INCOME TAX (PERSONAL ALLOWANCES)

HC Deb 10 November 1977 vol 938 cc874-997

4.21 p.m.

The Chancellor of the Exchequer (Mr. Denis Healey)

I beg to move,

That—

1. (1) Section 22 of the Finance Act 1977 (alteration of personal reliefs) shall have effect, and be deemed always to have had effect, as if—
2. (a) in paragraph (a) of subsection (1) (increase of married allowance to £1,295) for '£1.295 ' there were substituted ' £1.455 ';
3. (b) in paragraph (b) of that subsection (increase of single allowance and wife's earned income relief to £845) for ' £845 ' there were substituted ' £945 ';
4. (c) in paragraph (c) of that subsection (increase of age allowance to £1,765 and (£1,120 for '£1,765' and £1,120 ' there were substituted ' £1,975' and ' £1,250'
5. (d) in subsection (3) (increase of additional allowance to £450) for ' £450' there were substituted £510'.
6. (2) The above amendments shall not apply for the purposes of subsection (2) and the corresponding provision in subsection (3) of the said section 22.

But this Resolution shall not require any change to be made in the amounts deductible or repayable under section 204 of the Income and Corporation Taxes Act 1970 (pay as you earn) before 6th December 1977.

And it is hereby declared that it is expedient in the public interest that this Resolution should have statutory effect under the provisions of the Provisional Collection of Taxes.Act 1968.

May I first congratulate the hon. Membrs who have just joined the Opposition finance team? The House knows that the hon. and learned Member for Dover and Deal (Mr. Rees) and the hon. Member for Horncastle (Mr. Tapsell) will bring to our debates exceptional expertise with regard to tax and banking.

I give a particular welcome to the hon. Member for Blaby (Mr. Lawson) on his translation from a Whip into a scorpion. I look forward to suffering his stings if he catches Mr. Speaker's eye later this evening.

I understand, Mr. Speaker, that you will allow the debate to range widely over the economic background to the resolution. I welcome this opportunity briefly to review the events since our last debate in July and to deal at somewhat greater length with some of the more important of them.

First, our financial situation has improved dramatically in all respects over the last few months, and the improvement is still continuing. The rate of inflation has fallen, as predicted, and we can now have confidence, as I said at Question time, that it will be 12 per cent. or 13 per cent. by the end of the year and in single figures a few months later. The House may have noticed that the latest Price Commission index indicates that the annual inflation rate for prices in the Commission's field is only 7.3 per cent. which is the lowest figure since September 1973, over four years ago.

The balance of payments has moved into surplus even faster than we expected. We had a surplus on current account of £1½ billion in the third quarter of the year. This is due not just to North Sea oil; the volume of manufactured exports has been steadily increased. Indeed, we have actually increased our share of world trade in manufactures, despite the fact that world trade has increased less than we hoped.

Interest rates have fallen steadily. The minimum lending rate has fallen from 15 per cent. last October to 5 per cent. today —very much lower than the rate that we inherited from the Conservative Party. This improvement brought a fall in mortgage rates, which means that the average young couple getting a new mortgage will be paying about £200 a year less in interest than they would have been paying a year ago.

We now have a negative differential against the dollar interest rate, something which I think not many people expected to see a few months ago. The pound has risen significantly, not only against the dollar, but against the average value of the currencies of our trading partners. Our reserves are now over 20 billion dollars, second in size only to those of Germany and Saudi Arabia.

One of the most interesting statistics that I can quote is the latest Financial Times survey of consumer confidence which last month showed that today people in Britain are more optimistic about the future than at any time since the beginning of 1970. The confidence which that survey demonstrates is now reflected. my hon. Friends will be glad to note, in the political indicators as well. [Interruption.] What happened in 1970 is that, unfortunately, the Conservative Party won the election and ruined the confidence which it inherited from my predecessor.

The foundation for this transformation in our financial situation has been the most effective control of public expenditure—which I think the Opposition Front Bench will admit has been seen throughout the history of public expenditure control—and the undertakings I gave a year ago for domestic credit expansion, the public sector borrowing requirement and the monetary aggregates.

We have shown an effective determination in maintaining them over the last 12 months. But against this truly astonishing improvement in our financial situation Britain has unfortunately shared in the general failure of all industrial countries to achieve the growth which they expected at the Downing Street Summit. Output in this country was flat in the first eight months of this year and gross domestic product actually fell in the same quarter.

Although output is now rising again, it looks as if the increase in GDP over this year as a whole is likely to be only about ½ per cent. Partly in consequence, unemployment in the industrial world, as in Britain, has risen to over 16 million in the OECD countries and it is still rising in nearly all countries in the OECD.

I cannot yet feel confident that the fall in our own unemployment last month means the beginning of a firm downward trend. I shall have more to say about this in a moment. As the House knows, I have recently discussed this problem with my fellow Finance Ministers at the IMF annual meeting and in the Finance Council of the European Community. Both have agreed that steps must now be taken by the stronger economies to stimulate demand. We have agreed in both meetings that Britain is now strong enough to play a part.

Mr. John Mendelson (Penistone)

At my right hon. Friend's meeting with the Finance Ministers of the EEC, was the report of the group of EEC economic experts, published a few months ago, discussed? In it those people said that British deflation in the last 14 months had been overdone and was a main reason for our stagnating productivity.

Mr. Healey

My hon. Friend is always aware of reports that have never come to me or on to my desk. This report was not discussed by the Ministers of the Finance Council. Indeed, I do not think any of them knew it existed, if, indeed, it did. I know that sometimes reports about reports appear in the newspapers and turn out later to have been very ill founded.

I announced on 26th October a modest but significant contribution to the general reflation of world demand which has been asked for. That represents a 1 per cent. increase in our GDP in the coming year on top of what we already expected. This 1 per cent. increase is what we agreed at the European Finance Council should be the average for the European Community as a whole.

As the House knows, the steps that I announced last October followed similar measures in the March Budget and in July. I hope to take further measures next spring. I make no apology for correcting course whenever this is needed. particularly at a time when it has become very difficult for us in Britain, as for all other Government, to predict trends with any accuracy.

In these prevailing conditions of uncertainty I believe that the correct course is that described in the report published by the OECD earlier this year of a group of independent experts under Professor Paul McCracken. I quote: A relatively active demand management policy may be needed, involving a succession of injections of purchasing power over a period of months or even years…Governments should be ready to act reasonably promptly, but should also try to manage demand more steadily by a process of successive approximation. I have chosen to deliver the immediate injection of purchasing power that we need by cuts in income tax which will bring rebates of £20 for a single man and £35 for a married man. with a reduction in the tax take from their weekly wage packets by 65p and £1.05 respectively.

As the House knows also, I have also arranged for a £10 bonus for pensioners, which is extended on this occasion, not only to widows and others who have always shared in this bonus when it has existed, but, for the first time, to people getting non-contributory invalidity pensions, disabled housewives and people receiving invalid car allowance.

I know that doing this at this time, after the changes introduced by the House into the spring Finance Bill, imposes a heavy new burden on Inland Revenue staff, who have already been buffeted by changes over at least the last 10 years. But the House knows that there was no other way of giving the maximum stimulus to the economy as fast as possible so as to produce the greatest maximum impact on unemployment in the coming year. I believe that, whatever discontents may be felt by those called upon to implement this decision, they will not wish to frustrate a decision which will bring major financial benefits to themselves as well as the rest of the community, and will also lead to unemployment being lower next year than it would otherwise have been.

Mr. Ron Thomas (Bristol, North-West)

In any attempt to calculate the impact on employment of his measures, has my right hon. Friend taken into account that a good deal of that money will, unfortunately, be spent on imported finished and semi-finished manufactured goods?

Mr. Healey

Of course I have taken all that into account, and it is the case that whenever the British people get more money they spend part of it on imported goods. But that is equally true of the other countries. The stimulus that they give to their economies will be reflected in increased exports from Britain to those countries. That is perfectly true of West Germany, and I know that my hon. Friend will be glad to know that our exports to West Germany have been increased in consequence by 22 per cent. over the past year, representing a real help to employment in Britain which I know that my hon. Friend would not wish to see lost.

In addition to carrying through the tax cuts into the next fiscal year, the Government have decided to increase public expenditure next year by £1,000 million above the level planned in the last White Paper, and I believe that this will make a valuable contribution towards improving our public services, particularly for law and order, education and health, as well as giving substantial help to the construction industry. We will publish full details of the public expenditure plans for future years in the usual White Paper early next year. It will show the growth of expenditure that we are planning not only in 1978–79 but also in the three subsequent years.

Mr. Nigel Lawson (Blaby)

The right hon. Gentleman mentioned unemployment. Will he tell us when he thinks that unemployment will stop rising?

Mr. Healey

I am coming to that. Perhaps the hon. Gentleman will contain his impatience, because I can tell him now that I will make plain all the things worrying him during the remainder of my speech. He will benefit greatly in speaking later in the debate if he can restrain himself from interventions now.

The Government are not, however, committing additional resources to public expenditure before they can be confident that the resources will be available. The plans for the growth of expenditure will be well within the growth that we can expect in the economy as a whole, because that is the only way to achieve and sustain the improvement which we, at least on this side of the House, wish to see in the level and quality of our public services and in the efficiency with which they are provided.

Mr. Ian Gow (Eastbourne)

rose—

Mr. Healey

I have given way a great deal already and, as the House knows, I have also answered Questions for 45 minutes today.

The measures that I have described should reduce unemployment by 110,000 by the first quarter of 1979. This should ensure that unemployment starts moving firmly down before then. As I have made clear before, I cannot predict the level at which unemployment will still stand in consequence. The scale of the problem that we face is well illustrated in the review just published by the Manpower Services Commission, which I hope the House will read.

But it is no longer possible to state with confidence the relationship between output and employment. We had a drop in unemployment in the earlier months of this year, and a drop again last month. I do not say, and I do not think that anyone can say, whether the drop last month will be continued. I doubt it, but I expect a continuing fall in unemployment to begin in the coming year—I cannot predict what month.

Mr. Lawson

In 1979?

Mr. Healey

No—in the coming year, 1978. This is still 1977. The hon. Gentleman is a young man in a hurry.

It is reasonable to assume that unemployment will not fall unless the gross domestic product grows faster than growth in productive potential. I suspect that this generalisation is still true. But I believe that the growth in productive potential is now about 3 per cent. a year, only a little above the post-war level, because, although the growth of the labour force should add about three-quarters of 1 per cent. to the growth of productive potential, and North Sea oil another quarter of 1 per cent. productivity is probably growing more slowly than in the past, at about 2 per cent. a year, partly because of many years of low investment.

So, if we achieve a 3½ per cent. growth in GDP next year, which I expect, we should see a slow but steady fall in unemployment after the usual time lag, and, of course, I shall be able to give a further stimulus to demand in a few months' time in my spring Budget, either by a further rise in tax thresholds or by the introduction of a reduced rate band of income tax. But whether we are able to do so, and on what scale, will depend on how the economy moves between now and then, and above all, on the prospects for a continuing fall in the rate of inflation.

Three factors will help to determine the movement of the economy in the coming months. The first is the way it responds to any change in the international value of sterling following the recent change in our intervention tactics; the second is the degree to which our industrial strategy can improve the competitiveness of our manufacturing industry; the third is the extent to which pay settlements can be kept in line with the Government's guidelines for an early return to collective bargaining. I will deal with each of these three factors in turn.

I have already said that I believe that the key to the transformation in our financial position which now enables us to contemplate a steady and continuing growth in our economy is the determination with which we pursue our domestic monetary objectives. It had become clear in recent weeks that the inflows which resulted from our intervention to keep the exchange rate stable in terms of an effective rate would, if continued, have put the achievement of our domestic monetary objectives at risk, and that would have carried with it a risk of refuelling inflation, weakening confidence and putting paid to our hopes of bringing unemployment down in the coming year. That is why we decided to change our intervention tactics on the exchange market.

Up to the summer, the foreign exchange markets had been reasonably stable. There had, it is true, been a steady inflow into sterling, but most of this represented a gradual reversal of the excessively pessimistic view taken by the market in 1976. But, in about June, there began a new period of instability in world markets which focused on the relative positions of the dollar, the yen and the mark as well as the pound.

In this period of general uncertainty, there were very large inflows into sterling. During the earlier part of the year, we were able to offset the effects of these inflows by substantial sales of gilts to the domestic private sector. That, and the unusually low level of the central Government borrowing requirement in the period meant that, up to the September make-up day, the rate of growth of the money supply this financial year was within the preferred range of 9 to 13 per cent. There is clearly a limit to the ability of any Government to offset the effects of inflows in this way without beginning to distort the domestic financial system and to impose a monetary squeeze. In order to avoid those dangers I decided that we should change our intervention tactics last week, and thus released the pressures that had built up. I recognise that the changes of policy will bring a measure of uncertainty that I should have preferred to avoid.

During the last few years I have spent a great deal of time, as we all have, trying to think through the effect of exchange rates on the economy in general, and I confess that I find it difficult to reach a firm decision. It is clear that what business in this country needs most is such stability as we can provide in its general environment, and the case for maintaining stability is extremely strong. Against the pressures that I have just described, I am satisfied that any alternative course would have been far worse for industry and the economy than the change in our intervention tactics that we have introduced.

I have been criticised both for delaying a decision too long and for taking it too soon, and that probably means that I got it about right. It would have been wrong to have taken it before we were fairly certain that the inflows would continue on a scale that put domestic monetary control at risk. On the other hand, we had to take it before our ability to control the monetary aggregates was significantly at risk.

Given what we have done, I need hardly reaffirm the Government's determination to keep the growth of the monetary aggregates under control. In particular, domestic credit expansion will be kept to the limit that was set out in the Letter of Intent last year. The growth of sterling M3 will be kept close to the preferred range of 9 per cent. to 13 per cent., but it will not necessarily be within that range at all times during the course of the year. It has grown by only 7 per cent. during the last 12 months, and earlier in the year it was still below the range that I have quoted, but later on it may be above it. In particular, the timing of the tax relief announced a fortnight ago will lead to one or two high months. However, I think that all commentators will accept that it is the trend that matters and that high figures for a few months do not matter, provided that the authorities are maintaining control so that the growth subsequently comes back into line with the desired trend. I believe that the steps that we took by way of intervention last week will have helped to persuade people of this.

A great deal has been written by opposing camps of economic theologians about the likely effect of changes in the exchange rate on the economy as a whole and, particularly, on industrial competitiveness, in particular. Even practical business men find themselves at loggerheads after the effect of the recent change in our tactics. For example, the CBI has expressed serious misgivings about the change and I can well understand its concern. On the other hand, the Association of British Chambers of Commerce has taken the opposite view. The House may be interested to hear its words. I quote from a letter that the association sent—with a copy to me—on 4th November to the Governor of the Bank of England: We well recognise that some exports are more price-sensitive than others but overall our members are fully prepared to face what they regard as the stimulating challenge of a hardening pound. We believe that the resulting reduction in import costs will be of genuine benefit to the whole United Kingdom economy: an artificially depressed pound increases our import bill unnecessarily and it is difficult to see how it can really assist in the attack on inflation which remains the key economic issue. In the longer term an appreciation of the pound must act as an incentive to a move towards higher added value and less price-sensitive exports; and this latter is a nettle that our members recognise has sooner or later to be grasped if the country is not to let its living standards be forced ever downwards. That was the view of the Association of British Chambers of Commerce which claims to represent 50,000 British firms —mostly medium and smaller ones. The association disagrees with the CBI's general view, and I do not think it is possible intellectually to decide which is right.

Mr. Eric S. Heffer (Liverpool, Walton)

Will the Chancellor quote, not just the interesting letters that he has received from the CBI and others, but what estimates the Treasury has carried out in relation to the effect on employment levels? Is the change likely to increase unemployment—or to have the opposite effect—as many of us fear will be likely?

Mr. Healey

We have done as much work in the Treasury on this matter as has been done by other institutions in the world, and the answer is that there are great uncertainties. If we took the traditional, conventional arithmetic, the answer is that it would tend to reduce inflation at the cost of reducing exports and, ultimately—although very much later—reduce employment. On the other hand, there is a great deal of evidence from other countries that the degree of confidence created by a continuing low level of inflation would offset the effect on the economy of a higher exchange rate and higher unit costs.

Moreover, as I pointed out in the House a fortnight ago when we discussed this matter after my statement, it is interesting to note that whereas in this country business men have tended to respond to a reduction in our unit profit margins by exporting fewer goods, our German and Japanese competitors have always reacted by increasing the number of units exported and, sooner or later, as the British Chamber of Commerce said, this country must follow suit or we shall have a steadily declining standard of life and steadily declining industrial performance.

The letter from the President of the Association of British Chambers of Commerce hit the nail squarely on the head. It is essential that we improve our non-price competitiveness. This means producing the right products of the right design and the right quality, and delivering them at the right time. The main function of the co-operation between business, trade unions and the Government in the industrial strategy through the sector working parties, is to make this possible. The Government have already shown their readiness to respond. Two recent examples are the export market entry scheme, to which I referred in my statement of 26th October, and the scheme for assisting the drop-forgings industry, of which details were announced by my right hon. Friend the Minister of State for Industry on Tuesday. Both schemes will tackle specific problems identified by the sector working parties, and in designing them the sector working parties have been closely consulted.

I shall not deny that the increase in the value of the pound will reduce the profitability of exports to some extent or render them less competitive in price. But the key to competitiveness is the trend of our unit labour costs compared with those of our major competitors. This is what in the end determines the prices that we can quote and whether we can get the export orders or not.

During the last few years our competitiveness, measured in this way, has improved substantially. Between the fourth quarters of 1975 and 1976 the improvement was as much as 18 per cent. This was partly the result of the depreciation of sterling, but it also reflected the success of our incomes policy. So we started this year in an exceptionally favourable position.

The pound is now 6 per cent. or 7 per cent. up on its level in the fourth quarter of last year. And it seems likely that our unit labour costs over the same period have risen at much the same rate as the average of our competitors, so our competitive position is still substantially better than it was two years ago. Moreover, although we may have lost some price competitiveness against many of our competitors through the recent appreciation of sterling, the much greater appreciation of the deutschemark and the yen has made us more competitive against Germany and Japan, which are our most formidable rivals in world trade.

Mr. Bryan Gould (Southampton, Test)

Unit labour costs are a misleading indicator of competitiveness since they apply to the whole of manufacturing industry and not just to that part of it with which we are concerned, which is the exporting industries. Looking at comparative figures, we see that an economy which is expanding its share of world trade will have a much more favourable cost curve in exporting industries than it does throughout industry as a whole.

Mr. Healey

That goes without saying. But we want to increase that proportion of our industry which is successful in exporting, and a low level of unit labour costs will enable them to do that. That is the point that I am making.

In a sluggish economy where not enough attention is given to exporting, unlike Sweden where a very much higher proportion of manufacturing industry exports its products, we can see the benefit deriving from a low level of unit labour costs generally.

But a major reason for the continuing success in maintaining our competitiveness is our incomes policy and the moderation of wage settlements in Britain.

Mr. Peter Tapsell (Horncastle)

Before the Chancellor moves from his interesting remarks about foreign exchange, with much of which I agree almost entirely, may I put this to him? I accept readily that in all these matters we are dealing in uncertainties. If it were not so, all these problems would have been solved long ago. But, on the very analysis that he has given us of the reasons which eventualy led him to float the pound and allow it to appreciate in value, do not the same arguments seem to point in the same direction for the liberalisation of exchange control? If we do not lose the exchange control, is not it likely that the pound will appreciate in value to a greater extent than would otherwise be the case, which would mean either that our industry became less competitive overseas and therefore there was less inducement for investment at home, or that we would build up huge monetary reserves, which already are third in size only to those of Germany and Saudi Arabia? We have criticised other countries in the past for building up huge reserves unnecessarily. Does the right hon. Gentleman accept that analysis? If he does, why does not he move towards liberalisation of exchange control?

Mr. Healey

I accept that analysis as far as it goes. But we must accept that we are dealing, if we are involved, unfortunately, in economic management, with an extraordinarily complex range of problems and that what may be a relevant consideration in dealing with one part may be a very damaging consideration in dealing with the rest.

Let me deal with the points made by the hon. Member for Horncastle (Mr. Tapsell). The first matter concerns the size of our reserves. It is true that we have large reserves. But we have large debts as well. In relation to our debts, our reserves are not large. Our debts are about the same size—about 20 billion dollars—to be paid back over the next six years. So from that point of view, the comparison with Germany and Saudi Arabia is not relevant.

Secondly, it is not right to deal with the problem of short-term capital inflows by long-term capital outflows. I do not deny that there can be situations in which it can be helpful to trade off one against the other. But, in general, they are chalk and cheese.

Thirdly, it would be unwise to dismantle the apparatus of exchange control before we were more certain that the present situation was likely to be enduring. I hope that it will be, but we cannot be sure. It would be most damaging to dismantle the apparatus and then discover within two or three years that we had to recreate it.

Finally, I repeat the point that I made at Question Time. Our main objective in the coming years is to be sure that the additional benefits that we get from the flow of North Sea oil are channeled into investment employment in this country. Until we securely achieve that, it would be very unwise to take the steps mentioned by the hon. Member for Horncastle.

Several Hon. Members

rose—

Mr. Healey

With respect, this is a very interesting seminar, but I must get on with my speech. I have given way already about a dozen times, and I do not think that it is fair to later speakers in the debate to continue to do so—[Interruption.] There is a certain muttering by the scorpion at the moment. It may be interesting to his neighbours, but I cannot hear it. It may be that that is fortunate.

Mr. Nicholas Ridley (Cirencester and Tewkesbury)

Will the right hon. Gentleman give way?

Mr. Healey

With respect, I shall not give way to the hon. Gentleman, for the reason that I have just given.

I was saying that a major reason for the continuing success in maintaining competitiveness is our incomes policy and the moderation of wage settlements. The appreciation of the pound makes moderation in pay bargaining even more important. But its effect in reducing inflation should make such moderation easier, too. So I want to conclude with some reflections on pay policy.

The continuing support of the TUC for the 12-month rule, which was reaffirmed with great force by its economic committee only yesterday, has been of inestimable value in securing an orderly re-entry from two years of exceptionally rigid pay policy. But it is equally essential that settlements in the next round should be consistent with the Government's guidelines, otherwise extensive increases in money wages would mean inflation turning up again in the second half of next year, with the inevitable consequence of falling confidence, loss of competitivity and rising unemployment. Everyone would be worse off as a result.

I believe that the overwhelming majority of the British people now recognise this fact. Indeed, there has been a strik- ing movement of opinion—I do not make this point in any party spirit—at the extremes of the two parties on this matter. Many people who were very sceptical about the value of pay policy are a great deal less sceptical today. I notice that Dr. Arthur Burns told Congress a couple of days ago that it was time that the United States also started thinking in terms of trying to introduce some sort of incomes policy—[Interruption.] If the hon. Member for Blaby wishes to intervene, he must do the House the courtesy of getting to his feet to do so. However, I ask him not to do so at the moment. I have given way to him several times already. I may have difficulty in predicting the unemployment rate, but I can say with confidence that he will catch Mr. Speaker's eye at about nine o'clock this evening.

The growing support in the country for the Government's pay policy is one of the most interesting and important facts of our economic life. I do not know whether the House has had a chance yet to see the result of the latest poll published this morning by Opinion Research Centre, but no poll has ever shown such unprecedented support for a Government's pay policy. Of those questioned, 87 per cent. supported the Government's policy and 74 per cent. would still support the Government taking a tough line even if they knew that it would mean a miserable winter with power cuts, cold homes, industrial disputes and perhaps a three-day week. I hope and believe that it will not mean that, but I think that the strength of support for the Government's policy indicates a very important shift in the feeling of ordinary men and women about the problem, and that it is our duty, if we pretend to lead opinion and not just to follow it, to welcome this support and to do our best to reinforce it.

Mr. John Moore (Croydon, Central)

So that we may know what policy the country is supporting in the opinion polls, will the right hon. Gentleman indicate whether he is talking about his estimate of 15 per cent. on earnings increases or that of 10 per cent.?

Mr. Healey

If I may say so, that is a trivial debating point. The Government's policy is for an earnings increase of 10 per cent. over the year, and I shall come on to what that implies in terms of settlements in a moment.

The latest figures for pay settlements since 1st August show that the vast majority of pay negotiators on both sides of the bargaining table share this same view, and fully accept the reasoning behind our policy. Only 4 per cent. of workers have been involved in settlements outside the guidelines. It is true that this is still 4 per cent, too many-4 per cent. whose increases in excess of the guidelines have to be offset by lower settlements elsewhere if we are to reach our longer term targets. And we also have to allow for the various factors which lead the actual earnings out-turn for the economy to exceed the total implied by the general level of pay settlements. To be sure of finally defeating inflation, there is one, and only one, road which we can take: we must secure settlements that are well down into single figures.

