
    Mr. William Hamilton: That is what the NFU wants.
    Mr. Maclennan: That is, I believe, correct. That is why the Government have resisted a devaluation of the green pound.
    Mr. R. C. Mitchell: Do I take it from the earlier reply that if Mr. Lardinois persists in his absurd proposal for placing a tax on margarine the British Government will veto it?
    Mr. Maclennan: The British Government, in my presence, have made their views entirely clear in the current Council of Agriculture Ministers. This is an unacceptable proposal, not only to the British Government.

    Metrication Board
    Mr. Moateasked the Secretary of State for Prices and Consumer Protection
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    what has been the total cost to date of the Metrication Board.
    Mr. John Fraser: Approximately £4½ million since the board was established in 1969.
    Mr. Moate: Will the Government now take a close look at the Metrication Board to see whether it can be pruned or, preferably, axed altogether? Would it not be best now to end the obsessive dogmatic attachment to total metrication and instead to operate both systems of measurement?
    Mr. Fraser: It would be a great disservice, particuarly to many millions of children who have been educated in the metric system, if we were to maintain a dual system of measurement. The best way is to proceed with our Weights and Measures, &c. (No. 2) Bill and adequately to consult consumers, linking this with consumer protection, eventually having one unconfusing system.
    Sir John Hall: Following the experience gained from the partial conversion to metrication, may I ask whether the Government are now in a position to give an estimate of the total cost to the country of converting to metrication?
    Mr. Fraser: I cannot give an accurate figure, but the cost is not as high as some have made out. It is possibly no greater than the cost of not completing the metrication programme.
    Mrs. Bain: Can the Minister say whether he has persuaded his own Back Benchers that it is right to allow us to debate this question, so that we may end the uncertainty not only in education but among business men and manufacturers of products who are uncertain about what they should do?
    Mr. Fraser: I am grateful to the hon. Lady for her comments. I hope that we shall have the chance to debate these matters next week.
    Mr. Gwilym Roberts: Apart from the demands coming from schoolchildren about metrication, can my hon. Friend tell the House what other quarters are making such representations to him? Is he aware that I have made inquiries in industry recently and have found that there is little demand for a move in this direction?
    Mr. Fraser: The Weights and Measures, &c. (No. 2) Bill, which has now passed all its stages in the House of Lords, has the support of many responsible consumer organisations in the country, including the National Consumer Council.

    Retail Price Index
    Mr. Peter Morrisonasked the Secretary of State for Prices and Consumer Protection what has been the increase in the Retail Price Index over the past 12 months in the United Kingdom, the United States of America, France, West Germany, and Japan, respectively.
    Mr. Maclennan: The annual increases in consumer prices up to July 1976, the latest month for which consumer data are available for all these countries, were 12·9 per cent. in the United Kingdom, 5·4 per cent. in the United States of America, 9·4 per cent. in France, 4·1 per cent. in West Germany and 9·5 per cent. in Japan.
    Mr. Morrison: Will the hon. Gentleman explain how on earth his right hon. Friend can maintain that there has been a spectacular improvement in our rate of inflation when the rate of inflation is still miles above that of our main competitors?
    Mr. Maclennan: It is simply that the rate of inflation last July was running at well over twice the OECD average. We have reduced this rate to about half as much again as the average inflation rate. That is a great improvement for one year but it must be sustained.
    Mr. Cronin: Has not this increase in the British rate of inflation as compared with that of other countries been largely due to the profligate increase in the money supply which took place when the Conservatives were in Government, especially during the last two years of the Conservative Government?
    Mr. Maclennan: It is certainly fair to say that the voices from the Conservative Benches that we now hear were not raised at that time.
    Mr. Ridsdale: Is it not clear that, compared with other countries, the performance of the United Kingdom over the past two years has been absolutely abysmal? Is not the "spectacular" achieve-
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    ment of the Government spectacular only in its ineptitude?
    Mr. Maclennan: I do not think it helps the country to underrate the considerable achievement which has been made by working people in contributing to bringing down the rate of inflation, as they have done in the past year, by showing considerable restraint in their wage demands. They must be given full credit for offsetting other disadvantageous trends that have taken place, notably increases in the prices of commodities. Frankly, I believe that the hon. Gentleman would do well to recognise the extent of the achievement and seek to support our efforts to build on these foundations.
    Mrs. Sally Oppenheim: Has the hon. Gentleman noticed that the average level of inflation over the past year for the countries he has mentioned is half that of this country, despite the fact that those countries have also had to face rises in raw material prices and the drought? Will he confirm that the imminent fresh inflationary outburst that we are about to encounter has been caused mainly not by the drought or increases in raw material prices but by this Government's ruinous policy over the past two and a half years and their failure, even now, to respond to economic reality?
    Mr. Maclennan: As is not infrequently the case, the hon. Lady is wrong in her facts. The inflation rate which I quoted was 12·9 per cent. as against the average annual inflation rate of 7·9 per cent. in the other OECD countries listed. The picture is a good deal better than it was at the same time in the previous year. The hon. Lady—[interruption]. If the hon. Lady wishes to intervene again, she must catch Mr. Speaker's eye.

    Consumer Protection
    Mr. Ioan Evansasked the Secretary of State for Prices and Consumer Protection what further proposals are being considered to improve the protection of consumers.
    Mr. John Fraser: I have nothing to add to the reply given to my hon. Friend on 5th July.
    Mr. Evans: Does my hon. Friend agree that at a time of inflation the need for consumer protection is greater

    21
    than ever? Does he agree that there should be extra public expenditure to make it possible to continue to open new consumer advice centres throughout the country? Does he further agree that such centres are doing valuable work and preventing a good deal of unnecessary private spending?
    Mr. Fraser: He would he a rash man who promised an increase in public expenditure at present, but I agree with my hon. Friend that consumer advice services and price surveys have a significant part to play in the battle against inflation. I hope that we shall continue with them.
    Mr. Geoffrey Finsberg: Does the Minister agree that one way of protecting consumers, without public expenditure, is for them to take advantage of competition among retailers?
    Mr. Fraser: Yes, that is one of the ways of beating inflation. However, we cannot have perfect competition without perfect information, and that is why the two activities are complementary.
    Mrs. Dunwoody: Will my hon. Friend have a word with the Minister of Agriculture, Fisheries and Food and suggest that we should possibly opt out of the common agricultural policy, which is now accounting for two-thirds of our deficit with the Common Market countries, an opting out that would mean a great saving for the British housewife?
    Mr. Fraser: My right hon. Friend has already made clear in answer to earlier questions our critical view of the common agricultural policy.

    Price Code
    Mr. Arnoldasked the Secretary of State for Prices and Consumer Protection what further amendments he will now consider making to the Price Code.
    Mr. Hattersley: A new Price Code came into operation on 1st August after extensive consultations with all interested parties. I have no present plans to change it.
    Mr. Arnold: Given that the Price Code Order that we shall be debating tonight was published some time ago, is there not a clear-cut case in the light of recent
    22
    events for further and immediate relief in the areas of investment, profits and land?
    Mr. Hattersley: No, I think not. I hope to convince the House this evening that the revision which we propose will give all these companies a chance to increase prices, to increase profits and to invest. It will give them the opportunity to do so, and that remains our policy.
    Mr. Sainsbury: To assist the House when it considers the continuation of the Price Code, will the Secretary of State publish a comparative study of price controls in other countries which appear to be more successful in controlling inflation and stimulating investment?
    Mr. Hattersley: As the hon. Gentleman will imagine, during the past five weeks I have been considering price control techniques, mechanisms and philosophies in other countries. I have noted with interest the systems that operate in diverse social systems such as Sweden and France. They are extensive "inspector" systems which send Government representatives to retail outlets in a way that would produce an outcry from Opposition Members if we contemplated any such system. I think that the hon. Gentleman will have to bide his time and wait for the summer, when the present price control system runs out, to hear my conclusions on the system.

    Children's Shoes
    Mr. Hooleyasked the Secretary of State for Prices and Consumer Protection if he will hold consultations with the industry concerning the level of prices of children's shoes.
    Mr. Maclennan: I understand the concern about the price of children's shoes, but I would prefer to await the outcome of the footwear industry study being conducted under the auspices of the Department of Industry and of the Director General of Fair Trading's consideration of the feasibility of a reference to the Monopolies and Mergers Commission before deciding whether anything further needs to be done.
    Mr. Hooley: I thank my hon. Friend for the information that something is in train, but will he express a little greater sense of urgency and tell us when and

    23
    in what form the inquiries and studies will be published?
    Mr. Maclennan: I understand from the Department of Industry that the study is expected to be completed towards the end of the year.
    Mr. Michael Morris: Will the hon. Gentleman recognise in his representations to other Ministries that the industry has suffered excessively from dumped merchandise and export competition? Does he recognise that it is in no one's interest to cut back on the standard of children's shoes?
    Mr. Maclennan: I have noted the hon. Gentleman's point.
    Mr. Pavitt: In these consultations with the industry, will my hon. Friend take into consideration possible differential advantages for well-designed shoes that do not malform girls' feet? Will he consider introducing financial incentives for producing healthy rather than unhealthy shoes?
    Mr. Maclennan: That is an important point and one which I am sure my hon. Friend will draw to the attention of my colleagues in the Department of Health.

    Metrication
    Mr. Goodhartasked the Secretary of State for Prices and Consumer Protection whether he will make a statement about the Government's metrication policy.
    Mr. John Fraser: I made clear to the House in reply to Questions from the hon. Member for Macclesfield (Mr. Winterton) and my hon. Friend the Member for Newham, South (Mr. Spearing) on 27th May that, following widespread consultations, the Government intended to seek powers to secure the orderly completion of the metrication programme. The Weights and Measures, &c. (No. 2) Bill now before the House seeks these powers and the Government will be fully setting out their views during the Second Reading debate, which I hope will be taking place shortly.
    The Government's policy is also set out in the reply of 4th August to my hon. Friend the Member for Aberdare (Mr. Evans).
    Mr. Goodhart: Will the Minister give an assurance that the general public will be consulted through the Government's social survey before setting any cut-off dates for imperial measurements?
    Mr. Fraser: I have been most anxious to ensure that there is maximum consultation with consumer organisations, not least with the most vulnerable members of the community, and that consultations take place before any Order is put before the House for its approval.
    Mr. Ioan Evans: Will my hon. Friend reiterate that it will be the Government's policy to protect the consumer when metrication is introduced and to ensure that we do not have a repetition of what happened when decimalisation was introduced, which was against the interests of the consumer?
    Mr. Fraser: I can give that assurance. I am grateful for the comments and discussions that I have had with Members of Parliament and outside bodies. I shall try to build into any change of programme the maximum degree of consumer protection and to link metrication measures to measures of consumer protection—for instance, prescribed quantities.
    Mr. Marten: Am I right in assuming that the Government have no intention of moving to kilometres and all the road-sign costs that would be involved?
    Mr. Fraser: The completion of the metrication programme will eventually mean changing to kilometres, but I can assure the hon. Gentleman that that is not by any means a priority.

    Nationalised Industry Prices
    Mr. Kenneth Lewisasked the Secretary of State for Prices and Consumer Protection what has been the effect on the Retail Price Index of the increase in prices of nationalised industry products and services over the last 12 months.
    Mr. Dodsworthasked the Secretary of State for Prices and Consumer Protection what has been the most recent year-on-year increase in the prices of nationalised industry products.
    Mr. Maclennan: The prices of those nationalised industry goods and services

    25
    included in the Retail Price Index rose by 23·6 per cent. from August 1975 to August 1976, resulting in an increase of about 2 per cent. in the General Index.
    Mr. Lewis: Is the hon. Gentleman aware that all we get out of the nationalised industries is, on the one hand, large losses from some of them, which the taxpayer has to pay, and from others increased prices, which the consumer has to pay? Is that not an indication that this is a thoroughly unsatisfactory way of running industry?
    Mr. Maclennan: The large deficits which the nationalised industries faced were due to the Conservative Government's regressive subsidisation of the industries and their refusal to permit them to price commercially or even to move in that direction, as the hon. Gentleman ought to know. The difficulties which have been faced as a result of price increases in the past year are largely due to the phasing out of the deficits.
    Mr. Corbett: Will my hon. Friend confirm that it is the height of hyprocrisy for Opposition Members to complain about the losses of nationalised industries and then to criticise those industries and the Government for seeking to make good the losses by charging economic prices? Will my hon. Friend pay regard to the impact of some of the increases and the rate at which they are introduced, particularly on low-income families and the unemployed?
    Mr. Maclennan: That is a clear illustration of the point I was making earlier—namely, that Labour Governments have to clean up the mess left by their predecessors.
    Mr. Dodsworth: Is not the hon. Gentleman aware that the numerous changes in accounting and depreciation policies of some nationalised industries suggest that there is a need of a review of the costing policies of these industries to ensure that the tariffs are not an inequitable form of taxation regardless of the needs of the individual?
    Mr. Maclennan: Some consideration of the equitability of the tariffs, especially in respect of the gas industry, was undertaken at the behest of my right hon. Friend earlier last year. It is important to recognise that in the year ahead, as a result of the efforts made by the
    26
    nationalised industries, we can expect a period of relative price stability.

    DUCHY OF LANCASTER
    Mr. Canavanasked the Chancellor of the Duchy of Lancaster when he next intends to visit the Duchy of Lancaster; and what ministerial duties he intends to undertake during his visit.
    The Chancellor of the Duchy of Lancaster (Mr. Harold Lever): I carry out most of my Duchy of Lancaster responsibilities from London. However, I visit the Duchy regularly, not least because my constituency lies within it.
    Mr. Canavan: As Lancaster is quite near Blackpool, would it not be appropriate for my right hon. Friend to listen to some of the advice given in Blackpool and condemn any further massive cuts in public expenditure which would cause decreases in essential social services and increased unemployment in Lancaster, Scotland, North-East England and many other deprived areas of the United Kingdom?
    Mr. Lever: Although Blackpool unquestionably lies within the boundaries of the Duchy, the Duchy takes no responsibility for the political conferences which from time to time occur or the oratory which accompanies those conferences.
    Mrs. Kellett-Bowman: Will the Chancellor please go to Lancaster City itself and while there take a look at the Housing Corporation project for building 240 houses at Scale Hall Farm, on which £500,000 has already been spent on infrastructure, roads and services but on which his colleague at the Department of the Environment has now forbidden work to proceed? Will he then return and convince his right hon. Friend that this plan must go ahead if a lot of public money is not to be wasted and great hardship caused?
    Mr. Lever: Anxious as I am for the well-being of all parts of the Duchy, I sometimes find it possible to resist the claims of Lancaster upon my time. I will, however, see that the points made by the hon. Lady are fully, carefully and sympathetically looked at.
    Mr. Dalyell: Since we are told that devolution is good for us, may I ask whether my right hon. Friend is pressing for a legislative assembly in Preston?
    Mr. Lever: No. At the moment, the Duchy is satisfied with a one-man legislative and consultative assembly.
    Mr. Rost: As special economic adviser to the Cabinet, what personal responsibility does the right hon. Gentleman take for his Government's disastrous failures—or is he telling us that his advice has not been heeded?
    Mr. Lever: The hon. Gentleman must be aware that all members of the Government always agree with each other on policy. That is their constitutional duty. That policy is not always agreeable to everyone else, and that is their misfortune.
    Mr. Biffen: Is the right hon. Gentleman aware that the considerable agricultural estates of the Duchy of Lancaster extend to the Oswestry division of Shropshire? Can he indicate what advice he gave as to the likely consequences for British agriculture and for the tenants of the Duchy of a minimum lending rate of 15 per cent.?
    Mr. Lever: I confess that, although that subject occupied a good deal of my thoughts recently, I did not have the tenant farmers of the hon. Gentleman's constituency in mind. I shall certainly reflect upon the likely consequences to his agricultural constituents. Frankly, I would think that they would not be of very great importance to the agricultural community. [Interruption.] However, all these matters are taken into account in various aspects of the present policy. If the hon. Gentleman is seeking to make a more general point which is not specific to the Duchy tenants of Oswestry, I am bound to say that of course we regret the necessity for the rise in interest rates but that, as the Chancellor of the Exchequer has explained, it is in accordance with his need to keep a firm control on the money supply.
    Mr. Heller: When my right hon. Friend visits the Duchy again, either in his ministerial capacity or as Member for the area, will he nip over to Merseyside and have a look at the position there, where we have 87,000 unemployed and
    28
    20,000 people in Liverpool alone on the housing waiting lists—40,000 if we include slum clearance? Is it not clear that to have any further cuts in public expenditure which would keep those workers on the dole and those people waiting for houses would be an absolute disgrace?
    Mr. Lever: It is certainly the Government's policy intention to achieve the maximum of productive public expenditure and the maximum expansion of our economy on a sustainable basis.
    Mr. Biffen: Is the right hon. Gentleman aware that his answer to my supplementary question was trivial and unsatisfactory? It indicates that the Government have not even begun to have the faintest conception of the damage that will be done to the private sector, particularly agriculture, as a consequence of rates of interest which are absolutely medieval.
    Mr. Lever: The hon. Gentleman again accuses me of not weighing the consequences of these rates. I was merely supposing him to be somewhat egocentric in thinking that their major importance was in relation to his constituents within the Duchy.

    ECONOMIC ADVISERS
    Mr. Tim Rentonasked the Chancellor of the Duchy of Lancaster whether he intends to appoint further economic advisers to assist him in his rôle of advising the Government on economic policy.
    Mr. Lever: No, Sir. I am happy to say that at present supply exactly matches demand.
    Mr. Renton: I congratulate the right hon. Gentleman on containing public expenditure within his own office at least. May I ask him whether he associates himself with the view held by some of his colleagues that no further public expenditure cuts are required to contain excessive monetary growth? Is that the right hon. Gentleman's own judgment?
    Mr. Lever: My judgment is that all the economic factors in our society should be taken into account when judging what

    29
    steps are required to curb any unhealthy excess in monetary growth.
    Mr. Lipton: Is our economic plight due to the fact that the Government nave or have not accepted the advice of my right hon. Friend? Which is it?
    Mr. Lever: My hon. Friend has to bear in mind that my work is in the nature of an adviser and not of a dictator.
    Mr. Tapsell: When the right hon. Gentleman claims, as he did in reply to the previous supplementary question, that a minimum lending rate of 15 per cent. is necessary in order to reduce the money supply, whose responsibility is it that the money supply has risen at such a rapid rate in recent months?
    Mr. Lever: At the risk of defying the political conventions of both parties, I must say that the history of the increase in our money supply cannot be looked at over a short cycle of time but has to be looked at over a longer period of time and that the responsibility conies from diverse factors. I do not doubt that there are possibly even imperfections in Government decisions sometimes which play a part in that, but there are many other factors, such as the terms of trade, commodity prices and the like, which play an important part, and they are too many to analyse in the course of a reply to a supplementary question.
    Mr. Hooley: Can my right hon. Friend say what discussions he has had with the International Monetary Fund about the possibility of funding sterling balances? Would he care to share with the House on some occasion, or by means of a White Paper, his views on this subject?
    Mr. Lever: The handling of our negotiations with the International Monetary Fund is the responsibility of my right hon. Friend the Chancellor of the Exchequer, but at some point it might be possible to share with my hon. Friend and those others who are interested my views on this and kindred questions.
    Mr. Crawford: May I return to the original Question and ask the right hon. Gentleman whether, because of the shambles which Scottish Office Ministers have made of the Scottish economy, he has plans for taking on board anyone to advise him on how to improve the Scottish enonomy?
    Mr. Lever: I am not sure that the hon. Gentleman would welcome it if the Duchy of Lancaster took control, in an advisory capacity, of the Scottish Office. Certainly I have no plans to do so at the present time.
    Mr. Skinner: Does not my right hon. Friend appreciate that he is a little too modest about his achievements, particularly at the present time? Does he recall that he was quite happy to accept the gratitude and applause at the time when the economic situation was such that the inflation rate was down, for a short period at any rate, to about 8·4 per cent.? As he has been involved in many areas of Government Departments, does he not realise that he, or at least the strategy he has propagated, particularly against import controls, has brought us to this sorry pass? He really should tell us what the Government's present strategy is so that we can be fully aware of their policy.
    Mr. Lever: I had not thought of my hon. Friend the Member for Bolsover (Mr. Skinner) primarily as a source of gratitude or applause, although I am prepared to receive either his or anyone else's comments on this or any other subject. The Government have made their position with regard to import controls clear again and again. For the very best of reasons, including our direct advantage in our international trading position, the Government are firmly against general import controls.

NORMANSFIELD HOSPITAL
Mr. Patrick Jenkin Mr. Patrick Jenkin (by Private Notice) asked the Secretary of State for Social Services whether he will make a statement on the case of Dr. Terence Lawlor of Normansfield Hospital.
The Secretary of State for Social Services (Mr. David Ennals): Dr. Lawlor has been employed since 1970 as the Consultant Psychiatrist at Normansfield Hospital, a 260-bed hospital for the mentally handicapped managed by the South-West Thames Regional Health Authority and the Kingston and Richmond Area Health Authority.
The two authorities have been concerned about the situation at the hospital for some time. There is a long record of

31
difficulties at the hospital and there have been complaints from relatives of patients, from the Community Health Council and from the Richmond upon Thames branch of the National Society for Mentally Handicapped Children, both generally about standards of care in the hospital and, in one case, specifically about the attitude of Dr. Lawlor. There had also been complaints from nursing staff about Dr. Lawlor's attitude towards them. On 22nd April 1976, the Confederation of Health Service Employees, on behalf of the staff of the hospital, presented to the regional health authority a written list of complaints about Dr. Lawlor which were sent to him for his observations.
On 3rd May, Dr. Lawlor wrote to the area health authority seeking an inquiry into unexplained injuries to patients which he said had occurred during his absence. I understand that this letter was received by the area health authority on 5th May.
On the night of 4th May, virtually the entire staff of the hospital walked out saying that they would not return unless Dr. Lawlor was removed from the hospital. On 5th May the regional health authority chairman, on the advice of senior staff of the RHA and AHA, decided to suspend Dr. Lawlor on full pay pending a decision on further action. On 5th May, the Regional Administrator wrote to him telling him that he had been suspended
"as a result of complaints received from the nursing staff"
at the hospital.
On 12th May, the regional health authority decided to set up an independent inquiry under a legally qualified chairman, with the terms of reference
"to inquire into staff morale and patient care at Normansfield Hospital and in particular the circumstances leading to the withdrawal of labour by staff at the hospital on 5th May 1976".
It also decided to continue Dr. Lawlor's suspension during the course of the inquiry. The inquiry was scheduled to open on 16th August. Unfortunately, it proved impossible to assemble all the evidence in time and the start was later postponed until 8th November, the earliest date at which the chairman would be available.
I received representations in August from the Hospital Consultants and
32
Specialists Association on behalf of Dr. Lawlor and in September from the BMA raising issues of principle relating to the circumstances of Dr. Lawlor's suspension. I decided that, regrettable as the delay in starting the inquiry was, to reinstate Dr. Lawlor would not help to deal with the situation at the hospital. However, in response to the representations from the BMA, which I met on 1st October, I took immediate action. I spoke to the RHA chairman, who agreed to recommend to the RHA an extension of the terms of reference of the inquiry in order that it should also look into the circumstances of the suspension of Dr. Lawlor. The BMA urged upon me the desirability of an inquiry into this matter under Section 70 of the National Health Service Act 1946, but I decided that to change the form of the inquiry would only cause confusion and further delay. On the terms of reference which I have proposed, I have every confidence that the RHA's inquiry, under Mr. Gerald Kidner, will deal fully and effectively with the matters concerned.
In the light of this, I very much regret the decision of the HCSA to ask its members to ban all routine work last Friday and hope that they will be willing to accept that the important thing now is to establish the facts and responsibilities in this case as quickly as possible and to improve the situation at Normansfield Hospital. Further industrial action will not help towards this.
Mr. Jenkins: I thank the right hon. Gentleman for his very long statement. Does he not recognise that there is here a very grave issue of principle? Does he think that it can ever be right for a professional man to be suspended solely as a result of industrial action by staff?
Mr. Ennals: It has not happened in this case solely as a result of industrial action by staff. In my statement, I made clear the reasons given by the administrator. The suspension was basically because, I would say, of the situation of patient care at Normansfield Hospital, which has been a worry for a very long time. The BMA asked me to extend the terms of reference to include the circumstances of Dr. Lawlor's suspension, and that is precisely what I did. I think that it would be unwise of me if I allowed myself to be drawn by the right hon. Gentleman into issues which are, quite

33
properly, the subject of an independent inquiry.
Mr. Pavitt: Will my right hon. Friend convey to the HCSA and any other organisation that, whatever the cause and whatever their feelings may be, when they take industrial action it does not act against the Government or against other members of the staff or ancillary workers but can act only against the patients? Will he do something in his Department to see that this kind of development, which has arisen not only among doctors but among other sections of National Health Service staff—they all seem to he using industrial action repeatedly as a stick with which to beat the Government—is recognised as only denial, in the end, of their own humanitarian responsibilities?
Mr. Ennals: I am grateful to my hon. Friend. I believe that it is the view of the whole House that it is wrong not only for consultants and junior hospital doctors to take industrial action within the National Health Service but for other workers within the service to do so. I believe that those who suffer are, as my hon. Friend says, the patients themselves, who can never be at fault on these issues, and the thought that somehow or other Government policy is influenced by this sort of action is one which I would at once say was not the case.
Mr. Jessel: Is the right hon. Gentleman aware that there has been widespread concern in my constituency about the standards at this hospital and that staff morale had sunk to a very low level indeed? That cannot have been good for the patients. Is he further aware that the HCSA was not made aware by its officials of the bad background to the situation and that it would be better for it to await the inquiry?
Mr. Ennals: I am grateful to the hon. Gentleman. This hospital is in his constituency and he knows more about the subject than others, including the right hon. Member for Wanstead and Woodford (Mr. Jenkin), who have been making statements. The decision has to be seen against a background of a very serious situation within the hospital and not simply as a question of the suspension of a consultant at a particular moment. The real issue is to get the situation right
34
within the hospital and I hope that party politics will not be made out of the issue. I am grateful to the hon. Member for Twickenham (Mr. Jessel) for his frank statement.
Mr. William Hamilton: As a sponsored Member of the Confederation of Health Service Employees, may I associate myself with the expression of view by my right hon. Friend that the workers should get back to work, since it can only be to the disadvantage of the patients if they do not? Can my right hon. Friend tell us whether, before he went on the radio this morning, the right hon. Member for Wanstead and Woodford (Mr. Jerkin) had contacted the Department to ascertain the facts?
Mr. Mellish: Of course he had not.
Mr. Ennals: I do not know whether the right hon. Member for Wanstead and Woodford (Mr. Jenkin) contacted the Department to ascertain all the facts, but in the interview which he gave either he was not aware of all the facts, or, if he was, he was being very selective in his presentation to the public.
Mr. Cronin: Will my right hon. Friend understand that I regard it as utterly deplorable that industrial action should be used by consultants, doctors or any other health employees for the purpose
of dealing with matters concerning the welfare of patients? Will he at the same time bear in mind that before Dr. Lawlor made any complaints about ill-treatment of his patients on this particular occasion, a request for an inquiry had been made by the nursing staff on account of unpleasant and unco-operative behaviour, on account of unreasonable interference with nursing administration, and also on account of attempts to intimidate members of CoHSE and to induce them to join some other union? Will my right hon. Friend not agree, bearing in mind those circumstances, that this strike or industrial action, however ill-advised, was certainly provoked?
Mr. Ennals: I shall not be drawn into commenting on precisely the purpose of the inquiry, but the points raised by my hon. Friends and by the right hon. Member for Twickenham show that a very wide spectrum of problems is involved here. It is not just a question of one man. I think it is best for the House

35
and the country to let the inquiry proceed in order that we can get the matters put right.
Mr. Anthony Grant: Is the Secretary of State aware that the HCSA requires an answer to a very simple question, namely, who is clinically responsible for the care of patients—the doctors or the members of a lay union, who seem to have met at about 2 a.m.?
Mr. Ennals: The problems in Normansfield Hospital—I shall not state any conclusion on this—are of a very long duration. They have lasted many months. I shall not say where the blame lies. That is precisely the purpose of the inquiry that has been established.
In relation to the responsibility now, although Dr. Lawlor has been suspended, another consultant is looking after the patients on a sessional basis. I will not answer the specific question put by the hon. Gentleman because I believe that to do so now would prejudice the inquiry which is about to start.
Mr. Jenkin: The Secretary of State has sought to argue that Dr. Lawlor was suspended for a variety of reasons. Is he aware that the solicitor to the regional health authority, in writing about Dr. Lawlor's suspension, made it perfectly clear that he was suspended as a result of industrial action by the staff? Will the Secretary of State now answer my question? Does he think that is right or not?
Mr. Ennals: I have already made clear the reason given by the regional area health authority for the suspension. I quoted it in my earlier statement, and I have a copy of the letter from the administrator to Dr. Lawlor. It is because I believe that serious principles are involved, when people can be suspended for any reason at all, that I requested that the terms of reference should be so broadened. Happily, I have the co-operation of the chairman of the regional health authority in broadening the terms of reference in order that precisely the issue raised by the right hon. Gentleman will be dealt with by the inquiry. I believe that I have properly and effectively fulfilled my responsibility in this case.

ECONOMIC SITUATION
Motion made, and Question proposed, That this House do now adjourn.—[Mr. Graham.]
Mr. Speaker: Before calling upon the Chancellor of the Exchequer, may I say that I have the customary long list of right hon. and hon. Members who wish to speak in the debate. I merely inform the House of this so that those who take a long time will know that they are stopping other colleagues from participating.
3.44 p.m.
The Chancellor of the Exchequer (Mr. Denis Healey): I know there is deep concern on both sides of the House about the steps the Government had to take last Thursday. My speech this afternoon has two purposes—first, to describe developments in the economy since we last debated it over two months ago and to explain why the Government have decided to tighten credit and to apply to the International Monetary Fund for the use of further facilities; and second, to discuss the implications of these decisions and to answer in particular the questions on which I expect this debate will focus. Do the Government's recent decisions represent—or require—a fundamental change in the direction of their economic strategy? If not, is the strategy aiming in the right direction? And is there any alternative strategy which would better meet our economic needs?
First, I will give a short account of the background to the Government's decisions.
In the world economy at large, there has been a slackening in the pace of growth of output and of trade. In July, worry that the world recovery might be proceeding too fast was still widespread. Now it has largely given way to fears about the continued strength of the upturn. In all the leading industrial countries the growth rates in the second quarter of 1976 were below those in the first quarter. By the same token, the reductions in unemployment seen in many countries earlier in the year seem to have been checked or reversed, for the time being at least.
Yet Governments world-wide are still worried about the threat of inflation. The

37
decline in consumer prices seems to be decelerating in most countries. In recent weeks interest rates have been raised in France, Italy, Sweden and Denmark. Moreover, France and Italy, among a number of other countries, have introduced comprehensive counter-inflation programmes in which the search for an incomes policy such as we have operated so successfully plays a central rôle.
Britain is no longer at the bottom of the inflation league. However, we are still at the wrong end of the second of the three divisions. In the United States and Germany, inflation rates are running around 4 per cent. or 5 per cent. a year. In Japan, France, Canada and the Benelux countries inflation is in the range of 8 per cent. to 15 per cent. This is the second division we have now entered. We still have a long way to go before we can enter the first division. But we have at least climbed well out of the third division in which Ireland and Italy now find themselves, with inflation well over 20 per cent.
Until very recently we were moving steadily towards our original target of single figure inflation by the end of this year. That this target is now out of reach is not due to our labour costs rising more sharply than provided for in our pay policy. On the contrary. It is the consequence of the sharp rise in commodity prices earlier this year, which has affected inflation in many other countries, particularly France, in recent months, and of the rapid depreciation of sterling. Though our relative inflation rate made some depreciation inevitable over time, sterling has fallen faster and further than we expected.
There may have been a rather less vigorous rate of growth at the end of last year and the beginning of this than seemed likely on the basis of earlier assessments. Moreover, in the second quarter of this year we clearly shared in the world-wide hesitation in growth. It may be that this was only a temporary dip in the rate of growth, similar to that which took place in Britain at the same point in the last cycle in the summer of 1972. The estimates for industrial production up to July suggest that the underlying trend of industrial output is still rising, although somewhat less than previously thought. The growth that there
38
is is concentrated in the manufacturing sector. Latest three months on latest three months, manufacturing production was up by 1·4 per cent., or nearly 6 per cent. a year at an annual rate.
The increase in manufacturing production has already led to an increase in employment in manufacturing industries starting in June. This reversed the previous decline in manufacturing employment since the end of 1973. It is one of the indications that the priority we are giving to manufacturing industry is already having an effect. The large number of unemployed school leavers brought unemployment up to just over 1¼ million in August—an appalling figure—but total unemployment fell in September as school leavers moved into jobs. There are signs that seasonally adjusted unemployment for the United Kingdom, excluding school leavers, is now rising, if at all, only very slowly.
However, the prospect remains uncertain. Even though we are now getting a rise in employment where we most want and need it, there is not the scope there was in previous cycles for expansion in public and private service jobs. Like other countries we are still emerging from the deepest international recession since the war, and, as has become more and more widely recognised, there is an international dimension to curing unemployment. There is also a puzzling change in the composition of the unemployment registers. Men used to outnumber women five to one on the registers, but this ratio has now changed to only three to one. It may be that a higher proportion of women without jobs are registering than in the past.
There is now firm evidence that the measures we have introduced over the last 18 months or so to help in reducing unemployment are having the effect we intended. As the House knows, we introduced a further set of such measures a few weeks ago.
We now have the Temporary Employment Subsidy, the Job Creation Programme, the new Work Experience Programme and the Job Release Scheme; and the counter-cyclical training schemes which the Manpower Services Commission has introduced on top of its large existing programme. These measures are directed at those particular sectors of

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the labour market which have the greatest priority in a recession: the young, especially school leavers; those facing redundancy, or prolonged unemployment; and those in the areas where unemployment is highest.
It is important as we emerge from the recession that industry should be ready to cope with the new problems of the upswing: that trained work forces should be kept in being, that the level of skill training at apprentice level and the level of adult retraining should be maintained, and that those young people who have come on to the labour market for the first time should not have their morale weakened and their attitude to training and work soured for the rest of their working lives by the reduction in job opportunities that a recession brings.
These measures are already having a significant impact. Between the summer of last year and Easter of this year, 150,000 school leavers found work even though the general unemployment level was then rising fast. I would expect at least a comparable fall in unemployment amongst school leavers this year. And the level of training in industry has been maintained at the same level as in boom years. We estimate that the measures we have so far introduced will help about half a million people through this period of abnormally high unemployment.
Such measures have been widely adopted in other countries, but they can only be regarded as palliatives, alleviating the impact of unemployment.
The rate at which we return to full employment depends above all else on our ability to improve our industrial and sales performance so as to take full advantage of the export opportunities open to us as a result of the world recovery and the greatly improved ability of British goods to compete on price, both at home and abroad.
The record here so far is an encouraging one. The overall increase in export volumes in the 12 months to August has been well over 10 per cent., while exports of chemicals, metals, principal metal manufactures and other manufactures have all risen more than 20 per cent. Since this took place in a period when national output rose far less than this, it represents a substantial shift of
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GDP into exports, and that is one of the basic objectives of the Government's economic strategy.
Moreover, we have at last begun to increase our penetration of the more difficult markets in the industrial countries: right hon. and hon. Members will have seen this morning that our exports to Germany rose 24 per cent. in deutschemark terms between the first half of 1975 and the first half of this year.
We have always insisted that export demand must be the main foundation of our recovery, and so it is proving. For example, new engineering orders rose at an annual rate of more than 20 per cent. between the first and second quarters of this year—home orders at 10 per cent. and export orders considerably more. Similarly, the 20 per cent. increase in the volume of chemical exports to which I referred has contributed to a 12 per cent. increase in output over the period.
Mr. Nicholas Ridley: Is the Chancellor of the Exchequer aware that, under his administration, he has knocked a third off the value of our currency? Will he address himself to that, because it is about that that this House wants to hear?
Mr. Healey: I note the hon. Gentleman's question and, of course, I shall he referring to it later in my remarks.
So far as home demand is concerned, we have insisted that any increase must come from investment. Neither private nor public spending can be allowed to grow until our economy is once more in balance. Despite political temptations at least as powerful as those to which previous Governments succumbed at similar stages in the cycle, we have maintained our determination to see that the increase in output goes where it is needed. The rate of consumer spending has not changed significantly for more than a year. The savings ratio remains high, at 13 per cent.
Expenditure by the public sector is now levelling off as forecast and, following the July measures, it is due to fall somewhat next year in real terms. Thereafter, it will take a steadily reducing proportion of available resources. We shall give priority to support of our industrial policies within the total of public expenditure available.

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This priority was fully reflected in the decisions which I announced in the House in July. The cost of the measures we have since approved to relieve unemployment and to support industry will be within the limits set by the contingency reserve. The extensive application of cash limits to regulate expenditure in money terms combined with our refusal to sanction expenditure beyond the totals set for individual programmes and the contingency reserve should ensure that we have the most effective control of public expenditure achieved in Britain for many years.
I know very well the difficulties which this entails, in particular the problems involved for the local authorities. But the improved information system and the new methods of consultation have paid good dividends in our joint effort to bring local authority current expenditure this year more closely into line with the White Paper figures.
We are now approaching the discussions which will lead up to the Rate Support Grant settlement for 1977–78. Everyone involved in this operation knows very well that we mean to do everything possible to bring current expenditure for that year back into line with the White Paper plans and that the grant settlement will be directed to that end.
Mr. Frank Allaun: Instead of cutting social expenditure by a billion pounds a year and more, why do not the Government carry out their election promise and cut arms spending to the proportion of our Western European allies?
Mr. Healey: We have debated this on many occassions, and my hon. Friend will know that the Government have been approached quite recently by the trade unions working in the defence industry with requests that we should not proceed with some of the cuts in which we are engaged already.
Meanwhile, it looks as though total fixed investment may be rising a little from the very low level on the second quarter. Within that total, the key component is manufacturing investment. It now seems that the trough in manufacturing investment in this cycle has already come at about the middle of this
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year. Through our accelerated investment scheme, we have been trying to pull forward into the current year investment planned for 1977 and later. We have good success in this respect. Some rise in investment can be expected in the latter part of this year, and, as the CBI, the Financial Times and the Department of Industry surveys have recently demonstrated, a big increase of perhaps 15 to 20 per cent. is expected next year.
So far, apart from the unexplained dip in the growth of output in the summer months, reflected in the slower growth of export volumes in the same period, the evidence which has become available since July suggests that the real economy is developing in line with our strategic objectives. This point was made in a leader in the Financial Times a fortnight ago, and it is these hard facts of economic performance which have led so many foreign observers, like Chancellor Schmidt and the Dutch Finance Minister, to argue that sterling is under-valued. Yet the foreign exchange market has so far not taken that view, and we must live with the judgments of that market whether we like them or not.
It is in the financial or monetary field that the real problems have arisen in the last few months—and in particular in the interactions between expectations about the growth in the money supply and movements in the exchange rate.
Following the arrangement of the $5,300 million standby credit in June, the Government took steps to ensure that the PSBR is steadily reduced as we move out of the recession so as to control the pace of monetary growth and leave room for the increase in exports and productive investment that we need. Given the economic prospect as we then saw it, the July measures were designed to reduce the borrowing requirement from an estimate of £11·5 billion this year to £9 billion or less in 1977–78. On that basis, measured as a percentage of GDP at current market prices, the PSBR would be reduced by about one-third—from 9 per cent. this year to about 6 per cent. next year. Other countries and international comparisons often use an alternative concept of the general government financial deficit. I said that this would be halved—from just over 6 per cent. of GDP this year to 3 per cent. next year.

