ECONOMIC SITUATION

HC Deb 11 October 1976 vol 917 cc103-70

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. 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 (West Lothian)

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 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 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 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 (Horsham and Crawley)

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 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 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 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 (Loughborough)

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.

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 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 (Loughborough)

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 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.

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 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 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 (Caernarvon)

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. 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 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 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 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 (Dudley, West)

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. 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- 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 (Glasgow, Maryhill)

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.

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 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 (Wycombe)

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. 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 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. 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 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 (Berwick and East Lothian)

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 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 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. 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 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 (Cirencester and Tewkesbury)

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 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 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 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 (Preston, South)

Listening to the hon. Member for Cirencester and Tewkesbury (Mr. Ridley) and 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.

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. 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.

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 (Northampton, South)

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. 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 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.

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 (Liverpool, Walton)

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 (Hertfordshire, South)

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- 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, 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 (Finchley)

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 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 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 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 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 (Aberdare)

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.

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 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 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.

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 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.

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. 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.

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 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 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 (Leeds, North-East)

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 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 (Oswestry)

When the Administration calculated that it would be necessary to have a public sector borrowing requirement of its known 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 (Cleveland and Whitby)

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 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 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.