I have already said something about how the tax reliefs which I have now proposed will ensure that people will be able to maintain, and improve, their standard of living without pressing for wage increases above the Government's guidelines.

Let me illustrate this by two examples. First, let us take a married man with two children where he is on average earnings of, say £80 a week, which is roughly the average now. Immediately before the measures which I announced last July his net take-home pay was a little over £60 a week. The effect of the July measures and the further measures which I announced a fortnight ago will he to raise his net take home pay by 4 per cent. He could need a pay increase of only some 31 per cent., or an equivalent further relief in the 1978 Budget, to maintain his standard of living over the period of the current pay round, when, if further settlements are in line with Government policy, the cost of living could have risen by less than 7 per cent. over the round.

If one takes a similar family man on two-thirds average earnings, which is about £55 a week, the figures are even more striking. The July and October measures could leave him slightly over 2 per cent. better off over the current pay round, even if he receives no benefit from the 1978 Budget and no pay increase at all.

The fact is that settlements within the Government's guidelines can now be relied on to produce a real increase in living standards in the coming year. They will also guarantee a continuing fall in the rate of inflation, bringing us in 12 months' time into the same league as our international competitors; and they will offer us the prospect of steady and sustained growth at a level which produces a steady and sustained fall in unemployment. There is no other way of achieving these objectives.

I know very well, because I have to deal with these problems in my ministerial post, of the difficulties and frustrations that the guidelines cause to many groups which feel that they have special grievances which cannot wait for redress. I know particularly how galling it is for some trade union negotiators who have been looking forward this year to using their bargaining skills on behalf of their members. But I believe that the British people have shown their traditional instinct for the main issue in giving overwhelming endorsement to the Government's policy, and I believe that that endorsement is growing in all sections of the community.

Everything is now going for us if we can only preserve our fortitude in the fight against inflation. We are already reaping rich rewards from the sacrifices of the last two years. If we stick to it, we shall move into the era of North Sea oil with the prospect of reversing a generation of decline in our relative performance. I believe that we can and will, and I hope that we shall have the support of all right hon. and hon. Members in achieving this objective.

5.4 p.m.

Sir Geoffrey Howe (Surrey, East)

The House has heard forecasts and proclamations of that kind from the Chancellor on many occasions in the last three-and-a-half years, and he will understand when I say that we respond to them with a certain degree of scepticism. He will recollect telling the House when he announced his Budget measures—[Interruption.] The Chancellor says that he has heard my speech before, but it has been very well deserved on every occasion. The scepticism has been amply justified by his performance.

The Chancellor will recollect that in particular when he announced his measures on 26th October he actually used the phrase that we were now at a "turning point ". What he may not remember is that on the first of his 12 Budgets, on 26th March 1974, he said: I believe that the action which the Government have taken in the past few weeks can mark the turning point in our people's post-war history."— [Official Report, 26th March 1974; Vol. 871, c. 328.] So we had the first turning point from him on 26th March 1974 and the second just three years and seven months later.

The promise was equally glowing on each occasion and the performance thus far has been equally dismal. I can well understand why Oscar Wilde said: Experience is the name everyone gives to their mistakes. That is certainly true of the Chancellor.

I come now to the forecast he has been making for the outlook for the next year or so, and I hope that when he comes to reply to the debate the Chief Secretary will deal with some of the points that need to be made a little clearer. One of the critical foundations of the Chancellor's forecasts is the prospect for earnings growth over the year ahead. But they are also dependent on the expectation of private sector investment growing at the rate of about 121 per cent. in that period. I suggest to the Chancellor that that expectation is contrary to precedent and to expectations and is quite critical.

More important than that, the forecast growth of the economy appears to depend very substantially on a considerable growth in stock building—to the tune of some 11 per cent.—so that almost half the expected growth is likely to come from higher stock building when stock levels are very high in relation to output and demand compared with, for example, 1970.

The third factor to which the Chancellor refers is the expectation of export growth by 6 per cent., although we must be sceptical in the light of the factors he mentioned that world trade will grow fast enough to achieve that. The right hon. Gentleman acknowledged that in his own speech. For all these reasons and, finally, because of the effects on export growth of any upward float in the value of the pound, we must be sceptical about the Chancellor's forecasts for the year ahead.

It has been said that a pessimist is a man who has been compelled to live with an optimist. We in this House have been compelled to live with an incorrigible optimist, and that may be why we have been turned into a nation of pessimists.

I want to deal with a point not touched on by the Chancellor which is of considerable importance. The Prime Minister sought to deal with it when he spoke in the debate on the Queen's Speech on 3rd November. In answer to a question from my hon. Friend the Member for Chingford (Mr. Tebbit) the Prime Minister was quite specific. He was asked at column 40 whether a £60-a-week man on average industrial earnings with two children would be as well off now as he was at the time of the last General Election. The Prime Minister said in answer to that "The answer is ' Yes '." Plainly that is simply not so.

I want to examine that in some detail. We have had further answers on the matter today by the Chancellor and the Prime Minister. It is worth looking at the exact position. Average weekly earnings between October 1973 and October 1977 have risen on the Prime Minister's figures from £44.80 to £80, an increase of 78.6 per cent. Over the same period the retail price index has risen by 92.1 per cent., so the real value of gross earnings pre-tax has fallen by 7.6 per cent. The real value of total tax and national insurance contributions on that wage—and this is the point the Prime Minister made—is now about the same. That is about the only part in which there seems to be anything in what the Prime Minister is saying.

But that is not the reality of what has happened to people's living standards, for while people have got poorer, the Government have had the same real tax take from people's pay packets. Tax and national insurance as a proportion of average gross earnings have risen from 20.7 per cent. to 22.6 per cent., and therefore the tax take from that average pay packet has risen by about 10 per cent.

Net disposable income after tax and national insurance has gone up by just under 75 per cent., while the retail price index has gone up by 92 per cent., and therefore there has been a much smaller movement in the real value of post-tax average earnings than in the movement of the retail price index.

Dr. Jeremy Bray (Motherwell and Wishaw)

rose—

Sir G. Howe

I shall give way to the hon. Gentleman when I have developed this point a little further.

This means that the real value of net disposable income, the real purchasing power of post-tax income, has fallen between October 1973 and 1977 by exactly 9 per cent. That is the period to which the Prime Minister referred last week when in answer to a question he said that the living standard had remained the same. It is not so. The living standard has fallen by 9 per cent.

To summarise, first, the tax collector's share of the average pay packet has risen by 10 per cent., which is what one would expect when thresholds have not yet moved in line with the cost of living and when the standard tax rate has risen from 30 to 34 per cent. Secondly, gross pay has fallen in real value by 7.6 per cent. Thirdly, net pay has fallen in real value by 9 per cent. Indeed, the figures were confirmed in the answer given to my hon. Friend the Member for Chingford. The real purchasing power of the £60-a-week man in December 1974, in current price terms, was £68.91, and by August 1977 it had fallen to £60.16. Therefore, there has been a fall of £8.75 in the real purchasing power of that man's wage over those four years.

It will be recalled that when this question arose in the House last week, the Prime Minister appeared to relish the argument. He said: Let us continue with this argument because I shall relish it. We shall destroy the Conservative Party with regard to this matter… —[Official Report, 3rd November 1977; Vol. 938. c. 40.] It appeared as though the Prime Minister had some secret weapon that would reveal to the British people, contrary to their understanding, that they were all much better off as a result of the Government policy over the last three-and-a-half years. The reality is that they are 9 per cent. worse off in average earnings and purchas- ing power. The Prime Minister's secret weapon is a boomerang which we shall relish brandishing at him on every possible occasion.

Dr. Bray

There is one element that the right hon. and learned Gentleman seems to have omitted. It is that the lower-paid workers have had much bigger increases than the average-paid and higher-paid workers. If the right hon. and learned Gentleman allows for that, his figures will not then quite match those of his final conclusion.

Sir G. Howe

I am dealing precisely with the example taken by the Prime Minister, that of the person on an average wage. Much publicity was given to the Prime Minister's answer last week, when he appeared to be saying in the House that the average worker was as well off at the end of three-and -a-half years of Labour Government as he was in October 1973. It is perfectly clear from the figures that I have given that the average worker is 9 per cent. worse off in take-home pay as a result of the policies of this Government, and it is on that performance that the Government will have to he judged when they face the electorate in due course.

Mr. Healey

The right hon. and learned Gentleman is sometimes fair on these matters. He has often told us, as have his right hon. Friends, that the increase in oil prices, which began as we came into office, cut our real national income by 5 per cent. Since then we have achieved a 1 per cent. shift of gross domestic product into exports. Is he saying that the whole of the deterioration that he claims has occurred in average standards of life is due to the policy of this Government and that nothing is due to the increase in oil prices?

Sir G. Howe

Indeed not, and I am glad of the opportunity to deal with precisely that point. Every country, of course, has been affected by the impact of higher oil prices. I am dealing with the manifestly false claim of the Prime Minister that people are as well off as they were—[Interruption.] The question that was put to the Prime Minister was perfectly clear. It was whether the £60-a-week man on average earnings is as well off now as at the time of the last General Election, and the Prime Minister's answer was "Yes ".

The Financial Secretary to the Treasury (Mr. Robert Sheldon)

rose—

Sir G. Howe

I shall not give way gain, because—[Interruption.]

Mr. Deputy Speaker (Sir Myer galpern)

Order.

Sir G. Howe

I have referred to the question that was put to the Prime Minister and his answer to it. It is in the Official Report. Is this challenged?

Mr. Robert Sheldon

rose—

Sir G. Howe

Let me first put—

Mr. Deputy Speaker

Order. If the right hon. and learned Member for Surrey, East (Sir G. Howe) will not give way, the Financial Secretary will not be able to intervene.

Mr. Healey

The right hon. and learned Gentleman asked my right hon. Friend the Financial Secretary if he challenged the statement. Surely, if the right hon. and learned Gentleman asks a question—

Mr. Deputy Speaker

Order. The occupant of the Chair cannot order or command any hon. Member who is addressing the House to give way.

Sir G. Howe

Does anyone on the Government side challenge the proposition that the post-tax real purchasing power of the average wage-earner has fallen by 9 per cent. since October 1973? That was the question with which the Prime Minister was dealing. [Interruption.] The Prime Minister perfectly clearly claimed that the average worker is as well off today as in October 1973, and the House must be in no doubt about this. The Prime Minister gave a wrong answer, and that it why his right hon. Friends are now wriggling. The post-tax real purchasing power is down by 9 per cent., and the Chancellor of the Exchequer seeks to defend that by saying that it is entirely due to what has happened as a result of the increase in oil prices.

Let us examine that proposition. Is the Chancellor really contending that this change in conditions has taken place as a result of the increase in oil prices and that we are no worse off than any other country? If he asserts that, he is asserting something else that is wholly untrue.

Let me give the figures on that. During the time that this Government have been in office industrial production in this country has fallen by 3.7 per cent. Of the other OECD countries the next worst performance has been by France where industrial production has risen by 1.5 per cent. The best performance has been in the Federal Republic of Germany, where it has risen by 7.9 per cent. Production has risen in other OECD countries, notwithstanding the oil crisis.

Prices in this country since the first quarter of 1974 have risen by 75 per cent. The next worst performance among OECD countries was that of Japan, where prices have risen by 40.6 per cent. In the best of the OECD countries, the Federal Republic of Germany, they have risen by 17.6 per cent.

In Britain the gross domestic product per head in the three years since October 1974 has risen by 0.3 per cent. In the next worst OECD country, Italy, it has risen by 3.8 per cent. In the best OECD country it has risen by 6 per cent.

The reality is that in every other OECD country, notwithstanding the impact of higher oil prices, there has been a real improvement in the wealth and well-being of the people of those countries. Britain has been alone in having a substantial fall over the whole three-and-a-half-year period under this Chancellor of the Exchequer and this Government.

The Chancellor has sought to advance an alibi for this 9 per cent. cut in post-tax living standards. He has sought to suggest that it is due to the impact of oil prices. Does he now accept that he cannot lay the blame for it on that cause? Does the Chancellor of the Exchequer accept that this country and the people of this country have done a great deal worse, as a result of his economic mismanagement, than the people of any other OECD country? I give the Chancellor his opportunity. Does he have any other alibi that he wishes to offer, or any other explanation, other than his own economic incompetence?

We have watched those mistakes taking place throughout the Chancellor's time in charge of the Exchequer. The first mistake was a public sector pay explosion running at 35 per cent. in his first year in office. It was the direct consequence of the campaign on which his party fought the 1974 General Election. It led to the imposition of a rigid incomes policy, the effects of which still persist, with the winter of strife and discontent that is ahead of us.

The second mistake that the Chancellor has had to correct was his massive expansion of public spending. It is all very well boasting today about having achieved a tighter control of public spending when between 1974 and 1976 it rose by 20 per cent. while production rose by 2 per cent. Throughout we told the Chancellor that he should check it. He told us that it would be "cruel folly" to do any such thing, but eventually he has reversed his policy, under the guidance and pressure of the International Monetary Fund.

Another mistake was that he came into office determined to impose massive increases in taxation on the people of this country. He achieved the imposition of those taxes with relish. Now, he is struggling to claw back the burdens that he has put on the backs of the British people.

His next mistake was to embark on a reckless policy of high borrowing which continued, despite our warnings, so that he lost control of the money supply in the autumn of last year. It was growing at an annual rate of 30 per cent. last September. The right hon. Gentleman talks as though this had nothing to do with him, but it was as a direct result of that fact that the pound collapsed, that we moved into dramatically high interest rates, and that there was a collapse of confidence.

Finally, he has refused, until recently, to contemplate floating the pound and he only did so when it was too late. The burdens heaped upon the people of this country and the price that they have had to pay have been caused by the Chancellor's economic mismanagement.

If we examine why the position has improved in the way that the Chancellor described, we find that earlier this month he referred at the Mansion House to changes of policy made last year. He said that the accretion of confidence in this country was due to the stabilisation programme set in hand at the end of last year. It is not usual to get such a candid admission from the right hon. Gen- tleman, but sometimes, even in his speeches, a little truth will out.

Why did confidence return only as a result of the December stabilisation programme? Why had it taken more than three years of his time in charge of the economy before the stabilisation occurred? It was because only then did he correct some of the mass of mistakes that he had been making and he took guidance from the IMF and began to stabilise the consequences of his own previous misjudgments and bad objectives.

However, he is still making mistakes that concern us. My hon. Friend the Member for Horncastle (Mr. Tapsell) rightly asked him about the outlook for exchange controls and the maintenance of control of the money supply. I am concerned about the Chancellor's use of the phrase "keeping the money supply close to the preferred range ". We should be happier if he were announcing a firm target, and we expect him to announce a firm target for next year before long.

Now that the right hon. Gentleman has decided to abandon control of the exchange rate of the pound, we are anxious about his failure to accompany that with changes in the pattern of exchange controls. The right hon. Gentleman says that we must not be misled by the size of our reserves compared with our debts. That is fair enough—as long as he stops boasting about the size of our reserves. It is wrong for the Government to continue maintaining, without relaxation, the existing pattern of exchange controls.

If the controls were relaxed, we should be able to acquire income-producing assets overseas against the day when North Sea oil runs out. We should be able to establish bridgeheads in other countries for our exports, as well as a more prosperous expansion of our invisible earnings sector. Until this is done, we shall be facing the consequences of a lopsided float. If exchange controls are continued, they will lead to an artificially high level for the pound, discourage prospects for overseas sales, diminish the value of overseas profits and damage profits, investment and jobs in the United Kingdom.

I appreciate that there are other arguments to be balanced against this, but I suggest that before long the Chancellor will be obliged to accept our advice—as he has had to do on the other matters to which I have referred—and begin to relax controls. He should not be prevented from doing this by the prejudice of Left-wing members of his party or by the TUC's failure to appreciate this matter.

The Chancellor of the Exchequer spent some time on the outlook for the year ahead on inflation in relation to pay income and earnings. The long search for stage 3, which was the cornerstone of his policy earlier this year, may have been responsible for the delay in the decision to float the pound. The Government have been obliged to recognise the inevitability of a return to collective bargaining, but the mistake that they continue to make is to carry on using the language, and even the sanctions, of incomes policy.

The Government are conveying the wrong message. The Chancellor told us today, rather sotto voce, what he told us much more plainly in July, namely, that if money supply is controlled along the lines that he has in mind, the total national increase in earnings that is compatible with that, without higher unemployment, is probably about 10 per cent. It follows that the average level of settlements compatible with his target is between 5 per cent. and 6 per cent. He told us that in July and repeated it today, but in the intervening months he and his colleagues have failed to ram home that message. All we have heard is talk of Government guidelines of 10 per cent.

What should have been said and what is still of great importance is that the average level of settlements—not a rigid guideline—should be 5 per cent. or 6 per cent. and that what can be paid depends on the profitability and prices of the employer, his cash reserves and his need for an increase in his labour force. Instead of getting that message through, the Chancellor and his colleagues have allowed a belief to grow in the existence of a norm of 10 per cent. As his arithmetic makes clear, that will lead to a growth of earnings that is incompatible with his target for inflation. The result will be that the Chief Secretary will be proved right in what he said on television a few weeks ago in an unexpected moment of candour. The right hon. Gentleman said that he thought that prices would be rising by 10 per cent. to 12 per cent. in a year's time. If that happens, there will be higher unemployment or the monetary guidelines will be blown aside.

Mr. A. P. Costain (Folkestone and Hythe)

Does my right hon. and learned Friend agree that the Government's policy would be better understood if the Chancellor told people, for instance, what a 10 per cent. or 20 per cent. rise for miners would mean in terms of the price of a ton of coal? Would that not help the ordinary person to understand what would be the result of a 10 per cent rise in wages?

Sir G. Howe

That may be one way of looking at the matter. There are many ways in which the message could be got across, but the Government have failed to get it through with sufficient clarity. They have allowed the 10 per cent. figure to emerge as a rigid guideline instead of making plain that average settlements of 6 per cent. are needed and that we are back to a pattern of collective bargaining along those lines.

It is against that background that we have to consider the prospects for the months ahead if the Government stay in office. What are the prospects for a real growth of employment and prosperity in this country? Although the Government have corrected some of their negative errors, they have not begun to make the positive changes that are necessary to restore the health of our economy, and they never will be able to do so.

In the debate on the way in which the country should be governed we have, on the one hand, the traditional view advanced by the Labour Party and embodied in the Labour Party programme for 1976—that the Government should be taking an increasing role in the management of the economy. The Labour Party thinks that public spending, nationalisation, Government direction, greater equality and higher taxation of personal incomes are good things. That is the view urged week after week in document after document by the National Executive Committee of the Labour Party. That was the view embodied by the overwhelming majority of the Labour Party at the last party conference but one.

We absolutely reject that view. It is a view that depends on extending the poor performance of nationalised industries, with low productivity and high costs, that leads to larger sectors of the economy moving into a debt-logged paralysis of the kind that, sadly, affects the British Steel Corporation and to further chunks of the economy moving into the strike-torn chaos of British Leyland and other such companies. It is impossible for anyone who approaches the matter rationally to believe that that is the right way towards the recovery of the economy.

The alternative is to restore the effective dynamic of a market economy, which is the basis that we would put before the House. [Interruption.] The hon. Member for Liverpool. Walton (Mr. Heffer) may mutter and tut as much as he likes on this point, but that is the basis on which societies other than our own are able to achieve success.

The United States economy in the last two years has provided an additional 6½ million jobs and is growing at the rate of 4 per cent. to 5 per cent. a year. Germany, Japan and other countries—[Interruption.] Labour Members may argue that unemployment in the United States is higher than in this country, but the rate at which the Americans are hauling it down is far better than ours. The United States has created 6½ million new jobs. It is a free enterprise economy which is growing and adding to the wealth of the people of that country and producing jobs on a fantastic scale.

Mr. Tom Litterick (Birmingham Selly Oak)

rose—

Sir G. Howe

I shall not give way at the moment. That is the way in which we should be going. If that is to happen, we require the Labour Party—

Mr. Litterick

rose—

Sir G. Howe

If that is to happen we require the Labour Party to end the campaign of envy which has characterised its approach to so much of out society. We must have a decisive shift in the tax structure and in the atmosphere of our society to reward those who take risks, those who assert their enterprise and those who work hard and achieve things.

Mr. Litterick

Will the right hon. and learned Gentleman give way on that point?

Sir G. Howe

I shall not give way.

We need to create a climate in which success, achievement, enterprise and hard work are respected and in which Government policy fosters personal success. It is in that area that the Government and the Labour Party will never begin to move sufficiently far in the right direction. We have seen the way in which the ordinary burden of income tax, as the Government have established it, depresses living standards. But how much worse it is for those who have been doing the skilled and managerial jobs and on whom the future of our economy depends. How do the Government expect to promote investment or risk-taking when alongside dividend restraint they have imposed capital gains tax in its present form and capital transfer tax in the way in which the Chief Secretary designed it and with investment income surcharge at 98 per cent?

How on earth does it make sense for the Government to spend the whole time talking about investment and then doing everything they can to discourage investment? That is the Government's policy. Is it any wonder that investment does not take place and that new businesses are not being started on the scale that we should like? Almost everything possible is done to discourage and make investment impossible.

We find a belated repentance in recent weeks by the Labour Party beginning to recognise the importance of small businesses. What a pity it comes so late. The Chief Secretary spent months of his life grinding through Finance Committees a most repressive piece of legislation of his own design—the destructive capital transfer tax. The right hon. Gentleman has begun to make changes now in concert with a rather improbable partner, his hon. Friend the Member for Keighley (Mr. Cryer). We would as soon believe that the Labour Party had become devoted to the development of small businesses and private enterprise as we would believe that the Italian Communist Party had become an enthusiastic supporter of the North Atlantic Treaty Organisation.

What will be the policy on which the Labour Party will fight the next General Election? Will it be the policy—which perhaps the Chancellor of the Exchequer and the Chief Secretary are beginning to understand—of recognising the importance of remotivating private enterprise. or the policy sedulously fostered in document after document by the NEC of the Labour Party? Will it be the policy of the Chancellor of the Duchy of Lancaster or that of the Secretary of State for Energy? Will it be that of the NEC or the Manifesto Group? Earlier this week my right hon. Friend the Member for Newham, North-East (Mr. Prentice) referred to the high probability—and he should know—that the Labour Party will want to take several larger steps further towards the creation of an Iron Curtain society. The Labour Party Manifesto Group—a shrinking minority—will support every step in that direction if it is written into the manifesto.

One group which will have no influence whatsoever on the policies of a future Labour Government is the Liberal Party. The Liberal Party has had precious little influence on the content of the Gracious Speech or on the Government's programme in this Session. Its influence on the manifesto of the Labour Party, on which it will fight the next election, will be about as substantial as that of a dozen flies on the wall in Transport House. The Liberal Party will be swept aside and will have to make its choice between two courses

Mr. Russell Kerr (Feltham and Heston)

Speed it up, Geoff.

Sir G. Howe

The Prime Minister and the Chancellor of the Exchequer mutter from time to time about the embarrassment that would be created for them if they adopted the policies of the NEC, and the Prime Minister talks about electoral albatrosses.

Mr. Ridley

On a point of order, Mr. Deputy Speaker. There appears to be a machine somewhere in the Chamber which every five minutes says "Speed it up, Geoff ". I do not know whether this machine has been planted. May we have it removed from the Chamber, because it is intolerable that such unintelligent and stupid remarks should be hurled at regular intervals across the Floor of the House?

Mr. Deputy Speaker

I am not aware of any machine. I have not heard that record played. I think that we are doing remarkably well considering that this is not a General Election meeting.

Sir G. Howe

I do not quite follow the force of that observation, Mr. Deputy Speaker.

The fact remains that when the time comes for the people of this country to make their choice they will have to choose between the two courses that I have outlined: either to restore the dynamic of a social market economy—accepting that some people will succeed, prosper and earn more than others—or to accept we know not what from the Labour Party, with the Prime Minister and the Chancellor of the Exchequer muttering in embarrassment about the pledges that the NEC will hang around their necks, with the Chancellor making speech after speech to party conferences saying that those in the Labour Party have nothing to fear but themselves and that they must take care not to score own goals and with the Prime Minister talking about electoral albatrosses, but with the Labour Party nevertheless going ahead with policies that will do great damage to this country.

Even if the Chancellor or any of his colleagues know what ought to happen, even if they have learned some lessons from the pressure of events, in the end they will be totally unable to lead the Labour Party to accept policies which will not do damage to this country.