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The size of the general Government deficit this year and the rate at which we plan to reduce it is fully in line with what we know of other countries' plans.
At the same time as I announced these decisions I made clear that the PSBR should be financed in a way which would not refuel inflation. I indicated that the increase in the money supply as broadly defined—M3—during the current financial year should be in the region of 12 per cent. Any significantly higher figure would risk repeating the experience of 1973, when the then Government printed money and the grossly excessive increase in demand led to a seizure in production and a rapid increase in inflation and the balance of payments deficit.
The 12 per cent. monetary guideline was fully consistent with the provision of sufficient finance to support the increase in exports and investment on which the Government's economic strategy rests—and with the figure of £9 billion for Domestic Credit Expansion which I forecast in December 1975.
However, it became apparent in recent weeks that we were not achieving sales of Government stock on the scale sufficient to ensure that monetary expansion would keep to the guideline I set. As the Bank of England explained last Thursday, preliminary indications about the growth in M3 during the three banking months to mid-September show that monetary expansion was proceeding—at an annual rate—considerably faster than would be consistent with our objectives. Besides the failure to sell enough gilts, bank advances have shown a rising trend.
The increase in bank advances in recent months seems to be associated in some degree with the financing of leads and lags and may also have been used to finance more imports than would be justified by the present and prospective rate of consumer spending. In other words, excess liquidity in the banking system may have been operating not only to jeopardise our objectives for the growth of money supply but also to undermine the needed improvement in our balance of payments.
It is probable that the foreign concern about our ability to control the money supply was a major factor in pressure on the exchange rate in the last few
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weeks. There was a fall of some 12 cents between 8th September and 6th October. This in turn had its effect on gilt sales and so on the prospects for the money supply, producing further pressure on the exchange rate.
We have faced a situation in which uncertainties about the exchange rate have led people in this country to expect further measures from the Government—and they have therefore held off moving into long-dated Government stock; and the resulting relatively high level of liquidity in the economy has simply confirmed foreign opinion in their view that monetary expansion in the United Kingdom was proceeding too quickly. Last month we therefore raised interest rates and called for 1 per cent. of Special Deposits. This did, for a period, improve the tone of the gilt-edged market so that we were able to sell a very substantial amount of stock.
The figures for monetary expansion in the banking month of September, which ended on 15th September, will be high because the massive increase in gilt sales came later. These September figures will be published on Monday next. In banking October, however, we have already achieved over £1 billion net of gilt sales, with the effect in this and future months of the new stocks announced at the end of last week still to come. That should mean in due course monthly figures for monetary expansion much more in line with the Government's monetary guideline.
Mr. Norman Lamont rose—
Mr. Healey: In addition to these new gilt issues, we are improving the terms offered to the small saver on National Savings. There will be a new savings certificate, with a value of £5 rising to £7 over four years. These are generous terms related to present interest rates and the certificate will be on sale only for a limited period, from its issue in December to the end of March. The maximum holding will be limited to £1,500.
The rates of interest paid on National Savings Bank accounts will also be increased from 1st January 1977. The rate on ordinary accounts will be increased from 4 per cent. to 5 per cent. and on investment accounts from 9 per

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cent. to 10 per cent. In next year's Finance Bill I shall be introducing provision to make a corresponding increase in the amount of tax-free interest on National Savings Bank ordinary accounts and Trustee Savings Bank Ordinary Departments from the first £40 to the first £50.
These are important improvements for the National Savings Movement. They should both make a useful contribution to financing the PSBR and enable the small saver to share in the benefit from the general rise in interest rates in recent months.
Mr. Norman Lamont: Is not everything that the Chancellor has said a condemnation of the strategy outlined in his Budget speech? Does he remember my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) saying that if the public sector borrowing requirement were not cut, the Chancellor would have no alternative to skyscraping interest rates in order to finance his deficit? Has he not now admitted this and produced interest rates that will bankrupt the private sector unless they are cut soon?
Mr. Healey: I shall explain in detail why I do not agree with the hon. Gentleman and why all the employers I have met in the last few days share my view and not that of the hon. Gentleman.
The call for an additional 2 per cent. of Special Deposits, together with increase in interest rates, will make it considerably more difficult and expensive to obtain the sterling necessary to finance leads and lags or excessive imports. But by renewing the Bank of England's directional guideline we hope to ensure that productive industry will not be bearing the brunt of credit restraint.
The measures which I took last week were necessary to validate the economic strategy, which I laid before the House in my Statement of 22nd July. They should limit the growth of money supply—M3—to the guidelines which I announced in that Statement and ensure that we do not exceed our projected rate of Domestic Credit Expansion which I described to the House in December.
I cannot pretend that interest rates at current levels are in any way pleasing to the Government. They have already
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had a most unwelcome, though inevitable, effect on mortgage rates and, while they last, will put a strain on many parts of the economy. But it is quite wrong to suggest that they mean abandoning all our hopes for a rapid increase in our manufacturing investment and output. We do not want interest rates to continue at this high level and we hope that once the money supply is back on course any effect which the squeeze may have should not carry through to investment intentions.
Moreover, it is already clear from reports of industrial reaction from all over the country, well reported in the Financial Times of Saturday and yesterday's Sunday Times, that a failure to act so as to restore confidence would have been far more damaging, since the level of confidence does far more to determine investment decisions than the level of interest rates.
The bulk of manufacturing investment in fixed capital is drawn from a company's own resources. Where external borrowing is required, the rate of interest is usually less important than the degree to which capacity is already fully used and the manufacturer's prospects for the future. There was a steady increase in investment following the credit squeeze which my right hon. Friend the Member for Birmingham, Stechford (Mr. Jenkins) introduced in 1969, particularly in the export industries on which our recovery depends. The continuing pressure of export demand on existing capacity is likely to ensure that the investment intentions already declared in so many surveys are carried through in fact.
In sum, the recent measures that the Government have taken to tighten credit and to ensure that their published guidelines for growth in the money supply are met in the current year are a necessary element for the fulfilment of their economic policies. They do not put their industrial strategy at risk.
It is on the basis of this broad stance of policy that I announced nearly a fortnight ago that I would be applying to the IMF for the remaining tranches of credit available to us. The Government believe that it is prudent to make this application in order to ensure that their drawings on the June standby can be repaid and their external deficit financed

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in the coming year without undue strain on the reserves. [An HON. MEMBER: "What are you going to do about next year?"] I will explain about next year.
I expect a team from the Fund to visit London early in November for the usual joint examination of our prospects with the Treasury and the Bank of England. The team will then report to the Executive Board. Since the amount we are seeking is large and will require the Fund itself to seek supplementary resources under the General Arrangements to Borrow, established among leading industrial countries many years ago, time must be allowed for discussions between the Fund and those countries.
The timetable for consultations, following the normal pattern for a substantial standby, will not be completed until towards the end of December. We shall, of course, be repaying earlier than that—on 9th December—amounts we have drawn under the standby arranged in June by our fellow members of the Group of Ten industrial countries. These repayments—there has been exaggeration in some quarters about the amounts involved—will be met from our reserves, which we shall then replenish from our initial IMF drawing. Meanwhile, I am satisfied that the resources we currently have available, boosted by the on-going foreign currency borowing programme for public sector bodies, will meet our needs over the next two or three months.
I have been greatly encouraged by the response of Governments of other countries to this application, and particularly appreicate the warm remarks of leaders of the American and German Administrations, because those two countries will be important contributors under the General Arrangements to Borrow.
Mr. Peter Tapsell: Is it true, as is widely rumoured in Manila from where I have just returned, that the IMF has already privately informed the Government that it would wish to see the public sector borrowing requirement reduced from £9 billion to £6 billion next year?
Mr. Healey: No. That statement is totally untrue. I am surprised that the hon. Gentleman should give currency to a statement for which there is no foun-
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dation in fact. That type of rumour mongering by people who should know better—I believe that the hon. Gentleman has some rôle in the financial community—is one of the factors which has damaged sterling consistently in the last year.
The basic condition for the granting of assistance of this kind by the IMF is that the country which applies for it must present a satisfactory programme of policies to ensure restoration of its balance of payments. I have made it clear that this is the objective of the Government's present policies. Equally, I have emphasised that this implies both the determined maintenance of those policies and, within the framework which they set, such adjustments as events may require from time to time to ensure that they are carried through successfully.
Such adjustments may be painful, but this Government will not shirk from making them if the situation requires it. We did not shirk last week. As I have made clear time and time again, to negotiate within the framework of existing policies means accepting a great deal which is unpopular as well as a great deal which is popular. It may also mean a readiness to adapt elements in our policies to harsh realities if the main thrust of policy is to be preserved.
I announced our objectives in my economic statement last July when I said:
"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 in the export field; we have got to get our rate of inflation down to the level of our competitors and hold it there; and we have got to do both in a way which will protect the poorest and weakest of our people and retain the social consensus on which the success of all our policies depends."—[Official Report, 22nd July 1976; Vol. 915, c. 2010.]
Mr. Frank Hooley: Did the discussions with the IMF include any mention of the long-term problem of the sterling balances?
Mr. Healey: No. I have made it clear that we have not as yet had any discussions with the IMF. A team from the IMF staff will be visiting this country in

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a few weeks and discussions will begin then.
I have just quoted the framework of objectives within which all our policies must fit. Circumstances may threaten one objective or another from time to time, and we must react appropriately.
On 22nd July I announced a number of measures to bring about a better balance in both the public finances and the economy more generally. Without them our industrial strategy was at risk. With respect to the right hon. Lady the Leader of the Opposition, the cuts did hurt. As her right hon. Friend the Member for Sidcup (Mr. Heath) said last week, public expenditure cuts do hurt. Those affected by them, whether they are civil servants or private employees, have wives and families. For the right hon. Lady to suggest that cuts of £5½ billion to £6 billion can be made in public expenditure, as the vice-chairman of the Tory Party suggested the other day, without hurting, as she suggested to Mr. Robin Day, is gravely to mislead the people of this country.
Last Thursday's measures were essential to our attack on inflation. They are hurting, too. If further developments were to threaten any of our objectives, we would not hesitate to take any measures which were required to keep our policy on course.
But there are two elements in our strategy which must be preserved if it is to achieve its aim.
The key to the success of all our economic policies is the preservation and development of the social contract between the Government and the trade unions and the improvement of our industrial performance to which the CBI, the TUC and the Government have pledged themselves collectively in the industrial strategy which is being developed through NEDC.
The social contract is no fool's bargain. It is the basis on which any hope of recovery must rest. Its achievements are of critical importance to the success of our industrial strategy. Whatever right hon. Gentlemen opposite may claim to believe, they know that it has won universal admiration from this country's friends abroad.
This time last year we were only in the early stages of putting into effect the joint
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decision to keep pay increases during the year beginning last August within a limit of £6. At that time many people were doubtful—I do not blame them—whether a voluntary policy of this kind could be made to stick and whether or not it would achieve a dramatic reduction in the rate of inflation.
Now we can look back over the complete pay round. The £6 pay limit was universally observed. The reduction in the rate of inflation, which has been associated with it, has been dramatic. Whereas the increase in prices in August 1975 over the corresponding months of 1974 was about 27 per cent., the figure for August 1976 was under 14 per cent.
We are now well launched on the second round of the pay policy. Over 1½ million people have already settled firmly within the TUC guidelines. This includes the important settlement for local authority manual workers which has a bearing on other major agreements. I hope that the whole House will welcome the recent decision of the Trades Union Congress to seek a policy for the pay round after this which will enable us to maintain the attack on inflation and unemployment while seeking greater flexibility in pay bargaining.
The social contract has transformed the climate of industrial relations in Britain, too. In 1972 nearly 24 million working days were lost in stoppages. There were just over 6 million in 1975. Nor is that the end of the story. So far this year days lost are running at only half the levels of 1975, or only one-fifth the levels of 1974. The number of stoppages is the lowest for 20 years.
It is difficult to exaggerate the benefit this reduction in stoppages is bringing to the industries concerned, and to the economy as a whole. Disruptions in the chain of supply and delivery have in the past been a major cause of bottlenecks in industrial output and of lost sales at home and abroad. They still play far too prominent a rôle in the difficulties of the motor car industry. But over the broad spread of British manufacturing their disappearance has now transformed the prospect both for sales and output.
The House will have noted the results of the Survey carried out by the CBI which is reported in The Times today. Sixty per cent. of our customers all over

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the world said that there had been an improvement in delivery by British companies over the last 12 months. This is the best possible foundation on which to build the regeneration of our manufacturing industry.
Meanwhile, whatever massive disadvantages it certainly has in other fields, the depreciation of the pound has given British industry enormous advantages compared with its competitors both at home and abroad. Eighty-eight per cent. of our customers in the CBI Survey now consider British prices competitive. Exporting has never been so profitable. I trust it will not be very long before new investment following increased profits will generate both additional sales and additional employment.
I hope that the whole House will at least unite in affirming support for the new industrial strategy to which both sides of industry have already pledged their commitment. It is on these improvements in performance in the individual factory and sales office that the future of our economy depends.
Surely it is not too much to hope that the Opposition Front Bench spokesmen today will at least echo the generous tribute paid by the right hon. Gentleman the Member for Sidcup last week to the patriotism and common sense of our trade union leaders. I hope it is not too much to ask that the right hon. and learned Member for Surrey, East (Sir G. Howe) will at least renounce his customary sneers at ageing, prejudiced, doctrinaire trade union leaders. Whatever he may think of the social contract, that sort of talk is not really the best basis on which to realise the dreams of the right hon. Gentleman the Member for Lowestoft (Mr. Prior) of the Conservative Party and the trade unions walking hand in hand towards the sunset.
I do not deny that some of the adjustments we have had to make to keep our policy as a whole moving forward have imposed severe strains on the social contract and on the industrial strategy. It is not surprising that some have begun to wonder whether the broad direction of our policy is right. With respect, I think that most of these critics fail to recognise the magnitude of the change in our economic behaviour as a nation which was required when this Government took
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office. With hindsight, I must confess the Government themselves did not then recognise the full scale of the task which faced them.
I ask the House to reflect on the following words, about the present situation, from a source which I think the whole House will accept as politically independent:
"To see it in perspective we need to go back to 1973. In that year, money supply on the broader definition increased by not far short of 30 per cent. Inflation over the year was 12 per cent. and accelerating. The government of the day was shaping up to its confrontation with the miners, which it was going to lose. The way was being prepared for the wage explosion of 1974. In other words, not only was Britain pointing in the wrong direction in almost every aspect of its economic management. But the country seemed determined to move even faster down the wrong road. …"
The writer then goes on to discuss the situation today. He says:
"Most of the figures—wage increases, inflation rates and, above all, government borrowing requirement—are still frightening. But three years ago all of them were moving in the wrong direction. Most of them are now moving in the right direction.
But the point to focus on is the largely unsung change in direction which has already taken place in Britain. So far it has taken place without revolution or even without the social collapse which was being widely predicted two or three years ago. The danger remains. But it was three years ago that the rest of the world should have been going short on Britain. Not now, when we are making progress—if slow—in dealing with the consequences of that period of collective insanity."
These are not my words. They appeared in the leading article in the Investors Chronicle 10 days ago commenting on our application to the IMF. I believe that they represent the views of the great majority of thinking people of whatever party who have watched the performance of our economy in the last three years. I believe that they represent the secret views of the vast majority of hon. Members opposite. The task facing the right hon. and learned Gentleman who will follow me in a moment will be to convince the House, indeed to convince his party, in the light of all that was said—and not said—in Brighton last week, that in fact a future Conservative Government would have anything different to offer from the last 18 months of Selsdon Park followed by an abrupt reversal of policy and another dose of the policies so well described by the Investors Chronicle. That is not "The Right Approach".

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There are those, on the other hand, who believe we should take steps which would, in fact, cut us off from the international community on which we depend both for the exports on which our manufacturing industry must base its growth and for the help we need to carry out the regeneration of our economy at a pace which does not threaten the stability of our society. I understand and share the anxieties of those who see their livelihood threatened by unfair foreign competition. We shall continue to take steps to protect them in such cases.
But I cannot believe we would ever achieve that transformation of our industrial performance which is our common aim if we adopted a policy for protecting our less efficient and declining industries at the expense of stunting the development of our most efficient industries, by risking the denial of the worldwide markets which they are already capturing and on which their growth must rely.
I do not believe, once the facts are faced, that any real alternative will be found to the course on which we are now set, the long and painful road towards restoring balance in our economy and reversing the secular decline of our manufacturing industry. It is a journey which we cannot hope to complete except in partnership with unions and employers alike, and unless we remain as loyal members of the international community.
It is already clear that if we are to maintain the necessary rate of progress we shall have to accept in the coming year at least some further fall in the real incomes of the British people as a whole. But we are now beginning to see, not only in the broad magnitudes of trade and output figures, but in individual plants—factories up and down the country—that we are beginning to get the results that we need.
There will, no doubt, be further difficulties on the way which we cannot now foresee. If so, the Government will not flinch from taking the measures, however painful, which are needed to overcome them.
But if we are to derive some comfort from the alarms of the last few weeks it is that the British people have
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shown once again that they are prepared to face the facts and to make the sacrifices needed to see this country through.
4.30 p.m.
Sir Geoffrey Howe: The Chancellor of the Exchequer has treated the House to a speech as characteristic as it was inadequate. It was a combination of ineffable and unshakeable complacency with his own disastrous record and unspeakable impertinence to anyone who has dared to criticise him over the years. He responded quite characteristically to the interruption by my hon. Friend the Member for Horncastle (Mr. Tapsell), who asked him a serious question about what was going on at the IMF. My hon. Friend expected to be told, but all he received was a denunciation of his lack of patriotism. We are fed up with the Chancellor denouncing Conservative Members for lack of patriotism when all we have done has been to warn him at each step along his path that the course to which he is committed would lead to the disastrous consequences we now see. It is not the critics of the Chancellor who has sapped confidence in the Administration: it is the facts of his record and his performance.
The Chancellor began by talking, but with less confidence than before, about the record of this administration on the cost of living. No wonder. In 1974 he was saying that his target of single figures would be reached by 1975. In 1975 he said that the target would be reached by 1976. Today we had not a word. The target is now apparently out of reach. It is out of reach, as the Chancellor acknowledged, because of the collapse of the currency, because of the panic level of interest rates he has now introduced, which will compel him to push that single figure target heaven knows where. As the Chancellor began so he has continued.
His dreadful record of deceit and of targets indefinitely deferred is matched only by his disgraceful assertion, which the country will never forget, that the inflation rate was running at 8·4 per cent. in September 1974. When he came into office the pound was at $2·30. Today it is $1·66. It is small comfort to hear the Chancellor boasting that foreign statesmen believe that the pound is today undervalued. According to him they were
***
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saying exactly the same thing in May this year when he made his foolish boast that the pound would soon bounce back to a higher level. We know that it bounced back—back down 10 cents. It is small comfort for the Chancellor to say that this has caused some increase in export volumes when we reflect that for every 10 motor cars exported to buy foodstuffs and commodities in 1973 British workers and manufacturers have to export no fewer than 15 today.
The pound has fallen by more than 2 cents for every month that the Chancellor has been in office. That is the judgment of the world and its markets upon his mishandling and mismanagement of the economy. No one any longer believes a word that the Chancellor says. During his years at the Treasury the present Prime Minister presided over a devaluation of 14 per cent. and the Government had to be rescued from that mess by the right hon. Member for Birmingham, Stechford (Mr. Jenkins), who has now abandoned them. But at least the Prime Minister, when faced with that situation, had the decency to resign. The present Chancellor has presided over a devaluation of the pound more than twice as great as that of his right hon. Friend.
The office of Chancellor is one of the oldest and used to be one of the highest in the land. Its holder used to be respected throughout the world. But in the last two and a half years the Chancellor has not only devalued our currency; he has devalued that office as well, and it is high time for him to follow the Prime Minister's example.
Let me turn to unemployment. At the 1974 election the Chancellor said that he was confident that we could get through 1975 with well under 1 million unemployed. Within nine months that figure was surpassed, and today's figure is almost 400,000 higher still. We now have the highest rate of unemployment of any major country in Europe, and it is still rising.
The Chancellor told the House today—and no wonder—that the prospect remained uncertain. I say "no wonder" because the policies to which the Chancellor has now been driven are deliberately pushing the figure still higher. We have heard enough of the cry that lower
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public spending destroys jobs. We have now reached the situation where we can see that exactly the opposite is true. The Prime Minister knows that, just as inflation is the father and mother of unemployment, so high public spending by a Government borrowing one pound in every five is the father and mother of inflation itself.
We have repeatedly warned the Government that public expenditure is too high and should be reduced. They have stated that that could not be done because it would destroy jobs. However, last summer we saw the proof of where their high spending policy is taking the working people of this country. The Chancellor announced then—apart from cuts in public expenditure, which are bound to be hurtful, as both he and my right hon. Friend the Member for Sidcup (Mr. Heath) have said—a 2 per cent. tax upon employment. Characteristically, he described it euphemistically as an extra employer's national insurance contribution. But he admitted that that would destroy 60,000 jobs, and his officials have put the figure two or three times as high. How does he expect employers to pay this tax on jobs without laying off workers and increasing unemployment?
The same will be true for every firm and company in the land, and it is clear that the Government's failure to cut public spending is now destroying jobs. Last week we saw further proof, because the minimum lending rate has been raised to the highest level in the history of the bank of England. Why? It is because the Chancellor can now find no other way in which the Government can hope to raise the money which he remains determined to overspend and over-borrow.
It is not the slightest use the Chancellor's arguing that our public sector borrowing requirement or the general Government deficit is comparable with that of other countries. The fact he has to face is the one of which we have warned him every month—that it is and will be too high for him to borrow in a way consistent with keeping inflation down. He conceded that domestic and foreign opinion saw that the money supply in this country was going out of control exactly as we had predicted. Last week we saw a desperate and destructive attempt to get it back under control. It

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is essential to do something, but what a catastrophic way to have to choose. What a situation the Chancellor has left himself with!
He is afraid to raise taxes—although we may not have heard the last of that yet, because on present policies he may have to do just that—because he knows that the nation is already grossly overtaxed. He is unwilling to do now what he will be driven to do, and that is to make substantial reductions in Government spending. He has introduced an interest rate that only the Government can afford to pay at an immense cost to future generations.
The Chancellor said that he could not pretend that the Government are happy with present interest rates. He can say that again. He can remember his own description of 13 per cent. interest rates as disastrous. He can compare our interest rates with those of other countries—Japan 6½ per cent.; the United States 5½ per cent.; Germany 3½ per cent.; Switzerland 2 per cent. It is hardly possible for him, against that background, to describe the present situation as a crisis of capitalism. It is a crisis of a Government who have mismanaged the economy in a disastrous way.
How can the Chancellor still talk, as he does, about investment being past the trough and picking up again? Does he not read what others have to say about the impact of this 15 per cent. rate on investment? The President of the National Union of Mineworkers has said,
"It will knock hell out of the Labour Party politically at the next election."
He is right about that. He said,
"It is another hold-back on investment in industry."
He then asked—and the Chancellor should listen to this—
"Who can afford to borrow at 15 per cent. to invest in industry?"
I do not know about all the employers whom the Chancellor has been meeting. They must be a very different group from those I have been meeting. Alan Fisher, another trade union secretary, said very crisply that dole queues would lengthen as a result of this crisis catastrophic level of interest rates, and the Chancellor knows that perfectly well. Of course, he is right. Stockpiling will be cut. Invest-
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ment will be clobbered. On the best estimate that I have seen, the higher interest rates are likely to destroy well over 100,000 jobs, at least as many as the 2 per cent. tax on jobs that the Chancellor has introduced.
What is more, these changes cannot any longer be brushed away as though they were the result of some chance result of economic forces. They are a self-inflicted wound by the present Government. They represent the true price of the social contract. Of course we welcome a reduction in the number of industrial disputes. Only the Chancellor could pretend that it had nothing to do with the fact that unemployment is now running at 1½ million. However, the real evil of the social contract is that it was, and is, a sure prescription for deficit financing. It was bound to have the very consequences that we now see.
It is all very well for the Prime Minister to be complaining now that public expenditure has risen by 18 per cent. while gross domestic product has risen by only 2 per cent. But who started it? It is all very well for the Chancellor to speak now about the records of previous Governments. Let him remember that the Government of which I was a member, under the leadership of my right hon. Friend the Member for Sidcup, had put in hand reductions in Government spending of £1,300 million. It was the right hon. Gentleman's Government who deliberately reversed that trend and set about increasing public spending by 14 per cent. in their first year in office. The responsibility lies there, on that side of the House.
The truth is that more than 300,000 jobs will be lost because of the tax on jobs introduced by the present Chancellor and because of interest rates running at their present catastrophic level. Unemployment has more than doubled under the present Government just because public spending has doubled under the present Government. The policies to which the present Chancellor is now committed will probably treble the figure for unemployment before they have run their course. He has not been slow himself to call for sacrifices from the rest of the nation. The time has come for the Chancellor himself to make a sacrifice—for himself to join the ranks of the unemployed.

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Just over a year ago, the Chancellor told the Parliamentary Labour Party that the public spending cuts that he was then considering—too little and too late—were necessary if we were, in his words, to avoid crawling to the International Monetary Fund on our hands and knees. Only two months ago the Chancellor told the nation that the long-awaited economic miracle was within our grasp. No wonder the Leader of the House of Lords last week described that statement as a false dawn—the understatement of the century.
Only two weeks ago, the Chancellor told his own party's conference that he would be negotiating with the IMF on the basis of our existing policies, not on the basis of changes in policies. Why did he not tell his party then that he was this week going to introduce the most savage squeeze in history? Was it that he did not know what he was going to do and is less far-sighted than we believe, or was it that he dare not tell his party conference the truth? He would not have got a standing ovation if he had told it that.
Either way, it is the actions of the Chancellor, which he did not disclose to that party conference, that have now produced what Clive Jenkins describes quite rightly as the collapse of Labour's economic strategy. The reality is that the Chancellor deceived his party conference and deceived his parliamentary party, just as he has probably deceived his Cabinet colleagues. Above all, he has deceived the nation.
The Chancellor has spent the last two and a half years wandering around the world with a begging bowl in his hands. He ought now to drop the begging bowl and carry the can instead.
Mr. Eric S. Heller: The right hon. and learned Gentleman has referred to my right hon. Friend as deceiving the nation. Will the right hon. and learned Gentleman explain to the country precisely the amount of extra unemployment that would result if the savage cuts that he and his hon. Friends are suggesting were put into operation? Will the Opposition come clean and explain to the nation that the further cuts in public expenditure that they are proposing must mean further mass unemployment?
Sir G. Howe: I do not know when one will make the hon. Gentleman understand that a Government who have presided over this level of public spending have laid the foundations for this kind of inflation and this level of unemployment. There is no escape from that whichever way we go. The present Government, by neglecting our advice, by failing to reduce public spending sooner, as every other Western Government have done, are themselves now destroying more jobs by higher taxes on the private sector and by higher interest rates on private investment. [HON. MEMBERS: "Answer."] No one who has discussed this issue responsibly, none of my right hon. Friends—not even the Chancellor himself—has attempted to conceal the fact that the necessary reduction in public spending must lead to some increase in unemployment. What we now complain of is that it is the increase in public spending, the still higher taxes to be imposed in the name of the social contract, that will produce much higher levels of unemployment than are necessary in this country.
Where does that leave the Government and the Prime Minister? The Prime Minister made a brave speech to his party conference, just as he made a bold broadcast to the nation when he was elected. However, both that speech and that broadcast were in total contradiction of the policies and methods by which he and his party came to power in the first place.
The question is how far the Prime Minister and his Government intend to put those brave words into practice—how far, indeed, is the Prime Minister capable of doing so. I was not much encouraged to see in yesterday's News of the World the Prime Minister saying that he had no doubt that with our present strategy we are in a better position to build a strong economy than we have been for a very long time. If he believes that, he will believe anything.
What has he done to put substance to his words to the nation? Throughout his party conference, the Secretary of State for Energy—who is not in his place here today—did everything in his power, by word and gesture, to undermine the policies that the Prime Minister had spelled out. Meanwhile, the Minister for Overseas Development—who is in his place here today—as though he was not

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in enough trouble already with the Labour Party of Newham, was courageous and rash enough to spell out in public what he thought the Prime Minister believed. The Prime Minister left the Secretary of State for Energy quite undisturbed, and he rounded on the Minister for Overseas Development in a most disgraceful way. By that response the Prime Minister did more to destroy his own credibility than anyone else's.
The Minister for Overseas Development (Mr. Reg Prentice): The right hon. and learned Gentleman refers to a speech of mine. Will he accept that what I have constantly been trying to urge is that we need from politicians of all parties, including himself, helpful and constructive suggestions as to how the nation can get out of its difficulties and not cheap debating points such as the right hon. and learned Gentleman has been making here and elsewhere?
Sir G. Howe: If the right hon. Gentleman does not like the record of his Government, which he still supports in his present office, being pointed out, I am sorry. I shall come very quickly to the constructive points.
The right hon. Gentleman knows and the Prime Minister knows what has to be done to put the nation back on the road. The question is whether the Prime Minister will do it. The day after he declared that we could not go on living on borrowed money he authorised his Chancellor of the Exchequer to apply for the last brass farthing available from the International Monetary Fund. The Chancellor described that as prudence. If that is the hallmark of prudence, God save us from his folly. The Prime Minister continues to refuse to cut a single penny from his party's spending programme, and by so doing he has done his best to prove that he did not mean a word of what he said.
The day after the party which he leads voted overwhelmingly to nationalise the banks and insurance companies, what did the Prime Minister then do? He spoke to its National Executive Committee and, without a word of argument to suggest—as is the case—that such proposals would be disastrous to the nation, he merely pointed out that they would be an electoral albatross for the Labour Party. It is too much in line with the conduct that we fear from the Prime Minister—too
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great a tendency, even in this present hour of desperate need, to put the interests of party unity before the interests of the nation.
That is the Prime Minister's real dilemma. His party is now so deeply divided—we see it here on the Benches opposite—that he dare not do what the nation needs. The Prime Minister should not be worried so much as the Chancellor is about riots in the streets as about riots on the Benches below the Gangway on his own side. It is now beyond the capacity of this Government to retain the confidence of our overseas creditors on the one hand and their own left wing on the other. The time has come for the Prime Minister to choose whether he will serve the interests of his party or the interests of the nation.
In the interests of the nation, there is only one course left to the Prime Minister—to give overriding priority not to the advancement of Socialism but to the restoration of national solvency and self-respect. Let him realise, even if members of his party do not realise, that he has no choice about these matters. Let him realise the truth of his position—that beggars cannot be choosers.
That is the situation facing the Government. If they are to retain the support of the House, let alone the support of the country and the rest of the world, every policy and every action which is not directed to the restoration of national solvency should be ruthlessly set aside, and those members of the Labour Party who understand it should act to ensure that that is what happens.
By those standards let the Prime Minister now act. Let him determine to bring the money supply back under proper control, to restore a proper balance to the economy—not through higher taxes, through endless Government spending and through Dickensian money rates, but by making the large cuts in public spending that are now inescapable. Let the Prime Minister set out now to reduce the huge and indiscriminate subsidies on food, housing and transport to which his Government are still committed. The fruitless expense of those subsidy programmes has raised the cost of borrowing and cut the value of the pound by far more than in the end it has reduced the cost of living.

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Let the Prime Minister subject to ruthless reduction every aspect of Government spending except defence, police and help to those in real need. Let him now abandon the expensive and destructive commitment to the nationalisation of the land; he cannot afford it, and the nation does not want it. Let him this week drop the Bill to nationalise the aircraft and shipbuilding industries. Let him listen to the pleas of many in his own party and abandon the Dock Work Regulation Bill. Let him cease the disruption of the school and health services by calling off the vendetta against pay beds and the grammar schools.
The nation is far more ready than many in the Labour Party to recognise the harsh realities of our position. People are looking to the Government to do what is necessary. Indeed, I believe that the majority of right hon. and hon. Members would wish the Government to act in the interests of the nation and to abandon their Socialism. So, possibly, does the Prime Minister. But if the Prime Minister's Government are unwilling or unable to take the action which is necessary in the interests of the nation and nobody else, to let actions match his words, it is high time for them and him to make way for a Government who will.
4.56 p.m.
Mr. Douglas Jay: I think it deplorable that we should have had almost nothing but cheap debating points from the right hon. and learned Member for Surrey, East (Sir G. Howe). I much prefer, and I believe that the country would prefer, to hear the hard economic facts such as we had from the Chancellor of the Exchequer instead of the forensic extravagances of the right hon. and learned Gentleman. Indeed, I believe that it would be good for Parliament and welcome to the public if we had a little more serious analysis of the facts and less wild partisan talk about crisis, disaster, the end of the road, and the rest. That sort of talk not merely suggests a superficial state of mind on the part of its authors but can do a great deal of harm in the financial markets of the world.
What has actually happend since last summer in the real economic world as opposed to partisan rhetoric? The
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British balance of payments deficit has been reduced, the rate of inflation is substantially lower than it was a year ago, and a new pay agreement has been achieved. Those are the hard facts of the present situation. They suggest to me that there has been a major psychological element in the recent upheavals in the exchange market, excited, I would guess, first by the threat of a seamen's strike, also, perhaps, by some of the wild rhetoric at the political conferences, by fears of a revaluation of the German mark, and, above all, by the absence of any firm agreement on pay restraint in this country after August 1977.
To meet those short-term disturbances in the exchange market, the Government were, I believe, justified in the temporary monetary measures which they took last week, unpleasant though they may be. Nevertheless, the underlying unsolved problem has not altered, and I believe it to be this—to achieve in this country a long-term pay restraint policy which is at once firm enough to avoid intolerable inflation and flexible enough to enable a mixed economy to work.
That is the problem which faces this country, and many of the other advanced industrial countries as well. I believe that a solution of it is possible, but I am even more sure that, if we failed to find one, immense difficulties really would threaten us. I therefore urge the Government as strongly as I can to achieve an agreement as early as is practicable, preferably in weeks rather than months, if the exchange value of the pound is to be kept under reasonable control.
I speak as one who has advocated full employment and expansionist policies for a lifetime. But to anyone who now calls for reflation without pay restraint, I would say this: it was the pay inflation of 1973–74–25 per cent. and 30 per cent. increases all the way up the scale—that forced the Government into the inescapable dilemma of either letting that continue and accelerate, or else accepting this period of unemployment that we all deplore.
If anyone denies that, I think he has failed to understand the basic fact in this situation, which I summarise as follows: if pay rates increase faster than output, prices must rise; and if an attempt is made in the next pay round to recoup

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the loss of real income due to the rise in prices the rise in prices will accelerate. Any Government in that situation is then forced into the dilemma of either maintaining full employment by allowing prices to rise faster than ever, or else restraining the rise in prices at the cost of temporary unemployment.
There is no escape from that dilemma in that situation, and it is for those basic reasons that the pay inflation of two years ago must be counted as the cause of the present unemployment. It is this that has forced us into the absurd situation in which we are paying thousands of people to do nothing because present rates make it impossible for us to pay them all to do something without plunging us back into price inflation.
In order to get buck to full employment—which I assume is what the great majority of us want to do at the earliest possible moment—I urge the Government to reach a long-term agreement on pay restraint as soon as they can, and I therefore welcome the statement by Mr. Jack Jones, which some people may not have seen, reported in the Evening Standard of 1st October, that
"we are not going back to a wage explosion or a free-for-all, but we are going to try to deal with the problem of productivity and the necessary incentives to make industry efficient."
Mr. Jack Jones would probably agree—I hope so—that experience shows that the sort of new long-term restraint policy that we need must also achieve at least two things. It must allow, not merely differentials for skill, but relativities between different trades and different industries, to vary more easily over time than they have in the pure pay freeze of the past. I do not see how, in the longer period, that can be done until we have set up some sort of referee of last resort who can, in disputed cases, give final rulings, even without sanctions to enforce them. But if anyone can suggest a better way of overcoming that problem—the Government or anyone else—I shall be glad to hear it.
If we resolutely follow the sort of course suggested in those words of Mr. Jack Jones, and prevent another explosion there is no reason in principle why we should not get back to full employment in a year or two or why we should not maintain it thereafter. With the right level of costs, and the right exchange
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rate, there is hardly any limit to the potential exports which this country might achieve, because there is no limit to the needs of the world as a whole. Indeed, some people, in using all this extravagant language, forget that we had a major balance of payments surplus in this country as recently as 1970 and 1971. However, one is bound to add that, unhappily, we have inflicted one gratuitous burden, which we need never have done, on our balance of payments.
The only means of achieving long-term solvency in our balance of payments is to buy primary commodities as freely as possible in the world at the most economic prices and restrain the import of manufactured consumer goods. We did that after the war up to the 1950s with a good deal of success. But, unhappily, our terms of entry into the EEC are forcing us to do exactly the reverse—to force up prices of essential foods and to buy manufactured consumer goods from the Continent without any restriction. We are, to put it summarily, not allowed to buy beef from Australia, and we are forced to give free entry to cars from Germany, France and Italy. The imbalance that that is causing, on top of the oil cartel, is the main reason for our continuing balance of payments deficit and the underlying weakness of the pound in recent months.
I give the figures only briefly. According to the EEC Commission's own statistics, it would have cost the United Kingdom in 1975 about £800 million more on the balance of payments to buy our food imports at EEC prices rather than world prices. We are saving at present, so far as I can calculate—and if the Treasury has a better figure I should like to know—about half that £800 million through the so-called "green pound" and "monetary compensation arrangements". But few people believe that this can continue for very long. It is such a precarious and curious structure that it seems not likely to last.
The balance in manufactured goods is even more striking. Our balance on visible trade in manufactured goods—other than diamonds—with, first, the EEC Six and, secondly, the rest of the world has changed as follows between 1970 and 1975. With the world, other than the Six, we had a surplus in manufactured goods of £2,194 million in 1970, and

