BUDGET RESOLUTIONS AND ECONOMIC SITUATION

HC Deb 04 April 1977 vol 929 cc872-1004

3.43 p.m.

The Chancellor of the Duchy of Lancaster (Mr. Harold Lever)

The party excitements which we have just witnessed remind me of the time when I left the Treasury after a political discomfiture some eight years ago. I took with me the crystal ball which used to be the most prominent object on my desk and which I kept as a warning about the insecurity of prediction and the inadequacy of the instruments we have with which to make predictions. I also took a very distinct memory of the arguments we had had about the details of Budget management.

I had come to the conclusion—I shall not say that I still adhere to it, because it might be against Government policy: who knows?—that we should be better off if we affirmed once and for all the broad structures of the Budget and then, at every Budget time, by some regulator method, lifted or lowered by a percentage the rate of tax that we wished to apply, having regard to the Budget judgment of that year. We should then have been able to focus the talents of the House upon the great economic problems and strategies upon which we have to decide.

On the other hand, I have to recognise that it is the traditional rêle of the House to argue the relative priorities of the burden of tax on toothbrushes, bird food, and things of that kind. I hope, however, that we shall find an opportunity to focus the talents of erudition, learning, passion for the public weal, and all those other high qualities which, on our own admission, we possess in such abundance more usefully on the greater issues.

I mention this because it is not unknown to hon. Members that tonight we have to deal with the Budget Resolutions, some of which have caused difficulty in all parts of the House. In particular, there is genuine concern in all parts of the House about the impact of the increase in petrol tax. I have the greatest sympathy for people in rural areas who are obliged to travel considerable distances, using a car that they can barely afford, or inadequate public transport. But the problems of transport in general, and those of rural transport in particular, are much larger than the question of the price of petrol and the level of vehicle excise duty that we shall be deciding tonight.

Solutions to these problems are more complicated than anything appropriate to a Budget and a Finance Bill. However, these problems have been very much in the mind of my right hon. Friend the Secretary of State for Transport in preparing his White Paper which is due in about two months' time. My right hon. Friend is fully aware of the widespread and justified sense of grievance about aspects of our transport affairs. The question is how we should deal with those problems.

As I said, I do not think that the Budget Resolutions necessarily give the best opportunity for dealing with these problems, but the House must be the judge of that. The Chancellor's proposals, however, are contained in a resolution which is central to the Budget strategy. That it includes petrol tax and VED increases seems to me justified by the fact that in the case of petrol the increase is no more than is required to maintain, as it were, the real value of the petrol tax, and, in the case of VED, to achieve something less than that.

Although I am troubled, as I am sure many hon. Members are, about the problems that arise from the increases, we should bear in mind that in our energy situation we cannot afford deliberately to make fuel for vehicles cheaper in real terms. In addition, in considering tonight the problems arising from the resolution to which I draw particular attention we must bear in mind what is perhaps a weakness in our system of dealing with these matters. Inevitably the House passes the main Budget Resolutions early on, and the collection of the tax proceeds. I do not want to weary hon. Members, but the House will be aware of the immense administrative difficulties that would follow if, for any reason, the Government failed to carry their Budget Resolution on petrol. It would require the repayment of the duty to everyone who had paid it.

Mr. Nigel Lawson (Blaby)

The right hon. Gentleman mentioned energy-saving. So that the House may make up its mind on the basis of fact, can he tell the House what is the quantum of energy-saving—that is, of fuel saved—expected to occur as a result of the increase in duty in the Budget?

Mr. Lever

Of all people the hon. Member should know that that is not a useful question. I am sure that he does not wish to engage me in the kind of charlatanry in which he himself indulges and predict mathematically the consequences of the imposition of the petrol tax. The hon. Gentleman must know that the imposition of this tax makes it rather dearer than it would otherwise be, and presumably rather less of the fuel will be consumed than would otherwise be the case.

Several Hon. Members rose—

Mr. Lever

I have not come to devote the whole of my remarks to the petrol tax. I should press on, but I shall give way once.

Mr. William Clark (Croydon, South)

The Minister spoke of the administrative difficulty resulting from not passing the resolution on petrol tax. Is it not political arrogance for a Government in a minority position to impose a tax coming into operation at 6 o'clock last Tuesday when it could quite easily have come into operation at 6 o'clock tomorrow evening? We should then not have had all this kerfuffle with the Liberal Party. Does not the right hon. Gentleman agree that the administrative difficulty has been caused by the Chancellor the Exchequer's ineptitude?

Mr. Lever

The hon. Gentleman also realises that the point he raises is a spurious one. He knows that in order for the tax to be collected the assent of the House is required and was given. He knows that one cannot announce increases in duties of this kind in advance. In those circumstances, the point that he seeks to raise is a bad one.

Mr. William Clark rose—

Mr. Lever

I will not give away again on this point. No doubt the hon. Gentleman will catch your eye at some point, Mr. Speaker. He will then be able to devote the whole or such part of his speech as he requires to this issue.

Mr. Ian Gow (Eastbourne) rose—

Mr. Lever

I will not give way on this issue. Energy-saving must occur here, too, to save the energy of Members. I have given way several times. I must make some progress. I want to go on with the real point that I have to make.

In a few weeks' time we shall come to the Committee stage of the Finance Bill. The House will then have ample opportunity to consider the problem of petrol tax in detail.

Mr. Lawson rose—

Mr. Lever

It is no good the hon. Gentleman jumping up and down. I have given way to him. He has had the opportunity to express himself. I cannot turn my speech into a dialogue with him on one minor issue.

Mr. Peter Rost (Derbyshire, South-East) rose—

Mr. Lever

I have warned hon. Members that they are wasting their energy and the time of the House if they keep jumping up on this point, beause they will not be heard. Hon. Members have had ample opportunity to intervene and I have given way amply. I shall not allow a continuous barrage of intervention on this one point, which can be dealt with by Opposition spokesmen at leisure.

Mr. William Clark

On a point of order, Mr. Speaker. I raise this point of order reluctantly, but the right hon. Gentleman has said that the Chancellor cannot give advance notice of an increase in tax. That is surely factually incorrect, because any Chancellor can say that on a certain date a tax will be increased.

Mr. Speaker

If I were to intervene whenever I thought that anything was factually incorrect, I should be a busy man. I say that without any reflection at all on the right hon. Gentleman.

Mr. Lever

It has always been the habit of those with weak cases to raise bogus points of order, without advantage to the proceedings of the House.

In a few weeks' time we shall be able to discuss the petrol tax. We shall be able to discuss it with sharper focus because it will not be linked with other aspects. We shall be able to discuss all the details and to express opinions in our customary way. In the meantime, I must say this: recognising the genuine feeling in the House on this issue—among my own colleagues as well as hon. Members opposite and Liberal Members—my right hon. Friend the Chief Secretary to the Treasury will give his usual careful, benign and courteous reception to all those who wish to discuss the problem with him, as he will be very anxious to hear their views upon it. I have no doubt that my right hon. Friend the Secretary of State for Transport will also be equally obliged for any suggestions. [Interruption.] I gather from the noises from the Benches opposite that the Conservative Party is disquieted that what I have said might not be acceptable to the Liberal Party. Of course, we all know that at present the Conservative Party has an almost unlimited capacity for working itself into a frenzy of indignation over any obstacle that stands between it and the assuagement of the office-hunger which it is clearly now so feverishly projecting. But I do not doubt that Liberal Members will recall that they were not elected to office with the specific passion and purpose of assisting the Conservatives in this way. We were all elected to serve certain purposes and motivations. I am offering all right hon. and hon. Members—including Conservatives who feel sincerely about this question and who are not merely seeking to use it as a means for driving a hole through the Chancellor's Budget—the fullest discussions with my right hon. Friend the Chief Secretary and the Secretary of State for Transport of the troubles and grievances with which we are all closely concerned.

Several Hon. Members rose—

Mr. Lever

I am not being discourteous, but if any of those hon. Members to whom I cannot give way on this point would care to wait outside afterwards. I shall be glad to see them.

I now turn to the central purpose and strategy of the Budget.

Mr. Peter Emery (Honiton) rose—

Mr. Lever

The hon. Gentleman does not seem to think that I am a man of my word. I told the House that I had no intention of giving way on this point. No doubt the hon. Gentleman will regale the House with his wisdom upon it in due time.

Mr. Emery

Will the right hon. Gentleman give way?

Mr. Speaker

Order. It is clear that the Minister does not intend to give way. He has said so to the House and I hope that his position will be respected.

Mr. Emery

The Chancellor of the Duchy is a bully.

Mr. Lever

I am afraid that the hon. Gentleman will not necessarily carry everyone in the House with him by suggesting that any Minister who does not give way to him is a bully. It is conceivable that it would be more courteous if he retained his seat, observed the rules of order, and allowed me to get on with the business with which I have to deal.

Sir Keith Joseph (Leeds, North-East)

The right hon. Gentleman is generally extremely courteous to the House and is generally the master of his brief. He seems to be refusing to give way not because his speech is being unduly delayed, but because he cannot defend his own proposals. My hon. Friends are surely, therefore, entitled to probe a little further before a Minister is entitled to plead that his speech is being so delayed that he should not be interrupted any more.

Mr. Lever

The right hon. Gentleman is attempting to score unworthy points. I hope that I am never discourteous to the House. I have given way copiously on this point, but it is not the major burden of my speech. The main theme is on the Budget itself and the question of the Budget Resolution will be best dealt with in Committee.

Mr. Emery rose—

Mr. Lever

I do not hear what the hon. Gentleman is saying.

Mr. John Mendelson (Penistone)

Would my right hon. Friend bear in mind—

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

On a point of order, Mr. Speaker. The Minister said that my hon. Friend the Member for Honiton (Mr. Emery) suggested that he was not a man of his word. The right hon. Gentleman had given his word that he would not give way, yet he has now given way to my right hon. Friend the Member for Leeds, North-East (Sir K. Joseph) and to the hon. Member for Penistone (Mr. Mendelson). Is it the fact that he will not give way to Back Bench Opposition Members? Is that what he should have said? He has broken his word if that is not what he meant.

Mr. John Mendelson

Will my right hon. Friend bear in mind that although any Excise duty is a serious matter for all hon. Members, there is much more anxiety and criticism on the part of a number of hon. Members about the lack of growth proposed in the Budget? Will he now get on to the major economic strategy and not allow his time to be wasted on one point only?

Mr. Lever

My hon. Friend has validated my assertion that I would not give way on this issue any further, and I have not and will not—not out of discourtesy to the House, but because there are others who wish to speak. I have no time limit and could go on and make the rest of my speech indefinitely. I have made the points I wish to make. If any members of the Conservative Front Bench feel that those points are not cogent and convincing, they may wish to give in more articulate form the advice that they have been giving to the Liberals on how they should or should not behave on this issue, and no doubt they will receive the reception appropriate to their wisdom and impartiality.

I turn to the central policy—

Mr. Emery rose—

Mr. Lever

The hon. Gentleman can go on bobbing up and down like a jack-in-the-box from now until the rising of the House, but I do not intend to give way.

I wish to turn away from the series of somewhat frivolous interventions—

Sir K. Joseph

They were not frivolous.

Mr. Lever

The right hon. Gentleman says that the interventions were not frivolous. Questions asking me to assess the amount of petrol that will be consumed after the tax compared with what would have been consumed before the tax, I regard as frivolous.

Mr. Gow rose—

Mr. Lever

It is perfectly plain that hon. Members opposite do not want to hear the rest of my speech. I do not blame them, but I am afraid that they will have to hear it, because I have a duty to make it.

In his Budget the Chancellor's central problem, and one that is afflicting the whole of the world was the problem of inflation and recession, or lack of growth. It is quite plain, though one would not have gathered it from the somewhat sterile and negative criticisms of the Budget that have been made by the Conservative Front Bench, that the problem from which we have been suffering these past three years is a grave one troubling all advanced countries. Not only the Labour Government here, but every Government in every advanced country has had to grapple with problems, which they have so far not solved, of world inflation and world recession.

The question is how such a situation arose. Why were we not afflicted with these problems before the war? Those hon. Members who are quite satisfied that the afflictions under which we struggle in this country are uniquely to be attributed to the Labour Government presumably suppose that the problems did not exist under the Conservative Government, or do not exist under any other Government at the same time as we have been grappling with them.

While the world, perhaps prematurely, was congratulating itself on having solved the pre-war problems of lack of demand, it was in fact gestating a new problem—the problem of distributing in an advantageous way the level of demand that it had. In other words, in recent years, broadly reaching a climix in 1973, the world had, as it were, changed its problem from the problem of aggregate demand to the problem of managing the demand that it had in ways that would avoid inflation and permit the onward growth of production.

In this country inflation reached acute proportions and the Government decided that, whatever the difficulties, it had to be dealt with. The important question was what remedies were available. We had all learned that the paper chase for unreal increases in money incomes would not be of advantage to us. However, that was a very generalised recognition. The problem was not to recognise the general aggregate of resources available and the demand that could be allowed to match it; the problem was how to structure that demand so that it would lead not to a paper chase, but to stable or more stable prices and a resumption of the growth of real wealth creation.

Three remedies have been suggested for our problems. The first was monetarism, the second free collective bargaining and the third incomes policy. I shall speak briefly about monetarism. It has its addicts in all parts of the House in some form or another. If it were really true that monetarism could claim the possibility of solving our problems of inflation simply by the proper manipulation of the money supply, or the various monetary aggregates, we could pause to wonder why it was that in not one country has the problem of inflation been eliminated by this simple and advantageous method.

Although to me monetarism as a doctrine has not been intellectually convincing, it has had a value in drawing greater attention to monetary aggregates, which in the past have had insufficient attention, especially under the Conservative Government—as the right hon. Member for Leeds, North-East (Sir K. Joseph) has pointed out to his ex-colleagues who occupied the Treasury Bench.

However, as a total solution it represents a retreat into financial statistics which ignores the reality that is behind those statistics. A monetary solution, if attempted with the kind of rigidity that alone could offer us the hope of a cure for inflation by this means, would result in protracted and perhaps indefinite high unemployment. There is no guarantee, even within monetarism's own rather inadequate logic, that a structure of iron monetary restraint, would enable us to protect the weaker members of our society from the stronger. There is no justification for believing that this simple solution would resolve our difficulties in the happy way that its more naïve advocates press upon us.

The package may have alluring flowers on the outside, but I suspect that if we sowed the seeds of monetarism with the ruthlessness to which we are urged, we should get not the flowers of inflationless growth but unemployment and hardship for an indefinite period. Certainly there would be no prospect of growth.

Mr. Gow

The Chancellor of the Duchy has been arguing that if we were to follow an iron monetary policy it would be certain to lead to inflation. Since nobody believes that we have been following anything approaching an iron monetary policy over the past four years and since we have the highest rate of inflation that we have had since the 1930s, does not the right hon. Gentleman think that there is a monetary lesson to be learnt from that?

Mr. Lever

As we have a rate of inflation which is not much more than half that of two years ago, it cannot be said—

Mr. Gow

I meant to say "rate of unemployment".

Mr. Lever

I shall have to re-phrase the question to read "unemployment". Certainly this is a grave and threatening problem. However, the fact that we have not been able yet to achieve its solution does not mean that we must immediately espouse some alternative solution without any conviction as to its consequences. A monetarist is entitled to believe that there would ultimately be less unemployment if we applied—

Sir K. Joseph

The Government are applying monetarism.

Mr. Lever

The right hon. Gentleman says that we are applying monetarism. We are paying attention to monetary aggregates, which is not quite the same thing. If the right hon. Gentleman is satisfied that we are applying monetarism, he should be very happy because he has preached it and its fruits should be rich and rewarding. We are not applying monetarism. We are rightly taking into account monetary aggregates as part of the economic package by which we deal with our problems.

Mr. Nick Budgen (Wolverhampton, South-West)

Would not the Chancellor agree that M3 is expanding at about 5 per cent. per annum? Is not that iron control of the money supply?

Mr. Lever

We have a firm control of the money supply. That is different from relying on the money supply to accomplish tasks greater than it is feasible to rely upon it to accomplish.

The former right hon. Member for Wolverhampton, South-West, now the right hon. Member for Down, South (Mr. Powell), is always preaching that once one has the monetary disciplines one does not need to care any more what the trade unions or the working people do in organising wage claims and the like. But it has nothing to do with inflation. It is the total supply of money that has to do with inflation.

There is a distinction between total indifference to the money supply—such as the Tories normally display when in office and total adherence to monetarism which relies upon monetarism, and monetarism alone, to cure inflation. I dismiss the notion that monetarism is itself a complete solution.

I turn to the alternative suggestion, that we should go back to free collective bargaining. The trouble with free collective bargaining is that if, in the present context, we were to resume, without change, the system known as free collective bargaining we would undoubtedly produce a situation in which the stronger groups in our society would be able to achieve considerable benefits in relation to the weaker groups. But they would have two major disappointments. First, the gains that they made would be less than they thought they had made because of the twist to price inflation which was taking place. Secondly, the inflationary situation which would be resumed would bring about the dangers of slump and unemployment.

In all, even the stronger groups exercising their powers, without reference to the aggregate achievement of our society at the present time, would produce a situation in which their gains were temporary and soon would be non-existent. Even they would be worse off than if we could all find the means of co-ordinating our achievements so as to allow greater accretion to our wealth creation than is possible in the inflationary situation which would follow the reversion to what is called free collective bargaining.

The third choice is incomes policy, which is the policy the Government have been pursuing and intend to pursue. This is a policy of free collective bargaining co-ordinated so that each group takes into account, to its own advantage in the long run, the consequences in aggregate of the decisions they are making. I think this is a reasonable interpretation of the voluntary policies that we have been pursuing.

The alternatives to that policy are clear. Without further success in the Government's policy of incomes co-ordination we shall return to the positively horrific level of inflation of two years ago, which will be followed in turn by the prospect of slump, devaluation and deficit.

As a matter of fact, the policy so far, contrary to the pessimistic predictions of Conservative Members, of seeking the co-ordinated efforts of our working people in an incomes policy has had great success in removing at least partially the terrifying dangers that were arising two or three years ago. In fact, were it not for the fact that after the successful achievements of phases 1 and 2 a devaluation had occurred which became itself one of the great engines of inflation the Government would have made even greater progress in the success of these policies.

The devaluation which occurred was to some extent at any rate, quite inevitable in the light of the inflationary free-for-all consequences of the previous period. What is worse, it was aggravated by the imperfect state of our international financial mechanisms at that time.

Fortunately, the Government have been able to strengthen our international position—I refer now to the safety not and to the general strengthening of our international financial defences—which enables the Chancellor to offer the House a period of confidence in which we can look forward to the blessings of a stable currency and seek to organise our affairs within that stable currency so that we may become steadily more competitive.

Let me say a word about the parity question in relation to incomes policy and in relation to competitiveness. I often hear the seductive expression "the blessings of an undervalued currency", and we are often told by those who orate most freely about the German achievement in the export markets that it was the blessings of an undervalued currency which made possible that achievement.

I am afraid that that is a shallow view. The truth of the matter is that any economy which is gaining productivity against its rivals in world trade gradually acquires an undervalued currency and that the more it gains in productivity the more undervalued its currency becomes. So if I were to overstate the matter and turn it the other way round, I would say that Germany's currency became undervalued because Germany grew in its productivity in competition with its rivals.

That view is corroborated by simply looking at one or two other experiences. Nobody can deny that, whatever the blessings of an undervalued currency, we got them after the Stafford Cripps devaluation when, in the face of a fairly marginal current account deficit, we devalued by 40 per cent.

We devalued against the deutschemark and against the dollar, which was not devalued. One would have expected that with the blessing of this devalued currency, if it is a blessing, we would have leaped ahead and resolved all our problems. I do not need to dwell upon the number of times we have conferred the blessings of an undervalued currency upon ourselves or had it conferred upon us by agitated markets.

The truth is that an undervalued currency is a prize to be won, not a blessing which we are free to confer upon ourselves by parity manipulation. An undervalued currency is the prize which is won by a competitive country gaining in productivity on its trading rivals. That again is shown in the case of Germany by the fact that, although its currency has steadily appreciated in recent years, as its productivity improvements have matched that appreciation the German currency remains undervalued compared with those of its rivals. It will remain undervalued as long as productivity is maintained in this way.

The remedy for the evils of inflation is not to be sought in parity manupulation; nor are prizes of competitiveness. The prizes of competitiveness are to be sought in self-discipline and the organisation of a policy in which, instead of pursuing paper gains which cannot become real because the resources are not there, we seek to achieve in an orderly fashion the possibility of resuming the real economic gains which success in the battle against inflation will bring within our reach.

I read the speech of the hon. Member for Cornwall, North (Mr. Pardoe) with great interest. He made many good points, but I thought there was one weakness in his speech, on the question of inflation.

Mr. William Clark

A split already.

Mr. Lever

The hon. Gentleman seemed to ignore the fact that inflation is not a static condition in our society, but a dynamic process. When he advocated that ideally we should have zero growth, he ignored the fact that at any given time there is a huge weight of inflation already in the pipeline. The effect of a zero growth in wages would be not merely that one would ask for an immediate and probably intolerable sacrifice in real living standards by our working people, but that if one won that, they would not only accept an injury to their living standards but would injure the demand upon which their employment depends. And this at a time when nobody could say that our society was suffering from a plethora of demand.

For that reason there has to be some means of bridging the period in which the inflationary price rises in the pipeline are worked out. That is why the Chancellor's strategy is absolutely right in seeking to make the tax reductions march side by side with the self-disciplines which reduce the paper claims which work people make at any given time. This will enable them to bridge a good deal of the gap caused by the inflation already in the pipeline.

Mr. David Price (Eastleigh)

Would the right hon. Gentleman bear in mind that what he is arguing now does not tie up with what the Chancellor said in his statement or in the Red Book? In both those statements we were promised an increase of 1½ per cent. in economic growth for 1977 and that, if we were lucky, inflation would be down to 13 per cent. by the last quarter of 1977. However one plays with those figures, they can only mean reduction in living standards for the average Briton. There is no other way in which those figures can be interpreted. So is what the right hon. Gentleman is talking about going to happen?

Mr. Lever

I see no contradiction in my right hon. Friend's figures. My right hon. Friend says that we are coming to the end of the period of reduction in real living standards. He says that we shall have an increasing growth. Although I am liable to be irreverently critical of Treasury forecasts, I think that this forecast will, on balance, prove to be pessimistic rather than to overstate the prospects.

It is very difficult to predict these things with detailed confidence. I see nothing incompatible with the Chancellor's proposals and predictions in what I have said. The Chancellor is struggling to create the conditions for sustainable growth. The first condition is the control of inflation. That control is feasible only if we win the support of our working people for an incomes policy which will bring that about.

I am sorry that, owing to frequent interruptions, I have gone on for rather longer than I wished. One or two points, however, still remain. I have read the speech of the right hon. Member for Leeds, North-East. As so often, he makes good points that are true only in part.

He has a point when he says that it is not easy for private enterprise, if it faces a barrage of criticism of its efforts of its motivations, always to deliver its most exciting and satisfying work. The right hon. Gentleman is certainly in respectable company in pointing out that confidence in the system by which the country operates is a crucial factor in its success.

Like so many of his good points, however, that leads to no useful conclusion. What does the right hon. Gentleman wish to happen? Does he want, for example, members of the Tribune Group, persuaded by the force of his argument, to affiliate forthwith to Aims of Industry, and from then on to give unqualified paeans of praise to the private enterprise system? Surely that is not a very practicable proposal.

The right hon. Gentleman should bear in mind that it is about 130 years since the Communist manifesto was published, and since then private enterprise has changed dramatically. One of the most dramatic aspects of its change has been in its productivity. The achievements of private enterprise are greater under a barrage of criticism than they ever were when its tenets were regarded with almost religious fervour.

I think that the right hon. Gentleman—as, for that matter, is the Conservative Party—is giving his attention a wrong focus. I am a great believer in the political and economic advantages of, and necessity for, private enterprise. I see it, as well as the public sector, playing a successful part in the years ahead. I should rather see the danger to its survival, value and sucess in terms of its failure to tackle the defects in the system of which my hon. Friends on the Left wing in politics are the most vociferous and perisistent critics.

The danger to the private enterprise system does not lie in the fervent declarations of my hon. Friends the Members for Penistone (Mr. Mendelson), and Liverpool, Walton (Mr. Heffer), but in its own failure to remedy the horrific world level of unemployment and inflation from which we are suffering. It is the failure of private enterprise adequately to use the resources at the disposal of mankind for the creation of wealth and for the ordering of its affairs that endangers it. Nothing that is done by my right hon. or hon. Friends represents a danger a fraction as grave as that which threatens from the world evils of inflation and slump with which we are now beset.

That is the reason why I find no difficulty in endorsing the strategy of my right hon. Friend. The fact that there is a world problem within which our own problems must be faced does not by any means permit us to ignore our responsibility to grapple with the still frightening level of inflation.

The Chancellor's strategy is one for grappling with that inflation, not because of some theological objection to it, but because inflation is the biggest single obstacle to full employment. That obstacle must be removed, and because the Chancellor's is the only strategy that has been offered to the House and to the country in support of a policy of growth and full employment, I heartily endorse it.

The Chancellor and the Prime Minister have already shown in their activities in the world that they recognise that whatever is done here can succeed only as a part of a wider world success. We have made and will continue to make our contribution as good citizens of the world. The Budget, however, is a central contribution to the strategy of ending inflation at home and opening the path to sustainable growth and fuller employment policies.

4.31 p.m.

Mr. David Howell (Guildford)

Usually the Chancellor of the Duchy of Lancaster is second to none in his capacity to reassure us that things are growing a little lovelier each day and that the economy is coming up nicely. I hope he will not mind my saying that he appeared today to have filled up with a low-grade fuel with a heavy lead content. We note his reassurances but we do not believe them. I shall explain why later, but first I should like to look back on the debate on the 1977 Budget, of which this is the third day.

For me the high spot of the debate was when the hon. Member for Cornwall, North (Mr. Pardoe) rose, heavy with the terrible burden of his new rôle bearing down on his shoulders, and told a hushed House: In the present state of the economy hope is about the only commodity for which we can hope."—[Official Report, 30th March 1977; Vol. 929, c. 458.] I appreciate the burden upon the hon. Member, but there is another commodity—if that is the right word—for which we, certainly all of us on this side of the House, and perhaps the whole House, are entitled to hope. That is a little more candour and less cant in Liberal Party pronouncements. Anybody who was not born yesterday can understand the Liberal situation and see the dfficulties. Liberal Members must support the Government to survive, and I do not hold that against them. That is the political reality and the way in which the system works. But we are entitled to ask to be spared all the high-minded lectures about the new alignment and about giving the country a new era of stability.