Mr. Russell Kerr

Slow it down a bit.

Sir G. Howe

The Labour Party will remorselessly disregard the lessons that history should have taught it and will continue to move in a direction that will do nothing but harm to the people of this country.

5.40 p.m.

Mr. Bryan Gould (Southampton, Test)

When the Chancellor said in the mini-Budget debate two weeks ago that he did not want the exchange rate to rise, he did so against a background that showed all too clearly that the policy of a so-called stable exchange rate at a time when our costs were rising faster than those of our competitors was already causing great problems for our exporters.

The Government's own indices of export prices and the terms of trade, which are the most reliable indicators of our competitiveness, were already showing that we were less competitive than we had been for many years. A CBI survey showed that 61 per cent. of major exporters found price an inhibiting factor in securing new export orders and was on sharply rising trends. Major exporters such as Singer were laying off people in large numbers, and imports of manufactures were rising much faster than exports.

The true test of competitiveness is that the Chancellor dared not operate the economy at full employment level. To raise demand significantly would let in a lot of imports and would encourage British manufacturers to turn back with a sigh of relief to the easier and more profitable home market. It is little wonder that the Chancellor wished to resist any appreciation of the pound.

What made him change his mind so quickly? We are told that a conflict arose between the exchange rate policy and the money supply targets, a conflict caused by an inflow of hot money. We should ask ourselves whether the conflict arose in quite that way and whether the Chancellor chose the right way of resolving it.

The Bank of England in its most recent quarterly bulletin made the point that demand for money and velocity of circulation were more important than the quantity of money and that demand was not affected directly by external inflows. It is significant, too, that the IMF's concern is with domestic credit expansion rather than M3. We have substantially undershot the restrictive DCE targets which the Chancellor accepted and they will need to be raised to accommodate any element of economic expansion.

Excessive preoccupation with money supply is not the only charge that can be levelled against the Bank of England. Its competence in handling these affairs must also be called into question. Quite apart from providing speculators with a one-way upward option, it has resisted the fall in interest rates that would halt the inflow of hot money.

I wrote to the Chancellor as long ago as last March suggesting that interest rates should be brought down sharply. A month ago the Bank of England was still resisting that course. With the benefit of hindsight we see that the problem of conflict was on the point of resolving itself anyway. Even if there was a real conflict why did the Bank of England not consider calling for special deposits?

Where does this appreciation—albeit a small one so far—actually leave us? Some people argue that we should make a virtue of necessity, look to the Japanese and German models and solve our problems by making our goods more expensive. This is a simple-minded argument. It is like an athlete who is unsuccessful and who knows that the man who always wins has a high pulse rate when he crosses the finishing line. The unsuccessful athlete then assumes that the key to winning is to induce a high pulse rate before the start of the race. He then wonders why he collapses halfway round the track.

That argument ignores the fact that the Germans launched themselves into their virtuous circle from an immediate postwar position in which their industrial production was 54 per cent. of their prewar production. Ours was 108 per cent. Every since then the Germans have taken very great care, although the mark has been revalued, to resist revaluation at every opportunity and make sure that when it must be done it is by a very small margin. The Japanese also are concerned to make sure that the yen is not revalued, even to the extent of hoarding reserves in private bank accounts to stop an appreciation of their currency.

There are those people who say that price does not matter very much and it is things like quality, design and delivery dates that are more important. Of course those things are important, but people have been saying this for decades— for the better part of the last century. It is never explained how by making our goods more expensive and less competitive we shall effectively deal with the problems of non-price competitiveness.

Appreciation will not provide a solution. It will discourage the investment needed to resolve these problems by eroding our export markets and our profit margins. The proposition that we can put up prices of our manufactured exports by 23 per cent. over United States prices and by 13 per cent. over German prices since September of last year without damaging or in any way reducing our competitiveness would be laughed to scorn by any housewife.

A small number of people argue that appreciation should be sought and pursued rather than merely endured. These are the international monetarists, now seen as a small and isolated group in view of the great weight of opinion of economists and industrialists who have revealed their opposition to appreciation. One effect of appreciation, it is claimed, is its anti-inflation impact, but this is so small as to make no difference to people's willingness or otherwise to accept pay restraint.

The importance of appreciation in the context of the pay policy arises in a different way—from the fatal contradiction in the Government's reasoning. The Government are warning workers, correctly in my view, that they will price themselves out of jobs if they make excessive pay claims. I agree with that view. But how can workers take that seriously when the Government are demonstrating by their exchange rate policy that we have such a margin of international competitiveness that we can put up our prices overnight by 5 per cent. without any damage? If workers are in danger of pricing themselves out of jobs, why is the Government's action any less damaging? If we have that margin to play with, how do we stop wage negotiators from claiming their share of it? I hope that when the Minister winds up the debate he will explain the contradiction.

The impact of appreciation will be felt particularly in the field of investment. There is no incentive whatever to invest in new export capacity. Investors see their profit margins and markets disappearing before their very eyes. We shall see the effects of this on employment output and real living standards.

The only thing to be said for the Government's policies in these matters is that they are being forced to pursue them with a heavy heart knowing full well the dangers and difficulties that they face. What a contrast this is to right hon. and hon. Members on the Benches opposite who, to please their friends in the City, are calling for not just a high pound, but a relaxation of exchange controls.

I hope that the policy of the appreciating pound will be reversed at the earliest possible opportunity and that not a penny from reserves will be spent supporting the rate. If the Treasury is right—that there is a year's time lag between the movement of the exchange rate and the impact on the economy and on living standards—we can expect the disastrous results of the Bank of England's policy to be felt in a year's time. It is crucial that this policy is abandoned quickly and decisively.

5.50 p.m.

Mr. John Pardoe (Cornwall, North)

I was amazed to hear the right hon. and learned Member for Surrey, East (Sir G. Howe) indulge in what are two of his perpetual myths. The first is that the grass is greener on the other side of the hedge, by which I mean that he continues to be optimistic about the state of every economy in the world except our own. The second is that there was some golden age when all the problems that now beset the British economy were null and void. a time when we lived in happy and easy economic times, namely, before the advent of the present Labour Government.

Surely it is time that we all, irrespective of the party to which we belong, recognised that these are myths. It is time that we recognised that none of us can take any pleasure in observing the state of other economies in the Western world today. Many countries are in as bad a shape as we are, or arc in a worse state. Many of the problems that we now face and with which we are trying to deal are those that pre-date the capital transfer tax or any other changes that have been introduced by the Government.

I shall confine my remarks primarily to taxation, but first of all I shall comment on certain other aspects of the package. First, there is the issue of reflation. In many respects it is the most important issue that we have to face. The problem for us all is that the United Kingdom is not isolated. A world recession may well be just around the corner, yet we have hardly known what the world boom this time round is. The Japanese economy, the reducing rate of growth in the American economy and certain aspects of other European economies, especially the German economy, are the directions in which the world has to look if it is to expect real growth in employment, investment and other such prospects. In fact, none of those economies can offer any great hope.

Mr. Wynne Godley puts forward a view to which I find myself sympathetic. It is basically that the British economy now suffers from good old-fashioned Keynesian lack of demand and that good old-fashioned Keynesian remedies are the appropriate remedies for us to adopt. I think that that is nearer the truth than the arguments that are expounded from the Opposition and Government Front Benches.

We are suffering not so much from domestic saving but world wide saving. The saving that has taken place over the past three years has not been so much within the domestic economy, as in Keynes's day, though the savings ratio has been high, but in the Middle Fast. The money has been shored up in bank accounts. It has not been recycled into real industrial investment, either in the Middle East or in the Western economies. It is recycling that has not fully succeeded. It is clear that the desire to invest is low. That situation is not confined to the United Kingdom. The domestic savings ratio may be high here but it is the world domestic savings ratio with which we have to deal.

I should like to think that we could take the necessary measures on our own, à la Mr. Wynne Godley, to raise demand here, as an island, and to achieve the necessary full employment level. The effect of that action might be to inflate rather than to reflate and to suck in imports. We all know of the huge propensity of the British economy to consume imports in times of any expansion of demand. Therefore, there is a need for the management of world demand and not just our own. We cannot run away from our interdependence. What is really wrong is the tragic lack of penalties for scarce currency countries.

However, without reflation, and much greater reflation than we have had from the Government or that the Government are indicating they might give us in April, the unemployment situation will remain appalling. The unemployment situation is appalling now, and I do not mean only for the unemployed. It is bad enough for them but it is pretty poor for those who are paying for the unemployed.

Unemployment is imposing a real burden on the employed as well as the unemployed. It is reducing the living standards of all of us, whether we are employed or unemployed. I represent a constituency and part of a county that has some of the highest unemployment anywhere in the country. The male unemployment rate in October in Cornwall as a whole was 13.8 per cent. In Wade-bridge, in my constituency, it was 18.4 per cent. In Camelford it was 14.6 per cent. and in Bude it was 14.9 per cent. If anyone had said to me 10 years ago—this is Mr. Wynne Godley's point—that it would be somehow happily accepted that these rates of unemployment would be the natural order of things, I should have said that that was plainly ridiculous. However, the fact is that we have come all too easily to accept that level of unemployment, and to accept it throughout the Western economies.

It was made clear by way of an interjection in the speech of the right hon. and learned Member for Surrey, East that America has constantly had higher unemployment than the United Kingdom, in common with many other Western economies. However, on studying the unemployment figures in my constituency and having spoken to the unemployed in that area, especially the young unemployed, I have to ask myself whether my constituents will ever get back to work by means of the policies that are likely to be advocated by the majority parties that dominate British politics.

I am afraid that I am deeply pessimistic on that front. What is the level of growth that is required to get the British economy back to full employment? If we get 4 per cent.—we shall be lucky to get that in 1978—that will not see us back. The Treasury forecasts suggest that if we achieved a growth rate of 3½ per cent. to 4 per cent., which by the standards of the past would be a good rate for Britain, and if we achieve that rate for two years running, which would be miraculous to judge by Britain's record, we shall still not see a reduction in unemployment before the end of 1978.

What are the components of demand that are required to achieve a growth rate—it must be something over 5 per cent.—that will reduce unemployment in 1978? Will it come from consumer expenditure? And will that come from the breaking of the 10 per cent. Government guidelines? If everything has to come from consumer expenditure, clearly we shall not get the growth rate from that.

Will it come from exports? I confess that I am nearer to the hon. Member for Southampton, Test (Mr. Gould) on the revaluation of the pound than I am to either Front Bench. As the Chancellor indicated, on this point there is great intellectual uncertainty. I must say that it is quite something for the Chancellor to be intellectually uncertain: it is something quite new.

We are all receiving conflicting advice, on the one hand, that revaluation will help the British economy, on the other, that devaluation will help. I tend to side with those who say that the great growth period of the German economy, from which almost all the Germans' success has come, took place in the 1950s, when for a very long period--about seven to eight years—their business had the confidence that comes from an undervalued currency. They were able to invest in the knowledge that exports would be easy to sell. Unfortunately, British business has not been in that position since the war.

Mr. Litterick

Does the hon. Gentleman agree that another powerful factor operating in the development of the German economy at that time was that it had a virtually unlimited supply of cheap and unorganised refugee labour pouring into the country?

Mr. Pardoe: Yes, and I accept that even today comparisons of unemployment levels have to take account of the guest workers. If they are taken into account in making a comparison with German unemployment, the German figure is higher than ours, and no one should regard Germany as having solved the unemployment problem by means of the social market economy that the right hon. and learned Gentleman was advocating, whatever that may mean.

We must see whether some demand can come from exports. Judging by the level of the pound, I do not think that it will come from exports, because even before the revaluation of the pound Treasury forecasts were not good on the export record for the next 12 months.

Can the impetus come from investment? Profitability has been in longterm decline throughout the majority of Western countries and not just in Britain. Profits as a share of national income have been declining and inevitably in a free market economy that must mean investment will decline.

Can we change the attitude to profitability? I believe that we must do so, but I am not certain that it can be done without much more ambitious attitudes to it than the Government have so far adopted. We need a massive expansion of profit sharing and share ownership.

I accept immediately that there is a political problem here? Undoubtedly there is a view—a view shared by some on the Left of the Labour Party but by no means all in that group and by the majority in the TUC—that a massive extension of profit-sharing would undermine the centralised power of the present trade union leadership. That is a political problem.

We should try to change the whole nature of collective bargaining in Britain and what collective bargaining is all about. It should not be just about the standard of living over the next year or even about preserving the standards of various bargaining groups. That is important and I understand it. But it should be about the levels of profitability and of the investment required to increase the standard of living of all those members of the firm in the long term. Profit sharing cannot be just for the few. It must be for the many and must be made attractive enough for the many to demand it. The Government must face the political opposition within the TUC and must seek to make widespread profit sharing attractive.

There is an extraordinary contrast between the success of the financial economy and the lack of success of the real economy where the jobs are created and where people actually work. Within the last six months there has been an astonishing return of international confidence in the financial economy. But that confidence has not yet returned to the real economy.

Why has this financial confidence returned? Nothing new has happened in the British economy. Nobody six months ago could have been unaware of what was to happen to North Sea oil or its effect on the balance of payments. I believe that the new factor is political stability. I think that the Prime Minister was right to point this out in his contribution to the debate on the Queen's Speech. I also think that the Chancellor of the Exchequer was right to point this out in the television broadcast shortly after he announced his package.

I repeat, the new factor is political stability and a new style of government. It has convinced people all over the world that Britain does at last know how to govern itself. I know that some two party politicians may discount this, but it is extremely important to those who make business and financial decisions.

But there is still an appalling gap between the return of financial confidence and the return of confidence in the real economy which creates the investment and the jobs. The job that the Government and indeed all of us must now embark upon is to do for the real economy what has already been done for the financial economy.

The level of demand is important, but there are severe international constraints. Is there a psychological boost that Governments can use to change the confidence in the real economy? I believe that there is and that it lies in terms of tax. I am not talking of total taxation, because I have already indicated that massive reflation of the kind advocated by Mr. Wynne Godley would have severe effects if it were not accompanied by reflation elsewhere in the Western world. It is not a question of total relaxation of taxation but of switching the impact.

I have no doubt that the British people would react favourably to a massive switch from taxes on income to taxes on expenditure. The question is how it can be done. Most politicians on both sides of the House now agree that it should be done. Some many not agree with my choice of the word "massive ". I notice that even the Conservative Front Bench, if the document "The Right Approach to the Economy" is to be believed, is pussyfooting on the issue of the switch.

Can the switch be done by reflation—in other words by borrowing? I do not believe that the whole of any reduction in income tax can be made by means of borrowing. Some Conservatives believe that it can be done by cutting public spending. That is a myth, because, as we have discovered in the last few months. if we did not know it already, public spending cuts of this size generally mean public investment cuts, thus affecting jobs and wealth creation in the private sector, just as much as in the public sector. Those two things cannot be as easily distinguished as some Conservatives would have us believe.

Also much public expenditure is tied up in benefits and is related to the cost-of-living index. No party will ditch that commitment and, as long as inflation is with us, that part of public expenditure is bound to grow, and there is precious little else that one can cut.

Can these things be achieved by raising other taxes? I believe that is where we must go for the money. The Chancellor of the Exchequer today mentioned the possibility of a lower rate band, and that is a point that my Liberal colleagues and I have been pressing in discussions on Finance Bills and in discussions with the Government. An introductory rate of 34p in the pound is far too high and I think that the Chief Secretary believes that, too. Indeed, I think that every hon. Member in the House takes that view. However. we all know that there are administrative difficulties, particularly problems in the Inland Revenue, about introducing a lower rate band. I suspect that the major single reason for getting rid of the lower rates when Roy Jenkins took that course was administrative rather than economic. If we wish to bring a lower rate band back, we shall have to face those difficulties.

The best answer of all might not lie in the lower rate band but in a reduction in the standard rate of tax sufficient for it not to matter so much, but that means a standard rate of about 25p in the pound. That would cost around £4,000 million. I must point out to the hon. Member for Blaby (Mr. Lawson), who will be replying for the Conservative Front Bench, that it cannot be financed by increases in VAT. By how much would one have to increase VAT to reduce the standard rate to around 25 per cent?

Mr. J. W. Rooker (Birmingham, Perry Barr)

It would double it.

Mr. Pardoe

I agree that it would at least double it. In its present form VAT is not a very good revenue raiser. I do not make any criticism on that score because it has been so scheduled to exempt necessary items such as food, housing, children's clothing and similar matters, and that is quite correct.

However, if we are to make the switch we shall have to find a tax which is very broadly based, which is a very efficient revenue raiser and which is a tax on expenditure. I see no alternative but to raise the employers' national insurance contribution or social security tax, or whatever one likes to call it, which is exactly how the Europeans have managed to finance their very much lower levels of income tax. They have not financed their lower levels of income tax by means of a lower level of total taxation. They have financed it because they have much higher rates of social security tax.

I see no alternative to this. If hon. Members accept, as I do, that a reduction in income tax is now of the highest priorty, we have to accept the quid pro quo that this other broad-based tax will have to be increased.

Mr. Lawson

I am a little confused by the hon. Gentleman's preference for the national insurance surcharge on employers' contributions as against VAT, because a moment ago he was concerned about the balance of payments and exports and imports. Is he not aware that whereas VAT falls on imports but not exports, the national insurance surcharge falls on exports but not on imports?

Mr. Pardoe

I am well aware of that. One of the great advantages of VAT is that exports are exempted from it. That was always one of the arguments put forward for it. But the hon. Member for Blaby has to answer my point, and that is how far he wants to reduce income tax and where he is to find the money. If he has other sources from which this money can come, all right; we shall listen to them tonight and we remain to be convinced.

I have looked at every conceivable source in the British tax canon, and I cannot find another efficient, effective revenue raiser other than the social security tax. I say to the hon. Gentleman that although social security tax may have the effect on British business that he suggests and fears, it is strange that it has not had that effect on German business, which is charged at 15 per cent. of the payroll, or on French business, which is charged at 21 per cent. of the payroll. If they can pay these very much higher levels of social security tax and can still manage to export and sell in the world markets against us, why is it that British business cannot? I think that it can, and I think that it will have to do so, or else we shad have to give up the attempt to achieve a lower rate of income tax.

I come finally to the subject of small businesses. The small business sector in Britain has been in long-term decline, and I welcome the Government's proposals, as far as they go. But I believe that complementary to these proposals, a substantial reduction in income tax is necessary if we are to get a growth in the small business sector. My right hon. and hon. Friends and I are not pro-small business for sentimental reasons or because we have read the late Dr. Schumacher's "Small is beautiful ", or anything like that. It is simply because a cool and rational analysis of Britain's loss of world trade shows that it has taken place in the new products. It is our failure to get our foot in the door of the new markets for new products that has really caused the decline in our share of world trade. So many of these new products come from a bright idea through a small company, which then becomes bigger or is taken over by a big company. That is why the German economy in particular has been able to do so well in creating these new products and selling them in world markets.

I believe that if the Government are sincere in their adoption of the expansion of profit sharing, if they are sincere in their adoption of the commitment to foster the small business sector and if, above all, they are sincere in their protestations that they wish substantially to reduce income tax, and if they actually mean what they say and get on with it quickly—and I mean by the next Finance Bill—I think that many of Britain's economic problems in 12 months' time will seem a great deal less than they do now.

However, we are operating in unknown territory because of the great fear that we must have of a world recession and Britain's inability to stand out alone against that.

6.15 p.m.

Mr. Eric S. Heffer (Liverpool, Walton)

I think that everyone in the House would agree that the hon. Member for Cornwall, North (Mr. Pardoe) made a very interesting point when he referred to the payroll tax in Germany and other countries. This is obviously a matter which we should pursue with the greatest interest. Everybody is keen to have his or her personal income tax reduced, but I would hate to see personal income tax reduced and, at the same time, an increased tax on the purchase of goods, because that is a regressive tax and it means that working people in particular suffer as a result of higher taxation on goods. Therefore, if we are to deal with this question of taxation in a different way we have to look in different directions. I accept the point that the hon. Gentleman has made.

I am certainly no tax expert and, like everyone else in the House, I like to keep my income tax down to the least amount. That is obvious. However, what I want to talk about is the euphoria that developed a few weeks ago in relation to the economy and the financial situation. Everybody was saying that we really had turned the corner and had now reached an entirely new situation. It was said that the pound was strong, the reserves were better than ever and money was pouring in. I had a feeling that we were living in cloud-cuckoo-land.

I say that for the simple reason that Mrs. Jones in my constituency, whose husband has been out of work for two years, does not recognise this great upturn in the economic fortunes of Britain at all. We talk about an improved economic situation. When we have reduced our unemployment to reasonable levels, the day we get back to the concept of full employment and the day, for example, when we no longer have a 12.1 per cent. unemployment rate in the city of Liverpool, with over 9,000 youngsters under 18 years of age out of work, we can talk of having dealt with the economy. I think that we must keep this in perspective.

Financial upsurges in themselves do not deal with the economic realities and the economic problems. Of course it is much better to be in a better financial situation now, but let us look at some of the real economic problems. Many Labour Members have been arguing for a long time for greater investment, for planned investment. But even planned investment, even more investment than we have now, within a free enterprise, capitalist society, does not necessarily mean more jobs. It can mean higher levels of unemployment.

The more machinery there is, the fewer people are employed. That must be clearly understood. On Merseyside, a dispute dragged on and on about the new grain terminal. Why? It was because the brand-new grain terminal that was built needed only about 25 workers, who press buttons. It is a marvellous job. But this put a whole range of workers out of work. This sort of thing goes on the whole time. Therefore, even if we talk in terms of greater competition and greater investment, it does not solve the question of unemployment.

We have to have a different approach to the question of unemployment. That is why I personally have argued on the Back Benches on many occasions for the development of small businesses, because I have always believed that small businesses assist greatly in the take-up of unemployment.

Over the years, large areas of our inner cities have been destroyed and in the process small businesses have disappeared. We did nothing to renew those businesses. We destroyed thousands of jobs. We must deal with that problem. When we talk of investment, we must also consider alternative means of providing people with employment. More must be done.

We must face the fact that in our modern, mechanised, technological society there must be a reduction in hours of work and in the number of working weeks in a year. There must be earlier retirement—perhaps voluntary retirement, but it must be possible. We must have more training and retraining. I am in favour of educational opportunities for youngsters, but for God's sake let us not give them those opportunities and pretend that we have put them to work. We must give them real jobs. All these factors contribute to our real economic problems. If they are not dealt with, our working people will have no economic future. Members of the Labour Party in particular must concern themselves with these problems.

That raises the question of our wages policy. My right hon. and hon. Friends must accept that collective bargaining means collective bargaining. I have heard a very nasty story, which I hope is not true, that there have been discussions at a high level and that the nationalised industries have been told through the Treasury that wage increases must be kept down below 10 per cent. Perhaps that is why the Chancellor of the Exchequer said that if some people received more than 10 per cent. others would receive less.

I hope that the shipbuilding industry will not be picked out for this treatment. I hope that the companies which are conducting wage negotiations are not being told that they must keep wage increases well below 10 per cent. If that happened, it would be a recipe for further industrial conflict. That would be certainly the case if a 10 per cent. settlement had already been made in other organisations.

Either we have collective bargaining or we do not. If we do not have collective bargaining, the Liberal Party's argument would be correct. Either one operates a proper prices and incomes policy or one has free collective bargaining.

Workers do not like being pressurised, particularly when they are told at the same time that they have free collective bargaining. That attitude is leading to all sorts of difficulties. It is why we now have a problem with the firemen and with other sections of workers. My right hon. Friends must be more flexible. They must not indulge in creating fertility symbols. If they do, they will lead themselves into great difficulties with masses of workers.

Most workers have settled their pay claims within the guidelines. That is because our people are not stupid. A 10 per cent. wage increase for some workers is not bad, although I do not understand why there has to be a set figure. When the wage limit was £6 a week, I argued that some workers would receive more than they expected and that others, who should receive more, would be angry. People are now angry because of the years of wage control. My right hon. Friends must be more flexible than they have been in the past.

I turn to the problems in the construction industry. A total of £400 million will become available to that industry next April. The Chancellor of the Exchequer told the House that plans could be prepared now in readiness for April. However, it is difficult to plan if one does not know what one's allocation will be. I trust that the allocations are being worked out so that local authorities will know in advance how much money they will receive to help redevelop the construction industry. The money should have been made available now. A total of £400 million is not enough. The Government are playing around with this problem. The construction industry is in dire straits. The industry has the highest percentage of unemployed workers in the country. I appeal to the Government to do more.