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£4,800 million in 1975. With the EEC Six we had a small surplus of £95 million in 1970, and a deficit of £1,090 million in 1975. Our balance with the non-EEC world has vastly improved, and our balance with the EEC has heavily deteriorated. That is due to free imports of largely manufactured goods from the Continent in the past two years, and it is that balance, coming on top of oil prices, that is maintaining our balance of payments deficit and causing the weakness of the pound. We cannot afford to go on importing manufactured consumer goods from the Continent on this scale.
My constructive advice, therefore, to the Government this afternoon is this. First, agree on a long-term pay restraint policy with the TUC and the CBI as the immediate first priority. Secondly, keep the Budget deficit and the money supply, as the Chancellor is doing, within very strict limits. Thirdly, let us now have the proposals for a fundamental reform of the CAP which we have been promised over and over again but still have not received. Fourthly, let the IMF politely understand that if it cannot—and I hope it can—lend on reasonable terms the sums that we need, we shall be bound to limit imports of manufactured consumer goods—at least from the richer countries—because we cannot afford to do otherwise.
5.10 p.m.
Mr. Maurice Macmillan: The Chancellor of the Exchequer pretended in his speech that we were going through a financial and monetary problem rather than an economic crisis. For example, he said that the pound was undervalued. I dare say that that is true, if we look at the purchasing power of the pound in some markets and the selling value of our goods in some markets, looking at the pound as a medium of exchange. But it is certainly not true that the pound is undervalued if considered as a store of savings or value, because people do not want to keep their money here. They do not want to hold sterling.
The right hon. Member for Battersea, North (Mr. Jay) suggested that this was a relatively short-term problem, caused largely by the failure to announce now an incomes policy for the future. But I
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think that the lack of confidence goes far deeper and is far more important to our country than the right hon. Gentleman's diagnosis suggests, much though I respect his judgment. I think that it comes about because we cannot yet sell our goods successfully abroad, despite the price advantage that a depreciated pound gives us, despite the fact that we have idle manpower resources and, until very recently, idle money available for investment.
We are still late on delivery dates. Our quality is not good and our reliability as producers and salesmen is questioned throughout the world. To deal with that takes a little more than jiggling with the figures or pretending that we face purely a financial and monetary problem, however serious.
What is wrong is that for a long time we have been putting too much of the total effort of our manpower, skilled and unskilled, management and professional people, and too much of our money and investment, in the wrong place. We have concentrated too much on producing non-marketable goods and services. I do not think that it is, as the Chancellor suggested, simply a matter of changing the balance in favour of manufacturing industry. After all, many of our services, particularly financial services provided by the City and others, are very marketable overseas and bring us great foreign currency earnings. Besides, most developed countries have a long-term trend to increase the ratio of non-industrial to industrial effort.
I shall take the period 1961 to 1974 to show, I hope, a lack of political bias and a sense of the national problems that we face. During that period in Italy there was an increase of 10·3 per cent. in non-industrial output compared with industrial output. In West Germany the increase was more than 14 per cent. In the United States it was 15·4 per cent., and in France it was 18·6 per cent. But in the United Kingdom it was 33·9 per cent., a vastly greater increase in the ratio of non-industrial to industrial production than in any of the other countries.
That did not happen because of a switch from goods to marketable services, as is shown by the figures for people employed in services generally. The

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increase in the number of civilian employees of central Government in that period from 1961 to 1974 was 35 per cent. The number of local government employees went up by 54 per cent. But the employees producing marketable services increased by only 13 per cent. As a result of the change from industrial to non-industrial production and the great increase in non-marketable services, the Government's pre-tax claims on marketed output—nothing to do with transfer payments and nothing to do with taxation—rose from under 40 per cent. in 1961 to over 60 per cent. in 1974.
Mr. Tam Dalyell rose—
Mr. Macmillan: Many people wish to speak, and I should like to finish my argument, so I shall not give way.
The facts that I have just stated provide clear evidence that there are too few producers of real wealth and that too little effort has been devoted over the years to creating new wealth.
That point, and the effect on total employment, become even clearer if we divide the period from 1961 to 1974 into two. From 1961 to 1966 the Government created new jobs in the non-marketable goods and services sector at the rate of 91,000 a year. At the same time, new jobs in industry and commerce were created at the rate of 101,000 a year. The real return on capital was 7·8 per cent. In the second period, from 1966 to 1974, the Government created 116,000 new jobs in the non-marketable goods and services sector, and there was a decrease in jobs in productive industry and commerce of 173,000. The real return on capital was only 4·6 per cent.
That failure to create new wealth has had its effect at home and on our exports, perhaps increased by changes in the terms of trade. We have not yet developed our invisible exports to balance it out.
I chose the period 1961·74 to try to present a relatively balanced and unprejudiced case. In fact, matters have become much worse since 1974, as can be seen from the increase in overseas debt and the public borrowing requirement, higher unemployment and more inflation. In this situation, the Chancellor's policies have proved disastrous.
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Labour Members will have to accept that, no matter what system we use, public spending on the non-marketable sector must decrease. Now, with the minimum lending rate at 15 per cent., even the Government's attempt to switch public spending towards productive industry is taking away with one hand what they give with the other. There is an effect on private investment, on the capacity to finance increased working capital. Every time a firm increases its proportion of exports to home-sold goods, it requires more working capital to finance a longer period of waiting for payment. There are also effects on the building trade and on confidence.
The Chancellor and the Government have missed the basic point that we must transfer effort from the non-marketable to the marketable sector. Even if we had a fully Marxist State, the problem would remain. There would still be no way out of it.
I believe—and the Government and certainly the right hon. Member for Battersea, North take this view—that we in this country get on better with a mixed economy, and with a healthy private sector. We are too dependent on overseas markets in too many different places for what we buy and sell. We may disagree, as the right hon. Member for Battersea, North indicated, about where those markets lie, but they are many and various. We are too dependent on those markets to make a fully centralised and socialised economic policy practicable. We cannot rely on the apparatus of the State to dictate investment programmes to meet those markets and to provide the home base that is required to fulfil them.
I ask the Chancellor and the Government to tell us the truth. Whatever fears we may have about the hardship and difficulties caused by facing the truth, it is better to take that course than to run away. We are seeking a cutback in public spending on the non-marketable side which will not necessarily be permanent, except expressed as a proportion of the national income. It will be a cutback for four or five years, and as our productivity increases, as our markets expand, and as we sell more successfully, the amount we need to do in terms of social services, education and other matters which the

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whole House would like to support will become a tolerable proportion of our productive effort and not such as to endanger full employment.
The present level of Government spending—63 per cent. of gross national product—constitutes a grave danger to democracy. If it is extended into further control of investment and spending, there is grave danger of destroying our productive potential and of jeopardising any hope of getting back to collective bargaining. We must put more effort into the creation of wealth. That is the only way to restore confidence, to prevent a permanent lowering of our standard of living, and to avoid permanently high unemployment. However tough may be the process of getting the situation right, the process will not last for ever. But if we fail—and my right hon. Friend the Member for Sidcup (Mr. Heath) said this in a different context—we shall have come to the end of the road. Therefore, failure now would be truly disastrous.
5.22 p.m.
Mr. R. B. Cant: To many people the present crisis may appear to be the re-run of an old film. Certainly to me, as a Member who came into this House in 1966, it appears that we have experienced such crises at fairly regular intervals. On this occasion the event has been invested with all sorts of descriptions that point to the fact that in a sense it is more of a crisis than those that went before.
My right hon. Friend the Prime Minister said at the Labour Party Conference that the cosy world was over. The right hon. Member for Sidcup (Mr. Heath) at the Conservative Party Conference—although I was not present on that occasion—spoke of the end of the road. It is important that we appreciate the fact that in some senses this crisis is rather different, although some people have said that it is just another hiccup with a secular, downward trend.
One of the ways in which the crisis is different was well illustrated in an article by Mr. Eltis in the current issue of Lloyds Bank Review. He saw this as a point of time in our history when we have to pronounce distinctly that Keynesianism is dead. Some people have
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been monetarists for years. I vividly remember the occasion in November 1967 when the present Prime Minister, as the then Chancellor of the Exchequer, received a letter of intent from the IMF. That brought our nation for the first time face to face with the fact that there were certain evil spirits in the monetary world who were trying to resurrect the old quantity theory of money that seemed somewhat archaic. We have reached a point when we can no longer accept advice from the Bank of England or the Treasury to the effect that Budget deficits, inflation and other factors do not matter.
Mr. Jay: Nobody said that.
Mr. Cant: My right hon. Friend tells me that nobody said that, but it is certainly true that for a generation and more that is the kind of advice we have been receiving. Whether we accept all the various facets of monetary thinking about lags and velocities of circulation, I think that all of us, including the Chancellor of the Exchequer, have come to the view that there is a financial framework within which we must try to conduct the affairs of the nation and that we go beyond that at our peril. We have reached a point when we must pay a great deal more attention—and this applies to hon. Members in all parts of the House—to financial considerations and the economy will be a great deal healthier for it.
Another point that has come home to roost at long last, with serious policy implications, is simply the fact that we are desperately inefficient as an industrial nation. This fact manifests itself in many ways. We know from recently published figures that we are among the lowest industrial nations in the league table of wage payments. We also know that we are almost at the bottom of the productivity tables. We are faced—not for the first time, but this time perhaps with an element of drama and finality—with the fact that we have to regenerate our industry, that we must make it more efficient, and that we must change the balance of the use of our manpower.
I do not want to speak for too long, but I wish to emphasise that many of my Labour colleagues below the Gangway, with one or two honourable exceptions, tend to resort to the usual solutions each

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time we get into a crisis. [Several HON. MEMBERS: "Where are they?"] I hope that their absence means that they intend to support my right hon. Friend the Prime Minister in the Lobby.
It is important to realise that many of the solutions put forward by my right hon. Friend are put forward in moments of crisis and are not heard very much about when the economy is doing reasonably well. I do not want to speak of the pound. I have views on this. I do not know whether the foreign exchange markets develop a neurosis when the Labour Party Conference is being held or whether this activity is stimulated by the Chancellor so as to get his point of view across. On any serious analysis of what has happened in the foreign exchange markets in the past two or three weeks, I do not think it can be said that we had been desperately speculated against, that leads and lags were a worse than normal problem, that there was more hedging than usual by the multi-national companies or that the oil sheiks had moved anything out of this country after about 30th June.
We who come from the provinces are finding it increasingly difficult to explain Government policy to some of our constituents. We are faced with protest meetings by those who threaten to go on strike if there are any more cuts in Government expenditure. We have to get across, not just a general message that on this occasion we are faced with the need once again to make sacrifices—this time with hope—but some more specific policy decisions. Had the Chancellor been here I would have wished to speak to him as someone who has kept one foot in the local government camp over these years while I have been in the House.
We are talking about the need to cut public expenditure. The Government are saying that local authorities must make some sort of economies but that there must be no redundancies. I have sat through many meetings of the policy and resources committee at county level. We have tried to cut. But the Government will have to answer one question before we go much further in asking local authorities to make these cuts. Local authorities are massive spenders. I have enjoyed every year that I have been in
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local government, when spending went up by 8 per cent. a year. We were spending money on excellent things, town halls as well as old people's hostels.
In the Financial Times today Mr. Samuel Brittan was looking to the future and asking: whose men will be sacked—Hugh Scanlon's or Alan Fisher's? We have to face up to this. Are we to go further along the road of maintaining employment in the public sector and reducing it in the vital manufacturing sector? Even when we make economies in manpower or in spending in local government, almost inevitably that is done, on the capital account, by making cuts in employment in the private sector. If, on the basis of no redundancies, it is said that we have to cut out a number of highways, the highways which will be cut out will be those to be built by private contractors.
I say to the Prime Minister, for whom I have always had the highest regard, that in this area of local government—parochial and petty no doubt—he must stand up, or get the Chancellor to do so, and tell local government that if there are to be further cuts in expenditure it may imply a certain amount of redundancy among those employed in local government. My right hon. Friend should not place the whole burden of unpopularity on the shoulders of the elected representatives in the area.
Mr. Samuel Brittan said that those who, like me, think that the Chancellor put up the minimum lending rate to finance his public sector borrowing requirement are crackers and that it was really done to prevent the pound from collapsing when the new figures on money supply are published a little later. I do not believe that. The Chancellor is in a desperate situation about financing his public sector borrowing requirement. We have a remarkable situation. No one will agree with me about this except my friends from the Tribune Group, who are not present.
What we have had over the past two or three months has been a situation in which the poor old Chancellor has been forced by the pension and investment funds of the country to go to the banks and borrow through Treasury bills, increasing liquid reserve assets and thereby producing these horrific money supply figures—apart from the financing of lags

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and leads—which are to be announced shortly. This is intolerable. It is the exercise of financial power without any responsibility by those managers—apart from a responsibility to posterity.
Mr. John Nott: Would the hon. Gentleman think it fair to the policyholders—and it is their savings we are talking about—that they should have had those savings invested in, say, Government stock six months ago only to see the value of that stock fall in the intervening period? What would have been right about that?
Mr. Cant: I made the point that I am not too worried about posterity. I accept the hon. Gentleman's point. I would accept it all the more readily if the managers of these funds had shown any ability to lend their money in the equity market at anything above 6·6 per cent. which I believe was the last yield figure in this sector. It is appalling that they should hold the Government to ransom in this way, refusing to lend the money to the Government until they felt that the yield on gilt edged stocks would decline. I am happy that they made a mistake a couple of weeks ago when they rushed in to buy the new loan the Government put out. I am glad that the Government broker saved the Chancellor £40 million. I hope that he gets a cut.
We have to face up to the fact that my hon. Friends below the Gangway will use this sort of ammunition increasingly in support of the proposals to nationalise these enormous funds—pensions and insurance companies in particular—if we cannot see the exercise of a little more responsibility as well as financial power, so that those who are able to do so are prepared to assist the Government rather than hold them to ransom.
5.39 p.m.
Mr. John Pardoe: This has been called a crisis debate and an emergency debate, but I think that the word "crisis" is probably being wrongly used. I part company from the hon. Member for Stoke-on-Trent, Central (Mr. Cant) when he says that perhaps this crisis is in some way different in kind. I suppose that every crisis is different in kind, but I do not accept the view
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of the right hon. Member for Sidcup (Mr. Heath) that we are at the end of the road.
Anyone who has been in public life over the past 10 or 20 years and who has had any contact with the economy must have felt that we were near the end of the road on numerous occasions. Certainly I felt that in 1974. I thought then that we could not continue with the rate of inflation that then prevailed. I thought that people must begin to realise that and that the tide would have to turn.
A crisis is that stage in an illness when matters either get better or get worse. There is an element of uncertainty about which course the disease will take. However, there is no element of uncertainty about the course which the British economic sickness will take. It will get worse. Nothing has been said in this debate that leaves me with any confidence that the course of our decline will in any way be altered.
I know that that sounds like gloom, doom and despondency, something of which I was accused at my party conference. I was accused of causing a decline in the Liberal vote between the two elections of 1974. The fact remains that there is no reason to suppose that the British economy will improve.
In a pamphlet that I produced in 1974, I started with a quotation from the café wits in Vienna before the First World War—namely:
"The situation is hopeless but not serious."
That seems to be something of the mood of Britain today. I note that my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) carried that historical parallel further in an article in the Observer of three weeks ago. When dealing with Britain's situation he wrote:
"It is perhaps that of Vienna in about 1910. Austria is no longer a great power. Demands for internal self-government have gone too far for federal solutions. Her economy and industries are decaying. She is overburdened with a grimy mass of unproductive civil servants. She is threatened from without by the barbarism of Russia. She is pleasant, she supports art and music. She has a pathetic, well-intentioned hopeless Government."
Surely that is an exact description of Britain today. I should not wish to change one word of it.

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I want to take a broad view of our problem, as I believe it is essential to do so if we are to arrive at a correct analysis. Outside the Chamber people are expecting hon. Members of all parties to speak for the national interest. My hon. Friend the Leader of the Liberal Party called for that in a noted speech over the weekend. I am sure that that is what all of us would wish to do today, but it is impossible that it will be done. That is because this place is no longer constituted in a fashion to do so.
If I were a Conservative Member, I should now make a speech to show that this is a crisis of short-term causes, all of which I could happily blame on the present Government, especially the present Chancellor. Indeed, that was the speech that we had from the Conservative Front Bench. If I were a Labour Member, I should try to show that things are nothing like as bad as they really are and that the Government's measures are in fact working. Indeed, the Chancellor went out of his way to do that today. However, neither of those points of view would be in accordance with reality. What in reality is in the national interest?
Mr. Ridley: Electoral reform!
Mr. Pardoe: I shall come to that. I hope that the hon. Gentleman will have read The Economist with the avidity with which the Chancellor reads the Investors Chronicle.
Mr. Ridley rose—
Mr. Pardoe: No, I shall develop my argument. No doubt the hon. Gentleman will wish to intervene when I have done so.
I do not believe that this is a short-term crisis. It is part of the long-term decline, and it will continue whichever party is in power. We are the most incompetent industrial country in the world. Our industry is inefficient.
Mr. Dalyell: No.
Mr. Pardoe: If the hon. Gentleman knows of a more incompetent industrial nation, no doubt he will mention it. I cannot think of one that is more incompetent. If we consider the figures we might well pass such a judgment. The hon. Gentleman said very much the same thing in his speech.
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Our industry is inefficient in a way that could not possibly have been caused by anything that has happened in the past two years, let along the past 20 years. Let us consider the fall in the pound. That is not something that can be blamed on any one party or on any one Government. It is something that has happened over years. I have spoken to international bankers and I find that they take the same view. They expect the pound to be at about parity with the dollar in the early 1980s. The same conclusion springs from the fall in our share of world trade that we have suffered ever since the war. They are both symptoms of a failing economy with which no Government have come to terms since the war.
Although it is now fashionable to discount the views of the greatest economist of our age, I remind the House of the views that were stated by Keynes when he considered the post-war outlook for the British economy. It was a deeply gloomy outlook. Keynes was someone who revolted against over-regulation, but he came to take so gloomy a view about our post-war economic prospects that he warned that Britain could well be forced to employ all the weapons of Dr. Schacht to square the circle. If we consider the present state of our economy and the situation that Keynes was considering in 1943–44, I do not think we have moved on very far.
Keynes saw Britain's post-war balance of payments deficit as of a size and kind that no one else had appreciated. We had never balanced our trade account with the rest of the world. Since the Industrial Revolution we had not had to do it. We had relied on overseas investment. In two world wars we had not only sold most of those investments but had borrowed considerably. We had run up enormous debts to pay for those wars. Presumably it has been the policy of all succeeding Governments since the war to repay those debts, but some of them are still unpaid. They have been added to massively over the years. That has happened not only recently but over a long period.
What are the remedies that we are offered 30 years on? The Government offer us industrial regeneration and we certainly need it. But the Labour Party

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correctly defined and analysed that problem in the period leading up to the 1964 General Election. I well remember the right hon. Member for Huyton (Sir H. Wilson). who was then Leader of the Opposition, talking about the need for industrial regeneration in speech after speech. We are still as far from achieving it as we ever were.
The Government's strategy cannot work. First, the Government believe in export-led growth. Do not we all? But there is no hope of getting out of our problems by that course. Even if the boom in other countries takes off—it is very slow about it this time round—our industry is not competitive enough to take advantage of it.
That is not because of prices. Of course we are competitive in terms of price. Given the way that the pound has gone, we should be able to sell anything if it depended on price alone. Unfortunately, we cannot do that, for it is quality and dates of delivery that make for one's ability to sell in export markets. We are uncompetitive because there has been chronic under-investment over the years. No one can make up for poor quality by prices lowered by a sinking pound.
The falling pound might do the trick for some economies, but it will not do it for ours. Our added value is so low that the increase in the price of materials that we must import to make our exports outweighs most of the advantages of the increased export sales.
Let us consider this doomwatch formula. A calculation made recently by a Dutch economist—I have not been able to find anyone to fault it—is that for every 1 per cent. by which our GNP grows, our imports grow by 1·7 per cent. For every 1 per cent. by which the GNP of our major trading partners grows our exports to them grow by 0·7 per cent. There is no way out of that problem through an export-led boom. It will not happen. It cannot happen.
Is it possible that we can get the growth we need through investment? I do not believe so. There is a great deal of spare capacity about and even though a lot of the machinery is old, it is still being under-used. There may be some defensive labour-saving investment but
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there will be no job-creating investment of the size that we need.
Cutting interest rates would certainly make it easier for industry to invest, but how far should we have to cut interest rates from their present levels in order to make investment in British industry really worth while? Would we have to cut them to 10 per cent. or 5 per cent? Even at 5 per cent. they would then only equal the average return on industrial capital. That leaves us with a consumer boom. That is always possible but obviously it would be quite fruitless. I maintain that the Government strategy will not work.
What about the Opposition? The remedies that they have espoused in their new pamphlet are not at all new. And they did not work when they were last tried. It is no good talking about the 'fifties, which were a sort of golden age of Conservative economic policy, because the terms of trade were so different then. We are now faced with an entirely different international situation. If we cut public expenditure to allow industry to invest there is no indication at all that industry would then take up the money which was made available.
There are two fallacies in this Conservative approach. Would industry invest if this was done and do we know how to cut public expenditure by the amount required? In respect of the first question, did industry invest last time? I well remember the right hon. Member for Sidcup having to go down to the City to curse and cuss at the industrialists of this country for not investing in spite of the fact that he had done everything to make that possible. The right hon. Gentleman introduced all sorts of new investment incentives—he cut taxation and did everything he could to make investment possible—but investment went into the property boom instead. When did we last have an investment boom of the size that we now need to square the circle? It has not happened in my memory and I do not believe that it will happen in my lifetime, and certainly not within the next 20 or 30 years.
Having sacked all those public employees by cutting public expenditure, which for other reasons might well be a good thing to do, what would a Conservative Government do if industry then failed to invest? Perhaps the Leader

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of the Opposition will address some of her remarks tonight to the questions how and what. The hon. Member for Henley (Mr. Heseltine) when interviewed on the radio on Saturday morning by George Ffitch was asked what a Conservative Government would not do that Governments were now doing. That really is the crucial question when we try to see what to cut in public expenditure. The hon. Gentleman listed various Government Acts which should not be passed—shipbuilding and aircraft nationalisation and such things.
I agree that they should not be passed but those Acts have not yet been passed. They represent expenditure in the pipeline. Surely the Opposition are not saying that Government expenditure is too high only in view of the amount which has not yet been spent. They are talking about Government expenditure last year. If they are saying anything at all, it is that Government expenditure last year was too high and that something has to come out of that, not out of what is being planned in the future.
I would repeat the question: what is it that Governments will not do that they now do? It is a problem for all of us. I have asked it at many meetings of my own party in the last year and I have never got an answer. People talk about rolling back the frontiers of government, but they are never able to answer the question. We could cut out a few subsidies here and there. We could do a bit with housing subsidies. If we look at the list of public expenditure items in the central pages of the Government's annual White Paper we see that in order to make the impact that we need to make on public expenditure we cannot cut at the fringes: rather we have to cut right at the centre of things in the major areas of public expenditure. These are education, defence, national insurance and social benefits.
That is where the cuts would have to come if they were really to make the difference. They could not be made unless we were prepared to return whole services now provided by Government to the market. I have not heard that argument by the Conservative Party officially, though it has been argued by one or two individual members of the Conservative Party.
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What about the commitment to indexing pensions? That is something which nobody in this House will want to dismiss but unless one cancelled that commitment I do not see how such cuts as the Conservative Party are now calling for could be made.
I do not believe that we shall solve our problems by any of the measures that we have heard of either from the Government or Opposition. The Government are certainly blameworthy for short-term faults. The 8½4 per cent. fiasco is symptomatic of the Chancellor of the Exchequer. One of the first rules of politics is that even if one believes anyone's propaganda, one should not believe one's own. The Chancellor unfortunately not only misled the country but misled himself and the Treasury. I think he actually thought that he had got inflation down to 8½4 per cent.—poor fool. And that meant that he based all his policies on the wrong figures; that is not entirely unknown of British Governments, and he was not the first to do it.
There is a further point for the Opposition to consider. Supposing they come up with the right strategy, how long would that strategy have to be pursued to halt the decline? Ten years, or would it be less? I do not believe that it could be less. It would have to be 10 years. How can we ensure that any strategy is Pursued long enough for it to work?
It is certain, for instance, that any correct strategy would have harsh effects in the early years and be very unpopular. A very wise, if somewhat cynical, elder Tory statesman—indeed he is still very active today and within a stone's throw of the right hon. Lady's confidence—once told me that no Government should ever try to do anything in this country which could not reap electoral reward before the next election. Ten years is beyond the next election and the unpopular effects of the strategy will come before the next election—the first election that a new Conservative Government would have to fight. Therefore, the Conservative Party would not be able to pursue that strategy and would have to go back on it in exactly the same way that they had to go back on it after 1970. That is straight politics and there is no escape from it.
I believe that we are faced with a situation in which what is economically

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necessary is politically impossible. Since the Chancellor quoted from the Investor's Chronicle I will now quote from an even more illustrous one—the Economist, which said on 9th October:
"The real need for Britain is to find the political institutions and national will to reverse 100 years of continuous decline."
It added:
"But there will never be a party, Labour or Tory, with the self-confidence and moderation in government to make any of these reforms until the electoral process to what purports to be the mother of parliaments has itself been made representative."
I hope that the right hon. Lady will address herself to that.
It is no use her coming to the Dispatch Box tonight and making a repeat of the kind of speech which she made at the Conservative Conference or the kind of speech which the right hon. Member for Sidcup was making in the Selsdon Park days. Whether or not that is the right strategy, the right hon. Lady should realise that the political system of this country will not allow her to pursue that strategy long enough to have a hope of its working.
6.0 p.m.
Mr. Giles Radice: I was waiting for the punch line from the hon. Member for Cornwall, North (Mr. Pardoe). I was wondering what it was going to be. Of course, it turned out to be that the answer to our economic problems is proportional representation. I thought that a strange thing to say. I must add that if I were as gloomy as he is about the economy, I would resign from Parliament immediately.
I think that most hon. Members on this side of the House can accept the reasons given by my right hon. Friend the Chancellor of the Exchequer for agreeing to the raising of the minimum lending rate. The rapid depreciation in sterling combined with the difficulties that the Government have experienced in financing the public sector deficit has made it inevitable that he should have to take action on these lines. He could not stand by and watch the inflationary effects of depreciation of sterling and uncontrolled expansion of the money supply totally undermine the social contract and most of the Government's economic policies.
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But if I can understand and sympathise with his predicament, and if I can accept the raising of the minimum lending rate as a temporary but necessary crisis measure, I think that as a long-term policy it must be incompatible with the Government's economic and industrial strategy. In the long term, the raising of interest rates to this kind of level must bring to a halt the encouraging signs of investment intentions that we have seen in recent surveys which suggest that we are going to get considerably increased investment in the coming year. It must lead directly to an increase in unemployment, which is already far too high, and, as Member of Parliament for a constituency in the North-East of England, I must point out that if interest rates are as high as this for a long time, they will make it extremely difficult for such regions to expand and to prosper in the way they should.
In addition, of course, such high interest rates will have highly undesirable consequences for young people, particularly young married people. Apart from anything else, the situation will also eventually undermine the social contract. Raising interest rates may be a necessary short-term measure, but it can never be more than that. What the Government have to do is to restore confidence in sterling in a very short time in a way that does not undermine their basic economic and industrial strategy—a strategy that has the support of the trade union movement, of most British industrialists, and of the major Governments of the Western economic system.
I do not pretend to have any ready-made solution to all this. I do not agree with the right hon. Member for Sidcup (Mr. Heath) that we have reached the end of the road—if we have, it is a road which the Conservatives helped to make, certainly the right hon. Gentleman himself did. We are also told that further cuts in public expenditure will solve all our problems—this despite the fact that public expenditure is already declining in real terms and is likely to decline very considerably in real terms over the coming two years.
Of course there may be some areas in which we can make further economies of one sort or another, but drastic cuts of the kind proposed by many members

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of the Conservative Party and many commentators outside and in The Times would damage essential services very seriously. They would lead to far greater unemployment, and they would not be tolerated by the British people. That is a political and social fact.
There are those in the Labour Party who believe that they have a more acceptable alternative. I hope that they will forgive me if I remind them of Mr. Wynne Godley's recent letter to The Times in which, although he was advocating protection on a long-term basis, he said that we could not have it unless it was accompanied by the most severe financial, fiscal and monetary measures. So that is not an easy palliative or alternative to the Government's policies.
However, I believe that if the Government's economic and industrial strategy is to survive, there must be a radical change in the way we manage our financial affairs, and particularly the role of sterling. There is ample evidence that much of the fall in the value of sterling over recent weeks has been due to holders of large reserves of sterling getting out of sterling. It is about time the sterling balances were funded. It is wrong that a country with as small an industrial base as we have should be playing this rôle of major world banker.
Perhaps I shall be told that our position is too weak. Yet when our balance of payments was strong we were informed that funding was unnecessary. The Conservative Government missed a great opportunity by not funding in the early 1970s, when we had a strong balance of payments and were negotiating our way into the Common Market.
In our present position, it is often forgotten that, despite our weakness, we have very considerable bargaining advantages from the fact that we have a world currency and that we are still a very large domestic market. These are advantages that we have to exploit to the full. Whatever the right hon. Member for Sidcup has said, the truth is that the rest of the world cannot afford to see Britain go under. A funding by the major European countries and the United States is not only in our interests but in the interests of the rest of the world as a whole, because it would create financial stability in the world.
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We also need a massive long-term loan which will serve to underwrite the economy until the British balance of payments gets the full benefits of North Sea oil. It might mean some international supervision of our economy, but that is a price I am prepared to pay if we could get large-scale international support which would give our policies the time they need. As the hon. Member for Cornwall, North said, the problem is time.
Meanwhile, I think that the Government have to consider measures which are needed to help the balance of payments directly, because it is also our balance of payments deficit which is weakening the position of sterling. The depreciation of sterling has made our goods extremely competitive, and our exporters have a great opportunity—one that they have not had before. However, there is evidence that some of our main exporters still find it very difficult to quote for long-term contracts because of the uncertainties of inflation. This is an area where the Government might consider giving more help.
There might be a case for some form of import controls. I have never been against them in principle. I think that it is a question not of theology but of the balance of advantage and disadvantage. We may have to have some form of import controls in the coming year if the balance of payments deteriorates further—perhaps temporary controls, perhaps an import deposit scheme.
What I have been arguing for is a combination of enlightened support from the major economic Powers and some adjustment in our own financial and balance of payments policies which will preserve our economic and industrial strategy and give it the time to work. I shall be supporting the Chancellor in his measures. But I hope that the Government are now considering a package of the kind I have been discussing—otherwise we shall be once again "blown off course" when, if we can act with grit and determination, our long-term prospects are better than they have been for many years.
6.10 p.m.
Mr. J. Enoch Powell: I for one do not share the readiness of the hon. Member for Chester-le-Street

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(Mr. Radice) to accept international tutelage. If we lack determination, if we lack insight, if we lack wisdom and courage, then those qualities will certainly not be supplied by the interested benevolence of other nations. We have to find them for ourselves if we are to use them at all.
There has been much talk, in the recent conference weeks particularly, of national unity—these deploring that we do not have it, those believing that we are about to get it, and those calling for it to be created. I do not know about national unity; but on the subject which we are discussing this evening there certainly has recently been a remarkable move towards a consensus, at any rate as to the cause and nature of the inflationary evil from which we persistently and increasingly suffer in its symptoms and its consequences.
The two Front Benches, so far as one can judge, and most other quarters of the House seem now to be agreed upon the identification as at any rate the major cause of inflation of the consequences of an excessive public service borrowing requirement having to be met by methods which increase the money supply. Whatever distaste their past disclaimers may have inspired in Ministers and those who sit on the Opposition Front Bench, it is all too clear, from words in the one case and in the other from the practical policies which the Government pursue, that radically they accept this broad analysis of the causation of inflation and of our present predicament. It would be impossible otherwise to understand the necessity for the Prime Minister himself to make such speeches as he makes to his own party, notably at the Blackpool conference. So we have the advantage in this debate, which we have not always had, of a broad consensus as to diagnosis.
The Chancellor of the Exchequer was, I thought, remarkably frank in describing the immediate causes of the steps which have recently been taken—the massive new borrowing and the increase of the minimum lending rate. He described how quite suddenly it had been found impossible to meet the emerging requirement of the Government for loans from the public here or abroad, and that therefore steps had to be taken to meet
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that alarming deficiency. What was lacking in the speech of the right hon. Gentleman, and what I believe has to be supplied, is the relationship between that sudden predicament of the last few weeks and the fundamental and increasingly accepted analysis.
It is tedious and rarely justified to venture upon a self-quote; but sometimes such a thing can be a kind of datum or bench-mark, and I will venture upon two sentences from the debate of March this year:
"I say that it is an unacceptable danger—not to a class but to the nation—for us not to aim at eliminating the net borrowing deficit over the next two years, and without being able to quantify that precisely—of course I cannot—I say that it means a reduction of about £4 billion on what is proposed in the coining financial year. I said that six or nine months ago, at a point of time when it would have been much easier to achieve that result."—[Official Report, 10th March 1976; Vol. 907, c. 498.]
Already another seven months have passed since I said the words which I have just quoted.
We do not do these things unobserved, we do not conduct our affairs in secret. The consequences of the exorbitant public service borrowing requirement, and the chance that at any moment—as indeed happened in these last few weeks—we might fail to meet it by the selling of Government securities to the public had not escaped the attention of others. In so far as we were failing to fund this requirement, then, as the money supply figures mentioned this afternoon show, the process of overcoming inflation had actually been reversed: the pressure of money supply was again rising, and, of course, the prospects also were that this would only be the beginning. Those therefore who for their own purposes and in the course of their own business try to estimate what will be the course of our affairs concluded that, sooner or later, renewed inflation, generated by the inability to fund this excess borrowing requirement, was bound to be our experience in the coming months. Whether the fall in the rate of sterling somewhat anticipated the actual rate of inflation or not, it was a direct consequence of the manner in which our financial budget is constructed. Similarly, the necessity for trying to tempt out funds became stronger when potential lenders saw themselves threatened with the consequences

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—which have already been referred to earlier this afternoon, I thought in rather gloating terms—of buying gilt-edged securities at the wrong time.
Two measures, therefore, were taken which did not go to the heart of the matter but which were palliative of the symptoms. The first measure was directed at the symptom of the falling sterling exchange rate. Now, the balance of payments always balances, provided that the exchange rate is allowed to be the equilibrator; but the Government are not willing to accept that—I think mistakenly—and therefore have found themselves making immense borrowings in order simply to prop up the exchange rate of the pound sterling. For that purpose they both used the reserves and ploughed back the borrowings. It is exactly like attempting to cure a fever by smashing the clinical thermometer or putting it into a refrigerator. It is merely attempting to hide the symptoms without paying regard to the causes. This is not merely futile: it is positively damaging.
There is a lot of mythology about the exchange rate and the consequences of a fall in the sterling exchange rate; and I am afraid that the Press, and the manner in which it handles this, contributes to public misunderstanding. The notions of bankruptcy, catastrophe and so on, the whole vocabulary of national ruin, are exhausted every time there is a movement of a few cents in the exchange rate.
Yet a movement of the exchange rate which reflects, belatedly or in advance, internal inflation, has, and can have, no effect whatsoever upon our standard of living or our ability to procure what we want from other countries in exchange for our products. That can be affected only by an alteration in the real terms of trade; in other words, in the comparison between the prices of what we import and the prices of what we export. In fact, the terms of trade in recent years, though they took a dent in 1973, have, broadly speaking, been by no means catastrophic for this country.
It is also true that a fall in the exchange rate, temporarily at any rate, renders some items relatively more expensive on the domestic market, and others therefore necessarily less expensive—it alters slightly the pattern of internal
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prices. But this does not and cannot contribute, upon the analysis which, fundamentally, the Government themselves have accepted, to cause or to exacerbate inflation.
A fall in the exchange rate is, therefore, a pure symptom, harmless in itself and, indeed, very useful, because, unless we allow the exchange rate to act as the equilibrator, if we attach ourselves mystically to some exchange figure for the pound sterling in terms of dollars or otherwise, there will be no end to the extent to which we shall load upon ourselves useless debt for the mere purpose of concealing this indicator of reality, this external index of the internal depreciation in the value of our money. It is for that reason that I say, and have long said, that it is perverse for Governments to attempt to rig the exchange rate. The exchange rate is an indicator which tells useful truths if it is allowed to do so. Any attempt to rig or to fudge it does no one any good.
That brings me to the other measure which has been taken—that of the increase in the minimum lending rate. There is both an internal and an external aspect to this measure. The external aspect is yet another form of fudging the exchange rate, because an increase in the minimum lending rate is a kind of surrogate for a fall in the exchange rate. If the aim is not to let the exchange rate fall, it is possible to prevent the realisation of that movement by artificially increasing the internal rate of interest. However, I have already dealt with the disutility of fudging the exchange rate.
At the same time, driving up the internal interest rate temporarily brings out funds which are not in themselves inflationary to meet the Government's borrowing requirements, it being the case that people are ready to invest—very temporarily—in Government securities if they believe that the next move in the interest rate will be downwards, and it is easier to believe that when the interest rate has been pushed up very high than when it has not.
I will not describe this process as a trick, since everyone understands it, and those who are intended to be tricked watch very carefully to ensure that they escape from the trap before it closes on

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them. But morally innocent though the procedure may be, it is foolish and counter-productive, because the interest rate has an even more vital function in the regulation of the economy than the exchange rate.
The business of an interest rate is to spell out, in all the possible varieties of circumstances and under all the possible varieties of conditions, the choices which people are making between present and future and between less risk and more risk. If we are interested in getting investment and in getting the right investment, as I think we all are—in getting a more satisfactory productive pattern in the British economy—we must not fudge the interest rate, we must not grotesquely falsify it, for it is indeed a grotesque falsification to pretend that 15 per cent. represents the current balance of supply and demand for investable savings if it were not for Government intervention. When we intervene for short-term purposes, we destroy the markers by which those who are taking all manner of investment and commercial decisions should be guided. Other hon. Members se:; this—and I make no criticism—in terms of the direct harm which an artificial rise in the interest rate does to employment and to investment.
So in order, once again, to conceal the consequences of what really ails us and to patch over what the Government themselves know is the risk which they have deliberately courted and to which they have fallen victims, we have inflicted additional injury upon ourselves. That is what we have done with the 15 per cent. interest rate.
I come back, therefore, to the undisputed fundamental that we cannot carry on with a British economy staggering under this huge public service borrowing requirement, which at any moment can force a Chancellor of the Exchequer into the position in which the right hon. Gentleman found himself, no matter whether other economies can do so, where confidence and the attitude of the public to Government are different. We have, therefore, to bring total intake and total output of money by the Government much more nearly into balance, and we have to do it with greater urgency than ever. That is the message which should
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be conveyed by the events of the past few weeks.
Since I made the remarks six months ago which I ventured to quote to the House, I fancied that I had caught an echo of them from the right hon. Member for Leeds, North-East (Sir K. Joseph), and I noted with great disappointment that he was not to be leading for Her Majesty's Opposition in today's debate. But when the insistent question, "How do you do this?", which I have not been afraid to face, was put to the right hon. and learned Member for Surrey, East (Sir G. Howe), he took refuge almost in trivialities. Of course, he referred to the reduction and elimination of subsidies. I have always done the same and give it my support, but remember that it is an ambition which the Conservative Party and incoming Conservative Governments have cherished during the past 20 years but rarely realised. However when that phase of his speech was finished, when the reference to food, housing and transport was over—I wonder when these transport subsidies were mostly accumulated, but let that pass—the right hon. and learned Gentleman had nothing to talk about but nationalisation.
Nationalisation may be very wicked; but it does not make any difference to the expenditure estimates for 1977–78, and it is those estimates that we are discussing. The fact is—and the Chancellor of the Exchequer and the Prime Minister well know it—that in order tolerably to reduce the risk which they took, and which did not come off, with serious results, in the past three months, they need to reduce the estimates for the coming financial year by £4 billion or thereabouts. I use the figure again, because I believe that we should all indicate the magnitudes in which we are thinking. I have no doubt that the major contribution to that reduction can be found only in the capital programmes of the nationalised industries and of the great Government services.
In saying that, I come to the last point which I wish to make, and I make it more to Government supporters than to right hon. and hon. Members on the Benches round me. There is a misconception abroad about the relationship between public expenditure and unemployment. The unemployment from which we are suffering is the predicted unemployment