Where on earth is that stability? In the 12 days since the Lib-Lab pact there has been almost continuous instability and uncertainty. Over the weekend the Government were supposedly teetering on the edge of extinction while the Liberal Party danced a flamenco around the petrol tax issue, threatening archly to withhold favours from the Government but obviously determined to surrender in the end. The Chancellor had to rush on to the "Jimmy Young Show" to threaten the ultimate deterrent—3p on a pint of beer. That would, of course, have smashed the social contract and brought down the twin pillars of the Government's strategy.

So everything is in doubt, and we need no lectures on the need for stability. Of course, the Liberals must cling to life—and to their shadow portfolios—even more so as their support in the country grows more shadowy still. To call that "stability" insults the intelligence of the electorate. The country can reasonably ask to be excused these "Perils of Pauline" episodes as the Liberal Party rediscovers each weekend that it would rather be red than dead.

I turn to the more serious issues and I follow the Chancellor of the Duchy of Lancaster in looking at the contents of the Budget. I agree with him and the Chancellor of the Exchequer that this is not a political Budget. It may be paying the way for a political Budget, but it is not one itself. Indeed, one feature of the Stechford by-election—I shall try not to mention too often that painful episode for the Government—is that by Thursday nobody could remember much about what had happened in Tuesday's Budget, except the price of three, four, and five-star petrol. People saw that it was going up in price. We shall oppose the relevant resolutions tonight because we believe that it would be better for VAT to be consolidated at 10 per cent. instead. That is also what the Liberals believed last Wednesday and Thursday, although today they believe differently.

We should not be surprised that nobody could remember much about the details of the Budget. After all, why should people remember them? If one considers the matter from their point of view, prices are still rising impossibly fast and food and household goods are becoming incredibly expensive. The poor at work will be poorer in the coming year and the poverty gap will grow wider. Everybody will be worse off in the year ahead. Tax will go on rising, despite the temporary hiccough, and everyone will be paying more tax next year than this. As the Chancellor knows, jobs will be scarcer and life will become tougher—for example, the disabled who rely on motor transport will be in great difficulties. The queues at hon. Members' surgeries will be longer with the sad people who cannot make ends meet, such as the heads of one-parent families. Every rate, gas, food and garage bill will go up. This is certainly not a Budget for a family with children or those at the bottom of the heap. If anyone present doubts my word, he should go to Hansard and read the devastating speech of the right hon. Lady the Member for Blackburn (Mrs. Castle), who made that point. This is not a Budget for the weakest, whatever the propaganda may say.

Was this, then, a Budget for industry, the entrepreneurs and investment? We have welcomed the slight check in the deteriorating position of management that is implied in the tax concessions. It is slight, however, because by the time one has added the extra tax on company cars this year, extra petrol costs, and increased rates, the net effect will probably be nil. One should, however, be grateful even for small hiccoughs, and these we welcome.

What about a major tax boost for business and major incentives for the renewal of enterprise that we must have in this country? What did the Budget do about that? What help was there in the Budget for partnerships and the self-employed? What about easing the rules on the 714 certificate issue—in which the Financial Secretary has played such a distinguished part—that will, in practice, bring total chaos to the construction industry? What about the job-destroying capital transfer tax? There has been no change there. What about the VAT reforms, for which many of my hon. Friends have been pressing? Again there have been no changes. What about savings? They were hardly mentioned by the Chancellor. What about personal capital building or profit-sharing, on which the Liberals are so keen? They were not mentioned.

There is one industrial statesman who, I am told, is happy with the Budget. My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) reminded us on Wednesday that Lord Ryder will receive a fat increase in his take-home pay out of the arrangements—and good luck to him. He has authorised the National Expenditure Board, so my hon. Friend the Member for Rushcliffe (Mr. Clarke) tells me, to buy an ailing clock company to mark the occasion. I am told that it was a desperate bid to buy time.

The British National Oil Corporation should also be cheerful. The petrol duty increase, if passed, will give BNOC money to spend on its capital programme for drilling this year in the North Sea—a matter that private enterprise could have handled just as well. It might be useful for motorists to know that their money is going into nationalisation programmes.

Mr. Lever

Is the hon. Gentleman really trying to prove to a serious audience that money is being collected in petrol tax because we could not otherwise provide the finance required for work in the North Sea?

Mr. Howell

I am not saying that. I was simply pointing out the squandering of money through the BNOC, whose functions in regulations and safeguarding the national interest could be done in much better ways at much less cost.

There is nothing in the Budget for the rest of industry. Although the Chancellor refrained from talking about miracles, the real miracle in this country is that the business community survives despite the unremitting hostility of the Labour Party towards it.

Is the Budget designed to please trade unionists? There has been no great clamour of enthusiasm from that quarter. As far as the conditional cuts are concerned, most of my hon. Friends would agree, for once, with Mr. Hugh Scanlon, who said that it is the Government's responsibility to govern and who implied, as we do, that it is not the Government's responsibility to send out little conditional promises and enter into negotiations of that sort with one exclusive body. If we are asked what we would do, our reply is that we would seek an open understanding and not a hole-in-the-corner deal.

Whichever party is in power during the coming wage explosion, the situation will be fiendishly difficult in the face of the consequences of that explosion and the resulting threat to employment. That is the disastrous legacy of two years of the social contract. I am referring not just to the flattening of differentials which is causing such great difficulties and immense tensions. The workpeople were asked to "give a year for Britain" in three successive years. Did they get less unemployment in any of those years? No. It is higher now and as high as it has ever been. Did they get lower inflation? The Chancellor of the Exchequer assured workers that low pay agreements would bring down prices, but have we got lower inflation? No. Inflation is at 16 per cent. and is doing fearful damage to every household budget. Far from being near the level of our competitors, we are running at four times the level of inflation in West Germany.

Surely these figures ought to tell the Chancellor of the Exchequer and his hon. Friends something about the social contract, the third part of which he is trying to set up. They certainly tell the workpeople something. They tell them that while pay restraint may be vital to the holding of jobs—this is more widely appreciated—it is all in vain unless the Government go all out to cut public expenditure, taxation and bureaucracy and to lower interest rates and so restore business confidence.

That is the understanding that will really help the workpeople and the trade unions. The Chancellor of the Exchequer may have got a pay agreement last year, but the workers were betrayed not by their failure to deliver pay restraint—they delivered, even though wage drift pushed the level well past the original 4–5 per cent.—but by the Government's obsession with policies, ironically often in the name of the social contract, which froze incentives, destroyed profits and undermined foreign confidence through risks with the public sector borrowing requirement that should never have been taken. That made workers' restraint pointless and wasted and produced the appalling bitterness with which any Government will now have to deal.

If we are asked what would the Tories do, we say that our rôle is not to deliver a sawdust package of Socialist promises in exchange for a scrap of paper that will probably be invalidated by events but to stick to the policies that will bring workers what they want in terms of jobs and living standards. That may need spelling out more clearly and openly, and the monetary limitations under which we have to operate should be set out more clearly. All politicians should be thinking of ways of doing that.

I was interested in the views of the Director-General of NEDC on the links between the NEDO and Parliament. It may be that in NEDC we could create a forum in which these things could be thrashed out. Perhaps the monetary authority should also be given a more prominent rôle in this forum, as has often been done in other countries, as well as other interest groups.

That should be the aim of a constructive pay policy—to bring home more effectively what many responsible trade unionists know already, namely, that there is a monetary total for the year which cannot be exceeded, that public expenditure must be held within cash limits underpinned by the political will to hold it and that within such a policy excess for some means less for others or fewer jobs for all or more pressure on the sick, the weak, the old and the dependent.

That is the concerted way forward, rather than through job-destroying price freezes or a hole-in-the-corner social contract in which everything does indeed contract.

Mr. Ian Wrigglesworth (Thornaby)

The hon. Gentleman talks about giving more independence to the monetary authority. Can he give us any more specific details?

Mr. Howell

I was making the point that in many countries, and maybe in ours, there is a case for the monetary authority, as distinct from the Government of the day, putting forward in its own terms limitations which must be held to and the total resources available for increases in pay and salaries, together with the consequences in terms of unemployment and difficulties for workpeople if those limits are exceeded. That is the concerted way forward, and the work-people are beginning to realise it even if the Government do not. So let us have no more of the chorus of "What would you do?" That question is being overtaken by events. If we are serious people on both sides of the House, we should be putting our minds to the approach that I have described.

Let us, please, also have no more people saying that all is well and that we need not worry because the Budget marks the end of Socialism. That appears to be the Liberal view, and I heard the Leader of the Liberal Party say last week that we would get no more Socialism. I have news for him. Socialist measures and policies of the past have a habit of living on. Nationalisation, the war on the self-employed, the insatiable partiality for State employment and the obsession with price and profit restraint cannot be switched off like a bad television film or a party political broadcast. That is not the way these things work. There will be no end of Socialism until there is an end of this Socialist Government.

Mr. John Pardoe (Cornwall, North)

The hon. Gentleman is right to say that Socialism tends to live on in its effects of increased bureaucracy, wasteful expenditure and lack of public participation. However, the most Socialist acts of the last 20 years have been the Industry Act 1972 and the reorganisation of local government and the National Health Service. These have all created far more Socialism than has any nationalisation, and they were carried out by the hon. Gentleman's party.

Mr. Howell

The hon. Member may comfort himself with any arguments he likes, but we recognise the realities. He is supplying the oxygen to the Government. As politicians we understand his position, but he should not try to cover it with ambiguous persiflage and arguments about the high-minded principles of the Liberal Party.

We are reaching the end of a chapter in our country's affairs. It is recognised outside as having been a disastrous chapter even if Labour Members do not recognise it as such. The Conservative Party and the work people of Britain have a massive job to undertake. We tell this Labour Administration to face realities, even if the Liberals will not, that they are done for. We tell them to stand aside with what grace they can summon and we tell them to make way for a new Government who will bring stability to our uncertain nation in the storms through which we still have to pass.

Mr. Deputy Speaker (Mr. Oscar Murton)

Mr. Speaker desires me to make the following statement to the House. Six Privy Councillors and many hon. Members who have sat patiently through the previous three days of debate on the Budget have communicated to Mr. Speaker that they are anxious to catch his eye during today's debate. Although it is clear that some hon. Members are bound to be disappointed by failing to be called, it will enable the Chair to call more hon. Members if those who are fortunate enough to catch the eye of the occupant of the Chair will try to exercise self-discipline in the length of time they take.

4.51 p.m.

Mr. Douglas Jay (Battersea, North)

The hon. Member for Guildford (Mr. Howell) has told us, if I understand him aright, that the Conservative Party is in favour of some sort of pay policy. It is interesting to know that, and I hope that that statement goes for his hon. Friends.

He also appeared to tell us that it is Conservative policy to take monetary policy to some extent out of the control of Government and Parliament. That is even more interesting, and we shall await further elaboration of his views from his hon. Friends.

Like my right hon. Friend the Chancellor of the Duchy of Lancaster, I am anxious to examine the real underlying problems facing the country rather than to spend time on the price of petrol or the vacillations of the Liberal Party. I only wish in passing to congratulate the Liberal Party on having discovered that even a little power implies a little responsibility. Perhaps the Liberals will go on to learn that it is wiser to make up their minds first and to talk afterwards, in politics as in many other fields.

I believe that the Chancellor of the Exchequer was perfectly justified in selecting oil and petrol, amongst other taxes, for some of the rises in revenue required to give the income tax reliefs in his Budget. It is not necessary to have worked in the Treasury to discover that the nature and object of taxation is not to please, but to displease as little as possible.

I agree with my right hon. Friend the Chancellor of the Duchy of Lancaster that the real question facing the House and the country, and it goes very much deeper, is how we can get an effective enough voluntary incomes policy to make full employment and growth again possible in this country. My first priority in all this is full employment, which means, of course, full production and higher living standards. I believe that that is perfectly possible.

It is only unrestrained collective bargaining in recent years and the resulting pay explosion of 1974–75 that have made full employment temporarily impracticable. This is true, as my right hon. Friend says, not only in this country but in the main industrial Western countries to a greater or lesser degree in the 1970s. That is why I believe that in the United Kingdom a new incomes policy is even more important than Budget policy and monetary policy.

Indeed, one cannot have a Budget policy at all unless one has an incomes policy. At the moment I understand—my right hon. Friend will correct me if I am wrong—that £25 billion of Government expenditure is made up of payments of wages and salaries by the Government. To those who think that one can have a Budget policy without an incomes policy—and until today we thought that was the attitude of the Opposition Benches—I shall put this question: what do we do if there is a 20 per cent. increase in a few months in all wages and salaries, which would increase by 20 per cent. the £25 billion being paid out in Government expenditure? What becomes of Budget policy then?

I apologise for baldly stating one or two blunt economic facts that seem to me to lie at the heart of our problems and the problems of some other countries and that some people are wishfully ignoring. The first is that if pay rates in money terms rise faster on average than the supply of goods and services available overall, prices must rise. That is an arithmetical truism that price control cannot alter, because the value of all goods and services sold must be equal to the total value of money spent on them. What price control can do usefully is to make the prices of some goods lower at the cost of making other prices higher, and there are times when that may be well worth doing.

Secondly, if after prices have been forced up by a pay explosion the Government simply increase the quantity of money sufficiently to employ everyone at the higher rate of pay, prices must increase still further. That was beginning to happen in this country in 1975.

From those two arithmetical truths it follows that a sharp practical dilemma is bound to confront any Government of any party in those circumstances. After a pay explosion and the resulting price explosion the Government can only do one of two things. They can expand the quantity of money in which case prices rise faster and we move towards the South American solution. This is perfectly possible, and it means that prices and incomes rise by a greater percentage year after year. Or, and this is the only alternative, having got into this situation, the Government can halt monetary expansion, and then for a time unemployment must rise.

The other arithmetical truth, which I beg the House to grasp, is that, given a stable quantity of money, a rise in pay rates must mean a rise in unemployment. That is a point that people who are demanding rises in pay rates have not grasped. The practical implication is that in these circumstances only by pay restraint of some kind can we get the full employment that we all want. That is where we have got to in 1977.

The level of unemployment in this country in the next few months is thus dependent almost entitrely on the rise in pay rates that occurs. The steeper the rise in pay rates, the higher will be unemployment. This emphatically does not mean that Keynes was all wrong in believing that there was a time when one could maintain full employment by managing demand. This is what extreme monetarists ignore.

One can achieve full employment by managing demand on two conditions. The first condition is that pay rates do not rise faster than the supply of goods and services available. The second condition is that surplus capacity exists. In those two circumstances the Keynesian argument is valid. Far from Keynes having ignored this, he actually predicted the present dilemma in a particularly farsighted section of the employment policy White Paper of 1944, which he inspired and of which I shall quote just one sentence. It says: Action taken by the Government to maintain expenditure will be fruitless unless wages and prices are kept reasonably stable. That is the point we have reached after 33 years, and our present situation endorses rather than contradicts what Lord Keynes then said. This means not that demand management has failed, but that demand management is impossible without cost management. That is not particularly surprising, because the level of employment, after all, depends on the ratio of demand to costs.

If we prevent money demand falling too low—as in the 1930s and at other times—or prevent money costs rising too high—as in 1974–75—we can, given time, achieve any level of employment we wish. The idea now becoming fashionable, that for some mystical historical reason full employment is impossible, is sheer nonsense. We heard all that in the mid-1930s. What rubbish it looked 10 years later!

Again, I agree with my right hon. Friend the Chancellor of the Duchy of Lancaster. In practice three courses of action are open to a modern Government who are faced with the pressure of collective bargaining. First, they can restrict money supply and balance the Budget, and have no incomes policy. Until today I thought that that was the policy of the Conservatives. The result of such an approach in the United Kingdom today would be seven or 10 years not merely of high unemployment, but of stagnating production and lower investment. That must mean the decline of this country into a third-rate Power—which is the fact that the pure monetarists do not adequately or honestly face.

Secondly, the Government could gaily reflate without any incomes policy. That is all too easy for a Government if they wish to do so, and that is what some of my hon. Friends, understandably but, I think, unwisely, recommend at present. I beg those who recommend that course of action to realise that in present conditions that would mean prices rising rapidly and accelerating towards the South American spiral, and we all know how that has often ended.

Unless one is prepared seriously and candidly to accept that spiral as the normal state of the economy here, with perhaps a 30 or 40 per cent. rise in prices every year, one cannot honestly advocate unrestrained reflation and no pay policy. I believe that in that way would lie catastrophe for this country and suicide for any political party that led the country into it.

The only practical way is the third way, which is to reflate gradually, with a firm control of the money supply and the Budget, in step with a long-term, flexible incomes policy, which must cover dividends and prices as well as wages and salaries. I believe, indeed, that it is just because stage 2 has been reasonably successful that unemployment is now falling.

At the request of Mr. Speaker we have to keep our contributions brief, and therefore I cannot go into the details and intricacies of incomes policy. However, it should not have needed the British Leyland toolmakers to demonstrate what has always been the central long-term difficulty of an incomes policy.

Mr. John Mendelson

I greatly regret that my right hon. Friend is under such pressure of time, because he is coming to the point of predicting that unemployment will fall, and no doubt he wants to say that it will fall without providing any evidence of why that will happen.

Mr. Jay

It is a statistical fact that over the past three months, seasonally adjusted, unemployment has been falling. I could be wrong, but I believe that it has fallen because stage 2 has held, and, given that degree of restraint, I believe that unemployment will continue to fall.

The fundamental and serious difficulty of an incomes policy is to combine the essential movement of relativities inside the pay structure with the restraint of the average increase. That is the essential problem before the country. I do not see myself how it can be solved in the long run without some sort of independent referee authority which would give final rulings on pay claims. If that could be organised, and if it were successful, we should be on the way to solving the really basic problem. Only practical experiment could show whether it would be successful. It is emphatically not a matter of theory. So I say for heaven's sake let us try it.

But what an ironic tragedy it is that in this crisis in our national fortunes we have loaded upon ourselves the extraordinary handicap of the common agricultural policy. Just when we are forced to invite the public to exercise sever pay restraint, the Government are compelled by the 1972 Treaty of Accession gratuitously to raise the price of food, in some instances by as much as 50 or 100 per cent.

It is interesting that no one in this debate has mentioned the EEC and the "great home market" that was to solve all our problems. In our last EEC debate on 16th March I estimated the cost of the CAP to our balance of payments at £500 million net for 1976. A few days after that, Mr. Wynne Godley and his fellow Cambridge statisticians provided a much more expert estimate of £650 million for 1977. Once more, therefore, I must apologise to the House for having under-estimated the damage which the Common Market would do to this country.

Mr. Wynne Godley added that if the EEC Commission's present proposals were accepted, the burden on the United Kingdom balance of payments would rise to £900 million a year or more. To that we must add the £1,200 million increase in our trade deficit in manufacturing goods which we have incurred with this "great home market" since we joined.

The stark truth is that the total balance of payments burden resulting from membership is therefore now approaching £2,000 million a year. That was one major cause for the fall in the pound last autumn, a factor which then caused food prices to rise still further. This gratuitous burden has been loaded upon us at a time when price and pay restraint are so crucial. This is the responsibility of all those who voted for the European Communities Act, and this is the burden which must be removed if our national fortunes are to be fully restored.

5.8 p.m.

Mr. David Steel (Roxburgh, Selkirk and Peebles)

My hon. Friend the Member for Cornwall, North (Mr. Pardoe) and my right hon. Friend the Member for Orkney and Shetland (Mr. Grimond) have already outlined my party's general view of the Budget strategy. I do not, therefore, wish to trespass on the time of the House for too long. That general strategy is, however, one which we support. We think that it is necessary that the Government should be given the breathing time that is required to secure a sensible pay agreement and further control over the rise in prices in the coming few weeks. That is the stability to which I have constantly referred in previous speeches and which the hon. Member for Guildford (Mr. Howell) was so ready to deride.

I believe that it is right to make a start on shifting the burden of taxation from direct to indirect taxes. The Chancellor said that this is not the year to make a major shift of this nature, but nevertheless he has shifted the burden of income taxes from 51½ per cent. of the whole tax revenue to 48 per cent., and we regard this as a move in the right direction. Obviously, it does not go far enough. We want much more to be done, but this is a significant turning point.

I think that it is unfortunate that the Chancellor did not take the opportunity to raise some of the revenue from indirect taxes by going for a single rate of VAT at 10 per cent. That would have brought in more than the vehicle excise duty and the petrol duties combined. It would have also given him an opportunity to raise the VAT threshold from the present £5,000 level. That level should be raised soon, as it has never been changed in the light of inflation. Raising the threshold of VAT and having a single rate would make that tax simpler to administer.

I admit that a 10 per cent. rate would raise the retail price index, but I have never believed that one can disguise the real effect of inflation by tinkering with mechanisms of this kind. That is not a sufficiently weighty reason for rejecting our course of action. This is an issue that we shall raise again with the Chancellor.

Mr. Wrigglesworth

Is the right hon. Member aware that many of us have sympathy with the view that he has outlined? However, with phase 3 negotiations about to start this is the worst possible time to put such an imposition on prices across the board. Although I sympathise with his plan, I think that this is the least appropriate time to make such an introduction.

Mr. Steel

If the hon. Member asks around among trade union leaders he will find that they have sympathy with this point of view as well. While we all regard any increase in prices as undesirable, VAT would spread that increase across the community as a whole. Some of the proposals in the Budget mean that the effects have been particularly severe on certain individuals in our society.

The hon. Member for Guildford in his best Cambridge Union—or was it Oxford?—form this afternoon referred to the Liberal Party. I make no complaints about that. If the Liberal Party adds a little to the joy of politics, there is no harm done, and we shall not take his sallies too seriously. I shall take him up on three points. He said that the business community was very worried about the Budget. That may apply to the Tory moguls whom the hon. Member wines and dines. They may well be unhappy. But in reality the stock market rallied after the Lib-Lab agreement and it steadied even further after the Budget. So there is no factual evidence to support the hon. Member's remarks.

Mr. David Howell rose—

Mr. Steel

I shall give way to the hon. Member in a minute. His second point was that we should stop asking "What would you do?" That was a very moving plea, and I shall not ask him what he would do. As he said, this needs more discussion.

Thirdly, he accused my party of supplying oxygen for the present Government. What is the difference between the present Government's position and his party's position in March 1974? The only difference I can see is that we should have been supplying the Conservative Party with not only oxygen but splints and blood tranfusions. It had no parliamentary majority for what it sought, so it must not be too jealous of this agreement.

Mr. David Howell

I did not say that the business community objected to the Budget. I said that it was a miracle that the business community continued to be active despite the unremitting hostility of the Labour Government. Also, there is something a bit pathetic about senior Socialists taking cover behind the gyrations of the stock market as a fig leaf excuse for clinging to office.

Mr. Steel

I did not mean to give the hon. Member another chance to make a second speech. The facts speak for themselves—there is not deep unhappiness. But one of the legitimate complaints that he made when he was at the Treasury was that there was not enough industrial investment. That is still the problem, irrespective of the party in office.

I want to register the Liberal Party's strong opposition to the increase in petrol and vehicle excise duties. That should come as no surprise to the Chancellor. We have taken this view in debates in 1974 and 1975, when we spelt out our position very clearly. On 30th April 1974, when VAT was introduced on petrol, I drew attention to a speech made by the then Prime Minister the right hon. Member for Huyton (Sir H. Wilson) when he was Leader of the Opposition. He made a speech on 20th October 1973 that was widely reported in the Sunday Press and in fact was the front page lead in the Sunday Mirror under the banner headline "Cut petrol taxes". The political editor of the Sunday Mirror wrote: Harold Wilson pulled out of the bag yesterday a plan to save Britain's motorists from predicted petrol price rises of up to 5p a gallon. He said, 'Petrol and some oil products are heavily taxed. The Government should do all in its power to stabilise oil prices by corresponding reductions in taxation.' But Mr. Wilson's plan would also take in the cost of running a private car, an important item in millions of British budgets. Since then there have been several increases in taxation on petrol. In response to representations from my hon. Friend the Member for Cornwall, North in last year's Finance Bill debates, the Financial Secretary wrote on 10th March and said: We are urgently exploring a number of ways in which help might be given and I hope these investigations will result in specific proposals to meet the very real difficulties. He was replying to the point that we have made constantly about the effect of these increases on particular communities. The fact is that we have had no such measures. The proposed petrol and derv imposition in the Budget comes on top of a £10 increase in the Excise duty on the private car.

We maintain that this is a discriminatory tax because it discriminates against those for whom the private car is unfortunately a necessity of life and not a luxury. This is the burden of our argument. The Government say that the increase is a conservation measure because it is essential to keep down consumption of fossil fuels. While I am sympathetic to that, I urge the Treasury to look back at what has happened after other price increases.

I have made inquiries from a number of garages and the answers suggest that after other price increases there was only a tiny drop in demand for petrol for a short while and then it went roaring away again. Therefore, there is no argument on conservation grounds. If we want to raise revenue on conservation grounds, we should look at the possibility of re-imposing a higher rate of excise duty on larger engined cars.

I know that the Chancellor looked at this previously and argued that the British motor car industry was not geared to selling sufficient quantities of smaller engined cars and therefore he was worried about foreign imports. But things have changed since then. We have seen the success of the Vauxhall Chevette and the launching of the Ford Fiesta. Also a baby car is being developed by Chrysler, and British Leyland is considering financing a successor to the Mini. These developments should lead the Chancellor to a reconsideration of raising revenue by going back to penalising those—like myself—who insist on running large and thirsty cars.

Mr. Ronald Atkins (Preston, North)

Would not the right hon. Member agree that if we are considering conservation we must consider also the mileage done? That is more important than the weight of the car. One car might travel 100,000 miles in a year while another might travel only 5,000 miles. To have the same vehicle duty for both is not only inequitable; it does not favour conservation.

Mr. Steel

I hope that the hon. Gentleman will forgive me if I do not go into detail. I am sympathetic to the general argument that taxation should take account of the needs of conservation, but I was saying that what the Chancellor proposes does not do that and that we think that there are other ways of doing it. Beyond that, we should not go into detail now.

What is proposed is a big addition to the basic cost of travel to work in certain areas. When coming to that part of his speech which dealt with income tax reductions the Chancellor of the Exchequer talked about the effect of lowering the income tax threshold, which had risen through inflation. He said: The effect has been to weaken the incentive to work throughout the economy."—[Official Report, 29th March 1977; Vol. 929, c. 279.] I must remind him that there are areas, which very often happen, incidentally, to be where average wages are lower, where one must take into account not just the wage level against the level of social security benefit for which a person might qualify but wages less the cost of travel to work as against the advantage of staying at home. The disincentive is very real in those parts of the country.