I was pleased that the Secretary of State for the Environment announced another £180 million to be spent immediately. That is fine, but I shall not he satisfied until even more money is pumped into the construction industry. In one sense I am pleased with what we have achieved. Perhaps if we had not kicked up a row as we did we would have got nothing. It is always satisfying when pressure leads to results.

The Government should consider restoring the cuts in public expenditure as they affect local authorities. The cuts have led to increased unemployment. The results of some of the cuts are working through the system now. Unless we are careful, next year even more people working for local authorities will be without jobs because of the cuts that were made last year. This trend must be reversed now.

We cannot allow unemployment to increase further. We must talk in terms of reducing unemployment, particularly because of what is likely to happen as a result of the revaluation of the pound. That argument was brilliantly made by my hon. Friend the Member for Southampton, Test (Mr. Gould). I have no doubt that revaluation will lead to a higher level of unemployment. Unless the money that has been cut is restored to local authorities, unemployment will increase. That is why we must press for a restoration of finance.

This country is part of the Western capitalist world and we are suffering because of that. Contrary to what the right hon. and learned Member for Surrey, East (Sir G. Howe) said, if we did not have Government intervention the situation would be much worse than it is now. That must be understood. It is an absurd dream to think that abandoning any form of Keynesianism would give the Tories what they want.

That is not possible anyway. The right hon. Member for Leeds, North-East (Sir K. Joseph) talks utter twaddle on that subject. It is not possible. Even in the United States, that great citadel of free enterprise, there is Government intervention all the time, and the position there would have been even worse without it. I am amazed by this complete nonsense that I hear. It is the most absurd nonsense that is ever talked in this Chamber, by people with all sorts of degrees and other qualifications. I do not understand why we must listen to this drivel.

If the Conservatives ever get into power, they might try out those ideas for about six months and then, like the previous Tory Government, reverse them. They would have to do so, because of their experience.

Mr. John Mendelson

That is more than our Government are prepared to do.

Mr. Heffer

I almost replied to my hon. Friend "John, there is something in that ", but I had better not.

We are in a very serious position. We must decide now whether we go back to the sort of nonsense that I have described—I hope that the country will never do it—or advance beyond mere Government intervention of the Keynesian type and begin to introduce the type of Socialist ideas that many of us on the Labour Benches have been urging over the years.

6.31 p.m.

Mr. Reginald Maudling (Chipping Barnet)

Until I heard the concluding remarks of the hon. Member for Liverpool, Walton (Mr. Heifer) about Socialist intervention, I was almost in danger of agree- ing with him on some matters. It would be a bad day if that ever happened.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) dealt vigorously, and with a wealth of statistics, with the failure of the Chancellor of the Exchequer in his economic policies to date. I shall not go over that ground, but merely say that I support what my right hon. and learned Friend said. I want to deal with the present and the future.

As for the present, there is a fair amount of agreement that the Chancellor has got it about right this time. After 10 or 11 boss shots, it is about time he did. It almost restores one's faith in the law of averages, but not quite. Clearly, there is a need to increase demand. Anyone who says that there is excessive demand at present wants his head examined. There is a gross deficiency of demand in our economy. Basically, the right way to deal with that is by cutting taxation, because cuts in taxation do not, like increases in income, go straight on to the cost of goods. If they lead to higher output, they need produce no increase in unit prices. Therefore, I think that the Chancellor is right to add to the amount of purchasing power in the hands of the public, and to do it largely through an increase in personal allowances.

I am a little biased, because I did the same in 1963. I have been making some comparisons with 1963. It is fascinating to see that in that year I reduced the tax burden by £269 million and thereby relieved from taxation 34 million taxpayers. Such has been the progress of Socialist taxation since that it now takes £940 million to relieve from taxation fewer than 1 million taxpayers. That is a fairly significant statistic.

There have been two very important changes since 1963. One is that the inflation rate with which we are now trying to deal is totally different from the 3 per cent. or 4 per cent. that we were then very worried about and trying to cope with The second change is North Sea oil. if in 1963 and 1964 we had had but one of the major oilfields now available to this country our whole subsequent economic and political history would have been quite different, and I believe much more satisfactory from the point of view of the general public.

However, it is clear that expansion—cautious expansion—is now right. The Chancellor has done a certain amount, and he obviously intends to do more in his next Budget next year. He is right to do it stage by stage and to move in this direction. The real danger, as always, remains an incomes explosion. Time and time again the great threat to this country's economy and prosperity is an explosion in the level of incomes. This has become rather more apparent in the past few weeks.

Recent developments, the miners' claim and so on, have done a great deal to dispose of the extraordinary money control myth, the money supply myth, that has become more fashionable among academics than Dior's "new look" was among women after the war. The Chancellor of the Exchequer makes obeisance towards the money supply myth. He makes the appropriate remarks, but this afternoon I did not think that he believed in it. He is far too wily. I sometimes think that he is competing with the Prime Minister for the title of the downy old bird of Downing Street. The two of them are shrewd on these matters.

The money supply as such—M1, M3 and so on—is irrelevant to the real economy, to what people make and spend, except as an indicator. The amount of money has no effect on the real economy till it is spent, till it is changed into effective demand for goods and services. People can spend only what they earn, borrow or dissave. The limit of demand which controls the monetary side of potential inflation is the propensity to spend and the ability to do so. It is as simple as that: the total of earnings plus the total credit base.

I have reflected once or twice recently on some of the more extreme monetary theories. I find it very difficult to follow them. I am told, for example, that Professor Friedman has proved that the course of prices and inflation is fixed two years before by the movement in the money supply. As I understand it, that means that whatever happens about the miners' claim or anyone else's claim, whether it is for 50 per cent. or 100 per cent. more will make no difference to the course of prices in 1978, because it was all fixed back in 1976 by the money supply. One has only to say these things to see how absurd they are.

Another matter that I do not understand about the money supply is this. Suppose I had £1 million in savings. I wish I did. I have none at present. Suppose I put the notes in a tin box and keep them under my bed. They would be part of the money supply, but they would have no effect on the economy. Suppose I then bought gilt-edged securities with them and put those securities in the same box under my bed. That would be a very virtuous thing to do. It would reduce the money supply by £1 million, but the effect on the real economy would be nil. The only practical effect would be that, whilst I still held a Government obligation, instead of receiving no interest from the taxpayer I should receive a large sum in interest from him and increase the national debt service.

Against that background, I find it difficult to understand—and none of my monetary friends has explained it to me —how the money supply as such is, save as an indicator of what is going on, an effective contributor to dealing with our economic problems. It sometimes seems to me that trying to control the economy by controlling the money supply is like trying to control the pace of a motor car by twisting the needle on the carburettor. What are involved are the real facts. Monetary theories, which are fascinating as a subject for academic argument, are not harmful unless they intervene in real policy, and sometimes they can. There have been one or two examples recently.

I want to dwell briefly on the two subjects already discussed—the exchange rate and the incomes policy position. The Chancellor's performance over the exchange rates in the past week or two has been slightly odd. He seemed to change his stance rather abruptly. I shall not speculate about the reasons. He was probably right to allow the pound to float up by a certain amount. It is not a change between control and freedom, but is a question of how dirty our float is. It is bound to be a dirty float. When the right hon. Gentleman makes his decision about the exchange rate, it should be based on the right arguments and the factors that really matter.

An inflow of foreign funds to this country need not expand domestic demand at all, because it can be insulated by the taking of special deposits, as some have suggested. I should prefer to see variable bank advance ratios, but the Bank of England has always been against them. It is perfectly possible to insulate domestic demand in terms of earnings, borrowing or dissaving from a short-term inflow of foreign funds. It cannot be said that such an inflow forces the Government to move in any particular way, because they have their monetary instruments with which to deal with it. I sometimes think —if I may be frivolous for a moment —that one method I have thought of would be very effective in stopping an inflow of foreign funds, and that would be to reserve a permanent spot on all the overeas services of the BBC for Mr. Arthur Scargill.

However, the inflow of foreign money can be a real disadvantage to our economy, for two reasons. First, these funds are very volatile, as we have seen in the past. Second, they are interest bearing. This is money coming in on which we have to pay interest. It does not add a penny to our real wealth. All the hot money coming in may mean that we have more reserves, but we have exactly the same amount of indebtedness to balance those reserves, and there is not much joy in paying interest on vast sums of foreign money if one is not able to use that foreign money to earn interest with which to pay foreign creditors.

Some people argue that the answer is to relax on long-term investment. I am very doubtful about this. I was always brought up to believe that the classic recipe for bankruptcy in a banking organisation is to borrow short and lend long, and there is nothing shorter than foreign deposits flowing into London. I am not at all sure about this, but I think that the Chancellor was right to make some relaxation in foreign exchange control to encourage outward investment. I should like to see more, but the point is that the pace of relaxation on outward investment should be related not to the flow of hot money but to the genuine movement of the underlying balance of payments, which is improving substantially as a result of North Sea oil. This is a time when we should invest more overseas in income-bearing assets. It is a time for relaxation, but let the relaxation be related to our real overseas earnings, not to these temporary flows of money into London which are very bad for any such policy.

The Chancellor should base his exchange rate policy—have a policy ; he cannot just let it go—on broad considerations of a medium-term character. I admit that it is an extremely difficult matter. The present argument about a strong pound as against a weak pound reminds me of the old days at the Treasury when Lord Butler was Chancellor. He used to say that he shivered every time he saw a pig and a house because there was a wonderful argument to the effect that if the price of bacon went up this was bad for the cost of living index but very good for the Exchequer, and vice versa. The same applies to the exchange rate. If the exchange rate hardens, this is good for the cost of living index—I think that the hon. Member for Southampton, Test (Mr. Gould) underestimated the effect of a depreciation in the sterling rate on the cost of living index—but, on the other hand, it makes things more difficult for our exporters.

In my view, the Chancellor has a difficult row to hoe in dealing with these matters. My guess is that he was probably about right when on 26th October he said that he wanted to maintain the stability of the pound approximately at its present level ".—[Official Report, 26th October, 1977 ; Volume 936, c. 1448.] That seems to me to follow the good old maxim "If you do not know in which direction you should move, you should stay put till you do ".

The other aspect of policy which can be affected by monetary considerations is the basic problem of incomes and output. These, surely, are the factors which matter in our economic policy. We have had progress on incomes at a rate which cannot be sustained by output, and we have had a total failure to produce an increase in output commensurate with what so many other countries have been able to do.

These are not economic problems. They are political problems, problems of power and of purpose, problems of who has the power and what purpose he has in using it. They are political problems; problems for us in the House. I have spoken on this matter before, and I shall not dwell long on it now, but I make two. points.

First, the whole nature of industrial disputes has changed in recent years. Strikes are no longer strikes against a boss. They are strikes against the general public. The situation is entirely different, and there is a completely new moral and ethical basis, quite different from what it used to be. The strike against the public, against one's fellow citizens, for a larger share of the national cake, may be justified by feelings of being wrongly treated, but it is totally different from the use of the strike weapon against an employer as in the past. I do not believe that we have yet adjusted ourselves to that fundamental change, and I believe that an enormous job of informing and guiding public opinion is necessary before we can deal with this wholly new phenomenon.

Second, there is still no real effort to tackle the problem of low productivity. It is horrifying that from the same capital equipment and machinery in many parts of British industry we are producing little more than half what is being produced in Germany or France, or even in some cases in Italy and other European countries. This is our real problem—producing more from the same resources. More investment is splendid, but we could achieve an enormous increase in output from the existing investment if we went about it aright.

As regards taxation, I agree with what my right hon. and hon. Friends have said about the disincentive effect, but again I say that the real problem is political, not economic. There is not enough will in this country to be efficient. There is not enough regard for competence and efficiency at all levels. There is not enough desire to make things work well. Such attitudes have been eroded over many years, for many social and political reasons.

We cannot get back to the sort of prosperity which we should enjoy unless we can restore the right sense of ethos and of purpose and a desire to get results. It could all be done so easily. In a matter of one or two years, this country could be infinitely more prosperous and happy than it is today. Cannot Parliament, management and unions together try to find the answer?

6.47 p.m.

Mr. Douglas Jay (Battersea, North)

As I understood him, the right hon. Member for Chipping Barnet (Mr. Maudling) advocates a reduction in direct taxation as the proper remedy for the present situation. As that is really the purpose of the motion we are debating, I am sure that we will find him in the Government Lobby tonight. I agree with the right hon. Gentleman in advocating at this time what I think he called a cautious expansion. Indeed, I often find it difficult to disagree with him on many subjects.

As the Chancellor said, the country finds itself today in a far stronger economic postition than it was in a year ago, largely, I believe, thanks to the firm policies which have been pursued. But I hope that we shall not put these gains at risk now and risk the benefits of them by allowing the sterling exchange rate to float up too far. I am not one of those who, like my hon. Friend the Member for Southampton, Test (Mr. Gould), think that we should have actively depreciated the exchange rate even further than it fell in the earlier part of this year, and I take that view for the same reasons as were advanced by the right hon. Gentleman. I believe that is would have been too dangerous in pushing up living costs even further. But we must also avoid an excessive rise in the rate, and to that end I believe we shall find that we cannot carry on with an entitrely free float. It is never possible for very long, and there will have to be a degree of management by the monetary authorities.

I wholly agree with the Government, however—I may well disagree with the right hon. Gentleman here—that it would have been a mistake at this stage to embark on a massive easement of foreign exchange regulations. I say that because that tides can turn extremely quickly, and it is far harder to reimpose exchange restrictions than it is to take them off.

In all this matter, a good deal of confusion is, I believe, caused by the City journalists, and I say that while recognising that both the hon. Member for Blaby (Mr. Lawson), whom I congratulate on being on the Opposition Front Bench tonight, and I have been City journalists in the past. Understandably, perhaps, they have caused confusion by the phrase "money coming into the country ".

Strictly speaking, apart from gold, money does not come into the country. What happens is that holders of foreign currency purchase sterling and exchange one for the other. The sterling that they buy is either already in existence or it is created for the purpose by the Bank of England. Again I agree with the right hon. Gentleman the Member for Chipping Barnet. There is no reason why increased foreign holdings of sterling should he allowed to increase the quantity of money or, as it is now fashionable to call it, the money supply, still less the rate of spending, with all its effects on prices and incomes. Much of this foreign-held sterling can be left as inert investments or deposits in this country.

One is not forced to increase the quantity of sterling because foreigners have bought it. It might, therefore, have been better, in this situation, to have lowered short-term interest rates rather than to allow the exchange rate to rise, and to have enabled foreign holdings to be held as investment in this country. I agree with the right hon. Gentleman also that it is the flow of spending and not the stock of money that increases prices, production and employment, and it is about time that we got back to that simple truth.

However, none of these financial niceties should blind us to the far more important fact that employment and production, and. therefore, living standards, are all much too low. We cannot get full production and higher real standards without getting back to full employment. That is what matters most to me in this situation. We shall not get back to full employment in the conditions of today without an effective incomes policy. That is the hard truth, and I believe that that is the crux of the whole problem—and not only in this country.

If, in an economic debate, I might be allowed just one arithmetical platitude, it is this. As the total value of goods and services sold must be equal to the total of all money spent upon them—I do not think anyone will question that—it follows that, if pay rates and money incomes rise much faster than the output of goods and services, prices must rise. That, I suggest, is the basic fact that so many people have been neglecting, and no Price Commission and no Secretary of State for Prices and Consumer Protection can reverse the laws of arithmetic in this or any other respect.

It also follows from this that reflation of demand, such as the right hon. Gentleman and I and many others want, can expand real output if surplus capacity exists, and if pay rates do not rise faster than output. That means that reflation with an incomes policy is an intelligent and workable strategy. But reflation without pay restraint will again, in the conditions of today, lead straight to accelerating price inflation and, in the next stage, to the Government's being compelled to call a halt, with an even longer period of unemployment thereafter.

The hon. Member for Cornwall, North (Mr. Pardoe) mentioned Keynes. Incidentally, Keynes would not have disagreed with the argument that I am advancing about the necessity for an incomes policy. To show that, I shall quote just one sentence which is illuminating. It is from the celebrated Employment Policy White Paper of 1944, which was both approved and inspired by Keynes. That one sentence is as follows: Action by the Government to maintain expenditure will be fruitless unless wages and prices are kept reasonably stable. This is no discovery of mine. This is something which, with the approval of Keynes, was included in the White Paper which inaugurated the full employment policy. It was the pay explosion of 1974, provoked by the oil cartel on the one side and by the CAP of the EEC on the other, that forced on us the price inflation and the unemployment of the last three years.

Mr. Litterick

However fascinating the Keynesian point made by my right hon. Friend might be, may I ask whether he agrees that in view of the steadily rising unemployment figures since the 1950s, not only in our economy but in the economies of North America and many other countries, there is another element in the sum which suggests that we are in a different ball game? It is not the game that Keynes analysed and prescribed for but is a different game.

Mr. Jay

The different ball game is that collective bargaining has been pushing up pay rates too fast. There is not time for me to give all the evidence for that.

Having given my hon. Friend that answer, I go on to say that it was the price explosion of 1974–forced the Government, as it always will in these circumstances, into the inescapable dilemma that either they had to let price inflation run on, with all the consequences of that, or they had to stop it and face unemployment. That is the dilemma that we shall get into if we try to operate with no incomes policy at all.

It is also substantially true in these conditions that if the quantity of money, and, indeed, the flow of money incomes, is held stable, the faster pay rates rise in money terms, the more unemployment there will be. I believe that that is a horrid fact that many people have been trying to disregard during the last few months. With only a slight rise in the quantity of money at the present time, the sort of pay rises that have been demanded of about 30 per cent, all round would probably raise prices by 20 per cent. or 25 per cent. in the next year or 18 months and unemployment by nearly as much.

It is because we allowed that to happen two or three years ago that we now have the intolerable paradox of thousands of building workers unemployed and numbers of teachers out of work when all sorts of essential work needs to be done by those same people. This has happened because we have allowed demand and the level of wage costs to get out of balance. That in turn is why we are forced to indulge in all the job creation programmes and palliatives that we heard about yesterday from my right hon. Friend the Secretary of State for Employment. These are useful, and I support them in the present situation, but we did not need job creation in the 1940s and 1950s when we kept the rise in demand and the rise in pay rates in reasonable balance.

What we need is less laissez-faire and more of what my hon. Friend the Member for Liverpool Walton (Mr. Heifer) called Socialist intervention, in collective bargaining. In the present circumstances. I urge the Government as their first priority to do two things. First—the hon. Member for Cornwall, North did not mention—this if we really mean to check the pay and price inflation, for heaven's sake let us without delay launch a really effective attack on the common agricultural policy, which is holding up food prices and the cost of living at a moment when we can least stand it.

The right hon. and learned Member for Surrey, East (Sir G. Howe) complained today that real standards had fallen in this country over the past four years. That is in large measure due to the CAP, which resulted from the Act of Parliament which the right hon. and learned Gentleman's Government introduced. At present, most of the imported foods on which Britain depends chiefly—grains, meat and dairy products—cost in the EEC nearly double the free world price. That, together with oil, is a large part of the cause of the price inflation of the past three years. It is nothing short of madness to let this go on when we are supposed to be fighting a battle against pay and price inflation.

Secondly, I say to the Front Bench—it may not be necessary to say it, but I say it nevertheless—that the Government should stick resolutely to the 10 per cent. pay guideline and the 12-month rule. Even if this means temporary inconvenience, it is better than plunging back into the prices and pay explosion of 1974 and 1975, with all the resulting unemployment that that has caused.

Of course, I know that our present pay policy is only a one-year affair. It is extremely short-term anyway. In my view, we shall not get back to the real full employment that I should like to see until we have a permanent incomes policy backed by permanent institutions, not just a special inquiry for every awkward case that arises. It is tragic that we have missed the opportunity to do that in 1977 and must now go all round the circle with its various turning points again.

The 30 per cent. pay claims of which we read daily in the Press are one more proof that laissez faire in collective bargaining can no longer work in these conditions. However, as we have missed this great opportunity in 1977, let us at least grimly hold on to the incomes policy, frail and improvised as it is. Even a rubber dinghy is useful in the middle of the Atlantic if one has nothing else to support one. It is because I want above all to get back to full employment that the Government will have my full support if they use every moral and legal power that they have—including export credits, if necessary—to enforce their pay policy this year.

7.2 p.m.

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

I am happy to follow the right hon. Member for Battersea, North (Mr. Jay), and I shall return to his comments in my final remark.

I want to say a few words about capital goods investment. Its failure to recover seems to me on a worldwide scale to be one of the most serious aspects of our economic recovery. I say this because of the impact that capital goods investment can have on the problem of unemployment, which presents, as was said yesterday, a major responsibility to us as politicians to produce solutions.

Capital goods investment would have a multiplier effect which would begin to turn back the scourge that unemployment represents for us. It is notoriously difficult to get an accurate picture of what is happening within the general framework of capital goods investment. As far as I have been able to learn, the investment schemes which have a fairly fast pay-out have been holding up well on both sides of the Atlantic, but with any capital scheme which is by definition and of its nature of a longer-term kind there has been a massive downturn.

Figures in the United Kingdom are particularly difficult to secure, but in the United States it has been stated that the net return after tax which major businesses expect to see now on what I would call long-term investment has risen from 11 per cent. to 13 per cent. and that the extra 2 per cent. is a risk premium factor which has been added to their calculations because of the general economic uncertainty. Research and development expenditure is sharply down on both sides of the Atlantic.

The multiplier effect that one would like to see having a beneficial effect on the unemployment problem obviously has a reverse effect in the present situation. One needs only to think of the steel industry to see what that reverse effect is. The Chancellor has on a number of occasions said that he wishes that business men would invest earlier in the cycle so that they do not choose their time of investment at the very moment when the economy is moving sharply forward again and when capital goods become difficult to get hold of have some sympathy with the Chancellor's view, though any business man would have a better idea of his own interest than would the Chancellor or myself.

The problem that I have described becomes worse when capital goods manufacturers must put off their investment decisions because of the failure of their 3wn customers to recover. I want to discuss the causes of this failure to recover. Uncertainty is the greatest one. The inflationary imbalance in 1973 and 1974, which I freely grant was substantially caused by the oil crisis, is a cause. The worst recession since 1945 with inflation continuing right through until now is another.

I am not conscious of any precedent for the present economic situation that the politicians and the world economists have to deal with. My opinion is that economic theory, particularly in terms of the relation between the different factors in the economic education, is primitive when it is applied to the present situation and with the ruling uncertainty.

I find historical analogies unhelpful. The uncertainty I speak of can perhaps be best illustrated by remarks that the Minister of State, Treasury has made in the past when he has resisted suggestions that there should be a relaxation of investment disincentives on the private investor. He has reminded us that the savings ratio has remained peculiarly high, and it is difficult to see why it should have done so during a period of rapid inflation. I suspect that the private citizen and the private consumer suffer from exactly what private businesses are suffering from—namely, un certainty—and so prefers to put his money on one side rather than spend it

I want, secondly, to take up a series of articles in The Times about what should be done with the rewards of North Sea oil. The cost of capital has less to do with investment decisions than the business man's decisions on demand. I can confidently state that institutions within the City of London which I represent are well prepared to provide the finance as and when business men require it.

On the issue of uncertainty, I want to make two comments which I hope will not be regarded as controversial. They relate to matters for which we as politicians have some responsibility. The first relates to environmental controls, to which we and other legislators have not applied ourselves sufficiently over the past five or 10 years. The problem is that the individual business man who must implement legislation and is subject to controls does not know the extent of the cost in which he will become involved. That has been partly responsible for holding back a number of investment decisions.

I am not saying that the environmental controls are bad, but I sometimes wonder whether the unemployed, not only here but in other countries, would not at this stage rather have a job than have environmental controls promulgated now.

The second area of uncertainty relates to exchange rate instability, which has been endemic over the past five years. If the Chancellor has taken the right decision about the exchange rate, I have sympathy with him for saying that he saw the need for stability in the exchange rate so as to enable business men to operate with confidence.

The third area of uncertainty, however, is one about which I am much less happy. The Government may say that the unique economic situation with which they have been presented makes it difficult to find early and rapid answers. But the U-turns in Government policy over the past four years have been considerable. In the Shakespearian rôle of Second Murderer, the IMF has been very helpful in causing changes to occur, and I am happy about the constraints which have been seen in the past 12 months. But we cannot get away from the uncertainty which was engendered for business men by the policies which went before.

The speed of recovery which we have seen in the past 12 months is itself encouraging. However, it gives grounds for worrying about whether, because the economy has turned round so quickly, we have got not so much a U-turn as an acceleration of the Government's attitudes.