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which was bound to accompany a fall in the rate of inflation. It is a rise in unemployment which we knew we would have to go through if, as we knew we had to do, we reduced the rate of inflation from nearly 30 per cent. towards single figures. That is the prime nature of the unemployment with which we are now afflicted.
But it is not true to suppose that a lump of public expenditure which does not appear in the public accounts therefore vanishes into thin air. It is a mistake to suppose that this demand and the resources which it represents become non-existent if it is not part of the net borrowing requirement in the Government accounts. Every penny of Government expenditure is a transference from somewhere else in the economy achieved by one of three methods—taxation, genuine debt or inflation; for inflation is just as much a transfer of command over resources to the Government from the rest of the economy as is taxation or borrowing.
When one says that by alterations to the pattern of Government receipts and expenditures we have to achieve a massive reduction in the net borrowing requirement, one is not extinguishing a great mass of effort for the coming months and years. One is altering the pattern of application of that effort away from one which has constantly plunged us and still plunges us into embarrassments such as those we are considering today towards a pattern with which we shall not be at constant risk of refuelling—to use the Chancellor's own word—inflation and therefore having to go once again through the purgatory through which the people of this country are now living.
Perhaps I am being ingenuous or starry-eyed; but, unlike the hon. Member for Cornwall, North (Mr. Pardoe), I do not believe that the people of this country are incapable of understanding the things we are talking about and I do not believe that they lack sound instincts and understanding in these matters if they are not misled as to the relationship between cause and effect.
Mr. Pardoe: 'They will be.
Mr. Powell: The hon. Member for Cornwall, North may be right. His cynicism may be justified, but it has not ever been so and it is not my belief that
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it will for ever be so. I do not believe that the great majority of hon. Members or Ministers want to deceive the people who sent us here. But to get their support for the things which the Chancellor and the Prime Minister know have to be done it is necessary that we do not distract them with misrepresentations of the meaning of things like exchange rate or threaten them with bogys about unemployment and public expenditure, when the unemployment with which we are threatened arises from the dangers which can only be banished when we bring our finances back into tolerable balance.
The hon. Member for Cornwall, North may be right or I may be right; but I do not think that any of us can have much doubt that it is our duty to try, even if we fail again.
6.34 p.m.
Mr. David Marquand: We have just heard a characteristically lucid and powerful speech from the right hon. Member for Down, South (Mr. Powell). I am not sure that I agreed with any of his arguments, but I agreed with one of his conclusions: what he said about the rate of interest was profoundly true.
The right hon. Gentleman was wrong, however, to deprecate the language of crisis. We do face a crisis, and the speeches from both Front Benches today were below the level of events. It was foolish of the hon. Member for Cornwall, North (Mr. Pardoe) to flagellate himself into a state of hysteria about the nature of the crisis. It can and must be overcome, but it will not be overcome unless we admit that it is a crisis.
We have to start by recognising that this is not a crisis of the last three or even the last 30 years. It is a century old. This country started to lose its industrial supremacy 100 years ago. There were debates in this House at the end of the last century in which hon. Members described how our rivals in Germany and the United States were beginning to overtake us because their industries were more efficient and productive.
The facts of life were masked for a long time. We had the huge captive market of the Empire and the huge foreign investments made by our ancestors. We were lucky enough to ally ourselves with the strongest Power on earth in two

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world wars, and therefore ended on the winning side.
However, in the last 25 years reality has been steadily catching up with us and for the past 15 years or so the crisis has been in its acute stage. We shall not begin to put our house in order as a nation unless we recognise that fact.
If we are not just to get out of the immediate problems of the balance of payments and the public sector borrowing requirement but to do so in a way which deals with the underlying sickness of the British economy which has been with us for a century, the first essential is to recognise that the Government's strategy has not worked. I hate to have to say that. I take no pride or joy in saying it. I have supported the Chancellor of the Exchequer for the past year. I believe that he was on the right lines and still believe he was right to try the strategy he tried. But we have to face facts. His strategy has not succeeded and has not overcome the crisis that we face.
In essence the Chancellor has tried to do four things: first, to moderate the rate of inflation, partly by a rather mild incomes policy and partly by a rather mild monetary policy; secondly, he has tried to borrow abroad to finance our balance of payments deficit until the benefits of the devaluation of sterling come through and until North Sea oil starts to flow; thirdly, he has tried to borrow at home to finance the public sector borrowing requirement, which he has been unwilling to reduce more rapidly because he is afraid of the conseqeuences for employment; fourthly, he has held out the promise of growth in the longer term, to be achieved by selective State intervention and by a partnership between Government and both sides of industry to promote investment.
These have been the central elements in the Government's strategy. We have to recognise, I believe, that it is no longer possible to combine all four at once. We now see that a public sector borrowing requirement of the present size simply cannot be financed without rates of interest that destroy the Chancellor's own industrial strategy and make it impossible to achieve the growth and investment
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central to our salvation in the longer term.
Secondly, it has become clear that we cannot finance the balance of payments deficit by borrowing abroad—here I part company with the right hon. Member for Down, South—without seeing an unacceptable fall in the exchange rate. I agree that, in pure theory, the exchange rate is nothing more than a neutral equilibrator, if that is the phrase, but in an economy like ours with huge foreign balances and apt to face acute problems of confidence, a fall in the exchange rate can be self-generating and can lead to real and unnecessary cuts in standards of living. That has become clear over recent months.
The alternative to an unacceptable fall in the exchange rate, if the balance of payments deficit remains at its present size, is to maintain confidence by means of monetary squeezes, which jeopardise investment and growth.
Thirdly, it is becoming clear, if the reactions of my constituents are anything to go by, that public support for the Government's incomes policy, which must be a critical part of their fight against inflation, will not be forthcoming unless the country is given some reason to believe that the Government have a coherent strategy for the medium term. The events of the past month have greatly shaken public confidence in that respect. Unless the Government reappraise their strategy and think again, they will not achieve what my right hon. Friend the Member for Battersea, North (Mr. Jay) rightly said was an absolutely essential ingredient in any sensible policy over the next 12 months—namely, an effective stage 3 of the incomes policy.
We must face the fact that, for these reasons, the Government's strategy has to be reappraised. The question is what kind of alternative is needed. The aims are clear.
First, it is necessary to maintain a rigorous anti-inflationary monetary policy. If we go back to the rates of inflation which obtained a year ago, we might as well reconcile ourselves to industrial suicide. Secondly, I believe that we must transfer resources to the balance of payments more rapidly than we have been doing. Thirdly, we must somehow do all this without jeopardising business

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confidence in growth in the long term and without jeopardising the confidence of ordinary working people in the possibility of the Government's strategy succeeding.
It will be difficult to achieve those three aims. I believe that success will be impossible unless the Government present a coherent package of measures to the nation and the House. The worst of all worlds is to be forced, little by little, into successive measures of austerity which never finally deal with the problem. That is part of the difficulty that we have faced during the past two years. It must be a comprehensive strategy which will involve every section of the nation in sacrifices, both material and ideological, if we are to have any hope of getting out of the mess.
What are the ingredients of the package which I think the Government should bring forward in the coming weeks and months? First, we must get back to lower interest rates. Whatever else is right, it cannot be right to maintain interest rates at this penal level. That must be the first aim of Government policy. I accept that the Chancellor of the Exchequer had no alternative but to do what he did last week. But the first aim must be to get interest rates back to a more reasonable level.
Dr. Jeremy Bray: Does my hon. Friend think that it is practicable to have interest rates lower than the rate of inflation so that we have negative real interest rates for any length of time?
Mr. Marquand: No, I do not; but I think that they should and could be lower than the present rate and that the rate of inflation could be lower also.
Secondly, I believe that we have to grasp what for everybody in the Labour Party is an extremely unpleasant and distasteful nettle—namely, that there is no way of reducing interest rates without reducing the public sector borrowing requirement, either by higher taxation or by further cuts in public expenditure, or both. That is an extremely unpleasant remark for me to have to make, and I take no pleasure in making it, but we must face that fact. Unless we do, we shall have no hope of getting business confidence revived and the longer-term problems of the economy faced.
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Thirdly—this is something that the Tory Party will find distasteful—if sacrifices are to be made—and there is no question but that real incomes will fall further next year whatever policy the Government adopt—we must demonstrate to the people of this country that those sacrifices will be fairly shared and that there will be greater equality in the distribution of income and of wealth in our society than we have yet achieved. I do not accept the Conservative argument about high taxation. I believe that high income earners can be expected to make a higher contribution in a state of national austerity. It is not possible for me to ask my constituents—the coal miners of Ashfield—to accept austerity and sacrifices when they can see gross inequalities and injustices in society.
Mr. Ronald Bell rose—
Mr. Marquand: The hon. and learned Gentleman must forgive me if I do not give way to him. We have been asked to be brief, and I want to comply with Mr. Speaker's request.
We must have higher, not lower, taxation on high incomes.
Fourthly, the Government must face the fact that some form of controls on imports is almost certainly inescapable. I do not find it easy to say that. I know all the arguments against controls. Indeed, I have used them. I know the case against import controls by heart. I shall not bore the House by reciting it.
In this emergency situation more drastic action must be taken to put the balance of payments right. I cannot see how it can be done by a further depreciation of the exchange rate. The only alternative is some form of import control. An import deposit scheme would not have the distortionary effects which are one of the main arguments against import controls. I think that such a system will have to be introduced in the next 12 months and that the Government will have to accept that fact.
Fifthly, I agree with my hon. Friend the Member for Chester-le-Street (Mr. Radice) that there must be a determined effort to deal with the problem of the sterling balances. The Chancellor of the Exchequer was unresponsive when he was asked a question about that matter

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by one of my hon. Friends. I know that it is easy to talk about the sterling balances. We always talk about them in crisis situations. When things are going well, nothing is done about them; but this nostrum is trotted out again and again in times of emergency. But I do not accept that enough has been done to solve this problem. It will not be easy, but the Government must give an earnest of their seriousness regarding this matter greater than they have yet done.
Sixthly, and finally—this is perhaps the most controversial and difficult of all the proposals that I have been trying to put forward—I believe that there must be a kind of political concordat in this country to take industrial policy out of politics. That involves sacrifices from the Conservative Party, because at the moment they are engaged in drawing up a very Simpliste laissez-faire programme rather like the one they adopted before the 1970 election. They did not carry it out while they were in power, of course, because the facts of life were too strong for them, but they are now going back down the same sterile path which they trod between 1966 and 1970.
We on this side of the House must accept that the mixed economy is here to stay. That means also that the Conservatives must accept that selective State intervention in the form of the National Enterprise Board is here to stay, too, as part of the mixed economy. Unless there is this acceptance on both sides of the House, there is no prospect of our economy recovering from its problems.
I cannot pretend that we face an easy task in getting out of this crisis, but the kind of package that I have tried to sketch out promises at least the possibility of success. I am sorry that I did not see such a possibility in either of the Front Bench speeches this afternoon.
6.51 p.m.
Mr. Douglas Crawford: The hon. Member for Cornwall, North (Mr. Pardoe) said that very few hon. Members could in this House speak in the national interest. I am speaking in the national interest, but my nation is not the nation of the vast majority of hon. Members. My nation is Scotland, and it is in the interest of Scotland that I speak.
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It was with a sense of deep depression that I came to London after the Summer Recess. This sense of depression stemmed from leaving Scotland in general and coming to this Parliament in particular, a Parliament which has so patently failed to do anything for the economic, financial, business, commercial and employment problems of Scotland. My depression was countered by a sense of gladness that Scotland will not for much longer have to suffer its business being mismanaged by this House of Commons.
It is difficult to raise passions in this House. I except the ritual knockabout between the Chancellor and his Opposition Shadow, which we have seen again today and I suppose that, in general, this is a good thing. But for my party this is the time for some passion. The home rule Bill of 1969 got guffaws in this House and there is no doubt that the Scottish National Party's position will be received with the usual guffaws today, but in time people will realise just how serious we are and how successful we are becoming.
As far as Scotland is concerned, we have reached—if I may coin a phrase—the end of the road with this Government, this Parliament and the concept of the United Kingdom as a unitary economic State. Westminster has had its day as far as Scotland is concerned. The sooner we have a General Election in Scotland, the better. It cannot come soon enough. I do not know what the Opposition's position is on this matter. They made a lot of sound and fury in Brighton last week, but I am not sure quite how much this signified.
We in Scotland are concerned not just with the mismanagement of this Government but with the whole Westminster system. Successive Governments have dragged Scotland further and further into the mire. In 1973, the then Chancellor of the Exchequer engaged in a "print money policy" which increased the money supply and led to a rank proliferation of tertiary banks, and the result was the unacceptable face of capitalism. The present Chancellor has compounded the problem, and the illness from which the United Kingdom as a unitary economic state is suffering cannot be solved by medicine; the United Kingdom as

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a unitary economic State is in need of surgery. Economic physiotherapy will no longer do any good.
The Government's policies of panic are being pursued in the most disastrous way for Scotland because they are discouraging productive investment in my country. A short-term expediency of this kind is inimical to the medium and longer-term needs of the Scottish economy. This is another dose of benze-drine before facing up to the hangover shambles of a party which has gone on much too long.
I recognise, and I share, the despair of all people in these islands over what has happened to them. I will not exacerbate their sufferings by picking over the long sequence of economic mismanagement of successive Governments, and most notably of this Government, the list of which we saw articulated recently by the Blackpool brontosaur. From Scotland's point of view, watching the Callaghan Cliffhangers in operation—if operation is not too positive a word to describe their antics—has been like watching a marriage partner ruin the family finances and ruin its good name by a life style of spendthrift and wilful dissipation. Those of us who wish to see self-government in Scotland have been hearing a lot lately about the economic integrity of the United Kingdom. Some integrity, some economy.
It is more in anger than in sorrow that I remind those who are opposed to Scottish self-government that Scotland, more than any part of the United Kingdom, needs massive sustained investment to ameliorate unemployment, reduce the outflow of able people, and eradicate the appalling degree of social deprivation in the west of Scotland.
The unionists in all parties—Labour, Conservative and Liberal—no longer have an economic leg to stand on. Some businessmen say that devolution would cause economic upheaval in Scotland. But no economic upheaval could be as chaotic as that brought about by a 15 per cent. minimum lending rate, soaring mortgage rates, and the falling pound.
The Conservative Prime Minister of 1963–64 said in the late 1960s after he had lost office, at a St. Andrew's Society dinner in New York:
"The Scots know on which side their bread is buttered."
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Not only do we know that; we know that to stay within this Union means that we shall have not only no butter but no bread either.
The hon. Member for Oswestry (Mr. Biffen) wrote in a pamphlet published last week:
"With the discovery of North Sea oil it is now no longer possible to use the crude and dubious argument that the Scots are the financial dependants of the United Kingdom."
The value of Scottish oil production is now running at £2·5 million a day, or 320,000 barrels a day. How then can there be any further restrictions on the Scottish economy?
The Foreign Secretary is quoted in today's Financial Times as giving the following not quite so sotto voce answer in the United States to the question why London was refusing to grant independence to Scotland. He said:
"They have got a lot of oil."
Of course, we shall recycle our oil reserves to help our friends and neighbours in the South. England is, after all, Scotland's largest single market, and it is in our interests that England's economy should be buoyant. But the recycling will he done on our terms and our oil will not, by itself, be a panacea for England's ills. It is time that England realised that it cannot go on living for ever on tick.
Mr. Dalyeil: May I ask the hon. Member as respectfully as possible to spell out exactly what he means when he says "recycling on our terms"?
Mr. Crawford: It means according to the terms enunciated by the people of Scotland in their Parliament, democratically elected.
Scotland is also rich in another valuable resource, the most valuable of all, food. This makes recently articulated threats of possible food rationing all the more ironic. We in Scotland are self-sufficient in all major foodstuffs which is reflected in the following figures: beef, 105 per cent; mutton and lamb, 300 per cent.; poultry meat, 150 per cent.; liquid milk, 100 per cent.; cheese, 100 per cent.; and fish, 500 per cent. There is no question whatever that a self-governing Scotland could soon fix its own interest rates and minimum lending

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rates at levels much lower than 15 per cent.
The right hon. and learned Member for Surrey, East (Sir G. Howe) referred to other European nations' interest levels. But he missed out the smaller countries which have much lower levels. In Austria it is 5 per cent., Holland 7 per cent., Norway 5 per cent., and Sweden 8 per cent. With the resources and the labour, the economy of a self-governing Scotland will soon become one of the most prosperous in Europe with a strong and healthy £ Scots.
It being Seven o'clock, and there being Private Business set down by direction of The CHAIRMAN OF WAYS AND MEANS, under the Standing Order (Time for taking Private Business), further Proceeding stood postponed.

PRIVATE BUSINESS

  METHODIST CHURCH BILL [Lords]
  Order for consideration, as amended, read.
  To be considered upon Thursday at Seven o'clock.

ECONOMIC SITUATION
Question again proposed, That this House do now adjourn.
Mr. Crawford: One of my colleagues was told by a Tory heckler during the October 1974 election campaign that after independence the £ Scots would soon be worth $2. I am sure that we in Scotland would settle for that for a start. Actually, our initial problem would be to prevent the £ Scots from rising too quickly. There would be no need for a self-governing Scotland to take the humiliating road to the Canossa of the IMF. Whatever happens, the people of Scotland with self-government could not, even if they were all economic illiterates, make a bigger mess of their own economy than this House is making of it. The SNP proposals for a Central Bank with the right to fix its own minimum lending rate is meeting with increasing acceptance in Scotland.
What business man in his right mind would settle for an MLR of 15 per cent.
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when, with self-government, he could be enjoying one which would enable him to compete with the best in Europe? What trade unionist in Scotland would settle for a crashing pound sterling, with all that that means for inflation and the living standards of his members, when, with self-government, those members could be enjoying higher living standards and the lower inflation rates that will come from a healthy £ Scots?
Scotland cannot afford this Union. I was talking to an industrialist in my constituency—an Englishman—who said that the sooner we got self-government the better for industry in Scotland.
Mr. Dalyell: Who was he? Name this industrialist.
Mr. Crawford: The industrialist in question is the managing director of GR International, of Almondbank, Perth, and his name is Mr. Robin Twine.
As a unitary economic State the United Kingdom has had its day. We in the SNP are told that we are seeking the break-up of the United Kingdom. Nothing is further from the truth. The United Kingdom is not breaking up; it is breaking down. Self-government for Scotland is now no longer a luxury, if ever it was. For the living standards of our people, for jobs and for investment, self-government is an absolute necessity.
7.3 p.m.
Mr. Tam Dalyell: The Prime Minister, unlike some previous holders of the office, has done the House the great courtesy of listening to debates for many hours. I believe that he takes a genuine interest in what is said in the House of Commons and therefore I ask my hon. Friend the Financial Secretary to the Treasury, who is sitting on the Treasury Bench, to bring my right hon. Friend's attention to the speech of the hon. Member for Perth and East Perthshire (Mr. Crawford). People say to me that the SNP Members are not really serious in wanting a £ Scots, but they are. They talk about the £ Scots. The issue is indeed one of currency regulations, the border, customs at Gretna and all sorts of currency controls that would lead to industrial and commercial chaos.
There could not be a £ Scots and the pound sterling without the most rigorous controls of a most complex financial

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nature. This is neither the time nor the place to parade my views on devolution, but I hope that the Financial Secretary will bring the speech by the hon. Member for Perth and East Perthshire to the attention of those in the Cabinet who have any doubts about the true nature of the argument. Whatever that argument was two years ago, Miss Nancy Treneman in The Times is right in saying that the argument has now become one not of devolution by consensus, but of either a unitary United Kingdom or the alternative of separate Scottish State.
The House may not like this but the reality is a choice not between the devolution arguments but between the hon. Member for Perth and East Perthshire on one hand and those who think as I do, on the other. That may not be the ideal choice, but it is now the reality of the situation.
I have two questions for my right hon. Friends, and the first concerns this very subject. At Blackpool my right hon. Friend the Prime Minister rightly laid emphasis on the creation of wealth. I listened there to his speech with enthusiasm. I took note also of what the right hon. Member for Farnham (Mr. Macmillan) said this afternoon. He said how important it was that we should concentrate on. above all else, what was marketable, and run down where possible the bureaucracies.
What is the House of Commons to do about that? For 30 days in the next Session are we to concentrate on how we can produce more and create more wealth or on industrial democracy? Not a bit of it. For 30 days we shall be considering how to create expensive and expanding bureaucracies in Edinburgh and Cardiff. I wonder whether this is a sensible or reputable use of the time of the House of Commons.
The argument may have seemed all right two years ago when people might have thought that there was some kind of consensus, but the truth is that there is no kind of consensus. There will be endless argument, endless conflict, and endless dispute.
I ask the Government a serious if predictable question. In the current economic situation are we sure that we really want to go ahead with all
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the arguments about devolution and Assemblies? Whatever one's view of the matter—this is neither the time nor the place to go into the intricacies of the argument—one must conclude that it would be better to accept that devolution is not a priority at present. The economic situation is a reality which can be used as an honourable excuse by any of my hon. Friends who think that they are committed to devolution, that they have made certain promises and that they are prisoners of their past utterances on devolution.
My second question is a delicate one. I travel round Europe possibly a great deal more than I would wish as vice-chairman of the European Assembly Budget Committee on Control. In the course of my work, I meet a great many bankers, financiers, and people concerned with investment. They tell me that they know that it is fashionable to blame them, but that often we have the wrong targets. They say that it is not even that they think that our industry is incompetent.
I do not agree with the hon. Member for Cornwall, North (Mr. Pardoe) who suggested that British industry was incompetent. In all sorts of conversations it has become quite clear that the grass looks greener on the other side of the channel. The French industries have their incompetents. The Italians are very frank about theirs and even the Germans admit that they have bad industries. But in no other country do people talk down their industry or their currency to the extent that we do. This is a main issue. We British are unique.
I yield to no one in this House in believing in the freedom of the Press, and do not like politicians making a scapegoat of the Press; but in no other nation in the world would there be headlines day after day such as we have had about the "diving pound" and the running down and disrespect of our currency. In that we are quite unique. I am sensitive of course to the whole issue of the freedom of the Press, but is it not time that someone in a civilised and understanding way and without any invective or provocative argument asked the heavy Press and the BBC and, to a lesser extent, the ITV, whether some kind of balance could not be struck here between, on the one hand, telling the

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truth and, on the other hand, exaggerating the precarious nature of our own currency, because these things can be overdone?
I am not a believer in gnomes in Zurich, or bad bankers in Basle, or people who wish us ill in Frankfurt or Amsterdam, but the fact is that they do not have the time to read the finer print. They see the headlines. If they are subjected often enough to headlines that are not borne out by the fine print underneath, it is no wonder that we find it difficult to maintain any kind of a stable currency. And, for that matter, do the outpourings of the Henley Institute help Britain?
Therefore, there is a delicate balance—I am not very sure as to what solution can be arrived at—between, on the one hand, the freedom of the Press, which we take as an ultimate good, and equally, on the other hand, what often amounts to the freedom to find work, another ultimate good because if we are this masochistic about our own currency, what is the result? It means that it is very difficult to get the investment to provide the jobs that we all want. Therefore, there is a balance here. Freedoms often conflict.
I emphasise that with the freedom of the Press politicians have to be extremely careful. However, on the other hand, the media have certain responsibilities. As long as they go on deriding our own currency as they do, they cannot be entirely surprised that we have 1½ million unemployed and that our problems are greater than those of other people, because in the way that we disparage our own currency we are unique. Would the Prime Minister consider how the media ought to be approached?
7.13 p.m.
Mr. Peter Hordern: If the advice of the hon. Member for West Lothian (Mr. Dalyell) were followed by the Press, foreign holders of sterling would indeed have some concern, and the value of the pound would almost certainly fall even more steeply if they felt for a moment that the Government were exerting any control on the freedom of the Press or the BBC.
Mr. Dalyell: That is not what I said.
Mr. Hordern: I think that the hon. Gentleman, like some other hon. Members, mistakes the symptoms for the real position. It is not the fact that the pound has been sinking that is so dreadful. It is the underlying causes which should be so abhorrent to this country.
What the hon. Member for Ashfield (Mr. Marquand) said, with which I entirely agreed, was that we could not go on as we were with the massive public sector deficit that we have at present, which has grown so fast in recent years. He argued, therefore, for a series of measures that would deal with that problem. He very realistically pointed out that unless we were prepared to accept real reductions in public expenditure, this problem would not disappear. That was also very much the burden of what was said by the right hon. Member for Down, South (Mr. Powell). That is the message that the Conservative Party has been giving for very many months past, indeed years. The Conservatives have been saying that we could not go on as we have been, spending far more than we earn. It is no use blaming the foreign exchanges or speculators for what has happened. The fact is that we have been spending grossly more than we have earned.
The hon. Member for Ashfield was quite right to suggest that what the Government should do is to bring forward a package of measures which would deal convincingly with this question. I regret to say that the measures that the Chancellor has recently proposed are all of a piece with those that he has proposed from time to time in a steadily and, recently more rapidly, deteriorating position. Every time the Chancellor has taken some sort of measure, a few months later, entirely predictably, he has had to return to the House to ask for some other measure to be taken.
I do not think that any hon. Member present tonight really believes that the action taken last week to increase Minimum Lending Rate and the effect that it will have on the money supply will be sufficient. All hon. Members know very well that the Chancellor will be back with either a mini Budget or with real measures to reduce public expenditure either at the end of this year or at the beginning of next year. That is certain. Therefore, why does he not do it now? That is

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the question. That is the reason why sterling has fallen so sharply, especially in the last few months.
It is now time to make some sort of assessment of what the Chancellor has done and what he has not done. He has been in his present office for about two and a half years. Eighteen months ago there were $2·40 to the pound. Just six months ago, there were $2·02 to the pound. Now it is $1·66 to the pound. In a period of 18 months there has been a 30 per cent. fall in the value of sterling. In the last six months alone, sterling has fallen by 17 per cent. It has been an accelerating and deteriorating position for which the Chancellor is himself primarily responsible because it is the Chancellor who is responsible for the public purse and for public expenditure.
It is no use blaming the foreign exchanges or speculators in this matter. From time to time I have noticed that the Chancellor has called in aid some unknown City banker to say that sterling is very cheap. Indeed, more recently he has gone to rather better fry, to the German Federal Chancellor, no less, to say that sterling is cheap. These gentlemen, obscure or important, do not need to say these things. They have only to act and to buy sterling themselves. However, for one reason or another, they do not seem very ready to do so.
Other hon. Members have other prescriptions concerning sterling balances. They say that if only we can get the sterling balances funded, our problems will be very much smaller. However, the sterling balances are of considerable convenience to this country and of considerable misfortune to those who have to hold them. After all, 18 months ago, when the oil countries and other countries left their balances in Britain, those balances were worth 30 per cent. more than they are now. Therefore, they are only too happy to think up some scheme by which the value of their money can be retained. However, I can think of no guarantee that the Government can presently make, or any other alternative arrangement, which would not saddle this country for many years to come with a debt that would not be expressed in sterling. That is the real problem.
The solution to our problems is quite simple. We must put our own house in
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order. That is all that it comes to. Over the last three years public expenditure has been growing by 20 per cent. while output has grown by 2 per cent. In the last four years alone, public expenditure has grown from £41 billion to £51 billion. Throughout this time, the private sector has been crushed. My right hon. Friend the Member for Farnham (Mr. Macmillan) was absolutely right when he spoke about the need to reduce the level of public expenditure and to increase the range of the private sector.
There is another assessment of the Chancellor that ought to be made. His advisers must have told him that it has not been possible during the whole of this year to match the estimates for public expenditure and for private investment combined. The flow of funds analysis has been widely commented upon. It has shown without a shadow of doubt that the level of public expenditure, and the deficit needing to be financed, and the level of the private sector, especially in manufacturing investment, could not both be accomplished without a very rapid increase in the money supply. Right hon. and hon. Members have warned the Chancellor of this. We have seen it coming for a long time. It was inescapable that it would happen, and now it has.
The figures for mid-September—the Chancellor referred to this briefly today and said how bad they were—show an increase in the money supply of about 20 per cent. It was inescapable. It was forecast, and everyone was forewarned, except, of course, the CBI. I think that the CBI economic service and the CBI itself does a continuing and significant disservice to its members. It must have known for many months that the two together could not be combined. It was not possible to combine the level of public expenditure with any expansion of the private sector at all, yet the CBI totally failed to warn its members of that fact.
Now we see the cost, with the MLR up to 15 per cent. Only two months ago, I understand, Lord Watkinson was to send a letter urging every industrialist to invest. The industrialists who have done well are those who have not invested. Industrialists are now not only not investing—in which they are very wise—but they are actually lending money to the

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Government, because they can get far more money by lending to the Government than they conceivably could by investing in new plant or whatever it might be.
Mr. John Cronin: The hon. Gentleman makes an interesting point about industrial investment declining, but, surely, it does not square with the facts. Is it not a fact that opinion surveys taken by the Financial Times, the CBI and the Department of Industry all show that industrial investment up to now has been increasing by about 15 per cent. to 20 per cent. a year?
Mr. Hordern: The test I take is where the money is put. In 1973, which was a good year for industrial investment, all companies in the private sector borrowed £5·3 billion. This year, according to the latest quarter's figures we have, there is a net lending from the company sector to the banks and the Government—and the Government in particular. Thus, although the investment forecasts may well have shown an improvement out of retained profits, the real expansion for which everyone has been pressing can come only from significant borrowing from the banks.
We have so far been able to sustain our high level of public expenditure by overseas borrowing. It must be said that our overseas creditors have been extraordinarily generous to us. In the last two years alone they have lent us $13 billion. I notice that in June, when we had the $5·3 billion credit from our overseas creditors, the Chancellor said that this was a mark of confidence in Britain among other countries. I could not help thinking of the position of a gnome in a Swiss bank, reading those words with some interest and, perhaps, some wonder, and then puzzling a little about whether he himself might be involved. Just as he is puzzling, the telephone on his desk rings and there occur to him the words of John Donne—
"… never send to know for whom the bell tolls;
It tolls for thee."
So far, as I say, our overseas creditors have been extraordinarily generous, but now they have stopped being generous because they want to see the colour of our money and they want to see results.
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It has been a cruel deception to imagine, and for the Chancellor to say, that we could sustain the level both of public expenditure and of private investment at the same time. I notice that the conclusion reached in the latest issue of the Bank of England Quarterly Bulletin was that the rate of monetary expansion would need to be carefully watched. It has been watched, and it has been found to be too fast, as many of us predicted it would be.
Where do we go from here? I believe that our horizons are now very narrow and our options are very few. Whatever arguments may be put across the Floor from one side or the other, and whether we be Keynesians or monetarists, we are all in the same boat, and it is not a boat which is under our direction. The boat is under the direction of the IMF, and the IMF will steer it in the way it wishes.
For my part, I welcome the recognition which is now given to monetary matters. I notice that this boat has been crowded with many others who formerly did not attach much importance to these matters, and they are all the more welcome for that. But what is important is that at this time of crisis—for that is what it is—we should recognise that there are very few options open to us, and they are now being dictated to us. I regret to say that we have by no means seen the last of them.
Whatever might or might not have been said at Manila, I do not believe that the public sector borrowing requirement for next year, which is supposed to be £9 billion, will be found satisfactory by the IMF. I may be wrong, but I do not think that it will be, and I will give my reason for saying that.
The Chancellor is keen on making international comparisons. I offer him two such comparisons, between our country and the two which I believe to be the most important, the United States and Western Germany, which will have to pay over the money. In both the United States and Western Germany the rate of monetary expansion is 8 per cent. In the United States the rate of inflation is 5 per cent. and in Western Germany it is 4 per cent. Until such time as we can bring our monetary expansion down to something approaching theirs, we shall not

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achieve the same kind of satisfactory progress on inflation as they have achieved. That is why I think that we have by no means seen the last of the measures which will have to be taken.
I think that the Chancellor missed an opportunity today to announce further measures to cut down the public sector deficit. He could have done it by increasing taxation or by further measures to reduce public expenditure. He failed to do so. I regard this as his worst failure. He regards himself more as some sort of salami cutter, a piece-by-piece chopper, than as someone who is able and willing to take the measures which are necessary. This is very sad for the Government and, more particularly, for the country, because I believe that the country would now respond to measures which it thought were ultimately in the nation's interests.
7.27 p.m.
Mr. John Cronin: The hon. Member for Horsham and Crawley (Mr. Hordern) made an interesting speech, and, although I cannot say that I agree with everything he said, I thought it a much better speech than that made by the right hon. and learned Member for Surrey, East (Sir G. Howe).
Perhaps Ministers feel a little depressed by the recent sterling crisis—the Minister of State is probably trying to look cheerful, although he must feel some depression—but the Government have a tremendous asset in the ineffectiveness of the Opposition. The Opposition have now become so ineffective that even the Back Benchers are aware of it. One does not need to learn about it at Brighton or in the Press. Against the background of the speech of the right hon. and learned Member for Surrey, East, I feel that the Leader of the Opposition, who has sat in her place during this debate with commendable assiduity, will have to look back to the example of Mr. Harold Macmillan and have some sort of "night of the long knives" to increase the effectiveness of her Front Bench.
The speech of the right hon. and learned Member for Surrey, East seemed to me to be pre-eminently the most inept of all the speeches I have heard from the Opposition on economic subjects. Everything he said was calculated to lower
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confidence in sterling. He twice talked about restoring national solvency. What can he mean by that? Great Britain's overseas assets are enormously in excess of her total obligations abroad. We are one of the 10 richest countries in the world. How can the right hon. and learned Gentleman talk about restoring national solvency, as though we were on the point of bankruptcy? It was irresponsible for a Shadow Chancellor of the Exchequer to talk in that way.
The right hon. and learned Gentleman spoke about the importance of abandoning various projects now in the pipeline. He said that, to restore the money situation, it was essential that we abandoned the nationalisation of land and the Aircraft and Shipbuilding Industries Bill. What possible relevance can those Bills have to the sterling crisis that occurred last week? They can have no financial effect until 1978 at the earliest, and it seems absurd that something that amounts to a transfer of resources in the future should be considered of importance in the circumstances of the crisis that occurred last week.
The right hon. and learned Gentleman put forward as a constructive suggestion the idea that we should abandon the Dock Work Regulation Bill. What effect can that have on sterling? Will abandoning that Bill stimulate the holders of sterling to purchase more sterling? Even more fantastically, the right hon. and learned Gentleman put forward the suggestion that to improve the economy we should abandon our measures for getting rid of pay beds in hospitals. It is incredible that such suggestions should seriously be made by the Shadow Chancellor of the Exchequer as a cure for the sterling crisis. The idea that the restoration or support of grammar schools will have an effect in the present sterling crisis must be equally absurd. One is talking about boys who will have no productive or economic effect for several years.
The right hon. and learned Gentleman asked for the resignation of the Chancellor of the Exchequer. I find the right hon. and learned Gentleman a most amiable person but, on the basis of his speech today, I very much doubt whether he would find employment as a finance officer in one of the district councils in my constituency.

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Various suggestions have been made about what action should be taken. My hon. Friend the Member for Ashfield (Mr. Marquand) advocated import controls. They are out of the question, first, because they are contrary to the rules of the IMF. I cannot imagine the IMF agreeing to the essential massive loan if we use import controls.
Secondly, there is the obvious argument that the imposition of import controls brings about reprisals, and, in addition, such controls would be inflationary. They would have the effect of increasing the prices of all the imported articles.
Finally, import controls would greatly impair the efficiency of industry, which it has been the Government's objective to improve ever since they came to office. Import controls are generally undesirable except in a limited selective capacity. There is a case for import controls in industries that are suffering unreasonably from competition from countries where there is a low standard of living. I think that there is a case for import controls for the hosiery industry.
The hon. Member for Horsham and Crawley made quite a case for cuts in Government expenditure. There is no doubt that Government expenditure has increased to an excessive extent over the past 10 years. It has increased from 45 per cent. to 65 per cent. of total national expenditure, and obviously there has been a case for reducing it, but this reduction is already in the pipeline. The Chancellor of the Exchequer said this afternoon that Government expenditure would be reduced in 1977–78 from £11·5 billion to £9 billion. That is a substantial cut, and I should have thought that the case for cutting expenditure further must be of a limited and marginal nature.
There are no doubt instances where there could be cuts with increased efficiency, but, on the whole. It must be clear that any large increase in cuts in Government expenditure will lead to massive unemployment and a dislocation of the economy. That would be the effect of the Government's suddenly decreasing expenditure on a large scale. Conservative Members who, through the media, have called for cuts in Government expenditure have not been entirely as honest with the public as they should
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have been. They have not made clear the dislocation of the economy that would result and the massive effect that it would have on employment if the Government were suddenly to decrease national expenditure.
It is a setback for the Government that the MLR has been increased to 15 per cent., but there is no escape from the fact that this year the money supply was increasing dangerously. Towards the end of last year the Chancellor of the Exchequer gave a target of a 12 per cent. increase only in the money supply, but by the first half of this year 10 per cent of that increase had been used up. It was therefore essential, for the sake of foreign confidence, to take some steps to decrease the money supply, and the only effective way of doing that is to make money more expensive to hold.
We are talking, rather unhappily, about the money supply increasing by more than 12 per cent., a year, but in 1972 the Tory Government increased it by 26 per cent., and in 1973 they increased it by 28 per cent. Those staggeringly profligate figures had never before been known in peace time, and if we feel unhappy about the present increase in the money supply let us remember that what is being done now is not to be compared with the recklessness of the previous Conservative Administration.
It is possible to exaggerate the effect of the present high rate of interest, but there are some things that must be remembered. First, it is plainly temporary. I cannot imagine that we shall have a 15 per cent. MLR by Christmas, Secondly, most firms obtain money for their capital expenditure from their own resources. The majority of efficient firms do that, and even those that are not in a position to obtain their capital requirements from their own resources can borrow money even at the present high rate of interest, provided that they can make profits greatly in excess of that figure. If they are firms that export, because of the decline in the value of sterling they can make such profits comparatively easily.
Mr. Hordern: Why should these companies, out of retained profits, invest instead of lending their money to the Government, considering that they can

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get more than 16 per cent. if they lend to the Government, which they are by no means certain of getting if they invest? What is the Government's comment on the Price Commission's statement that a margin of 19·2 per cent. for retailers and the rental television companies is excessive when someone can get 16 per cent. safely by lending money to the Government?
Mr. Cronin: The hon. Gentleman ought to agree that it is part of the Government's strategy to get maximum resources into exports. Export profits of 20 per cent., 25 per cent. and 30 per cent. are not uncommon as a result of the depreciation of sterling.
There are some cheering things about the present situation. Up to July manufacturing industry increased its investment by 6 per cent. Although the hon. Member for Horsham and Crawley speaks lugubriously about investment in manufacturing industry, that is the most solid achievement that has taken place for some time. Exports increased by more than 10 per cent., by volume and investment plans, as indicated by opinion polls conducted by the CBI, the Financial Times and the Department of Industry, show that there will be an increase of 15 per cent. to 20 per cent. in investment in the coming year.
But, most important, there is now an established co-operation between industry, trade unions and the Government. That has not been achieved in this country before. Tremendous credit is due to the moderation and good sense of the trade unions, in spite of pressure from their members, often ill-informed pressure. Immense credit is due to the unions for having co-operated with the Government.
Anyone who thinks of an alternative Government must ask himself "Who will obtain the co-operation of the trade unions?" I cannot feel that the right hon. Member for Finchley (Mrs. Thatcher), with all her advantages, or any of her right hon. and hon. Friends, is in a position to command that co-operation. I say to my hon. Friend the Minister of State, Treasury, that taken on the whole the Treasury Ministers are doing a very good job, and we wish them god-speed.
7.41 p.m.
Mr. Dafydd Wigley: It must be a crisis indeed when we hear Labour Members calling for reductions in public expenditure and Opposition Members castigating the CBI. We have just heard from the Labour Benches that we cannot contemplate import controls on a large scale because the IMF would not allow it.
Mr. Cronin rose—
Mr. Wigley: The hon. Gentleman has had his opportunity to make his speech and no doubt he will comment again at a suitable opportunity.
In Wales we used to be told that, whatever the cultural disadvantages of the union of Wales and England, the economic advantages were overwhelming. That has a pretty hollow ring to it today, when we appear to be tied hand and foot in a union which is becoming progressively more bankrupt. None the less, while we are in it let us try to look for possible solutions to alleviate the situation as it affects the people of Wales and other hard-hit areas.
It is easy for people to think that we are in a sudden crisis. I cannot help feeling that a reading of the history books shows it to have been coming for years. The countries of this island have lived for a century and a half or two centuries on commodities imported from a world that has now changed. We have depended on imported raw materials to a large extent from an empire that has now gone. Those raw materials are no longer available at low prices. Raw materials are in short supply throughout the world, as we saw at the end of 1973, so we cannot rely on cheap raw materials to build an economy.
For two centuries we have depended on cheap imported labour, first coloured slave labour, then Irish labour. Since the war, we have seen more coloured immigration and we have seen people from Wales and Scotland going to the South-East of England. That cheap labour will no longer be coming as the standard of living in England drops relatively to that of other parts of the world.
We have depended on cheap food imported from the Empire and Commonwealth. That is no longer available.