Moreover—and I do not think that this is fully appreciated—we are talking about parts of the country where petrol prices are, on average, much higher than in the urban areas. Already it is quite common for people to pay as much as 10p a gallon more in some of the areas about which we are talking than in the big cities with their cut-price wars. So it is not a question of saying that there should be favourable treatment for parts of the country where the cost of petrol is a major problem. We are simply saying that already there is a very high cost about which the Government have done nothing.

I suggest that the Secretary of State for Industry and the Secretary of State for Prices and Consumer Protection should have discussions with the oil companies about the price mechanisms for petrol in Britain. I could take the Chancellor to a small community in my constituency where the petrol station has closed because the oil company that supplied it refused to deliver the small quantities that the tanks can hold unless a heavy surcharge was paid. The result was that that uneconomic station closed and the people of the community now have a round trip of nearly 40 miles to fill up their tanks. That is the sort of problem we face in parts of Britain where the extra 5½p tax is the last straw.

I say to the Chancellor with all humility that there may not be many bits of experience that the Liberal Party can give the Government, but we ask the Chancellor of the Duchy of Lancaster, the Chancellor of the Exchequer and the Prime Minister to look at the matter from the point of view of their constituencies in Manchester, Leeds and Cardiff. They do not have the same sort of problem in their constituency surgeries as we do, representing the areas that we know. We have experience of all these problems which we believe the Government have ignored for a long time.

We have already talked about rural transport. I brought forward a Ten-Minute Bill on the licensing of minibuses about two years ago. Governments generally—not only the present Government but the previous Government—have moved very slowly on this matter. A Bill has gone through the House of Lords, and is about to come here, dealing with experiments in collective travel to work in rural areas, with people sharing the cost of private motoring. We are beyond the stage of experiment. There is a major cost-of-living crisis in many parts of the country which has so far been ignored.

Therefore, we oppose the 5½p increase. The only question we must face is that of the best method of opposing it. Of course, the Conservative Party will argue that the right way is to vote against it tonight. [HON. MEMBERS: "Hear, hear."] They must note that the Leader of the Opposition referred on Thursday to the administrative and constitutional difficulties that would be caused. Moreover, when we voted in 1974 in a period of minority Government—the February to October period—against the VAT increase on petrol, 43 Conservative Members were conveniently absent, only 17 of them paired, when we could have defeated the Government. They no doubt rightly took the view that the administrative consequences of such retroactive action would be very difficult.

Mr. Norman Tebbit (Chingford)

Set us a good example tonight.

Mr. Steel

One must be fairly determined but also responsible, and we do not want to create administrative chaos in the attempt to pay back the revenue collected since Budget Day.

The second point is that the Budget Resolution covers more than the £300 million revenue involved in the petrol and derv increases. The Chancellor of the Exchequer dealt with these matters in two separate parts of his speech. In Hansard there is a separate heading: "Heavy Oils Duty". The Chancellor gave the different amounts that would be collected for petrol and derv, on the one hand, and heavy duty oils on the other, but unhappily they are together in one resolution tonight and there is no way in which it would be possible to vote against one without voting against the other, causing a total loss to the revenue of £450 million.

We must take into account that if the Government have made their Budget judgment correctly, the Chancellor of the Exchequer would have to find alternative ways of raising the same revenue if the House were to decide that the 5½p increase should go ahead. In a sane world the right hon. Gentleman should be given a chance to consult not only the Liberal Party but his own Back Benchers and the Opposition. Why should he not consult widely on the most acceptable method of raising the alternative revenue?

Mr. William Clark rose—

Mr. Steel

For those reasons, I recommend to my right hon. and hon. Friends that we should abstain tonight and later move an amendment to the Finance Bill which will kill the increase. That is what we intend to do.

I ask the Charncellor of the Exchequer to give us assurances on three points in his winding-up speech if we follow that course. First, it is important that the matter be dealt within that part of the Finance Bill taken on the Floor of the House and not sent upstairs to Committee. That is the normal practice with these duties, but we should like confirmation that that will happen.

Secondly, because of the intricacy of the heavy duty oils being linked in the resolution, will the right hon. Gentleman give us an assurance that the Bill will be drafted in a form in which it is possible to distinguish between them and petrol, and that the House will be set free to amend it?

Thirdly, will the Chancellor of the Exchequer give an undertaking that if the House as a whole decides in Committee that the 5½p increase should not go ahead, he will accept that verdict, which will mean the loss of a considerable sum? The Chancellor would then have to find the revenue in different ways.

I believe that the Chancellor of the Duchy of Lancaster could have been a little more forthcoming when he talked about the rather unsatisfactory way in which we deal with these matters. As far as I know, this is the only country where the Budget is treated with Trappist-like secrecy in advance of the Chancellor's statement. The decisions themselves must remain secret, but the options should be open, and the wide range of choices that the Chancellor might make should be a matter for much greater public debate and parliamentary consideration before the Budget is presented. If we learn one thing from this Budget, I hope that it is that this should happen in future.

5.27 p.m.

Mr. Giles Radice (Chester-le-Street)

I shall not take up what the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) has said, except to say that I am sure that he is very wise not to be voting against us tonight.

The Budget of my right hon. Friend the Chancellor has been described as cautious. Given the constraints that he faced, I am sure that he had no alternative. Even so, I think that he will have given enough away in tax allowances and tax cuts to have given some relief where the pressure points are most severe.

As a northern MP, I also congratulate him on the extension of the temporary employment subsidy and on the introduction of new employment schemes, particularly the one for small firms in special development areas. I hope that he will decide to continue it beyond the six months' experimental period. However, bringing unemployment down will, in the end, depend on expanding the economy.

On present policies, the forecast is that there will be a growth in gross domestic product over the next 12 months of only 1½ per cent., although, if we have a better trade performance, that will rise to 2½ per cent. Given our balance of payments deficit and the level of debt owed by this country it is hardly surprising that my right hon. Friend has decided in favour of caution.

We should not forget that, by the middle of this year, it is quite possible that the Budget judgment will need to be reassessed. By then, our balance of payments should be in surplus, having received the benefit of North Sea oil—so much so that even the Treasury admits that we are likely to be in balance. Be that as it may, it is certainly highly likely that in 1978 and 1979, because of the favourable impact of North Sea oil, we should be able to run our economy at a much higher level of demand.

It would be wrong for us to go for an unsustainable level of growth. That would lead to bottlenecks and thus pull in imports instead of creating jobs. It would also have a bad effect on the rate of inflation. It would be equally foolish if we decided to limit demand and to pile up balance of payments surpluses. Although we would then be able to pay off our debts very quickly, investment would inevitably be discouraged and unemployment would rise further. In addition, sterling would probably appreciate, which in its turn would make our goods less competitive, thus further weakening our economy.

As the OECD report and my right hon. Friend the Member for Battersea, North (Mr. Jay) suggest, we need to follow a middle course between the two extremes, a course that will both enable our economy to grow and allow us to pay our debts. Even if we accept the OECD report figures, we should be able to grow at 4 per cent. per annum between 1977 and 1982, while running balance of payments surpluses large enough to pay off our debts.

Given North Sea oil, we shall be able to expand our economy without resorting to the sort of import controls for which the Cambridge school argues. The only scenario in which import controls would be justified would be if world trade did not expand in the way that is at present forecast.

However, with the help of North Sea oil we should be able to grow at a considerably faster rate than in the past. A growth rate of 4 per cent. over a number of years would transform the economy and go a long way, if properly managed, to lay the foundations and create the basis for a more open and dynamic community.

If we are to achieve the breakthrough to a period of growth of that nature we need a third round of pay restraint, a third pay deal. When living standards are falling in real terms it is a natural reaction for trade unionists to say that they wish to return to free collective bargaining. That is natural, but it would be disastrous for the majority of trade unionists as well as for the country as a whole. If we have another wages explosion of the sort that we had in 1974–75 we can say goodbye to single figure inflation in this decade. Equally bad, we would almost certainly abort any economic recovery. We must have another round. It will have to be more flexible than the last. Bargainers will have to have some room to deal with the anomalies that have arisen.

Mr. J. Enoch Powell (Down, South)

How much?

Mr. Radice

We shall have to deal with the problem of differentials and the difficulty of wage structures.

Mr. Powell

How much?

Mr. Radice

We shall also have to deal with productivity agreements.

Mr. Powell

How much?

Mr. Radice

In this situation it will be best if the policy—I come to the right hon. Gentleman's point—is expressed in percentage terms and related not to individuals but bargaining units. The recent PEP pamphlet on the next stage of the incomes policy has suggested that the increases should be directly connected to establishments. I see the attractiveness of that idea, but it will be far more practicable if it is linked to bargaining units. A percentage increase such as I have described would give negotiators some freedom to reach agreement on the matters that they believe to be most important and the policy would at least have some chance of sticking.

A policy of the sort that I have described throws up the difficulty of monitoring. If we have a flat-rate policy, it is relatively easy to monitor. The TUC has been highly successful in monitoring the past two stages. However, during the second stage there has been some leakage. The evidence shows that much of it has taken place in unorganised plants. If that is so, it seems that there is a strong case for having some tripartite body, perhaps on the ACAS model, to help monitor the policy. Although I understand the feelings of trade unions about such bodies, I think that the logic of the situation points irresistibly in that direction.

Whatever else may be said about my right hon. Friend's Budget it is certainly not an election Budget. It is clear that with the help of the Liberals the Government intend to continue governing. They intend to continue in office. The Government are absolutely right to take that view.

I accept that the Government have made some mistakes; but if there is one event above all others that would undermine our present prospects for recovery and the enjoyment of a period of unrivalled economic growth—unrivalled, at least, in the past 25 years—that would be a Conservative Government. The hon. Member for Cornwall, North (Mr. Pardoe) coined a phrase when he suggested that a Government led by the right hon. Member for Finchley (Mrs. Thatcher) is one of the few terrible things in this world. I suggest that a Government under the right hon. Lady, advised by the right hon. Member for Leeds, North-East (Sir K. Joseph), would be even more terrible.

It is true, as we have heard in the debate, that Conservative policies are remarkably obscure. However, where they are known, they are extremely alarming. The Opposition are unthinking monetarists. They do not believe that we have cut public expenditure enough. They do not believe in an incomes policy. They do not believe in price control. They are against aids for industry. It is by no means certain that they are in favour of a mixed economy. By attitude and by temperament they are singularly ill-equipped to manage a modern economy, let alone one that is going through a severe crisis.

When I look at the alternative I am strengthened in my firm conviction that the Labour Government are the only Administration capable of carrying us through to a long period of growth and economic prosperity.

5.38 p.m.

Mr. Reginald Maudling (Chipping Barnet)

I am grateful for the opportunity of taking part in the debate. I think I am right in saying that, apart from the Prime Minister, I am the only other ex-Chancellor remaining in the House. Where have all the flowers gone? Fortunately, most have gone to another place. There are now only two ex-Chancellors in this place, but if the hon. Member for Tottenham (Mr. Atkinson) has his way, we may be joined by a third ex-Chancellor in a fairly short time.

It is interesting to strike a comparison between the Budgets of 1963 and 1977. In 1963 the then Chancellor said: I have decided to concentrate this further relief in the field of direct taxation, as this is the method best calculated both to stimulate the economy and to encourage individual effort. At the same time, in view of the importance of incomes policy to our plans for expansion without inflation, I have framed the reductions in such a way as to spread the benefits as evenly as possible over the full range of incomes."—[Official Report, 3rd April 1963; Vol. 675, c. 490.] When we examine the figures involved in the years 1963 and 1977 we see there provided the most graphic example that I have ever seen of the state to which our economy has been brought and the state of our finances under the present Administration. This year the Chancellor needs a reduction in direct taxation of over £2 billion to exempt 850,000 taxpayers from taxation. In 1963 a net reduction of £269 million exempted 3¾million taxpayers from taxation.

Let us take the figures of the economic prospects for the next 12 months and compare them with the 12 months after the 1963 Budget. The Chancellor expects prices to show a 13 per cent. rate of increase at the end of the year, falling to single figures by the second quarter of 1978. Between 1963 and 1964 prices rose by 1½ per cent.

No prediction is now given in respect of unemployment, but in that period unemployment fell by 28 per cent. The Chancellor has predicted an increase in output of 1½ per cent. Between 1963 and 1964 output in terms of GDP rose by 9.3 per cent. As for balance of payments problems, although we had them in 1964, they were small indeed compared with the balance of payments problems faced by the present Government, apart from the factor of North Sea oil. If we had had North Sea oil in 1964, I am convinced that the Tory Government would have lasted ever since.

I turn to the Chancellor's Budget proposals. I see no objection to raising the proportion of total revenue coming from indirect taxes, but why has he concentrated so much on oil? There are surely better alternatives, for example, VAT. What about alcohol as an alternative area of action? After all, VAT would be more widely spread, less felt in individual areas, and would have less impact in terms of further inflation.

Many people hold the view that alcohol is less essential than is petrol. Why did the Chancellor concentrate on petrol and oil? The reason he gave related mainly to energy and transport policies. These increases, plus the increase in gas prices, reflect the Government's policy on transport and on energy. To make it more expensive to heat one's home and to make it more difficult to drive one's car seems a strange form of policy. Neither commodity in present days could be regarded as luxuries. I am delighted that the Conservative Opposition intend to vote against those proposals this evening.

Where do the Liberals stand following the speech of the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel)? They appear to be standing on their collective heads. However, perhaps that would be a degree of collective decision that is unusual in the Liberal Party. As for the Liberals' main argument advanced by their Leader in the censure debate, that they intended to team up with the Government because of the need for stability, that looks even more bogus than it looked at the time. The idea appeared to be that such stability would be adequate if it lasted a few months until the end of the Session. Now they have not even achieved stability for a few days.

The taxes on oil and petrol and the proposals on vehicle duty are a central part of the Chancellor's financial strategy and of the Government's transport and energy policy, yet they are at risk—though apparently not at risk tonight, because the risk is to be deferred to a period during the Finance Bill proceedings. What price stability then? Do the Liberals think that stability deferred makes the heart grow fonder?

It would be churlish to reject the main thrust of the Budget involving the reductions in income tax and the insistence on the importance of incomes policy. The simple fact is that when a party is in office—and sometimes when it is in opposition—it always recognises the need for an incomes policy, since the days 20 years ago when Lord Thorneycroft introduced the Council on Productivity, Prices and Incomes. Common sense shows that if there is a wage explosion later this year, there will be, as night follows day, an explosion of costs and prices as well. Some people try to deny this. There are the monetarists on one side and Mr. Jack Jones on the other.

Let us take first the monetarist argument. There is the extreme academic view that is reflected in correspondence in The Times today, which appears to show that the course of inflation this year is determined by what happened to money supply two years ago. I find that hard to believe—and, if it were true, what are we arguing about anyway?

Secondly, the less academic monetarists argue the quantity theory of money, suggesting that if the total money supply is held, prices as a whole will not rise. But they can and do rise. Spending power may be held steady, but if unemployment rises, production falls and the same amount of money will be available to be spent on fewer goods.

Apart from the consequences in terms of stagnation, unemployment and less investment, I find the argument about monetary control—which is the credit squeeze in different words—totally unacceptable in modern circumstances.

On the other hand, the argument of Mr. Jack Jones seems to be equally unacceptable—namely, that one can counteract increases in wage costs by stiffer price controls. Apart from the disastrous effect of such controls on business and investment prospects, the simple fact is that one cannot consume more than one produces, particularly when one comes to the end of one's credit, as has happened under the present Government.

The trouble is that the present incomes policy has been too inflexible—indeed, it is bursting at the seams because of inadequate flexibility. It has not recognised the overwhelming need for higher productivity, which, in turn, means rewarding that increased productivity. I am convinced that our problem is not one of over-spending, but of under-producing. I have said this on other occasions, and I do not apologise for repeating it now.

We are grossly under-producing not only in respect of new investment but in terms of any international comparison involving existing capacity. Demand undoubtedly is inadequate. When there are so many idle resources and idle people, clearly demand is inadequate. If one expands demand rapidly, one has balance of payments problems and a new demand factor involving the prices equation.

The right way to deal with the situation is not to continue restraint, but to work towards increased output and productivity. We hear so little said about this factor in discussions about economic policy in the House and outside. I do not believe that our public services are excessive. In some ways, they are pitifully inadequate in quantity and quality. What is more important in life than education and health? They are essential services for a Government to provide.

The problem is that we have neglected the fact—and this applies to the Labour Government in particular—that those services have to be funded out of the expanding efficiency of manufacturing industry, which is basically privately-owned. The Chancellor appears gradually to be recognising this fact by the cuts in some forms of public expenditure, by his tax reductions, and by his more friendly words in respect of higher profit levels and higher investment in manufacturing industry. But this is only a small move on the long road that we have to travel.

The basic reason for our inadequate industrial performance lies in the lack of industrial morale. The causes have developed over many years, but they are linked with a general decline in British morale and in our loss of empire, and the change from a vast imperial power to a relatively small island.

There are other factors which we must seek to identify. I wish first to refer to the high level of direct taxation. It cannot be a matter of coincidence that we have the most progressive system of direct taxation in the Western industrial world and the worst industrial performance. Secondly, we have had to face the teachings of Socialism about profits and relations between labour and capital over many years. They have eroded much of our industrial morale. This policy was reflected in recent years by the Government's lamentable policies involving the nationalised industries. That history shows how wrong those teachings were.

Furthermore, there has been a limitation in the attitude of many trade union leaders which has not encouraged productivity. There has been little discussion about that side of the picture. We have heard too little about what can be the benefits and fruits of increased productivity.

So much could be done in this country if only we could raise the level of production from the same machinery and equipment in manufacturing industry to the level achieved by some Western competitors. That would transform our entire industrial economic and social picture. A transformation of that kind, coupled with the benefits of North Sea oil, could release the energies of our people and lead to the improvement of our living standards—an improvement such as we have not seen since the days when Lord Butler was Chancellor. That is a real possibility.

The Government in their broad approach to income tax reductions are beginning to recognise some of these truths, but they are recognising them belatedly. If we are to have rational, sensible measures—if, indeed, we are to have Tory measures—we need a Tory Government to carry them out.

5.50 p.m.

Mr. Kenneth Lomas (Huddersfield, West)

I am pleased to have the opportunity of following the right hon. Member for Chipping Barnet (Mr. Maudling), a former Chancellor of the Exchequer. I only wish that he had made that kind of speech when he was Chancellor. He is right to say that we are suffering from under-production. Equally, however, we are suffering even more from under-investment. That is what the country must face. I would like to take up many more of the points the right hon. Gentleman made, but I promised to restrict my remarks as much as possible.

Now we have heard where the Liberal Party stands tonight, tomorrow night, next Tuesday, and so on. What happens on future occasions is anybody's guess. No one knows. We need not be too worried. All that has emerged is that the man of steel has become a man of straw. There they sit, Tweedledum and Tweedledee, in the persons of the right hon. Member for Roxburgh, Selkirk and Peebles (Mr. Steel) and the hon. Member for Cornwall, North (Mr. Pardoe), listening to what has had to be said. Now they think that they have a chance of entering into some kind of agreement with the Labour Party.

For a long time—and let the Conservatives bear the responsibility for this—between 1950 and 1964, the Liberal Party had a pact with the Tories. Lord Wade, for whom I have great respect, and whom I beat in 1964 in Huddersfield, West, and Mr. Arthur Holt, who used to sit for Bolton, West, were not opposed by the Conservatives for years because of the pact between the two parties.

Now the Liberals suddenly decide that they will have an agreement with us. The Liberals know that in many constituencies their candidates are returned by Tory votes. Colne Valley is the classic example of the fact. It will go Labour again next time, because the Tories there will not again vote Liberal in order to keep Labour out.

All parties in this House know that the name of the game is "survival", and that if a vote against the Government will bring the Government down they will shrink from the brink when the occasion arises. The Liberals are paper tigers. They have nothing in their think tank. They will only vote against us when they can see that, despite their vote, the Government will survive. That is where they have some kind of rapport with certain of my hon. Friends, who do exactly the same kind of thing. The Liberals, of all parties, do not want a General Election now. When they poll fewer votes than the National Front they really are in trouble.

Nor is there any joy for the Tories to be told by their leader that she is over the moon. It is not for me to remind hon. Members of the kind of animal which jumped over the moon. It is up to them to draw their own conclusions, but I remind the Conservatives that the same Terry Davis who fought such a magnificent battle for Labour at Birmingham, Stechford, and lost is the same Terry Davis who, in 1971, at Bromsgrove turned a Tory majority of 10,874 into a Labour majority of 1,868. So the Conservatives should not count their chickens before they are hatched. Of course Bromsgrove went Tory again in 1974, and Stechford will come back to the Labour Party at the next election. It may be that an election will take place in October. If I were a betting man I would say that it would be 13th or 20th October, or that we may survive till the second or third Thursday in March.

I broadly agree with the financial and economic strategy of the Government. I am convinced that only a Labour Government will be able to get some semblance of an incomes policy the third time round. If will be very difficult, very tough and very hard. I think that it will be a question of people on this side of the House being able to speak to the trade union leaders and getting some kind of agreement. The Conservatives could never get an agreement, because we know what their policies are. They will not spell them out in detail because they are too frightened to do so, but, broadly speaking, their policy is to cut and cut and cut again.

Mr. Patrick Jenkin (Wanstead and Woodford)

Has the hon. Gentleman heard one speech that I have made over the last 15 months, since I became the Conservative spokesman on the social services, in which I have advocated cutting the social services?

Mr. Lomas

I have a great affection for the right hon. Gentleman. He is a very honest man. He may not have spelled out where the cuts would take place, but we know where the increases would take place—on defence, for example. The Conservatives wish to be friends to all men. They say that they believe in devolution, then vote against it; they say that they believe in the Trade Union and Labour Relations Act, and then vote against it; they voted against what is now the Industry Act, the repeal of the Housing Finance Act, and the rest. What will they repeal if ever they get back into office? The Opposition oppose the Budget, and it is traditional for them to do so, but there is great doubt about what they would do, given the present situation.

It is true that 845,000 people will be taken out of the tax bracket by the Budget, but, by the end of the year, with wage increases already in the pipeline, or which will be negotiated, those people will be back once again in the tax bracket, and the Treasury should take that fact on board. Is there no way in which my right hon. Friend could raise the tax band for the lower paid workers? It is something that he must try to do. I say to him, as a loyal supporter of the Government and as a member of the Labour Party for over 30 years, that there is a growing feeling in the country, including in my constituency, that it is better to be out of work and picking up benefits that to be in employment. There is something wrong when that sort of thing happens, and we have to do something about it.

As a Member sponsored by the National Union of Public Employees, I say that this situation applies to many of the ancillary workers in the National Health Service, to workers in local government and, certainly in my constituency, to textile workers. I hope that my right hon. Friend will try to find a way out.

It is true that what matters to the average worker is not his gross pay but his take-home pay, and I congratulate my right hon. Friend on doing something about that. It should be recognised that a pay increase from the employer is subject to tax and national insurance contributions, but tax relief means that there is more money in the pay packet at the end of the day. It therefore follows that the proposals put by my right hon. Friend, when fully implemented, will mean that a married man earning £80 a week will get another £2.7 a week. If this were not achieved by raising his allowances, he would need a pay rise approaching £3.50 a week, an increase of 4.4 per cent., in order to obtain the same net gain. So in this respect the Chancellor is right. I think that it is a factor that he has taken on board.

I must join in the criticism by the Liberals and other hon. Members of my right hon. Friend's action in increasing the petrol and other fuel taxes. Such a tax does not hit just the ordinary motorist. Its effect is felt straight across the board in terms of distribution costs and the like, and this inevitably must push up the cost of living. If distribution costs rise, the cost of buying articles will rise.

If the Chancellor of the Exchequer says that it has to be 3p on a pint of beer—and I do not believe it does—then so be it. If it is to be the imposition of a 10 per cent. flat rate VAT I would say "Yes", and many small shopkeepers in my constituency would welcome that. There is something to be said for it. Many people would not like it, but we should look at it. I also hope that the Chancellor would offset that to some extent. With regard to vehicle excise duty, I believe it is totally wrong that the owner of a Rolls-Royce or Mercedes, or of any big powerful car, should pay the same rate of tax as the owner of a Mini or of any of the cheaper kinds of cars produced by Ford, Leyland and other companies. I ask the Chancellor to look at this point again.

In spite of these small points, I support the Budget proposals. I believe that the Budget is recognised as being on the correct lines. It is not an election winning Budget, but that was not the intention. We are trying in the national interest to get the country and the economy right. Unlike the Tories, we might just gain some credibility for being honest and truthful by facing the facts of life. We have no desire, unlike the Tories, to buy votes. We only wish to see the electorate take on board the policies that we are pursuing. We shall win the next election because our policies will begin to show that the strategy is right. Exports are increasing, imports are levelling off, and unemployment will continue to fall. The Liberals dare not let us down in this. We need—and they need—to survive for a minimum of six months, and for probably another six months after that, to put things right.

We are truly the party of Government, working not just for political gain but for the benefit of the whole of the nation. We shall survive because the Opposition—or Oppositions—on the other side of the House have not the remotest idea what to do or, indeed, how to do it. The more they try to spell out what they intend to do the less will the people believe them. The electorate will get to know that our policies are right, and will give us the mandate necessary for a strong and stable democratic Socialist Government to carry out the further reforms essential for our country and its people.

I conclude by quoting some remarks made by the General Secretary of the Labour Party when speaking at a Parliamentary Press Gallery lunch in the House of Commons on 15th March last. I apply these words to some of my hon. Friends. The General Secretary said: There are too many people who hide behind their alternative strategies and the supposed pristine purity of their socialism to avoid doing the much more necessary task of fighting for and preserving a Labour Government in office. He went on to say: Let me emphasise that objective—'to win and retain power' … I am not interested in the unity of opposition—the unity of impotence. I suspect that there are a number in our party who long for the good old carefree days when politics was merely a matter of Tory bashing with no danger of having to take responsibility or choose priorities. I hope that some of my hon. Friends will recognise this when it comes to the vote. We shall win the next election, and the Chancellor can certainly rely on my vote tonight.

6.5 p.m.

Mr. Peter Brooke (City of London and Westminster, South)

It is a privilege for any hon. Member to rise to address this House, but it is one that a Member feels particularly when he rises to address it for the first time. I am grateful to you, Mr. Deputy Speaker, for calling me, and it is a pleasure to follow the hon. Member for Huddersfield, West (Mr. Lomas).