In the announcements made by the Chancellor of the Exchequer on 26th October, which we are implementing today, it seemed that he was concerned that inflation should not be re-ignited. It is very important that it should not be re-ignited. The anxiety of the Opposition is that the modest impetus which has been given to the economy in the autumn will be followed by a more massive impetus in the spring.

While the jury is out at the moment considering what impact the Chancellor's decisions will have this winter, the fear is that we may have a General Election upon us before the members of the jury have the chance of returning a verdict on anything that the Chancellor does in the spring.

If we regard investment and the return of investment as being critical to getting down unemployment, both sides of the House should work together to maintain stability and continuity in the way that the economy is managed so that business men can plan ahead with a greater degree of clarity than they have been able to do in the past.

I said that at the end of my remarks I would return to the right hon. Member for Battersea, North. I do so by way of a biblical footnote. We all know how few members of the 1951 Administration survived their 13 years out of office to return to the Treasury Bench in 1964. Some 13 years later, in 1977, the son of the right hon. Member for Battersea, North has bestowed the name of Moses on his father-in-law.

I am reminded of the jingle which I learned at my mother's knee: Joshua, the son of Nun, And Caleb, the son of Jephunneh, Were the only two Who ever got through To the land of mill: and honey. As we march through the chapters of Exodus waiting for Moses to come down from the mountain and tell us when the General Election will be, we on the Opposition Benches shall have an opportunity to speculate about who on the Treasury Bench is Joshua, the son of Nun, and who is Caleb, the son of Jephunneh. What is certain is that on the basis of their management of the economy in the past four years, taking an overall view of those four years, this Government will go out into the wilderness for another 13 years.

7.14 p.m.

Mr. Tom Litterick (Birmingham, Selly Oak)

I had prepared some speech notes, but as the debate progressed I found it more and more necessary to respond to many of the quite startling statements made in this debate by the most unlikely people.

First, however, I recall that it is almost exactly three years since I spoke in this House for the first time. On that occasion the theme of my speech was confidence. I talked about the illusion of pursuing the confidence of those who controlled the world's money and property as opposed to the necessity to pursue and to capture the confidence of the people who did the world's work. I cited in evidence examples of the type of constituents which I had in Birmingham, who were the people who produced Britain's wealth.

After being here for three years, I find that we have arrived at the strange situation where many people are congratulating the Government on having captured the confidence of those very people who are irrelevant to the real economy, except to the extent to which they damage it. By that, I mean the people who control the world's money and who own the world's property.

We are misleading ourselves dangerously if we allow ourselves to go down that path too far, thinking that we have the confidence of the people who hold vast quantities of sterling and that we are well on the road to some kind of success. It is an illusion. It is not true, and it never was true at any time.

No one in this Chamber knows how to capture the confidence of the people who own this world sufficiently to guarantee that they will make sure that the people of the world are allowed to work and produce the goods and services that the people of the world need. No one knows. Much mystical nonsense is written and spoken about getting the confidence of the business community. But no one knows.

It was not for nothing that Keynes referred to the investing public as "an ignorant rabble ". He did not do that in a fit of enthusiasm. He was a man who had considered carefully the behaviour of the investing public and who had realised that the aggregation of the individual decisions of the property-owning population added up more often than not to calamity for the rest of mankind and, at best, a position of relative prosperity which was temporary and unstable.

Keynes made that observation because it was a fact of history which anyone who examined the economic history of this or any other capitalist country could see as plain as the nose on his face. Keynes set out not to suggest or to prescribe a different economic order. He set out to save that very economic order which was so dependent on the ignorant, self-serving decisions of those people who owned the world. Sadly, there are too many people in the Labour Party who regard themselves as Keynesians without realising what his real purpose was.

But there was another Keynesian. He was something of a heretic, but he came out of the Keynesian stable. He was Roy Harrod, who wrote later that there was no way in a capitalist system of reaching and maintaining full employment without reaping an inflationary whirlwind. This was 10 years on from Maynard Keynes. Harrod was not a Socialist either, but he was a sensible economist and he understood the implications of the commitment by the developed capitalist nations of the world to achieving and maintaining full employment. He pointed out the paradox that it was impossible to have both stable, full employment and free enterprise capitalism. That is what we are now trying to live with, and we are trying to solve the impossible.

I was very surprised to notice the common ground between the right hon. Member for Chipping Barnet (Mr. Maud-ling) and my right hon. Friend the Member for Battersea, North (Mr. Jay). I hope that my right hon. Friend will forgive me, but the way what he said came out seemed a little sinister. I am sure that he was not able to develop his argument fully because of the limitations of time.

But, taking the two statements together —that the working class must accept that a discipline has to be imposed on them by the State or, as the right hon. Member for Chipping Barnet put it, that they must accept responsibility on behalf of the community—it is interesting to note that neither right hon. Member made any criticism of leaving the laissez-faire element in the economy. They want the business man to be free and to be Keynes's ignorant rabble as an investor, just as before.

The only conclusion that one can arrive at is that the strategy which both contributors to the debate were implicitly advocating for the working class is precisely that advocated by Benito Mussolini and Adolf Hitler. They did exactly that. It is well known now that Hitler and his economics Minister, Dr. Schacht, were Keynesians before Keynes. They were doing it while Keynes was still trying to work out his sums. They were effective, but the social and political consequences for Europe were disastrous.

I am sure that my right hon. Friend will take another opportunity to balance his argument. I hope that he does, because there are too many hon. Members on both sides of the House who do not understand the Fascist implications of the arguments they make, and I am not being frivolous. That by itself has virtually destroyed the speech I had intended to make.

Much talk is made of the need for investment. The hon. Member for City of London and Westminster, South (Mr. Brooke) referred to it as a central feature necessary for the recovery of the economy. But I cannot share his view about the consequences of a hypothetical resurgence of investment. The evidence suggests the contrary. The long-term effects of an increase in capital intensiveness in our type of economy has been simply to make people unemployed. My right hon. Friend the Member for Battersea, North suggested that it was the power of labour which had caused the unemployment. That, however, does not seem to be borne out by the facts.

In the gas, electricity and water industries, for example, productivity increased by 58 per cent. between 1964 and 1973. The labour force fell by 16 per cent. In the engineering industry during the same period, production rose by 47 per cent. and the labour force fell by 13 per cent. In the coal, oil and petrochemical industries, output increased by 72 per cent. and the work force fell by 9 per cent. In textiles during the same period, output went up by 29 per cent. and the labour force fell by precisely 29 per cent.

More recently, announcements by large conglomerates of investment programmes have made it clear that the employment effects of their investment decisions will be disastrous for the communities in which they operate. Recently, Pilkington's of St. Helens, for example, announced the largest investment project in its history, which spans more than a century. The cost will be £70 million, and the end result will be that Pilkington's will employ about 400 fewer people.

About a fortnight earlier, Du Pont, the American multinational, announced a large investment programme in Northern Ireland. The company is already located in Northern Ireland. My right hon. Friend the Secretary of State for Northern Ireland quite sensibly welcomed the announcement with a great fanfare. But the small print of the announcement was that when the project is completed fewer people will be employed by Du Pont in Northern Ireland. The large investment programme now being carried out by ICI will have the same ultimate effect on employment.

I suggest, therefore, that we are concentrating on the wrong thing, and that we are looking at investment in productive capacity with a view to its solving the unemployment problem. It will not do that. We are in the paradoxical situation that more intensive investment will create unemployment. That reminds me of the famous story of the occasion when Henry Ford and William Reuther, the former head of the motor car workers' union in the United States, visited a large new factory owned by Ford. Reuther surveyed row upon row of machines controlled by computerised equipment and turning out car components. There were virtually no people in that factory. Ford said proudly "Look at that. They will not go on strike." Walter Reuther replied" No, and they will not buy motor cars either." This is the logic of the situation of our manufacturing sector now. The same applies to both the private and the public sectors, and I have given examples from both.

Perhaps I should say for the benefit of some Conservative Members that I believe the production of water, gas, electricity and coal to be productive enterprise. Some of them regard these industries as non-productive, but that is foolish.

The fact that investment in productive activity creates more unemployment scandalises the layman who understands very well that many people in this country want for the products of industry and that their lives are impoverished for lack of them. Beyond this country there are hundreds of millions of people who want not only for the products of manufacturing industry but for the products of agriculture too. These people are starving and homeless. Our people and people in the Third world desperately need these things, and yet the Opposition insist that industrial and economic development can take place only so long as someone believes that he has a prospect of making a profit.

This in turn depends upon a factor called effective demand. The poor people do not have any effective demand. The effective demand of the unemployed will not impress any potential investor. The investor who creates unemployment damages the community in which he works, but he also cuts his own throat. That is the paradox at the heart of free enterprise capitalism.

Keynes understood that. He knew that capitalism had to be saved from itself and he offered a prescription that was used throughout the northern hemisphere. However, that has now failed. The long boom which got under way in the 1940s has collapsed. It will not come back because we are now in a different world in which the sort of process I have described has dramatic consequences wherever capitalism seeks to develop—not only dramatic economic consequences, but dramatic social and political consequences too.

We must face the fact that we cannot invest our way out of a depression by concentrating on manufacturing industry. There is a need to increase effective demand now in the economy. Hence the emphasis on tax reliefs. But that cannot be the whole story. If more can be produced by fewer people, surely there will be fewer people to whom to give tax reliefs, fewer people with incomes to tax, and, therefore, there will be less reason for production to take place—under the terms of capitalist logic.

My response to this is that we must at the very least think in terms of restorin the cuts in public services which have already been made and increase the public sector. That is not simply a matter of nationalising. I am talking about the service sector of an economy which in employment terms is more of a service economy than an industrial economy. This is true of the United States and Germany as well as ourselves and all the highly developed capitalist nations, just as it would probably be true of the highly developed Socialist nations on the other side of the European divide—but I do not know about that.

We are a service economy. Nearly 60 per cent. of our working population are not employed in production. That proportion is higher than in those economies which are popularly supposed to be more advanced than ours, such as the United States and Sweden. In other words, if we are to follow the path already beaten by economies such as that of the United States and Sweden, more people must be made unemployed, or at least displaced from manufacturing industry.

This fits rather well with the recent articles by the Editor of The Times. I understand that he is some sort of archpriest of Conservative respectability. He recently published a group of articles asserting that various major British industries were overmanned. The right hon. Member for Leeds, North-East (Sir K. Joseph) was very quick to jump in and say that he entirely agreed that British industry was overmanned.

What those two people were saying, in effect, was that more than 2 million people should be displaced from manufacturing industry, in addition to the existing 1½ million unemployed. How on earth is demand to be sustained if 2 million people are to be displaced from manufacturing industry? Neither of those two had anything to offer as to how we as a community would get out of that bag, except for the airy pronouncements of the right hon. Member for Leeds, North-East about a healthy, expanding economy absorbing the displaced workers. It was as if we were still talking about a nineteenth century economy. We are not a nineteenth century economy, and there is no obvious place in which a free enterprise system can absorb displaced labour on that scale.

One of the Conservative speakers today attempted to suggest that this was being done in the United States, but the United States has the same problems and it is unable to absorb the displaced labour. Unemployment remains persistently high in the United States, the highest in the northern hemisphere. That in itself is surely an indication and a warning to us that if we do not concentrate on the service sector we shall be failing woefully. As far as I know, there are no NEDCs, little or big, dealing with the services sector in any comprehensive way. They are all concentrating on the manufacturing sector. I have no brief for them, because they are totally powerless and have no real effect at all. I am looking for a planning mechanism which uses the information produced by the NEDCs, with an executive authority which would make sure that the rational processes of the NEDC discussions are actually made effective in the economy.

The important thing is that we should produce goods and services that people need, not that we create jobs for the sake of creating jobs. Therefore, attention ought to be devoted, and devoted urgently, to the development of the service sector and to the restitution of the cuts already made in the public service sector. Serious attention should also be paid to the development or the regeneration of the private sector, because that is the labour-intensive part of the economy. There and there alone can the displaced labour for manufacturing industry he absorbed.

It has been remarkable during this week, as we have proceeded from one major subject to another, that we have concentrated wholly and solely on the economy, with the exception of one day. From this has emerged a very strange fact about the Conservative Party as it stands today. It seems that its priorities are that we need more policemen, more prisons, more soldiers, more armaments and a level of value added tax that is approximately four times the level we have now. The mind boggles. [Interruption.] Well, that is the implication of the Conservative argument about taxation. The Conservatives want to shift the burden of taxation from direct to indirect taxation, and since the only indirect tax left is VAT, and since the Conservatives wish to cut direct taxation by such a vast amount, the result must be a gigantic increase in VAT.

Above all, however, what the Conservatives clearly wish to do is to have the trade union movement broken. That is their recipe for creating confidence in the investing public; the trade union movement must be hamstrung and rendered totally powerless. My impression is that the present Government have inadvertently gone too far along that road already, but I think we are beginning to see common sense. I doubt very much whether that prescription will impress any but the most bigoted in Britain.

7.35 p.m.

Mr. Ian Stewart (Hitchin)

I want to follow the hon. Member for Birmingham, Selly Oak (Mr. Litterick) in one respect only, and that is to make a completely different sort of speech from the one that I intended to make when I arrived here. I thought that he painted very clearly the constrast in the choices before any economy. We can either have full employment or some sort of free market. No free market is perfect in producing 100 per cent. employment The only way to get 100 per cent employment is by losing all political freedom, and all of us on the Opposition side—and, I hope, most hon. Members on the Government side—would agree that it is better to live under our system than in Russia, where these freedoms do not exist.

The debate has ranged very widely over the fundamental industrial and economic problems and the economy at large. It has touched a number of times —starting with the Chancellor of the Exchequer's own references—on the exchange rate and what has been happening in the financial market. Many conflicting and irreconcilable comments have been made this evening. If I may say so without immodesty, I probably know as much about this subject as anyone else in this House, because I have been a practising banker for 17 years, and for many years it has been my responsibility —[Interruption.

Mr. I,itterick

I am sorry. I did not mean to interrupt the hon. Gentleman.

Mr. Stewart

That is one of the most gracious apologies that I have had in this House, and I accept it warmly. Having had the responsibility for advising those involved in industry and commerce for some considerable time, I feel that I must put the practical man's view of some of these things, because it sometimes gets submerged in a great tide of economic froth and the realities of the subject are completely swept away.

My first point concerns the relationship between the financial market and what, following the Governor of the Bank of England, we have come to call the real economy. In spite of what my right hon. Friend the Member for Chipping Barnet (Mr. Maudling) and the right hon. Member for Battersea, North (Mr. Jay) have said, it is not possible to separate the two, because the real economy operates with real money, which flows through financial markets, and it cannot be pretended that the one is isolated from the other; nor, as my right hon. Friend the Member for Chipping Barnet said, can we ignore the effect of changes in the money market.

We cannot say that surplus foreign-held money can be stacked up in the economy without having any effect. These days the international markets are so complicated and the domestic economy is so complex that it is quite impossible to isolate substantial monetary resources whether international or domestic, from having an effect on the economies in which they exist. I do not, therefore, accept the theory that the money supply does not matter, or that it does not matter what money there is in the system. It does matter, but it can be handled in different ways.

This has been brought to the fore in a very dramatic manner in the last few weeks by the problem which has arisen over the sterling exchange rate. It is difficult to make detached comments on this subject, because I never really thought that the exchange rate would become a subject of such hot political discussion as it has recently. But the fact is that it has. The reason is that behind the behaviour of the pound have been a lot of other political and economic forces which have brought us to the position in which we now find ourselves.

As one who has watched the exchange markets at fairly close quarters for some time, I should like to comment on what seems to have happened. During the past year, the Government have at last taken serious steps to get public expenditure under control. They did this without making it obvious until the end of the year, and they failed to get some of the benefits from their actions because the Chancellor of the Exchequer was always looking over his shoulder and trying to pretend that the restraints were not as real, effective or determined as they proved to be.

Eventually, further restraints were imposed at the instigation of the IMF towards the end of last year. At that time the British economy was at a very low level of activity and the financial markets were badly rattled by the experience of previous months. It was clear that the Government, fortified by the IMF, were going to be strict about public expenditure and were going to reduce the public sector borrowing requirement. They were going to impose restraints on the growth of the money supply and sustain interest rates at a high level for as long as necessary.

In these circumstances, there was only one factor missing to ensure a strong currency—and that was a rapidly improving current account balance of payments. Partly because of changes that were gradually taking place in the non-oil sector over quite a long period, but more fundamentally because of the major impact of oil revenues on our current account, the balance of payments was being fundamentally affected at about the same time as this combination of other circumstances.

Exchange markets are markets in money and if an economy is strong in its overseas account and is following orthodox policies in budgetary and monetary affairs, the currency of that country will begin to find favour in the international markets. That has always been so and will always be so. There has been no single instance of any currency of a country that has a sustained balance of payments surplus and is pursuing orthodox budgetary and monetary policies being a weak currency and it would have been folly to expect that we should be the exception to the rule.

Something had to give. Those who had taken a position against sterling thought that it was no longer necessary to do so and unwound their protective position. It was considered that interest rates of 15 per cent. were exceptionally attractive compared with what could be found elsewhere.

British companies ceased protecting themselves so vigorously against the possibility of further falls in sterling and foreign bankers and investors decided that it was a fair bet to hold some reserves of sterling or at least not to get rid of it immediately they obtained it—as they had been doing for some time. This was the start of the build-up of the capital flows.

I was surprised by the Chancellor's description of what happened. He said that the early part of the strengthening of sterling was due almost entirely to the unwinding of speculative positions built up towards the end of last year and that from about June the strength of sterling had basically derived from the weakness of the dollar. Both these statements are true, but they are not the whole truth.

There has been a substantial improvement in the international opinion of sterling as a currency during 1977. The capital flows reflected a positive decision by many people abroad that sterling is one of the relatively few currencies that is more likely to appreciate, rather than depreciate, against other currencies.

It was this fact that eventually forced the authorities to alter their intervention policy on the exchange markets. To start with, they allowed the strain to be taken mainly by interest rates and we had sharp falls in interest rates for the first nine months of this year. There was a pause at about 8 per cent in June and July and some commentators said that rates had come down so far and so fast that they were bound to turn round and start going up again. But these people had misread the signs. Money is a commodity like any other commodity. If no one wants to use it, or, if the demand for its use is less than the supply, interest rates will come down—and they did.

The position improved because the Government sustained a responsible policy on budgetary and monetary control and all this time the current account surplus was building up. Month on month it is in substantial surplus and is likely to remain so for the next three, five or even 10 years. In these circumstances it can be predicted that sterling is likely to remain if not one of the strongest, at least one of the less weak, currencies for a considerable time.

There is an element of unreality in the debate over whether the Government should have changed their intervention policy. I do not think that they could have done anything else. Indeed, I was surprised that they sustained the policy for as long as they did. If I were being charitable, I should say that the probable cause was an excess of caution in Whitehall and the Bank of England, but a movement in that direction was inevitable and is likely to continue.

It does not make sense for the hon. Member for Southampton, Test (Mr. Gould) to say that we should depreciate our currency. In some economic models it might help to have a lower international value for sterling, but how are we to achieve it? We cannot force the value of any currency sharply in the opposite direction from that in which the market thinks it should move.

Mr. David Mitchell (Basingstoke)

Would we not bring about a rapid depreciation of the value of our currency if we allowed the Labour Party's NEC to continue manufacturing proposals for the future government of this country?

Mr. Stewart

Even my hon. Friend's interesting intervention underestimates the strengths of the financial markets. The way in which the pound was not unsettled by the Government's failure to obtain a formal stage 3 of the pay policy and the way that the markets have shrugged off some of the more threatening noises of the Labour Party NEC, the miners and others, show that we have to recognise the realities of the exchange markets.

Mr. John Watkinson (Gloucestershire, West)

I think that the hon. Gentleman is missing the point that my hon. Friend the Member for Southampton, Test (Mr. Gould) was putting earlier. My hon. Friend said that the prices of our exports are rising and that this will make them more uncompetitive and will therefore affect the real economy—which the hon. Gentleman does not believe exists. My hon. Friend fears that in these circumstances we shall use North Sea oil to finance a tide of imports and that once the oil is gone, we shall be left without a manufacturing base.

Mr. Stewart

That may be what the hon. Gentleman was trying to say, but I do not believe that it is a practicable option. We cannot force markets against their natural direction for any length of time. The record of Governments who have attempted to intervene persistently in the exchange markets to force up or down the value of their currencies against the level judged proper in the markets has been that the markets have always won the battle and that the cost has been a sharper and more disruptive adjustment in the end than would have been necessary if the Government had recognised these forces earlier.

I am saying that it is best to recognise these forces. We should say "We are in this situation and, although some people, some industrial companies and some economists do not like it, we should try to make the best of it ". If we start from that premise, we can possibly think of other ways in which the disadvantageous consequences of a stronger currency can be compensated. But if we persist with the idea that it is still an option to have a weaker currency and that that is an alternative approach to our industrial problems, I thing that we shall be confounded. Not only will the measures which we bring forward on this assumption not work, but, after a time, the assumption itself will be proved wrong, so the whole thing will have to go out of the window.

The proper course now is to accept the inevitability of a stronger currency than we might wish to have for some purposes and to use the virtuous parts of that situation to try to compensate for the disadvantages. We must remember that, although there will be hiccups in these things, the likely pattern in the next year of two is that we shall have a substantial visible current account surplus, quite apart from the invisibles. The level of our investment in the North Sea is declining at the same time as the yield from the North Sea is rising. The effect of a rising yield is, in the first place, to replace imports of oil, and eventually it will create surplus capacity which we shall be able to export.

Those two movements, apart from the underlying trend which I think still exists in the non-oil economy, will create a strong current account surplus. The effect of that on the market is that month by month, week by week and day by day foreigners will have to be buying sterling at least to the extent of the amount that British exports exceed British imports. and that will support the currency.

That is one reason why in the foreign exchange markets dealers and investors always say that a country with a strong current account surplus has a currency which they wish to hold. Like it or lump it, that is what we have to face over the next few years. Therefore, we should settle down and try to work out policies on this basis rather than do something entirely different—as some hon. Members have suggested this afternoon—which would be bound to fail.

The problem of inflation, which has also been raised in the debate, also deserves a word from me. It is very easy to say that we must have an incomes policy because wages create cost-push inflation and, therefore, how can we be without it? It is also easy to say that incomes policies distort the distribution of labour and creative effort in the economy, that we have seen it happen every time, and that we cannot possibly have incomes policies. However, not having an incomes policy creates problems and having an incomes policy creates problems.

I suspect that in future some sort of incomes policy will crop up from time to time in certain political or economic circumstances, because in those special circumstances it may be judged the lesser of two evils for the time being. I suggest that that is what caused the present Government to introduce their incomes policy and what caused the previous Conservative Government to introduce an incomes policy.

Mr. Nick Budgen (Wolverhampton, South-West)

Is my hon. Friend arguing that an income policy has an economic effect or merely a psychological effect?

Mr. Stewart

I think it probably has both. The problem about incomes policies in the past—this is the case with the latest incomes policy that we have had—is that the other remedial measures should have been introduced much sooner after the incomes policy was introduced so that the beneficial psychological impact that it might have had in the early stages was not regarded as being sufficient in itself, but should have been accompanied by the corrective measures at the time.

I dislike incomes policy as much as many other hon. Members. On the other hand, I think that it is unrealistic to say that in no circumstances should the Government try by one means or another to intervene in the way in which wage settlements are reached over the broad spread of the economy. It is quite unrealistic today, given the structure of our industry. the nature of our unions, the type of labour force and the problems we have in adjusting to the inflationary problems which crop up from time to time to abandon the idea of an incomes policy absolutely.

However, the point is not so much about an incomes policy because, fortunately this one is coming to an end, but to make a comment about the reaction of the exchange and financial markets to wage claims and settlements. A few months ago I detected an air almost of disbelief in Treasury and Bank of England circles that the pound did not suffer seriously when it was learned that a formal incomes policy was not going to be perpetuated. It astonished me that that was their reaction. They had under-estimated the effect of getting the financial factors right, just as in the past they underestimated the effect of getting the financial factors wrong. If we do not have good budgetary control and monetary discipline and if we have inflationary trends whether they come from commodity prices, incomes or whatever, we tend to weaken our currency, because it works quickly through to our balance of payments. But if we have strict control of the budget and strict monetary control as well, and if the balance of payments is not going to be threatened for a considerable time, almost whatever wage settlements are introduced or whatever the rise in earnings, the exchange markets are likely to shrug off the implications for a considerable time ahead.

The lesson is that, when we are dealing with the currency, we are dealing with markets. The markets observe what is going on and come to their own view about it and eventually the situation responds to the market view. It is possible to influence the market view by one's behaviour. Because of our more ortho- dox behaviour in the last 12 months in business affairs, the markets have been favourably influenced. But we need the right conditions and confidence, and it has taken time for this to come about.