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Indeed, cheap food is available nowhere in the world, and it will not be available in a world in which so many people are starving. We have depended on cheap imported energy from the Middle East, but two or three years ago there was a crisis and that cheap energy is no longer to be had.
When the availability of four basic inputs—raw materials, labour, food and energy—is so drastically changed, it is no wonder there are far-reaching economic consequences. We must learn to live with them. We must see that the effects of the changes are equitably shared and that people do not suffer unduly for factors outside their control.
The objective of any Government must be to increase manufacturing investment and thereby reduce unemployment. The Chancellor of the Exchequer said that an increase in jobs must come from increased investment, and he boasted of the investment ratio of 13 per cent., but he did not say that the increased investment was going into manufacturing. The danger of the package of the past few days is that the investment will be driven away from manufacturing industries.
Unlike many hon. Members, before I entered the House I worked for 10 or 12 years as one of those who analysed investment projects in manufacturing industry—the motor industry, the washing machine industry and the food industry. When projects are scrutinised to see whether they justify investment by the company, one of the most important factors is the base rate for lending, the price of money. When that is high, the return needed to justify a project will also be high. As the base rate increases, projects that would have been marginally acceptable at a lower rate are thrown out of the window.
It is no use saying that the present high rate will last only until Christmas, because from now until Christmas most manufacturing companies will be drawing up their budgets for next year. Nor is it acceptable to say, as the Chancellor said, that companies invest mainly from funds internally generated. Companies look around to see the best use for their money. That use may be internal or
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external. If a better return is to be obtained exernally, they will not invest the money in a project that will bring the the jobs we so badly need. Therefore, that argument is spurious.
The Chancellor of the Exchequer referred to the need for an export-led boom, but the price of imported raw materials has risen at such a rate because of the depreciation of the pound that it is drastically affecting the liquidity of companies that could take advantage of the possibility of such an export-led boom. Moreover, those companies need more capital, because when they are changing to overseas markets they need a longer credit time for the goods they are exporting. In the present situation, overseas suppliers will not give credit for deliveries of raw materials to the United Kingdom—they need money now in their own currency—and overseas customers will hold out for as long as they can when it comes to paying the bills for our exports.
Therefore, one of our most important needs is not higher interest rates but substantially lower interest rates to encourage more investment, not only in new projects but for the replacement of plant which drastically needs replacement in so many of our industrial sectors. High interest rates are of themselves inflationary because they are the money-lenders' rake-off from the manufacturing process.
I had an example in my constituency in the past month of a project killed off because of the rate of interest—and that was before the increase of 2 per cent. A young person was thinking of investing his savings in a small commercial project. When I approached someone with experience of raising funds for such projects, he said "Tell him not to bother. Tell him to wait until he can get a better return, because at present he could get a good return by just putting the money in the bank." In such circumstances we have a worsening employment prospect. The situation is desperate from that point of view.
This sudden switch of policy had a smack of panic about it. It takes us back to the stop-go era, which was so desperate for all sectors of manufacturing industry. I remember what happened in 1971, when there were fundamental

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changes in the credit restrictions. Hire-purchase deposits were reduced in June or July.
I was then working in the washing machine industry, where if demand was taken as 100 in the first half of the year it was 300 in the second half. Demand trebled at the stroke of a pen because of a drastic change in Government policy. No industry that is capital intensive can cater for that sort of switch in policy. It is the opposite of what we should be seeking if we are trying to plan our economy to move towards better pastures. We cannot expect industry to plan for the future when the central Government, of whatever colour, ask it to operate in such conditions. It has by now become no more than a random probability whether industrial capacity matches consumer demand in virtually any sector.
I turn to the effect of the present proposals on wage inflation. We have already heard of the effect on mortgages, which will be felt particularly by sectors of the community which have been hard hit in the past two years—young married couples more than older people, who have smaller mortgages in relation to their total income. Junior and middle supervisors, foreman and middle management are particularly hard hit.
There will also be an impact on the whole of the community because of the effect on prices. Manufacturing industry is certain to look for higher prices to obtain a sufficiently high return to justify the investment it has already made. These pressures must inevitably lead to equal pressures for higher wages. That is the harvest that will be reaped early next year, or in the middle of next year, if not this year.
We have heard a great deal about public expenditure cuts. My colleagues and I would rather see cuts in such items as the multi-rôle combat aircraft rather than in some of the matters itemised by the Conservative Party. We realise that there are different areas of political emphasis in these matters but it would do a great deal to reduce the public sector borrowing requirement if we were to reconsider that project, which will cost in the region of £2,000 million.
If there are to be reductions in public expenditure, they must be examined area
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by area. Levels of personal incomes in some areas are very much lower than in others. Although the situation may not be as serious in the Midlands or in the South-East of England, cuts will have an extremely serious effect on areas at the end of the queue. We need policies that will do away with unemployment and that will reach that end via investment and the creation of industrial jobs. Any policy that will add to unemployment cannot be accepted. It cannot be right to have 1,500,000 men idle when we need a greater level of economic activity.
It cannot be right for Wales to have a requirement of 25,000 new houses per year—and it must be remembered that we have the materials and the land for the task—and at the same time to have 80,000 work people unemployed. We do not appear to have the wit to put all these factors together to solve our problems. We must somehow put our minds to the task of creating jobs for our people for their work is fundamental to the solving of our economic problems. There is no sense in paying people to do nothing when those people could be mobilised to solve our economic problems.
I wish to emphasise that economic problems hit some areas more severely than others. They can hit Wales badly not only because of the low level of per capita income but because the average per capita wealth in Wales is only 70 per cent. of the United Kingdom average. That means that in a situation of high interest rates Wales will inevitably be among the hardest hit. If Parliament and the United Kingdom Government cannot find economic answers to the problems that hit our people in Wales then at least we should have the right and the responsibility to make our own mistakes.
7.53 p.m.
Dr. Collin Phipps: Perhaps one of the most disappointing things about today's debate is to see the small number of hon. Members now present in the Chamber. We are now experiencing what is regarded nationally as a major crisis. I agree with the hon. Member for Cornwall, North (Mr. Pardoe) that it is far from the only crisis, but perhaps it can be said to be a peak in the continuing crises of our nation over a period of years. The Chamber was full earlier in the debate. It is now rather less full.

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This is a situation of which the public should take note and properly regard with some scepticism.
My right hon. Friend the Chancellor of the Exchequer put the Government's case in a solid and lengthy speech, without the aid of histrionics. In essence, most of us on the Labour Benches would accept what he said—namely, that the present policy bound up with the social contract is the only policy for which there is any degree of national acceptance. If we are to get out of our economic mess, we shall do so only if the majority of the country is behind that policy.
In examining the alternatives put forward on the one hand by the Opposition and on the other hand by some of my Labour colleagues it is worth examining whether the policies so propounded are acceptable to the public. The policies advocated by the right hon. and learned Gentleman the Member for Surrey, East (Sir G. Howe) are based on the thesis that by cutting public expenditure we shall miraculously be brought out of our economic difficulties and at the same time increase our exports and our industrial investment and everything will come right. But this is not a new policy, because it has been tried in earlier years by Labour and Conservative Chancellors. It is a policy that contains a number of difficulties.
We must remember that the cutting of public expenditure cannot be achieved overnight. Cuts do not move rapidly through our economy but take a long time. One remembers the public expenditure cuts advocated by Lord Barber in a former Conservative Government. But if we examine the record of his proposed public expenditure cuts, it will be seen that they never took place. That has been the fate of many such cuts over the years, because it takes a very long time before they work through the economy.
Cuts of the kind advocated by the Conservatives will increase the level of unemployment far more severely than the level currently being experienced, and I do not believe the British public would accept them. The Conservatives must appreciate that the public are now sufficiently sophisticated to appreciate that public expenditure cuts affect them in-
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dividually. Such cuts are not felt only by local councils or nationalised industries, but they do a great deal to reduce the standard of living of everybody in the United Kingdom. The days when it was thought that public expenditure cuts were thought to be unconnected with the standard of living have long since gone. Everybody now appreciates that what is now being proposed will affect every individual, and the public are no longer prepared to accept them.
If Conservatives find this difficult to accept, ask them to look at the notebooks kept in their constituency surgeries and to tot up the number of times people ask them for services that specifically require the expenditure of public money at local or national level. I estimate that up to 30 per cent. of such requests in a constituency are aimed at that kind of expenditure. Therefore, it is obvious that the public are not prepared to see their standard of living reduced by such cuts.
It has been suggested in some quarters that we should go in for some kind of siege economy and that we should look to the imposition of import controls. But such controls work slowly through the economy and in our case will have the great disadvantage of being imposed by a country which lives basically by exporting manufactured goods. The United Kingdom still exports more manufactured goods than it imports. The last thing we should be doing is to seek to set up difficulties for our exporters. It is astonishing to suggest that overseas manufacturers are somehow guilty because they send us their goods. It appears to imply that they are responsible for the fact that their goods are purchased in this country. Obviously those who purchase such goods are United Kingdom residents.
Mr. J. M. Craigen: Does not my hon. Friend agree that one of the weaknesses in our system is that one can go into shops in the United Kingdom and find available for sale foreign finished manufactured goods? I am not arguing the case for controls but seeking to point to a weakness in our manufacturing industry. Might we not learn more if the Prime Minister were to call a conference of the various people who are responsible for buying in many of these goods in order to find answers to some of our problems?
Dr. Phipps: I would find that an acceptable suggestion. Nevertheless, one comes back to the fact that there are British goods available, in competition with foreign goods, and it is the British people who are choosing to purchase foreign goods. It does not seem to help the quality of British goods to protect them. I suggest that protecting British goods is likely to perpetuate the very features in those goods which cause people to buy foreign goods in the first place.
It does not seem that import controls are in any way a solution to our problems. The Chancellor has never pretended that the course we are taking will be quick or easy or one which will not at times be beset by difficulties. We have been beset by a particular difficulty, namely, the selling of sterling, largely by some of the smaller Middle Eastern oil States. This has rocked our boat. It seems that the course we are on is the right one and that we have perhaps two or three years before North Sea oil begins to flow in sufficient quantities, first to provide us with exports earning dollars and secondly, to provide us with internally-generated oil, replacing dollar imports. It is important to appreciate that all of the oil from the North Sea is dollar oil and always will be. It is not devalued pound oil. It retains its value in dollars on the international oil market. We have two or three years in which this policy can bring us to a condition where the oil revenues will put us back on the right track.
If I am asking for patience and support, particularly from the Parliamentary Labour Party and Labour voters, I also appreciate that there are certain aspects of the current policy which are extremely damaging to British industry. I want to touch on one or two of these. In particular, the putting up of interest rates to 15 per cent., something I have argued many times before, demands specific interest rate subsidies for industry. A 15 per cent. interest rate—for industry it will be something like 17 per cent. or 18 per cent.—plus an inflation rate of 13 per cent. plus the corporation tax which is paid upon the unreal profits made because of inflation means that in money terms any investment has to return in the order of 35 per cent. before it is worth considering.
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The block grant system we are using is not the best way. I have argued this before. A minimum lending rate of 15 per cent. demands subsidised interest rates for new investment in industry. Without that there will be no such investment. It is a plank of the Chancellor's policy that this investment should take place.
Secondly, we must learn to sell our goods overseas. I do not believe that there is a great deal of difference between a British car and a Japanese car. The difference lies in our ability to sell. This stems largely from the fact that over the years we have been used to selling to captive markets in the Commonwealth. We have not had to get out and learn to sell in the same way as the Germans and the Japanese. I should like to see a much greater emphasis on selling. I should like to see the importance of the commercial sections in our embassies developed so that they become part of the export drive, if necessary with them taking a commission on the sales they make. I have no objection to embassies making money. It might even cut expenditure on the Foreign Service, which I am sure we would all want to see.
Thirdly, and most important, we cannot be continually rocked by the selling of sterling by some of the smaller oil States when they believe that there may be a repreciation in its value of 5 per cent. or 10 per cent. If our membership of the EEC is to mean anything at all, we ought to go to other EEC member countries, particularly Germany, but I should like to see it done across the board, and ask them to help us in the funding of sterling balances.
If we continue to have a fall in the sterling rate it will damage the possible success of the EEC, and I speak as an unashamed pro-European—I want to see the EEC being successful. If we have a falling pound—we have already seen the pressures being exerted on the green pound—success will be endangered. Considerable pressure, because of the sterling balances, is bound to be exerted. I should like to see the EEC playing a much larger part in the funding of the sterling balances. I see no reason why it should not do so and I believe that it would be in the interests both of the United Kingdom and all other EEC member countries. The Chancellor and members

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of his team should go to EEC member countries to discuss this type of funding in the near future.
This policy is the correct one because it is the only one acceptable to the majority of the people. No other policy can possibly succeed without that support. None of the alternatives proposed has that kind of support. It behoves us all to get behind the Government and the Chancellor to see this policy through until North Sea oil reaches a level which enables us to face our creditors with confidence again.
8.6 p.m.
Sir John Hall: The hon. Member for Dudley, West (Dr. Phipps) began his speech by expressing regret about the poor attendance at this important debate. I share his regret. I wonder whether it is because of the present form that our system of parliamentary government is taking which means that, more and more, parliamentarians feel that they can have little influence on events when they take part in debates in the Chamber. The power seems to lie outside this House rather than inside. That may be why so many of our debates are so poorly attended.
Because of the pressure of time I shall confine my remarks to one issue, namely the increase in Minimum Lending Rate. I want to speak, not as a politician but as an industrialist. I am only too conscious of my many shortcomings as a politician and when I listen to many of my hon. Friends I am even more conscious of the rudimentary grasp I have on economic theory. Indeed, when I was listening to the hon. Member for Cornwall, North (Mr. Pardoe) I realised that I had failed to appreciate something which I clearly ought to have appreciated, and that was the fundamental effect that electoral reform could have on our economic situation. I must go back to my books.
Nevertheless, I have had 45 years' experience in a wide range of industry in this country and abroad. I can perhaps claim to speak with some understanding of the problems facing industry today. Only rarely have politicians of any party, or economists of whatever school, been right either in their forecasts or the proposals they have advanced for the curing of our ills at any particular moment.
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Nevertheless politicians, and I believe economists, continue to flourish in one way or another. The industrialist, on the other hand, is either right or he is bankrupt. Therefore, when he faces problems put before him by Government action of the kind we are discussing he has a considerable task.
When I first heard the news of this increase my reaction as a politician was to say "Well, I suppose this is something that the IMF wants the Chancellor to do and it is understandable from that point of view". My reaction as an industrialist was to use rather unparliamentary language and to ask "What the hell does the Chancellor think he is playing at?".
There was a time when a modest increase in what used to be called the bank rate, which is now the MLR, would have attracted money back to this country. That time has long since gone. What investor will put his money into a company, however attractive the rate of interest might be, if he has serious doubts about its stability and even more serious doubts about the efficiency of the board of directors when it has a long record of failure? The same now applies to putting money into this country regardless of the rate of interest we might offer. All that we are doing is imposing further burdens on industry.
These matters are perhaps offsetting. For example, there is the advantage that the falling exchange rate has given us in the export market. However, that advantage has already been offset by the increasing cost of importing raw materials. That is a factor that must be taken into account. The present situation is delaying the expansion of various schemes leading to new developments and a planned expansion to which the hon. Member for Caernarvon (Mr. Wigley) referred in the course of his interesting speech. It is creating great problems for boards of directors everywhere who are now considering their budgets and plans for next year and the year after. They are having to ask themselves exactly how long the present rate is likely to continue and, if it is to be reduced, by how much it will be reduced.
We are now approaching a situation when far from taking risks, investors take the view, when the issue is in doubt, that it is much better to put their money into Government stocks or to lend money

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to the Government in the knowledge that they will get a sure return. By investing in that direction they know, generally speaking, that they will receive a higher return than they are likely to get in present circumstances from industrial enterprises. Top companies are now required to pay 15 per cent. plus for new money, and the average company probably pays 16½ per cent. or more. At a time when television rental companies have been criticised by the Price Commission for a return on historical costs of 19·4 per cent., which in real terms is about 5 per cent., it is incredible that the Chancellor should increase Minimum Lending Rate to 15 per cent. and expect industry to continue investing and expanding. That is not part of the real world.
The effect upon the individual is difficult and hard. We know the effect that it has had on mortgage rates. It has recently been announced that they will be increased to 12½ per cent. There will be higher credit charges and prices will be increased in consequence. While the present incomes policy holds—we all know that it is likely to come under increasing pressure over the next 12 months—the effect will he to reduce the spending power of the public in general. Presumably that will do what the Government want—namely, reduce the increase in the money supply.
This will do nothing, or little, to strengthen the pound. Indeed, reaction over recent days seems to show that inflation will increase. It will tend to push industry into recession and increase unemployment. It will give a classic example of what we have become accustomed to over recent years—namely, the post-war phenomenon of stagflation.
We should no longer use the bank rate or Minimum Lending Rate to check the flow of funds from this country. Accepting that we must be competitive if we are to keep funds here and not see them pour out to another country which gives a better return, we should examine the case for two interest rates. I am aware of the problems which arise whenever there are two rates—for example, leakage between one and another. But those problems are not insurmountable. The Chancellor should look carefully at the possibility of having one interest rate to be given to foreign lenders and another one available to industry in this country.
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That would enable us to borrow money for industrial expansion and encourage people to invest in the knowledge that they can expect a reasonable return.
Those of us of my age have all been through this situation before. When I started working the unemployment rate was over 15 per cent. By 1932 it had risen to 26 per cent. When I was working in France in 1934–36 the pound was so devalued against the franc that I had to be paid 60 per cent. more in salary to have the same purchasing value in France as in this country. We have seen it all before. The problems that faced us in those days are not dissimilar although we cannot compare the two situations. The circumstances are different.
Before the Second World War the problems that faced us seemed to the Governments of the day, and the parties, to be very dangerous and diflicult to overcome. The only solution that they had at that time was to form a national Government. I believe that we are reaching a situation in which it is becoming difficult, if not impossible, for any one party to carry out the sort of programme that will be essential if we are to get on top of our problems in the next few years. I do not think it is possible for any one party to gain the complete acceptance and understanding of the country. It may be that we shall have to adopt a similar solution to that which was adopted in the years before the last war. The effect of that solution over the years which followed to the outbreak of war was to reduce unemployment and deal with the problem of inflation.
People come to debates of this sort hoping in their heart of hearts that someone, preferably from one of the Front Benches, will produce the magic answer, a formula that will deal with all our problems painlessly, and if not painlessly, without too much hurt. Such a situation does not exist. The only way in which we shall deal with the problems which now face us is by determination, hard work and enthusiasm. We shall not deal with them necessarily by working harder, but we shall do so by working more effectively and more ably in the industries in which many of us are part.
Although we have difficult years ahead of us, I do not share the gloomy and

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black view of the hon. Member for Cornwall, North about our future. I believe that we have the ability, ingenuity and general determination to overcome our problems, provided always that we are given the right lead. Perhaps it is that lead which is now lacking.
8.28 p.m.
Mr. John P. Mackintosh: It is with great pleasure that I follow the constructive and interesting speech of the hon. Member for Wycombe (Sir J. Hall). The speeches that I have heard in the centre portion of the debate have been more along the lines of the feeling of the country in its alarm about the present situation and its desire to work together than some of the speeches we have heard at party conferences or from the Front Benches during this debate.
I was a little surprised by my right hon. Friend the Chancellor of the Exchequer, although I think he is following the right strategy. I admire him for his defence of his policy and for the way he goes for his critics and holds on. Nevertheless, I was surprised when he suggested that the 15 per cent. Minimum Lending Rate made no difference to his forecasts and no difference to the longterm targets and the chances of achieving them.
I should have liked to hear from my right hon. Friend precisely what effect he thinks the 15 per cent. Minimum Lending Rate, plus the extra on employer contributions and the tighter hold on credit, will have on future investment policies and on the confidence of industry in this country. I agree with so many speakers that this Minimum Lending Rate will have a crippling effect on investment if it continues for any length of time. I should have liked to hear what effect the falling rate of sterling will have on the future rate of inflation. I should like to know what effect the falling rate of sterling will have on the balance of payments.
I suspect that for the next six months we shall get sterling tremors every time we get a bad set of figures and every time we are threatened with industrial disputes or other indications of competitive weakness. I believe that psychologically it is a great mistake for the
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Chancellor to say that everything is fine and then suddenly to introduce an emergency package the next week. It is much better to say "We hope that it will be like this but we have been in difficulties and we have changed our targets. We might have to take exceptional measures in due course to meet this situation." It is better to say that than to pretend continually that everything is splendid, and then the following week place some further burden on the shoulders of our hard-pressed community. That is my one major criticism of the approach that has been taken.
I believe that in the House we are getting a more genuine acceptance of Britain's industrial problem. I have been here for 10 years, and year by year we have heard from one party or another that it has had to give up its targets for growth. One party or the other has had to have cut backs. We have said that we have been blown off course. There has been a seamen's strike, an oil war or something or other which has pushed us back.
Surely we have now got to the point—the Prime Minister has been ramming this home in his speeches—that there is a much deeper problem. Basically, it is the decline in productivity per man compared with our major industrial competitors. The National Institute put its finger on the problem perfectly in its last issue when it pointed out that in 1955, when post-war recovery was over, this country had 15 per cent. higher productivity per man hour than France or Germany and 40 per cent. higher productivity per man hour than Italy. By 1973 the situation had changed and the Dutch were 56 per cent. ahead of us; the Belgians about 40 per cent.; France and Germany 30 per cent. Even the Italians were ahead. We cannot as a major industrial country have lower productivity than other countries and pay ourselves the same wages or try to achieve the same standard of living. That is the fundamental problem.
The causes of this relative decline in productivity are incredibly elaborate. As an old university teacher I felt, in my previous occupation, that we were partly to blame because one of the problems is that not enough young people in this country have gone into industrial management. It is fourth or fifth in the list

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of choices. Our management is poor, our industrial relations are bad and our investment record is poor. What we are talking about now is buying time once again to try to tackle the fundamental problem. This time it must be without excuses and without attempts to say that this is a temporary phenomenon or that it is something we shall get over in a week or two or a month or two. In the meantime, we must struggle to preserve our currency and internal economic stability.
The fundamental problem facing us, which upsets me deeply, is that I do not believe we can preserve our situation without either cutbacks in public expenditure or deflation which means cutbacks in investment. That is the fundamental choice which faces the Chancellor and he has tried a bit of both but the burden in the last measures has fallen on the private sector.
One pseudo-solution which has been put forward in a long list of pseudo solutions that we have had in the past—the latest, which I am glad this Government are not looking at—is the possibility of a wide range of import controls. Some people, like Professor Neild, have entered the battle with a letter to The Times and put forward what is called "the infant industry argument" which was applied in Germany in the 1860s and 1870s while Germany was catching up on industrialisation. The ridiculous thing about the infant industry analogy is that it presumes that the infant is growing stronger day by day with the urgent desire to become an adult. The point about an infant industry is to free it from protective wraps so that it can get on with the job of competing on an equal footing. If we had import controls now on a large scale in this country, it would not be an infant industry argument; it would be a geriatric industry argument. It would be shelter for the dying and declining. It would be like building a wall around an old folk's home in their declining years.
Unfortunately there is no evidence that British management is throbbing with a desire to invest and modernise which would flourish, given protection, and it is this management and investment problem with which we have to grapple.
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To protect industry by high tariff controls would only make the problem that much worse. We have to grasp it at its root. In the meantime, to defend the currency and buy time, we are faced with the miserable and horrible choice between cuts in public expenditure or cutting investment by the kind of deflationary processes that we have seen put into practice in the last few weeks.
I do not want to make this choice. I agree with my hon. Friend the Member for Dudley, West (Dr. Phipps) that every cut in public expenditure hurts somebody, particularly those people in need of support. I came into the Labour Party because I believed in a high level of public expenditure, but if I am forced to choose between a cut back in investment by a high Minimum Lending Rate or a cut in public expenditure, and if that is the alternative and no third choice is possible, I have to grasp the difficulty and accept the answer that it has to be a cut back in public expenditure. I am miserable about it, but we have to face it.
We have to prove that this nettle, if it is to be grasped, will be grasped yet again by the Government and grasped firmly. It is no good the two parties banging it about across the Floor of the House. If the Leader of the Opposition happened by any chance to win an election in the next year or two, she would face the same problem of endemic failure to invest by British industry. It is in the interests of both parties to get this matter sorted out.
I was attracted by the proposals of my hon. Friend the Member for Dudley, West and the hon. Member for Wycombe, who both suggested that we must have some method of subsidising investment and getting investment exempted from the party battles. I would have thought that we could surely agree between both parties to pursue a policy of encouraging investment which any party succeeding to office would not immediately undo. The thing that is depressing British industry and investment is the idea that whatever one party does the other party cannot think of anything to say except that it will undo it. If I had been an industrialist the right hon. Lady's conference at Brighton would have depressed me enormously because the major speeches made it clear that if her party ever wins

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an election, the first two years in office will be spent undoing what the Labour Party has done. The horrible scenario is that my party in opposition would go through another convulsion, more further to the Left and come back to power with a programme of re-doing all that the Conservatives had undone.
I would hope that the two Front Benches could reach agreement on policies to promote productivity and industrial capacity which either Government will continue to support in or out of office. We must give industry confidence that it can plan knowing that government policy will remain the same for at least a decade. No industry, public or private, can plan if it is being chopped or changed every few years in response to changes in sterling rates or party fortunes. We must give our country the stability on which to base its plans for growth and expansion.
Mr. Deputy Speaker (Sir Myer Galpern): Order. The winding-up speeches are due to begin at 9.5 p.m. Several hon. Members have asked to take part. If there were a cutback in the length of speeches we could accommodate all those hon. Gentlemen who wish to take part.
8.26 p.m.
Mr. Nicholas Ridley: It is a remarkable thing in itself that my right hon. Friend the Leader of the Opposition has spent the whole of the debate on the Front Bench. If that is an example that can help the country in these difficult days, it should be followed by the whole of the House. It makes me feel somewhat guilty when I compare her attendance with my own brief attendance, so if, while I am speaking, my right hon. Friend feels like slipping out for a meal, I will not take it amiss.
I identify two themes in the debate. First, I have detected a deeper gloom about the state of the nation than I have ever heard before. The other is a growing agreement that it is essential to cut public expenditure. I am pleased with the latter because, as one who has spoken of this need for many years, under Governments of both parties, it has been an agony to me to watch successive Chancellors of the Exchequer as it were in
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possession of my credit card and taking their wanting out of my waiting. If this is the last tranche from the IMF, I for one will be grateful. Indeed, I feel like writing. "Dear IMF, Please do not lend daddy any more money". The excuses are still there. The Chancellor says that this is in line with other countries' performances—that this, that and the other indicator is in line with those of other European countries. There are those who seek to blame the speculators and the bankers. But in my view the Government have been lucky in managing to exist for so long by borrowing 20 per cent. of their expenditure.
I confess to being wrong in my prediction. I thought that this situation would happen a great deal earlier. But in the end it has caught up with us. Let us therefore concentrate not on symptoms but on the piece of strengthening agreement which is emerging—the piece of agreement, which is getting firmer not only between the parties in this House but throughout the country, that public expenditure is beyond our ability to meet.
If that is the conclusion to which we are moving, it cannot be right to make Minimum Lending Rate 15 per cent. because that in no sense affects public expenditure, other than that it will put it up, because, by paying these higher interest rates, the expenditure of the Exchequer, marginally at least, becomes a little higher, and does so every year these excessive borrowings increase. To raise Minimum Lending Rate therefore does not deal with the problem but mildly aggravates it.
So we come to the difficult problem which has caused trouble to those who have advocated the cutting of public expenditure for quite a long time. Curiously, it has even caused serious trouble in the debate to the right hon. Member for Down, South (Mr. Powell), because, without saying what one would cut, no one sounds convincing. One can say how one would cut out the frills—the advisory committees, the endless candy floss of government—which have grown up in this Socialist era. I would add to the list what I would call the "social police"—the enforcement officers, the snoopers, the inspectors, the traffic wardens, an endless number of people paid by us in order to enforce

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Socialism. All these things could be cut, but no one believes that it would save much money.
One could cut out the food subsidies, the electricity and gas subsidies and so on, and start on the thorny problem of housing subsidies. That I would support entirely, but it would not be getting near the target of £4,000 million suggested by the right hon. Member for Down, South, nor the target in the same region which the Opposition Front Bench have put forward. I would go one stage further and say that we must in principle charge people for what they get and that when carried into every activity of life that brings in some more money. But it is palpably wrong to say that one can find the money by cutting Government capital expendture because that means that we build no power stations, no schools, no hospitals and no roads. The total of Government capital expenditure hardly adds up to £4,000 million. One could make such a cut in Year 1, but what happens in Year 2 or Year 3?
The sum we are looking for in these terms is £10 billion, which is the amount the Government are spending over their revenue, so one is forced to the striking conclusion that the whole apparatus of social democracy in which we have believed since the end of the war has failed us, and that we have to look at the health services, at the education system, at the pensions system—indeed, at the whole apparatus of free State monopoly provision. There is no way round it.
Hon. Members opposite assume that to say that these things have to be looked at means immediately that schools will be closed, pensions slashed and hospitals knocked down. Not so. I put the simple contention that wherever the State provides something it tends to provide it at twice the cost at which it could be provided by the private sector. That is not an original thought of mine. It is the latest view of Milton Friedman, but he may be wrong. The State provision may cost three times as much. I do not know.
These services having been made free, people's demands on them are infinitely greater. At the same time, being administered by the State, the services become responsive to the trade unions which work within them, and not to patients, clients
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or customers. Therefore, we have the situation which is evident in the health service, the education system and so on, where the arguments are about how many more fringe benefits people can get and how much more expenditure can be squeezed out of the Government, while at the same time the services provided to the public diminish and dwindle both in quantity and quality.
In order to make this necessary cut in public expenditure we have to tackle that problem. I realise what this means for Labour Members. It means that the whole damned thing, from Beveridge to Bevan to Benn, was wrong, and that we are witnessing the burial of social democracy. If that is so, the worst thing would be to accept the arguments of the hon. Member for Ashfield (Mr. Marquand) and the hon. Member for Berwick and East Lothian (Mr. Mackintosh), neither of whom is here, who sought to perpetuate the political position of social democracy in this country by trying to bring in with them Tories, Liberals and anybody they could get—even Scottish and Welsh nationalists—in order to make one last desperate stand for social democracy.
The only thing that social democrats have on their side is that they are in the middle of the party spectrum, and therefore it is tempting for them to seek support from the Right and the Left. But I believe that the Tribune Group are quite right. Social democracy has failed, and the way it wants to go is to Communism, to Marxism, but I believe that that is the wrong way.
Mr. Heffer: Rubbish.
Mr. Ridley: I believe we must get back to organising society so that it pays to work, so that we spend what it costs on what we get, so that both nation and people live within their means, so that investors are rewarded, and so that public services are provided where private services would not be appropriate, and there only. Only along that road lies the way to cut public expenditure, and only in cutting public expenditure lies the solution to the nation's crisis.
8.38 p.m.
Mr. Stan Thorne: Listening to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) and

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to his references to the speech of my hon. Friend the Member for Berwick and East Lothian (Mr. Mackintosh), I did not find any considerable difference between their approaches, and it is not my intention to follow their arguments. My hon. Friend the Member for Berwick and East Lothian clearly saw the crisis in the same way as did the Chancellor of the Exchequer.
At the beginning of his statement, the Chancellor of the Exchequer posed three questions. In one of them he asked whether there were any alternatives to the Government's economic policy. To the Chancellor of the Exchequer and to my hon. Friend the Member for Berwick and East Lothian the crisis is about inflation. It is about a bank lending rate of 15 per cent. It is about loans from the IMF and the public borrowing requirement that we have. But in the North-West, in Lancashire, the area from which I come, the crisis is not about those things. The crisis is about unemployment, and a fairly substantial portion of the 1½. million unemployed is in the North-West. To them the crisis is about rising prices. It is about lowered living standards. It is about cutting the social wage.
The Labour Party manifesto in 1974 addressed itself to the problems that capitalism then faced, and faces in even stronger terms now. We outlined the tasks that lay ahead and our aims as a party. We hoped that the Labour Government would do something about them on the basis of the plans contained in that manifesto. It is necessary for me to look briefly at the action which the Government have taken in the process of arriving at the present unemployment level of 1½ million.
Recently, when there has been much talk of the need to increase industrial investment, we have had the spectacle of a Labour Government deciding to allow prices to rise on the basis of the argument that that would increase the rate of profit and that that increased profit would find its way back into expanding industry. However, this flies in the face of experience, which has shown conclusively that that does not necessarily follow. In fact, there are other areas where those who make large profits in Britain seek to go in order to improve substantially their financial position.
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The reality is that by increasing prices on the basis of increasing profits we succeed only in making the poor poorer and the rich richer, which is the complete opposite of Labour's aims. What is more, it goes along with the public expenditure cuts, which are another aspect of Government action affecting and forming part of the social wage, bearing in mind that housing, health, education, the social services and road and rail transport have all been subjected to major cuts by this Government.
We are forced, therefore, to contrast promise with performance. I am glad to see the Prime Minister in his place, because it is pertinent to remind ourselves of the road trodden by the Labour Government of 1964–70 and of the outcome in 1970 of going to the country on the basis of the past actions of a Labour Government.
My hon. Friend the Member for Berwick and East Lothian and others referred to import controls. I notice that there are one or two converts among my hon. Friends to this line of thought, and they are to be welcomed. Imports of manufactured and semi-manufactured goods in 1966 ran at the level of about £2,200 million. In 1975, the figure was £11,400 million, representing a 500 per cent. increase. In the first half of 1976, between £7,000 million and £8,000 million of manufactured and semi-manufactured goods flowed into Britain. It is against that background that some of us consider that action in regard to imports is vital to protect our own manufacturing industry.
Another aspect of the Government's policy is to control wages and salaries and, by so doing, to contribute to raising the level of unemployment. If workers are subjected to restrictions in respect of wages and salaries, the inevitable result is a short-fall in demand and a cutback in production, ultimately resulting in the loss of jobs. We need to make that good.
Although we accept the notion of increasing investment in manufacturing, it must be admitted that some increase in investment in manufacturing could occur without any improvement in the number of jobs available. It means, therefore, that we should be considering the labour-intensive industries and putting into them the investment that is required.

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I have in mind, for example, the building industry, which is close to the heart of my hon. Friend the Member for Liverpool, Walton (Mr. Heller). It is an industry where a massive input of resources would make a tremendous contribution not only to the solution of its unemployment problem, which is so vital, but to our house-building programme, our road and rail programmes, and so on. That is the sort of investment that we should be thinking of, together with a controlled reflation of the economy, beginning with an acceptance of the fact that increased wages, pensions and benefits are vital and that taxes on profits should be increased instead of accepting, as at present, that profits should be allowed to rise.
There are other alternatives to present aspects of Government strategy. We have an overseas investment portfolio of £6,625 million. I am sure that there is an easy way of selling some of that portfolio to improve the situation in respect of our reserves.
It is time that the Government took action to freeze prices for a minimum period of six months. It is time that we had the wealth tax which has been spoken of time and again from the Front Bench, but the introduction of which still evades the Government.
We must accept the message of the Labour Party conference on banks and insurance companies. Ownership and control in these sectors is vital if we are to plan the economic life of Great Britain. At the same time, we want a major extension of public ownership into manufacturing industry. The public ownership of all North Sea oil and gas is vital if we are to plan our economy. As part of the reflation process, the Government should restore public expenditure cuts.
We need a radical extension of house building. In Preston we are still faced with considerable difficulties over houses for renting. On this side of the House we ignore the demands of people living in shocking housing conditions at our peril.
Instead of cuts in the National Health Service, we should be talking of major expansions, which could make a similar contribution to the improvement of the economy.
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Reference was made in the education section of the last Labour Party manifesto to nursery schools and the extension of further education. I am sure that my hon. Friend the Member for Walton will have received many letters about the fact that at one college of further education in Liverpool, 162 young people aged 16 to 17 started a course of GCE "O" and "A" subjects but that following the Government cuts only 60 will receive discretionary grants. What will happen to the other 102? They will sign the employment register and receive social security for sitting at home. We should be paying them to go to school and learn something of value for their employment prospects.
This is the sort of madness of policy we are getting from the Government at present. Gone is the concept of an irreversible shift of power to working people and their families. Instead the Government are pursuing a policy that will guarantee the return of the Conservative Party if there is an early General Election.
8.50 p.m.
Mr. Michael Morris: I shall resist the temptation to comment on the speech by the hon. Member for Preston, South (Mr. Thorne) because it was so much out of touch with the real world and, even more important, so much out of tune with the contributions which have been made in this Chamber from both sides. I should like to comment briefly on two aspects of policy about which I claim to know a little.
First, exports: I ask the Prime Minister to comment on the incentives that the Government are giving to our exporters. Is the right hon. Gentleman aware that there has recently been a cut-back in the funds provided for the British Overseas Trade Board? That organisation was set up to encourage our exporters. Yet it is to have a 25 per cent. cut-back in the coming financial year.
Does the right hon. Gentleman know that the decline in sterling has been so fast that our exporters have been unable to take advantage of it? The majority of our exporters would say to the right hon. Gentleman and his right hon. and hon.