There is someone else whom I am following today who is not present on this occasion. That is Christopher Tugendhat, who is now a Commissioner of the European Economic Community. During the past month since I was first introduced to this House the great warmth and regard in which Mr. Tugendhat was held on both sides of the Chamber has been made very clear to me. It is therefore an added pleasure to be following so popular and so widely regarded a Member.

That I follow him I owe to the electors of Westminster and the City of London. It is a constituency that embraces not only the majority of the monuments of this city of London, which outsiders think of as London, but also a series of villages and hamlets which join together to make this great city what it is. I am thinking of Pimlico, Covent Garden, Soho, Charing Cross, Knightsbridge, Mayfair, and the City of London itself.

My constituents—I have likewise realised in the course of the past month that at least half the Members of this House are among my constituents—live here in the heart of this capital city because they like it. There can be no more honourable objective for any Member for this constituency than that he should help to make it practicable and possible for them to go on living here and to be helping to create life in the heart of our nation. The very title of the constituency imposes responsibility and privilege on its Member, for Westminster is synonymous with this Palace and with the parliamentary freedoms therein, and the great Abbey across Parliament Square where so much of our history has been consecrated.

The City of London—the other half of the title of the constituency—stands like a beacon to remind us of certain aspects of our economic affairs where we are still great. Month in and month out, year in and year out, the City makes an unfailing contribution to our current account in invisible earnings that goes a long way to compensate for the deficit that we show on visible trade. It is a shining example of British initiative, energy and success in a world that is somewhat short of such successes. The number of foreign institutions found in this City of London is a demonstration of our having created a market place for the world.

Some of my right hon. and hon. Friends have been disparaging about the industrial strategy. I may join them in the future when this speech is behind me and I can enter areas of controversy. But of one thing I am sure, and that is that if ever that strategy threatened the immense success of our invisible earners or imposed any constraint on their health and growth, I would be a vigorous opponent of that industrial strategy. I understand that one of the principles of that strategy is that winners should be backed, and I hope that the City of London will receive even greater support from the Government than it has heretofore on those grounds. This applies also to the service industries in the other half of my constituency, in Westminster.

I have made my own living as a management consultant in Westminster since 1961, and it is in the context of that experience that I should like to make one brief point this evening. The consulting practice in which I have been engaged has had as its bedrock the recruiting of executives. The point I want to make relates to the movement of executives in and out of the country, for the surest index of the incentive or disincentive effects of a country's tax system is the willingness of citizens to leave the country or to return to it.

The fashionable side of this subject is the brain drain—people moving out. This is a worrying aspect, although it is not my prime concern this evening. The Diamond Commission, in its relevant report, said that the statistics of outward movement did not warrant concern. But in private members of the Diamond Commission admitted that the data on which those judgments were based were not as adequate as they might have wished. I hope I am not being controversial if I remark that those statistics and data only go up to the end of 1973 and therefore do not cover the life of the present Government.

My own firm has no involvement in this traffic of executives outward across the Channel or across the Atlantic, but one cannot make a living in this field without being aware of trends within it. There has been a marked rise in the number of executives gratuituously making it clear that if jobs were to open up overseas, they would be interested in taking them. That applies to people who are household names, at least within the corridors of the Department of Industry.

The MSL index published the other day made a similar point in terms of the number of overseas advertisements which are now being carried in this country. I have in my pocket correspondence from the graduating class of the Manchester Business School making it clear that those who graduate this summer would like to take their first job outside this country.

These things are only straws in the wind. We British have the reputation of being insular. In fact, we are among the most maritime and international of all peoples, and always have been. It was so in our past and it is so today. The corridors of international companies are full of our compatriots. One could, I suppose, make a case for the multinational corporations and international organisations being the twentieth century equivalent of Africa and India in the last century as vehicles for the British civilising influence and mission.

At any rate, I believe in a free society and in people not being tied either to their work bench or to their desk. I know that executives who go abroad will be the more valuable when they return as a consequence of that experience.

My concern this evening lies with persuading them eventually to come back, as in the past so many have. My own firm had some success in the 1960s in persuading British executives in the United States to come back to take senior jobs here. We are finding it considerably more difficult today. This is always true of high tax countries. For example, it is difficult to persuade the international Swedish executive to return to Sweden.

I have lived abroad, within the last seven or eight years, in both the United States and Benelux. I have a reasonably clear idea of how easy and attractive it is for British executives to live there. It is a sign of the times that the £47,000, tax-free, which my predecessor Mr. Tugendhat is receiving in Brussels is often cited as wealth beyond the dreams of avarice. But in the United States and in Belgium—in the latter case if the man is doing an international job—salaries of that sort after tax are not so extraordinary as they may seem to us.

It is not income which deters people from coming back to this country. There are people who will come back knowing that they will get less income but acknowledging that the quality of life here will make up for that. But the tax burden which they would have to bear does deter them. It is all right for Sweden, perhaps, to be able to get along without the executives who have gone abroad, but in my opinion we shall find it much easier to rebuild this country's fortunes in the last quarter of this century if we can persuade executives to return from across the world.

So something has to change. The Government may say that they have done their best in this Budget. I welcome the changes in direct taxation and the form which they have taken. But the Government are prisoners of their past. Their freedom is limited by the consequences of their own actions. To borrow an analogy from another of my constituency's most successful trades, it is a fundamental tenet of internal decorators that if one paints oneself into a corner, one has only oneself to blame.

The Government have chosen instead, in terms of being blown off course, to blame the exchange rate, almost as if it were an act of God. Hon. and learned Members on both sides of the House will remember the definition in the law dictionaries—that an act of God is an act which no reasonable man would expect God to commit. There is an alternative conspiracy theory about the exchange rate, to the effect that across the world, from Abu Dhabi to Zurich, men are lying in wait to bring down sterling and this Government.

I should have thought that there was a third interpretation of the exchange rate, and that is that it is a vivid reflection of the performance of the economy and of the performance of the Government who are handling it. I hope that I am not controversial in setting out that choice. I clearly would be controversial if I indicated which interpretation I myself favour. Since some hon. Members may embarrass me by asking me to make that choice, it is at this moment that I shall sit down.

6.15 p.m.

Mr. Sydney Irving (Dartford)

The hon. Member for the City of London and Westminster, South (Mr. Brooke) is the son of a distinguished father whom many of us remember and whom we respected as a Member of this House. On his own account the hon. Gentleman has made a fluent and most competent speech, although we look forward with some interest to the time when he ceases to be non-controversial, if that was a non-controversial speech.

The hon. Member brings to the House great experience in business and management which I am sure will help us in our deliberations in the years ahead. He rightly spoke with some pride of the constituency that he represents. Some of us will remember two, if not three, of his distinguished predecessors. We remember Sir Harold Webb, who used to come down from the Back Benches and sit on the Treasury Bench, wearing a silk hat, on Budget Day. That figure is no longer there, and in some respects he was a relic of the past. We also remember John Smith and Christopher Tugendhat, who also made distinctive contributions. I am sure that the hon. Gentleman will make his own valuable contribution to our affairs. I congratulate him on a successful maiden speech and look forward to hearing him in future.

I judge the Budget by the extent to which it helps to improve our industrial performance. The need to secure an increase in production, particularly in exports, lies at the heart of practically all our problems. Without the creation of new wealth, none of our aspirations can succeed. In its tax reliefs, the Budget makes a useful contribution to that end. However, before I comment on its contents, I should like to make some general remarks.

We are pledged by a number of archaic practices. The first is the convention that the Chancellor sits for weeks, like a broody hen, on his Budget proposals. That inhibits discussion of taxation both in the Cabinet and in Parliament. The Liberal Leader said something of this sort, but I think that he was more concerned with extricating himself from the cul-de-sac into which his weekend pronouncements had led him than with talking seriously about this problem.

It is long past the time that there was a Select Committee on taxation to examine the consequences of different methods of taxation, to look at such subjects as the balance between direct and indirect taxes and the question of drift and distortion, which have been mentioned several times in this debate. It is not surprising that the Chief Secretary had to say several times that few hon. Members seemed to understand the consequences of the difference between a 10 per cent. VAT rate and the car and petrol taxes.

The Chancellor has lost out in some respects here, because he was unable to discuss the basis of his taxation proposals earlier. Nevertheless, he contrived to raise expectations in such a way that the proposals, although very generous, came as an anti-climax. Because he did not get the benefit of secrecy which the system is intended to give, he did not get all the credit for what he has done.

The second archaic practice is the need for a long speech in presenting the Budget. That arises from a state of affairs so different from our own that it makes the practice both tedious and irrelevant. It was not until well into this century that this House started the process of beginning its Session in the autumn. It used to sit until July, sometimes even beyond July as we do, but then it did not resume for the new Session until January. It was clear that, by the time of the Budget, it was appropriate in those circumstances to have a long survey, if the Budget was at all as significant then as it is today.

That practice is now time-wasting and unnecessary. There are those who say that it grew up because we had to wait until the Stock Exchange had closed before the Chancellor could announce his proposals. Even now that practice is no longer adhered to and the time of the Stock Exchange closing is ignored in presenting the Budget. I believe that the Chancellor deserves some credit for cutting down the length of the speech to one and half hours. I hope that on the next occasion he will take his courage in both hands and cut out the survey altogether.

In search of industrial recovery, the main and immediate objective is the pay policy. Like my hon. Friend, the Member for Stoke-on-Trent, Central (Mr. Cant) I should have liked to see the Chancellor avoid anything to do with the RPI at this time. All this means is aggravation and greater difficulty in negotiations. It is foolish to deny that there is increasing resentment at price rises which, in many cases, appear to the ordinary person either to be avoidable or a deliberate exploitation of the consumer.

If it was essential to raise the additional revenue, I still believe, despite what the Chief Secretary said, that the arguments in respect of this question of negotiation are in favour of a 10 per cent. rate rather than the petrol and car tax. If he had simplified the rate to one of 10 per cent., he would have had the eternal gratitude of the co-operative movement and the whole of the distributive and service industries. That would have been something on the credit side. He also would have had less difficulty in negotiations.

The co-operative movement, to which I belong and which I represent as a sponsored Member, has been disappointed that none of its representations has been accepted in the Budget. It is disappointed that in a year when the Chancellor is making a number of concessions he has not been able to concede any of the points made by the movement. There is particular disappointment that no capital allowances are proposed for new commercial buildings, as recommended by Sandilands and numerous other reports.

Apart from tax equity with industry, we believe that this relief now would also have been a help in the resuscitation of the building industry. The movement also urged the Chancellor to take general account of the contribution which the distributive and service industries can make in solving the unemployment problem if given parity of treatment with industry. There is disappointment that there was no recognition in the Budget of that matter.

The decision to disregard for tax purposes the first £50 of interest in the National Savings Bank and the Trustee Banks as well as increasing the interest rates makes life much more difficult for other small savings institutions such as the I and P societies. We asked for modest concessions and we did not get any recognition at all of this problem. No doubt we shall wish to make further representations very soon.

I am sceptical of the idea of the deferred carrot. I believe that the TUC and most trade union leaders see the need for a third phase of pay policy. They certainly want a transitional phase. It would have been better to have made a reality of the negotiations by indicating that there was £1,000 million available to assist this process and to discuss with them the best use to which the money can be put.

The Tories want a pay policy but they do not want to pay the price. As The Sunday Times said, the people believe that a Labour Government are more likely to succeed in negotiating a third phase of pay policy.

The Opposition display a peculiar and extraordinary ambivalence in their approach to co-operation with the TUC. They want the co-operation of the TUC, and at the same time they question the legitimacy of the right of the TUC even to negotiate, as if it was possible to have some kind of separate representation that could be consulted alongside those organised workers in the TUC. They forget that it is not just the acquiescence of trade union leaders in the policy that we need, but their positive co-operation in selling the policy to their members. Even more importantly, we need them to exert themselves, as they have in the past two years, in some of the difficult situations which arise in defending the pay policy on the ground.

The debate has been characterised by the complete failure of the Opposition to advance any clear strategy or policy to deal with the critical situation which some Opposition Members believed they would have to face on behalf of the country in a short space of time. I do not believe that that is responsible opposition or a responsible alternative Government.

There seem to be two groups in the Opposition. There are those who believe that there is an answer if they can agree on it and those who believe that they ought not to put forward an answer but ought to wait until the Labour Government fail and leave them a free run. I do not believe that that will happen. I believe that the Prime Minister and the Government have the determination and the capacity to see us and the country through not only to calmer and more prosperous times but to electoral popularity, which will accompany this success.

The Lib-Lab agreement can make this possible. Let us not forget that the primary purpose of the agreement is to allow us both to survive. What is does beyond this depends on the willingness of each side not to put it under too much strain. If on the Liberal side there is to be an attempt—for personal aggrandisement or for early party advantage—to use it unscrupulously, it will fail and neither of us will survive. Equally, a disposition on the Labour side of the House to hold that it ought to be opposed because it is something more than it purports to be, or what we can do without it, would also put it under strain and produce dangers.

Mr. Neville Sandelson (Hayes and Harlington)

Would my right hon. Friend not agree that the so-called Lib-Lab pact very much reflects the desire of the majority of the people in this country that the Labour Government should continue to press their policies to a successful conclusion?

Mr. Donald Stewart (Western Isles)

What about Stechford?

Mr. Irving

I believe that what my hon. Friend has said is so. But with common sense the agreement can carry us both through to calmer times.

If we have a series of cliff-hangers, such as we have had this last weekend, it will weaken the confidence of the Government in their capacity to negotiate and the confidence of those people who have to negotiate with the Government. Incidentally, it will also bring discredit to those who bring about such a state of affairs.

I hope that, while supporting the Budget and the agreement, which is a respectable one, the Liberal Party will quickly learn the lesson that it cannot pick and choose but must act in good faith in support of the agreement and not have us in a state of constant anxiety that will damage both parties.

6.28 p.m.

Mr. J. Enoch Powell (Down, South)

To what has already been said by the right hon. Member for Dartford (Mr. Irving) I want to add my own congratulations upon a distinguished maiden speech to my own Member of Parliament—although I did not help him to be elected—the hon. Member for City of London and Westminster, South (Mr. Brooke). I have a special and personal reason why those congratulations are particularly warm. From even before the time, 27 years ago, when I entered this House, I received from the hon. Gentleman's father wise counsel and friendly help and guidance in my earlier years in politics. It is something which I have not forgotten and which I never can forget. It adds to the pleasure, which many feel, that Henry Brooke should have a son to succeed him in this House and to continue, as we are sure he will, the contributions which his father in his time made.

I had assumed, wrongly, that this Budget debate would centre upon what is called the Budget judgment and, in particular, upon the judgment of the Chancellor of the Exchequer as to what should be the size of the public sector borrowing requirement and to what extent, if any, he might absorb some of the expected diminution in that requirement by various forms of tax remission. If so, I would not have taken up the time of the House in order to repeat a point of view already known; for I have in previous debates indicated my own belief and that of my colleagues that the borrowing requirement to which the Chancellor's remissions of tax have again brought the estimate back—a requirement of between £8 billion and £9 billion—imposes an excessive risk of inflationary financing during the coming financial year.

I share with, I think, the right hon. Member for Deptford (Mr. Silkin) his sense of an inconvenience in these debates upon the Budget, in that all of us can complain of a particular form of taxation, a particular taxing decision which the Chancellor has taken, but cannot demonstrate at the same time that we would wish to see any loss in revenue if he were to take our advice on that particular point made good elsewhere. Those of us, therefore, who wish to show our dissatisfaction with the Chancellor's choice of indirect taxation to be increased are not in a position, as many of us would wish to be, to indicate that any remission there ought to be accompanied by corresponding increases in other directions.

However, as it has turned out, the Budget debate has not principally been about the Budget judgment. Unmistakably, the central question in this debate—it has come up every day unsummoned—has been phase 3 of the prices and incomes policy, the question whether, and if so how, it is possible to maintain the limitation upon wage increases for yet another year, but render it—in the now hallowed phrase—"more flexible". I cite, simply as one example of the posing of that question, the right hon. and learned Member for Surrey, East (Sir G. Howe) on the second day of our debate, when he said: We have to go through a period of transition to a world which is free from direct Government interference in pay bargaining. That period of transition must be one of greater flexibility to allow room for the compressed spring of pay differentials to uncoil. I think I am not being unfair when I say that that proposition summarises the aspiration which has been expressed in many speeches from both sides of the Chamber.

The right hon. and learned Member for Surrey, East has said that it is important for us to try to hammer out those areas where we agree and disagree."—[Official Report, 30th March 1977; Vol. 929, c. 437–39.] My contribution to this debate is to say that for my part I believe the whole notion of a transition from a maximum pay limit—a freeze—on the one hand to some flexible system on the other hand, which will allow for differentials to be varied, widened and narrowed, which will allow for the changing supply and demand for labour and for different forms of goods and services to be taken into account, is a sheer chimera. The search for it leads into "wandering mazes" where Governments get lost, into Seronian bogs, where armies whole have sunk and the attempt will recoil with disaster upon the heads of those who make it.

We are long enough in this Chamber to understand where the insolubilities of this course of action lie. It is 15 years now, or a little over, since Chancellor Selwyn Lloyd, having accomplished six or nine months of his 3 per cent. flat-rate pay freeze, produced a White Paper entitled—it was not an original title and has been imitated many times since—"Incomes Policy: The Next Step". That is the perilous next step upon the threshold of which the Government are now poised.

Since 1962 we have learned a good deal about what lies over the threshold. That White Paper set out with immaculate accuracy and in the best Civil Service English all the possible factors which lie behind differentials in wages. It said that those different factors, changing as they did as time went on, ought to be taken into account in the fixing of wages. So, of course, they ought. But what the White Paper did not explain and what no one has yet explained—not even the hon. Member for Chester-le-Street (Mr. Radice) this afternoon—is how the appropriate weight is to be given in each particular case to each of those factors.

Unless one has a machinery whereby the differentials can be correctly assessed, it is futile to talk about a flexible wages control policy, or of a prices and incomes policy which will allow economic change, economic realities and alteration of differentials to be taken into account.

Of course, there is a stage at which—I was waiting for it and sure enough the hon Member for Chester-le-Street stepped in with it—harassed by this question a Government refer the matter to a board. I do not think that we shall have to wait long before once again we get some sort of board for prices and incomes, no doubt under a new title—the possibilities of invention have not yet been exhausted—but with the same motive. The motivation will be "As we cannot answer the question, let us pass it over to someone else and see if he can answer it."

However, the question is inherently unanswerable, because no one can predict in advance what ought to be the relativities between one trade, calling or service and another, nor how they are changing; for the only way in which we can judge the change is precisely by that free movement of wages which it is the very purpose of the policy to prevent. So there is an interent impossibility implicit from the outset.

But there is another one, too, which is distinct and cumulative; for the object of phase 3 is to ensure that, whatever variations may be permitted, when wages are all totalled up at the end of the year they will come out at the right percentage increase overall.

Whether the figure chosen for a particular year is to be 4 per cent., 6 per cent. or 8 per cent., a flexible wages policy will have to provide the means of allowing 10 per cent., 15 per cent. or 20 per cent. for one set of people and 6 per cent., 4 per cent., 2 per cent. or—dare I say it—minus 5 per cent. for another set of people, and in such a way that when all the increases are totalled up the required percentage increase overall comes out.

I repeat that there is no transition from a flat-rate policy saying "Nobody can have more than 4 per cent., 5 per cent., or whatever it may be"—that is workable as long as it works, workable as long as the changes in the real world do not set up too intolerable a tension between real supply and demand for labour and the rigidities reinforced by month after month and year after year by a flat-rate system—from that there is no transition, no bridge, no path which leads by pleasant and easy stages to a hitherto wholly undiscovered arrangement for a prices and incomes policy which will maintain an overall ceiling as an average and yet permit considerable variations and differentials within it.

Mr. Jay

I am reluctant to interrupt the right hon. Gentleman's as always powerful argument. The weakness of his present argument is that what he has just proved to be impossible has been done in practice over certain periods. He will find from the record that Aubrey Jones's Prices and Incomes Board operated for a number of years and was operating successfully when it was abolished by the Tory Government in 1971.

Mr. Powell

There is no difficulty in concealing the impossibility of a policy as long as its non-existence is expressed in sufficiently vague terms. I congratulate the Government on professing a prices and incomes policy but having succeeded for nigh on three years in expressing it in terms so general and so vague that they were able to draw a veil over the inconsistencies between what was happening in reality and what the policy professed. Even so, it has worked thus far only because the Government selected as their upper limits the upper limits which the trade union movement was wise enough to know were the maxima likely, in current conditions, to be obtainable and negotiable.

Of course, that does not remove the difficulty of an overall limit nor provide the transition nor the other terminal of the transition; but it explains why the Government, to their credit, have survived with a prices and incomes policy longer, I think, than any of their predecessors.

However, hon. Members on both sides of the House are now saying that this will not do, and that we must move over to phase 3—an expression which must strike terror into, at any rate, Conservative hearts. Phase 3 must be written upon many heartstrings above and particularly below the Gangway on this side of the House. So I ask: having witnessed—demonstrated in practice as well as demonstrable in theory—the impossibility of a system of controlling wages overall while allocating or permitting variable increases for the myriad claimants on the total wage fund, if I may use an antiquated expression, why is it that we are always clamouring to do it again? I believe that the answer has emerged in the course of today's debate.

I was going to ask the permission of the right hon. Member for Chipping Barnet (Mr. Mandling) to say, pace him that we are all monetarists now—not, of course, monetarists in the distorted sense in which the term was used by the Chancellor of the Duchy of Lancaster this afternoon, but monetarists in the sense that the growth of money supply is by all identified as the necessary condition of inflation.

Mr. John Mendelson

Not quite all.

Mr. Powell

Very well, not by all.

Mr. John Mendelson rose—

Mr. Powell

I gladly except the hon. Member, but I hope that he will assist me because I must be brief. I will give him any indulgence—a plenary indulgence if he wishes—but I should be grateful if he will let me get on.

Mr. John Mendelson rose—

Mr. Powell

All right, I give way, then.

Mr. John Mendelson

The right hon. Gentleman means the Cabinet and the Tories. He does not mean many sections of the Labour Party and Labour movement which have never accepted the nonsense of the monetarist policy from him or from my right hon. Friend.

Mr. Powell

Very well, I shall be content with the Cabinet for the purposes of my present argument. The Government and many hon. Members opposite have been happy to state as a self-evident verity that the high inflation of 1975 and 1976 was the result of the immense increase in the money supply in the years 1972 to 1974 under the Conservative Government. The Minister of State, Treasury nods assent. The Government cannot do other than assent because this has been the staple of the argument and invective of the Chancellor of the Exchequer in debate after debate.

Moreover, the argumentation from both sides of the House and from many sections of the House—of course, with the exception of the hon. Member for Penistone (Mr. Mendelson)—has been that we must control the public sector borrowing requirement because unless we control its magnitude we are in risk of so financing it that we shall increase the money supply and that in turn will cause inflation. Therefore, there is, if not universal, at any rate widespread agreement on the monetary causation of inflation.

Mr. Lever

The right hon. Gentleman must except me too. He started perfectly correctly by saying that it was widely accepted that a monetary supply defect was a necessary condition of inflation. He has slid into saying that we have accepted it as the cause of inflation. That is quite different.

Mr. Powell

What the right hon. Gentleman has given me is sufficient. Excessive money supply is a necessary condition, a sine qua non. Without it there cannot be inflation. That is what the right hon. Gentleman has admitted.

Now, if the Government accept that undue increase in the money supply is a sine qua non of inflation—and they do accept it, whether or not the hon. Member for Penistone accepts it—why are they so anxious to have a policy for controlling wages since clearly, on that hypothesis, the trade unions are powerless, by any action they can take, however unreasonable, to cause inflation? That is the question to which we must address ourselves at the next stage.

An answer to it has been given over and over again, which is part of the conventional wisdom and which it is my purpose to challenge. The conventional answer is that if the money supply is being controlled as it must be controlled, in order to prevent or reduce inflation, the trade unions will obtain for their members increases in wages which are inconsistent with that limitation on the money supply and will thereby cause unemployment. It is to prevent, so the conventional wisdom goes, the trade unions from running their members and workers generally into unemployment while the money supply is being so held as is necessary to control inflation that we must go directly, through an incomes policy, to the trade unions and others and tell them what wages they should have and how their negotiations should turn out.

I deny that that is a rational answer. I believe it to be a theory unsupported by any experience and, indeed, capable of being refuted by any empirical test that can be applied. Our experience is that the trade unions have shown themselves to be extremely skilful and extremely shrewd in judging the limits to which wage increases could be pushed without involving an increase in unemployment for their members. After all, that is what trade union leadership is about—these men are precisely in the business of securing the maximum emoluments for their members without damaging their own positions as trade union leaders. The social contract, as it is called, has stood so far because the TUC and its members—they are very good economists and have good economists behind them, and a great deal of common sense too— have recognised that the limits imposed represented in current circumstances approximately the maximum of what was obtainable overall without incurring the risk of pricing the workers out of jobs.

Our experience to date, then, is of a trade union movement which has certainly not shown itself to be out of touch with the current realities or with what was obtainable for its members. But I offer a test—indeed, I ask for a test. I ask for evidence to be produced which will show that there has been more unemployment in those occupations where unions have been specially strong, specially demanding or specially militant, because that ought to be the case if the theory is right. If the conventional wisdom were sound, we should find unemployment in the callings where militant trade unions have extorted what are called excessive wages. Not so. There is no correspondence—no correspondence can be indicated—between the activity of the trade unions and the incidence of unemployment.

Mr. Jay rose—

Mr. Powell

If the right hon. Member for Battersea, North (Mr. Jay) is about to ask me—[HON. MEMBERS: "How do you know?"]—then I shall let him put his own question afterwards—"Why is it, then, that, in spite of years one and two of the social contract, we have nevertheless had this heavy increase in unemployment over the last two years?", I shall give him the same answer I have given in the House before—and even before the unemployment happened. It is that a fall in the rate of inflation is inevitably accompanied by temporary unemployment. It was perfectly predictable that when the rate of inflation was halved, as it has been over the last 18 months, that would he accompanied by a severe rise in unemployment. Now I shall hear whether that was what the right hon. Member for Battersea, North was going to ask.

Mr. Jay

I was about not to ask a question but to point out that surely the flaw in the right hon. Gentleman's argument is that the money supply was held relatively stable during 1976 and yet there was a large increase in unemployment in that year.