I have used my time making a rather technical speech, because I thought it important to make these comments clearly. I hope that I shall be permitted a few moments to relate these matters to the problem about which I was going to speak—the relationship between the financial markets and the rest of the economy. Just as the markets in the exchanges are markets in money, so the whole of the rest of the economy is a market in human effort. I believe that human effort is much more important than investment in bringing about an economic recovery. The motivation of individuals within the economy is probably the single greatest force for progress from our present situation.

I do not think that we can start to get that motivation right with the present level of taxation, as my right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) said. I do not think that we shall get the wider economy right until we restore some prestige and value in crude money terms to human effort. If we make it worth while for people to work so that they can keep more of what they earn, I think that they will willingly go about their business and we can put Britain on its feet quite quickly.

The British people are not suckers. Their energies over the last few years have been taxed almost out of existence. That is the basic reason for the demoralisation of the British economy.

8.0 p.m.

Mr. J. W. Rooker (Birmingham, Perry Barr)

I shall be brief and, compared with the hon. Member for Hitchin (Mr. Stewart) who has just spoken, I shall lower the tone of the debate somewhat by talking solely about the Ways and Means Resolution before us. I give a very warm welcome to these resolutions—indeed, it would be churlish of me to do anything else—because the figures for the tax threshold are way above those that my hon. Friend the Member for Coventry, South-West (Mrs. Wise) and I attempted to put in the Finance Bill last summer. I congratulate the Treasury on taking this decision at this time. It is an important step.

The fact that we have had three changes in personal allowances during the course of one financial year should not be regarded as exceptional in any way. There is nothing wrong with the Chancellor making adjustments which he thinks are suitable in his judgment of the economy.

Listening to speeches from Opposition Members, I find it incredible that they, and the Leader of the Opposition particularly, are opposed to the tax reduction implicit in the first resolution. On the opening day of the debate on the Queen's Speech, the Leader of the Opposition said that this change was a retrograde step, and she castigated the Chancellor for making what is, in effect, a reduction in income tax—something she is always belly-aching about.

The message should go out loud and clear that this has been done by the Treasury and that it should take all the credit due for the changes that the resolution makes. I hope that hon. Members will make a song and dance about it during the course of debates on the Finance Bill.

In paragraph (2), the first sentence says: The above amendments shall not apply for the purposes of subsection (2) and the corresponding provision in subsection (3) of the said section 22 of the 1977 Finance Act. This is the indexation part. I have looked at that sentence very carefully, and I can see two different interpretations of it. I hope that the Minister will answer this point. because I want to go away quite clear about what the Treasury has in mind. Does it mean that the Chancellor is saying that if he wishes to index at Budget time next year he will do so on the basis of the Finance Act of 1977, Section 22, before amendment by the Ways and Means Resolution, or is the Chancellor leaving himself open to index on whatever personal allowances are operating at the time of the next Budget? These are two interpretations that one can place on that sentence. If I am right in the first interpretation, it will be easy for the Treasury to say "Yes ", and I would in no way criticise that. I will not cause any problems over indexation in the next Budget provided that certain other things come forward.

We have talked about the lower rate tax band. I wonder at what level it is to be set and what band of earnings it will cover. The introduction of the band can only be good even though it is very expensive to do. I want a commitment from the Chancellor that he will try to bring in a system of a lower rate tax band which has no spin-off to higher rate taxpayers. I want to see a lower rate of 20 or 25 per cent. on the first £1,000, and if the higher rate taxpayers do not get that benefit it will release a lot of money in order to make the band wider or the rate of the band lower. Alternatively, it would leave more money available for child benefit.

It is fair to point out that the changes in the resolution, while not anti-family, do not take sufficient account of the needs of families. Had we not been phasing out the child tax allowance, many hon. Members on this side of the House would have liked to raise this allowance and index it last summer. But, of course, it would be absolutely crazy to come forward with that sensible proposal in view of the phasing out of the child tax allowance and the bringing in of the child benefit system.

I want to see the lower rate tax band introduced in such a way that it will give a further spin-off to child benefit, because I consider that this is vitally important. I would be prepared to buy any policy in the next Budget for the maintenance of these present thresholds, which is implicit in what the Chancellor has said, if this is done. When the Finance Bill finished last summer no one saw a further raising or reducing of the thresholds, and it would be unfair to capitalise on this windfall. I would not want to go to the stake on this issue in the next Budget, provided that the chancellor brings certain things forward.

The new money involved in child benefit—which will cost £330 million—is only £90 million. The rest will come from the phasing out of the child tax allowance. Perhaps this could be postponed for another year or two in order to give additional benefits to families.

Given that change, I warmly welcome the Chancellor's statement. I shall not get involved in the arguments about tax reductions vis-a-vis public expenditure. I have made my opinions on this matter clear so many times before. I am in favour of high taxation to finance high public expenditure, but I believe that the high taxation should be of the highly-paid members of society, particularly those on above-average earnings There is no sense in a Labour Government taxing people who are below the poverty line.

The incomes policy has been mentioned a lot today. My right hon. Friend the Member for Battersea, North (Mr. Jay) said that it is clear that the Government will stand firm on the guidelines of 10 per cent and the 12-month rule. The incredible thing is that not one lion. Member who has spoken has said anything about settlements for low-paid workers which are under 10 per cent and which, in some instances, make workers wait for as long as 16 months between settlements. These unfortunate people should be fought for as well. Yet the Government will refuse to use their legal sanctions for the low-paid in the wages council sector.

An example of this is the Hairdressers Wages Council which has just settled. The hairdressing industry provides a valuable service and does not employ very many people. It last settled in July 1976, when it received the 5 per cent or £2.50. The 1977 or phase 3 settlement—which it is, in effect—is due to come forward in November. On the Hairdressers Wages Council there are representatives of the trade unions, independent members and employers. But the Minister of State, Department of Employment has not seen fit to call in that wages council. Why should it make these relatively low-paid workers wait 16 months for their pay increase? Why should the settlement not be backdated to 12 months after the phase 2 settlement? This means that this group of low-paid workers will, in effect, be settling below the average 10 per cent.

If one has an average of 10 per cent., this means that some workers will get more and some will get less. The Government will see that workers in the public sector do not get more and they will lean very heavily on the private sector. However, Ford's managed to get 2 per cent. over the guideline. In effect, the lower-paid hairdressers are paying for the 2 per cent. that Ford's have run away with. These low-paid hairdressers are governed by a statutory wages council with rates applied and laid down by this House, yet the Minister has taken not a blind bit of action to see that the wages council pays the accepted amount of 10 per cent. and enforces a 12-month gap. The fact that the workers have to wait 16 months between settlements means that they will get less than 10 per cent.

The Minister of State, Department of Employment called in the Button Manufacturing Wages Council because it settled above the 10 per cent., yet he adamantly refused to call in the Hairdressers Wages Council with a view to backdating the increase. If that aspect of policy is not pressed vigorously, I am afraid that much of the good will that my hon. Friends will undoubtedly generate in the House and the country will be dissipated. They will be seen not to be taking care and not to be thinking about the low-paid in society when they are in a position to take some action.

It is not as if we are talking about small private settlements. The wages councils can be controlled. In fact, we have given them too much independence. That was given to them by means of the Employment Protection Act. If necessary, we shall have to draw some of it back.

A contrast can be drawn by citing British Leyland. As my right hon. Friend the Financial Secretary to the Treasury knows, I am not a free-for-aller. However, it is accepted right across the industrial spectrum and on both sides of the House that if British Leyland is to survive it must be allowed to carry out its bargaining arrangements, which have been accepted by a two-to-one majority by the work force. The arrangements are designed to get rid of the anomalies that damage industrial relations and production.

It is crazy for the TUC Economic Committee, as the arbiters or enthusiasts of the 12-month rule, to say "No ". I hope that I am not right, but in my opinion they are handing the British car market to Ford's and the Japanese. That could result from British Leyland not being able to put its proposals into effect. It is vital that it gets a common starting date. After all, that is what the work force voted for. If there is no common starting point, there will be a further year of disruption and a further loss of production. This is something from which Ford's does not suffer. The company has adequate protection. It has a common starting date. It has no production problems as a result of different dates for different plants. It has other problems, but it does not suffer from the difficulty that British Leyland faces in this respect.

I do not know much about Michael Edwardes, but from my previous industrial experience I believe that he is the first professional manager ever to be in charge of British Leyland. That must be a good thing. I have gone back through British Leyland to before Stokes, even to when Slater was nearly at the top. Michael Edwardes is the first professional manager from manufacturing industry to be in charge of the company. It must be good. However, its hands are not merely tied behind its back by the men of the TUC Economic Committee. The fact is that they have been chopped off. Michael Edwardes will not be able to start to reform the industrial relations set-up until there is a common starting date.

That does not mean that anyone will walk away with extra money at the end of the year. In the end, no worker at the company will have any more than anyone else. The workers will have pro rata increases for the odd few months that will be involved in bringing in a common starting date.

No one can deny that British Leyland is in the public sector. That brings me to my last but one point, which concerns the Government's management of their own industrial relations. Since we finished with the policy that has been written as opposed to the guidelines policy, it has become more and more apparent that the Cabinet—I hate to use the analogy, but I believe that it is necessary to do so—is the board of directors. No member of the Cabinet is in charge of personal industrial relations. Any large company that is operating these days without someone at board level responsible for this function will be severely criticised by my hon. Friends, by Opposition Members and by those in the trade union movement. However, the fact remains that there is no one of Cabinet rank who is responsible for this specific function.

Every departmental Minister handles his own industrial relations and pay negotiations. That is true, for example, of doctors, teachers and the air traffic controllers. Different people are handled by different Ministers. Ministers do not operate a co-ordinated policy. It may be that they tell me privately that the Treasury is co-ordinating everything in Whitehall, but that is not good enough for employees in the public sector.

We have hived off so much from the Department of Employment that it has little to do other than collecting unemployment statistics. We have hived off so much that there is a good case for making a ministerial group responsible for the Government's industrial relations negotiations in respect of pay and conditions. That would stop the Home Office getting into the mess in which it was involved in respect of police pay. It would stop it from making errors over the provident fund of the Police Federation. It tried to treat the Federation as a trade union by giving it tax exemption for provident funds. It is a fund for police officers' widows and orphans.

The Home Office never had the wit or intelligence to say "We shall treat the Federation like a trade union and backdate to the same date as we backdated for the trade unions ". It never crossed the minds of Home Office Ministers to do that. It was left to me as a Back Bencher to put forward the suggestion. It was accepted by the Treasury. The Home Office never put the issue to the Treasury. That is because those in the Home Office did not have it in the forefront of their minds. They did not take into account the industrial relations connotations that were involved.

That leads me to think that there must be a reorganisation at ministerial level to remove these responsibilities from departmental Ministers. For example, the Chancellor should be negotiating with the Inland Revenue Staff Federation on whether its members have a £100 bonus to carry out extra work. It should not be the function of the Chancellor or Treasury Ministers to deal with the negotiations. For a start, they are too close to the problem. This argument has been used in industry. It has been argued that it is necessary for someone to take a wider view of industrial relations. The same applies in the public sector.

My last point concerns the tax officers. They are rightly annoyed. They are so annoyed that they wrote to the Prime Minister in July bitterly to complain about the extra work that had been put on them. I took exception to the letter when it was published. Tony Christopher knows about that. My hon. Friend the Member for Coventry, South-West and I exchanged correspondence with him during the recess.

I took exception to the Inland Revenue saying that it has had this extra work because of the changes that have been made. It is a pity that there should be complaints about the work involved as a result of mortgage rates decreasing when many millions benefit. Those in the Inland Revenue said to the Chancellor "We have all these extra jobs to do and we cannot do any more, but we recognise that the cause of our problems did not arise from you, Mr. Chancellor." This was a letter that was written to the Prime Minister. It was said in the letter that the problem arose from the eccentricities of Members of Parliament who sat in Committee on the Finance Bill.

I will not take that from industrial bodies and I will not take it from those in the trade union movement. I do not care whether it comes from a member of the TUC Economic Committee. I saw the contents of the letter as a threat. That was compounded in further correspondence. I was not satisfied, and neither was my hon. Friend the Member for Coventry, South-West. As Mr. Speaker will know, we took advice on the matter just over a week ago from the Clerk of the House.

As a group of civil servants, the Inland Revenue staff do a good job, if not a better job than any other group of civil servants that one can name. They do a difficult job. However, it is not the role of Parliament to modify its proposals because it knows that Inland Revenue staff have a problem. Their employer is the Government. That is the Executive, not the House of Commons. That was totally misunderstood by the General Secretary of the Inland Revenue Staff Association.

That which is done in the House is done openly and is above board. We are responsible to our constituents. We take the consequences for what we do. We make a political judgment, not a per- sonal judgment. We made political judgments in Committee on the Finance Bill. It is for the Government, the Executive, as the employers of the workers in the Inland Revenue to make arrangements so that the work is carried out.

It is no good complaining to me that the extra work has cost the equivalent of 2,000 extra jobs in overtime. I have criticised as much as anyone else the amount of overtime that is being worked. It is no good saying that 2,000 extra people should have done the work because that would be the equivalent of the overtime that has been paid. I do not like the working of overtime, but the Government are the employers of those working in the Inland Revenue and it is up to them not to leave the tax inspectors in a position in which they feel for the first time that they have to threaten the House that they will not be able to carry out its instructions.

This could easily have been solved by better man management by the Executive. These industrial relations problems would not arise if departmental Ministers were not involved. Adequate arrangements could be made for the Inland Revenue staff. I should like the Inland Revenue to have more employees. That is because there is £1.7 billion tax remaining uncollected, as my right hon. Friend knows. That is the information that he gave in an answer just over a week ago. There was £1.7 billion outstanding at the last count from the Revenue's year. It is estimated that only £870 million will ever be collected. There is a good case for getting it all in the coffers first and arguing about it afterwards, rather than leaving it outside the coffers and starting to drag in what we can get. I should like to see more tax inspectors employed in ensuring that assessments are more accurate and more detailed. I should like to see less scope for the tax avoidance and evasion that undoubtedly take place on a massive scale. By and large, I am not criticising the Treasury. This is a question of the Government's industrial relations management.

I give a wholehearted welcome to the Ways and Means Resolution and the Chancellor of the Exchequer's statement. However, I hope that my right hon. Friend the Chief Secretary will clear up the point concerning paragraph 2 of the resolution.

8.20 p.m.

Mr. David Mitchell (Basingstoke)

I make no apology for referring once again to the subject of small firms. I championed their cause before it became fashionable. I am delighted to note that the Chancellor of the Exchequer and the Chancellor of the Duchy of Lancaster have now climbed on the bandwagon, and I hope that they will stay on it, even after the next General Election.

I am pleased to note that the Chancellor of the Duchy has been given responsibilities in this area, because I believe that he has a genuine concern and some understanding of the problem. Certainly the small business sector will expect some results from all this activity. Some people have asked me, "How does it feel when the Government steal your clothes?" But I must point out that those clothes clearly do not fit them.

It might be helpful to look at some of the incongruities in the present situation. Small businesses are glad to have help from whatever quarter it may come. There is now general agreement that small businesses are most important as the birthplace of new business and also to found future businesses. In Germany there are 40 per cent. more small businesses than exist in this country, and I believe that that has a direct relationship to the much greater vitality of Germany's economy in general.

Furthermore, small businesses are the long-term source of new jobs. I agreed very much with the remarks of the hon. Member for Liverpool, Walton (Mr. Heffer). The criterion of success in terms of employment—particularly related to the number of people in creative work producing goods which the country wants or which can be exported—lies very much with the small business.

Small businesses are the starting place for new products and technologies. The Liberal spokesman, the hon. Member for Cornwall, North (Mr. Pardoe), said that Britain was failing to create new products. New products are coming forward from small businesses, and in a decade from now an increasingly high proportion of our exports will consist of products which are not now being produced at all. The ability to take advantage of that situation is very much in the hands of small firms. Therefore, we should not devote too many of our resources to prop up older industries.

I welcome the Government's first faltering steps to undo the damage which, wittingly or unwittingly, they have inflicted in the last few years. I believe that three main problems arise—first, the overheads of Government and the on-cost of Government activity, which bear heavily on the small firm ; secondly, lack of finance ; and, thirdly, the desperate need to restore incentives. I wish to examine those matters and I am delighted that the hon. Member for Walton has joined in this debate, because I agree with him about the enormous importance of small businesses in the creation of jobs.

Let me take the first of the three aspects, namely, the overheads of Government. Small firms are trapped in a web of controls and regulations When I said that it was incongruous that the Government were stealing our clothes. I was referring to the fact that their philosophy is based on a concentration of power, wealth and decision-making in the hands of the State. The more that that happens, the more that one has to regulate and control the smallest businesses. I hope that some change can be brought about in that situation.

Let me take one example. Last year the Government imposed a new burden on small businesses in the form of a piece of legislation entitled the Companies (No. 2) Act. My hon. Friends will remember how we fought strongly against the application of that legislation to the smallest firms because it meant imposing severe penalties on small firms and much unnecessary disclosure. I welcome the recent announcement by the Department of Trade in its discussion paper. The Department now admits the case which my hon. Friends and I made last year, namely, that the level of disclosure of small businesses is too high. It is a pity that the Department did not listen last year to our pleas because much damage may have been avoided.

Another area of difficulty in terms of overheads is the Employment Protection Act. It is not a job-destroyer, as it is sometimes described, but it is a sure-fire new-job prevention kit. That is the most dangerous aspect of that legislation. It is a pity that we have seen no action in that respect.

Mr. Max Madden (Sowerby)

I apologise for intervening in this debate because I addressed the House yesterday, but I then said that there were no provisions in the Employment Protection Act affecting workers employed by a company for a period of under 26 weeks, who wished to make applications in cases of unfair dismissal. Therefore, it would be proper for an employer to dismiss a worker within the 26-week period. I am sure that the hon. Gentleman would agree that that is an adequate period in which an employer can decide whether a person is satisfactory. Therefore, the hon. Gentleman should put the matter in proper perspective and should not pursue his line of argument. which I do not think compares favourably with the facts.

Mr. Mitchell

I am interested in the hon. Gentleman's remarks but his comments apply only in certain areas. There are large areas, particularly in contracting work, where the arrangements continue for periods longer than six months. During the Summer Recess I travelled the country and spoke to many small business men and touched upon their problems. One comment made time and again was to the effect, "If we take on more people to undertake an extra contract, or to build another boat in the next berth, it will mean an enormous extra commitment." Perhaps there is an element of misunderstanding, but the practical effect of the legislation is to make employers wary of taking on new employees.

I turn to the subject of finance. The small business sector, unlike some parts of the large business sector, is short of money. It needs money to keep pace with inflation and also to invest. There must surely be a case for a lower rate of corporation tax—significantly lower than the present rate. That point has not been sufficiently aired. I welcome the thinking of the Chancellor of the Exchequer to the effect that he will now allow initial losses to be offset against earlier income. But that does not apply to companies. It applies only to individuals and only to loss makers.

We are all aware that the present Government are the greatest experts on loss-making that we have ever had of any Government at any time. Nevertheless, it does not help the problem of the successful small enterprise short of money for expansion and having to pay out 83 per cent, of the income coming in in the personal taxation of the proprietor, leaving insufficient to plough back to deal with the problems of inflation and expansion.

I welcome the announcement of lower interest rates for the Council for Small Industries in Rural Areas. On this point I wonder whether I may attract the attention of the Financial Secretary or the Chief Secretary, because the announcement was made in the Chancellor's Press statement made at the time of the Budget that the interest rate for COSIRA would be lowered. But if the Financial Secretary or the Chief Secretary examine the facts, they will find that what is happening is that on the same day that the job-creating loan interest rate is going down, the interest rate on job-maintaining lending is going up, and it is going up from 11⅜ per cent. to 13 per cent. on 20-year money.

Therefore, while the Chancellor of the Exchequer is taking public credit for giving with one hand, he has not even announced the fact that he is taking away with the other. I hope that the Financial Secretary or the Chief Secretary will look closely into that, because it may be that the Government will wish to make changes very rapidly.

I regret that nothing has been done about stock relief. In the Budget debates earlier this year I drew attention to the need for change in order to make a greater amount of collateral-free assets available to borrow against from the bank. In its consultations around the country the Small Business Bureau has found that this is a significant factor in making insufficient borrowing available for small firms.

Indeed, having made that point during the Budget debates in the spring of this year, I was glad to find that no less an authority than the Governor of the Bank of England pointed out at the ICFC Conference on 25th October, Another area that might be looked at is inhibitions to lending arising from uncertainty over the Deferred Taxation element in company balance sheets. There can be little doubt that the stock relief provisions of 1974 were designed to bring permanent relief to companies; yet banks and other providers of finance cannot prudently ignore the resultant and relatively very much larger deferred tax provisions in assessing the borrowing capacity of potential borrowers. That is quite right.

The whole point about this is that it bears differently on the large company from the small one. The large company is known to have an on-going trading certainty, and therefore the banks will lend against stock which has a deferred liability against it. But no bank manager will do that with a small business. He will say "What happens if the proprietor walks under a bus and the whole thing is brought to an end and the liability has to be paid?" It seems to me that logically we have to reach a situation in which the stock relief liability is written off, but to a particular date, whatever date the Chancellor of the Exchequer may choose.

I see one of my hon. Friends looking at me somewhat urgently in order to persuade me to finish what I am saying, but there are many other points of significant detail about the inadequacies of the Government's proposals in this area which ought to be brought to the attention of the House. The small business sector is a very important sector and has a major contribution to make. It will not make this major contribution unless we get right the climate and the tax climate in which it operates.

One of the problems with stock relief is that it is so sophisticated that a lot of people do not understand it. Small business men who run quite significantly sized businesses have said to me I pay it as I go along because I do not like to have liabilities hanging over the business." This means that they have forgone considerable financial easement that they could have had. It brings home to one how important it is to have something simple, such as a lower rate of corporation tax, rather than something very sophisticated.

I welcome the easing of close company rules, but let us understand what the Government are doing. They are enabling companies to put more money to reserve, subject to tax at 42 per cent. or 52 per cent. This will enable some companies to survive better in future than they otherwise would, but it does not create one job. It does not secure any investment in equipment or machinery. In fact, the very reverse is the case. It actually removes a pressure to invest that now exists.

The Financial Secretary and the Chief Secretary are looking puzzled. Under the present situation, a business man will be told "You either have to distribute or prove that you have a requirement in the business ". The pressure to invest in business has been taken away. Although I welcome the easement and although it will enable companies to step up business, it will not give them an incentive to invest that money in the business.

We now come to the third and final missing key to the problem—the lack of incentive. I shall not go into the subject in detail in view of the time. The capital transfer tax concession is barely sufficient to deal with the difficulties brought about by inflation and is totally inadequate to deal with making it a viable proposition for a business to pass from one generation to another. That is particularly so when considered with capital gains tax.

The Government have lost the opportunity to reduce the top rate of income tax. I am glad to see tax reductions but they are a straight hand-back. The tax reductions do not provide an incentive. Psychologically the Government could do more by bringing down the standard rates of income tax, particularly at the top, to encourage people to earn more. Much more could be done to revive the small business sector.

8.37 p.m.

Mr. John Watkinson (Gloucestershire, West)

The House owes the hon. Member for Basingstoke (Mr. Mitchell) a debt of gratitude since he has championed the small business man for a long time. I wish to say something about small businesses, for there are many in my constituency. The hon. Member for Basingstoke touched upon one of the major problems in the small business community—finance.

In my view local banks in hon. Members' constituencies are not sufficiently adventurous when considering loans to small businesses. They are reluctant to take risks. They frequently boast of what they do for the farming community—and I do not wish to minimise that—but in those cases they are lending against rock-solid security. They should adopt a more adventurous policy. In many cases their attitudes are pusillanimous. The banking community believes in competitiveness and it should be prepared to promote it.

I suggest that there should be some kind of secondary bank acceptance house which could assist small businesses that have difficulty in getting money in. Small firms may be pressurised by bigger firms but they find it difficult to persuade people to pay their debts. A secondary bank acceptance house would be helpful in those circumstances.

If each small firm took on one extra person we could virtually solve the unemployment problem. One thing that shines through the Chancellor of the Exchequer's statements that the Government are now committed to a monetarist approach. I do not regret that, because I am one of those who believe that the events of the early part of the 1970s have to be explained at least in part in the context of excessive money supply.