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Friends that at $2 to the pound our goods were as competitive as anybody else's in the world and that they needed no further help from a devaluation of the exchange rate in terms of competitiveness.
I suggest to the right hon. Gentleman and to those hon. Gentlemen and hon. Ladies below the Gangway who continually implore the Government for import controls that British industry does not want import controls. I represent a city which has a declining industry—the footwear industry. That industry recognises that it is declining. All that that industry and others like it ask for is reasonably fair competition. The footwear industry wants a decline in dumping. It asks for action on that front alone. Given that action, it will stand on its own feet.
The second point that I should like to make to the right hon. Gentleman concerns the cut-back in public expenditure at home, particularly local authority finance. The right hon. Gentleman knows as well as I do that even in this financial year local authorities are reckoning to be overspent by £250 million. It is a hard fact of life—the right hon. Gentleman knows it as well as I do—that Labour, not Conservative, controlled local authorities are overspending. The inner London boroughs and some of the other city areas have cocked a snook at the Secretary of State for the Environment and refused to cut back. The right hon. Gentleman must get to grips with this problem.
I suggest that if the right hon. Gentleman is looking for substantial cuts—I hope that he will mention some of the areas where there will be further cuts—he should take a hard close look at the housing budget. The Minister for Housing and Construction has already cut it back to 80,000 units in the coming financial year.
If the Prime Minister goes round the inner city areas—I have been round quite a few in the recess—he will find some which are revitalising themselves. For example, in Liverpool houses are being built for sale at £8,000 to £9,000 per unit. One has only to go across the river there or come down to the development corporation in Northampton to find identically sized units being put up at £18,000 or £19,000. If one comes down
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the motorway to London, one finds comparable houses being built for between £30,000 and £50,000 in the inner London boroughs.
That is a respect in which substantial sums could be saved. If the Government could bring themselves to encourage the sale of houses and to look hard at rents, I believe they would find at least £1,000 million just sitting there for the taking. If the Government are looking for substantial sums of money, I suggest that they should look at the commercial assets of development corporations. They have hundreds of millions of pounds of assets which could be liquidated and put to better use.
Finally, the Prime Minister was asked by one of his hon. Friends to come clean on the staffing of local authorities. It is the Government's responsibility to indicate to the nation that there is overstaffing in local government. None of us likes unemployment. This problem must be faced up to, and the Government should come clean and say that they believe that it is the role of local authorities where they have surplus labour to release it and so reduce their costs.
I end with these reflections. If the social contract is so valuable, and the unions have the degree of control which they indicate they have today, when are they going to show leadership in terms of reducing overmanning, discriminatory practices and other restrictive practices in British industry? It is right that we in Parliament should make a contribution and that the leaders of industry should make a contribution, but the obligation also rests on the shoulders of the leaders of the unions, who can show the greatest possible gain by reducing overmanning.
There is a creditability gap in the performance of the Chancellor of the Exchequer. I heard the comments of the Chancellor during the recess about the rumour that mortgage rates were going up. He said on television that the Government would act to ameliorate the situation. People believed him. But it came as no surprise to any of us to find that he took no action at all when mortgage rates went up to 12¼ per cent. It is this credibility gap between what the Chancellor says and what he actually does a few weeks later that is helping to destroy our economy and this Government as well.

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I make a plea to the Prime Minister, who has not been here throughout our debate, and while I am about it I pay tribute to the Leader of the Opposition for her presence here. There have been serious contributions from all sides of the House in this debate, and I urge the Prime Minister to read them in detail because they contain suggestions and proposals to help the economy out of its difficulty. If he does not act in the near future, and if he is not prepared to ameliorate his policies he should give way to another party, which is prepared to take over.
8.58 p.m.
Mr. Eric S. Heller: The sign language going on between myself and the Leader of the Opposition was only to determine the length of time for which she would like me to speak so that she can follow me. My contribution should stop, she has indicated, sometime before 9.10 p.m. I am particularly grateful to her for allowing me this time, because most of my remarks will be connected with her speech at the Conservative Party Conference last week.
I listened very carefully to the right hon. Lady at that conference and it seemed to me, despite the rapturous reception at the end, that her speech totally failed to meet the needs of the present situation. We are in a crisis—no one can or should deny that—but what sort of a crisis is it?
Mr. Cecil Parkinson: A Socialist crisis.
Mr. Heller: It can hardly be a Socialist crisis when we have never carried out Socialist policies in this country. We have never had Socialism in Britain. What we have got is a Labour Government operating within the context of the capitalist system, and this crisis is one of the failure of the capitalist system, in Britain and indeed in Western Europe. The quicker that fact is understood in this country the better.
It is no good the right hon. Lady looking for Reds under the bed. It is no good her trying to blame this crisis on the left wing of the Labour Party. The left wing of the Labour Party does not control the Government—[HON. MEMBERS: "Rubbish."] It is no good hon. Members act-
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ing like children. They must face the facts. The facts are that we are in a crisis because of the failure of the private enterprise system.
Any Labour Government are always supposed to suffer a crisis of confidence. The reason is that no matter what we do we can never satisfy the international bankers or the friends of the Tory Party. It does not matter what retreats there are or how much we back away from our Socialist convictions, we can never satisfy the Conservatives. The reason is that even the mildest of Labour Governments begin to attack the power and privilege upon which the Conservative Party bases itself.
Last week the Leader of the Opposition referred to when Britain was great. But when Britain was great the working people of this country suffered poverty and mass unemployment. They had not secured a National Health Service or any of the other positive achievements made by Labour Governments. In spite of the unemployment today, and in spite of the crisis, the British people are living better than ever before, thanks to the achievements of successive Labour Governments.
The true aims of the Conservative Party have been revealed by the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), who is an honest man. He has suggested that all subsidies on food and housing and all assistance of any form to industry should be cut. That is basic Tory philosophy. It would mean that in the current crisis all these additional burdens would be placed upon the shoulders of the working people.
The right hon. and learned Member for Surrey, East (Sir G. Howe) said this afternoon that there should be further cuts in public expenditure. When we ask him what that means, what does he say? He says that as far as he is concerned it means that we should stop the programme on which we were elected from being carried out. That is a smokescreen. He knows that the nationalisation of the aircraft industry, the Dock Work Regulation Bill, and so on, involve no basic increase in public expenditure.
When we ask the Opposition what cuts in reality they would make, they never give us an answer. The real cuts that they would make would fall on the poor, on those who have home helps, for example,

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and all those who suffer in our community. That is the point that is never made by Opposition Members. It is never made by the right hon. Lady the Leader of the Opposition. The only answer that she has is that the problem is all due to the so-called Marxist subversives, and so on. That will not do.
The reality is that while my Government, of whom I have been very critical, have conducted policies that are wrong in many respects—we have said so—and while we want a change in economic policy, as outlined by my hon. Friend the Member for Preston, South (Mr. Thorne), what we do not intend to have is a Government dominated and led by the right hon. Lady the Leader of the Opposition. That would mean massive unemployment in Britain and greater burdens on the shoulders of working people. That we shall not have, and the right hon. Lady had better understand it. We shall not support in any way any effort to bring about her type of Toryism, which is a return to the beginning of the century.
9.7 p.m.
Mrs. Margaret Thatcher: I hardly expected the hon. Member for Liverpool, Walton (Mr. Heffer) and myself to agree on the future. However, I am very glad that I gave him nearly 10 minutes in which to make his speech, because I think that what he has shown is that if we ever have another Labour Government, they will not operate a mixed economy. They will operate the total Socialist State, which will be total State control and the end of all individual freedom.
I know that the hon. Gentleman and I disagree. We disagree openly and honestly. I believe that capitalism and democracy are inseparable. I believe that one does not get the one without getting the other. I believe that most people prefer capitalism because it gives them a better standard of living and it protects and preserves their freedoms. That is perhaps why whenever we have an opinion survey on the future of nationalisation it always returns the same results—the people do not want more.
We started this debate with a very long and detailed speech from the Chancellor of the Exchequer. One or two things
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about it were, of course, predictable. We knew that when Chancellor Schmidt was coming here yesterday, inevitably he would be quoted as saying that sterling is undervalued. I just thought, therefore, that I had better look back to see what the present Chancellor of the Exchequer said in the election campaign of February 1974 on "Election Call". We all listen to our opponents on "Election Call", and I recalled something that he had said. He said,
"Countries which have managed their economy sensibly, like Germany under a Socialist Government, have managed to increase the value of their currency."
Perhaps the right hon. Gentleman will now take a few tips from Chancellor Schmidt, particularly those about profits, and not in terms of speeches but in terms of the action he takes.
Nothing I can say about the Chancellor of the Exchequer is half as damning as the judgment he passed on himself during the recent Labour Party conference, when he was reported as saying that the alternative to another loan would be economically savage and would produce riots in the streets. What an account of one's stewardship to say, after two and a half years, that there will be riots in the streets unless the capitalist countries bail one out!
I have felt at times today that there was not a sufficient appreciation of the seriousness of the economic position. Some people seem to be writing it off and saying "We have been here before". I cannot remember when we have been so near to the end of our borrowing powers as we are now. People do not have to get into the hands of international bankers if they run their affairs in such a way that they do not need to go for loans. But the Chancellor has probably asked for more loans than any previous Chancellor has, and some have been in office rather longer than he. Indeed, the whole history of his stewardship has been of one loan after another.
We started off with a loan of$2,500 million which the Chancellor said was the biggest loan ever raised from international bankers. We went on to the increased swop facility with the New York Federal Reserve Bank. Then, still in July 1974, we went on to have a new facility from the Shah of Iran of $1,200

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million. Then the Chancellor drew the entire quota of the IMF oil facility. After that, in May 1976, he drew the first IMF tranche. Even all this was not enough, and we had to have another standby credit of $5,000 million of which an unknown amount has been used up. Now the Chancellor has gone to the IMF for the main tranche, leaving only a super tranche.
I wonder whether everyone realises just how near the end of our borrowing powers we are and how little we have left to support sterling. We do not know how much of the standby credit the Chancellor has used, though we know that he has admitted to over $1,000 million. We believe that more was used up in September. We know also that there will almost certainly be a foreign exchange liability, which has not been revealed, on the exchange equalisation account.
Adding all those figures together, I shall be very surprised if there is much more left out of the tranche which the Chancellor hopes to get from the IMF than about $1,800 million. If that is all that is left to support sterling—perhaps that is why the Bank of England withdrew support, because it can support only for technical reasons and cannot support the main value of sterling now—that is all there is to support our current balance of payments deficit, unless the Chancellor is already arranging loans on a Government-to-Government basis with other oil countries, and unless he is we are at the end of our borrowing. That is why we have absolutely no choice but to change policies.
I have felt also today that we have not given quite enough attention to what my right hon. Friend the Member for Farnham (Mr. Macmillan) termed the structural shift that has taken place from the productive sector to the non-productive sector. This was well set out in the Eltis and Bacon articles in The Sunday Times, and later in their books, showing that we can no longer go on tinkering with the economy but we have to look at the real structural changes which are needed.
I am the first to admit that some of the structural changes have been going on for quite a time. I am the first to admit, for example, that if the diagnosis
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now is that we have more consumers of expenditure than we have providers, we must have a change of strategy which moves from those who consume expenditure to improving the chances and numbers of those who provide and create the wealth.
But that is not what the Chancellor is doing. Public expenditure under our Conservative Government was high enough, but it never rose above 50 per cent. of the gross national product. He has shifted it to 60 per cent., so he is going in a direction the reverse of the underlying strategy which is needed.
The right hon. Gentleman went back to some of the problems during our time, but the sterling crisis that we have now is nothing to do with the problem of our time two and a half years ago. When the right hon. Gentleman opened his Budget in 1975, sterling was at $2·30. It has suffered the most severe fall that it has ever had since then, and the right hon. Gentleman can only look to the policies that he has been following to try to explain that. He cannot squeal now about what happened two and a half years ago. This is the Chancellor's sterling crisis. Unfortunately, it is Britain's sterling crisis, too.
The recent fall in the standing exchange rate has revealed the extent to which the pound has become suspect. One of the means of judging how far a currency should fall compared with another is to compare their relative inflation rates internally. If one does that with sterling and the dollar in the United States and the deutschemark, one finds some interesting results.
Let us give the Chancellor of the Exchequer the benefit of the doubt. Let us consider the figures since October 1974. During that time the internal value of the pound has declined by 28 per cent., while the internal value of the deutschemark has declined by only 9 per cent., and the internal value of the dollar by only 11 per cent. That shows how much better those countries have done with their internal problems than we have during the Chancellor's stewardship.
If one translates those internal inflation rates on to the value of sterling, one finds that the pound ought to buy DM4·88, but it does not. It buys only DM4·10. The pound ought to buy $1·94, but it

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does not. Today it buys only $1·66. The difference is due to the lack of confidence of other countries in the Chancellor's policies. Were it not for the confidence factor and we were judging on the relative internal inflation rates, the value of sterling today would be higher.
The value of sterling is not higher not because of speculation, and not because of international bankers. It is because the overseas holders of sterling have taken a view not only of the Chancellor's past—that is bad enough—but of his future policies, and they have decided that his inflation targets are not going to be reached—and they have good justification for that, because his inflation targets have never been reached.
What is more, inflation has started to turn upwards again, as the right hon. Gentleman knows full well. The rate increased substantially last month. I do not know what will happen shortly—the right hon. Gentleman probably does—but I think he will accept that the danger now is of increasing inflation, not of reducing it. That is increasing inflation from the already high base.
The other view that other countries have taken is that the Chancellor's economic strategy is not going to work, and today he has given us absolutely no new strategy to replace it. Whatever the problems, the Government and the House—
Mr. Joan Evans: Will the right hon. Lady's speech help?
Mrs. Thatcher: Everything that I am saying is well known. What we have to do is to face reality and stop running away from it.
Whatever the economic problems, it is the duty of the Government and, I believe, of the House to try to create policies that will restore confidence in sterling and, secondly, that are suitable and fit for the skills and aptitudes of our people. Those skills and aptitudes are as great as ever they were, but they are not being released in any way. We used to be the workshop of the world, but we are not now. We have the same skills, the same initiative and the same spirit, but they are not being given a chance to work because of the Government's strategy.
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I disagree with the hon. Member for Cornwall, North (Mr. Pardoe), who made one of the most cynical and depressing speeches that I have ever heard. I wonder why he stays in the House if he takes the view that there is precious little that we can do about righting the fundamental problems before us. The hon. Gentleman spent two elections fighting me and then went as far away as he could. Fortunately, I acquired none of his pessimism.
There is no point in facing the situation pessimistically. We must face it realistically and on the basis that we can put into practice policies that will cope with it. Tough speeches are not enough. If tough ministerial speeches could strengthen the money markets, the pound would be one of the world's hardest currencies. We need the open recognition that the Government's economic strategy has collapsed, and we need a series of measures that will restore confidence.
I turn to consider the Government's economic strategy. The problem has arisen from very high public expenditure as a proportion of the gross national product. Public expenditure is not high in relation to nothing. It is high as a proportion of the gross national product.
Of course it is far easier to have high public expenditure. It is unpleasant for Departments to have to cut it. I have been through a cuts process myself, and so I know what it is like. It is much easier to go on spending, spending, spending.
Every year 40,000 people leave the Civil Service, either to retire or to go to other jobs. We have had increases over the years in the Civil Service, but I doubt whether many people think that we have run a very much more efficient administration as a result—quite the contrary. The increased numbers do not necessarily seem to have given rise to increased efficiency.
We have had enormous increases in local government over the years—
Mr. Healey: The right hon. Lady is making a fascinating speech. [HON. MEMBERS: "A very good speech."] The other day she wrote an introduction to a pamphlet by Lord Blake in which he pointed out that the last Conservative

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Administration, of which she was a member, saddled the country—[Interruption.]
Mrs. Thatcher: I am very grateful to the Chancellor. I did not hear what he said, but never mind.
Mr. Healey rose—
Mrs. Thatcher: I will not give way.
Mr. Healey>rose—
Mr. Speaker: Order. The Chancellor of the Exchequer knows that if the right hon. Lady, whom I called to address the House, does not give way, he must keep his seat.
Mrs. Thatcher: It seems to me that both the Chancellor and his supporters are saying that they do not like the increases in staff. Therefore, they cannot object to any reductions that take place through natural wastage. If they think that the increases should never have taken place, they cannot object to reducing the present numbers in that way, which is a very good way of cutting public spending. [Interruption.] I do not know what the wastage in the National Health Service is. I accept that it is about 9 per cent. The same comment might be made about that.
Natural wastage provides the means for a possible substantial decrease in public expenditure without one sacking. That is exactly the way in which it has been done in Australia and New Zealand. The people there took a slightly different view, which was that public expenditure had to be cut. The people knew it. It was reduced without a single sacking, by going through every Department. The standing of the Governments there in the opinion polls is up. So much for people who think that it cannot be done because the public will not allow it.
Public sector expenditure has led to an enormous public sector deficit. The Chancellor knows this. He was warned time and time again that the attitude he took towards that deficit would in the end unhinge his whole economic strategy, and that is exactly what it has done. Because it was so large, he has found great difficulty in financing it. It was easy at first. There was a large balance of payments deficit, which helps with financing the public sector borrowing requirement. The Chancellor will
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now find that very much more difficult, and he knows full well what has happened. He cannot finance his deficit at ordinary rates of interest. Therefore, he is having to put up the interest to a prohibitive rate of 15 per cent.—a rate that will put the rest of his economic strategy in jeopardy.
The right hon. Gentleman's strategy has been based on the idea that this year we must keep a high deficit, we must not flinch from public expenditure cuts next year, but that they are not, by God, to take place this year. I wish to emphasise that the strategy is based on a high deficit this year, and that next year there will be public expenditure cuts. At that time more will be put back into the private sector, and the recovery in the private sector will take up the slack in the public sector. That is his general strategy.
However, the Chancellor now finds that he cannot finance the deficit, except by imposing a minimum lending rate of 15 per cent. That 15 per cent. figure is in danger of aborting the whole economic recovery on which the strategy depends. The right hon. Gentleman knows that. Firms cannot afford to invest if they have to pay 15 per cent. for the money. Products cannot command their price in the market and manufacturers are left with them.
The right hon. Gentleman knows that if one is to be successful one has to make certain kinds of investment. First, one has to replace obsolete machinery. By doing that, one may well create unemployment problems because the new machinery does not usually require as many people to man it as the old. But if investment is to stop it will be fatal. There must be enough resources to enable investment to take place in expansion in order to take up the slack. We need substantial industrial recovery. The Chancellor has now stopped that process by putting up the rate to 15 per cent.
Let us look at the situation cumulatively and examine the other damage inflicted by the Chancellor on the private sector. He complains about unemployment. So do I. All my life I have only had the product of my work to live on, and I can understand what it must be like to be out of work. I do not accuse anybody anywhere in the House of wanting unemployment, but the present policies have resulted in unemployment.

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The Chancellor of the Exchequer has aggravated a situation of rising unemployment by putting a tax on jobs in the form of a payroll tax that will cost another £1,000 million. The right hon. Gentleman admitted that in the first year it would cost 60,000 jobs. The Select Committee on Public Expenditure said that it would cost 150,000 jobs in the private sector. The right hon. Gentleman then adds a further burden in the form of a lending rate of 15 per cent. I am told on the best calculation I can get that it will put another £700 million on to the existing industrial base over and above what industry was paying on 11 per cent. That money could have gone into investment. Therefore, we shall lose that investment and the jobs that go with it.
Let us examine the problems that are being created by the Chancellor. In financing one's working capital, one has to increase stocks if one is to expand. The Chancellor may say that even though the minimum lending rate has risen to 15 per cent., one can get it off one's income tax. But I must point out that the intermediate problem is that of cash flow. That will put many of the smaller businesses on which so many people depend for their jobs in serious difficulty. Furthermore, it will have a damaging effect on those who pay mortgages. Indeed, I understand that it will involve a further £200 million for those who will have to pay for mortgages at the increased rate. It will also have a highly damaging effect on the housing and construction industry, which is another area in which one could achieve an expansion of jobs.
We have reached the position in which an interest rate of 15 per cent. is in danger of aborting the very economic recovery on which we depend to take up jobs in the public sector. When one has to cut expenditure, one cannot afford to go on at this rate of public expenditure because one cannot finance it. Unless one cuts it, one will be able neither to finance this programme, nor to achieve economic recovery. That is why the Chancellor's whole economic strategy is in ruins and why the country now does not have a strategy. Unless we do something, not only to cut public expenditure but later to change taxation levels, we shall have no
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chance whatever of having a standard of living anything like that of our competitors.
One thing is obvious. The people will not finance 60 per cent. expenditure by taxation levels. They already think that taxation levels are far too high. Already, at every level, whether it is what the unskilled man earns, what the skilled craftsman earns, what the manager earns or what the person who is retired has in addition to his pension, there are complaints about the tax levels.
How people can go on saying that they want more public expenditure I do not know. What they are saying is that they want the Government to take more out of the pockets of the people so that the Government can decide how it shall be spent. People will not be left with a choice. That does not seem to be very much in people's interests and they do not think so either. Of course we would all say that the Government must cut their public expenditure. They have no choice. They cannot go on borrowing. People will not go on paying more tax. They will not go on paying 15 per cent. for very long. The Government have no choice and that is the message which it has been difficult to get across.
The Prime Minister talked about the long march. The last time he was in a position of authority in the Treasury he talked about "Steady as she goes." We were then "Steady as she goes" on a disaster course and we devalued. This time we are on the long march, but we are on the wrong road. The further we go down that road—15 per cent. is no incentive for economic recovery—the worse it will be for sterling and the worse it will be for Britain.
This Chancellor has presided over the worst economic decline we have seen in the post-war period. Because of these strategies there is only decline ahead and that is why we shall vote against the Government tonight.
Hon. Members: Hear, hear.
9.32 p.m.
The Prime Minister (Mr. James Callaghan): I thought that hon. Members on the Conservative Benches were getting up to reply to their Leader. That does not seem to be quite the right thing.

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Before I begin my speech perhaps I might be allowed to say what it was that the right hon. Lady did not hear when the Chancellor rose to his feet. The hon. Lady was complaining about the number of civil servants and local government officials. All that my right hon. Friend wanted to do was to point out that in a pamphlet, which she commended, the conclusion was drawn that the Local Government Act had led to a huge increase in expensive bureacuracy and that its passing by a Conservative Government, along with our other contributions to the multiplication of public servants, weakened our whole stance in dealing with what I believe is to be a major issue during the next few weeks. Parliament saddled the country, according to the latest statistics, with a larger increase in public servants than any previous Administration in the past 15 years.
I know that when we are in opposition we tend to forget what has been done in Government. I have no particular reason to call the kettle black tonight, but it seems that the right hon. Lady thinks that all our troubles are due to an excess of public expenditure. Is that really so? Is that really the diagnosis of the Conservative Party? Does it think that all our troubles are due to public expenditure? If that is its view, I beg Opposition Members to read what their own document says about our present difficulties.
Until about a quarter to nine tonight it was a very good debate, but since then we have seen the arrival of a great many other people—[HON. MEMBERS: "Oh".] I was not referring to my hon. Friend the Member for Liverpool, Walton (Mr. Heffer) but to the bellowing that we are now hearing. That did not take place before that hour. Those who were then present were trying to discuss the issue seriously whilst most hon. Members were in the Dining Room.
If we are to consider the seriousness of the situation, I shall quote from a passage in "The Right Approach" with which I agree entirely. It states:
"the troubles of our economy are by now long-standing and deep-seated. To make the structural changes that are necessary to restore the dynamic of a mixed economy will need a settled approach over a long, hard haul. It is idle to talk … of the economic miracle that is round the corner. The foundations of economic health will not be relaid in less than a decade."
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That seems to go a little deeper and much wider than a speech which concentrated during its last 22 minutes on whether public expenditure is too high to enable us to get on with our economic policy. Since the war Governments have tried nearly every approach to this problem. I remind the House that we have had tight money, easy money, high fiscal rates and low fiscal rates. We have had floating sterling rates and fixed sterling rates. The solution has eluded every Government so far.
I quote what was said by the right hon. Member for Sidcup (Mr. Heath). I believe that a certain amount of humility in approaching this problem does not come amiss of any of us. When the right hon. Gentleman met a group of industrialists in 1973 he said:
"The curse of British industry is that it has never anticipated demand. When we came in we were told there were not sufficient inducements to invest. So we provided investments. Then we were told people were scared of balance of payments difficulties leading to 'stop-go'. So we floated the pound. Then we were told of fears of inflation. And now we are dealing with that. And still you are not investing enough."
That is really a little more profound than an attack on the Government of the sort made by the right hon. Lady.
I agree with the right hon. Lady in disagreeing with the hon Member for Cornwall, North (Mr. Pardoe). This is certainly not a terminal illness, but we must pursue policies very steadily. I shall enumerate them although Opposition hon. Members may not like them. We must pursue the social contract. We must pursue an incomes policy. We must build up manufacturing industry. We must keep public expenditure in bounds—[HON. MEMBERS: "Oh."] I shall return to that, if Opposition hon. Members want to jeer, and tell them what their record is. Above all, we have tried to preserve social cohesion.
Some of the remedies I have heard put forward today by the hon. Member for Cirencester and Tewkesbury (Mr. Ridley), and the right hon. and learned Member for Surrey, East (Sir G. Howe), would be so injurious in their effects that they would result in a convulsion and revulsion which would prevent whatever effects the hon. Gentleman thinks might be forthcoming from appearing.

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I say to the House in all seriousness that at a time when our standards are changing in many ways, and when there are different values, it is very important indeed that we do not stretch what might be regarded as ideologically pure remedies by the hon. Member for Cirencester and Tewkesbury to the point where we destroy the social cohesion of this country.
Let me give one example of what I mean. This is the way in which the Conservative Party proposes to approach the idea of national unity. As I understand it, the Conservatives are going to repeal the 1975 Industry Act and are going to get rid of disclosure provisions and planning agreements. They will abolish the National Enterprise Board. They will curtail and weaken the powers of the Scottish and Welsh Development Agencies. They intend to sell off British shipbuilders—is Harland and Wolff to go too?—to private bidders. The British National Oil Company would be sold off and its assets distributed to private bidders. They intend to scrap the legislation on comprehensive education.
Then, of course, against that background they will go to the trade unions and say "We want pay restraint". Or will they? Are they to go to the trade unions and say that they want pay restraint or are they not? It is not for me to say, but the Bow Group says that one has either to be a palmist or an astrologer to know the Conservative Party's policy on incomes. Let me quote some of these examples of double talk.
Mr. Ridley rose—
The Prime Minister: I have given up my time to the right hon. Lady and I would like to get on. The Conservative Party says that restraint in pay bargaining can play a vital rôle but experience does not suggest that a prices and incomes policy is the best way of achieving a solution; and that same experience demonstrates the unwisdom of flatly and wholly rejecting the idea of a prices and incomes policy. What are we to make of that double talk?
There is no doubt that we shall need a new pay agreement next year, although I must say that we shall not he helped in achieving it by some of the ostentatious displays of luxury that we have
160
seen of wealthy ladies chartering an airline to fly two dogs across the Atlantic. I will gladly give way if someone on the Opposition Front Bench cares to tell me: is the view of the hon. Member for Henley (Mr. Heseltine) accepted or not, that trade union leaders should be ashamed of themselves for agreeing to pay restraint? What is the policy of the Conservative Party on that? Does it want pay restraint or does it not?
Mr. Ridley rose—
The Prime Minister: The hon. Gentleman is not on the Front Bench yet. What is needed is a clear approach by the Opposition if they are to convince the Government of their so-called alternative policies on this matter. All we know is that they will embark upon a series of measures of repeals of action which has been taken by this Government combined with a muddled approach on incomes policy, and nobody knows whether they intend to ask for restraint or not. That simply will not do if the Opposition are to present themselves to the country.
I turn to some of the things which have been said about the question of money supply. Action was taken last week because money supply was increasing at a rate inconsistent with the Chancellor's guidelines. If he had allowed that to continue, he would have run the risk of a much higher level of inflation in due course. He therefore acted promptly unlike our predecessors in 1972–73. Having set a target of 12 per cent., my right hon. Friend stuck to it.
As we have been challenged about this, I remind the Opposition of what happened in 1972–73. The same degree of strain came on their economic policy as is coming on ours. What was the consequence? Money supply figures increased in 1972 by 26½ per cent. and in 1973 by 28·2 per cent. Why did not Lord Barber take the kind of action which has been taken now by my right hon. Friend? How does it lie in the mouths of the Opposition to reproach my right hon. Friend now? When they came to the crunch, they crumbled and ran, but they ran straight into confrontation with the miners.
What we want to do is to work with the trade unions, with the workers of all

161
denominations, and with the employers in order, through the social contract, to avoid that kind of confrontation. The social contract is one of our major instruments, and I deeply resent the right hon. Member for Leeds, North-East (Sir K. Joseph) calling it a fool's bargain. That statement of his merely shows his own lack of understanding.
Sir Keith Joseph: This country has had an abundance of good will and I do not doubt that there has been good will. But the fact is that it has been a fool's bargain because it has committed the Government, in return for wage restraint, which was in trade unionists' own interest—a wage restraint at levels that they would in most cases not have exceeded if there had been free collective bargaining—to maintain public spending which is going to force the Government to raise taxes, as they have already been forced to raise interest rates, and to increase the inflation and the unemployment which they have already multiplied.
The Prime Minister: The whole House is indebted to the right hon. Gentleman for stating his view so clearly? Is it the view of the Opposition? Three days before the Conservative document was published, I had an open letter from the right hon. Gentleman, and I concluded then that he was putting his gloss on the document in order that he could, as far as possible, relieve himself of some of the obligations contained in it.
Having read these sentences on such a vital subject as incomes policy, on which the Opposition are totally unable to tell the country where they stand, I can only say that the hon. Member for Stratford-on-Avon (Mr. Maude) must have had a large roll of Sellotape to bind those sentences together in the document in order to make any sense of it at all.
I come back to some of the things that are going for this country. Inflation is down. The new pay agreements are already working, and over 1½ million people have accepted them. Public expenditure has levelled off. Savings are high. Manufacturing investment—this is based on intentions made before the increase in the Minimum Lending Rate, and those intentions will depend on how long that rate lasts—is estimated to grow
162
by between 15 and 20 per cent. next year. Employment in manufacturing industry started to increase in June. The public sector borrowing requirement will come down from 9 per cent. of GDP to 6 per cent. next year.
I return to my point that our credit is still good. I believe that we should be making a profound mistake if we were to have a surgical operation to try to cut £10 billion off the PSBR. It would be totally intolerable. Therefore, with the oil resources that are coming along, the sensible policy for this Government—and, indeed, for this country—to pursue is to work on a constantly diminishing percentage of the public sector borrowing requirement as a percentage of the gross domestic product, and to work it down over the next two to three years. This seems to me to be the way in which we can preserve social unity and at the same time take advantage of the great assets which this country has. I recommend this as the best way along which we can proceed, and it is the way in which the Chancellor of the Exchequer is endeavouring to do it.
Mr. Crawford: The Prime Minister referred to oil—
The Prime Minister: I have had rather a lot of interruptions. The oil belongs to the United Kingdom. That is quite clear.
The number of industrial stoppages is the lowest since the 1950s. The number of days lost is lower than for several years. Industry is strongly competitive. In engineering, in the second quarter, the home orders rose by 2½ per cent. and export orders rose by 10½ per cent.
Those are some of the things that are going right for Britain today, and this is why there is no reason to depart from the overall objectives that the Government have set. Unlike 1973–74, the indicators today are all pointing in the right direction. We have got to move along that path. [HON. MEMBERS: "What about unemployment?"]I Yes, even in regard to unemployment this is true.
Now I come back once again—
Mr. John Biffen: When the Administration calculated that it would be necessary to have a public sector borrowing requirement of its known

163
dimensions, did they then foresee that a Minimum Lending Rate of 15 per cent. would be necessary to secure its financing?
The Prime Minister: I think the answer is clear to the hon. Gentleman. If it had not been for the depreciation of sterling—and I agree with what the Leader of the Opposition said about the confidence factor there—it would have been much easier to finance the borrowing requirement of the Government than it is today. It is this interaction between the depreciation of the sterling rate and the need to sell gilt-edged which is responsible for some of the problems we have on the Minimum Lending Rate. That is why it is important and essential that the Minimum Lending Rate should not stay at its present level for a moment longer than necessary.
Mr. Leon Brittan rose—
The Prime Minister: I come to public expenditure. The Conservatives have made many proposals for reductions—for example, in housing. The housing subsidies are about £1,080 million. Let us assume that £300 million were cut off that. That is not an unreasonable assumption. For council house tenants it would mean an increase of £1·80 a week on rents.
Let us suppose that the second item in the catalogue of the right hon. and learned Member for Surrey, East was adopted, namely, to get rid of food subsidies. That would add 4·8 points to the food index.
Let us suppose that the third item put forward by the right hon. and learned Gentleman were carried into effect, namely, to abolish the transport subsidies. That would save £561 million and would have the effect of doubling the fares on British Railways.
At the end of this exercise, the right hon. and learned Gentleman would have saved £1,267 million. What the consequences would be to the pay policy if we doubled fares, put up prices on food in the way that he suggests and increased the rents, I hardly dare think.
But that is not the end. The right hon. and learned Gentleman wants to save £10 billion, not just a measly £1
164
billion. That is not the end. The tax credit scheme would cost a minimum of £3 billion. It means that the right hon. and learned Gentleman would be down £2 billion before he started on this exercise if the tax credit scheme was introduced. The old-age pension is going up next month at a heavy cost, to £15·30 for a single person and to £24·50 for a married couple. Would the right hon. and learned Gentleman touch that, or would it be left untouched?
I say to the right hon. and learned Gentleman that he could not cut public expenditure by £10 billion. He could not cut it by 10 per cent. He said that he would reduce it by from 60 per cent. to 50 per cent. He could not do it, he knows that he could not do it, and he is trying to deceive the House when he says that he would do it.
The right hon. and learned Gentleman asked me who started the increase in public expenditure. I can tell him. It was he and his right hon. and hon. Friends who started the increase in public expenditure. I am in favour of high public expenditure. Anyone who travels round the country and sees the need to refurbish our inner cities, sees the need for new housing stock and sees all the other needs that have to be met must be in favour of providing more public expenditure. But we have to face, and to face reluctantly but nevertheless necessarily, as I have said on many previous occasions, that we have to create the wealth before we distribute it. Therefore, we are giving the first priority to manufacturing investment.
I finish by saying that it is essential that we maintain the value of our currency. It is essential that we give priority to industrial investment. Our chosen instruments for this purpose—and there is none better—are the social contract and giving priority to manufacturing itself. We have as an obligation and as our objective the need to overcome inflation, to improve the status of workers in industry, to have social policies which will protect those in need and to preserve the social cohesion of our country.
The Opposition would go back to 1973. They would tear the country in two. The country is not divided now, as it was in 1974. There are millions of people in the country who understand

165
the seriousness of the situation and want us to succeed. Millions of people are looking to the Labour Government to succeed. We shall not waver. We shall bring the country through.
Question put, That this House do now adjourn:—
The House divided: Ayes, 288, Noes 301.

Division No. 312.]

AYES

[10.00 p.m.

Adley, Robert

Fox, Marcus

Lester, Jim (Beeston)

Aitken, Jonathan

Fraser, Rt Hon H. (Stafford & St)

Lewis, Kenneth (Rutland)

Alison, Michael

Fry, Peter

Lloyd, Ian

Amery, Rt Hon Julian

Galbraith, Hon T. G. D.

Loveridge, John

Arnold, Tom

Gardiner, George (Reigate)

Luce, Richard

Atkins, Rt Hon H. (Spelthorne)

Gardner, Edward (S Fylde)

McAdden, Sir Stephen

Awdry, Daniel

Gilmour, Rt Hon Ian (Chesham)

MacCormick, Iain

Bain, Mrs Margaret

Gilmour, Sir John (East Fife)

McCrindle, Robert

Baker, Kenneth

Glyn, Dr Alan

Macfarlane, Neil

Banks, Robert

Godber, Rt Hon Joseph

MacGregor, John

Beith, A. J.

Goodhart, Philip

Macmillan, Rt Hon M. (Farnham)

Bell, Ronald

Goodhew, Victor

McNair-Wilson, M. (Newbury)

Bennett, Dr Reginald (Fareham)

Goodlad, Alastair

McNair-Wilson, P. (New Forest)

Benyon, W.

Gorst, John

Madel, David

Berry, Hon Anthony

Gow, Ian (Eastbourne)

Marshall, Michael (Arundel)

Biffen, John

Gower, Sir Raymond (Barry)

Marten, Neil

Biggs-Davison, John

Grant, Anthony (Harrow C)

Mates, Michael

Blaker, Peter

Gray, Hamish

Mather, Carol

Body, Richard

Grieve, Percy

Maude, Angus

Boscawen, Hon Robert

Griffiths, Eldon

Maudling, Rt Hon Reginald

Bottomley, Peter

Grimond, Rt Hon J.

Mawby, Ray

Bowden, A. (Brighton, Kemptown)

Grist, Ian

Maxwell-Hyslop, Robin

Boyson, Dr Rhodes (Brent)

Grylls, Michael

Mayhew, Patrick

Brittan, Leon

Hall, Sir John

Meyer, Sir Anthony

Brocklebank-Fowler, C.

Hall-Davis, A. G. F.

Miller, Hal (Bromsgrove)

Brotherton, Michael

Hamilton, Michael (Salisbury)

Mills, Peter

Brown, Sir Edward (Bath)

Hampson, Dr Keith

Miscampbell, Norman

Bryan, Sir Paul

Hannam, John

Mitchell, David (Basingstoke)

Buchanan-Smith, Alick

Harrison, Col Sir Harwood (Eye)

Moate, Roger

Budgen, Nick

Harvie Anderson, Rt Hon Miss

Monro, Hector

Bulmer, Esmond

Hastings, Stephen

Montgomery, Fergus

Burden, F. A.

Havers, Sir Michael

Moore, John(Croydon C)

Butler, Adam (Bosworth)

Hawkins, Paul

More, Jasper (Ludlow)

Carlisle, Mark

Hayhoe, Barney

Morgan, Geraint

Chalker, Mrs Lynda

Heath, Rt Hon Edward

Morgan-Giles, Rear-Admiral

Churchill, W. S.

Henderson, Douglas

Morris, Michael (Northampton S)

Clark, Alan (Plymouth, Sutton)

Heseltine, Michael

Morrison, Charles (Devizes)

Clark, William (Croydon S)

Hicks, Robert

Morrison, Hon Peter (Chester)

Clarke, Kenneth (Rushcliffe)

Higgins, Terence L.

Mudd, David

Clegg, Walter

Holland, Philip

Neave, Airey

Cockcroft, John

Hooson, Emlyn

Nelson, Anthony

Cooke, Robert (Bristol W)

Hordern, Peter

Neubert, Michael

Cope, John

Howe, Rt Hon Sir Geoffrey

Newton, Tony

Cordle, John H.

Howell, David (Guildford)

Normanton, Tom

Cormack, Patrick

Howell, Ralph (North Norfolk)

Nott, John

Corrie, John

Howells, Geraint (Cardigan)

Onslow, Cranley

Costain, A. P.

Hunt, David (Wirral)

Oppenheim, Mrs Sally

Crawford, Douglas

Hunt, John (Bromley)

Osborn, John

Critchley, Julian

Hurd, Douglas

Page, John (Harrow West)

Crouch, David

Hutchison, Michael Clark

Page, Rt Hon R. Graham (Crosby)

Davies, Rt Hon J. (Knutsford)

Irving, Charles (Cheltenham)

Paisley, Rev Ian

Dean, Paul (N Somerset)

James, David

Pardoe, John

Dodsworth, Geoffrey

Jenkin, Rt Hon P. (Wanst'd & W'df'd)

Pattie, Geoffrey

Douglas-Hamilton, Lord James

Jessel, Toby

Panhaligon, David

Drayson, Burnaby

Johnson Smith, G. (E Grinstead)

Percival, Ian

du Cann, Rt Hon Edward

Jones, Arthur (Daventry)

Peyton, Rt Hon John

Durant, Tony

Jopling, Michael

Pink, R. Bonner

Dykes, Hugh

Joseph, Rt Hon Sir Keith

Price, David (Eastleigh)

Eden, Rt Hon Sir John

Kaberry, Sir Donald

Prior, Rt Hon James

Edwards, Nicholas (Pembroke)

Kellett-Bowman, Mrs Elaine

Pym, Rt Hon Francis

Elliott, Sir William

Kershaw, Anthony

Raison, Timothy

Emery, Peter

Kilfedder, James

Rathbone, Tim

Evans, Gwynfor (Carmarthen)

Kimball, Marcus

Rawlinson, Rt Hon Sir Peter

Ewing, Mrs Winifred (Moray)

King, Evelyn (South Dorset)

Rees, Peter (Dover & Deal)

Eyre, Reginald

King, Tom (Bridgwater)

Rees-Davies, W. R.