Mr. Powell

In that year there was also a steep fall in the level of inflation.

Mr. John Mendelson

There is never one cause.

Mr. Powell

I do not know that the hon. Member for Penistone is right in saying "never", but I agree that there are usually more causes than one operating. However, the major cause of the rise in unemployment—it was predicted as well as predictable—was the halving of inflation. One cannot halve inflation from 26 per cent. to 13 per cent. without severe dislocation which reflects itself in unemployment. That has always been understood, and those of us who have been concerned to see inflation reduced have always warned that there is a transitional price of unemployment that has to be paid while it is happening.

So I repudiate the notion that the trade unions must be restrained, by an impracticable "flexible" phase 3 of prices and incomes policy, from injuring themselves and their members. On the contrary, trade unionists are probably the people in this country who are most sensitive to the implications of what is happening to the money supply and to demand, and who are most skilful in adapting themselves to it, whatever—for they are politicians too—they may say while doing it.

These subjects are matters of great academic and intellectual interest and amusement. The dissection of the errors and absurdities of prices and incomes policy over the last decade and a half is a fascinating task. But it is not just that. Prices and incomes policy, more than any other single cause, has, over that period, brought Government and Parliament into conflict with the public and the governed. It is true that in the last three years we have been spared the acute forms of that conflict experienced between 1972 and 1974; but, as sure as the sun rises and sets, the attempt to obtain even voluntarily a policy for controlling wages by influencing the movement of individual wages and restoring differentials, will lead—if it is to have any reality—to renewal of that conflict between Government and Parliament on the one hand and the governed and the people on the other.

On whichever side of the House we sit, we surely cannot believe that that is something to be courted or that it is something which this country can afford. Therefore, I exhort the Government—whatever smokescreen of words they use to conceal their withdrawal from the impracticable move from phases 1 and 2 to phase 3 of an incomes policy—to eschew a course that will bring them into outright and manifestly insoluble conflict with what millions of workers, trade unionists and others throughout the country know to be the reality which they face in their daily circumstances and work.

The Government have set their hands to the effective lever for doing what must be done—controlling inflation. They have not avoided risks; but they have identified the true lever and set their hands to it. Let them not spoil all by attempting to add an impracticable and damaging wages and prices policy for phase 3.

6.56 p.m.

Mr. Donald Stewart (Western Isles)

I start by congratulating the hon. Member for the City of London and Westminster, South (Mr. Brooke) on his maiden speech. We look forward to contributions from his expertise on management. Goodness knows, the Government and the Opposition could do with some of that. The hon. Member made a vigorous and trenchant speech, and if, in accordance with convention, it was non-controversial, there was more than a hint that all his future speeches will not be delivered in that vein. We look forward to his contributions to our debates.

I agree with the point that was made by the right hon. Member for Down, South (Mr. Powell) about phase 3. My party has never supported the alleged social contract, the incomes policy or anything of that kind. Far from believing, as so many people pretend, that the Prime Minister and Cabinet are carrying out the instructions of the Trade Union Congress, my party believes that Mr. Jones and Mr. Scanlon and other such people have sold out the interests of their members to the interests of the Government.

There has been a tendency during the debate on the Budget Resolutions to regard the Budget as innocuous since there has been a standstill on swingeing impositions of tax—except one particular tax, with which I shall deal with in a moment.

The Budget was presented at a time of sharply dropping living standards in the United Kingdom. It appears to be the aim of the Government to push down incomes in real terms. Working people are beginning to suffer a serious erosion in their standard of living. The 15 per cent. increase in incomes between 1975–76 has been wiped out by devaluation of the pound, high inflation and tax increases. According to Government figures, the spending power of the pound dropped by 3p during the last three months of 1976 to the lowest point since early 1974.

The Chancellor of the Duchy of Lancaster and his colleagues agree that the situation is difficult, with regard to unemployment and so on, but they claim that it is due to world conditions. There may be something in that argument. I am not interested in refuting it at the moment, but I am certain that in no sentence in the Labour manifesto was there a qualification that the Government would maintain employment provided that employment kept up in the rest of the world, or that there would be a proper balance of payments provided Germany were not in a worse situation, or anything else of that kind. That is the charge against the Government.

My hon. Friends the Members for Perth and East Perthshire (Mr. Crawford) and Dunbartonshire, East (Mrs. Bain) have already dealt with various aspects of the Budget tfrom the Scottish angle. I intend to concentrate on the disgraceful extra tax on petrol, oil and cars. This increase has created great apprehension and tremendous anger throughout Scotland, particularly in the deprived rural areas.

The policy of the Government and the nationalised industries, such as British Rail and the Scottish Transport Group, seems to be intended to confine the people of the Highlands and Islands to their homes in the same way that Red Indians were confined to reservations and forbidden to leave them. British Airways, which will fly one to Athens for £85, now charges £60 for a flight from Stornoway or Benbecula to Glasgow—a price increase of 32 per cent. in a year.

Now we have 5½p on a gallon of petrol, with no remission for areas such as the Highlands, which are almost totally dependent on cars, and which have the highest unemployment and cost of living in the United Kingdom. It is not possible to shop around for cut-price petrol in the Highlands; all the prices are the same and they are the highest in the country. The relative burden is greater on Scotland than on the rest of the United Kingdom. The message has not been lost on the Scottish people that, although Scotland is the only nation with all resources, the British Government's imposition of petrol taxes falls heaviest on the Scots. The Scottish colony has been made to bear the brunt of the present economic difficulties of the country.

What about the compassion of which the Labour Party claims to have a monopoly? At a time when some headway is being made in fighting for better conditions for the disabled, the Budget proposals will be a savage curb on their mobility, and the mobility allowance does not take care of that. Is the Chancelllor of the Exchequer determined to remove their already restricted mobility? For the handicapped and for the ordinary folk at home for whom cars are essential, the SNP will be voting against the resolution on the petrol tax increase.

What do the Liberals intend to do? They are fond of saying "Wait and see". As far as I know, Mr. Asquith used those words only once. The present members of the Liberal Party are prepared to use them a great deal. Their main support comes from rural areas and they were among the first to announce a hard-line position on the extra tax on petrol. However, with the prospect of a Government defeat, the Leader of the Liberal Party has confirmed that they are back pedalling furiously and intend to abstain tonight. His defence, that the heavy oil duty is mixed up with the petrol price increase, and, therefore, causes difficulties, is a lot of nonsense. The Liberals have already betrayed Scotland and Wales on the devolution Bill and now they are betraying the rural areas from which their support comes. Their last shreds of credibility have been blown away. Some years ago Liberal leaders talked about marching their troops towards the sound of gun fire. Now they are becoming an army whose buglers will be required to learn only one call: sound the retreat.

We have announced where we stand, and we shall be there at the vote.

7.4 p.m.

Mr. Bryan Gould (Southampton, Test)

There was a curious omission in the Budget speech. The Chancellor of the Exchequer made no mention of export-led growth. Whatever happened to export-led growth? There was a time a few months ago when no speech or statement by the Chancellor of the Exchequer was complete without the ritual incantation of the words "export-led growth". Last year, the Chancellor did his best to ensure that the competitiveness and profitability of exports of which he was so proud did not eventuate. He spent 1976 spending thousands of millions of pounds trying to prop up the rate of sterling, push up interest rates to 15 per cent. to help the pound, and cut public expenditure as well. Despite this, he maintained that there would be a competitive edge which meant that export-led growth was just around the corner.

We now know that it did not materialise. In fact, it is not even on the agenda, because the Chancellor's Budget speech showed that the Treasury now forecasts a growth in output of tiny proportions. The forecast growth in exports is 5½ per cent. If we take away what we would expect from oil and the growth of invisibles, we are left with a growth in manufactured exports which must be very small indeed and only a tiny proportion of the growth of world trade. The Treasury also expects rising unemployment, falling living standards, and a falling share of world trade in manufactures.

The Treasury figures show that export-led growth is not to be expected, and the Chancellor's speech simply confirmed that fact. The Chancellor must know that the Treasury's own figures on the index of competitiveness of exports and manufactures expressed in dollar terms reveal that throughout the greater part of 1976 our export prices were less competitive than those during the bulk of the preceding three years. According to my calculations, the figure is now the worst since 1972, which was itself a high point in uncompetitiveness. At that time the Bank of England forced up the rate of sterling at the same time as our industrial costs were rising faster than those of anyone else. If my right hon. Friend disputes my calculations I hope that he will produce better figures for the winding-up speech. The index of competitiveness is not a wholly reliable indicator of our competitiveness, but it is the best we have, since only that index measures the performance of that part of our manufacturing industry that is involved in exporting.

Even that index, damning though it is, understates our loss of competitiveness in the past five or six years. For example, it takes no account of goods that are no longer exported because they are no longer price competitive, or of the loss of preferences, particularly with the Commonwealth and EFTA following our entry into the EEC. Nor does it take account of the fact that we have had to reduce our tariffs for EEC goods. Admittedly its tariffs against our goods have been reduced, but there is no doubt that ours were much more effective in keeping goods out than were the EEC tariffs. Moreover, the index is based on 1970 figures which related to a situation distorted by a severe credit squeeze then in operation.

There is, therefore, no competitive edge, and no export-led growth to look forward to. The Treasury has forecast import-led stagnation, and that forecast is confirmed by many independent forecasters, including the National Institute and the Economist.

If we look at what is happening in the real world, we see there can be no question but that we have a massive trade deficit, and imports of manufactures are rising three times faster than the export of manufactures. Our export manufactures are rising at half the rate of the growth of world trade. Not surprisingly there is a remorseless and continuing decline in our share of world trade. We have a huge and rising total of unemployment and an industry operating at well below capacity. It staggers me that anyone can argue that export-led growth is just around the corner. Those who argue that the pound should be revalued are indulging in an exercise of self-delusion on a grand scale.

Despite that gloomy picture one can still read articles and leaders in newspapers that say that the competitive edge of British exports means that export-led growth will come. They are deluding themselves, as they have deluded their readers for decades. The problem is that we have no objective measurement in our recent history—by which I mean the past century—against which to measure our performance, because every period in that time of decline has been one in which competitiveness has been falling. Therefore, it is quite fruitless to say that we are as competitive as we were in 1973, 1963 or 1953, since in each of those years our industrial decline and falling share of world trade continued.

I believe that the difficulty we face in this country, in facing up to the unpalatable facts, particularly on the exchange rate, rests largely on the fact that we have become accustomed to following a "hooray" policy towards the exchange rate. We regard the pound as a prestige symbol; if we raise the level of the pound, or maintain it, we say we are doing well, quite oblivious of the impact that it may have on the economy and on jobs.

Then there are those who say that perhaps our lack of competitiveness is really the fault of the wicked exporters who recognised the fact that there has been a fall in the value of the pound, and took advantage of this in increased profit margins rather than increased volume. Therefore they say that it is the wicked exporters who are selling the country short. There is absolutely no evidence that the profits of exporting firms have risen very substantially during the past few months or years. If one tried to do a survey of firms that have made their reports in the past six months one would see that there is no difference between firms that export a large proportion of their production and those that do not. The level of profit remains very low in both cases. The only argument on which this claim can be made is that last year export prices rose faster than wholesale prices; but that has been true for many years. It was true in the four years before the 1967 devaluation.

It shows, not that exporting is particularly profitable, but that exporting is becoming increasingly difficult and expensive, since many of the costs have to be incurred abroad, and the cost of credit has risen in recent years. If one doubted that, one could have recourse to the 1967 experience. Exporters took advantage of the devaluation then in terms of volume rather than profit margins. It is hard to imagine that they could do otherwise now, when redundancies are biting into the ranks of managers themselves.

Others say that it is inevitable, that our industrial decline cannot be reversed, and that there is nothing we can do about it. They argue that there is some defect of national temperament or character which makes us unsuitable for industrial work, and therefore we can only be dragged along on the coat-tails of other countries, and that, therefore, we cannot adjust our policies to increase our share of world trade. They say that we must wait on other countries to reflate and increase the volume of trade and then, according to the Treasury, if we are lucky we shall pick up half of the rate of the increase in world trade in increased exports.

There are others—and I understand that the National Economic Development Office is to produce a paper to this effect—who say that devaluation or a competitive exchange rate is all very well but that it does not work. The truth is that we have not had an effective devaluation over the past year. The fall in the value of the pound has not done enough to keep up with our loss of competitiveness over that period. If there is one indication of the fact that we have not had an effective devaluation it is surely the fact that we have not had the familiar J-curve result of a devaluation.

Others say that price competitiveness is not a crucial matter and that quality, design and delivery are the real explanation for our difficulties in selling abroad. Of course that is true, but what are we to do about it? Are we to have more ministerial speeches exhorting everyone to work harder and invest more? Are we to pin our hopes on productivity improvements and so on? Will this be the key to our export-led growth? What are we to say to foreign customers in the meantime? Shall we say "we realise that we have acute problems about difficulties with the quality, design and delivery of our products, but we are aware of it and if you leave it to us, in a few more years, after more ministerial speeches and exhortations we shall put things right, but in the meantime will you kindly buy these goods at a price which is higher than last year?" Of course we cannot do that.

We have to take account of price competitiveness. That has served others well. The Japanese seem to have done well out of price competitiveness, and the Chancellor of the Exchequer himself thought, not many months ago, at a time when he believed that our exports were price competitive, that that would produce a rapid increase in our volume of exports. This agreement overlooks the fact, that the defects are to be cured only if exporting is made more competitive and more profitable.

We need more investment in new export capacity if we want better quality, design, and delivery dates. These things will cost money. We are suffering from a century-old process of industrial decline, arising from the fact that we have consistently managed our exchange rate in the interests of those who deal in money, rather than in the interests of those who produce and sell things. Until we change that frame of mind—it will be extremely difficult to change the ingrained habit of a century—industry will continue to decline, despite ministerial speeches.

It is sometimes argued that the German experience—my right hon. Friend made this point this afternoon—shows that competitive exchange rates, price competitiveness and so on, are really not essential to export success. The Germans waited until they had a substantial trade surplus, enormous reserves, investment had been made, the factories were there, the skilled work force was there and markets overseas had been developed, and then, when the pressure for revaluation was irresistible, they revalued by the carefully calculated amount which enabled them to make use of those advantages. They were able to reduce the impact of imported inflation. To suggest that we, with our deficit, reserves, and industrial decline, can launch ourselves into that virtuous circle by holding up the rate for the pound, is ludicrous.

Mr. Lever

I never said that the Germans' export success was not related to export price competitiveness. That is not what I said. My hon. Friend has not listened. I said that the German mark became undervalued because of their steadily increased productivity compared with that of their rival nations, and that they continued in that way, and that we had had the opportunity of having an undervalued pound, in spite of the supposed machinations of the City and others, but because we were unable to be relatively competitive in productivity, that undervaluation gets lost. In short, the parity does not decide the issue. It is the trend of competitiveness in productivity that decides the issue.

Mr. Gould

My right hon. Friend is quite right in saying that the Germans have maintained their currency at an undervalued level, by improving their competitiveness and productivity, but we can argue about the point at which we can break into this circle. My argument is that for a century we have consistently maintained our currency at such a high level and at such an overvalued level that it has prevented us from producing the sort of investment and productivity to which my right hon. Friend referred.

My right hon. Friend referred to the 1949 devaluation, but, as was pointed out in another part of the Chamber, that was accompanied by a substantial devaluation by other countries at the same time. The devaluation of the pound was to a figure which was really just a cockshy. We had very little idea in the immediate postwar period of what pattern of world trade was to emerge. It was more a question of luck—bad luck as it turned out—that the level ended up at the figure of two dollars 80 cents to the pound.

The final and most difficult argument against following a policy of competitive exchange rates is that in the current situation of pay policy negotiations now underway and with a high inflation rate we cannot afford to let the pound fall further because of the inflationary consequences of such a fall.

That argument overestimates very considerably the inflationary effect of the falling pound. It is clear that the bulk of the inflation that we experienced last year owed nothing to devaluation and a great deal to increased labour costs and changes in the terms of trade. Of course, we could reduce our inflation by pushing up the rate for the pound to $1.90 as some commentators have suggested, but at what price? It is always possible to reduce inflation provided one is prepared to accept another million or so unemployed and a level of economic activity closely resembling paralysis.

Let us look too at the inflationary effects of the present policies and the costs we have incurred in terms of high interest rates to protect the pound. Let us look at the costs in inflationary terms that we must pay for allowing labour unit costs to rise because industrial production is stagnant. Let us look at the way in which the burden of inflationary import prices is falling on our import bill. Many people talk as though we are still an economy which imports food and raw materials and exports manufactures. The fact is that nearly 60 per cent. of our import bill is accounted for by imports of manufactures. There is no way in which we can prevent the import of these manufactures from continuing to close British factories and drive British workers out of work without making them less competitive, and that means more expensive. It would be the ultimate foolishness to hold up the exchange rate in the fond belief that we were thereby keeping down our industrial costs, when all we would be doing would be subsidising imports and putting a penalty on exports.

Reports appeared in the Press today and yesterday—and that leads me to suggest that they must have emanated from Government circles—to the effect that the whole policy of competitive exchange rates to which the Chancellor is committed under the terms of the Letter of Intent to the IMF has been abandoned. It is said that this represents a victory for industry over the interests of finance. What gobbledegook! What double thinking and double talk that is! By abandoning any effort to maintain the competitiveness of our exports we are throwing away any chance of growth, of rising employment and of rising living standards.

It pains me to say that this is precisely what is in the Chancellor's programme and in his Budget Speech, and that this is the prospect which faces us. We are once more falling for that wonderful old British failing of simply refusing to face the facts if they are unpalatable. We are also putting yet another turn in the downward spiral which has meant a century's industrial decline for this country.

7.23 p.m.

Mr. Nigel Lawson (Blaby)

The hon. Member for Southampton, Test (Mr. Gould) has just made a very powerful speech about the exchange rate. It reminds me of the arguments that I used to put forward very strongly during the 1960s, saying that we had an over-valued exchange rate which was at the root of all our problems. I still believe that that was so. Then we were in the era of fixed exchange rates. Now we are in the very different world of floating exchange rates, and the last Conservative Government, to their great credit, took the step of floating the pound.

I say to the hon. Member, therefore, that he really should not worry. If the expected surplus on the balance of payments next year does not seem to come about, the exchange rate will fall of its own accord, and the Chancellor of the Duchy of Lancaster and all his wiles will not be able to prevent it.

Mr. Lever

I did not say that I would want to.

Mr. Lawson

There are two ways of looking at a Budget, and it is difficult to choose which to adopt. First, there are the tax changes comprised within it. Secondly, there is the overall economic strategy, of which the Budget is only one part, and the prospects for the coming year in the light of that strategy. In opening the debate the Chancellor of the Duchy, for whom I have great affection but who, I believe, made a speech tonight that was by no means one of his more successful efforts, seemed to pour scorn on the changes in taxes in the Budget, and he said that we should talk only about strategy. I do not believe that. His view shows how very much removed he is from the thinking of ordinary people, who are deeply concerned at changes in taxation in the Budget, whether in petrol tax, income tax or any other tax.

Of all the 10 Budgets and quasi-Budgets produced by the current Chancellor of the Exchequer, this is by far and away his best. I admit that that may not be saying a great deal, but it should be said. Although far from perfect, this Budget is on balance a good one. It contains, so far as I have been able to discern—we have not yet seen the Finance Bill, of course—not a single fresh instalment of Socialist malice. It is essentially a Tory Budget.

It is a Tory Budget first in that cuts in taxation have been introduced and made possible by cuts in public expenditure. It is a Tory Budget, too, in that the tax cuts have been concentrated on income tax, even at the cost of some increase in the taxes on spending. Perhaps most strikingly, it is a Tory Budget in the way in which the income tax cuts have been allocated with a much-needed measure of relief to middle management, and it is worth spelling that out.

Whenever income tax is cut, it is inevitable that those who pay most tax stand to benefit most in absolute terms. The Budget, however, is striking in that it goes much further than that, because the point is true in proportionate terms as well. I refuse to take any notice of the fiction that the 2 per cent. reduction in the basic rate is in any sense conditional, although the relative effects would be very much the same even if one did take notice of it. Taking the income tax reliefs as a whole, the effect on the family man on average earnings of £4,000 a year is a rise in his net family income of 3½ per cent. But for the family man on £15,000, who receives the peak benefit under the Budget, the comparable rise is 8½ per cent. That is a substantial difference.

In one of our debates last week the Financial Secretary pointed out that even so this cut goes only a small part of the way towards undoing the depredations of the dispiriting egalitarianism which has been imposed upon the nation during the preceding three years. Nevertheless, it is a remarkable turnabout. I mention that not merely to commend the Chancellor, at long last, but to express the hope—and I have every hope and confidence—that now that he has blazed the trail we shall no longer hear the tired old Socialist cliches about handouts to the rich when the next Conservative Government take the next steps along this path.

Other steps are obviously needed. It is absurd that the top rate of tax is still as high as 83 per cent. on earned income. That is the highest rate in the civilised world—

Mr. Pardoe

In the uncivilised world, too.

Mr. Lawson

I believe that there are one or two uncivilised countries that have a higher rate than 83 per cent., but certainly there are no civilised ones in that category. That rate comes into effect now at a lower level in real terms than ever before. In the 1970 pounds, which the Treasury is so happy to use in working out its forecasts that rates comes into effect at £8,400 a year, and that is ridiculous. Part of the trouble—and I hope that here I carry the hon. Member for Cornwall, North (Mr. Pardoe) with me—is the Government's consistent refusal to index the tax system. I have been pressing for such a system at every possible opportunity since I first entered the House. As such I was appalled to see that the Financial Secretary, speaking in this debate last week, said I understand that the main argument for indexation was prompted by the attempt to fix the Government to ensure that taxation was independently based and outside the Government's control."—[Official Report, 30th March, 1977; Vol. 929, c. 536.] All I can say is that if he understands that, he understands nothing, despite the three years' intensive tuition that I have given him. Every schoolboy knows that nothing can remove the power of Government and Parliament together to determine the level of taxation and make such discretionary changes as are inevitably required from time to time. As the Financial Secretary is obviously unteachable, I direct my remarks to my own Front Bench and implore my right hon. and hon. Friends to pledge themselves to this limited but crucial form of indexation. If they will not do that, it will never be politically possible for them in office to make and maintain—and I stress maintain—the income tax cuts to which we, as a party, are pledged.

What about the rise in expenditure taxes? It is perfectly true that the Chancellor has gone little further than what is needed to make good the loss in real revenue due to inflation. We talk about fiscal drag for income tax—but there is a reverse fiscal drag for the specific duties. [An HON. MEMBER: "Fiscal boost."] I reject the use of the phrase "fiscal boost". If it is analysed, one can see that it is wholly inappropriate and I hope that the Chancellor will realise that the use of it is misguided. My charge against him is not the extent of the rise—he could have gone even further—but the nature of the tax that he has chosen.

We touch here on the Lib-Lab pact, and that is a very delicate subject. I refrain from commenting on the embarrassing negotiations between the high contracting parties to this pact. It is clear, however, that both parties are certainly contracting. Another thing is now clear—we have heard from the Leader of the Liberal Party this afternoon that the Liberals will indeed vote against the increase in petrol, diesel and fuel oil duties but, as Napoleon said to Josephine, "not tonight".

The Chancellor's defence for these increases is based on the energy savings argument, but that is so much hot air. When I asked the Chancellor of the Duchy of Lancaster in an intervention how much energy saving there would be, he had not the faintest idea. He said that it was impossible to work out, but the figures in the Budget must relate to some estimation that has been made of energy saving. Judging from the increased yield the Chancellor expects, the assumed reduction in consumption must be negligible.

The real argument against these tax increases, as the Leader of the Liberal Pary has pointed out, is the alarming feature of our present tax system which means that more and more people are better off not working and going on social security than they are by working. Even for those who are slightly better off working the margin is narrowing all the time, as my hon. Friend the Member for Norfolk, North (Mr. Howell) has repeatedly pointed out over the years.

One key element in the equation between working and not working is the cost of travelling ot work, which is not tax deductible. By acting deliberately to increase this cost the Chancellor has done something very dangerous, for many more family men will be better off not working than working as a result of the increased duties, and that is an excelllent reason for voting against this resolution.

Finally, it is worth pointing out that the £1 billion 2 per cent. payroll tax comes into effect only this year, so, despite the Budget, we shall still be a more highly taxed nation in the coming year than we have been in the past year.

What are our overall prospects? Even the Treasury ruefully admits in the Budget Red Book that short-term economic forecasting is something of a mug's game. In the Budget Statement the Chancellor made forecasts for the year ahead which, in a number of important respects, differed wildly from the forecast he made for the same period as recently as last December in his package. No doubt as the months go by these forecasts will be falsified in their turn.

Given the miasma of uncertainty in which we all live—and not least the Treasury—a fact which must surely demonstrate the folly of neo-Keynesian fine tuning beyond dispute, my own conclusions necessarily will be in very general terms. First, I believe that to plan to reduce the public sector borrowing requirement from £8.8 billion in 1976–77 to £8.4 billion in 1977–78, bearing in mind the present plan to keep it at £8.6 billion the following year, represents, even allowing for inflation, a too leisurely rate of reduction.

Second, in contradistinction to fiscal policy, I believe that monetary policy has got into an excessively deflationary rut and that this will lead to the current recession being unecessarily prolonged. I am glad that I have the agreement of the Chancellor of the Duchy to that proposition. There is not only that danger but the danger that there will be a panic counter-reaction by the Government in a few months' time. The danger of that is all the greater because of the Government's apparent conviction that the path of virtue is mapped out by the IMF's guidelines, whereas the domestic credit expansion guidelines are laughably lax.

What of the Chancellor's overall strategy? In a somewhat schizoid way the Chancellor has two strategies. There is his monetary strategy, which the Chancellor of the Duchy of Lancaster dislikes so much and which may account for his lack-lustre performance this afternoon. Alongside this, and eclipsing it in rhetoric, there is his incomes policy. In his Budget speech the Chancellor said: It is difficult to exaggerate the advantages of a satisfactory pay agreement"—[Official Report, 29th March 1977; Vol. 929, c. 284.] I have news for the Chancellor: nothing is easier to exaggerate. It is difficult to know what he means by "a satisfactory pay agreement", but the Chancellor had little difficulty in exaggerating to a ludicrous extent the benefits of his proposed income tax cuts in this context. He did this in his Budget speech, his Budget broadcast and in various Press handouts to journalists.