I see my hon. Friend the Member for Sowerby (Mr. Madden) looking somewhat worriedly at me. I think that there is a difference between the doctrine of monetarism and acceptance of the importance of money supply. I classify myself among those who accept the latter idea. It is clear that the international banking community takes that stance. The position of the United States dollar is caused not only by the huge balance of payments deficit but because money supply targets in the United States are running out of line. One of the reasons why my right hon. Friend the Chancellor had to take the action that he took over the inflows of money was the danger to the money supply targets.

I sympathise with my right hon. Friend over the position in which he found himself. He was unusually humble this afternoon in his discussion of these events. I tend to the view that on economic grounds I should have been prepared to take the gamble of relaxing exchange control, though I can understand the political reasons that guided my right hon. Friend to the view that he took. The hon. Member for Blaby (Mr. Lawson) should accept that there is a potent argument that there could be a flight of long-term capital and that we might be left with the hot money, which would in turn flow out.

But our economy is now underpinned in such a way by North Sea oil that I do not see that risk. However, I do not agree with my hon. Friend the Member for Southampton, Test (Mr. Gould), who seemed to think that the matter could have been solved by special deposits. The flows are so enormous that we are in a different league altogether.

I should like to pinpoint two problems. I am glad that the hon. Member for Hitchin (Mr. Stewart) has returned to the Chamber, because he dealt at length in a learned and interesting speech with the problem that oil is creating for us as a nation and with its effect on the exchange rate. The hon. Gentleman was basically saying that we must accept that oil now underpins our economy, that it will boost the exchange rate, and that this will continue.

It still seems to me, perhaps because I am not as learned as the hon. Gentleman, or perhaps because I am more naive, that a distinction can he drawn between a financial economy and a real economy. The danger is that with the oil, with the exchange rate high, and with imports being encouraged to come in, our oil balances will be used to pay for those imports, and that after we have had our import-led stagnation we shall be left with nothing once the oil has dried up. I find that an extremely worrying prospect.

That is a difficult problem for the country. It is a problem of success, but it cannot be denied. One cannot simply say that the two are interlinked. De-industrialisation has been going on in this country for a long time, and the propensity to import is much higher than in other countries. One of the reasons is that we are almost like an underdeveloped nation industrially, and we are responding in that way. When things go well for us, we suck in great quantities of imports. Because of the oil, we are protected, but in the past our economy was ruined.

My other point concerns the consequences of the flows of hot money around the world. Ordinary working people may be slightly bemused and wonder why the export prices of the goods they are making in their factories has suddenly gone up and why they can buy imports more cheaply, when basically it all stems from the fact that a great deal of hot money is flowing around the world looking for the most profitable places in which it can end up.

In his speech today my right hon. Friend referred to the McCracken Report. The McCracken Report points to the fact that we have a sort of domestic credit system at the international monetary level without a world central bank. What is happening is that our economy was put under pressure last year, we are under pressure agan now in a different sense, and the United States is under pressure, because of the movements of hot money. I hope that my right hon. Friend will take action in this areas now that he holds a position of power, I believe, in the international monetary sphere.

All of us are entranced by the arguments advanced by my hon. Friend the Member for Test. I sometimes think when listening to him that all we need to do today is to persuade my right hon. Friend the Chancellor to move the sterling exchange rate down to $l.50 and I we could all go home because everything would be solved. There are no easy levers which we can pull to solve our economic problems.

Looking at the wider problem beyond exchange control, I am concerned—I have not heard it mentioned today—about the problem of the public sector borrowing requirement and, in particular, what has happened as a result of the incredibly tight régime which my right hon. Friend the Chief Secretary has been running at the Treasury.

As the House knows, this party went through agonies about cutting public expenditure, public expenditure was cut, and then, lo and behold, we discover that the estimates are all wrong and in fact a great deal of money which was available to be spent has not been spent. This means, possibly, that some of the agony we went through was unnecessary, but it means also that jobs which could have been created have not been created. I hope that my right hon. Friend will be able to help me on this problem when he winds up the debate.

I put another question to my right hon. Friend. I know that the Treasury is always being asked what models it has and what models it operates, but I should like to know whether it has a full employment Budget model so that the Treasury may know whether its present budgetary stance is expansionary or contractionary. I noticed that the Cambridge School was suggesting not long ago that by next year we should in full employ- ment terms be running a surplus in terms of the Budget. I should like to know whether this model is used so that my right hon. Friend might be helped in taking decisions in relation to the economy, and so that we might know whether we were expanding or contracting in a full employment context.

My next point, which I regard as the most important, is this. In my view, the Downing Street Summit was a disaster. The world leaders came there, they uttered fine words, but nothing was done about the crucial factor which we need, for which my right hon. Friend has been pressing over and over again, namely, that the German and Japanese economies should expand. Everyone went away without any real commitment on that, and, in my view, no one has gone ahead with it. I heard a lecture by the Secretary-General of the OECD saying yet again that the locomotive economies must move forward. They must lead the way.

It is vital that the German and Japanese economies expand. We have taken the first tentative steps, with an inflation rate far beyond theirs, but the rest of the world looks to them rather as we used to look to the United States. They are in the strongest position now. I feel that the strongest possible arguments should be used—I know that my right hon. Friend has attempted to use them—and pressure must come from every direction in an effort to persuade those economies in particular to expand so that the rest of our economies may expand as well.

8.49 p.m.

Mr. John Moore (Croydon. Central)

I thank the hon. Member for Gloucestershire, West (Mr. Watkinson) for his effort to allow me a little time to come into the debate. I find my position a little difficult, and I hope that I do not trespass on the time or temper of the House, having sat through the whole of the debate without leaving the Chamber.

I imagine that anyone who was here would say that the debate was one of the most interesting, stimulating and intelligent ever heard on this subject. We read in the Economist and other publications criticism of the level of debate in the House, and I am sure that tomorrow we shall see reports about the Pyrrhic points of confrontation as opposed to the points and arguments of great interest and significance which passed across the Floor.

I was particularly interested in what was said by the hon. Members for Birmingham, Perry Barr (Mr. Rooker), and Birmingham, Selly Oak (Mr. Litterick). Although I cannot go all the way with what was said by the hon. Member for Southampton, Test (Mr. Gould). I must say that he presented one of the best short intellectual arguments for his case that I have ever heard. However, as a tempered note of criticism, I suggest that he might consciously criticise the Bank of England less. It is the agent of the Government, and it is wrong of the hon. Member to be so critical of the Bank of England when it carries out Government policies.

I thought that it was a little unfortunate that the Chancellor of the Exchequer described as trivial my brief attempt at a serious question on a subject on which I was seeking to assist. I draw the right hon. Gentleman's attention to an item in today's Financial Times. I do not suggest that the Chancellor of the Exchequer goes to bed with Samuel Brittan, but perhaps he considers his views while he is in bed. I again draw attention to this, because the country must have answers. Mr. Brittan said: The real official forecast alluded to in paragraph 13 of ' Economic Prospects to End 1978 ', published on October 26 —by the Treasury— is of a 15 per cent. increase in earnings which would, it is said, be associated with ' over 10 per cent.' inflation in 1978. These documents are being published. I accept and understand the Chancellor's dilemma, but it would be better if we could have absolute clarity on this matter from all organs of government.

The essence of my speech is to attempt to give an air of congratulation to the government, to the extent that, from my point of view, they have carried out policies—whatever the instigation of the policies—in many areas where it has required courage to do so. I am concerned about the restoration of confidence. The debate has followed confidence throughout, and this is crucial to restoring and re-establishing confidence.

The decline in short-term iterest rates is excellent. But the key to industrial long-term borrowing is long-term interest rates. We are talking now about 11½ per cent. and 13 per cent. rates. It does not relate in any way to a current 2 per cent.-plus minimal rate of return on capital investment. These are the key relationships, as opposed to the important reduction in short-term interest rates.

On the question of sterling, after the outstanding speech of my hon. Friend the Member for Hitchin (Mr. Stewart), I do not think that there is very much more that can be said technically and intelligently on the subject from either side of the House.

The thing that worries me in considering cash limits is that we have not yet reached the point of test, though we should congratulate the Government on entering into areas that are crucial if we are to seek to establish parliamentary, as opposed to Executive, recontrol over money limits.

We have gone though all the hair shirt features of the repentant sinner or the penitent. The real test now is the present and the future. In that respect, I should like to be more critical and make one general comment, and then perhaps look at two features in detail. I am concerned—though I understand the political pressures—that the measures that the Chancellor of the Exchequer has sought to take are essentially short-term. There is no question that they will produce in the short term a boom in consumer durables and that, as many hon. Members have said, they will, unfortunately, bring in a great deal of imports to fuel that boom. There is no way to control that.

I should like to put a specific figure on earnings—and I give this as my own estimate, as opposed to the Treasury figure, or the Chancellor of the Exchequer's statement—that we shall see at the end of August 1978. The increment for earnings will be nearer 20 per cent. than 15 per cent. I do not necessarily think that that is bad, because I very much agree with what was said by the hon. Member for Liverpool, Walton (Mr. Heffer). One of the tragic problems is the underpayment of people rather than that they are being paid too much. That is the sort of problem with which we shall have to contend.

I think that these are short-term answers, because in the long term we need to approach the problem of rebuilding our industrial economy as well as the destruction of the present levels of inflation. That means the destruction of the current level of unemployment. The present level of 1½ million is bad enough, but it is minimal in relation to the enormous problem of the large number of young people who will come on to the job market over the next few years.

There are two comments that I want to make in the six minutes remaining to me. They relate to taxation and to the exchange rate. Obviously, no one would disagree with the Government's attempt to raise the level of allowances. The problem is that we do not consider an essential causative factor. The level must be raised because of the structure of our direct taxation system which has produced unfairness and folly.

The Government's action in raising allowances, and thereby bringing about additional fairness, will also bring about increased consumption rather than production. Our prime need is the production of wealth and increased productivity. That requires, above all else, massive changes—I say here exactly what was said by the hon. Member for Cornwall, North (Mr. Pardoe)—in the levels of direct taxation. We cannot fail to recognise that, however we seek to finance it. I shall be specific. I have in mind a base level of 15 per cent. and a top level of 50 per cent. The creation of incentive and of wealth is the key.

I want to touch on the constant discussion that is taking place about the United States in regard to unemployment data. Anyone who studies the statistics knows that we are talking complete nonsense. To reduce it to ordinary parlance, it is like trying to compare chalk and cheese. In view of the shortage of time, I shall not attempt to go into the question in detail. Because of the way the data are gathered, the United States unemployment rate is comparable to ours if one reduces its gross figure by 1½ per cent. Currently this would reduce its 7 per cent. to 5 per cent. to make a statistically fair comparison. It is still high, but it is lower than our level. I have done some work on this matter and I submit that we should be thinking in terms of job creation and the promotion of job opportunity.

In the period 1960–75, in Britain the population increased by 6.6 per cent. and our work force increased by 5.4 per cent. In the United States in the same period, the population inreased by 17.7 per cent. and the work force increased by 30 per cent.—in other words, 22 million new jobs were created. I am interested in the creation of new job opportunities.

The creation of job opportunities is the crucial problem. How do we create the necessary incentives? How, through our taxation system, do we enourage people to be productive? There is no doubt about what the Conservatives would do if they were in office now: they would change the direct tax structure downwards. The Government are not willing to lower the tax burden other than by raising allowances, and this is the fundamental difference between the two parties.

There is no time for me to engage in any lengthy dissertation on the question of the exchange rate. I appreciate, understand and recognise many of the difficulties, and I sympathise with the Chancellor's dilemma. Classically, I am a free marketer and a free floater. However, it must be recognised that problems exist because "dirty floats" will constantly exist. I recommend caution in the pursuit of purity in a very impure world.

I am more concerned about the longterm change in the industrial and economic structure than I am concerned with short-term potential benefits that might accrue from trying to manage the exchange rate. I believe that the Government have been pursuing measures that will produce short-term improvements in a euphoric sense. I do not think that it will work at the next General Election. whenever it comes.

The degree to which I do not think that it works is basically concerned with two simple factors. About the first I can give the data, because they are taken from the Government's own agricultural statistics. It is that the British people are eating less and producing less than they were three and a half years ago. This kind of awesome, horrible statistic for a country such as ours will be kept in front of our minds by the 1.5 million-plus people who are unemployed because of the policies of the past three and a half years. The second factor, of course, is that we can improve the state of the economy rapidly if we concern ourselves more fundamentally with massive tax reductions.

I conclude by expressing my gratitude to you, Mr. Deputy Speaker, for allowing me 10 minutes of the remaining time.

9.0 p.m.

Mr. Nigel Lawson (Blaby)

My hon. Friend the Member for Croydon, Central (Mr. Moore) has just remarked on the high quality of our debate today. He is right, and in his contribution he has added to it.

I begin, if I may, by thanking the Chancellor of the Exchequer for the kind remarks which he extended to me at the beginning of the debate on my appearance at the Opposition Dispatch Box following my year of total silence. He invited me to be a scorpion and to bite him. I may nip him gently from time to time, but it will be nothing like what he intends to do to me, I am sure.

We have had an interesting debate in many ways. There has been scarcely a speech from the Government Benches which has not been highly critical of Government policy. I can remember only two. One, strangely enough, came from the hon. Member for Birmingham, Perry Barr (Mr. Rooker), which is a curious reversal of normal form. Incidentally, the hon. Gentleman made a very interesting suggestion about the Government's handling of public sector pay which I hope that the Government will consider.

The only other hon. Member on the Government Benches who spoke favourably of the policies of his hon. and right hon. Friends was the hon. Member for Gloucestershire, West (Mr. Watkinson) who, I believe, would feel rather happier to be sitting on this side of the House. I hope that I do not embarrass him when I say that. I do not intend to do so.

We had some outstanding speeches from the Opposition Benches. The speech of my hon. Friend the Member for Hitchin (Mr. Stewart) has been widely and rightly commented upon. He introduced a breath of fresh air into the discussion of the exchange rate, bringing realism and practical knowledge to what had become a somewhat academic discussion in the worst sense.

My hon. Friend the Member for Basingstoke (Mr. Mitchell) spoke with his usual eloquence about small business men. He reminded us very properly that this was a cause which the Opposition had been espousing and a drum which we had been beating long before the Government heard the tom-toms, and that he had been among those beating hardest, loudest and earliest.

My hon Friend the Member for City of London and Westminster, South (Mr. Brooke) spoke very rightly about the importance of the return on capital and its decline, a subject to which I shall turn presently.

The ultimate distinction was lent by a former Chancellor of the Exchequer, my right hon. Friend the Member for Chipping Barnet (Mr. Maudling). He seemed to me to be answered, to an extent, by my hon. Friend the Member for Hitchin, but I thought that he slightly mis-stated the money supply position when he seemed to argue that those who believed that the money supply mattered were wrong in saying that it affected the real economy.

The point is that those who are concerned with the money supply—the so-called monetarists—argue that it is not in the long run the real economy which is affected by changes in the money supply but prices and inflation and that, on the contrary, it is the neo-Keynesians who argue that by pumping money into the economy we can affect real factors like production and productivity. The boot is really on the other foot.

But my right hon. Friend the Member for Chipping Barnet made one important statement when he said that, whatever one believed, the problem of trade union power was real and political.

My right hon. Friend also raised a matter to which I hope the Chief Secretary will reply, because it was important and serious. He said that the theory that the money supply matters was a myth and, what is more, a myth which the Chancellor of the Exchequer did not believe in for a moment. He said that the Chancellor considers it, as my right hon. Friend considers it, irrelevant. That is a very important statement and I hope that the Chief Secretary will say whether it is a correct assessment of the Chancellor's view on the money supply.

It would be only right to say something also about indexation. The hon. Member for Perry Barr raised this matter. He and I together in the Finance Bill Committee upstairs had something to do with the fact that indexation is now on the statute book. In a sense this is the first indexation Budget that we have had in this country. The Chancellor made that clear in introducing his Budget on 26th October. A few days earlier, at the annual dinner of the Manchester Associaton of Her Majesty's Inspectors of Taxes —about the only growth industry we have at present—the Chief Secretary said : I doubt if the tax system can be left with just one part of it indexed ". I agree with him and I hope that he will say how he proposes to extend further indexation in our taxation system.

One obvious need is to index the threshold for higher rates. At £6,000 the higher rates now start at less than 1½ times average earnings. If the system had been properly indexed from the start that should now be more like £10,000 or more. This is a serious matter if the Chancellor is concerned, as he professes, about middle management and differentials for skilled workers. Of course the Chancellor must raise the thresholds before he indexes them, but I think that we have shown that it helps if they are indexed.

One of the reasons we introduced indexation—certainly one of the reasons on the Conservative side—was that we believed, in the phrase first coined by my hon. Friend the Member for Guildford (Mr. Howell) in the principle of truth in taxation. I think that the Chancellor has found this concept a little difficult to grasp. I shall turn to that in a moment.

The Chancellor found he had the necessary scope for action, because the public sector borrowing requirement now looks like being £2 billion below his estimate. That is a remarkable margin of error, but it is still below his usual level. I have calculated that the average error during the time he has been Chancellor has been £2.75 billion on the PSBR. We can give him some marks for a little improvement, therefore, but he has proved that he is no better at forecasting the PSBR than he is at forecasting the rate of inflation.

The right hon. Gentleman has certainly emphasised the "chance" in Chancellor.

He has been obliged to introduce one Budget after another to correct the errors of the predecessor. It would be as well if, in addition to getting inflation into single figures, the right hon. Gentleman had also kept his Budgets in single figures.

The scope provided by the £2 billion has enabled him to cut income tax this year by £l billion. But how did that £2 billion come about? Giving evidence to the Expenditure Committee on Monday the Treasury said that £1.75 billion of it came from taxes being higher than had been envisaged. This was chiefly because wages and salaries had been higher and income tax had therefore yielded more. In other words, the right hon. Gentleman is taking £1.75 billion more than he intended, but he is giving back only £1 billion of it this year.

But the more important point is that for the next year the Chancellor is totally departing from the principle of truth in taxation, which is what the House wanted when it passed the indexation amendments. It is very near to fraud to say, as he did, that £1.25 billion is being given away in income tax when in fact the Chancellor is not giving anything away. It is what would be needed merely to retain in real terms the existing level of the allowances. When the Chancellor, doing his Santa Claus act, then says, "If you are all good I may be able to do something further in the next Budget ", it is not something further. It will be the first time that he will have done anything at all. The £1.25 billion is less than what is needed merely to retain the same real level of income tax.

The same spuriousness attends his calculation of what the two Budgets together, the last one and this, are worth in terms of earnings to the average man. In his Budget speech the Chancellor grossed it up and said that it was an extra 6½, per cent. In his speech today he quoted a net figure which was rather more realistic when he said that it was 4 per cent. But, in any event, at least half of that is not an increase to the ordinary working man. It is merely what is needed to allow for the effect of inflation on the tax thresholds. It really is not any good telling the working man that he is getting more than he is in fact getting.

What, however, is the Chancellor's economic strategy of which this Budget is presumably a part? He emphasised at great length the importance of his pay policy as a main element in it. This is rather strange.

Before I go further, in view of what seems to be happening in the electricity industry dispute, which seems, happily, to be drawing to a close, I believe we should pay some tribute to the Electrical Power Engineers' Association. I believe that in this dispute its behaviour has been a model for a responsible trade union. [Interruption.] It now likes to be called, I believe, the Engineers' and Managers' Association. I was not sure that all hon. Members were aware of the new name. Its behaviour should be a yardstick for judging future trade union behaviour—a yardstick, too, against which which we compare very unfavourably the behaviour of the Secretary of State for Energy in this matter.

The Chancellor said that everyone was now in favour of an incomes policy, and that even Arthur Burns in the United States was in favour of an incomes policy. But the question is whether the Government are in favour of it.

Mr. Healey

Are the Opposition in favour of it?

Mr. Lawson

Certainly the Prime Minister said that a return to free collective bargaining…would be a return, this year, to free collective chaos ".—[Official Report, 22nd February, 1977 ; Vol. 926, c. 1221.] But then the Prime Minister, on 20th July this year, after stage 3 had not come about, said: We are in a period of free collective bargaining."—[Official Report, 20th July. 1977 ; Vo. 935, c. 1614.1] That is now, not next year.

If that is so, what is the Chancellor on about when he talks of an incomes policy? Even if he thinks that we have an incomes policy now, he has made it absolutely clear that he intends to move away from it. This is the last year of it, as the right hon. Member for Battersea. North (Mr. Jay) pointed out. If everyone is in favour of an incomes policy, why is it that the Chancellor is moving away from it next year? He really owes the House an explanation of his policy.

Certainly the Chancellor's policy announced today was nothing like the policy that he set out in his letter of 10th August to my right hon. Friend the Member for Lowestoft (Mr. Prior). My right hon. Friend asked the Chancellor certain specific questions, and the Chancellor gave what passes with him for a magisterial rebuke. He said that it would be unthinkable to translate what we have now in terms of a flat-rate figure, yet he is talking about a flat-rate figure all the time. He said It is common ground between us that He cannot specify the level of particular settlements in this transitional period, and so it is misleading to talk of ' exceptions ' as though there was some rigid imposed level of settlements. Yet this is actually the language in which he is now speaking.

If he thinks it is so important, why is he going away from it? If he is going away from it—quite rightly, in my opinion—why does he pretend that it is so important? Perhaps he thinks that it might be popular for the General Election to have all the brakes off. If he thinks that, he is too late, because it is a curious fact that in the past 25 years no Government, Conservative or Labour, which has indulged in a formal incomes policy has ever won the subsequent General Election, and for the past 25 years no Government, Conservative or Labour, which has refrained from a formal incomes policy has ever lost the subsequent General Election. That is an historic fact, and hon. Members on both sides can draw what conclusions from it they wish.

That is a considerable comfort to us—although we have other reasons for comfort as well. The Chancellor might have done better to warn, as did one of his hon. Friends, that if incomes rise faster, there will be higher unemployment, which is something that we all wish to avoid. If he had uttered that warning, which he has had the courage to do in the past but did not do today, it would have done a great deal to educate people in the realities of economic life. I am glad to see that the Chancellor agrees with that proposition. I thought that he might be sliding away from it, because he slides away from policies with remarkable rapidity.

Another important point is the question of miners' pay. I see no point in speculating now about what the miners will get. That would be useless. However, it is important that we should get from the Chief Secretary tonight—and I do not envisage that he will have any difficulty in giving it—a firm undertaking that any award to the miners will be financed entirely by the NCB, whether by closing uneconomic pits, by other methods of cutting costs or, if the worst comes to the worst, by increasing the price of coal, and that in no circumstances will it be financed by the taxpayers or the Government through higher grants or loans to the NCB. I hope that the Chief Secretary will give that assurance so that it is on the record.

What is the Chancellor of the Exchequer's economic strategy? It is rather difficultt to find it out. He talks the language of Keynesian demand management as if he believes it, particularly in his speeches overseas. In his talk to the IMF he went so far as to say: It may well be true that in some countries fiscal measures are less effective in increasing demand than they used to be. … But this is surely an argument for increasing the scale of fiscal measures above what used to be regarded as necessary to produce a given increase in demand rather than doing less. That is how he talks, but what does he do? As many hon. Members have pointed out, what he does is far less than would be done in terms of orthodox neoKeynesian reflation. He talks one way and acts another.

Mr. Healey

Let me help the hon. Gentleman in his troubles. I am an unorthodox neo-Keynesian monetarist.

Mr. Lawson

I was not concerned with labels—though I am glad to note that the Chancellor is a self-confessed monetarist, whatever adjectives he puts in front of that description.

I am trying to get at the strategy that he is following. He appears to believe that we can hold the rate of increase in the money supply at a fixed level in order to contain inflation and, at the same time, increase the budget deficit in order to stimulate demand and growth and to reduce unemployment. This seems to be his policy. I note that he does not deny it.

If this is his policy, it is a policy based on sheer confusion. A higher Budget deficit means either higher borrowing at home—which would push up interest rates and cancel any fiscal boost to home demand—or more borrowing overseas, which in that case means a smaller current account surplus on the balance of payments. That is another way of saying fewer exports or more imports.

Either way, it cancels out the effect of the fiscal boost at home. There is no way in which the right hon. Gentleman's fiscal boost can be a boost if he is holding, the money supply constant. I think that he is right to hold the money supply constant because of the overriding importance of the battle against inflation and the fact that this has to come down. Moreover there are other ways in which growth is generated in the economy than by Government action, although one would not think so listening to Labour Members.