Fairbairn, Nicholas

Kirk, Sir Peter

Reid, George

Fairgrieve, Russell

Kitson, Sir Timothy

Renton, Tim (Mid-Sussex)

Fell, Anthony

Knight, Mrs Jill

Rhys Williams, Sir Brandon

Finsberg, Geoffrey

Knox, David

Ridley, Hon Nicholas

Fisher, Sir Nigel

Lamont, Norman

Ridsdale, Julian

Fletcher, Alex (Edinburgh N)

Lane, David

Rifkind, Malcolm

Fletcher-Cooke, Charles

Langford-Holt, Sir John

Rippon, Rt Hon Geoffrey

Fookes, Miss Janet

Latham, Michael (Melton)

Roberts, Michael (Cardiff NW)

Forman, Nigel

Lawrence, Ivan

Roberts, Wyn (Conway)

Fowler, Norman (Sutton C'f'd)

Lawson, Nigel

Ross. Stephen (Isle of Wight)

Rossi, Hugh (Hornsey)

Stanbrook, Ivor

Wainwright, Richard (Colne V)

Rost, Peter (SE Derbyshire)

Stanley, John

Wakeham, John

Royle, Sir Anthony

Steel, David (Roxburgh)

Walder, David (Clitheroe)

Sainsbury, Tim

Steen, Anthony (Wavertree)

Walker, Rt Hon P. (Worcester)

St. John-Stevas, Norman

Stewart, Ian (Hitchin)

Walker-Smith, Rt Hon Sir Derek

Scott, Nicholas

Stokes, John

Wall, Patrick

Scott-Hopkins, James

Stradling Thomas, J.

Warren, Kenneth

Shaw, Giles (Pudsey)

Tapsell, Peter

Weatherill, Bernard

Shaw, Michael (Scarborough)

Taylor, R. (Croydon NW)

Wells, John

Shelton, William (Streatham)

Taylor, Teddy (Cathcart)

Welsh, Andrew

Shepherd, Colin

Tebbit, Norman

Whitelaw, Rt Hon William

Shersby, Michael

Temple-Morris, Peter

Wiggin, Jerry

Silvester, Fred

Thatcher, Rt Hon Margaret

Wigley, Dafydd

Sims, Roger

Thomas, Dafydd (Merioneth)

Wilson, Gordon (Dundee E)

Sinclair, Sir George

Thomas, Rt Hon P. (Hendon S)

Winterton, Nicholas

Skeet, T. H. H.

Thompson, George

Wood, Rt Hon Richard

Smith, Dudley (Warwick

Townsend, Cyril D.

Young, Sir G. (Ealing, Acton)

Speed, Keith

Trotter, Neville

Younger, Hon George

Spence, John

Tugendhat, Christopher

Spicer, Jim (W Dorset)

van Straubenzee, W. R

TELLERS FOR THE AYES:

Spicer, Michael (S Worcester)

Vaughan, Dr Gerard

Mr. Spencer Le Merchant and

Sproat, Iain

Viggers, Peter

Mr. Cecil Parkinson.

Stainton, Keith

NOES

Abse, Leo

Davidson, Arthur

Hooley, Frank

Allaun, Frank

Davies, Bryan (Enfield N)

Horam, John

Anderson, Donald

Davies, Denzil (Llanelli)

Howell, Rt Hon Denis (B'ham, Sm H)

Archer, Peter

Davies, Ifor (Gower)

Hoyle, Doug (Nelson)

Armstrong, Ernest

Davis, Clinton (Hackney C)

Huckfield, Les

Ashley, Jack

Deakins, Eric

Hughes, Rt Hon C. (Anglesey)

Ashton, Joe

Dean, Joseph (Leeds West)

Hughes, Mark (Durham)

Atkins, Ronald (Preston N)

de Freitas, Rt Hon Sir Geoffrey

Hughes, Robert (Aberdeen)

Atkinson, Norman

Dell, Rt Hon Edmund

Hughes, Roy (Newport)

Bagier, Gordon A. T.

Dempsey, James

Hunter, Adam

Barnett, Guy (Greenwich)

Doig, Peter

Irvine, Rt Hon Sir A. (Edge Hill)

Barnett, Rt Hon Joel (Heywood)

Dormand, J. D.

Irving, Rt Hon S. (Dartford)

Bates, Alf

Douglas-Mann, Bruce

Jackson, Colin (Brighouse)

Bean, R. E.

Duffy, A. E. P.

Jackson, Miss Margaret (Lincoln)

Benn, Rt Hon Anthony Wedgwood

Dunn, James A.

Janner, Greville

Bennett, Andrew (Stockport N)

Dunnett, Jack

Jay, Rt Hon Douglas

Bidwell, Sydney

Dunwoody, Mrs Gwyneth

Jeger, Mrs Lena

Bishop, E. S.

Eadie, Alex

Jenkins, Hugh (Putney)

Blenkinsop, Arthur

Edge, Geoff

Jenkins, Rt Hon Roy (Stechford)

Boardman, H.

Edwards, Robert (Wolv SE)

John, Brynmor

Booth, Rt Hon Albert

Ellis, John (Brigg & Scun)

Johnson, James (Hull West)

Boothroyd, Miss Betty

Ellis, Tom (Wrexham)

Johnson, Walter (Derby S)

Bottomley, Rt Hon Arthur

English, Michael

Jones, Alec (Rhondda)

Bradley, Tom

Ennals, David

Jones, Barry (East Flint)

Bray, Dr Jeremy

Evans, Fred (Caerphilly)

Jones, Dan (Burnley)

Brown, Hugh D. (Provan)

Evans, Ioan (Aberdare)

Judd, Frank

Brown, Robert C. (Newcastle W)

Evans, John (Newton)

Kaufman, Gerald

Brown, Ronald (Hackney S)

Ewing, Harry (Stirling)

Kelley, Richard

Buchan, Norman

Faulds, Andrew

Kerr, Russell

Buchanan, Richard

Fernyhough, Rt Hon E.

Kilroy-Silk, Robert

Butler, Mrs Joyce (Wood Green)

Fitch, Alan (Wigan)

Kinnock, Neil

Callaghan, Rt Hon J. (Cardiff SE)

Fiannery, Martin

Lamble, David

Callaghan, Jim (Middleton & P)

Fletcher, L. R. (Ilkeston)

Lamborn, Harry

Campbell, Ian

Fletcher, Ted (Darlington)

Lamond, James

Canavan, Dennis

Foot, Rt Hon Michael

Latham, Arthur(Paddington)

Cant, R. B.

Ford, Ben

Leadbitter, Ted

Carmichael, Neil

Forrester, John

Lee, John

Carter, Ray

Fowler, Gerald (The Wrekin)

Lestor, Miss Joan (Eton & Slough)

Carter-Jones, Lewis

Fraser, John (Lambeth, N'w'd)

Lever, Rt Hon Harold

Cartwright, John

Freeson, Reginald

Lewis, Ron (Carlisle)

Castle, Rt Hon Barbara

Garrett, John (Norwich S)

Lipton, Marcus

Clemitson, Ivor

Garrett, W. E. (Wallsend)

Litterick, Tom

Cocks, Michael (Bristol S)

George, Bruce

Lomas, Kenneth

Cohen, Stanley

Gilbert, Dr John

Loyden, Eddie

Coleman, Donald

Golding, John

Lyon, Alexander (York)

Colquhoun, Ms Maureen

Gould, Bryan

Lyons, Edward (Bradford W)

Concannon, J. D.

Gourlay, Harry

Mabon, Dr J. Dickson

Conlan, Bernard

Graham, Ted

McCartney, Hugh

Cook, Robin F. (Edin C)

Grant, George (Morpeth)

McDonald, Dr Oonagh

Corbett, Robin

Grant, John (Islington C)

McElhone, Frank

Cox, Thomas (Tooting)

Grocott, Bruce

MacFarquhar, Roderick

Craigen, J. M. (Maryhill)

Hamilton, W. W. (Central Fife)

McGuire, Michael (Ince)

Crawshaw, Richard

Hardy, Peter

MacKenzie, Gregor

Cronin, John

Harrison, Walter (Wakefield)

Mackintosh, John P.

Crosland, Rt Hon Anthony

Hart, Rt Hon Judith

Maclennan, Robert

Crowther, Stan (Rotherham)

Hattersley, Rt Hon Roy

McMillan, Tom (Glasgow C)

Cryer, Bob

Hatton, Frank

Madden, Max

Cunningham, G. (Islington S)

Hayman, Mrs Helene

Magee, Bryan

Cunningham, Dr J. (Whiteh)

Healey, Rt Hon Denis

Mahon, Simon

Dalyell, Tam

Heffer, Eric S.

Mallalieu, J. P. W.

Marks, Kenneth

Rees, Rt Hon Merlyn (Leeds S)

Thomas, Ron (Bristol NW)

Marquand, David

Richardson, Miss Jo

Thome, Stan (Preston South)

Marshall, Dr Edmund (Goole)

Roberts, Albert (Normanton)

Tierney, Sydney

Marshall, Jim (Leicester S)

Roberts, Gwilym (Cannock)

Tinn, James

Maynard, Miss Joan

Robinson, Geoffrey

Tomlinson, John

Meacher, Michael

Roderick, Caerwyn

Tomney, Frank

Mellish, Rt Hon Robert

Rodgers, George (Chorley)

Torney, Tom

Mendelson, John

Rodgers, Rt Hon William (Stockton)

Tuck, Raphael

Millan, Rt Hon Bruce

Rooker, J. W.

Urwin, T. W.

Miller, Dr M. S. (E Kilbride)

Roper, John

Varley, Rt Hon Eric G.

Miller, Mrs Millie (Ilford N)

Rose, Paul B.

Wainwright, Edwin (Dearne V)

Mitchell, R. C. (Soton, Itchen)

Ross, Rt Hon W. (Kilmarnock)

Walden, Brian(B' ham,L'dyw'd)

Molloy, William

Rowlands, Ted

Walker, Harold (Doncaster)

Moonman, Eric

Ryman, John

Walker, Terry (Kingswood)

Morris, Alfred (Wythenshawe)

Sandelson, Neville

Ward, Michael

Morris, Charles R. (Openshaw)

Sedgemore, Brian

Watkins, David

Morris, Rt Hon J. (Aberavon)

Selby, Harry

Watkinson, John

Moyle, Roland

Shaw, Arnold (Ilford South)

Weetch, Ken

Mulley, Rt Hon Frederick

Sheldon, Robert (Ashton-u-Lyne)

Weitzman, David

Murray, Rt Hon Ronald King

Shore, Rt Hon Peter

Wellbeloved, James

Newens, Stanley

Short, Rt Hon E. (Newcastle C)

White, Frank R. (Bury)

Noble, Mike

Short, Mrs Renée (Wolv NE)

White, James (Pollok)

Oakes, Gordon

Silkin, Rt Hon John (Deptford)

Whitehead, Phillip

Ogden, Eric

Silkin, Rt Hon S. C.(Dulwich)

Whitlock, William

O'Halloran, Michael

Silverman, Julius

Willey, Rt Hon Frederick

Orbach, Maurice

Skinner, Dennis

Williams, Alan (Swansea W)

Orme, Rt Hon Stanley

Small, William

Williams, Alan Lee (Hornch'ch)

Ovenden, John

Smith, John (N Lanarkshire)

Williams, Rt Hon Shirley (Hertford)

Owen, Dr David

Snape, Peter

Williams, Sir Thomas (Warrington)

Padley, Walter

Spearing, Nigel

Wilson, Alexander (Hamilton)

Palmer, Arthur

Spriggs, Leslie

Wilson, Rt Hon Sir Harold (Huyton)

Park, George

Stallard, A. W.

Wilson, William (Coventry SE)

Parker, John

Stewart, Rt Hon M. (Fulham)

Wise, Mrs Audrey

Pavitt, Laurie

Stoddart, David

Woodall, Alec

Pendry, Tom

Stott, Roger

Woof, Robert

Perry, Ernest

Strang, Gavin

Wrigglesworth, Ian

Phipps, Dr Colin

Strauss, Rt Hon G. R.

Young, David (Bolton E)

Prentice, Rt Hon Reg

Summerskill, Hon Dr Shirley

Prescott, John

Swain, Thomas

TELLERS FOR THE NOES

Price, C. (Lewisham W)

Taylor, Mrs Ann (Bolton W)

Mr. James Hamilton and

Price, William (Rugby)

Thomas, Jeffrey (Abertillery)

Mr. Joseph Harper.

Radice, Giles

Thomas, Mike (Newcastle E)

Question accordingly negatived.

PRICE CODE
10.16 p.m.
The Secretary of State for Prices and Consumer Protection (Mr. Roy Hattersley): I beg to move,
That the Counter-Inflation (Price Code) Order 1976 (S.I., 1976, No. 1170), a copy of which was laid before this House on 29th July, be approved.
The Order proposes and contains a revision of the Price Code. That proposed revision has to be judged against a number of indisputable facts—not hopes or suspicions but facts—about inflation policy during the last year.
The first, and certainly the most spectacular, fact, in spite of what we have heard from the Opposition today, is the success we have achieved in cutting the annual inflation rate virtually in half—from 26·9 per cent. to 13·8 per cent. That is a remarkable achievement, almost unique in an industrialised democracy and very largely the result of the efforts and public spirit of the trade unions through the operation of the social contract. The second indisputable fact lacks the arithmetic precision of the first but is of equal importance. The reduction we have achieved is only a beginning. We have not yet moved far enough and we are not yet moving fast enough.
In August, there was an upturn in the Retail Price Index. That was the direct and demonstrable result of a number of causes—most prominent amongst them the drought and its effect on the cost of home-produced food, and the depreciation of sterling with its consequences for the price of imported raw materials. A 4 per cent. fall in the value of sterling produces an unavoidable 1 per cent. increase in the RPI, its full effects taking about a year to work through. That is why measures designed to arrest sterling depreciation, although themselves adding immediately to the cost of living, have the net effect of keeping prices down.
The arithmetic relation between the drought and food prices is less precise. But for some months it will be considerable. I give the most topical example of the drought's inescapable effects. Milk will cost a penny a pint more in January—specifically to help dairy farms sustain their herds despite the extra feeding costs the drought has imposed.
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The consequence of these two adverse factors, drought and depreciation, will be with us for some months. That means that we shall not reduce our inflation rate to the level of that of our industrial competitiors as quickly as we hoped and planned. The inflation rate, on a year by year basis, seems likely to remain at or about its present level for some time—that is about half the rate of the summer of 1975. That is not good enough, and I shall never pretend that to be so. But equally certainly it is an enormous improvement on the accelerated inflation that the drought and sterling depreciation would have triggered off two or three years ago.
The Price Code whose regulations are revised by the Order we debate tonight played a substantial part in both limiting price increases and creating the climate in which a successful pay policy was possible. Over a year, the Price Commission scrutinises around 8,000 price notifications. In the 12 months covered by its last four reports, the Commission recorded that over 1,100 notifications were modified, rejected or withdrawn. The difference between the prices which firms notified to the Commission and the prices they actually took amounts to around £100 million in a year. In addition, over £20 million was secured for consumers when firms reduced or froze their prices to work off profit excesses.
The new Code which I now propose and commend to the House will continue to check inflationary price increases. The amendments are designed to facilitate investment. The latest evidence—I shall turn shorty to the effects on that evidence of the measures announced last Thursday by the Bank of England and discussed by the House today—from both the Departments of Trade and of Industry and the CBI investment intention surveys suggests that we have turned the corner in respect of investment prospects. The Department of Industry survey of investment intentions published on 4th October confirms that a new confidence exists in manufacturing industry.
That confidence has built up gradually as firms discover the benefits of pay restraint and the profitability of export markets. The recovery in profits has preceded this recovery in investment intentions and in actual investment levels. Although 1976 as a whole will still be a

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bad year for industrial investment—4 per cent. to 5 per cent. below the level of 1975—the reduction will be less than we feared at the beginning of the year. Indeed, the declining trend has now been arrested. Investment levels during the last six months of this year will be much higher than we originally anticipated.
It is within this context—hard won gains on the ground and declared expectations of a formidable increase in investment in 1977 over 1976—that we should consider the effects of the measures taken by the Bank of England to reinforce our control of the money supply and maintain the stabilisation path announced by the Chancellor on 22nd July.
While the higher cost of financing will certainly inhibit some investment, its effects on firms with high self-financing ratios will be minimal. I am glad to say that the reaction of many firms—the most notable example over the last week being ICI—confirms this point. Indeed, the Director General of the CBI has already said that the prospect of increasing confidence is more important to industry than a couple of percentage points on the minimum lending rate.
The recovery in profits means that firms have more internal resources for investment and the Price Code amendments, which I now commend to the House, will add to these internal resources. The Government's array of incentives for industrial investment remains unchanged. The market prospects for British goods abroad remain buoyant.
There is no reason to exaggerate the potential effect of a percentage point or so on interest rates on manufacturing investment, provided the markets are there and profits are rising and provided we as a nation can demonstrate the same confidence in our own ability to win through as Chancellor Schmidt and Secretary Simon have shown they have confidence in our position. That point was made with great force on television last week by the Director General of the CBI.
It was to enable industry to increase investment as a response to this new confidence that the Price Code was revised. My predecessor was specific on this point during the debate on 7th July:
"If the economy is to succeed and to sustain full employment … we have to allow
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a rate of return to the private sector and to the public sector which enables them to survive, to invest and to expand".—[Official Report, 7th July 1976; Vol. 914, c. 1380.]
Let me at once make plain that the changes in the Price Code will, for the most part, raise the ceilings which have restrained prices and therefore profits in the past. That is necessary and that is right. It is no use any of us saying that we want a return to full employment and then preventing or inhibiting firms from raising the resources which they need to finance expansion. Our main aim must be not to prevent the improvement in profit levels but to ensure that profits are used wisely and reinvested in economic expansion. The main object of the revision of the code is to enable companies to rebuild profits as long as we can be sure that the consequent increases in profits will be used for investment purposes.
Mr. Dennis Skinner: Can my right hon. Friend tell us specifically how the increased profits that will accrue from the relaxation of the Price Code will be diverted into investment? What sort of financial instrument have the Government in their possession to force firms to plough that money into the areas where my right hon. Friend feels it ought to be ploughed?
Mr. Hattersley: If my hon. Friend will bear with me for a moment, he will see that the regulations governing the Price Code revision embodied in the Order which I now offer the House insist that the relaxation be actually related to investment. In a moment or two, I shall go through in some detail the policy which I now offer and the requirements which we impose to ensure that the relaxations are literally related to new investment rather than simply used for other purposes which my hon. Friend and I would both agree were less worthy of our support and of our agreement.
The final version of the code, the Order before us tonight, developed propositions in the consultative document which we debated in the House in July, and I now single out the three most significant changes against which I hope the House will judge the merits of the new code. They are—and I list them—an additional provision for investment, which is the centre, heart and core of

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the proposals I now make; a change in the measurement of cost and profits which takes the code a step towards current cost accounting; and a positive incentive to cut costs.
First, I take investment relief. In the previous code 20 per cent. of expenditure on new fixed investment for productive equipment could be passed on in higher prices. In the consultative document we proposed an increase in that allowance to 35 per cent. The proposal now is that investment relief should stand at 50 per cent. The object of that relief is clear, and I wish to emphasise—this is the point my hon. Friend made—that the relief will be allowed only if the Price Commission is perfectly certain that the price increases and the consequently larger profit margins are actually used for investment.
The Commission will want to receive detailed information about the expenditure involved and its relation to the proposed price increases. The new investment will have to be firmly committed and firmly budgeted; in the case of a company it will need to have had the approval of the board of directors. The actual expenditure on investment will be monitored. After six months the Commission will expect a report confirming that the allowances for new investment have been used for that purpose and for that purpose alone.
Mr. Ron Thomas: Is it not true that firms which already have capital investment intentions will receive this 50 per cent., and they would have invested in any case so that that, ipso facto, will mean that they are given resources which they could otherwise invest in their total investment already planned but which they can invest overseas, in property, or in anything else?
Mr. Hattersley: I understand the point that my hon. Friend is making, because I, too, have read that detailed study by the trade union research group at Ruskin College. It is a most impressive document and sets out with clarity and in detail the argument on the matter that my hon. Friend has drawn to my attention. However, I do not agree with the point that is made.
To say that we could have encouraged good investment by making an allowance
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on new investment is to misunderstand the powers that the Price Commission and the Price Code can confer. I assure my hon. Friend that if it had been possible, with a smaller allowance, to concentrate on new and additional investment we should have done so. But as the Price Code is only a blunt instrument, the only way in which we can create the climate in which there is new investment and more jobs is to offer incentives over a wider field than might appear appropriate were we able to concentrate it in the precise way that my hon. Friend suggests. My conclusion is that it is not within our power to apply the remedy that he suggests and Ruskin advocates.
I now turn to the second change in the Price Code—the changes that have been made to accommodate the spirit, if not at this stage exactly the letter, of the Sandilands Report. The new Code does not accommodate current cost accounting, because current cost accounting does not exist. In any case, we could not afford this year to encourage firms to bridge by a single jump the whole gap between historic and inflation accounting. But if we are to encourage companies to increase their investment—which must be our principal endeavour—the profits from which they come must be real rather than illusory. So some adjustment to accommodate more realistic accounting is essential.
The base figure from which the percentage of allowable profits is calculated can, under the new code, be calculated in one of two ways. Assets can be revalued provided that the new figure corresponds to figures in the audited accounts, or depreciation charged on the historic cost of assets can be adjusted by a factor of 1·4.
I accept that in some cases neither of these techniques allows a complete movement from historic cost to replacement cost accounting. Nor does it impose on companies—and this is the point made in part by my hon. Friend—an obligation to use completely profits that they have thus created for depreciation. But it does enable them to create a realistic and secure financial base from which the development of investment can grow. As well as including that higher sum for depreciation of assets, firms' costs will also be taken to include an allowance

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for stock appreciation. I believe that if that provision were not made the prospects for greater investment would be substantially worse.
Thirdly, the new code contains an additional reward for efficiency. I understand very well that the present Price Code, the original code on which it was based, and for that matter any adaptation of a code of this sort can play only a small part in the promotion of the efficiency of individual companies. A new price policy, the sort of policy that we might have after the summer of 1977, might be more effective in this regard. But even with our present code we can introduce some element which encourages efficiency within individual companies. In the previous code all productivity improvements had to be allocated to the consumer and passed on in the calculation of the eventual price.
Indeed, the rule went beyond that. The "productivity deduction" meant that firms had to pass on all productivity improvements and on top of that take a cut in their margins when their labour costs went up. As things are now, that approach could, and I believe would, have a damaging effect on employment. Therefore, we have dropped the productivity deduction. I hope that the hon. Member for Kingston upon Thames (Mr. Lamont) will explain his mirth at about twenty minutes past eleven. Indeed, the new code goes further. In certain defined cases firms will be able to retain some of the benefits of improved productivity. There is provision for the case where rising output or exports will spread the cost overheads. Where this happens, the saving may be divided between the firm and its customers. As a special incentive to economy in the use of fuel, any savings over and above the cost last July may be retained by the firm.
I believe that the beneficial effects these changes are bound to have on the prospects for industrial investment are beyond dispute. But I know that many of my right hon. and hon. Friends will be equally anxious to know the effect they will have on retail price levels. My predecessor told the House three months ago that we believed the net effect would be an increase of about 1 per cent in the Retail Price Index. I know that many other estimates have been made. I have
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already referred to the impressive document prepared by the Trade Union Research Unit. Much of it I agree with. But its conclusions on the price effect of the changes in the code seem to me to be wrong. In part they are wrong because we should not assume that every company will exercise every form of relief that the new code offers. The market and the pressures of market forces will prevent that from happening.
The code and those market forces between them will, on our present forecasts of economic activity, keep price increases at or about the 1 per cent. level over and above those price increases that would be occurring in any event. I believe that this is a reasonable price to pay for the industrial investment which we need, the investment which is an essential feature of improving employment. It is that investment which the revisions of the code intend to make possible. I commend the Order to the House.
10.36 p.m.
Mrs. Sally Oppenheim: It would be stretching credibility too far if I were to welcome the new Secretary of State to his first debate on the Price Code. Instead, I commiserate with him quite sincerely on having to grapple with the complexities of the code in his first debate after assuming office. He did so with commendable restraint and firmly stepped in the footmarks in the sand left by his predecessor. At one point I wondered whether he would come to the code at all. We had a long peroration about the drought—no doubt the lifebelt to which he will cling during the coming months as inflation mounts. I remind the right hon. Gentleman once again that other countries that had the drought have not had our rate of inflation.
The debate on the proopsed amendments to the Price Code at one time looked like being a mere formality. As the right hon. Gentleman said, we have already had a full debate on the White Paper. However, since then further concessions have been given on the one hand and a heavy burden of National Insurance contributions has been imposed on business and industry on the other. But, much more importantly, we are now discussing the amendments against an economic background which has worsened

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immeasurably since that debate, with the likelihood of a further outbreak of inflation in the coming months, something which is now not a possibility but a virtual probability.
On top of that, industry and business have had to sustain record increases in interest rates, and there is no doubt that many of them will be bankrupted as a result. There is no doubt that many of them will have any benefits of the relaxation of the Price Code wiped out as a result. Far from tightening price controls at a time when inflation is mounting again, it is now more urgently necessary than ever to relax the code far beyond the scope of the amendments before us if we are to have any vestige of the return of investment confidence that the right hon. Gentleman seems so confident we already have. If there is to be any chance of companies being able to reinforce their cash flow or find the scope or desire to invest, there will have to be a great deal more in the way of relaxation and encouragement of profitability than we have already had and than exists in the amendments.
The right hon. Gentleman was so confident. He quoted the CBI in its most recent review about its members' confidence and their investment intentions. Yet at page 11 of that review the CBI says:
"these revisions have required revision of all earlier calculations of the share of profits in total income. Whereas it had appeared that that share had fallen during 1975 to the record low level … the revised figures indicate that in each of the first three quarters of last year the share was 6·6 per cent., against 5·5 per cent. in the first quarter of 1974".
It continues:
"These revisions make the latest figures appear all the more disappointing and, indeed, disquieting."
We now have before us phase 5 of the Price Code which has not, cannot, and will not in itself restrain inflation. Phase 5 of the Price Code is having little effect on prices, it is destroying profitability, preventing investment and costing jobs. It is now widely accepted that the only raison d'être for the retention of the Price Code is the political desire of trade union leaders to control profits. This Price Code is not being retained by public demand from consumers, most of whom have never heard of it, and many of
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whom would dispute that it was having any effect on prices, nor is it being retained without full appreciation of the former Secretary of State of the damage it has already done to industry, investment and jobs. The complexity and inflexibility of the code remains, as was acknowledged in the right hon. Lady's letter to the accounting bodies, published in the Financial Times on 6th August.
Therefore, we have a Price Code which is not wanted by the consumer, which is not having much effect on prices, and which is destroying investment, now being relaxed and resuscitated for what we have been told is positively its final year. This is being done for no other reason than to satisfy the blinkered desires of people who are the unrepresentative leadership of an unrepresentative minority—
Mr. Hattersley: To whom is the hon. Lady referring?
Mrs. Oppenheim: I am talking about the trade union leadership—the very people who, at a time of rip-roaring unemployment, should be the last to want to depress investment since that will make the creation of jobs more difficult.
The excuse for this bizarre state of affairs we have heard again tonight from the Government spokesman. We are told that it is the need to reconcile economic needs with political reality. In fact, it is the political need to ignore economic reality. That is a very dangerous maxim to which the Government have adhered far too much in the past with absolutely disastrous consequences. The whole country can see that the Price Code has not restrained inflation for all the jobs it has lost. Unemployment is still at the highest post-war level and inflation is rising. A fresh outbreak of inflation will come as soon as the devaluation of the £ and recent measures have worked themselves through. That is the reality which no Price Code can disguise.
The National Institute of Economic and Social Research conducted a special study of the Price Code and published its findings in August of this year. It revealed a number of interesting facts. For example, the main conclusions drawn from a survey of manufacturers and distributors were that it was not the Price Code that was restraining prices but market forces. Furthermore, in the case of manufacturers, current prices are below the levels

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which the Price Code would have permitted them to charge.
Mr. Hattersley: Will the hon. Lady make clear which argument she is choosing—namely, whether the Price Code is restraining profits and fresh investment or whether the Price Code is not restraining profits and investment? In the first ten minutes of her speech she made the point that the Price Code was having an effect on investment. She is now moving on to an argument which has nothing to do with that aspect at all. Which argument is she choosing?
Mrs. Oppenheim: That is the whole point. If the right hon. Gentleman had been more familiar with the debates on the Price Code he would know that one of the things of which we complain is the uneven effect of the code—and indeed that it is far more repressive in the case of some industries and businesses than in others. In some cases it has increased prices more than otherwise would have happened. That is one of the reasons for our criticisms.
The survey shows that while most manufacturers have not been able, under market conditions, to raise their prices to the levels that the Price Code would permit and other companies are not able to avail themselves of increases for which they already have consent, a number of companies, under the Price Code, are able to charge higher prices than they would have done without the code. A total of 20 per cent. of manufacturers fall into this category.
One of the reasons given for this is the procedures of the code, whereby companies apply for price increases sooner than they would otherwise do so. In chart 1 in the survey it is shown that, even allowing for the sharp upturn, which will not now take place, and for exploitation of the full scope of the relaxations in the code—which will certainly not take place—in two areas of sensitive family expenditure, food and drink and textiles and clothing, the removal of the code would make no difference whatever, because although current prices are substantially below the level that the code permits for some manufacturers, the average effect over all companies in these categories of the removal of the code would be price levels no higher than in
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the present code. This is an average and obviously some prices would be higher, some less high.
The Under-Secretary of State for Prices and Consumer Protection (Mr. Robert Maclennan): It is strange that the hon. Lady should have chosen the example of food, since the representations of the food manufacturers were the most cogently argued among those who expressed the view that they were adversely restrained. They were among those who most strongly urged us to make further relaxations.
Mrs. Oppenheim: I am not sure that the Under-Secretary is familiar with the chart to which I am referring. This was an average, and in the food distribution industry it would be a case of levels being slightly below what it would be able to charge in the absence of the code. This would be counter-balanced by other industries, such as textiles and clothing, so that the average effect would be almost exactly the same as if the code were not in existence.
Another article in the Financial Times of 8th September shows how the code began pushing prices up. Some companies are exporting to avoid the effects of the code. The code allows them to sell goods at higher prices abroad. Obviously, without the extra costs of exportation, these goods would be sold at a lower price at home. There are sometimes artificial shortages caused by the exportation for higher prices, and home-produced goods are replaced by more expensive imports, as I predicted a year ago they would be.
From all of this it will be seen that the code is contradictory gobbledegook. It is unfair and uneven in its effect on business and industry and it does not have very much effect on prices.
I know that other hon. Members wish to take part in what is an unduly short debate in view of the complexities of the amendments we are debating. Because of the shortage of time I will deal now with some effects of the changes we have before us on prices, investment and jobs. First and foremost, even the most welcome of the relaxations in the code in these amendments inevitably add to its complexity and generally bureaucratic nature. According to the NIESR review,

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the average annual expense of administering the code for three-quarters of manufacturers in the survey was £47,000.
Some of these proposals, even though they bring new flexibility, will create greater bureaucracy. I have here the CBI document giving guidance on the changes. It runs to 23 closely-printed pages and is itself a digest of the Price Commission's guidance. Two pages deal solely with one aspect of the new interest option whereby firms will have the option of having interest costs treated either under the old or the new rules.
We come to an important matter that I hope the Under-Secretary of State will clarify. As he will no doubt be aware, under the new rules, once a decision has been taken on the option regarding the treatment of interest rates it is irrevocable. I hope that the hon. Gentleman will tell the House what will happen to companies which took the decision and opted in such a way before the recent rise in interest costs. How will they be affected? Will the rise in rates wipe out all the benefits of the relaxation of the code?
Is the right hon. Gentleman aware that interest charges to industry have risen by 30 per cent. since the renegotiation of the code took place last July? That will certainly wipe out a great deal of the benefit of the relaxation of the code.
I refer to an important representation that was made to the Secretary of State by the chairman of the Calor Group on 22nd September. It was a helpful and constructive letter dealing with the new measure in the code allowing prices to be increased in stages. He made the reasonable and valid point that once consent has been obtained in the first place from the Price Commission and all the data have been supplied, it seems ridiculous that companies have to create work for themselves and for the commission at each stage of the price increase by providing the data all over again. The chairman made a constructive suggestion for a minor amendment which has not been implemented. Further, he told me today during a telephone conversation that he has received no acknowledgement or reply from the Secretary of State. I thought that the right hon. Gentleman would deal with the matter this evening.
The measures in the code about which the right hon. Gentleman has spoken—
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for example, the increase in investment relief, the increase in the adjustment factor for depreciation and the raising of the lower limit, especially for category 3 companies, and the abolition of the productivity deduction—must receive an unreserved welcome as far as they go. However, the right hon. Gentleman did not point out that it is only the investment relief that is to be chanelled directly into investment. I hope that all the other reliefs will go in other directions, such as improving eventual dividends and, therefore, attracting equity investment.
How much scope is given by these reliefs that we have actually welcomed? They do not provide scope to recover the lost profitability of the past two and a half years. They will not, as the Chancellor has claimed, encourage investment; they will merely discourage it less. The Price Code was designed as a temporary short-lived measure. The fact that it has been allowed to continue for so long has already done serious damage.
It is not a bit of good the Prime Minister paying lip service to profitability at the Labour Party Conference and then continuing with a Price Code such as this. It is inadequately relaxed and it is not helping investment very much. When the Chancellor of the Exchequer and the Prime Minister so fulsomely praise the TUC for its belated but welcome compliance with the social contract, they might also have the grace to acknowledge that since the Price Code first started industry has faithfully obeyed every last bit of nonsense in it. It has done so voluntarily, as there are no criminal sanctions in the code as such. Out of some 20,000 companies within the code, over the past two and a half years only nine orders have been made by the Price Commission limiting price increases or rolling them back. That includes the year in which the social contract was breached and breached again. It is high time that a tribute was paid to business and industry for that record, especially when we consider the extent to which the corporate sector has been in financial deficit since the Price Code started.
Even if the increase in investment intentions for 1977 of 15 per cent. comes about—I doubt very much that it will—the actual amount of investment in that year will be lower than in 1970, 1971 and

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1974. It was against that background that the former Secretary of State, in her original statement, spoke about putting back £1,000 million of profitability into the hands of industry. But that must be a theoretical figure which depends on the pace of the upturn, which will now be very much slower. It will depend on the degree of scope that companies have to obtain the required level of profits and on the will to invest. That goes to show the futility of attempting to predict with accuracy the effect on investment and jobs of the continuance of the code, especially against the present economic background.
On the basis of the former Secretary of State's calculations, the National Insurance contribution increase will add about another £1,000 million to the costs of industry and 1 per cent. to the RPI. It is still not confirmed—I am sorry that the right hon. Gentleman has not dealt with this—that all or any sectors of industry will be told to pass on the whole of the increased contribution as an allowable cost, despite assurances in the past. Manufacturers will be allowed to do so as an allowable cost, as the Chancellor has said, but only when the Government decide whether this is a rise in National Insurance contributions rather than a revenue device. If it is the latter it will need a further amendment to the Price Code, but for distributors, including retailers, who do not operate under the allowable cost regime, that is not the case. The increase in manufacturers' prices will have to be absorbed into their gross margins and can be passed on in higher prices but their own National Insurance contributions will have to come out of net profits and will partly absorb those profits without any compensatory price increases.
Clearly that is an anomalous situation which I would have thought the Secretary of State would clarify tonight. If it is true that retailers and distributors have to absorb these costs, they will lose any benefit of the relaxation of the code, and that is in an area which is labour intensive and which employs a great many school leavers. I hope that we shall have some explanation on the subject from the Under-Secretary of State when he winds up the debate.
I have repeatedly called for further relaxations in the code, and even for its
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abolition, and I have urged the need for extra profitability to help investment and jobs and to attract equity investment which would allow some companies to remain in business which will not otherwise do so. But that does not mean that I am not fully aware of the great concern among consumers at present about the level of prices, even during the temporary lull, let alone when they are about to rise again. Far from it. I am deeply concerned that prices, particularly food prices, are taking off again. I know the anguish that this will cause, particularly to those already suffering record falls in living standards at present.
It will not be the necessary relaxation of the Price Code or any further withdrawal of food subsidies which are to blame. It will be this Government's policies over the past two and a half years which have failed to restrain inflation adequately and which are causing this hardship. It is characteristically cruel of this Government, and characteristically misguided of the TUC, to pretend to those people that an anachronistic and irrelevant Price Code can be any substitute for the determined pursuit of the right economic policies in overcoming inflation.
10.58 p.m.
Mr. Ron Thomas: I would be interested to hear what the Tories' determined economic strategy is to deal with this inflationary situation as well as the deplorable level of unemployment. The worry of many hon. Members on this side of the House who are opposed to this shift of £1,000 million away from consumers to the corporate sector is basically that we do not accept that there is a correlation between increases in profits and capital investment. The hon. Lady spoke a good deal about this and about the need to increase profits in order to stimulate capital investment. We know very well that during the period of the Heath Administration profits increased considerably but that the level of capital investment has declined more or less from 1970 onwards. We do not therefore accept that simply to increase profitability will mean an increase in capital investment. It certainly did not happen in the past and we do not see any reason why it should happen in the future.
When we debated these changes in the Price Code, and the consultative document, back in July it was part of an

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overall economic debate and there was a good deal of thought, and a number of contributions, in respect of what caused inflation. Many were blaming trade union bargaining, although it is quite clear that trade union bargainers chase prices rather than push them up. We all know that over the past 12 months there has been a considerable cut in the standard of living of working people. We have also heard a good deal today, and in the past, about the money supply, M3 and so on. We have also heard from the hon. Lady the Member for Gloucester (Mrs. Oppenheim) about devaluation. I personally believe that the devaluation of the pound since it was floated by the Tory Government has been the main generating force in inflation. I do not think one has to look far beyond that, and the impact it has had, quite understandably, on wage bargaining in trying to catch up with the increase in prices.
What the Conservatives are advocating in terms of cutting subsidies on housing and food will, as my right hon. Friend the Prime Minister has said, considerably increase the level of inflation. I believe that the Conservatives do a gross disservice to the country and sterling by advocating that such public expenditure cuts are necessary, since speculators will believe either that they really are necessary and take it for granted that we should cut another £5,000 million off public expenditure, or that if the Tories get back to power, they will in fact do it. I believe that this is a considerable encouragement to speculators to sell sterling and speculate against it. The Conservatives have something to answer for in that regard.
When we discussed the code in July, we were told that it would mean a shift of about £1,000 million from the consumers—the working people and others—to the corporate sector. There have been amendments since then, and I hoped that my right hon. Friend would give more up to date figures of what the shift will be. He told us that the investment reliefs are not going down from 30 per cent. to 25 per cent. but, as I understand it, that they will go up to 50 per cent. I have made the important point before that companies which in any event intended to invest £2,000 or £3,000 million of capital investment will get these reliefs whereas we should be concentrating—I
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do not accept that there is no mechanism by which to do it—on net capital investment. Why should we say to ICI, for example, "We are pleased that you are to invest, say, £400 million in any case, and we shall allow you to increase your prices" when that will simply release its resources for something else, probably capital investment abroad?
Then there is the question, a very important one in terms of prices, of the move from historic costs to replacement costs. Many of us have read the Sandi-lands Report, and if some had their way they would see it carried out overnight. But we have moved from the historic cost basis of accounting to current cost accounting, and that will lead to a further increase in prices.
Companies are to be allowed to disregard 70 per cent. of stock appreciation. That was contained in the consultative document. They are also to be allowed to disregard the productivity deduction, but if that deduction had any worth and utility in the past—
Mrs. Sally Oppenheim Mrs. Sally Oppenheim indicated dissent.
Mr. Thomas: The hon. Lady shakes her head. If the productivity deduction therefore did not have worth and utility in the past, why was it included in the first place? We were told at the time that it was essential. Now we are being told that it was practically useless and therefore companies will not have to take it into account in putting up their prices.
We are also told that there will only be—unless this has been amended as well—a half-deduction in a situation in which a company moves from a lower to a higher level of capital utilisation.
Another factor in terms of inflation is that many British firms—especially capital-intensive firms—have been working at a very low level of capacity. With low demand and a low level of production, unit costs increase, and this pushes up prices. This has been one of the main generating forces of price increases.
It has been said time and time again that there is no need to worry about that because, as the so-called resurgence in world trade for which we are all hoping takes place—some of us do not think it will ever come, but that is a matter of judgment—and as companies then move