He argued that the tax cuts for the average married man amounted to an extra £2 a week in take-home pay, which was as good as a 4½ per cent. gross pay rise. Taking account of the fact that a 4½ per cent. gross pay rise would put up prices by 2½ per cent., however, the Chancellor argued, the poor man would have needed in order to make up for that a 9 per cent. gross pay rise.

Why did the Chancellor stop there with his spurious arithmetic? Why was he so uncharacteristically modest. He could have gone on to say that a 9 per cent. gross pay rise would put up prices by a further 2½ per cent. and in order to make up for that a man would need a gross pay rise not of 9 per cent. but of 13 per cent., and so on ad infinitum. Thus the income tax cuts, on the Chancellor's phoney figuring, are worth any pay rise that one cares to name. If the Chancellor thinks that a single trade unionist believes that, he will believe anything.

Mr. Lever

Spurious.

Mr. Lawson

I do not think that the Chancellor of the Duchy of Lancaster is right. I believe that this spuriousness is not unsymbolic, because it portrays the spuriousness of the whole incomes policy strategy.

The problem is basically that by impressing on the foreign holder of sterling the allegedly vital importance of a satisfactory stage 3 pay deal, whatever that may mean, the Chancellor of the Exchequer has boxed himself into a position where he is forced to conclude something he can portray as being a satisfactory pay agreement, or face a major collapse of overseas confidence such as he experienced six months ago. What then? The satisfactory agreement will, by its very nature, by the nature of things, prove very unsatisfactory to a number of people on whose behalf it has been concluded, causing unnecessary industrial strife and ultimately breaches of the agreement, which will then in turn trigger off just the collapse in overseas confidence that it must be the Chancellor's desire and ambition to avoid.

To what gain is this whole doomed charade undertaken. We must all hope, of course, if we are sensible, to minimise the avoidable level of unemployment. For that reason—and here I part company slightly from the right hon. Member for Down, South (Mr. Powell), who has left the Chamber, so I shall not pursue the argument here—there is a danger of people pricing themselves out of jobs.

Therefore, if we wish to minimise avoidable unemployment, we will obviously want some kind of pay restraint. But pay restraint is crucially different from a formal incomes policy. We know that, for example, in the private sector pay restraint is imposed by the nature of the market, of economic conditions, the disciplines and facts of economic life. In the public sector it is the cash limits White Paper that determines pay restraint. The Government brought that White Paper out on Budget day with no fewer than 48 specific blocks of pay in the public sector which are cash-limited. That is the true way in which overall budgetary and monetary control are both translated into and made possible by pay restraint. That is the only form of incomes policy—if one likes the term, and I do not—that is needed.

The idea that if there were to be the abandonment of the formal system of incomes policy which we have now there would suddenly be a pay explosion, just because there was one in 1974, shows a total failure to understand the difference between the economic conditions today and those in 1974. Of course there would be a great explosion for highly skilled men in certain small categories, but overall not at all. There is no evidence—quite to the contrary.

But beyond that—because I go beyond monetarism, the Chancellor of the Duchy of Lancaster will be glad to know—there is needed in our management of the economy a mutual understanding between Government and people and Government and trade union leaders in particular, understanding of what the consequences of particular policies are, and the consequences, too, of bucking them. We have something to learn from the Germans in this context. Their system, the so-called concerted action, is well worth studying by the Government. It is a system of mutual discussion, mutual education, mutual understanding between the Government and the major interest groups in the economy, including the trade unions, explicitly based—this is the basis for the whole understanding—on total non-interference by Government in wage bargaining. That is the very cornerstone of the understanding that is reached.

The understanding is also facilitated by a degree of consensus in Germany greater than the consensus at the top that we have in this country. It is a consensus based on success. There is to a certain extent a vicious circle—that if one does not achieve the economic success, it is hard to achieve the consensus, and without the consensus, it is hard to achieve the economic success.

Nevertheless, we have in Britain where it really matters, at the grass roots of industry, a remarkable degree of economic consensus. I think that the divide is much more at the top. That is one reason why I have long favoured some form of genuine industrial democracy. I believe that that is something on which we can build. Certainly, we must try.

We must try to learn to live without incomes policy. Admittedly, we have not learned how to do so yet. But what is absolutely clear—and we have learned this the hard way—is that no free society, no free economy, can live with incomes policy, and the sooner we learn how to live without it, the better.

7.46 p.m.

Mr. Ralph Howell (Norfolk, North)

I should like to thank my hon. Friend the Member for Blaby (Mr. Lawson) for his very kind references to me. I agree with him that the only good thing that can be said about this Budget is that it is devoid of any Socialist malice.

It seems that the Treasury team have made some attempt to move in the right direction, away from direct taxation to indirect taxation, but it is an awful pity that they have chosen to do it by putting the extra tax on petrol, particularly for constituencies such as mine, a rural area where so many people are totally dependent on using their own cars to travel to work because transport facilities are so poor. It would have been much better if the switch had been made with an increase in the standard rate of VAT to 10 per cent. or even more. I beg the Financial Secretary to note the effect that the tax will have on rural areas, because so many people who are spending large sums to travel to work are worse off than if they did not bother to work at all.

The Budget is extremely disappointing, because we were led to believe that tax thresholds would be raised considerably. The effects of what has been done are minimal. In every category—in every size of family, single people and married couples—people will be taxed at below the social security levels. It is pathetic and nonsensical that we are still taxing those who work so that they are left with less spending power than if they did not bother to work. We should note that the unemployment figures include a considerable number of people who cannot afford to work while the present tax rates and tax system prevail and while the tax thresholds are so low.

I am also disappointed that the Chancellor did not see fit to make all income equally taxable. It is too absurd for words to continue the system whereby benefits are tax-free and wages are always taxable. A man with a wife and two children will still have to earn more than £50 a week to be as well off as if he were on supplementary benefit. How crazy it is that we should continue that situation, despite all the efforts that have been made to draw this absurdity to the attention of the Government.

I mention again the letter that I sent to the Chancellor of the Exchequer from one of my constituents, a widow whose total income is £28 a week, who is currently being taxed at £5 a week, leaving her £23 to maintain her house and meet other commitments. As a result of the Budget she will be roughly 50p better off. If the agreement is reached she will be 60p better off. That 60p is supposed to make allowance for the 16 per cent. price inflation with which she will have to cope.

It is gratifying that there has been fresh thinking among the Cabinet, but the wild men on the Left will not allow this Socialist Government to change from direct to indirect taxation. Socialism depends on high taxation and cannot exist without it. That is a fact of life that we must realise. The only way that the country can free itself of high taxation is to rid itself of the Socialist Government.

Surely the answer to our problems is to create the conditions whereby it is profitable to work, whereby the maximum number of people are working. We need a complete reorganisation of our taxation and welfare systems. At present they are totally unco-ordinated, and absurd situations arise where many people are better off not working. There are many others who are only marginally better off by bothering to work.

Surely the Stechford result should have proved to the Government that something is wrong with their voters. They failed to realise that car workers, industrial workers and miners are major taxpayers. Those workers are heartily discouraged by our excessive taxation. After the Budget we are still at the top of the world's income tax league. We are at the top by a quite considerable lead.

I address my remaining remarks to our Front Bench colleagues, to the incoming Conservative Government. It cannot be many months before we shall have to take charge of the nation's affairs. The Conservative Party must take on board that small changes will have no real effect. We have not had a true free enterprise Budget since the war. All the Budgets since then have been Socialist in content. There needs to be a great switch so as to give incentive to our people who work. That is recognised in Stechford. Those remarks might cause amusement to some Labour Members but they are recognised by nearly everyone in the country.

There must a dramatic reduction in income tax rates if we are to be able to compete with our main competitors. They have an average starting rate of income tax of less than 15 per cent. and no more than 55 per cent. as the top rate. If we were to adopt similar rates, we should have to halve the yield that we get from income tax. That is what the next Conservative Government should think of doing. Indeed, they should do so very quickly.

It is no good reducing income tax as gradually as we have done in the past. People are saying "The Conservatives are criticising the Budget, but what would they have done?" We should now tell the country what we would do. We should tell the people that it would be our policy to make a major switch in the direction that I have outlined.

I am not suggesting that we should promise to cut taxation generally. I am not in favour of promises that we might not be able to fulfil. However, surely we could promise to switch from direct to indirect taxation. That would leave the wage earner free to do what he wanted with his wages. If he chose to spend lavishly, he would pay a great deal of income tax. If he spent modestly, he would pay little tax. If he spent hardly anything, he would pay virtually no tax. That is the way ahead for our party. It should be popular throughout the country and we should gain the confidence and the co-operation of the great majority of people.

7.56 p.m.

Mr. Ian Wrigglesworth (Thornaby)

I do not wish to take up the remarks of the hon. Member for Norfolk, North (Mr. Howell), save to say that if he is worried about the policies of his Front Bench he should read the speech that his right hon. Friend the Leader of the Opposition recently made to the Zurich Economic Society. If he does that, he will find to his great pleasure but to my horror that the economics of Adam Smith and Alfred Marshall, the latter being the doyen of nineteenth century economists, are held high as an example. It was a remarkable speech that led us back over two centuries of economic experience in this country and the Western world to the simplicy of economists of bygone days. I fear to think of the havoc that would be laid upon the economy and British industry if those philosophies were reintroduced by a Conservative Administration.

I begin my remarks by welcoming the general thrust of the Budget. It makes good sense, although when I returned from Stechford on Monday after canvassing to listen to the Budget on Tuesday I was not sure that it made very good political sense. The rub will come in due course. The long-term political analysis is probably right. It is a good thing for the Labour Party and the Government to be pursuing a modest and reasonable policy and not going ahead with too great an expansion, choosing to restrain growth until the economy, along with the economies of the Western world picks up.

I like the way in which my right hon. Friend the Chancellor of the Exchequer has linked his policy with the need to keep down inflation, with the industrial strategy and with the need to get a further round of pay policy. There is help in the Budget for small companies in the special development areas. There is extra stock relief for companies for another two years. There is corporation tax relief for small companies. All those matters and a number of other measures tie in with the Government's industrial strategy. Those are all features that are to be welcomed.

Clearly, the main economic indicators are showing the right trends. The public sector borrowing requirement is below the agreed IMF level. Domestic credit expansion is at half the level required by the IMF agreement. The balance of payments trend is going in the right direction. Although it is early, probably, to try to reach firm conclusions, the trend in employment is going in the right direction. The pound is much stronger than we could ever have hoped shortly before Christmas.

The measures of 15th December have had their effect upon the money markets and the City. Interest rates have come down sharply so that borrowing by companies and individuals is now some four or five points lower than before Christmas. We hope shortly to see the drop in interest rates being reflected in a lower mortgage rate for house purchase. All the trends of the main economic indicators point in the right direction. The Chancellor, in allowing himself leeway for the future, has made the correct economic judgment, and I hope that in the longer term it will prove to be the correct political judgment.

The debate on the Budget has centred on two main issues. There has been a dispute between the monetarist policies of the right hon. Member for Down, South (Mr. Powell), and to some extent of the hon. Member for Blaby (Mr. Lawson), and those who believe in an incomes policy. What the right hon. Member for Down, South did not show in his analysis of the monetarist theory was that it involved nothing more than simple facts and figures and the pressing of buttons in economic management. I see the distinction between his view, and, indeed, the view of the right hon. Member for Leeds, North-East (Sir K. Joseph), and those of us on the Government Benches who believe in an incomes policy as being a somewhat more fundamental matter than the mere pressing of the buttons or the pulling of the levers of economic management.

The basic difference is that we believe in the concept of fairness in incomes policy, whereas the right hon. Members for Leeds, North-East and Down, South believe basically that market pressures will control incomes. Most of us on the Government Benches are not prepared to accept that the incomes of people in the different sectors of industry should be determined solely by the market place. I personally believe that there is a need for a permanent incomes policy and for permanent guidelines to ensure that there is fairness. That involves Government controls or guidelines to determine the growth of incomes overall within the economy. There is that fundamental divide. It is not simply a question of pulling levers in certain directions. The matter is more fundamental than that. There is a strong political content in the difference between the two arguments. Therefore, it is of fundamental importance that the Government reach another agreement with the trade union movement and employers founded on phase 3 of the incomes policy.

I was surprised that the hon. Member for Blaby spoke as though this country for a period of time had been without an incomes policy. He gave the impression that we had undergone a period when the freedom of the market place was allowed to operate to create economic growth. But if the hon. Gentleman studies history he will discover that we have had an incomes policy in most of the years since the Second World War. We remember Selwyn Lloyd's pay freeze and all the pauses and the norms imposed by various Chancellors, including those brought in by Conservative Governments. Various policies have been introduced and put into operation, and more often than not they have involved incomes policies.

I believe that the prices and incomes policy pursued in the late 1960s, with the establishment of a National Board for Prices and Incomes under Aubrey Jones, was the policy to follow. That gave us many benefits, and I believe that we should return to such a policy. I know that the trade unions object to the establishment of a body to arbitrate and police incomes, but I do not think that that course can be avoided. I believe that the two sides in price and pay negotiations must be brought together because the relationship between the two cannot be denied—nor can the relationship between prices and jobs.

It is important to ensure the closest possible link between prices policy and pay policy, not only for the reason that if people agreed to restrain their incomes they would feel some confidence in the fact that there was restraint on prices, but because of the direct link between price increases and pay levels. Furthermore, pay levels and the impact on prices are reflected in the number of available jobs. These are matters for the negotiators when dealing with pay matters.

It was most unfortunate that in 1970 the incoming Conservative Government abolished the National Board for Prices and Incomes. The reports of that body on relativities and other sectors of the economy are classics and still have great relevance today, even following the demise of the Board. We now need a body that can draw up criteria which are acceptable to trade unionists and which will embrace deep trade union involvement. The trade union movement must accept—and, indeed, has implicitly accepted in the last two years—that there should be discrimination in favour of the weaker unions.

Certainly the TUC must accept that point. Its pay policy has discriminated, for example, in favour of unions like USDAW. That union has received a £6 pay increase, but it would never have had that treatment under a free system of collective bargaining. We can find many other sectors in which lower-paid workers have received wage increases which they would never have obtained by free collective bargaining. Implicitly the TUC, by adopting the flat-rate policy initially, acted in favour of its weaker members. I believe that that principle should be enshrined in pay policy with TUC involvement, so that trade union members can be confident that it is being carried out fairly and without discrimination, otherwise workers will not tolerate such a system.

The trade unions and the people of this country must accept that there is a limit to the amount that the Government can do to restrain price increases. If the Government adopt policies urged by some people and by Opposition Members who are very much against Government intervention, there will not be sufficient funds available for investment or for the development of business and, therefore, there will be fewer jobs. If a company has to borrow because its prices are held down artificially, it will go bust and will go out of existence, and the jobs which it has provided will also disappear.

When we examine the experience of the public sector, we see what nonsense it is to artificially restrain prices in an industry such as the Post Office, an organisation for which I worked for three and a half years. At a stroke its prices were restrained. As a result, demand was artificially stimulated by the fact that telephone and postal charges were kept down. Such charges can be kept down by order or by whatever means the Government like to impose, but that policy will result in larger losses which have to be financed by the taxpayer. That is madness both for the customer and for the people working in the Post Office.

On the telecommunications side—the postal side has its separate problems—the Post Office will have to find this year £670 million for investment for new equipment and the renewal of equipment in order to keep the telephone system at least reasonably modern. If people object to Post Office price increases being made at the moment, let them tell us where the Post Office is to get that money. Profits of £400 million may sound substantial for the telecommunications side, but it has been estimated that in the short term the telecommunications business will need an investment of £1 billion a year.

Where is that money to come from? Should it be borrowed on the market at substantial rates of interest, with the public paying more in that way? Should it be borrowed from the Government, thereby increasing the public sector borrowing requirement, with all that that means in terms of inflation? Where is the Post Office to find the money? The simple answer is that the price of the service should be economic, which can be justified in the market place and will not stimulate artificial demand. I take the Post Office as an example of the nationalised industries. One could make the same sort of argument for the others. Where is the Post Office's money to come from if it is not to come from economic prices and investing the profits that are made?

Mr. Peter Fry (Wellingborough)

I am following the hon. Gentleman's speech with interest. Would he use the same argument in respect of agriculture and food prices, or in respect of the £500 million subsidies to British Rail? I am sure that the House would be interested to hear.

Mr. Wrigglesworth

I have two farms in my constituency, both owned by Wimpey, and both, I understand, are about to be developed into housing estates. I do not claim to be an expert on the farming industry. My hon. Friend the Member for Gloucestershire, West (Mr. Watkinson) might be able to tell the hon. Gentleman something about that.

But I would pursue my argument in the case of British Rail as well. I think that there is a straightforward and simple policy to be operated in that case. If the Government and British rail—or any other nationalised corporation—decide that a certain service should be kept going for social reasons, the Government should pay for it on that basis and the corporation should get a subsidy for it from the Government. For the rest, however, the business should charge the full economic price for providing its services. The prices to rail travellers from London to Edinburgh or elsewhere should be at the proper commercial rates, related to the cost of running the services properly and to the need for investment in electrification, new rolling stock and so on. If one keeps the prices of these services artificially low, one will not get investment and one will get demoralisation of staff. One will get bad service because there will not be the new equipment, new track and so on. That applies to virtually every corporation in the public sector.

The same thing applies equally to the private sector. I am not discriminating in favour of the public sector. But the public sector comes under fire on the prices front more than the private sector does, so I take the public sector as the example. The argument is equally strong in the private sector, however. One cannot hold down prices to any substantial extent.

It would be misleading to trade unionists to give them the impression that by the waving of a magic wand prices can be kept down. It is much better to be absolutely open and honest, as the Government have been in the discussions they have had with the TUC and as I hope they will continue to be publicly. For example, if the pound drops in the exchange markets by four points, I believe that the retail price index goes up by one point. That simply cannot be avoided. If the Government had introduced subsidies to cover the fall on the exchange rate and to keep prices at a level which would have shielded the consumer from the impact of that fall in the value of the pound, since the period just before Christmas it would have cost about £2 billion to £3 billion. That gives some indication of the size of the problem.

There is no way in which the Government can raise that kind of money in order to keep prices down. There is no way in which the Government can stop price increases caused by a fall in the value of the pound from getting through to the consumer, except, of course, by getting the pound to move up again by taking such measures as they took on 15th December. The rise in the value of the pound, from $1.52 to $1.72, has made a considerable impact since then, which will work through in due course on the prices front.

That is one factor, but there are many others, wage increases among them, which affect price increases in the shops, and it would be misleading for the Government or this House to give the impression that simply at a stroke prices can be held down. They cannot be held down to the extent that some trade unionists and certainly many housewives would like.

We have never misled the country in the last two years, in introducing the incomes policy, into thinking that there would be anything other than a fall in the standard of living. Both my right hon. Friend the Member for Huyton (Sir H. Wilson) and the present Prime Minister went on television and made speeches in the country talking about the hard time that the country would have to go through. I recall my right hon. Friend the Chancellor of the Exchequer making the same sort of speech. We have never tried to mislead anyone into thinking that the incomes policy would be matched by price reductions or by prices being held at the same level over the same period.

Admittedly we hoped that the price levels would go down rather more than they have done, and one knows the reasons why they have not done so. The main cause was the fall in the value of the pound towards the end of last year. The fact is, however, that everyone acknowledged that there was going to be a drop in the standard of living over the past two years. What people did not realise was that the way in which their standard of living would drop was that prices would increase faster than their wages. Price increases are getting through with a vengeance now, but that is what the Government have been telling the country would happen over the past two years, and it is somewhat peculiar that some people should now be expressing surprise that it should be happening.

The strategy which the Government adopted in the 15th December package and in the Budget will help to keep down prices in the long term, but it would be wrong to get the trade union movement to reach an agreement on any hope that the Government can somehow magically stop price increases from taking place.

I have two more points to make. The first is on the way in which the pound has risen in recent months and the implications of that movement. As my right hon. Friend the Chief Secretary knows, I am concerned that we have seen an inflow of hot money into London, which could give rise to problems if it were allowed to continue. Many of us on this side of the House were very pleased when the safety net agreement was reached. We were looking forward to the time when London would cease to attract that sort of money, or when it would be held in such a way as not to have radical effects on the value of the pound at a moment's notice. This can have an enormously damaging effect on the economy, as I have already mentioned.

There is considerable evidence that the Bank has been keeping the pound down in value by buying dollars. One has the impression that possibly a good deal of foreign money is flowing back into London. That is a rather worrying situation, because at some future time there might be vast withdrawals. If, for instance, pay scares suddenly blow up in the newspapers, we shall possibly have great withdrawals which could have an enormous impact. I should be grateful if the Chief Secretary, in his reply, would give us some information about that and tell us whether the Government are aware of the problem and are able to do anything to alleviate any difficulties that might arise from it.

There is ample evidence that industry has benefited considerably from the pound falling in the way that it did. Its competitive position on the export front has been improved enormously. Whether industry has taken all the advantages flowing from that is somewhat open to question. With inflation in this country still at a very high rate, however, it is important that we do not allow the pound to rise because of the prospect of oil coming in much faster than at present and thereby giving us a balance of payments surplus on current account which makes everything in the garden appear rosy. As a result of this, the pound could well float up again and be at complete variance with the facts of life for our exporters. If they have to face the problems of a 15 per cent. rate of inflation, their competitiveness is being eroded all the time. It would be very dangerous if the pound were allowed to go further and further up. We do not want to see the competitive position of exporters eroded because the situation is being masked by North Sea oil flowing in at a greater rate and improving the balance of payments.

Sir John Hall (Wycombe)

Does not the hon. Gentleman agree that it is probably even more dangerous for exporters to rely on price advantage through keeping the pound at an artificially low value? As the Chancellor of the Exchequer stressed, we should be relying on quality, design, service and all the other things which create a long-term market, which price advantage would not do.

Mr. Wrigglesworth

I accept the point that the hon. Gentleman makes. I think that too much stress is laid on the value of the pound. I know that my hon. Friend the Member for Southampton, Test (Mr. Gould)—I did not hear his speech—takes the view that the pound should be allowed to flow down and down, and that it could be devalued even more than it already has been in order to give our industries greater competitiveness. We could debate endlessly what is a competitive level for British industry. What is the starting point from which we take our judgment? At what point do we say that all industries are reasonably competitive—at what exchange rate and at what point of time? These are very difficult judgments to make.

I think there was general agreement that the pound was too high. It probably came down a little too low. All I am saying is that at present we have a good competitive edge, and I should not like to see that eroded by the pound rising on the strength of increased flows of North Sea oil. That competitive edge is already being eroded by inflation at 15 per cent., making the lives of exporters that much more difficult.

I hope that the Chancellor of the Exchequer and the Chief Secretary will endeavour to keep the pound at the sort of level that it has reached at the moment and will not allow it to rise up. I support their policy. As the year goes on, however, and if inflation continues at the sort of level that we have at the moment, I see no reason why the pound should not be allowed to float down in order to retain the present competitive edge.

There was one slight disappointment that I felt in the Budget concerning industrial strategy, although many of the things within it went along the industrial strategy road and were intended to help the various sectors of industrial strategy and back up the NEDC policy. I think that possibly more could have been done by the Government to support some of the work that the sector working parties in the NEDC have been doing and to support individual industries.

Some of the working parties had made specific requests to the Government for help. We need to have demonstrated in the trade union movement and on the part of Government that all Government Departments, including the Treasury, are working very closely with the Department of Industry and with the work going on in the NEDC so that we may have a comprehensive industrial strategy. We do not want strategy comprised of little bits and pieces, with the Department of Trade doing its thing, the Department of Industry doing its thing, the NEDC working parties going off and doing their things and the whole process not knitting together with the support from the Treasury that our industrial strategy will need in order to be a success.

Mr. Deputy Speaker (Mr. Bryant Godman Irvine)

I understand that the Front Bench speakers will start at 9 p.m. Six hon. Gentlemen were trying to catch my eye when I made the last count. I leave the rest to the good judgment of hon. Members.

8.27 p.m.

Mr. Dafydd Wigley (Caernarvon)

I will indeed, Mr. Deputy Speaker, be somewhat shorter than the previous speaker. It is a reflection on the times that the eulogies of the hon. Member for Thornaby (Mr. Wrigglesworth) on the Budget followed the comment by the hon. Member for Blaby (Mr. Lawson) that it was a Tory Budget. The main argument we have just heard was in favour of economic pricing. This is an apposite reflection on the time of "Lib-Labery" that we are living through.

With regard to the lack of strategy as seen from my part of Wales, we feel very much the transfer of resources that the Government have been pursuing over recent months—and it is continued in the Budget—from rural areas to the inner city areas. This has come out very clearly in the Budget. The Government have been quite open about it. But to have it following on the cutting back of the regional employment programme will mean devastating effects in areas such as mine. They will be underlined even more by the effect of the increase in the cost of petrol, to which I shall return.

The strategy we were looking for was one to deal with unemployment. As the hon. Member for Norfolk, North (Mr. Howell) said only a few moments ago, one of the important things to secure is the best possible ratio of people in productive employment to the total population, yet we have not seen any strategy in the present Budget for achieving this. We would have looked for that sort of strategy, particularly trying to use the 20 or 30 per cent. available capacity that exists, as well as the available manpower in the people who are presently unemployed or who are in the labour reserve.

With regard to petrol prices, the proposed increase will affect my area very badly. We do not have, as London does, a Tube service, and we barely have a railway service. Our bus service has been devastated. Because of this, car ownership in my area is well in excess of the United Kingdom average, yet the average personal income levels are about 55 per cent. of those in the United Kingdom. Cars are not luxuries in my area but necessities for everyday life and for getting to work.

The increase in the cost of petrol means that some people will have to move their homes and others will choose not to go to work because the differential between what it is possible to get by being out of work and what one gets for working will have been eroded. Only a couple of weeks ago some pensioners from the tip of the Lleyn Peninsula in my constituency came to see me. They were over 70 and partially disabled and they lived two miles from the nearest shop. They could not get transport assistance under the mobility allowance, because they were too old. They had to keep a car, which will now be priced out of their reach. Presumably, the Government's strategy for them is that they should go back to the horse.

The Government's policy will also be a great disincentive to new employment in these areas. The input of transport costs for companies moving there is greater than the average for companies throughout the economy.

One aspect of this increase which has not so far been mentioned is that, as the price of petrol goes up, petrol stations have a problem with their pumps. The cost of replacing some will be about £1,000 each, a substantial sum for small petrol stations. Indeed, even the most recent pumps, which can be adapted, will cost £300 each to be adapted when they go over the 92p per gallon mark, which is being rapidly approached in areas like mine.