There is similar confusion over the exchange rate. There has been a lot of abstract argument, which my hon. Friend the Member for Hitchin properly put in its place. What will happen to the exchange rate? The direction in which it moves will be determined primarily by the balance of market forces. The fact that the exchange rate went down as much as it did in the early years of this Government was nothing to do with the Chancellor sitting in his ivory tower in the Treasury weighing up the argument and saying "On balance it would be beneficial if it were to come down ". In the same way, the future movement of the exchange rates will be determined by factors other than the elegant theories put forward by the hon. Member for Southampton, Test (Mr. Gould) and others.

There is also confusion over exchange control. Let me briefly try to put that confusion clearly so that the Chancellor will see what it is and perhaps abandon it. The Treasury is clearly afraid that rising North Sea oil revenues will be balanced by a worsening of exports of manufactures—the so-called Dutch disease spoken of by the hon. Member for Gloucestershire, West. It is, of course, true that this could happen if the capital account is unchanged—irrespective of the exchange rate. If the capital account is unchanged, because the whole thing has to balance an improvement on oil account must be balanced by a deterioration on the other part of the current account.

The only way in which one can get an improvement on the oil account coupled with no deterioration on the rest of the current account is if one has at the same time a worsening of the capital account, and that means a substantial relaxation of exchange control—irrespective of the exchange rate. This has nothing to do with the inflows of hot money. It is a case for relaxing exchange control because of the genuine current account surplus. Indeed, I very much suspect that that is what is going to happen. The Chancellor rather resembles an ageing Humpty-Dumpty sitting on a wall waiting to be pushed either one way by the TUC or the other way by market forces, whichever happens to be the stronger at the time. Perhaps fortunately for him, the restorative powers of the IMF are rather greater than those of all the king's horses and all the king's men.

The danger in all this is that, if the right hon. Gentleman insists on continuing to speak in neo-Keynesian demand management terms, when it becomes clear that the relaxation that he has undertaken in this Budget, fails to have the expected effect because monetary policy remains unchanged, there will be a relaxation of the monetary guidelines and a loss of monetary control, which will lead to a very serious inflationary danger in the years ahead.

My right hon. and learned Friend the Member for Surrey, East (Sir G. Howe) was right to point out that M3 is now above the 13 per cent. guideline. That is a danger signal, an amber light, as is the fact that the six-month rate of annualised increase of M1 is 25 per cent. higher than ever before in our history.

Of course, there are real world problems from which we suffer. However, my right hon. and learned Friend demonstrated clearly that these do not give the Chancellor any excuse, because as a nation—I have all the figures here and I should be happy to let the Chancellor have them if he wishes—our performance is far worse in the last three or four years—

Mr. Healey

Over the years.

Mr. Lawson

—than France or Germany. The Chancellor says "Over the years ", but I must make this historic point: our performance over a really long period has not been markedly worse than that of our competitors.

What has happened is that in times of tranquillity we have fallen behind and in times of trouble we have caught up. If the Chancellor looks at the 1930s, he will see that the British economy recovered from the slump of the 1930s faster than the economies of our competitors. This is the first time that there has been a world recession in which we have done worse than our competitors. In the past when the going has been rough this country has done better and caught up.

There are behind all this two genuine world problems—the steadily rising structural unemployment problem which is not susceptible to simple demand management and the equally steady decline in the return on capital. Given these two trends the one thing that the Chancellor should have done was to do everything possible to improve the workings of the labour and capital markets. But everything this Government have done—every measure taken—has worked in the opposite direction.

We have high taxation with ludicrously high rates of income tax especially at the top marginal rates. We have a most rigid form of incomes policy and a mass of over-detailed legislation, such as the Employment Protection Act, bearing especially hard on small businesses. We have fierce price control which cuts profit margins and subsidisation of those parts of industry where the return on capital is lowest or even negative. We have all that within a political climate of hostility towards enterprise and its rewards. That is why the Chancellor cannot expect to see this country's economy recovering from the oil crisis in the way that others have done.

The political context is crucial. This minority Government are something of an interregnum. Before the end of the day there will be either a majority Conservative Government or a majority Labour Government. That is the choice before the nation and we all know what sort of a Government a majority Labour Government would be.

The hon. Member for Liverpool, Walton (Mr. Heller) said that he wanted to see "thorough-going Socialism". The speeches of Mr. Alex Kitson are acceptable, because he approves of the Soviet economy, and that has enabled him to remain on the National Executive Committee of the Labour Party. On the other hand the Chancellor of the Exchequer gets chucked off the National Executive because he does not follow Soviet economic policies.

I have here a little red booklet entitled "Labour's Programme, 1976 ". This is a programme for massive increases in Government spending, massive increases in taxation, massive further nationalisation and a massive increase in statutory controls over what remains of the private sector. I should like to read two extracts from what is said in this book. [Interruption.] I know hon. Members opposite do not like it, but this is their policy. This is the sort of thing which the private sector will have to face. The Labour Government will provide: A systematic basis for making large companies accountable for their behaviour— [Interruption.] Hon. Members opposite applaud and cheer. The quote goes on: and for bringing into line those who refuse to co-operate. It continues: We must take powers: to issue, in the national interest, directives to companies on a wide range of individual matters; to put in an Official Trustee to assume temporary control of any company which fails to meet its responsibilities to its workers, or to the community as a whole. This neo-Marxism is the policy of the Labour Party, the party of which the Prime Minister is leader. This is the policy that is being offered to the country. I and my hon. Friends shall go on quoting from this policy as being the policy of a majority Labour Government, unless and until the Chancellor and the Prime Minister are prepared to repudiate it and say that they would rather resign than introduce it. When that happens that will be the end of our quoting from this little red book.

Unless and until they do that it must be accepted that that is the policy of the Labour Party. It is a warning of what the country will face if it is unwise enough to be gulled by the benignity of the Chancellor and the smoothness of the Prime Minister into thinking that what we see now has any relevance to what we would see if by any mischance they were to be returned.

9.31 p.m.

The Chief Secretary to the Treasury (Mr. Joel Barnett)

I sincerely congratulate the hon. Member for Blaby (Mr. Lawson) on his promotion to the Opposition Front Bench. We may not always recognise the difference between the years of silence and what we are getting now. Perhaps I should commiserate with the hon. Member for Guildford (Mr. Howell) on his having been sacked from the Shadow Treasury team. I have noticed it. I suppose that the hon. Gentleman should treat it as something of a compliment to be replaced by three of his hon. Friends. I am not sure whether that is a compliment to me or to my right hon. Friend the Chancellor and other Treasury Ministers. It is interesting.

There is something that I should make clear to the hon. Member for Blaby. In the unlikely event of the Opposition winning a General Election, it does not follow that because the hon. Member is in his present position he will be on the Government Front Bench. We have been told—I am sure that this will be of interest to Conservative Members who have had to listen frequently to the right hon. and learned Member for Surrey, East (Sir G. Howe)—that in the unlikely event of the Conservatives winning a General Election it is not likely that they will have to put up with the right hon. and learned Gentleman. We have that on the authority of Conservative writer George Hutchinson. He writes: Sir Geoffrey Howe is Shadow Chancellor, but this is not to say that Sir Geoffrey must become the real Chancellor in the fullness of time. Mr. Hutchinson can say that again. There is not much likelihood of that happening. That is certain.

As some hon. Members have said, this has at times been an excellent debate. There have been excellent contributions, especially from Back Benchers and from my right hon. Friend the Chancellor. I only just got in the latter reference. The speeches of the right hon. and learned Gentleman and the hon. Member for Blaby took a somewhat different approach from that which we find in the little blue book entitled "The Right Approach to the Economy ". We are told in the blue book what we shall get. I quote from page 3, in which it is stated: We prefer to set out the sober truth ". Then we get the hon. Member for Blaby —nothing personal, I assure him.

The kindest thing that one can say of the two Opposition Front Bench speeches is that they can be summarised as a series of petty quibbles, recognising, as the Opposition do and as the right hon. Member for Chipping Barnet (Mr. Maudling) said, that the Chancellor has got it right. They know that. They know that we have created the right financial situation from the financial chaos that the Conservatives left behind. All they can do is string together a series of petty quibbles, and that is what we have heard today.

I shall take up some of the points that the Opposition have made. First, I am obliged to the right hon. Member for Chipping Barnet for his kind words about my right hon. Friend. One thing that I like about the right hon. Gentleman is the name of his constituency. To me, it has a particular ring that I always find reasonably attractive. In most of his speech, the right hon. Gentleman was saying that we have the situation about right. I do not think it is unfair to summarise what he said in that way.

Mr. Maudling

I said that the Government had put things in a frightful mess and that they were doing rather better this time.

Mr. Barnett

The right hon. Gentleman has got to say that, but he also said, and I did not misquote him, that the Chancellor of the Exchequer got it about right. My right hon. Friend the Member for Battersea, North (Mr. Jay) also said that, and I am happy that both right hon. Gentlemen agree with what we have done so far and are seeking to do.

My hon. Friend the Member for Liverpool, Walton (Mr. Heifer) rightly said that there was no need to become euphoric. He thought that we had the right financial base and that we now had to move on to the right industrial future for our country.

I wish to deal with some of the quibbles which were advanced from the Opposition Front Bench. A good deal was made of the need to relax exchange controls. Again, I thought that the right hon. Member for Chipping Barnet got it about right in relation to what both Opposition Front Bench speakers argued. I forget the adjective that the right hon. Gentleman used, but his point was that one should not borrow short and invest long. That is a criticism of those who want a massive relaxation of exchange controls.

The right hon. and learned Member for Surrey, East appeared to argue in his opening remarks that the question of exchange controls was related to North Sea oil and that one could achieve a considerable amount of increased investment over a broad sector which would benefit from the proceeds of North Sea oil. That argument has been frequently set out in many newspapers and journals in recent times. I think that it is wrong for the reason I have already given. Indeed it is fundamentally wrong, because what we have to do, if we are to deal with the problems of employment and industrial investment and if we are to rectify the situation, is to use North Sea oil to improve our industrial base at home rather than abroad.

Sir G. Howe

Perhaps I should intervene to make the point clear. The two propositions are in no sense exclusive. It is possible and desirable to invest at home and abroad. Nobody should imagine that any Conservative is advocating a massive and sudden sweeping-away exercise. We have to proceed steadily and progressively. We have made that clear. However, the Chancellor of the Exchequer appeared to be standing on the proposition that he should do nothing.

Mr. Barnett

I have never subscribed to the argument that one should use money twice. The right hon. and learned Gentleman withdrew what he said earlier, and I accept that withdrawal. I believe that we are right not to relax exchange control at this time. [HON. MEMBERS: "Ah."] Of course that is the case, and it is what the Chancellor of the Exchequer said too.

I listened carefully to the speech of my hon. Friend the Member for Southampton, Test (Mr. Gould), as I always do when he argues depreciation of the currency. I admit that he did not quite put the matter in that way today but was concerned about appreciation. There is a serious argument to be made in this respect. The arguments for both appreciation and depreciation have been made powerfully on the one side by my hon. Friend the Member for Southampton, Test and on the other side by Conservatives. However, they massively overstate the situation.

The hon. Member for Cornwall, North (Mr. Pardoe) said that much of the German success—indeed, he may have said all the German success—was related to the low value of the deutschemark. I do not doubt that that was one factor. He immediately conceded to one of my hon. Friends who intervened that there were about a million guest workers in Germany on low wages. That was another important factor, and there were many others. Another important factor is that output per man in West Germany is considerably higher than in this country and, indeed, in many other countries. Therefore, to say that it all stemmed from the deutschemark rate is massively to overstate the situation.

The point was made by my hon. Friend the Member for Southampton, Test on the question of competitiveness that my right hon. Friend the Chancellor of the Exchequer referred to unit labour costs as being a crucial factor in this matter. My hon. Friend said—at least, I thought he was saying this—that that could be to mislead, or something to that effect. I am bound to say to him that when we have had depreciation in the past in this country it has very soon been lost by an increase in unit labour costs. That is why we have been all too frequently in the vicious circle that has arisen every time we have depreciated.

I am not suggesting for one moment that appreciation of itself will necessarily get one into a virtuous circle, but if one argues that 1 per cent, or 2 per cent. or a small percentage movement either way will have a fundamental effect on our whole industrial performance in this country, I say that that is to exaggerate the case. First of all, it depends on what base one is looking at. If one looks at the position two years ago, one sees that our competitive position is substantially better today than it was then in terms of relative unit labour costs. Nevertheless, despite that, our industrial performance is still bad, and there are many reasons why that is so.

Therefore, all I would say to those who seek to use the exchange rate as some kind of totem pole or as some fundamental reason for our bad performance or good performance is that eventually the exchange rate in this country will depend on our industrial performance here in Britain. I only hope that we can have rational discussions about this. It is possible to do that nowadays. We never used to be able to do that, but I think that we can do it today. I just hope that the position is not exaggerated.

Mr. Gould

Does my right hon. Friend accept that I do not think that anyone is arguing that a competitive exchange rate, by itself, is a sole and sufficient condition for economic growth and all the other things that we would like to achieve? What we are arguing is that it is a necessary condition and that without a competitive exchange rate we simply shall not achieve the solution to our problems.

Mr. Barnett

I never want to misquote my hon. Friend. I do not want to do so now. All I am saying is that it is not the sole argument. I am sure he accepts that.

One of the other quibbles of the right hon. and learned Member for Surrey, East in his opening speech was a somewhat convoluted argument giving a whole load of figures about income tax to try to say somehow or other that there has been a cut in living standards or a cut in personal take-home pay. The Chancellor of the Exchequer and I have never disputed that there has been a cut in net take-home pay. [Interruption.] The Prime Minister has never disputed it. The right hon. and learned Member for Surrey, East conceded that one of the major reasons was the massive increases in oil prices that we inherited—not through any fault of his. There was a massive increase in oil prices and commodity prices, and that cut living standards by about 5 per cent. The other reason, which the right hon. and learned Gentleman did not concede, was that it was his responsibility when we took office in 1974. One would have respected the argument more if he had been prepared to concede that as well.

But what is the right hon. and learned Gentleman's own solution? What were the constructive arguments put forward today? As many Opposition Members, including the hon. Member for Blaby, put forward, it was to cut income tax. How to cut it is another matter. The Opposition do not accept the suggestion of the hon. Member for Cornwall, North that we should have a substantial increase in the national insurance surcharge or something like it. They tell us vaguely that there should be massive cuts in public expenditure in order to do it. But such cuts would have to be very large, because, in addition, the Opposition want to cut the borrowing requirement. [Interruption.] I have read the blue book, and a lot more besides. Where will the Opposition cut public expenditure? This is a serious argument. I have been handling public expenditure on and off, man and boy, for three and a half years. We shall never have a credible debate on public expenditure if we read simply the blue book.

Where would the Opposition cut public expenditure? Let us take the three biggest items of public expenditure. Would they cut expenditure on social security? No, I see that they would not. Would they cut expenditure on health and personal social services? No, I see that they would not. Education? No. Are we to have charges'? Perhaps we would.

The right hon. Member for Wanstead and Woodford (Mr. Jenkin) asked: Is it not reasonable to ask people to pay something towards health costs? Is it really so unthinkable that people might be expected to pay towards the cost of their keep when they are in hospital?

Mr. Patrick Jenkin (Wanstead and Woodford)

I can answer the right hon. Gentleman by quoting from the same speech one sentence further on. I said: It seems to me that this is a proposal that should be examined. Is not the right hon. Gentleman aware that I have been examining a large number of options that are currently being investigated by the Royal Commission, as, indeed, are the Secretary of State and his Department? If the right hon. Gentleman tries to make too much of that, he will make a fool of himself.

Mr. Barnet

I am not making too much of it. I want to know whether the Conservatives will make charges for a stay in hospital.

Mr. Lawson

Wait and see.

Mr. Barnett

Perhaps we should have that on record. The new member of the Shadow Treasury team tells me that we should wait and see. Fortunately it will not matter, because the Conservatives will not be in office. However, if they were we would see charges for a stay in hospital. Let them deny that. We should also probably see charges for education, or would they also deny that? We are getting no answers

The Opposition are constantly telling us that they would cut subsidies. After my right hon. Friend the Secretary of State for the Environment had announced some additional expenditure for the inner cities, the right hon. Member for Leeds, North-East (Sir K. Joseph) said: This afternoon we have had another example, as one of my hon. Friends said, of throwing public money at a problem when enormous amounts of public money have already been unsuccessfully and in vain thrown at that problem. He could not have been in the House a few minutes earlier when the Shadow Secretary for the Environment said to my right hon. Friend: Will the Secretary of State recognise that the sums that lie is offering are so small, and are so spread over the years in relation to the scale of the problem itself, that he is giving a false impression ".—[Official Report, 8th November 1977 ; Vol. 938, c. 505, 489.] What do the right hon. Gentlemen want? Do they want more or less subsidies? Do they want more or less subsidies for the nationalised industries? What do the Opposition want to do? Let us have a credible discussion. Who is in charge?

Mr. Lawson

rose—

Mr. Barnett

I see that the hon. Member for Blaby is in charge.

Mr. Lawson

Why is the Chief Secretary getting so excited? He has been cutting public expenditure, has he not?

Mr. Barnett

That is it, then. Let us leave the matter there, because there are many other subsidies which the Opposition want to cut. Would they cut agriculture subsidies? I do not know what is the public expenditure policy of the Opposition. Their policy is that we should wait and see—except in areas such as defence and law and order, where they wish to increase public expenditure. However, perhaps we had better leave it at that.

On the other hand, genuine concern about both public expenditure and unemployment is felt by my hon. Friends. We very much share their concern about the level of unemployment and their desire to move as quickly as possible to an improvement in our public services and an increase in public expenditure. We do not have to apologise for that. But when I tell my hon. Friends that, unfortunately, we have had to cut public expenditure programmes, they should also be fair in recognising that, despite the difficulties of the past few years, we increased public expenditure programmes overall between 1973–74 and 1976–77 by 6.5 per cent. in real terms, despite great difficulties.

Mr. Peter Bottomley (Woolwich, West)

rose—

Mr. Barnett

I am coming back to the hon. Gentleman's hon. Friends. I know that they need help from every conceivable source. I should like to put one or two more questions to them and see whether I can get an answer. They have frequently told us that they would like to cut public expenditure by local authorities. Many local authorities are controlled by Conservatives who are cutting expenditure, often much faster than I should have liked.

But when it comes to incomes policy—again, we heard nothing from the hon. Gentleman's hon. Friends about this—we are told about special cases. Conservative Members made themselves look rather foolish over the police, who are a local authority expenditure. They told us that the police should be a special case and receive substantially more than 10 per cent. Which local authority expenditure or local authority manpower would they cut to make room for that?

Mr. Lawson

Local authorities would decide.

Mr. Barnett

I see. At least, the hon. Gentleman mutters something. The right hon. and learned Gentleman never says a word. The Conservatives' posture throughout has been appalling.

Mr. John Nott (St. Ives)

rose—

Mr. Barnett

I shall not give way.

Mr. Healey

The hon. Gentleman's hon. Friends can speak for themselves.

Mr. Barnett

I have eight minutes left, and I want to deal with many other points that were made in the debate.

Mr. Nott

rose—

Mr. Healey

The Conservatives have four spokesmen, and none of them can say a word.

Mr. Barnett

On the Opposition Front Bench we see the Shadow Chancellor and three replacements for his previous assistant, and not one of them wants to rise or to let him rise. I know that the hon. Member for St. Ives (Mr. Nott) has been tipped as a future Chief Secretary. I read about that.

I want to turn to the question of income tax, which was raised in the debate, as was the matter of small firms. To my hon. Friends who want us to increase public expenditure as fast as they and I would like, I say that to increase it too fast would limit what we could do in the matter of income tax. This is not unimportant, as my hon. Friends the Members for Birmingham, Perry Barr (Mr. Rooker) and Coventry, South-West (Mrs. Wise) have frequently suggested to me. I am most grateful for the congratulations offered to us today by my hon. Friend the Member for Perry Barr. We do not receive them too often, and when they come we appreciate them.

My hon. Friend asked us about the effect of the Ways and Means Resolutions on the indexation clause. I am happy to tell him that the effect is to clarify the position so that for the purposes of the clause to which he referred the figures that will apply for the next year will be the 1977 Finance Act figures, not the new ones.

The hon. Member for Blaby quoted me on indexation, saying that one cannot have simply indexation of personal allowances and nothing else. Then he proceeded to pluck one other area out of the air for indexation, not indirect taxes—

Mr. Rooker

Not child benefits.

Mr. Barnett

No. It was higher-rate taxes. The hon. Gentleman tried very hard to show that the tax relief is no tax relief at all. I am sorry to disappoint him. When the taxpayers get the money in their pay packets, they will not have read what he said but they will note the money in their pockets and pay packets and be very pleased, regardless of what the hon. Gentleman calls it.

I come now to a few words about small firms. The general argument from the Opposition Front Bench has been that all we have done for small firms is, as it was said, what the Conservatives have been beating the tom-tom about for years. I must tell the Opposition that when they try to adopt the slogan "Small is beautiful ", they have no chance when I am speaking for the Government on taxation matters.

I give credit to the hon. Member for Basingstoke (Mr. Mitchell), who has constantly pressed us on behalf of small companies, as have the hon. Member for Cornwall, North and many of my hon. Friends.

Mr. Heffer

Do I not come first?

Mr. Barnett

Of course, the hon. Gentleman comes after my hon. Friend the Member for Walton.

When the Opposition claim credit for what they say they have done for small firms, I must remind them of precisely what they have done for small firms. First there was corporation tax, the worst conceivable form of corporation tax which could be applied to small firms. The hon. Member for Basingstoke, in all honesty, has always said it. Next, they tell us that estate duty is so much better than capital transfer tax. Would they go back to it? I bet they would not. I bet that the widows who have benefited so much from capital transfer tax would not want to revert to the old estate duty. I bet that small firms would not want to go back to-it either, because, as I have constantly said, under capital transfer tax small firms are enormously better off than they were under estate duty.

The other tax about which the Opposition complain in relation to small firms is value added tax. What greater impertinence could one hear than that from the party which introduced the damned tax when it did not even need to? The Conservative Government said that they were not introducing it because of the Common Market but were introducing it because it was a good tax. They did not say that it was good for small firms. They said that it was a good tax. Now, they tell us that it is not a good tax for small firms.

We are doing our best with value added tax. We are raising the threshold, and we are simplifying it as much as we can. [An HON. MEMBER: "Multiple rates."] In countries which the hon. Gentleman adores there are many more rates. We have done a great deal more, for example, in the announcement we made on tax relief for small firms and by increasing the starting point for capital transfer tax. In fact, on corporation tax, as every hon. Member opposite knows, with stock relief, small expanding trading companies pay no corporation tax whatsoever. So there is no problem now for family firms which want to expand.

I hope, therefore, that in the matter of small firms the Opposition will stop trying to take the credit. The credit belongs here on these Benches, and here it should stay.

There is another matter on which I should acknowledge the contributions from other parties, notably the Liberal Party. I refer to the question of profit-sharing. The hon. Member for Cornwall, North thought that some of my hon. Friends might not like profit-sharing. I assure him that the distribution of profits is of great importance to my hon. Friends, and, provided that I can secure what will be included in the consultative document which we shall issue, it will be framed, unlike Tory legislation, to benefit all workers and not provide special benefits for the higher-paid and directors.

I hope that it is clear from this debate that there is no realistic alternative whatever to the policies at present being pursued, policies which have proved so successful. [HON. MEMBERS: "Certainly. We were told in the little blue book that we shall now not get slick phrases from the Conservative Party—

Mr. James Tinn (Redcar)rose in his place and claimed to move, That the Question be now put.

Question, That the Question be now put, put and agreed to.

Question put accordingly, and agreed to.

Resolved,

That—

1. (1) Section 22 of the Finance Act 1977 (alteration of personal reliefs) shall have effect, and be deemed always to have had effect, as if—
1. (a) in paragraph (a) of subsection (1) (increase of married allowance to £1,295) for ' £1,295 ' there were substituted £1,455 ' ;
2. (b) in paragraph (b) of that subsection (increase of single allowance and wife's earned income relief to £845) for '£845' there were substituted ' £945' ;
3. (c) in paragraph (c) of that subsection (increase of age allowance to £1,765 and £1,120) for ' £1,765' and £1,120' there were substituted £1,975 ' and £1,250' ;
4. (d) in subsection (3) (increase of additional allowance to £450) for £450' there were substituted £510'.
2. (2) The above amendments shall not apply for the purposes of subsection (2) and the corresponding provision in subsection (3) of the said section 22.
3. But this Resolution shall not require any change to be made in the amounts deductible or repayable under section 204 of the Income and Corporation Taxes Act 1970 (pay as you earn) before 6th December 1977.
4. And it is hereby declared that it is expedient in the public interest that this Resolution should have statutory effect under the provisions of the Provisional Collection of Taxes Act 1968.