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up to a higher level of capacity, they will either be made not to increase their prices as much as they may wish or, indeed, to reduce their prices.
I am sure that the hon. Lady will agree with me that there are many capital-intensive companies which, if they are working at, say, 45 per cent. of capacity, are making a massive loss, but which, if they are working at 60 per cent. of capacity, are making a massive profit. I think this is true of the British Steel Corporation, of ICI and of many capital-intensive firms.
When we debated the price codes in the past it was felt that, as companies moved up to a high level of capacity, the consumers would share in either smaller price increases or no price increases at all. I raised these matters on the previous debate and said that, as the Ruskin-TUC research document points out, and as my own trade union's research department points out, the suggestion that the code would mean only a 1 per cent. increase in prices was a nonsense. The response to that was to pick on one item. I am not picking on one item. I am talking about a company which takes advantage of each one of these possibilities, so that there is a cumulative effect. We have been told that companies will not do this because of the market. I do not understand the world in which the hon. Lady lives.
Each industry is composed in general of two or three oligopolists. We are not living in the free market economy of the nineteenth century. This is no longer an Adam Smith laissez-faire economy. What will stop ICI putting up its prices? The only competition it has is in regard to imports, and in any case it can come to arrangements with its overseas friends about those. British industry is oligopolistically controlled. Companies move their prices up together.
It is nonsense to talk about a market and competition. To imagine that when these companies examine the possibilities under the code they will say "We had better not put up our prices because some other firm might not do so" is a nonsense in terms of up-to-date economic analysis. Therefore, in my judgment, many of the companies will take advantage of each one of these things, and I put it to my right hon. Friend that the
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increase in prices will be much greater than he is suggesting.
At a time when working people have accepted cuts in their standard of living, and will be expected to accept further cuts over the next 12 months, I find this document unacceptable. At the same time, and running alongside this in economic terms, we were told that we had to have public expenditure cuts totalling £1,000 million. The Chancellor of the Exchequer shifts from one argument to another, and one can never pin him down to specific reasons. He shifts his ground whenever one tries to grab him. But at one stage he said we needed to shift economic resources so that we could have more capital investment in exports. So, in so far as that works, we are now talking about at least £2,000 million. But we know that there is no mechanism in the capitalist system which can shift resources out of public expenditure into capital investment. Certainly there is not one which can shift it out of profits into capital investment. The period between 1970 and 1974 taught us that, if nothing else.
I want to move from that to a question about interest. The hon. Lady the Member for Gloucester raised it, and it is a very important issue. As I understand it, paragraph 19 says:
"Except where an enterprise as a whole … elects … interest shall be taken into account in determining total costs".
My assumption is that all companies which borrow money from the banks and have to pay more for it can put up their prices. It is the consumer who pays, and not the companies, just as the consumer will now pay for the capital investment. Prices will go up to pay for the capital investment. Consumers will be buying it. It is about time that they owned it. If they have to buy it, we think that they should own it.
What is the difference between that and, either via taxation or via any other form of public expenditure, investing in the nationalised industries which we as a community own, and doing it this way? The only difference is that the community does not own a stick of it at the end of the day. The community does not benefit from it. The shareholders benefit from it.
I want finally to ask about the banks. Clearly, under the 15 per cent., the banks

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will be making massive profits. What control does this document have over the banks and the financial sector? I am sure that the hon. Member for Gloucester will agree with me when I say that the banks will make massive profits if we have, as we now have, a 15 per cent. MLR. We know that with the higher bank rate—the differential between deposits and overdraft rates and lending rates—bank profits can be considerable. I should like to see the Government doing something about that by having provisions in this code to deal with the massive and increasing profits which will be made by banks and finance houses under this 15 per cent. rate.
But I am not convinced that the price increases and profit increases generated by this document will lead to the kind of increases in capital investment which we want to see. The only way that we shall get them is by a strengthened National Enterprise Board, by directing this £1,000 million via the NEB and, if firms will not take it up via the NEB, by directing this £1,000 million into the publicly-owned industries which can diversify and produce some of the finished and semi-manufactured imports now flooding into the country.
11.14 p.m.
Mr. A. G. F. Hall-Davis: In the tradition of this House, perhaps I might make one or two comments on the remarks of the hon. Member for Bristol, North-West (Mr. Thomas).
The hon. Gentleman asked why investment in this country was so slow to respond to specific Government measures in the private sector. One answer is that private investment projects in modern technology probably take two, three or even five years to plan, assess and bring to execution. Unless industry is convinced that there will be a continuing political climate sympathetic to the private sector, it will be extremely cautious about committing itself so far ahead.
I hope that the hon. Member for Bristol, North-West will not think that I am being unnecessarily controversial when I say that his speech tonight and those of some of his colleagues at his party conference, although reasoned and intellectually well supported, are not
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likely to stimulate investment in the private sector.
The hon. Member for Bristol, North-West asked what would encourage investment. One element which is regularly missing in discussions on this matter is technological innovation. Great leaps forward in investment have usually been stimulated by technological innovation in conditions of competition and in circumstances where investors may expect a fairly substantial early return on risk capital in a new industrial situation.
In fairness to other hon. Members who wish to speak, I shall not develop my views at length. They are simple: the continued existence of the Price Code, on balance, makes price levels higher than they would have been were there no Price Code and investment lower.
The arguments on the prices front have been deployed in a balanced way by my hon. Friend the Member for Gloucester (Mrs. Oppenheim). It is one of the Government's claims that direct exports are exempt from price controls, but very few industries or firms can undertake investment with the sole object of selling in the export markets. There may be a few highly specialised or giant industries which can invest with only the export market in mind, but most companies want to know that if the export markets are temporarily adverse, they can turn to the home market and get an adequate return on investment. Many come within the scope of the Price Code because they do not know or cannot show whether their goods are exported. Component manufacturers are one example. Prices would be lower, industry more efficient and competitive and investment higher if the Price Code were abandoned now.
I call in aid experience. Which country has had a 27 per cent. inflation rate? The answer is the United Kingdom. No wonder we have cut our rate of inflation. We were starting from a level which was double that of almost any other advanced industrial country and we reached that level with the Price Code in operation.
May I make a plea for a new explanatory document for the code? Paragraph 80 (1), which I suspect is of some importance, says:
"Prices should be determined so as to secure that net profit margins, as defined in paragraph 81, do not in any period of 12 months exceed the reference level."

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Paragraph 80(2) looks simple enough until one sees that sub-paragraph (3) reads:
"For the purposes of sub-paragraph (2)(b) there shall be left out of account any excess of the net profit margin over the reference level determined under the code in force at the time."
I read that several times and got nowhere. I turned to the CBI guidances notes and read in relation to paragraphs 80 and 81 of the code:
"There will be an option for profit margin units to replace the lower of the two base years used to calculate their present reference level, by a base year taken from a year of account ending after 30 April 1973 and before 31 July 1976."
However—and here conies the crunch:
"if the profit margin in the latter base year is over the present reference level, then the excess should be left out of account."
I think that I know what that means, but I would not like to be the manager of a medium-sized business with no specialised accounting services at his disposal who had to try to interpret that. I hope that the Minister will elucidate it and do so tonight rather than in a letter in three or four weeks' time.
Mr. Norman Lamont rose—
Mr. Ian Gow: On a point of order, Mr. Deputy Speaker. If I interpret your selection correctly, it will mean that in this short debate we shall have had four speakers from the Front Benches and only two from the Back Benches. May I ask whether you could exercise your discretion to protect the rights of Back Benchers in this matter?
Mr. Deputy Speaker (Mr. Bryant Godman Irvine): The wishes of the Front Bench are generally accepted.
Mr. Hall-Davis: Further to that point of order, Mr. Deputy Speaker. Is it not in your power in a matter of importance—no one could say that this was not a matter of importance—where there has not been sufficient opportunity to discuss an Order, to say that the matter be carried forward to another day?
Mr. Deputy Speaker: This is a matter which the usual channels discuss. If the usual channels give some indications as to what is required by the Minister, it is not contrary to the usual principles if I accept them. Mr. Lamont.
Mr. Gow: Further to that point of order, Mr. Deputy Speaker. Is it not happening too often that the usual channels get together and deprive Back Benchers of their rights in this House? I respectfully ask that you consider further the representations which I made and do not allow things to be fixed between the usual channels.
Mr. Deputy Speaker: I have noted what the hon. Gentleman said, and I will report the matter to Mr. Speaker. Mr. Lamont.
11.21 p.m.
Mr. Norman Lamont: I apologise to my hon. Friend the Member for Eastbourne (Mr. Gow). I must say that if he feels he is being stifled in this House, it is the first time that I have ever noticed it.
I should like to associate myself with my hon. Friend's complaint at least to the extent that this is an unsatisfactory way of dealing with these Orders. They are extremely complex, as has been pointed out by my hon. Friend the Member for Gloucester (Mrs. Oppenheim). This document is almost as long and complex as a Finance Bill, and it is being considered very late at night for an hour and a half.
There is widespread agreement that there is a problem with secondary legislation coming before this House and not being properly considered. Nowhere is it worse than in the business of amendments to the Price Code which are repeatedly brought before the House. They are vital to the economy, they are of immense importance to industry, and they are inadequately considered in too, short a time.
I welcome some of the changes announced by the Secretary of State. I welcome particularly changes which ease the administrative burdens on companies. What is not perhaps as widely appreciated as it should be is the amount of time that is taken by companies in trying to comply with the Price Code.
One interesting figure which came crust of the report of the National Institute of Economic and Social Research was that the average cost to companies of seeing whether they were conforming to the Price Code worked out at about £27,000 per company. Indeed, the administration costs to ICI of complying with the Price

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Code go up to £500,000. Therefore, anything which could simplify these Orders would be extremely welcome.
For that reason, I am pleased that the category thresholds are to be raised. However, that does not help companies which will remain within the code and which will have to continue to supply information. In fact, life for them will become even more complicated, because the alterations in the code are additionally complicated.
The code is very complex. I notice that a number of firms have now come into existence specifically for the purpose of trying to help companies to understand the Price Code. Indeed, one of the gentlemen involved with these firms is a member of the Price Commission. Good luck to him. It is rare to find the toast buttered on both sides, but in his case it certainly is.
I also welcome the reliefs which have been given: the abolition of the productivity deduction, the concessions on unit costs when they fall in response to increases in volume, the changes in the depreciation provisions, and, of course, the investment relief provisions.
I hope that the Secretary of State will not expect too much from the investment relief provisions, because in the present climate they will make very little difference indeed. Time after time Ministers come to this House and quote investment intention statistics. We should forget them. They are just factories and machinery in the air, and there is very little chance at all of them becoming reality.
The National Institute report showed that very few firms took up the investment reliefs which are already available. That is because they find the extremely complex monitoring arrangements very difficult to comply with and very time-consuming. When the Secretary of State says that he is imposing more monitoring arrangements, I wonder whether he realises that the more of these he makes, the less likely it is that investment reliefs will be taken up. The Government must understand that people cannot be forced to invest. Water cannot be driven uphill. If the economic conditions are such that people do not have confidence, investment will not take place.
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The Secretary of State said that the 15 per cent. minimum lending rate would not make much difference to investment intentions. They may believe that in the Department of Prices and Consumer Protection, and even in the Treasury, but in the real world that is just not the case, and there is little doubt that investment will be very badly damaged by the increase in interest rates.
But if investment relief amounts to 50 per cent. where are the firms meant to get the rest of the money? From he stock market which has slumped? Borrow it from the banks at 20 per cent. for prime companies, or from retained profits when return on capital has slid down to 3 per cent. and is threatening to disappear completely?
I do not believe that the Government understand the psychology of investment at all. If they did they would not attach any importance to the letter from the CBI chairman to member companies. No company will invest just because it has or has not received a letter from the head of the CBI. Any firm which would pay attention to such a letter must be a very peculiar firm indeed. It is a better level of profitability which will bring back the return to increased levels of investment.
I was very disturbed about the way in which the Secretary of State talked threateningly about allowing firms to increase prices only if they used the money to invest. There are firms which, far from considering investment, are struggling hard to survive because of the sorry state of affairs brought about by the Price Code.
As far as points in the Code itself are concerned, the Secretary of State has, in many areas in his document, conceded the principle but not gone the whole way on the question of unit costs falling because of volume increases. Firms will get 50 per cent. of such reductions in unit costs. Why will they not get the whole benefit?
Then there is the problem of allocation of overheads between exports and domestic sales. As the Secretary of State may or may not be aware, considerable problems have arisen because the depreciation of sterling has meant that many firms have had to alter the allocation of overheads between foreign and domestic markets because of the alterations in exchange rates. For that reason alone, the

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return on capital domestically has been overestimated. The document half recognises that problem and half allows firms to take account of it. But why does it not go the whole way?
Only one thing matters about the Price Code—whether it does enough to restore the profitability of industry. That is the only thing which matters. All the talk about 1 per cent. or 2 per cent. on RPI does not amount to a row of beans compared with whether the private sector is allowed to survive. Every trade unionist and every unemployed person should be concerned that what happens in the Price Code amendments should be sufficient to restore profitability to industry.
First we are told that the Government are making one set of concessions, then they alter them to slightly more favourable concessions. Then at the last minute there is an increase in the National Insurance contributions which is outside the scope of the negotiations and which is made without a word to those who participated in the negotiations.
The Secretary of State asked for our view. He asked whether we thought the Price Code was irrelevant because market forces were holding down prices, or whether the Price Code was actually damaging the return on capital and profits to industry. Surely the answer is that the code has done both in different sectors at different times. In the initial period the Price Code certainly damaged profitability.
Today, as we know from the National Institute report, about 70 per cent. of companies regard market forces as the dominant factor in restraining prices. But even in that changed situation there still remains the problem whether there is sufficient headroom to enable firms to take advantage of an upturn if it came. That, of course, is an academic discussion because we know that there is no prospect of an upturn. If it came, however, we would find the noose very quickly tightening around industry's neck. Very quickly industry would be squeezed hard and the Government would be slow to recognise the changed situation. That is the reality and the danger of the Price Code. To judge from the expression on the Secretary of State's face he does not understand, and we can only hope that after a few weeks, with more time to study the matter, he will understand it.
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The proposals in the code are insufficient and we must move either radically to alter the code or abolish it at some time in the future.
11.33 p.m.
The Under-Secretary of State for Prices and Consumer Protection (Mr. Robert Maclennan): Perhaps I may begin by dealing with the constructive question put by the hon. Member for Morecambe and Lonsdale (Mr. Hall-Davis) and at the same time demonstrate the desire of myself and my colleagues in the Department to explain what I admit is sometimes a difficult matter to understand. The question concerns paragraph 83 of the Price Code.
As a small concession firms may use their most recent three years as well as five previous years to calculate their reference levels. They then average out the best two years. Paragraph 83 says that a firm can only set a profit level which is consistent with the Price Code as it is in force at the time. If the firm earns a profit in breach of the code it must not build that into its ceiling for the future.
It is a pity that the Opposition have chosen to make tonight's debate one of their usual knockabout affairs and have sought to have the best of both arguments about the code. The hon. Lady Member for Gloucester (Mrs. Oppenheim) seemed quite incapable of deciding whether the effect of the code was to hold down prices or whether it was ineffective in that respect. She cannot have it both ways. If the code is holding down prices, further relaxations would undoubtedly affect the rate of inflation. If it is not holding them down, the hon. Lady's remarks were pointless. But that is an experience with which we have been familiar before in this House.
The events of the last two weeks, which are the background to this debate and serve to give it some sharp point, have underlined the importance to industry of modifications on which we are embarked and which we are now debating. The important need for industry is that the immediate crisis should be met by determined Government action so that our economic recovery can proceed.
The Government are well aware that the increase in the Minimum Lending

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Rate may adversely affect—indeed, will adversely affect in certain cases—industrial investment. But further depreciation of sterling would put up industry's costs just as surely as does a rise in interest rates. If as a result of the MLR increase the use of borrowed funds for investment has become more expensive, it is all the more important that companies should be able to generate a substantial proportion of their investment funds from retained profits. In 1975 retained profits accounted for 68 per cent. of the sources of all capital funds whilst bank borrowings accounted for only 9 per cent.
In the amendment to the code we have raised the rate of investment relief in the Price Code from 20 per cent. to 50 per cent. This means that companies may increase prices and profit margins to obtain additional revenue equal to half their firmly budgeted investment expenditure for the year ahead. This is in addition to the cash they are able to generate not only from their existing margins but also through the higher depreciation charges which are now allowed in the code on existing assets.
Mr. Giles Shaw: Will the hon. Gentleman give way?
Mr. Maclennan: No. I am afraid that this is a short debate as has been pointed out.
The last Price Commission quarterly report showed that investment relief worth £589 million had already been claimed in the period December 1974 to May 1976. This is substantially more than the £1 million a day which the CBI estimated as the cost of higher interest rates. Moreover, the figures I have given take no account of the subsequent increase in the rate of relief from 20 per cent. to 50 per cent.
Mr. Giles Shaw: Will the hon. Gentleman give way?
Mr. Maclennan: I am considering a point that has been put to me.
I should add that the new code in any case gives manufacturing and service companies the option to continue to treat interest charges as allowable costs for Price Code purposes. This was inserted into the code at the behest of the CBI.
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It means that they are free to reflect higher interest charges in their prices in so far as the market allows.
The hon Lady the Member for Gloucester specifically asked about the position on the National Insurance surcharge as it affects distributors. The allowable cost rules do not affect distributors. For them the rule is that they should operate within gross and net margin ceilings under the normal rules of the code. Distributors will be free to offset the cost of the National Insurance surcharge out of net profits. I do not have in mind any change in the Price Code rules as they affect distributors. However, if distributors wish to make representations, we shall naturally consider them.
The present crisis therefore underlines the part which the Price Code plays in our industrial policy and the extent to which we have recognised industry's needs in the modifications which we have introduced in August. Far from negating our relaxations of the Price Code, recent events have emphasised their importance.
When we debated these proposed changes shortly after publication of the consultative document, on 7th July, we were in a situation that was in some respects different from the present situation. However, the hon. Lady has drawn attention to the further changes which were made in the light of representations that we received and which I believe have met with a very widespread welcome. Now that hon. Members have had time to absorb the contents of the new code and the further modifications that we have made, I think that these will be seen to have done much to achieve the objective that we set ourselves of removing impediments to investment.
I want to deal, however, with a couple of criticisms that were made after the changes were announced—that the Government had not gone far enough to meet the needs of industry and commerce. Distributors argued at the time that not enough had been done for them because the safeguard level which triggers increases in gross margins to compensate for erosion of their net profit margins had not been raised from 80 per cent. to 85 per cent. of net profit margin reference levels. But we have in other respects done a great deal to ease the difficulties

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of the relatively few distributors who are close to their Price Code ceilings. The rate of investment relief has been increased to 50 per cent. and the relief has been extended to cover distributors' expenditure on the construction of shops; the new stock relief will enable distributors to deduct 70 per cent. of the increase in the value of their stocks from both gross and net margins when comparing these with reference levels. The special safeguard has been improved by raising the absolute limit on increasing gross margins, so that they can be increased to 110 per cent. rather than 105 per cent. of their base levels, and the Price Commission has for the first time been given powers to raise individual firms' gross margin ceilings if it considers a modification is justified.
The other criticism is one that I referred to in a short intervention when the hon. Lady the Member for Gloucester was speaking. It was made by representatives of the food manufacturing industry. Now that they have had time to study the potential impact of these matters, I think that they will be reassured. The 50 per cent. investment relief, the raising of historic depreciation charges by a factor of 1.4, the abolition of the productivity deduction and the improvement of the safeguards in paragraphs 49 and 51 which permit price increases in order to achieve certain minimum profit margins on individual products or product ranges, are all of particular relevance to food manufacturers.
Previous codes—and it has to be remembered that this code is the product of the Conservative Party, which seems ready to wash its hands of it—may have constrained particular firms at profit levels which are not adequate for longer-term viability, but I hope that there are sufficient options in the package of reliefs for these firms to ensure that the code does not inhibit recovery of investment in the future.
In the debate on 7th July the hon. Lady seriously underestimated the benefit to company profitability flowing from the changes. She took the figure of £1,000 million which we had estimated as the effect on company profits in the coming year and reduced it to £400 million to allow for the limited take-up which might have been assumed from experience under
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the previous code—for example, in respect of the 20 per cent. investment relief. Our estimate had already allowed for take up. It was an estimate of the actual effects of the new code as compared with the old in the market conditions foreseen over the following 12 months. That does not mean that we expect company profits next year to be about £1,000 million higher than they will be this year. Profits are affected by many factors. All we are saying is that we expect profits to be about £1,000 million higher next year than they would have been if the old code had been maintained.
My answer to my hon. Friend the Member for Bristol, North-West (Mr. Thomas) is that our estimates on this have not changed since July, because we believe that market factors will prevail to restrict the take-up of reliefs, and it is wrong, as my right hon. Friend emphasised, to assume that companies will avail themselves of every relief that is open to them. That has not been the case in the past, and I do not believe it will be in the future. We see no reason to change our original estimate.
Before concluding I think it would be right to say a few words about the future, because this is an opportunity to put forward some constructive thoughts. Over the next few months there will be opportunities to consider what sort of policies for prices make most sense in the economic environment to be expected over the next few years and which will make the most effective contribution to our social and economic objectives.
It is a pity that the Opposition did not take the opportunity tonight to state clearly and constructively what would be their approach. Their recent, stylishly-produced policy document "The Right Approach" is glib but unrevealing. It speaks of further substantive relaxations of the code being urgently required, as did the hon. Lady, but industry recognises that to go further than the Government have gone is not only unnecessary for most firms—which could not get more out of the market in any case over the next year—but would risk damaging the pay policy which is one of the cornerstones of our strategy. Similarly—and it was demonstrated again tonight—the Opposition appear unwilling to say whether they think there should be a total removal of the Code. [Interruption.]

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That is not what the hon. Lady's document states.
Mrs. Sally Oppenheim rose—
Mr. Maclennan: It says that if total removal of the code is not yet possible the present system must give way to something else. It is far from saying that the present code should be abolished. The hon. Lady must square herself with her own Back Benchers, not me.
Mrs. Sally Oppenheim: Will the hon. Gentleman give way?
Mr. Maclennan: No, I have a minute left.
Mrs. Sally Oppenheim: I gave way to the hon. Gentleman.
Mr. Maclennan: Prices policy may be seen primarily as part of a policy to reduce the rate of inflation. In particular, it is possible for a control like the present Price Code to be tightened to the point where it cuts back profit margins across the board so as to exercise a macro-economic effect on the general price level and the rate of increase of the RPI.
That is how the Price Code has operated at certain periods. I think that, as the White Paper made clear, the squeeze on profits can be carried to the point where it is counter-productive. Next year, particularly in the second half, that is the last thing we shall want.
My right hon. Friend said that the options for the next phase of price policy were open. We shall discuss this with all interested organisations. There will be an opportunity to consider the pros and cons of moving towards a more selective approach to prices. I do not want to suggest that the need for close—
It being One and a half hours after the commencement of Proceedings on the Motion, Mr. DEPUTY SPEAKER put the Question, pursuant to Standing Order No. 3 (Exempted Business).
Question agreed to.
Resolved,
That the Counter-Inflation (Price Code) Order 1976 (S.I., 1976, No. 1170), a copy of which was laid before this House on 29th July, be approved.

CENTRAL ADVISORY COUNCILS FOR EDUCATION
Motion made, and Question proposed, That this House do now adjourn.—[Mr. Graham.]
11.46 p.m.
Mr. Nigel Spearing: I wish to raise the subject of the Central Advisory Councils for Education for England and Wales respectively. I do so against the background of the Tenth Report from the Expenditure Committee, House of Commons Paper No. 621, on "Policy Making in the Department of Education and Science". One of the recommendations was that there should be a Standing Commission for Education.
The second document to which I wish to refer as a background to this matter is the Official Report of an Adjournment debate which I initiated on 22nd October 1971, answered by the right hon. Member for Finchley (Mrs. Thatcher), when she was Secretary of State for Education and Science.
Section 4 of the 1944 Education Act set up two Central Advisory Councils for Education, one for England and one for Wales. Subsection (1) reads:
"There shall be two Central Advisory Councils for Education, one for England and the other for Wales and Monmouthshire, and it shall be the duty of those Councils to advise the Minister upon such matters connected with educational theory and practice as they think fit, and upon any questions referred to them by him."
Section 5 says specifically that:
"The Minister shall make to Parliament an annual report giving an account of the exercise and performance of the powers and duties conferred and imposed upon him by this Act and of the composition and proceedings of the Central Advisory Councils for Education."
In the debate on 22nd October 1971 I gave in some detail the background to that legislation, including references to the Official Report of the Committee stage. I showed clearly that the legislators of the time thought that the councils should have a central rôle. Indeed, an advisory council had been in existence from the earliest days of centralised education. The requirement of a report to Parliament was added to the measure in Committee.
In that Adjournment debate I showed that in the past few years—now, I am

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afraid, for eight years—successive Secretaries of State for Education and Science of both parties had flouted the Act. I am glad to see the hon. Member for Ripon (Dr. Hampson) on the Opposition Front Bench. His right hon. Friend the Member for Finchley at the Government Dispatch Box point blank refused to implement Section 4. I hope that she will remember that when she talks about law and order.
The reason I am raising this matter yet again after a period of five years is the appearance of the Select Committee Report to which I have referred. It is now generally recognised—and not before time—that the Department of Education and Science is a secretive organisation and a body of questionable efficiency. The Expenditure Committee suggested that there should be a standing commission to act as a check or balance on the secretive and centralised actions of the Department.
Having taught in a classroom for 12 years, I, too, have my views about that Department, as indeed do most practising teachers. They regard the Department as a not very practicable set-up. Therefore, this underlined the importance of the Central Advisory Councils. The councils had the power of initiative and under the Act could advise the Minister on matters connected with educational theory and practice, as it thought fit. That power of initiative—a power not possessed by other organisations set up by the Minister—was very important.
The fact that the Department is regarded by many people with some cynicism is not necessarily the fault of the Department. It is clear from various memoranda that the Department works in close relationship to the Treasury and deals with quantitative rather than qualitative matters. In the last resort education in the deepest and most fundamental sense takes place in the classroom when the learning environment is qualitative.
That has been a fundamental paradox of the problems of education in the last few years. Unfortunately, the Department does not realise it. It is said in the Select Committee's Report by Sir Toby Weaver, a former head of the Department, that the Department
"are kept in close and constant touch with what is going on in the field …"
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I believe that it is as in touch with what goes on in the field as was the general staff in touch with affairs at the battle of Passchendaele. The Central Advisory Councils operated as a short-circuit to this system, right from the classroom floor up to the Department.
However, when I called on the right hon. Lady in that earlier debate to activate these councils and to operate the Act as intended and as the law required, she replied "No". It is wrong to say that other bodies would have been able to do the job better. It is true that many different types of committee have been set up, but it is clear from the evidence of Professor Vaizey on page 56 of the Tenth Report from the Expenditure Committee that it was the officials who made policy and not the Minister. It must be remembered that none of the other bodies had the power of initiative possessed by the Central Advisory Councils. Therefore, Professor Vaizey's point is well underlined by what happened in the earlier debate. I hope that after five years' lack of legal operations in this sphere, my right hon. Friend who is now Secretary of State for Education and Science will take another look at the matter.
My hon. Friend may be about to say that there will be a Government reply to this sub-committee statement and therefore he cannot say anything about it tonight. I would not be surprised if that were the case, and in some ways I have sympathy with that view. With the publication of this report we ought now to get off on a new footing altogether. It is about time that the secret garden of the Department of Education and Science was broken into. I hope that this report has done that. The secret garden is not just a matter of the curriculum. It is about the way in which the Department has operated in the past. I hope that it will not operate in that way in future.
In my maiden speech in this House I pointed out that education administration at all levels was perhaps inverting its priorities and not only was education administration all the way down the line, Elizabeth House, unrealistic but education administration all the way down the line even perhaps as far as the headmaster's study, was unrealistic because what it did was to impose a series of quantifiable restrictions, options and administrative

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formulae on a situation which is essentially not susceptible to quantification but which, rather, is virtually entirely qualitative.
The education process has no tangible product, unlike some other matters with which we are concerned in this House. Ultimately it is not teaching that matters, it is learning; and a person will not learn unless he has had proper motivation. I believe that quite a lot of so-called educational debate and discussion we have had in the past five years or 10 years has not been fundamentally realistic. A lot of it has been related to matters of secondary selection and so on and to the new methods which have come into schools. This is, perhaps, rather doctrinaire. The fundamental things have been ignored.
I suggest that when my right hon. Friend sets up, once again, the Central Advisory Councils, which should have a legal obligation to do, they might consider at least four areas which have been rather neglected in the past few years. First, there is the mathematics mess. I will not enlarge on that. Everyone knows what I mean. One of the features of English secondary education has been that undue influence has been exercised on the curriculum by universities. Not that I discount the need for higher and further education—far from it. But it is not good preparing people in school for courses which only a tiny proportion will ever take. While it may be fine for mathematically able pupils to begin to understand something of what years ago would have been taught only at university, it does not help if they cannot multiply or add up when they leave school at 16.
Then there is the teacher training area. Teacher training was vastly expanded in the early sixties, with a terrible drain on the resources of school in terms of lecturer staff. There was considerable disquiet in the late sixties about how teacher education was carried out. It was almost entirely divorced from the needs of schools. I might add, in parenthesis, that this is the sort of thing which happens in English education.
Parliament set up a Select Committee which was unfortunately interrupted in its work in 1970. Had that Select Committee continued its work I am sure that
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it would have turned up some useful and important information. Instead the right hon. Member for Finchley set up the James Committee, in respect of which she did not even publish statistical evidence to back up its views and to which evidence was given in private by some people from the Department and from other notables in education—a good example of the bad way in which things were going along.
In this country we need to recruit teachers from the age of 25 onwards, after they have spent some time in some other occupation. That is a matter that I have mentioned repeatedly to teachers, heads, principals of education and education administrators. They all say "Yes, that is the ideal. That is what we should like." Why not? Perhaps they will now have a chance to rethink the whole issue. We have not got very far along that road without Central Advisory Councils and without a Select Committee.
There is the whole question of secondary rationale. So many of our debates have been rather sterile although I happen to be a strong supporter of comprehensive education. However, that does not go far enough. We have never had a secondary rationale since the war. That is because the prestige of secondary education was retained in the pre-war grammar schools. Whatever their functions may have been then, they were certainly not secondary education for all. Therefore, we have never had a proper secondary rationale since the end of the war. The Crowther Report, the Newsom Report and the Central Advisory Councils show this split attitude to what was a fundamental part of our education scene.
The next matter that perhaps the Central Advisory Councils should consider—this is of fundamental importance and is brought out to some extent by the report, but not as much as I should like—is the role of the inspectorate. Years ago Her Majesty's Inspectors were very independent of the Department. They stood aside. Their fundamental commitment was to education with a capital E. But what has happened since, particularly since local government reorganisation and the spread of their responsibilities? I am told that in many cases they have become ambassadors for the Department. It is

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said that they have become interpreters. They serve as go-between boys. To some extent that is a good role for them, but I understand that even the inspectors sometimes find it difficult to interpret the policies that are coming out of the Department.
I hope that my hon. Friend will consider the reactivation of the inspectorate as a corporate body of wise men and women which, to some extent, stands on one side, a body which is able to go into the classrooms, gather the information and put it into the places where it really counts. On occasions perhaps it should exercise the role which it exercised historically rather than the role which perforce it has had to take in the past few years.
Finally, there is the whole issue of the curriculum. I shall not go into matters which obviously have to be discussed in another place, but I tell the Department to keep out. It is not a secret garden. It is a very public garden. I do not think the Department or any Government should be the gardener in this garden. It is much too important and far too fundamental to the life of the whole country for any parts of central Government, for example, to come in on a continental style. I know that in the past the Department was sensitive about these matters and that the Schools Council was set up. I do not want to debate that. That was a mixed experiment with mixed results, as those in the House know full well. I hope that the sensitivity will remain but that the machinery will be updated. Perhaps that is a matter that the Central Advisory Councils should consider.
I am sure that my hon. Friends will press for reactivation because of their concern for Parliament. It may be said that the 1944 Education Act has resulted in Parliament having had no report for eight years of the activities of the councils. No assessment has been made and no references have been made. For the councils to have been in abeyance in that manner is symptomatic of the great deal that was wrong with the Department. I hope that my hon. Friend will consider these matters. I hope to hear something of encouragement from him tonight.
12.4 a.m.
The Minister of State, Department of Education and Science (Mr. Gordon Oakes): My hon. Friend the Member for Newham, South (Mr. Spearing) has been a notable champion of the Central Advisory Councils. He chose them as the subject of an Adjournment debate in October 1971, in which he outlined the history of the councils and berated the then Government and their predecessors for not having reappointed them. He now draws the attention of the House to the fact that another five years has passed during which Governments of both parties have failed to bring the councils to life.
I think it will be agreed that this is not a party political matter. The question is why, for so long a period, Governments of both parties have apparently neglected the councils. To answer that question I think we need to look briefly at the history of the councils. They were established under Section 4 of the 1944 Education Act to replace the former consultative committee which, since 1899, had advised the Board of Education on specific matters referred to it by the board. Some replacement of that committee would have been necessary anyway as there was little or nothing else by way of advisory machinery.
The very considerable changes brought in by the 1944 Act made it inevitable however that there would be in succeeding years a ferment of ideas, and something more flexible than the old committee was needed. The councils were, therefore, set up—one for England and one for Wales—with the ability to turn, in the absence of a remit from Ministers, to other topics which they themselves saw as important and in need of inquiry.
My hon. Friend said that successive Ministers have flouted the 1944 Act in this regard. I do not think that is a very apt choice of words. I do not think successive Secretaries of State have operated with the intention of flouting an Act of Parliament. Rather they have tried to adapt the provisions of that Act of Parliament to the current needs of the particular time when they were Secretary of State.
The developing education service, however, began to demonstrate a need for

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official bodies specialising in particular areas. The National Advisory Council on Education for Industry and Commerce was early in the field in 1948. More recently we have the Schools Council and the Advisory Committee on the Supply and Training of Teachers. On more specific matters ad hoc bodies were more convenient and the House will be familiar with such names as the Albemarle Report, the Robbins Report, the Russell Report, the James Report and, no doubt, we shall, I hope, soon have the Taylor Report on the management of schools. These developments reduced the scope and need for the Advisory Councils to set off on inquiries of their own and they became, therefore, the repository of major Government inquiries where their standing, membership and methods of working were particularly appropriate. The result was a number of reports of great importance—Crowther, Plowden, Newsom, and, in Wales, Gittins are household words to this day and the reports contributed greatly to informed discussions about education and had substantial effects on the education services.
One has to see the Central Advisory Councils not against the background of 1944, when they were first set up, but against the position we see today. No Government are short these days of advice, opinion and comment from a large number of educational interest groups and from the Press, including the specialist education Press, and they have available not only standing bodies but can readily set up ad hoc bodies to look into particular matters.
I hope the House will accept, therefore, that Governments have not failed to revive the Councils because of any perverse animosity towards them or any desire to flout an Act of Parliament, but because it simply would not do to bring together a group of people, especially with all the formality and publicity which surrounds these prestigious councils, unless there were a subject of inquiry calling for the kind of examination which only the councils can conduct. It is, of course, ten years since they stood down, and it might seem surprising that in that period there have not been matters of sufficient weight to justify appointing the councils. On reflection, however, I think
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Members might agree that 10 years is not a long period in educational development where fundamental changes are necessarily, and rightly, measured. The succession of major inquiries following the 1944 Act was what one might have expected. It may be that at some future time it will be felt that once more there should be a series of fundamental reviews of educational provision. Indeed, my hon. Friend has outlined four—I counted six—different areas which he would like to see examined.
As to the power that the councils have to make inquiries of their own, in their early days they considered certain matters on their own initiative but not thereafter and I hope I have shown the House that with the development of other methods of inquiry there would be little a revived council could do in this way. The plain fact is that over 30 years have passed since the councils were first established, and those 30 years have seen enormous changes in the whole of our national life, not only in education. It is not, therefore, surprising that the role foreseen for the councils by the drafters of the 1944 Act does not entirely match the circumstances of today.
I understand the feelings of my hon. Friend, who sees value in the need, expressed in Section 5 of the Act, for reports of the activities of the councils to be presented to Parliament, but this provision has value only if the councils are able to report in a useful way. Were the Government to find a major subject to remit to the councils, their activities would, of course, be reported to Parliament under Section 5. However, this is not the only means available to the House for raising education matters. Education Ministers have their share of Questions, and debates on education matters are not unknown. We are engaged in one at the moment.
All this said, however, the gravamen of my hon. Friend's argument is not that Governments have simply failed to appoint the councils, and in doing so have failed to give Parliament an opportunity to receive councils' reports, but that successive Secretaries of State have been in breach of the law. The Expenditure Committee drew attention to this in its Tenth Report on policy-making in the Department of Education and Science

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and said that it may be that there are arguments against the continuation of the councils, in which case a change of law ought to be sought. My hon. Friend thinks that the councils should be revived, and not discontinued by subsequent legislation. I have tried to outline the reasons for which successive Secretaries of State have not revived the councils, and those reasons have been practical.
Mr. Spearing: Apart from Parliament, the Central Advisory Council was the only body which could require a response from the Minister, and therefore it is not for the Minister to say that it should not exist.
Mr. Oakes: Again my hon. Friend is coming to an argument raised in the Expenditure Committee's Report. He has anticipated my difficulty tonight in trying to give him a reply in anticipation of the
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full and proper reply which should be given to the Select Committee. What I can say is that the Government will consider the future of the councils in the light of the law as it stands, of their effectiveness in the present circumstances, of what was said in the Expenditure Committee's Report, and, of course, of what has been said in the House tonight. They will deal with the whole of these questions in their reply to the Expenditure Committee's Report and we expect to get the reply out quickly—before the end of the year, we hope.
In view of what I have said, I hope that my hon. Friend will excuse me for not trying to anticipate what my right hon. Friend will be doing in a few weeks' time.
Question put and agreed to.
Adjourned accordingly at fifteen minutes past Twelve o'clock.