On pay policy in stage 3, we should prefer the abandonment of any attempt to fix so-called "fair" wages by a bureaucracy out of touch with reality. Instances in my constituency of the lack of fair play in the present system go to the heart of the matter. For instance, when the two sides of the present water authority were brought together in 1974, they had different pay structures. The difference now between workers doing exactly the same work side by side is over £15 a week. People cannot be expected to tolerate that sort of unfairness much longer. Greater flexibility is needed, if not an end to the present system altogether.

I have one comment on the empty Liberal Bench in front of me. The vote or the lack of a vote by the Liberal Party on petrol costs tonight—the main Division that we shall have—will be noted in my constituency, throughout rural Wales and, I suspect, throughout rural Britain. Every time people fill their petrol tanks, that extra 5½p will be the price of the Liberals.

8.32 p.m.

Mr. John MacGregor (Norfolk, South)

I wish to deal with two points—the Chancellor's tax strategy and one aspect of the pay policy. I had the overwhelming impression from listening to the Chancellor last week—an impression which has been reinforced by all the thinking that I have since given to the Budget—that this was an illustration of a sinner repenting his past sins, but only just. It was like an alcoholic who announced that he had decided to reform and that in future he would drink only three-quarters of a bottle of whisky a day rather than a whole bottle.

Although I welcome the switch, back from direct to indirect taxation as far as it goes, as do so many of my hon. Friends—we have been pressing for it for so long—there is still a long way to go. From the many complaints that I have heard in my constituency, I know that the tax burden is now one of the main items worrying people. When the fog of the Government's smokescreen about what they have done to help on direct taxation this year blows away, it will be seen that the Budget has made only a small dent in the problem, that it has probably left most people roughly back to where they were in taxation terms this time last year, and that for the coming year they will only stand still. Thus, the three groups with whom we are particularly concerned on the tax front are still relatively unaffected, and their problems still need to be tackled.

The first group is those affected by the problem of the poverty trap and the fact that it now often pays people on lower incomes to stay out of work rather than be in work. We shall have time in Committee to debate this matter thoroughly and to consider all the figures, but my early calculations suggest that, although the Chancellor and the Chief Secretary promised before the Budget to do something about this problem in the Budget, they have done very little, particularly when one takes into account the fact that social security tax-free benefits will be uprated next November.

I am not surprised that the Chief Secretary hedged last week about how the benefits would be uprated. If we knew the figures now and compared them with the tax reliefs given to the lower paid who are in work, I believe that we should see that this poverty trap problem and the problem of people being better off out of work will be exacerbated and not improved come next November by the measures in the Budget.

Secondly, there is the problem of differentials. This is dealt with only in tax terms in this Budget by the 2 per cent. provisional concession on the standard rate. After all, increases in allowances will apply to the lower paid as well as to the skilled. When one sees that that tax relief amounts to only £20 per £1,000 of extra income gained by the better paid, the skilled and so on, one can see that in tax terms the Budget has not greatly dealt with that differential problem.

Finally, there is the management group. Although it looks as though in general money terms big concessions have been given to various levels of management, when we look at the realities, both in relation to inflation since 1974 and in terms of international comparisons, we see again that it is only a small dent in the problem. The starting point for the higher rate of taxation, to go back to the 1974 level, would not be far short of £10,000. That is some illustration of the scale of the problem still to be tackled.

When we compare all the international tax levels, as illustrated in the forceful speech of my hon. Friend the Member for City of London and Westminster, South (Mr. Brooke), from his special knowledge and experience, we see again that the difference made in this Budget in making British levels more competitive is very small, especially when we take into account that for many management groups there will be disadvantages in the coming year. There will be claw-backs on the child benefit, an extra impost for some on company cars, and the increased national insurance contributions for most in the higher income ranges.

The burden of direct taxation is now leading to fairly massive evasion, not avoidance, of the tax system throughout the country at all income levels, notably at the average level and below. When I look at the general figures for what should have been the reduction in the standard of living and compare price increases with income increases within the past year, and when I look at what is happening in the shops, I wonder how anyone can afford to buy things such as expensive furniture and so on. Yet massive buying is still going on.

So this is becoming a cash economy and people in a cash position and able to evade tax have kept their standard of living moving ahead. It is the ordinary people, the PAYE workers, who are suffering, unless they moonlight and get cash. Moonlighting is going on on a large scale throughout the country. It is only by much bigger tax reductions that we shall see it reduced.

I do not believe that anyone will be fooled in the long run by what the Chancellor has done by this switch of direct taxation. Everyone knows that it results from a deliberate policy of high taxation, high Government spending and high Government borrowing over the past three years. The Chancellor has been boxed in today by the steps he has taken over the past three years, and as a result he will cover people only for inflation in the coming 12 months.

This has been a poor Budget too for the rural areas. I do not need to elaborate the point about petrol, because it has already been well put. Except to say that I do not believe that the Government understand that the car is becoming even more of a necessity in rural areas. Over recent years, as things have become worse and public transport has practically disappeared, the car has become more important.

I should have hoped that the Government would learn their lesson as a result of the 25 per cent. increase in VAT which they imposed two years ago and which had such differentially damaging effects for certain areas of the economy. By putting so much of the strain of the increase in indirect expenditure on perol the Government have repeated the same mistake. This is a mistake in terms of the political reaction and the economic consequences.

I do not agree with those who say that it would be the wrong time today, with the negotiations for a new pay policy coming forward, to seek to raise VAT to 10 per cent. I believe that spread across the board in that way, people would have accepted the extra impost much more than they will by way of this high concentration on petrol tax.

I regret that all the measures affecting the construction industry have been concentrated on the urban areas. None will touch the rural areas, where levels of unemployment in the industry are as high proportionately, as in the inner urban areas.

I regret that the Chancellor did nothing in tax terms to help the farmers who are facing rising costs. The petrol increase will hit them particularly hard. Some months ago the Minister of Agriculture, in compensation for the fact that he would do nothing else to assist farmers to overcome their declining incomes and rising costs, said that he thought there was a great deal of merit in the tax proposals to average out profits or losses over a three-year period. That would at least have done something to encourage farmers and I regret that the Minister of Agriculture, Fisheries and Food failed, if indeed he tried, to persuade the Chancellor to introduce that measure at this time.

I hope that there will be opportunities in Standing Committee on the Finance Bill to say some of the many other things that I wanted to say about the Budget. I want to conclude by making one point on the question of pay policy, which has dominated so much of our discussion during this three-day debate. If my right hon. Friend the Member for Down, South (Mr. Powell) will forgive me, given the shortage of time, I shall not enter into the argument about whether there should be a pay policy at present.

I shall concentrate on one point. If there is a pay policy, and even after the flexible phase 3 disappears and there is either no pay policy or a semi-statutory pay policy, the biggest area of difficulty will be the difference between the private sector and the public sector. I believe that in the private sector, whether the pay policy is flexible or whether, indeed, there is no pay policy, the realities of the economic situation and the sanction of the need to make profits will do a great deal to ensure that such pay increases as are granted are kept at levels that the economy can afford.

The danger is the public sector, where there is not the sanction of profits and where there are also at present strong monopolistic unions trying to exert influence over the formulation of forthcoming policy. My hon. Friend the Member for Blaby (Mr. Lawson) said that he thought that the system of cash limits was the answer. I believe that that is right. But any such system would have to be heavily reformed to make it into the proper weapon that is needed.

It is easy to stick to cash limits, particularly the block units relating to pay, when there is a fixed pay policy. It may even be comparatively easy next year, because most of the pay negotiations in the public sector will take place at the end of this fiscal year and, therefore, will not greatly increase the cash limits laid down in the White Paper. The problem will come after the forthcoming year. The cash limits will be settled after the negotiations on pay for that forthcoming year have taken place. It should be the other way round.

Cash limits are a system designed to carry out what the economy can afford in terms of the public expenditure in each of the different units. That is how the system should be used, but for that to be done effectively and to ensure that we have a sanction in the public sector equivalent to that in the private sector and in the nationalised industries, provided that the latter subsidies are not allowed to run away, it must be a reformed cash limits system.

If it is to be changed into such a weapon, a start must be made now. It will be too late to think in terms of changing the system in the autumn. I hope that the Government will apply their minds to reforming the cash limits into that system now.

8.37 p.m.

Mr. John Watkinson (Gloucestershire, West)

I endorse what the hon. Member for Norfolk, South (Mr. MacGregor) said about the possible tax concessions which the Chancellor could have made to agriculture. I know that the Minister of Agriculture, Fisheries and Food was keen that "the rolling system" of the payment should be incorporated in this year's Finance Bill. I can only assume that he has had to spend so much time in Europe that he has been unable to catch the Chancellor's ear. It is a very important advantage which could be given to farmers, and it would benefit the community at large.

I also agree very much with the hon. Member for Caernarvon (Mr. Wigley) about the problem of rural areas and the imposition of the petrol tax. In my constituency in West Gloucestershire the vast majority of the workers must use cars to get to work. It may be argued that the majority of people have to use cars. The point about rural areas is that there is no choice: there is no option. This is the fundamental point that I suspect that the Chancellor did not grasp. So in a real sense this imposition will mean an increased burden on those who must travel to work in rural areas.

One of the most depressing things I saw today was the statement issued by Chancellor Schmidt at the Labour summit over the weekend in which he indicated that West Germany would not expand its economy to mop up the unemployment in the rest of Europe. I find that disappointing in this sense: as has been spelled out by President Carter and, indeed, by hon. Members, unless countries which are in surplus and which have their inflation rates under control are prepared to expand their economies, it will become virtually impossible for an economy such as ours to expand.

Each of the Keynesian booms engineered in this country has foundered on the fact that the balance of payments is destroyed and we go into vast deficit. Unless countries such as the United States and Germany which are in surplus are prepared to expand, there will be no scope for us to expand our exports into their markets. Therefore, I should like the Prime Minister and President Carter at the coming summit to put all possible emphasis on the argument that economies in surplus should expand to allow economies such as ours to expand. I am aware that it may well be possible in 18 months for us to undertake an expansion in Keynesian terms because of the oil which will be flowing in and because our balance of payments can be protected in that way, but with our present disastrously high level of unemployment it is virtually impossible for us to go for expansionist policies unless other economies expand.

I turn briefly to the question of incomes policy, which has dominated this debate. Like my hon. Friend the Member for Thornaby (Mr. Wrigglesworth), I would welcome another round in the pay policy. I appreciate the difficulties. It is sometimes said "If we do not have a stage 3, there is no incomes policy". There is an incomes policy and it is dead similar to that which would be proposed by the Opposition. It was delineated in the letter to the IMF in which we indicated that we would have to keep our money supply within certain very strict limits. If we do not have a pay agreement, the limit will operate, and that money supply limit is the incomes policy.

In those circumstances, the strong, such as the miners, may be able to get their wage increase, but the weaker unions will not. There will be a limited amount of money available if we adhere to the IMF Letter of Intent. The strong will succeed and the weak will go to the wall. The prospect will be even more unemployment in key sectors of the economy. This is why I am in support of an incomes policy.

The hon. Member for Blaby (Mr. Lawson) made some sensible comments. In time we shall have to move towards an understanding in terms of incomes policy. My hon. Friend the Member for Thornaby suggested that we should have a permanent incomes policy. In a free society like ours it is very difficult to sustain for long an incomes policy of that institutionalised nature. A process of education and awareness must be gone through. However, at present I would support the Government's efforts to obtain a new incomes policy.

One of the duties of hon. Members is to serve on Select Committees. I serve on the Public Accounts Committee. Recently Lord Ryder gave very instructive evidence to the Committee. He indicated that our present financial institutions were not able to cope with the small firm which wanted to obtain finance and that the National Enterprise Board was stepping in to fill the gap, and filling it successfully. Therefore, it is for this reason that I advocate and support even more expenditure being set aside for the NEB.

I conclude with this remark: It is absolutely crucial, if the Western world is to go forward and expand, that it be made clear at the economic summit in London later this year that the German economy in particular should follow the path that President Carter is presently pursuing in the United States, to the benefit of us all.

8.55 p.m.

Mr. David Price (Eastleigh)

In the few moments that I have available to me, I wish to comment on the intervention that I made during the speech of the Chancellor of the Duchy of Lancaster, referring to the standard of living. This is my major point. The figures given by the Chancellor of the Exchequer in his Budget and in the Red Book amount to a reduction in the standard of living of the average Briton.

Ministers made odd faces at me when I intervened, but the Chancellor is expecting a minimum growth rate of 1½ per cent. The growth in manufacturing industry is put at 2½ per cent.—but I shall come back to that in a moment. The best estimates of the Chancellor show that by the fourth quarter of 1977 the rate of increase of inflation will be 13 per cent. We can assume that over the whole year the increase will be higher than 13 per cent. This must mean a reduction in the average standard of living. That does not make the chances of the Government negotiating a stage 3 on pay very hopeful.

I now take up a point with the Chancellor on the growth of manufacturing industry. At the beginning of August last year the Government announced scenario 2, their great industrial strategy. It involved a growth rate for manufacturing industry of 7.9 per cent., sustained over five years. I have questioned that in the House on a number of occasions and I spoke on it during one of the Christmas Adjournment debates. Out of that it has emerged that these figures are totally unattainable and that in order to reach that scenario 2 target, because the first year has gone by with an average growth rate of 0.8 per cent., all the other figures must be revised upwards. I was in correspondence with the Minister of State during the Christmas Recess. He admitted that my revised figures were correct and that, if I had erred in any way, I had underestimated the increases that would have to take place in order to meet scenario 2 targets.

However, the Chancellor in his Budget Statement said that aim for manufacturing industry in 1977 is 2½ per cent. I therefore ask what has happened to scenario 2. I hope that it has been completely forgotten, because it was a completely illusory set of targets. Where, therefore, is the Government's industrial strategy now? The House will recall that during the recent no-confidence debate the Prime Minister made a great deal of the importance of the Government's industrial strategy. I ask again, where is that strategy? It seems to me that the Prime Minister's attitude is like that of the Fiddler on the Roof—"If I were a rich man"—"If I had an industrial strategy."

This year's Budget has brought out the truth that most of us knew but did not always put together in a simple proposition—namely, that inflation is a tougher taxing master than the Chancellor. The Chancellor has made considerable modifications to income tax. I certainly welcome them, but at the end, when all the modifications have been implemented, they will not restore in real terms the position that the majority of taxpayers had a year ago, let alone three years ago.

I also wish to draw the attention of the House to capital gains tax. Whatever may be the arguments for or against the tax or any particular rate, all of us would agree that the tax should be on real gains and not on paper gains. Since the present Government have been in power there has been 70 per cent. inflation. Therefore, a person who owned an asset worth £1,000 three years ago—assuming that the asset merely kept its market value—would have made a paper gain of £700, upon which he would be liable for capital gains tax. In reality, there would be no gain.

Thus, our system of capital gains tax has been turned into a wealth tax. Whatever one thinks of a wealth tax, it should be operated openly and cleanly. It should not be disguised as a capital gains tax. No effort has been made by the Government to correct paper gains by any form of indexing so that chargeable gains are real and not paper gains. We see the same thing with income tax.

I should like to refer to the across-the-board problems of middle management. I declare an interest because I have been a middle manager for most of my working life. I profoundly agree with what has been said about the importance of manufacturing industry. There is a lot of talk about the TUC and the CBI, but we must consider the man in the middle, the manager.

In order to show the House the seriousness of the situation, I should like to quote from a survey by Opinion Research Centre entitled "Motivation of Management". It says of British managers: They are embittered, demoralised, and demotivated. The majority are undergoing real hardship in view of the financial squeeze on them caused by high taxation, salary freeze, narrowed differentials, and inflation. The Budget assists them only marginally.

As regards tonight's vote, a lot has been made of the imposition of the increased petrol tax on motorists, particularly those in rural areas. The hon. Member for Gloucestershire, West (Mr. Watkinson) may not have agreed with the earlier part of my speech, but he will agree with what I have just said because he has made the same point himself. What will be the attitude of the Liberals tonight? None of them is here at the moment. Perhaps they are taking their abstention to the point of not being in the House at all.

In the recent no-confidence debate, the Leader of the Liberal Party made a great point of wishing to see stability. He said that if the Government were to have a fair chance they required stability, and he and his party would provide it. Having seen the posturings and apings of the hon. Member for Cornwall, North (Mr. Pardoe) on our television screens over the weekend, one wonders where that stability is now. The hon. Member was behaving like an infant Malvolio. Some are born great, some achieve greatness and some have greatness thrust upon them, but the hon. Member seemed to feel himself great in all three respects.

The Liberal Benches are empty, but perhaps I could offer that phantom party the advice of an extremely acute political journalist who said: He who is the cause of another becoming powerful is ruined. That was written in 1513 by Nicolo Machiavelli, who, the House will recall, was the Robin Day of his times. There is little doubt that the Liberal Party will live to regret having taken up the cause of rural transport and then having abandoned it on the grounds of a spurious deal with the Government.

9.0 p.m.

Mr. John Nott (St. Ives)

It is a pleasure to open my speech by congratulating my hon. Friend the Member for City of London and Westminster, South (Mr. Brooke) on his excellent maiden speech. He will bring to our debates much-needed experience of management and management recruitment where he has clearly learned that short speeches endear a speaker to an audience even more than a curriculum vitae as impressive as his own.

I never had the privilege of serving in the House with the hon. Gentleman's distinguished father. I joined the House with Mr. John Smith, who was his predecessor but one. I think that he was one of the most modest and witty speakers that all of us can remember in the House.

I am sure that my hon. Friend will be his equal in every way. My hon. Friend represents, as he said, a vital sector of our economy, namely, the City of London, which is possibly as successful as our manufacturing sector has been unsuccessful in recent years. Since he represents the second most prominent constituency in the country—my own is the most prominent—I am sure that he will be a worthy Member of the House, and we certainly welcome him here to our debates.

I have a feeling that the House tonight is possibly rather more interested in politics than in economics. In spite of this, I hope that I shall be able to refer briefly to the Budget, since some of this debate has been concerned with the Budget and not with wider matters.

Reversing my normal practice, I want to spend rather more time on the subject of the tax changes and Budget Resolutions than on the Budget strategy, but I shall say a few words about the Budget strategy at the outset. I shall take last Wednesday's speech by the Chief Secretary to the Treasury as my text for some comments on the Budget strategy. The Chief Secretary, echoing the words of the Labour Chancellor, said: The Budget will, I believe, be seen as an important turning point in progress towards achieving our objectives of full employment, steady economic growth and inflation no higher than our competitors'."—[Official Report, 30th March 1977; Vol. 929, c. 446.] That was a modest claim. There were no miracles there, no economic breakthroughs, no rose-tinted dawns, simply a turning point, a turn. That is a phrase more usually used to describe a sharp twinge of indigestion than a shift of economic circumstances. But I am prepared to examine the claim on its merits.

The Press suggests—and for all I know the Leaders of the Labour and Liberal Parties actually believe it—that if they can hang on, whatever the humiliation and indignities, until 1978, the Government can hope for better things. I shall return to the subject of hope in a moment. With that in mind, I went to the Red Book to see what I could find.

I examined the turning point towards full employment. The House should not be deluded either by the private forecasts of some Cabinet Ministers of 2 million unemployed or by the figures of the past two months, which have been more satisfactory. The Chancellor was wise to end his speech with a note of caution on the unemployment figures. The Red Book is very illuminating on this. On page 10 it states clearly: The prospect is for a continued modest increase in demand and output at a rate below the prospective growth of productive potential. Even economic illiterates, who have been referred to by Ministers, must know from the Red Book's own figures, that that means rising unemployment, according to the Government's belief. I cannot see much of a turning point there.

I come now to the Chief Secretary's phrase "steady economic growth". Table 5 of the Red Book shows that the index for gross domestic product stood at 100 in 1974 and that in 1977 it was 99.9. There is not much steady economic growth there. The GDP had actually fallen. In the first half of 1978 it is forecast to rise to 101.1, which is growth of a sort, but which is at half the rate experienced in the past 10 years. Quite frankly, I do not see the turning point there, either.

Finally, the Chief Secretary said that we might be able to anticipate a turning point towards inflation which was no higher than that of our competitors. The forecast in the Red Book for inflation is 13 per cent. from the fourth quarter of 1976 to the fourth quarter of 1977—

The Chancellor of the Exchequer (Mr. Denis Healey)

No.

Mr. Nott

Perhaps the Chancellor will correct me.

Mr. Healey

The rate to the fourth quarter of 1977, which is the year we are now in—I believe that the hon. Member's enthusiasm betrayed him there—is the rate for the fourth quarter of this year, and very likely the figure given would be that for November this year.

Mr. Nott

The Chancellor clearly needs the assistance of the hon. Member for Cornwall, North (Mr. Pardoe), who now advises him on these things. I think the Chancellor confirms what I actually said.

If 13 per cent. inflation is progress, it is hardly acknowledged as such by anyone outside the Labour Government, not least because the people in the country have been repeatedly told to expect single-figure inflation. With each forecast single-figure inflation recedes further into the distance, and even the forecast for the future is higher than the rate at which inflation was running when the Labour Government assumed office. In fact, the latest forecast is so hedged about with qualifications that it is almost worthless. The Red Book's forecasts are estimated on the basis that an agreement on pay increases after July 1977 holds the rate of increase of earnings close to that experienced under the present pay limit. That is around 12 to 13 per cent.

Many of my right hon. and hon. Friends—including my right hon. Friends the Members for Chipping Barnet (Mr. Maudling) and Worcester (Mr. Walker) and my hon. Friends the Members for Croydon, South (Mr. Clark), Horsham and Crawley (Mr. Hordern) and Blaby (Mr. Lawson)—have discussed the rate of inflation and the effect of the pay deal upon it. My party has been constantly challenged to say what its pay policy is. My hon. Friend the Member for Croydon, South tried to find out from the Chief Secretary during the second day of our debate precisely what is the Government's pay policy. My hon. Friend asked the Chief Secretary: The Government have said that the reduction in the standard rate of tax from 35p to 33p is dependent upon a satisfactory incomes policy being arranged. … Will the right hon. Gentleman be a little more explicit about the conditions that are attached to the ordinary taxpayer paying a standard rate of 35p or 33p? The Chief Secretary replied: Clearly that depends upon the Government remaining in office, which I am sure they will do for a very long time. Equally, I am confident that we shall be able to negotiate a satisfactory pay deal. My hon. Friend the Member for Horsham and Crawley then intervened and said: As the right hon. Gentleman is so interested in our incomes policy, perhaps he would be good enough to tell us what the Government's incomes policy is. The Chief Secretary then replied: It was crystal clear to me and my hon. Friends that, subject to our achieving a satisfactory pay deal, there would be a 2p reduction in the basic rate of tax. My hon. Friend the Member for Guildford (Mr. Howell) then came to his feet and said: As the right hon. Gentleman is being so coy about the contents of his cash limits White Paper, will he confirm to my right hon. Friend the Member for Worcester (Mr. Walker) that the figure he has in mind is a 10 per cent. increase in gross earnings for 1977–78"? To which the Chief Secretary replied: Hon. Members should know better than that about cash limits. The cash limits White Paper contains assumptions not forecasts, of what will happen in a pay deal. He then concluded his remarks with the comments: I am paid to answer questions".—[Official Report, 30th March, 1977; vol. 929, c. 453–5.] That brings me to the Chancellor of the Duchy of Lancaster. He spent more time intervening in the speeches of my hon. Friends and asking them questions than he did in giving way in his speech on the subject of conservation. I shall return to these comments in my perora- tion, which also embodies the Liberal Party as well.

In contrast to the Chief Secretary, my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) was clear and explicit about what we hope to see in this area. In his speech on the second day of the Budget debate he made it absolutely clear that the money supply should be firmly and steadily controlled. In early 1976 the domestic supply of money far exceeded the demand for it. In fact, M3 was held only because of a substantial cash outflow on the balance of payments.

The Government's deficit should be firmly controlled and we are unhappy about the size of the public sector borrowing requirement this year and next year. Cash limits over Government expenditure should be firmly controlled, and this requires political will. Cash limits for public sector pay should be equally firmly controlled.

We must redesign the cash limits system or the public sector pay settlement arrangements so that the timetable embodies the cash limits to act as some kind of regulator of public sector pay, rather than the arrangements that exist now whereby the pay settlements are put into the cash limits after the event. There is a serious point of the redesignation of the cash limits system to help us use it for public sector pay. These explicit suggestions made by my right hon. and learned Friend the Member for Surrey, East went far further than anything that we have heard from the Government in this debate about phase 3.

The right hon. Member for Down, South (Mr. Powell) appears to have left the Chamber, but I shall answer his point and he can read it in Hansard in the morning. He said that Government policies were, on the whole, correct, but that they could be damaged by an impractical and dangerous phase 3. He did not want phase 3 at all. Earlier he implied that phase 2 had been ineffective and that the settlements under it were just as high as they would have been had the pay policy not existed.

But the Government must have phase 3 because, effective or not, it has been announced to the world as a vital necessity for the health of our economy. I predict that the Government's proposals when announced will be so loosely drawn that they will constitute the mere shadow of a pay policy rather than the substance of one. However we must wait for that and see what the Government produce in due course.

In one or two respects the Budget has been an encouragement to us as my hon. Friend the Member for Blaby has said. I refer particularly to the pointers the Budget has given towards a more sensible all-party consensus about the levels of direct taxation. It was welcome to hear a Socialist Chancellor admit for the first time that I can remember in this House that a reduction in the burden of direct personal taxation can contribute to the attack on inflation and to the improvement of industrial performance.

At one stage the Chancellor waxed lyrical about incentives. In my 10 years as a Member of this House I have never before heard a Socialist Treasury Minister admit that incentives existed. That was an important departure. We are delighted that the high flyer of £25,000 a year will benefit by a reduction in tax of £900 this year, or £18 a week. It will make it easier for us to extend this process when we come to office.

The raising of the limits for self-employed annuities were also very welcome, and we give the Chancellor particular credit for that. The rise in the corporation tax threshold for small companies is also welcome, as is the partial raising of the threshold for the surcharge on savings income.

But I regard the lowering of the starting point for the so-called investment income surcharge as probably the meanest act ever perpetrated by any Socialist Government. I take a personal example. I have never understood why my father, who saved all his working life for his retirement and never inherited very much, should pay tax at a marginal rate of 50 per cent. on his savings income, at a level of retirement income about one-third that of the national average wage. [Interruption.] "The marginal rate of tax" is what I said, not the "average" rate.

What is Socialist about the process I have just described? I have heard a succession of Socialist Treasury Ministers, far richer than my father will ever be, justify it as fair to the working man. Where is the justice in that? If there is bitterness in our society, Labour Ministers might sometimes contemplate the plight of the thrifty among the elderly retired and what has been their fate under this Government.

I have to leave tonight the other major casualties of Socialism. As always, the main casualties are the poorest sections of our community. There were references to the widening of the poverty trap this year in a very useful speech by the right hon. Member for Blackburn (Mrs. Castle), a good speech by the hon. Member for Thurrock (Dr. McDonald), and speeches today by the hon. Member for Huddersfield, West (Mr. Lomas) and my hon. Friends the Members for Norfolk, South (Mr. MacGregor) and Norfolk, North (Mr. Howell). Following the uprating in social security benefits in November, and on the assumption that they will rise broadly with inflation, the poverty trap will be greater as a result of this Budget, not less. Once again the poorer sections of the community have suffered at the hands of a Socialist Chancellor.

I must now come to what are perhaps more controversial matters—shall we say "more inflammatory matters"?—such as the petrol tax and in particular the mysterious working of that most important constitutional innovation, the consultative committee, or the Foot Committee, which has now been charged with the governance of Britain. I do not know where the author of that great work, and certainly the author of most of our misfortunes, is now. Perhaps he is in my constituency in the Isles of Scilly preparing his successor's Dissolution Honours List. I do not know where else he might be. Not even he, not even the right hon. Member for Huyton (Sir H. Wilson), with his talent for manipulation, could have foreseen that the right hon. Member for Ebbw Vale (Mr. Foot) would eventually have risen to supreme power in the land, not with the unanimous approval of the Tribune Group, but by the approval of 20 members of the Liberal Shadow Cabinet, 10 of them Members of the House of Lords.

Mr. Pardoe

That is not true. The hon. Gentleman should get his figures right.

Mr. Nott

I have in my notes "Lord Byers, Lord Wigoder, Lord "Aviary" and Lord Henry of Minced Morsels, Caligula's horse. Another is "Lord Mackie of Banshee". I thought that Banshee was in the Punjab. The Sun newspaper dealt with the matter very well when it said the other day: To be the Liberal Shadow Minister without portfolio implies a still emptiness hitherto only achieved by the holy men of the East. I thought that that put it particularly well. I hope that it is not indecent of me to recall that the right hon. Gentleman's distinguished father—Mr. Isaac Foot was certainly a very distinguished man, a West Country Liberal of considerable repute—was defeated in my constituency of St. Ives in the 1930s. That was the loss of a traditional Liberal seat by an unknown National Liberal called Mr. Alec Beech-man. The association of the Foot family with Liberalism, although distinguished, has not always found favour with the electorate of St. Ives. That now appears to be the case with the electorate of Stechford.

I speak with all the authority of being the ex-Leader of the National Liberal Party in the House of Commons. I was the last National Liberal Member of the House of Commons and I appointed myself Leader. My family all became members of the National Liberal Shadow Cabinet. My right hon. and learned Friend the Member for Huntingdonshire (Sir D. Renton) gave our room to the Liberal Party. I am trying to get it back again. If there is any split in the Tory Party on policy, it is on this very subject.

The only justification that we have had for the Chancellor's policies is that the FT index apparently rose at the moment when it looked at if the Tory Party was about to win the vote of no confidence. I never thought that I should hear the member of any Cabinet, let alone a Socialist one, justify Socialist policy by the movement of the FT index within one Stock Exchange account. It proves that the Government have the vision of the third-rate stockbroker. It proves absolutely nothing else.

If the FT index is that important to the Government, I quote from the financial page of The Guardian of several months ago: Uncertainties created by Mr. Wilson's planned resignation sent a nervous shudder through the markets which had the largest fall for 18 months. It seems that shortly before the present Prime Minister was to assume office the FT index fell by an even greater amount than the other day.

I turn specifically to the Budget Resolutions, especially the increased tax on petrol. Shortly after the oddest marriage of convenience and perhaps the shortest political honeymoon in history, described in the most graphic phrase by the Liberal candidate for Stechford, which I cannot repeat, the hon. Member for Cornwall, North made one of his several hundred statements on the marriage. The hon. Gentleman, like some young, inexperienced bridegroom gloating over a rich but raddled old spouse, said: We give notice to the Labour Government here and now that we have not come along just for the ride—we are in this business to get things done. Three days later, as we know, the Labour Chancellor took the Liberal Party for the most expensive ride in history.

According to the RAC, the cost of motoring for the average driver has risen by £5 a week in the past year. The general increase in prices since February 1974 has been about 70 per cent., whereas the tax on petrol has doubled, as has the Excise duty. Both taxes have risen considerably faster than has the Index of Retail Prices.

Yet despite universal derision for the statements and counter-statements by a whole string of the Liberal Shadow Cabinet and against public blackmail by the Chancellor of the Exchequer—the headline in The Observer yesterday said "Callaghan Bullies Liberals into line"—and contrary to every word uttered and every vote cast on the subject, it appears that the Liberals tonight will pluck up their courage and abstain.

That is an odd state of affairs, because they have always criticised the Back Benches of both main parties for supporting loyally their Governments in office. But Back Benchers support their Governments because they want to keep them in power. That is power with responsibility. The Liberals have obtained responsibility with no power at all. They have no power over the Labour manifesto—and it will not be a social democratic manifesto. It is all set out in a little red book which I have in my hand entitled "Labour Programme for 1976".

But it will not be the Prime Minister or the Chancellor of the Exchequer who drafts that manifesto. It will be drafted by hon. Gentlemen below the Gangway. Furthermore, there is a report printed within a lavender cover setting out the proceedings of the Labour Party Conference. It is the Labour textbook and shows what the next Labour Party manifesto will contain.

The Liberals will have no power over the timing of the election. The policy to be adopted by Labour at the next election will not be formulated by the "Foot Committee"—in other words, by the consultative committee—but will come out of this red book.

I do not understand why the Chancellor, who presumably wants this support of the Liberals, did not know that he would gravely embarrass the Liberals by the way in which he has acted. The only explanation I can find is that he has contempt for Liberals and equal contempt for his own party, as the Stechford result has shown. It is true that the late Mr. Jenkins—or should I say Mr. Jenkins late of Stechford?—did his worst for Dudley and Meriden in 1968. There is an honourable tradition in the Labour Party for Chancellors to ignore their colleagues. But it is odd in these circumstances, because the Chancellor knew that the Liberals, the rear end of the theatrical horse, would have supported an increase in VAT to 10 per cent., and he also knew that the Conservative Party would have supported such a move.

In every speech made by the Chancellor in the last year he has extolled the non-regressive nature of VAT which, he said, because of zero-rating should not fall on essential goods, such as food. Having prepared the country for an increase in VAT which people were expecting, he slaps a major increase on the most essential item of all—essential to the rural commuter, the shift worker and in many cases the elderly retired person.

Energy savings will be highly restricted, as everybody, except the Chancellor of the Duchy of Lancaster, well knows. The Chancellor of the Duchy should have taken the trouble to consult the Departments of Energy and Environment before he came to the debate. I have read evidence given by the Department of the Environment to a Select Committee in which it clearly sets out its view. I shall pass that report across the table to the right hon. Gentleman, if that is not contrary to the procedures of the House. He will there read the answer he should have given in this debate. Obviously the right hon. Gentleman was not properly briefed.

Why did the Chancellor, having prepared the country, his colleagues, and the voters in Stechford for an increase in VAT, change his mind? I can find no other explanation than that Mr. Jack Jones and the trade union leaders told him to do so. This was meant to be the year of the beaver—but it is a beaver that is now employed because of the existence of the temporary employment subsidy and the selective investment scheme. Why did the right hon. Gentleman, instead of increasing VAT, put an impost on petrol duty? It makes no sense to any of us.

I shall quote some words by Mr. Scargill: I am sick of hearing all the whining that the trade unions must sustain a Labour Government; I must say that I am not prepared to support policies which harm those I represent. I conclude by quoting some comments made by one of my neighbours in another constituency. The headline in the local newspaper the Western Morning News, was "Climbdown Backlash Hits Libs". Then there is a quote from the hon. Member for Cornwall, North—namely, that he does not regard the petrol duty as so bad after all. Inside the paper, the hon. Member for Truro (Mr. Penhaligon), his neighbour, addressing a very large Liberal meeting—100 people, according to the report—said that the Liberal Party was now in control. The report quoted him as saying: We have never been anywhere near it since the 1920s. We have got power today like we never had it before. I hope that the Liberals enjoy their power, because it will be short lived. The Prime Minister will not consult them on the timing of the election, nor on his manifesto. He will go to the country at the moment when the Labour Party can emerge from that election as a viable political entity to fight again another day.

Mr. Dan Jones (Burnley)

And so would the hon. Gentleman.

Mr. Nott

Yes, and I would go sooner rather than later, because the later the Government carry on with the support of the Liberals, the worse they will do.

I hope that the Chancellor will take my advice. He has never taken it before, but I offer it in a constructive spirit. I say to him "Go now. Emerge as a viable entity. Do not destroy the Labour Party altogether, and maybe we shall see each other across the Benches in different positions very shortly."

9.31 p.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

First, I must congratulate the hon. Member for St. Ives (Mr. Nott) on his excellent and uproarious speech. I do not think that the House has laughed so much during an Opposition winding-up speech for several weeks, or, perhaps I should say, for 10 days. I was particularly surprised by his final words, in which he said that he was both sick and tired. He gave no signs of it tonight. I think that all of us will be grateful for the fact that he cemented in his speech his alliance with Mr. Arthur Scargill, an alliance to which I shall have cause to return a little later.

I think that the House also enjoyed the speech by the right hon. and learned Member for Surrey, East (Sir G. Howe) very much more than it has enjoyed most of his earlier speeches. The only conclusion we can draw is that the occupants of the Opposition Front Bench are entertaining only when they are not even trying to be serious.

This has been an interesting debate in two respects. It has been marked by far less real party confrontation than most such debates that I remember. To my astonishment, there has been unanimous support from all quarters of the House for my Budget speech in at least one aspect—its brevity. The only thing on which we would all agree in the speech of the hon. Member for St. Ives is that my Budget was certainly not an electioneering one. [Interruption.] I welcome the sniggers which have come so characteristically from the hon. Member for Chingford (Mr. Tebbit) when I say that.

Now that a week has passed, the House can see that the Budget has fully achieved its immediate objective. The immediate objective was not Stechford; it was to reinforce the success of my December measures in strengthening confidence in our financial position, both at home and throughout the world.

The right hon. and learned Member for Surrey, East rightly referred to the new robustness of our currency. It is worth noting that the only occasions on which the pound has been under pressure in recent weeks have been those when the markets shuddered at the faintest prospect that this Government might be unable to remain in power to see their policies through, and that the right hon. and learned Gentleman might be speaking from the position that I now occupy—first, when the Leader of the Opposition's motion of no confidence seemed to have a passing prospect of winning a majority in the House just a fortnight ago, and, second, last Friday when similar fears caused a similar tremor in financial circles. I am not surprised that the only moment of embarrassment that the hon. Member for St. Ives showed in an entertaining and enlivening speech was when he had to admit that the Conservative Party has been deserted by all its traditional allies, both at home and abroad, in financial markets.

Today's figures, which the hon. Member for St. Ives took care to ignore, show Britain's official reserves at a record level, and they do not include the substantial inflow which took place following my Budget speech. They will appear in next month's figures. I have made it clear many times that the Government do not intend to use private inflows of foreign currency to finance their remaining deficit on current account. We have already taken steps to make such inflows less attractive to the foreigner concerned, and I have this afternoon given the House details of the new foreign currency bonds on offer to official holders.

Meanwhile, the size of our reserves guarantees that we can now protect the sterling rate of exchange against the sort of sudden or erratic pressures which afflict it when there seems to be some faint possibility of the Conservative Party taking power. I believe that at least a majority of hon. Members on both sides will support us in doing so, provided that we can continue to maintain our present competitiveness. The only disagreement between myself and my hon. Friend the Member for Southampton, Test (Mr. Gould) is, what is the level at which we protect our competitiveness? He made that clear.

However, I should remind the House that there is nothing new, as some observers have claimed to detect, in what I said last week about the need to maintain competitivity by higher productivity and to improve our performance in areas other than prices. I made the same point at considerably greater length in my speech to Birmingham Chamber of Commerce on 18th January, nearly three months ago.

The new stability of sterling is a matter of concern not only to bankers and business men. It affects the living standards of every man and woman in the country. As I told the House last week, because of the recovery of sterling from the low point that it reached last October, the retail price index at the end of this year will be three points lower than it would otherwise have been. To achieve the same improvement in the cost of living by Government subsidies would have cost the taxpayer between £2,000 million and £3,000 million.

We have also taken steps to ensure the orderly financing of our internal deficit. By adding last week's short gilt stock to the earlier long stock and arranging to defer most of the payment, we should cover our internal financing needs for the next three months and thereby give ourselves further protection against possible inflationary pressures.

Finally—this answers a point made in an intervention a second or two ago—our new financial strength has enabled the Bank of England to re-engage the formula for determining the minimum lending rate at 9½ per cent., 5½ per cent. below the high point that it reached last October and 3 per cent. below the level which I inherited from my Conservative predecessor.

The fall in interest rates will help the cost of living in every way. The whole House can now rightly look to the building societies for a reduction in their interest rates next week, while maintaining reasonable levels of lending. Therefore, mortgages should be cheaper and easier to obtain in a fortnight's time. Meanwhile, the fall in interest rates has already reduced the cost of bank borrowing by manufacturing and construction industries by one-quarter or more. So we should see an increase in activity in investment as a result.

The success of the Budget in achieving-its immediate financial objectives will bring us real and visible benefits in the fight against inflation for many months to come, through both lower prices and lower interest rates. [Interruption.] I think that this is common ground. I do not think that even the hon. Member for Croydon, South (Mr. Clark), who is used to addressing the House in a recumbent position, will deny that.

Mr. William Clark rose—

Mr. Healey

The hon. Gentleman has already interrupted from a recumbent position. I do not propose to test his ability to stand on his feet by allowing him to ask me a question.

The main issues on which the debate has concentrated have been whether the total amount of net tax relief offered in the Budget is right, and whether it has been rightly distributed between direct and indirect taxation and between the different groups of the community which it affects. There has also been the question whether the Budget will help us to reach an agreement on a third phase of the pay policy and whether a third phase is desirable. I shall deal with these questions in turn.

My right hon. Friend the Member for Dartford (Mr. Irving) suggested that there should be more discussion in advance of the Budget about the possible tax changes. I do not think anyone can deny that I have encouraged more discussion on this matter than any previous Chancellor of the Exchequer. It may well be that the reaction of the public to the decisions I took last week was less joyous than it might have been simply because they had been led to believe that I would take the sort of measures which I have taken.

I do not believe that it would have been right, at this time, to offer larger net relief on taxes than I have done, namely, £1,500 million in a full year, adding about £1,000 million to the public sector borrowing requirement in 1977–78. It is true that I have left some margin within the ceiling for next year's public sector borrowing requirement, which I announced in my December measures. The House knows that the public sector borrowing requirement estimates are notoriously uncertain, possibly the most uncertain of all the statistics that the Government have to guess in advance.

The balance of payments figures have been swinging widely in recent months. It will be a month or two yet before I feel confident of our performance in this area. Negotiations on a new pay policy have not even begun. For all these reasons, I believe that I was right to err on the side of caution. I know that the Opposition will be as pleased as my hon. Friends if circumstances permit me to relax a little some time later in the year.

The £1,500 million net tax reliefs is made up roughly of cuts in income tax amounting to £2,250 million, offset by an increase in indirect tax amounting to £750 million. I shall take each of these in turn. The reduction in income tax is about 25 per cent. more than the £1,800 million which would have been required to offset the so-called fiscal drag between 1976–77 and 1977–78 which was caused by inflation. I think that the House would agree that this is more than most people expected before the Budget.

I felt it necessary to aim at this amount of relief in income tax because any sum under £2 billion would have made it impossible for me to distribute the relief so that every section of the working population received significant help, with special help going to those at the bottom of the earnings ladder and those towards the higher end, particularly the highly-skilled workers and middle managers. I have no doubt that every hon. Member will feel that, in one respect or another, he could achieve a better distribution of tax relief, but someone has to decide and that can only be the Chancellor of the Exchequer.

As I explained to the House last week, the introduction of a reduced rate band would have left no room for adequate raising of the tax thresholds which was essential to help the poorest in our community. It would have prevented me from offering help to those on average earnings and above who will gain from the 2p reduction in the basic rate.

I know that many of my hon. Friends believe that it was unnecessary to raise the higher rate thresholds at all, but I hope they will at least agree that it was essential to extend the basic rate band in order to save 800,000 working people earning only half more than the average from paying the higher rate.

The total of income tax relief due to the introduction of a more regular progression of higher-rate bands beyond that costs only £185 million out of the £2,250 million total relief, and to have done nothing would have been a blow not only to management but to many skilled workers in key areas of our economy, which would have been immensely damaging to our industrial strategy. As it is, even after the raising of their thresholds, people on the higher rate will still be paying a slightly higher proportion of the total income tax bill than if I had not cut income tax at all.

Much of the criticism of the Budget has centred on the proposals for increases in indirect taxation, particularly petrol. As I have already explained, it would have been impossible for me to offer so wide-ranging a relief from income tax if I had been unable to recoup some of the money from indirect taxation. In seeking the additional money from indirect taxes, I was guided by three principles—first, to choose areas of indirect taxation which would have the least impact on the cost of living; secondly, to concentrate on taxes whose yield does not rise automatically with inflation as does the yield of value added tax, which is a percentage of the selling price; and, thirdly, to choose areas where failure to act would have damaged important objectives of national policy.

It was those three considerations which led me to focus on cigarette tobacco, where the health arguments for a real increase in taxation are in my view decisive; heavy oil, where energy policy indicated an increase and the effect on the retail price index is very small and slow to come through; and, finally, excise duty and petrol, where the arguments arising from energy policy are reinforced by considerations of transport policy.

Most of the criticism has focused on the increase in the taxation of road users, and it is on these that I wish to concentrate in the next few minutes. First, let me remind the House that the increase in the price of petrol is only just sufficient to restore the tax to the level of a year ago in real terms. Incidentally, I was a little surprised at the hon. Member for St. Ives talking about the increase in the price of petrol over the past three years without even mentioning the 400 per cent. increase in the price of petrol charged by the OPEC countries. I really think that that was a little unworthy of him. We respect the hon. Gentleman when he is trying to be serious, but it was quite unrealistic of him not to refer to the increase promulgated by the OPEC countries.

Mr. Nott

I did not refer to the price of petrol. I referred to the fact that the Chancellor had doubled the tax on petrol, which is quite different.

Mr. Healey

When the hon. Gentleman comes to look at what he actually said, he will find that my criticism is fully justified.

The increase in the car licence fee is only two-thirds as much as would be required to restore it to the real value it had when it was last raised in 1975. However, I do not see how anyone who has been committed to the indexation of taxes for a long time, as have been the Tory Party and the Liberal Party, can complain about these adjustments. It is too often forgotten that inflation, besides increasing the real burden of income tax from fiscal drag, also reduces the real burden of the specific duties by what is called fiscal boost. Broadly speaking, fiscal boost has decreased real revenue from indirect taxes by about £500 million in the past year, while fiscal drag has increased the real value of revenue from direct taxes by about £1,800 million.

My Budget proposals go somewhat further than what would be required to deal with the effects of inflation on direct and indirect tax. I must confess, having listened carefully to the debate and read all the speeches to which I have not had an opportunity to listen personally, including an account of the excellent maiden speech by the hon. Member for City of London and Westminster, South (Mr. Brooke), that to have sought the increase in indirect taxation by raising the standard rate of VAT from 8 per cent. to 10 per cent. instead of by the proposals I put forward would have been double perverse in this situation.

In the first place, VAT is not subject to fiscal boost like the specific duties. The real burden that it imposes on the taxpayer has already been maintained in line with inflation, so if I had increased VAT I would have been increasing that burden in real terms. In the second place, as my right hon. Friend the Chief Secretary pointed out last Wednesday, to increase VAT to 10 per cent. would raise about the same amount of revenue next year as the increase in duties on petrol, heavy oil and vehicle excise duty but would add 50 per cent. more to the retail price index than those duties. I see that the Leader of the Liberal Party agrees with me. Moreover, an increase in VAT would fall more heavily on the housewife.

On the other hand, the Government recognise the special difficulties created by the increase in the taxes on those who have to use their cars to get to work—many hon. Members made much of this point—particularly in the rural areas and will consider what can be done to alleviate them. My right hon. Friend the Secretary of State for Transport will give special consideration to this problem in his forthcoming White Paper. Meanwhile, as my right hon. Friend the Chancellor of the Duchy of Lancaster pointed out this afternoon, right hon. and hon. Members will have a further opportunity of considering the detailed proposals for tax increases when the Finance Bill is debated in Committee.

I hope that those who have difficulties about these elements in my proposals will prefer to raise them in Committee at the appropriate time and will accept the need to compensate by tax increases in other fields if their views prevail. I cannot believe that they would wish to vote against the relevant resolutions tonight when this would mean voting simultaneously against some proposals of which they fully approve and, if they succeeded, would produce a degree of administrative anarchy for which the country would be slow to forgive the House.

Mr. William Clark

Why is it that the Chancellor thinks that in introducing his Budget last week he had to increase the petrol tax at 6 o'clock on Tuesday? Why did he not increase the tax on petrol at 6 o'clock tomorrow? That would have avoided the administrative muddle. It is unbecoming of the right hon. Gentleman to say that because there would be an administrative muddle, because of his ineptitude, the Liberal Party should vote with him.

Mr. Healey

The hon. Gentleman is experienced in these matters, and I believe that he supported the last Government. He will know that the last Government, when they increased specific duties, always made the increase operate from the day on which it was announced. [Interruption.] The last Government did not have a majority for a large part of the time. Secondly, any party in office has a right to believe that its Budget Resolutions will receive the approval of the House, and I believe that in 10 minutes' time the present Government's confidence in that belief will prove to be justified.

I am grateful for what the Leader of the Liberal Party—

Mrs. Audrey Wise (Coventry, South West) rose—

Mr. Healey

I shall give way in a moment.

I am grateful for what the Leader of the Liberal Party said on this matter this afternoon. I can certainly give him the three assurances for which he asked. First, we shall ensure that the increase in petrol duty is taken in Committee on the Floor of the House and, with luck, on the first day that we take the Committee stage, which will be around 10th May. Secondly, petrol duty will be considered separately from the duty on heavy oil. Thirdly, the Government will, of course, accept any decision that is finally taken by a majority of the House and, if necessary, will seek administratively to raise the equivalent revenue by other means.

I have already explained why I believe that my proposals are best calculated to meet the nation's needs. I know that the Leader of the Liberal Party will not blame me if I do my best to convince the House accordingly when we come to debate the matter in Committee.

Mrs. Wise

Does the Chancellor accept that the easiest way to find extra money to do something about petrol tax and to wipe the smiles off the faces of Opposition Members would be not to increase the thresholds for the higher rates of taxation, because that benefits only those earning well over £7,000 a year? Those earning £22,000 a year will actually do best out of the Budget. Will my right hon. Friend consider that as an alternative?

Mr. Healey

I am most grateful to my hon. Friend for that interesting suggestion, and I shall certainly consider it carefully if the House is misguided enough to decide that it wants to change the proposal to increase petrol duty which I put to the House last week.

Mr. William Clark

Will the Chancellor get the facts right before he distorts them? When the Conservative Government increased taxation and put duty up they did so at 6 o'clock on the evening of the Budget, but the Conservative Government had a majority in the House. My point was that the Chancellor has a minority Government of at least two without the Liberals and that he should not have put the tax up on the same day as the Budget without giving the House an opportunity to debate the matter.

Mr. Healey

Of course, what the hon. Member has just suggested could apply to all the income tax changes that I put forward in the House last week and to the improvement in the higher rate thresholds. In putting these resolutions down I was expressing not arrogance but confidence. We shall see in a few minutes' time whether my confidence was justified. I think that, on reflection, the hon. Member will recognise that he was raising an issue that is of no consequence whatever and that was certainly not worth putting to me now.

I conclude by saying that the main issue around which public discussion on this Budget has circulated is not the tax on petrol or the increase in licence duty. It is what the Budget will do to improve the prospect of a rising standard of living and of improving employment for people in this country. Of course everyone wants a higher standard of life, but there is no route for obtaining and sustaining higher living standards except through higher efficiency, higher output and higher sales. No Government alone can guarantee the improvement in our industrial problems upon which this depends, but I believe that the country will soon learn that this Budget will at least increase the chances of achieving that improvement.

Question put and agreed to.

Resolved, That it is expedient to amend the law with respect to the National Debt and the public revenue and to make further provision in connection with finance; but

1. (a) this Resolution does not extend to the making of amendments with respect to the surcharge imposed by the National Insurance Surcharge Act 1976 other than amendments for affording relief to charities; and
2. (b) without prejudice to any authorisation by virtue of any Resolution relating to value added tax, this Resolution does not extend to the making of amendments with respect to that tax so as to provide—
1. (i) for zero-rating or exempting any supply;
2. (ii) for refunding any amount of tax;
3. (iii) for reducing the rate at which tax is for the time being chargeable on any supply or importation otherwise than by reducing that rate in relation to all supplies and importations on which tax is for the time being chargeable at that rate; or
4. (iv) for any relief other than relief applicable to goods of whatever description or services of whatever description.

Mr. Speaker

I am now required under Standing Order No. 94(2) to put successively, without further debate, the Question on each of the Ways and Means motions numbered 2 to 35 and on the three motions on procedure, on all of which the Finance Bill will be brought in. Instead of reading out each motion, I propose to follow the procedure of the House in recent years. Thus, I shall first take the title of the motion and then put the Question "That the motion be agreed to."

Further, and by leave of the House, I believe that there are blocks of these motions that it is possible for me to read

Description of wine (in strengths measured by reference to the following percentages of alcohol by volume at a temperature of 20C.)	Rates of duty (per gallon)
		£
Wine of an alcoholic strength—
not exceeding 15%	…	3.2500
exceeding 15 but not exceeding 18%	…	3.7500
exceeding 18 but not exceeding 22%	…	4.4150
exceeding 22%	…	4.4150 plus
		£0.4700 for every 1% or part of 1% in excess of 22%; each of the above rates of duty being, in the case of sparkling wine, increased by £0.7150 per gallon.

out and put together, although if anyone wishes to divide on any motion which, by accident, I put with others, I am sure that he will indicate the fact to me.